M/s. ExxonMobil Lubricants Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 1153/DEL/2015

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 3574 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 26-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: REEMA MALIK
• Keywords: Depreciation; Transfer pricing; International transaction; Unabsorbed depreciation
• Section: 143(3); 234B; 37(1); 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER ITA NO.1153/DEL/2015 ASSESSMENT YEAR : 2010-11 EXXON MOBIL LUBRICANTS PVT. LTD., E-20, 1 ST AND 2 ND FLOOR, MAIN MARKET, HAUZ KHAS, NEW DELHI. PAN: AABCE0207H VS. ACIT, CIRCLE-8(2), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VISHAL KALRA, ADVOCATE & MS REEMA MALIK, CA DEPARTMENT BY : SHRI SANJAY I BARA, CIT, DR DATE OF HEARING : 21.08.2018 DATE OF PRONOUNCEMENT : 21.08.2018 ORDER PER R.S. SYAL, VP: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E FINAL ASSESSMENT ORDER DATED 30.12.2014 PASSED BY THE ASSESSING OFFI CER (A.O.) U/S 143(3) ITA NO.1153/DEL/2015 2 READ WITH SECTION 144C(13) OF THE INCOME-TAX ACT, 1 961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEA R 2010-11. 2. GROUND NO.1 IS GENERAL WHICH DOES NOT REQUIRE ANY SEPARATE ADJUDICATION. 3. GROUND NOS.2 TO 5 DEAL WITH ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.25,74,03,817/-. BRIEFL Y STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN INDIAN COMPANY ENG AGED IN MANUFACTURING AND MARKETING OF LUBRICANTS IN INDIA. IT IMPORTS D IFFERENT GRADES OF BASE OIL AND ADDITIVES. THESE BASE OILS ARE BLENDED WITH ADD ITIVES TO MANUFACTURE LUBRICANTS FOR DIFFERENT APPLICATIONS IN AUTOMOTIVE INDUSTRY AND MARINE SEGMENTS. THE ASSESSEE FILED REPORT IN FORM NO. 3C EB DECLARING TEN INTERNATIONAL TRANSACTIONS. THE A.O. REFERRED THE MATTER OF DETERMINATION OF ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANS ACTIONS TO THE TRANSFER PRICING OFFICER (TPO). THE TPO DID NOT DISPUTE THE DETERMINATION OF ALP BY THE ASSESSEE OF ALL THE TRANSACTIONS EXCEPT ONE, NAMELY, RECEIPT OF BUSINESS SUPPORT SERVICES WITH TRANSACTED VALUE OF RS.26,22,03,817/-. THE ASSESSEE APPLIED TRANSACTIONAL NET MARGIN METHOD (T NMM) FOR ITA NO.1153/DEL/2015 3 DEMONSTRATING THAT THIS INTERNATIONAL TRANSACTION W AS AT ALP. IN ORDER TO BENCHMARK THIS TRANSACTION, THE ASSESSEE SELECTED I TS FOREIGN AE AS TESTED PARTY AND CHOSE FOREIGN COMPARABLES. THE ASSESSEE SEGREGATED SERVICES AVAILED UNDER TWELVE HEADS, WHICH HAVE BEEN SET OUT ON PAGES 5 AND 6 OF THE TPOS ORDER. THE TPO CONSIDERED ALL THE TWELVE TRANSACTIONS ONE BY ONE AND CAME TO THE CONCLUSION THAT EITHER THE SERV ICES RECEIVED WERE IN THE NATURE OF SHAREHOLDERS SERVICES OR DUPLICATION OF SERVICES OR NO BENEFIT WAS RECEIVED OR THERE WAS NO EVIDENCE OF THE ASSESSEE H AVING RECEIVED SUCH SERVICES AT ALL. EXCEPT FOR INFORMATION TECHNOLOG Y SERVICES REFERRED TO AT SL. NO. (XI), THE