GATES INDIA PRIVATE LIMITED,DELHI V. ASSESSMENT UNIT, INCOME TAX DEPARTMENT

ITA 5350/DEL/2024

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Gates India Private Limited appealed against the assessment order passed by the Assessing Officer, which was based on the TPO's adjustments to the Arm's Length Price (ALP) of international transactions and the DRP's confirmation of these adjustments. The main issues revolved around the disallowance of management charges and royalty payments to AEs, and the imposition of interest on outstanding receivables. The Tribunal found that the TPO and DRP had not adequately considered the evidence provided by the assessee, including invoices and email correspondences, and had incorrectly applied the Comparable Uncontrolled Price (CUP) method for valuing management services. The Tribunal also noted that similar transactions in previous years had not been disturbed, indicating a lack of consistency in the application of transfer pricing rules.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 314417 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2021-2022
• Other Referred Cases: CIT vs EKL Appliances Ltd., Kusum Healthcare Pvt. Ltd.
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K JADHAV
• Assessee Lawyers: ROHIT TIWARI; TANYA
• Keywords: Set aside; Opportunity of being heard; Transfer pricing; International transaction; Corroborative evidences; Principle of natural justice; TDS; Working capital adjustments; Bogus
• Section: 143(3); 234B; 10B; 92D

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH, ‘H’: NEW DELHI BEFORE SHRI PRAKASH CHAND YADAV, JUDICIAL MEMBER AND SHRI BRAJESH KUMAR SINGH, ACCOUNTANT MEMBER ITA No.5350/DEL/2024 [Assessment Year: 2021-22] Gates India Private Limited, C-434, Defence Colony, South Delhi, New Delhi-110024 Vs Assessment Unit, National Faceless Assessment Centre Income Tax Department, Delhi PAN-AAACA8125F Appellant Respondent Appellant by Shri Rohit Tiwari, Adv. & Ms. Tanya, Adv. Respondent by Shri S K Jadhav, CIT-DR Date of Hearing 01.05.2025 Date of Pronouncement 07.05.2025 ORDER PER PRAKASH CHAND YADAV, JM The present appeal of the assessee is arising out of the order of the Ld. Assessing Officer dated 25.10.2024 having DIN No.ITBA/AST/S/ 143(3)/2024-25/1069956215(1) and relates to Assessment year 2021-22. 2. Brief facts of the case as coming out of the orders of the authorities below are that the assessee is a company and primarily engaged in the business of trading, manufacturing and marketing of rubber hoses and assembly hoses in Punjab & Harayanda and Maharashtra. In the impugned assessment year, the assessee company has filed its return of 2 ITA No.5350/Del/2024 income on 15.02.2022 declaring total income of Rs.56,22,13,520/-. The same was processed u/s 143(1) of the Act and thereafter the case of the assessee was selected for scrutiny. Since, international transactions with its Associated Enterprises (in short ‘AE’) are involved, the reference was made by the Assessing Officer to the ld. Transfer Pricing Officer (in short ‘TPO’). The TPO vide its order dated 30.10.2023 made certain adjustments to the Arm’s Length Price (in short ‘ALP’) of the international transactions of the assessee with its AE and then the Assessing Officer passed the draft assessment order. 3. Against the draft assessment order, the assessee filed its objections before the Learned Dispute Resolution Panel (in short ‘DRP'). The Ld. DRP, while confirming the order of the TPO has also enhanced the income of the assessee by making the disallowance of royalty payments to AE vis-a-vis sales made with third parties. Thereafter, the Ld. Assessing Officer framed the assessment and passed the order in accordance with directions of the DRP. 4. Aggrieved with the said order, the assessee has come up in appeal before us by raising the following grounds of appeal:- “1. That on the facts and circumstances of the case and in law, the final assessment order passed by the Ld. AO under Section 143(3) read with section 144C(13) and section 144B of the Act is bad in law and liable to be quashed. 2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the total income of the Appellant under Section 143(3) read with section 144C(13) and section 144B of the Act at INR 67,67,67,011 as against the income reported in the return of income (\"ROI\") amounting to INR 56,22,13,520. 