DCIT, CHENNAI V. Flakt (India) Ltd., CHENNAI

ITA 1032/CHNY/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9156 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 1 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-06-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 10-05-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 23-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Fair market value
• Section: 92C; 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , . !'# ! , % !& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO.1032/MDS/2014 ( )( / ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(3), CHENNAI - 600 034. V. M/S FLAKT (INDIA) LTD., (NOW KNOWN AS M/S SOLYVENT FLAKT INDIA LTD.), NO.147, POONAMALLEE HIGH ROAD, VILLAGE NIMBAL, CHENNAI - 600 077. PAN : AAACF 6153 G (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SMT. VIJAYALAKSHMI, CIT -.+, / 0 / RESPONDENT BY : SHRI KAPIL HIRANI, CA SHRI AJIT TOLANI, ADVOCATE SHRI DARPAN KIRPALANI, ADVOCATE 1 / 2% / DATE OF HEARING : 10.05.2016 3') / 2% / DATE OF PRONOUNCEMENT : 09.06.2016 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST T HE ORDER OF THE ORDER OF THE ASSESSING OFFICER, CONSEQUENT TO T HE DIRECTION OF THE DISPUTE RESOLUTION PANEL, CHENNAI, DATED 20.12.2013 AND PERTAINS TO ASSESSMENT YEAR 2009-10. 2 I.T.A. NO.1032/MDS/14 2. SMT. VIJAYALAKSHMI, THE LD. DEPARTMENTAL REPRESE NTATIVE, SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSIN ESS OF MANUFACTURING AND SALE OF INDUSTRIAL FANS. FLAKT WO ODS (LUXEMBOURG) IS THE HOLDING COMPANY OF THE ASSESSEE -COMPANY. THE ULTIMATE HOLDING COMPANY OF THE GROUP IS STROMB OLI INVESTMENTS SAS. THE ASSESSEE PAID MANAGEMENT SERVICE FEE TO I TS ASSOCIATE ENTERPRISE. THE TRANSFER PRICING OFFICER ACKNOWLED GED THE SERVICES RENDERED BY THE ASSOCIATE ENTERPRISE TO THE ASSESSE E-COMPANY. HOWEVER, HE DID NOT APPROVE THE TRANSACTION NET MAR GIN METHOD AS MOST APPROPRIATE METHOD FOR THE PURPOSE OF TRANSFER PRICING ADJUSTMENT. THE TRANSFER PRICING OFFICER FOUND THA T THE VOLUME AND QUALITY OF SERVICE ARE DISPROPORTIONATE TO THE PAYM ENT MADE BY THE ASSESSEE. THE TRANSFER PRICING OFFICER FURTHER FOU ND THAT THE MANAGEMENT FEE PAID BY THE ASSESSEE, CONSISTING OF SEVERAL SUB- CLASSIFICATION, WHICH NEEDS TO BE ANALYSED ITEM-WIS E FOR DETERMINATION OF ARM'S LENGTH PRICE, WHICH METHOD I NVOLVES STUDY OF TECHNICAL SERVICES RECEIVED BY THE ASSESSEE AND ALS O ANALYSIS WHETHER SUCH SERVICES DEMAND HUGE PAYMENT. AFTER C ONSIDERING THE REPLY GIVEN BY THE ASSESSEE TO SHOW CAUSE NOTIC E ISSUED, THE TRANSFER PRICING OFFICER FOUND THAT THE CUP METHOD MAY THE MOST 3 I.T.A. NO.1032/MDS/14 APPROPRIATE METHOD FOR MAKING TRANSFER PRICING ADJU STMENT IN THIS CASE. ACCORDING TO THE LD. D.R., THE TRANSFER PRIC ING OFFICER HAS ALSO FOUND THAT AS PER OECD GUIDELINES, IN ORDER TO ARRIVE AT MOST APPROPRIATE FAIR MARKET VALUE OF THE SERVICES RECEI VED BY THE ASSESSEE, THE TRANSACTION HAS TO BE EXAMINED INDEPE NDENTLY AND INDIVIDUALLY. AFTER CONSIDERING THE QUALITY OF THE SERVICES RENDERED AND PLACING RELIANCE ON THE DECISION OF BANGALORE B ENCH OF THIS TRIBUNAL IN GEMPLUS INDIA PVT. LTD. V. ACIT IN I.T. A. NO.352/BANG/09, THE TRANSFER PRICING