TPO DETERMINED NIL ALP OF ALL THE SERVICES. AS REGARDS INFORMATION TECHNOLOGY SERVICES FOR WHICH THE ASS ESSEE PAID A SUM OF RS.8.50 CRORE AND ODD, THE TPO DETERMINED ITS ALP A T RS.48 LAC BY ESTIMATING THAT NOT MORE THAN 5 PERSONS @ RS.80,000 /- PER MONTH WERE REQUIRED FOR RENDERING SUCH SERVICES. HE ALSO REJE CTED THE ASSESSEES APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD AND RESORTED TO COMPARABLE UNCONTROLLED PRICE METHOD (CUP) AS THE M OST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF RECEIPT OF BUSINESS SUPPORT SERVICES. THIS IS HOW, HE DETE RMINED THE ALP OF ITA NO.1153/DEL/2015 4 INFORMATION TECHNOLOGY SERVICES AT RS.48 LAC AND NIL FOR ALL THE REMAINING ELEVEN SERVICES WHICH RESULTED INTO RECOMMENDING TR ANSFER PRICING ADJUSTMENT OF RS.25,74,03,817/- AGAINST THE TRANSAC TED VALUE OF RS.26,22,03,817/-. THE ASSESSEE REMAINED UNSUCCESS FUL BEFORE THE DISPUTE RESOLUTION PANEL (DRP) ON THIS ISSUE. THIS LED TO THE MAKING OF ADDITION OF RS.25.74 CRORE AND ODD IN THE FINAL ASSESSMENT ORDE R WHICH HAS BEEN ASSAILED BEFORE THE TRIBUNAL. 4. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE REL EVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESSEE CLAIMED TO HAVE RECEIVED TWELVE DIFFERENT SERVICES VIZ., CONTROLLERS, HUMAN RESOURC E; CORPORATE LAW; PUBLIC AFFAIRS; SECURITY; PROCUREMENT; SAFETY, HEAL TH AND ENVIRONMENT; TAX; TREASURY; BUSINESS ADVISORY; INFORMATION TECHNOLOGY ; AND OTHERS INCLUDING MEDICAL SERVICES. WHILE DEALING WITH CONTROLLERS SE RVICES, THE TPO HELD THE SAME TO BE DUPLICATE IN NATURE DESPITE THE ASSE SSEES CONTENTION THAT IT RELATED TO MANAGING ITS ACCOUNTS, FINANCE, INTERNAL CONTROL AND REPORTING ISSUES. AS REGARDS HUMAN RESOURCE SERVICES, THE AS SESSEE CLAIMED TO HAVE MADE PAYMENT IN LIEU OF ITS AE PROVIDING SUPPORT ON PERSONNEL ACTIVITIES BY ENSURING THAT SUCH POLICIES WERE STREAMLINED AND TH E REQUIRED STANDARDS ITA NO.1153/DEL/2015 5 WERE MET. THE TPO HELD THAT THE ASSESSEE WAS NOT RE QUIRED TO MAKE ANY PAYMENT FOR THE SAME AS IT WAS THE GLOBAL POLICY OF THE GROUP. SIMILAR IS THE POSITION FOR ALL OTHER SERVICES FOR WHICH THE A SSESSEE STATED THE NATURE AND THE TPO DETERMINED NIL ALP BY CONSIDERING SUCH SERVICES AS EITHER DUPLICATE IN NATURE OR NOT REQUIRED EXCEPT FOR INF ORMATION TECHNOLOGY SERVICES, FOR WHICH HE DETERMINED THE ALP UNDER CU P METHOD IN A UNIQUE WAY OF ESTIMATING THAT NOT MORE THAN 5 PERSONS @ RS .80,000/- PER MONTH WERE REQUIRED FOR THESE SERVICES. THE TPO FURTHER R ECORDED AT SEVERAL PLACES ABOUT THE NON-FURNISHING OF ADEQUATE EVIDENCE BY TH E ASSESSEE IN SUPPORT OF SUCH SERVICES. THIS SHOWS THAT THE TPOS DETERMINA TION OF RS.48 LAC ALP AGAINST ACTUAL PAYMENT OF RS.26.22 CRORE IS PREMISE D ON THE FOUNDATION THAT EITHER NO SERVICES WERE RECEIVED OR, IN THE ALTERNA TIVE, THE SERVICES, IF ANY, RECEIVED BY THE ASSESSEE AMOUNTED TO DUPLICATION OF SERVICES WHICH DID NOT GIVE ANY BENEFIT TO THE ASSESSEE. 