3 ITA No.5350/Del/2024 3. That the Ld. AO/ Learned Deputy/ Assistant Commissioner of Income-tax, Transfer Pricing Officer- 2(1)(1) (\"Ld. TPO\"/ Learned Dispute Resolution Panel (\"Ld. DRP\") have erred in enhancing the income of the Appellant by INR 6,36,03,091 in relation to payment of management charges to its AEs. In doing so, Ld. AO/ Ld. TPO/ Ld. DRP have grossly erred in: 3.1. rejecting the aggregation approach adopted by the Appellant to benchmark its international transactions in the TP documentation maintained in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (\"the Rules\"); 3.2. contravening the conditions laid in Section 92C(3)(c) of the Act, by citing incongruous reasons to allege that the Appellant has not derived any tangible or direct benefit from management services and has failed to furnish evidence to demonstrate the actual receipt of management services. Further, the Ld. AO/ Ld. TPO/ Ld. DRP have conveniently overlooked the supporting evidences and arguments that the Appellant filed during the course of the assessment proceedings to support the arm's length nature of management services; 3.3. challenging the commercial/ business wisdom of the Appellant in relation to payment of management charges; 3.4. segregating the 'payment of management charges' transaction and arbitrarily determining arm's length price as 'Nil' through application of 'Other Method' in contravention of the provisions of Rule 10B of the Rules; and 3.5. disregarding prior years' favourable TP orders passed in Appellant's own case with respect to payment of management charges; 4. That similar issue in respect of payment of management charges, in Appellant's own case for Assessment Year 2018-19, has been adjudicated in favour of the Appellant by the Hon'ble Delhi Bench of ITAT. 5. That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO/ Ld. DRP have erred in enhancing the income of the Assessee by INR 3,74,76,635 on account of payment of royalty in relation to sales made by the Assessee to its AEs. In doing so, Ld. TPO/ Ld. AO/ Ld. DRP have grossly erred in: 5.1. rejecting the aggregation approach adopted by the Assessee to benchmark its international transactions in the 4 ITA No.5350/Del/2024 TP documentation maintained in terms of section 92D of the Act read with Rule 10D of the Rules; 5.2. disregarding that the Assessee operates as a licensed manufacturing entity, bearing entrepreneurial risks with respect to its business, and frivolously holding that the characterization of the Assessee in respect of manufactured goods sold to the AEs is that of a 'contract manufacturer'; 5.3. ignoring the fact that functional, asset and risk (\"FAR\") profile of the Assessee is similar for sales made to unrelated parties as well as AEs; 5.4. not appreciating the substance on ground in terms of the fact that the sales made by the Assessee to its AEs are on a principal-to-principal basis, and also driven by open market conditions just as sales made to unrelated parties; 5.5. holding that the benefit of producing goods by the Assessee is reaped by the AEs; 5.6. reducing the arm's length price (\"ALP\") on this account to Nil, thereby depriving the licensor i.e., Gates Corporation, of its right to earn return on these sales in return for the research and development investments made over the years; 5.7. not considering that identical payment of royalty on account of sales made by sister concern of the Assessee to foreign AEs was held to be allowable by the Indian Revenue Authorities. 6. That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO/ Ld. DRP have erred in enhancing the income of the Assessee by INR 1,20,50,053 on account of payment of royalty in relation to sales made by the Assessee to third parties. In doing so, Ld. TPO/Ld. AO/ Ld. DRP have grossly erred in: 6.1. rejecting the aggregation approach adopted by the Assessee to benchmark its international transactions in the TP documentation maintained in terms of section 92D of the Act read with Rule 10D of the Rules; 6.2. holding that the terms of certain license agreements (intellectual property used, product involved etc.), furnished by the Assessee as part of its supplementary analysis for benchmarking royalty payment on third party sales, are different vis-à-vis inter- company royalty agreement entered between the Appellant and its Associated Enterprise, and thus, not comparable; and 5 ITA No.5350/Del/2024 6.3. not providing the Assessee with a reasonable opportunity of being heard, or to furnish its rebuttals, with respect to allegations made by the Ld. TPO in its order giving effect to Ld. DRP's directions, thereby violating the principles of natural justice. 