OFFICER FOUND THAT ONLY 25% OF TOTAL AMOUNT PAID TOWARDS MANAGEMENT FEE COULD BE A LLOWED. ACCORDINGLY, THE LD. D.R. SUBMITTED THAT THE TRANSF ER PRICING OFFICER FOUND A SUM OF ` 2,05,11,061/- WAS TO BE DISALLOWED AND ACCORDINGLY A DOWNWARD ADJUSTMENT OF ` 6,15,33,183/- WAS MADE. 3. THE LD. DEPARTMENTAL REPRESENTATIVE FURTHER SUBM ITTED THAT WHEN THE MATTER WAS REFERRED TO THE DISPUTE RESOLUT ION PANEL, THE DISPUTE RESOLUTION PANEL FOUND THAT THOUGH THEORETI CALLY TRANSACTION NET MARGIN METHOD WAS THE MOST APPROPRI ATE METHOD, BUT, PRACTICALLY ADOPTION OF CUP METHOD WOULD BE MO ST APPROPRIATE. ACCORDING TO THE LD. D.R., WHEN THE DRP FOUND THAT CUP METHOD WOULD BE THE MOST APPROPRIATE PRACTICAL METHOD FOR MAKING TRANSFER 4 I.T.A. NO.1032/MDS/14 PRICING ADJUSTMENT, OUGHT TO HAVE ADOPTED CUP METHO D FOR DETERMINATION OF ARM'S LENGTH PRICE. THE LD. D.R. FURTHER POINTED OUT THAT AN INTER GROUP ACTIVITY MAY BE PERFORMED RELAT ING TO GROUP MEMBERS EVEN THOUGH THOSE GROUP MEMBERS DO NOT NEED ACTIVITY / SERVICE. ACCORDING TO THE LD. D.R., THE TRANSFER P RICING OFFICER HAS RIGHTLY DISALLOWED 25% OF THE PAYMENT. THE LD. D.R . HAS ALSO PLACED HER RELIANCE ON THE DELHI BENCH OF THIS TRIB UNAL IN KNORR BREMSE INDIA LTD. (56 SOT 349). 4. ON THE CONTRARY, SHRI KAPIL HIRANI, THE LD. REPR ESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT THE SERVICES RENDERED BY THE ASSOCIATE ENTERPRISE TO THE ASSESSEE-COMPANY IS NOT IN DISPUTE. IN FACT, THIS WAS ACCEPTED BY THE TRANSFER PRICING OFF ICER AND THE DISPUTE RESOLUTION PANEL. THE ONLY DISPUTE IS WITH REGARD TO ADOPTION OF MOST APPROPRIATE METHOD. THE ASSESSEE ADOPTED TRANSACTION NET MARGIN METHOD AS MOST APPROPRIATE M ETHOD. HOWEVER, THE TRANSFER PRICING OFFICER FOUND THAT CU P METHOD CAN BE THE MOST APPROPRIATE METHOD. THE TRANSFER PRICI NG OFFICER, ACCORDING TO THE LD. REPRESENTATIVE, AFTER ANALYSIN G THE CASE, ESTIMATED THE COST OF THE MANAGEMENT SERVICE AT 25% OF THE COST PAID BY THE ASSESSEE. THIS ESTIMATION OF TRANSFER PRICING OFFICER 5 I.T.A. NO.1032/MDS/14 WAS FOUND TO BE IMPROPER BY THE DISPUTE RESOLUTION PANEL. ACCORDING TO THE LD. REPRESENTATIVE, DETERMINATION OF ARM'S LENGTH PRICE SHOULD BE BASED ON COMPARISON WITH COMPARABLE UNCONTROLLED PRICE. THE VALUE OF THE SERVICE RENDERED BY ASSOC IATE ENTERPRISE SHOULD BE DETERMINED BASED ON COMPARISON OF COMPARA BLE SERVICES AND THERE IS NO QUESTION OF ESTIMATION OF THE VALUE . THE TRANSFER PRICING OFFICER HAS NOT MADE CLEAR HOW HE WAS ABLE TO ESTIMATE THE MANAGEMENT SERVICE FEE AT 25% OF THE CLAIM MADE BY THE ASSESSEE. ACCORDING TO THE LD. REPRESENTATIVE, EST IMATION IS NOT PERMITTED WHILE MAKING TRANSFER PRICING ADJUSTMENT. THEREFORE, THE APPLICATION OF CUP METHOD WITHOUT COMPARING THE SER VICES OF COMPARABLE COMPANIES CANNOT BE ADOPTED. ACCORDING TO THE LD. REPRESENTATIVE, THE DISPUTE RESOLUTION PANEL HAS RI GHTLY FOUND THAT THE MANAGEMENT SERVICE FEE CANNOT BE ESTIMATED FOR THE PURPOSE OF MAKING TRANSFER PRICING ADJUSTMENT. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. RULE 10B OF INCOME-TAX RULES, 1962 PROVIDES FOR METHOD OF DETER MINING THE ARM'S LENGTH PRICE UNDER SECTION 92C OF THE INCOME- TAX ACT, 1961 (IN SHORT 'THE ACT'). THE ASSESSEE HAS ADOPTED TRAN SACTION NET 6 I.T.A. NO.1032/MDS/14 MARGIN METHOD AS MOST APPROPRIATE METHOD FOR THE PU RPOSE OF TRANSFER PRICING ADJUSTMENT. FOR THE PURPOSE OF TR ANSACTION NET MARGIN METHOD, THE NET PROFIT MARGIN REALIZED BY TH E ENTERPRISES FROM INTERNATIONAL TRANSACTION ENTERED WITH ASSOCIA TE ENTERPRISE, IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISES OR HA VING REGARD TO ANY OTHER RELATIVE BASE, HAS TO BE TAKEN INTO CONSI DERATION. THEREFORE, FOR THE PURPOSE OF TRANSACTION NET MARGI N METHOD, THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISES FROM AN INTERNATIONAL TRANSACTION HAS TO BE TAKEN INTO ACCOUNT TO ARRIVE AT ARM'S LENGTH PRICE AS PROVIDED IN RULE 10B(C). 6. WHEREAS, FOR THE PURPOSE OF CUP METHOD, THE PRIC E CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVID ED IN A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSA CTIONS IDENTIFIED HAS TO BE COMPARED WITH THE PRICE PAID BY THE ASSES SEE FOR THE SERVICES RENDERED BY THE ASSOCIATE ENTERPRISE. SUC H A PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEE N INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS WHICH W ILL MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET. THE ADJUSTED PRICE SO ARRIVED 7 I.T.A. NO.1032/MDS/14 SHALL BE TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPE CT OF THE SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTIONS. THEREF ORE, IT IS OBVIOUS THAT FOR THE PURPOSE OF CUP METHOD, THE SERVICES RE CEIVED BY THE ASSESSEE HAVE TO BE COMPARED WITH SIMILAR SERVICES RECEIVED IN INDIA BY THE TESTED PARTIES IN AN UNCONTROLLED TRAN SACTION. IF THERE IS ANY DIFFERENCE BETWEEN THE TWO, THE ADJUSTED PRICE ARRIVED HAS TO BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF DETERMI NING THE ARM'S LENGTH PRICE. 7. IN THE CASE OF TRANSACTION NET MARGIN METHOD ALS O, THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN U NRELATED ENTERPRISE IN AN UNCONTROLLED TRANSACTION HAS TO BE ADJUSTED T O TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN. THEREFORE, IN BOTH THE CASES, THE COMPARISON HAS TO BE MADE WITH UNCONTROLLED TRA NSACTION IDENTIFIED WITH REGARD TO SIMILAR SERVICES RENDERED FOR THE PURPOSE OF TRANSFER PRICING ADJUSTMENT. IN THE CASE OF CUP ME THOD, THE PRICE PAID BY THE ASSESSEE HAS TO BE COMPARED WITH OTHER COMPARABLE COMPANIES ENTERING INTO SUCH TRANSACTION. THEREFOR E, IDENTIFICATION OF THE COMPARABLE COMPANIES WHO ARE TRANSACTING IN THE COMPARABLE UNCONTROLLED TRANSACTION HAS TO BE TAKEN INTO 8 I.T.A. NO.1032/MDS/14 CONSIDERATION FOR THE PURPOSE OF DETERMINATION OF T HE MOST APPROPRIATE METHOD. IN THE CASE BEFORE US, FOR THE PURPOSE OF MAKING TRANSFER PRICING ADJUSTMENT BY ADOPTING CUP METHOD, THE TRANSFER PRICING OFFICER HAS NOT TAKEN ANY PAIN FOR IDENTIFYING THE COMPARABLE UNCONTROLLED TRANSACTION. WITHOUT IDENT IFYING THE COMPARABLE UNCONTROLLED TRANSACTION, THE TRANSFER P RICING OFFICER SIMPLY FOUND THAT THE QUALITY AND VOLUME OF THE SER VICES RECEIVED BY THE ASSESSEE WOULD NOT COMMENSURATE WITH THE PAYMEN T MADE BY THE ASSESSEE. FOR MAKING THIS OBSERVATION, THE TRA NSFER PRICING OFFICER PLACED HIS RELIANCE ON THE DECISION OF BANG ALORE BENCH OF THIS TRIBUNAL IN GEMPLUS INDIA PVT. LTD. (SUPRA). 