5. WE FIND THAT ON THE `BENEFIT TEST AS APPLIED BY THE TPO FOR DETERMINING THE ALP AT NIL IN RESPECT OF ELEVEN SER VICES AND RS.48.00 LAC IN RESPECT OF THE SERVICE OF `INFORMATION TECHNOLOGY, THE HONBLE PUNJAB & HARYANA HIGH COURT IN KNORR-BREMSE INDIA P. LTD. VS. ACIT (2016) 380 ITA NO.1153/DEL/2015 6 ITR 307 (P&H) HAS HELD THAT THE QUESTION WHETHER A TRANSACTION IS AT AN ARMS LENGTH PRICE OR NOT IS NOT DEPENDENT ON WHETH ER THE TRANSACTION RESULTS IN AN INCREASE IN THE ASSESSEES PROFIT. A VIEW TO THE CONTRARY WOULD THEN RAISE A QUESTION AS TO THE EXTENT OF PROFITABILITY NECESSARY FOR AN ASSESSEE TO ESTABLISH THAT THE TRANSACTION WAS AT AN ARMS LENG TH PRICE. A FURTHER QUESTION THAT MAY ARISE IS WHETHER THE ARMS LENGTH PRICE IS TO BE DETERMINED IN PROPORTION TO THE EXTENT OF PROFIT. T HUS, WHILE PROFIT MAY REFLECT UPON THE GENUINENESS OF AN ASSESSEES CLAIM , IT IS NOT DETERMINATIVE OF THE SAME. IT WENT ON TO HOLD THAT BUSINESS DECI SIONS ARE AT TIMES GOOD AND PROFITABLE AND AT TIMES BAD AND UNPROFITABLE. B USINESS DECISIONS MAY AND, IN FACT, OFTEN DO RESULT IN A LOSS. THE QUESTI ON WHETHER THE DECISION WAS COMMERCIALLY SOUND OR NOT IS NOT RELEVANT. THE ONLY QUESTION IS WHETHER THE TRANSACTION WAS ENTERED INTO BONA FIDE OR NOT OR WHETHER IT WAS SHAM AND ONLY FOR THE PURPOSE OF DIVERTING THE PROFITS. REV ERTING TO THE FACTS OF THE EXTANT CASE, WE FIND THAT THE ASSESSEE FURNISHED SO ME EVIDENCE IN SUPPORT OF SOME OF THE SERVICES, THOUGH SUCH EVIDENCE WAS NOT COMPLETE AS HAS BEEN RECORDED BY THE TPO IN RESPECT OF OTHER SERVICES, S UCH AS, CONTROLLERS, CORPORATE LAW, PROCUREMENT, TREASURY AND BUSINESS A DVISORY. THUS, THE ITA NO.1153/DEL/2015 7 INTERNATIONAL TRANSACTION OF RECEIPT OF SERVICES EN TERED INTO BY THE ASSESSEE WITH ITS AES PRIMA FACIE DOES NOT APPEAR TO BE BOGUS, AT LEAST TO SOME EXTENT FOR WHICH EVIDENCE WAS FURNISHED. 6. IT IS FOUND THAT THE TPO REJECTED THE TNMM AS AP PLIED BY THE ASSESSEE AND STATED TO HAVE APPLIED THE CUP METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF RECEIPT OF INTRA-GROUP SERVICES. WHILE APPLYING THE CUP METHOD, IT WAS OBLIGATORY UP ON HIM TO BRING ON RECORD SOME COMPARABLE UNCONTROLLED INSTANCES AVAIL ING SIMILAR SERVICES AS PER THE MANDATE OF RULE 10B(1)(A)(I). NOT EVEN A S INGLE COMPARABLE CASE HAS BEEN BROUGHT ON RECORD TO FACILITATE A COMPARIS ON BETWEEN THE PRICE FOR THE SERVICES AVAILED BY THE ASSESSEE VIS--VIS THAT PAID BY OTHER COMPARABLES IN SIMILAR CIRCUMSTANCES. 