7. That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO/ Ld. DRP have erred in enhancing the income of the Appellant by INR 14,23,712 by imputing interest on outstanding receivables from the AEs. In doing so, Ld. TPO/ Ld. AO/ Ld. DRP have grossly erred in: 7.1. ignoring the fact that the working capital adjustment will adequately test the opportunity cost of delay in realization of receivables and the same has to be accounted for, so as to neutralize the impact of embedded interest in the receivables, and post undertaking working capital adjustment, a separate adjustment for outstanding receivables is not warranted; 7.2. re-characterization of overdue receivables amount as a deemed loan and treating it as a separate international transaction; 7.3. not appreciating the fact that arm's length price determination for outstanding receivables is subsumed within the arm's length price determination of the principal international transaction itself; 7.4. not appreciating the fact that the Assessee has a consistent policy of not charging any interest on receivables from AEs as well as third parties; and 7.5. ignoring various judicial pronouncements around the issue of imputed interest on outstanding receivables. 8. That similar issue in respect of 'interest on outstanding receivables', in Appellant's own case for Assessment Year 2018- 19, has been adjudicated in favour of the Appellant by the Hon'ble Delhi Bench of ITAT. 9. That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under Section 234A, 234B and 234C of the Act. 10. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 274 read with section 270A of the Act, thereby violating the provisions of section 144C of the Act.” 6 ITA No.5350/Del/2024 5. Grounds no.1 and 2 are general in nature and hence don’t requires any adjudication. 6. In ground no.3 and 4, the assessee has argued the disallowance of intra group services expenses paid by the assessee to its AE amounting to Rs.6,36,03,091/-. 7. In ground no.5 and 6, the assessee has challenged the disallowance of royalty payments made by the assessee to its AE on account of sales to its AEs and third parties. The royalty payments made by the assessee in respect of sales made to AEs is amounting to Rs.3,74,76,635/- and with respect to the sales made to its non-AE is Rs.1,20,50,053/-. 8. In ground no.7, the assessee has challenged the levy of interest on outstanding receivables from its AE. 9. Ground no.8, 9 and 10 are general in nature. 10. The ld. Counsel appearing on behalf of the assessee, with respect to ground no.3 vehemently argued that the ld. TPO and Ld. DRP has failed to appreciate that the assessee has actually received services from its AE for running its business smoothly. The ld. Counsel for the assessee drawn the attention of the Bench towards page no.242 to 533 and contended that these are the evidences which were filed before the TPO as well as before the ld. DRP in order to establish the rendition of services by the assessee to its AE. The ld. Counsel for the assessee further argued that the TPO and the Ld. DRP has wrongly applied the benefit test ignoring that the net profit of the assessee is far better when compared to the previous year and hence, 7 ITA No.5350/Del/2024 the approach of the Dispute Resolution Panel and TPO is contrary to the material on record. The ld. Counsel for the assessee has relied upon the order of the Tribunal in assessee’s own case for AY 2018-19 and contended that the issue of IGS is already decided the coordinate bench in favour of the assessee in ITA Number 2379/D/2022 order dated 22.08.2024. 11. The Ld. CIT-DR appearing on behalf of the Revenue vehemently argued that the rendition of services by the assessee has not proved by the assessee and the ld. TPO has rightly observed that the assessee has failed to file cogent evidences vis-a-vis rendition of services by the assessee to the AE. The ld. DR further argued that the assessee has failed to establish the cost allocation as well as the benefits accrued to the assessee as a result of these services. 