8. WE HAVE CAREFULLY GONE THROUGH THE DECISION OF B ANGALORE BENCH OF THIS TRIBUNAL IN GEMPLUS INDIA PVT. LTD. ( SUPRA). THE BANGALORE BENCH, AFTER EXAMINING THE AGREEMENT BETW EEN THE PARTIES, FOUND THAT THE ASSESSEE HAS NOT PROVED ANY COMMENSURATE BENEFITS AGAINST THE PAYMENT OF SERVICE CHARGES TO THE ASSOCIATE ENTERPRISE. IN THE CASE BEFORE US, THE TRANSFER PR ICING OFFICER CALLED FOR THE DETAILS RELATING TO SERVICES RENDERED BY TH E ASSOCIATE ENTERPRISE ITEM-WISE ALONG WITH COSTS INCURRED BY T HE ASSOCIATE ENTERPRISE. WITHOUT EXAMINING FURTHER THE SERVICES RENDERED BY THE 9 I.T.A. NO.1032/MDS/14 ASSOCIATE ENTERPRISE, THE TRANSFER PRICING OFFICER HAS SIMPLY OBSERVED THAT THE SERVICES RENDERED ARE ADVICE AND DISCUSSION IN NATURE, THEREFORE, VOLUME AND QUALITY OF SERVICES A RE DISPROPORTIONATE TO THE PAYMENT MADE BY THE ASSESSE E. IT IS NOT KNOWN HOW THE TRANSFER PRICING OFFICER CAME TO KNOW THAT THE VOLUME AND QUALITY OF SERVICES RECEIVED BY THE ASSE SSEE WAS DISPROPORTIONATE TO ITS PAYMENT. 9. THE TRANSFER PRICING OFFICER HAS NOT TAKEN ANY P AIN TO IDENTIFY UNCONTROLLED TRANSACTION BETWEEN TWO INDEP ENDENT ENTITIES. IN THE ABSENCE OF ANY COMPARISON OF THE TRANSACTION WITH TRANSACTION CARRIED OUT IN A UNCONTROLLED MARKET, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE TRANSFER PRICING OFFICE R CANNOT INDEPENDENTLY COME TO A CONCLUSION THAT VOLUME AND QUALITY OF SERVICES WAS DISPROPORTIONATE TO THE PAYMENT MADE B Y THE ASSESSEE. THE MATTER MAY BE TOTALLY DIFFERENT IF T HE TRANSFER PRICING OFFICER WAS ABLE TO IDENTIFY THE UNCONTROLLED TRANS ACTION BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTION WHICH WO ULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET. IN THIS CASE, SUCH AN EXERCISE WAS NOT MADE BY THE TRANSFER PRICING OFFICER. THE DISPUTE RESOLUTION PANEL HAS, THEREFORE, RIGHTLY FOUND THAT THE METHOD 10 I.T.A. NO.1032/MDS/14 ADOPTED BY THE TRANSFER PRICING OFFICER FOR DISALLO WING THE CLAIM OF THE ASSESSEE WAS NOT JUSTIFIED. AS RIGHTLY OBSERVE D BY THE DISPUTE RESOLUTION PANEL, THE TRANSFER PRICING OFFICER HAS NOT BROUGHT ON RECORD THE BASE ON WHICH HE ESTIMATED THE ARM'S LEN GTH PRICE AT 25%, WHEN RULE 10B(C) PROVIDES FOR METHOD OF DETERM INING THE ARM'S LENGTH PRICE. THIS TRIBUNAL IS OF THE CONSID ERED OPINION THAT ESTIMATION OF THE SERVICES RENDERED AND COSTS FOR S UCH SERVICES MAY BE OUTSIDE THE SCOPE OF TRANSFER PRICING ADJUSTMENT . WITHOUT IDENTIFYING THE COMPARABLE CASES, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT ESTIMATION OF THE DISALLOWANCE WITHOUT ANY BASE IS NOT CALLED FOR. THEREFORE, THE DISPUTE RESOLUTION PANE L HAS RIGHTLY UPHELD THE TRANSFER PRICING STUDY MADE BY THE ASSES SEE. THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH T HE ORDER OF THE LOWER AUTHORITY AND ACCORDINGLY THE SAME IS CONFIRM ED. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON 9 TH JUNE, 2016 AT CHENNAI. SD/- SD/- (. !'# ! ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) % / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 9 TH JUNE, 2016. KRI. 11 I.T.A. NO.1032/MDS/14 / -267 87)2 /COPY TO: 1. +, /APPELLANT 2. -.+, /RESPONDENT 3. DIT (INTERNATIONAL TAXATION), CHENNAI 4. 79 -2 /DR 5. ( : /GF.