7. EVEN OTHERWISE, WE NOTICE THAT THE ACTION OF THE TPO IN DETERMINING NIL ALP OF THE ELEVEN SERVICES AND RS.48.00 LAC OF INFORMATION TECHNOLOGY ON THE GROUND THAT NO SUCH SERVICES WERE REQUIRED T O BE AVAILED OR IT WAS A CASE OF DUPLICATION OF SERVICES OR SHAREHOLDERS SE RVICES AND THEN THE AO MAKING ADDITION SIMPLY ON THE BASIS OF RECOMMENDATI ON OF THE TPO, IS NOT ITA NO.1153/DEL/2015 8 IN ACCORDANCE WITH THE JUDGMENT OF THE HONBLE JURI SDICTIONAL HIGH COURT IN CIT V. CUSHMAN & WAKEFIELD (INDIA) (P.) LTD. (2014) 367 ITR 730 (DEL ), IN WHICH IT HAS BEEN HELD THAT THE AUTHORITY OF THE TPO IS LIMITED TO CONDUCTING TRANSFER PRICING ANALYSIS FOR DETERMININ G THE ALP OF AN INTERNATIONAL TRANSACTION AND NOT TO DECIDE IF SUCH SERVICES EXIST OR BENEFITS DID ACCRUE TO THE ASSESSEE. SUCH LATER ASPECTS HAVE BEEN HELD TO BE FALLING IN THE EXCLUSIVE DOMAIN OF THE AO. IN THAT CASE, IT WA S OBSERVED THAT THE E- MAILS CONSIDERED BY TRIBUNAL FROM MR. BRAGANZA AND MR. CHOUDHARY DEALT WITH SPECIFIC INTERACTION AND RELATED TO BENEFITS O BTAINED BY ASSESSEE, PROVIDING A SUFFICIENT BASIS TO HOLD THAT BENEFIT A CCRUED TO ASSESSEE. AS THE DETAILS OF SPECIFIC ACTIVITIES FOR WHICH COST WAS I NCURRED BY BOTH AES (FOR ACTIVITIES OF MR. BRAGANZA AND MR. CHOUDHARY), AND ATTENDANT BENEFITS TO ASSESSEE WERE NOT CONSIDERED, THE HON'BLE HIGH COUR T REMANDED THE MATTER TO FILE OF CONCERNED AO FOR AN ALP ASSESSMENT BY TP O, FOLLOWED BY AO'S ASSESSMENT ORDER IN ACCORDANCE WITH LAW CONSIDERING THE DEDUCTIBILITY OR OTHERWISE AS PER SECTION 37(1) OF THE ACT. 8. WHEN WE ADVERT TO THE FACTS OF THE INSTANT CASE, IT TURNS OUT THAT THE TPO PROPOSED THE TRANSFER PRICING ADJUSTMENT OF RS. 25.74 CRORE AND ODD ITA NO.1153/DEL/2015 9 ALMOST EQUAL TO THE STATED VALUE OF THE INTERNATION AL TRANSACTION BY HOLDING THAT NO BENEFIT WAS RECEIVED BY THE ASSESSEE AS A R ESULT OF AVAILING THESE SERVICES OR THESE AMOUNTED TO DUPLICATION OF SERVIC ES OR SHAREHOLDERS SERVICES AND HENCE NO PAYMENT ON THESE SCORES WAS W ARRANTED. THE AO IN HIS DRAFT ORDER HAS TAKEN ALP OF THESE INTERNATIONA L TRANSACTION AT RS.48.00 LAC ON THE BASIS OF RECOMMENDATION OF THE TPO WITHO UT CARRYING OUT ANY INDEPENDENT INVESTIGATION IN TERMS OF THE DEDUCTIBI LITY OR OTHERWISE OF SUCH PAYMENT IN TERMS OF SECTION 37(1) OF THE ACT. THE A DDITION HAS BEEN MADE BY THE AO IN HIS FINAL ASSESSMENT ORDER GIVING EFFE CT TO THE DIRECTION GIVEN BY THE DRP AND NOT BY INVOKING SECTION 37(1) OF THE ACT. AS PER THE RATIO DECIDENDI OF CUSHMAN & WAKEFIELD INDIA (P.) LTD. (SUPRA) , THE TPO WAS REQUIRED TO SIMPLY DETERMINE THE ALP OF THE INT ERNATIONAL TRANSACTION, UNCONCERNED WITH THE FACT, IF ANY BENEFIT ACCRUED T O THE ASSESSEE AND THEREAFTER, IT WAS FOR THE AO TO DECIDE THE DEDUCTI BILITY OF THIS AMOUNT U/S 37(1) OF THE ACT. AS THE TPO IN THE INSTANT CASE IN ITIALLY DETERMINED RS.48.00 LAC AS THE ALP OF THE INTERNATIONAL TRANSA CTION OF RS.26.22 CRORE BY HOLDING THAT NO BENEFIT ETC. ACCRUED TO THE ASSE SSEE AND THE AO MADE THE ADDITION WITHOUT EXAMINING THE APPLICABILITY OF SEC TION 37(1) OF THE ACT, WE ITA NO.1153/DEL/2015 10 FIND THE ACTIONS OF THE AO/TPO RUNNING IN CONTRADIC TION WITH THE RATIO LAID DOWN IN CUSHMAN & WAKEFIELD (SUPRA) . FOLLOWING THIS DECISION AND THE DISCUSSION MADE SUPRA , WE ARE OF THE CONSIDERED OPINION THAT THE IMPUGN ED ORDER CANNOT STAND. THE SAME IS, THEREFORE, SET ASI DE AND THE MATTER IS REMITTED TO THE FILE OF AO/TPO FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF `RECEIPT OF BUSINESS SUPPORT SERVIC ES DE NOVO AS PER LAW AFTER ALLOWING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. THE LD. AR HAS UNDERTAKEN TO EXTEND FULL CO-OPERATION TO TH E AO/TPO BY SUPPLYING ALL THE RELEVANT MATERIAL AND EVIDENCE AS DEMANDED. 9. GROUND NO.6 IS AGAINST THE DISALLOWANCE OF INTER EST AGGREGATING TO RS.9,39,413/- WHICH WAS PAID ON ACCOUNT OF LATE PAY MENT OF CENTRAL SALES- TAX, SERVICE TAX AND VALUE ADDED TAX. THE LD. AR C ONTENDED THAT THE ASSESSEE FILED RECTIFICATION APPLICATION BEFORE THE DRP, WHICH WAS DISPOSED OF VIDE ORDER DATED 21.05.2015. A COPY OF SUCH ORD ER HAS BEEN PLACED ON RECORD. SIMILAR TO GROUND NO.6 RAISED IN THE MEMOR ANDUM OF APPEAL BEFORE THE TRIBUNAL, THE ASSESSEE RAISED OBJECTION NO.2 BEFORE THE DRP IN RECTIFICATION APPLICATION AGAINST THE DISALLOWANCE OF INTEREST PAID ON CENTRAL SALES-TAX, SERVICE TAX AND VALUE ADDED TAX. THE DR P HAS DECIDED THIS ITA NO.1153/DEL/2015 11 ISSUE IN THE ASSESSEES FAVOUR VIDE PARA 3.2 OF ITS DIRECTION GIVEN IN RECTIFICATION PROCEEDINGS. THE A.O. IS DIRECTED TO GIVE EFFECT TO SUCH DIRECTIONS, WHICH THE LD. AR STATES HAS NOT BEEN DO NE SO FAR. 10. GROUND NO.7 IS AGAINST THE DISALLOWANCE OF INTE REST ON PAYMENT OF ADVANCE TAX AMOUNTING TO RS.8,86,431/-. THIS ISSUE HAS ALSO BEEN DEALT WITH BY THE DRP BY HOLDING THAT NO DEDUCTION CAN BE ALLOWED IN RESPECT OF INTEREST PAID FOR PAYMENT OF ADVANCE TAX. IT GOES WITHOUT SAYING THAT THE DECISION TAKEN BY THE DRP IS UNIMPEACHABLE AS HAS A LSO BEEN CONCEDED BY THE LD. AR THAT THE PAYMENT OF SUCH INTEREST CANNOT BE ALLOWED. THE LD. AR, HOWEVER, SUBMITTED THAT THE DEDUCTION ON ACCOUNT OF SUCH INTEREST CLAIMED BY THE ASSESSEE HAS BEEN VOLUNTARILY REVERSED BY TH E ASSESSEE IN THE SUCCEEDING YEAR. IN OUR CONSIDERED OPINION, THE SUO MOTU OFFERING OF INCOME IN A LATER YEAR, WILL NOT MAKE THE AMOUNT D EDUCTIBLE IN THE YEAR UNDER CONSIDERATION, WHICH HAS BEEN RIGHTLY HELD TO BE NOT DEDUCTIBLE. THE ASSESSEE IS AT LIBERTY TO TAKE REMEDIAL ACTION IN R ESPECT OF SUCH OFFERING OF INCOME IN A LATER YEAR IN APPROPRIATE PROCEEDINGS. ITA NO.1153/DEL/2015 12 11. GROUND NO.8 IS AGAINST NOT SETTING OFF OF BROUG HT FORWARD UNABSORBED DEPRECIATION OF RS.9,60,34,623/- WHILE COMPUTING IN COME OF THE ASSESSEE. THE A.O. IS DIRECTED TO EXAMINE THIS CONTENTION AND DEAL WITH THE SAME AS PER LAW. 12. THE LAST GROUND REGARDING LEVY OF INTEREST U/S 234B IS CONSEQUENTIAL. 13. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES ONLY. THE ORDER PRONOUNCED IN THE OPEN COURT ON 21.08.201 8. SD/- SD/- [BEENA A. PILLAI] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 21 ST AUGUST, 2018. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.