12. With respect to the disallowance of royalty payments vis-à-vis sales to AEs, the assessee has argued that observations of the TPO that the assessee was a contract manufacturer is patently wrong in as much as the transactions of the assessee with its AE are on principal-to-principal basis. Further, the ld. Counsel for the assessee pointed out that the similar royalty has been paid by the assessee in previous year also and the same has not been disturbed by the TPO in the previous year order. The ld. Counsel for the assessee also relied upon the agreement in pursuance to which the royalty has been paid and contended that the same agreement was enforceable in the previous year also. He drawn the Bench to the copy of the agreement of royalty which is at page no.490 of the paper book. 8 ITA No.5350/Del/2024 13. The ld. CIT-DR appearing on behalf of the Revenue relied upon the orders of the authorities below. 14. With respect to the disallowance of royalty payments vis-à-vis sales made to third parties, the ld. Counsel for the assessee argued that the ld. DRP has made this enhancement on some factual misunderstanding. The ld. Counsel for the assessee argued that it is not the case of the assessee that the assessee has incurred bogus expenses. It is the submission of the ld. Counsel for the assessee that the assessee has duly filed all the evidences with the lower authorities. 15. The Bench has enquired from the counsel whether the assessee made payment of royalty to third party. So, in response the ld. Counsel pointed that the assessee has not made any payment of royalty to third party rather the assessee has paid royalty to its parent company with respect to the sales made to third party. Meaning thereby, the assessee has paid royalty to its AE with respect to the sale transaction entered in to with AEs @7.1% and the assessee has also paid royalty to its parent company with respect to sales made by the assessee to the third party, which means non-related party @5%. 16. The ld. Counsel for the assessee contended that the directions of the Dispute Resolution Panel to do bench marking without further enquiry with the assessee with respect to the royalty payments made to the parent company vis-a-vis sales to third party is highly arbitrary. The ld. Counsel for the assessee pointed out that in order to giving effect to the directions of 9 ITA No.5350/Del/2024 the DRP, the ld. TPO has disallowed the entire royalty payment with respect to the sales made to third party. 17. The ld. DR relied upon the orders of the authorities below. 18. With respect to the charging of interest on outstanding receivables, the ld. Counsel for the assessee pointed out that if working capital adjustment is being provided to the assessee, there will be no need for making any adjustment qua of interest on outstanding receivables. The ld. Counsel for the assessee has relied upon the following judgments: - a. CIT vs EKL Appliances Ltd. reported in 345 ITR 241(Delhi High Court) for the proposition that the benefit test is not applicable in the transactions entered with AE. b. Kusum Healthcare Pvt. Ltd. (ITA No.765/2016) (Delhi High Court) for the proposition that if working capital adjustments made applicable and the profit level indicator is better, then there is no need for making any additions on account of delayed receivables. 19. The ld. CIT-DR relied upon the orders of the authorities below. -: Finding of the Bench: - 20. We have heard the rival submissions and perused the materials available on record. With respect to the issue of intra group services(management fees paid), we are of the firm view that the assessee has successfully demonstrated before the lower authorities about the rendition of services from its parent company to the assessee. We have seen 10 ITA No.5350/Del/2024 the invoices raised by the parent company with respect to the rendition of services. After perusing these invoices it is observed that the assessee has also deducted TDS on these payments made to its AE, for which, no adverse inference has been drawn by the Assessing Officer during the finalization of the assessment proceedings. We next observed that the assessee has also filed a chain of email exchange with respect to the discussion took place while rendition of services, no adverse material has been brought on record by the TPO in contrast to these mails. We further observed that the similar issue has come up in appeal before the Co- ordinate Bench in assessee’s own case in ITA No.2379/Del/2022, wherein, the Tribunal has observed in para 20 to 24 are as under: - 20. In the light of the delineations made above, we find considerable merit in the plea of the assessee that determining the value of management services at ‘Nil’ by resorting to CUP method runs contrary to the factual matrix as well as overwhelming legal position enunciated in this regard. On facts, the assessee has reasonably demonstrated the rendition of services against the management charges paid to its AE by direct and circumstantial evidences inter-company namely agreement, emails correspondence, invoices, payments and substantive improvement in the revenue and profitability. 21. At this juncture, we also advert to the findings rendered by the DRP. On perusal, it is found that the DRP has passed a nondescript and cryptic order in a summary manner which reads as under: “4.2.3 The Panel has considered the rival averments as above. The Panel does not find any infirmity in the IPO's order and hence, is not inclined to intervene with it. Accordingly, the assessee's objections are rejected and the TPO's action is upheld. However, the TPO is directed to consider the assessee's contention that disregarding prior years favourable TP orders passed in Assessee's own case with respect to payment of management charges as the TPO has not recorded any observations on this issue in the order; by passing a speaking order.” 11 ITA No.5350/Del/2024 22. Ostensibly, no independent reasons whatsoever have been cited by the DRP while upholding the action of the TPO. The DRP is completely swayed with the adjustment made by the TPO without objectively examining the factual matrix and applicability of CUP method in the light of judicial precedents and treating the value of services rendered at ‘Nil’. Such arbitrary exercise by the DRP without showing any application of mind cannot be countenanced in any manner. The directions made are neither clear nor implemented by the TPO and TP adjustment earlier made was mechanically reiterated. 23. In the peculiar facts of the case and legal position analysed, the DRP directions are required to be set aside and the adjustment made by the TPO on account of intra group services are liable to be cancelled and reversed. The value of transactions towards management charges under TNMM methodology adopted by assessee thus stands reinstated. 24. The adjustments made towards payment of management services in question are quashed. 21. Respectfully following the view of the Co-ordinate Bench, we allow this ground of the assessee. Before parting we would like to observe that so far as benefits attributable to these services is concerned is not criteria to be applied for the allowability of these expenses a reference can be made to the judgment of Hon’ble Delhi High Court CIT vs EKL Appliances Ltd. reported in 345 ITR 241(Delhi High Court), where it is held that benefit test cannot be applied for the allowability of expenses incurred on IGS. 22. With respect to the royalty payment to its AE vis-a-vis sales made to AE as well as sale made to third party is concerned, we are of the view that the ld. TPO as well as ld. DRP are not correct in disallowing the entire payment of royalty. Since, the assessee is paying this royalty in previous year also and no disallowance has been made. The TPO as well as the ld. Dispute Resolution Panel are not correct in holding that the assessee was contract manufacturer with respect to the sales made to its AE. However, in the interest of justice, we are of the view that the other method applied by 12 ITA No.5350/Del/2024 the TPO is not correct in disallowing the entire payment of royalty. However, adopting a pragmatic approach, we direct that the payment of royalty made by the assessee to its AE should be allowed @ 5% on all sale transactions i.e. with respect to the sales made to AEs and sales made to non-AEs. 23. So far as the chargeability of interest on outstanding receivables is concerned, we are of the view that the assessee should be given working capital adjustment as held by Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. (supra), and then if any shortcoming is there, the ALP is to be determined after giving effect to the working capital adjustment. We direct the TPO to provide working capital adjustment to the assessee and determined the ALP of interest on outstanding receivables afresh. 24. In the result, the appeal of the assessee is stands allowed as indicated above Order pronounced in the open court on 07th May, 2025. Sd/- Sd/- [BRAJESH KUMAR SINGH] [PRAKSAH CHAND YADAV] ACCOUNTANT MEMBER JUDICIAL MEMBER Dated 07.05.2025. f{x~{tÜ f{x~{tÜ f{x~{tÜ f{x~{tÜ Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi "