M/s Goodrich Aerospace Services Private Limited, Bangalore V. DCIT, Bangalore

ITA 116/BANG/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 6778 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 03-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR PRA DEEP KUMAR
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Set aside
• Section: 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R BASKARAN, ACCOUNTANT MEMBER IT(TP)A NO.116/BANG/2016 ASSESSMENT YEAR : 2011-12 M/S GOODRICH AEROSPACE SERVICES PVT. LTD., #14/1, 15/1, MARUTHI INDUSTRIAL ESTATE, PHASE-2, HOODI VILLAGE, WHITEFIELD ROAD, BENGALURU-560 048. PAN AAACB 8857 H. VS. THE DY. COMMISSIONER OF INCOME- TAX, CIRCLE-3(1)(2), BENGALURU. APPELANT RESPONDENT A ND IT(TP)A NO.252/BANG/2016 ASSESSMENT YEAR : 2011-1 2 THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)(2), BENGALURU. VS. M/S GOODRICH AEROSPACE SERVICES PVT. LTD., #14/1, 15/1, MARUTHI INDUSTRIAL ESTATE, PHASE-2, HOODI VILLAGE, WHITEFIELD ROAD, BENGALURU-560 048. PAN AAACB 8857 H. APPELANT RESPONDENT APPELLANT BY : SHRI K.R VASUDEVAN, ADVOCATE RESPONDENT BY : DR. PRADEEP KUMAR, CIT DATE OF HEARING : 04.04.2019 DATE OF PRONOUNCEMENT : 24.04.2019 IT(TP)A NOS.116 & 252/BANG/2016 PAGE 2 OF 7 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THESE ARE CROSS-APPEALS BY THE ASSESSEE AND REV ENUE AGAINST FINAL ORDER DATED 28/12/2015 PASSED BY DICT CIRCLE- 3(1)(2), BENGALURU U/S 143(3) R.W.S 144C OF THE INCOME-TAX ACT 1961 (THE A CT) IN RELATION TO ASST. YEAR 2010-11. 2. WE SHALL FIRST TAKE UP FOR CONSIDERATION OF GROU ND NO.4 OF THE GROUNDS OF APPEAL IN THE ASSESSEES APPEAL WHICH RE ADS AS FOLLOWS:- 4. THE HON'BLE DRP ERRED IN COMPARING THE APPELLAN T WITH FUNCTIONALLY DIFFERENT COMPARABLE COMPANIES EN GAGED IN PROVIDING DIVERSE IT ENABLED SERVICES IN THE NAT URE OF MEDICAL TRANSCRIPTION, RECEIVABLES MANAGEMENT, DATA EXTRACTION, AGGREGATION, ELECTRONIC CONVERSION OF F INANCIAL STATEMENTS ETC. WITHOUT APPRECIATING THAT THE APPEL LANT IS ENGAGED IN PROVIDING LOW END CONTRACT ENGINEERING D ESIGN SERVICES. 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING AND EXPORT OF AIRCRAFT SAFETY AND EVA CUATION SYSTEMS, ASSEMBLY OF AIRCRAFT LIGHTING SYSTEM, CARGO SYSTEMS , ELECTRICAL POWER SYSTEMS, PRIMARY AND SECONDARY CONTROL ACTUATION SY STEM AND OFFSHORE DESIGN SERVICES. THE DISPUTE IN THIS APPEAL IS WITH REGARD TO DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TR ANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE. IN VI EW OF THE PROVISION OF SEC. 92 OF THE ACT WHICH LAYS DOWN THAT INCOME FROM AN I NTERNATIONAL TRANSACTION HAS TO BE DETERMINED HAVING REGARD TO ARMS LENGTH P RICE. THE AO MADE A REFERENCE FOR DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF AN INTERNATIONAL TRANSACTION OF RENDERING ENGINEERING DESIGN SERVICES BY THE IT(TP)A NOS.116 & 252/BANG/2016 PAGE 3 OF 7 ASSESSEE TO GOODRICH GROUP COMPANIES WORLDWIDE. AS PER THE AGREEMENT DATED 1/1/2009 BETWEEN GOODRICH CORPORATI ON USA AND THE ASSESSEE, THE ASSESSE HAS TO PERFORM ENGINEERING AN D DESIGN SERVICES FOR GOODRICH CORPORATION USA. GOODRICH CORPORATION US A FROM TIME TO TIME, ASSINGS SPECIFIED ENGINEERING AND DESIGN PROJECTS T O THE ASSESSEE. THE CONSIDERATION RECEIVED BY THE ASSESSEE FOR PROVIDIN G ENGINEERING DESIGN SERVICES WAS SUM OF RS.89,78,79,938/-. THE ASSESSE E ADOPTED THE PROFIT LEVEL INDICATOR (PLI) AS OPERATING PROFIT (OP) TO O PERATING COST (OC) WHICH WAS 14.36% IN THE CASE OF THE ASSESSEE. THE ASSESS EE HAD CHOSEN IN ITS TP STUDY TRANSACTION NET MARGIN METHOD (TNMM) METHO D AS THE MOST APPROPRIATE METHOD (MAM) FOR DETERMINATION OF ARMS LENGTH PRICE. THE ASSESSEE HAS CHOSEN IN HIS TP STUDY COMPANIES THAT WERE ENGAGED IN PROVIDING ENGINEERING DESIGN SERVICES. IN THE TP AN ALYSIS THE ASSESSEE HAD GIVEN THE FOLLOWING DESCRIPTION WITH REGARD TO THE SERVICES RENDERED BY IT TO THE GROUP COMPANIES. ORDER THE SERVICE SEGMENT, GASPL PROVIDES SERVICES IN THE NATURE OF ENGINEERING DESIGN SERVIC ES, TO GOODRICH GROUP COMPANIES WORLDWIDE. ENGINEERING DESIGN SERVICES: GASPL IS ENGAGED IN TH E DESIGN AND DEVELOPMENT OF VARIOUS PRODUCTS ACROSS THE THREE SEGMENTS NAMELY ACTUATION AND LANDING SYSTEMS, NACELLES AND INTERIOR SYSTEMS, AND ELECTRONIC SYSTEMS. THESE SERVICES INCLUDE DESIGN AND DEVELOPMENT OF VARIOUS PARTS AIRCRAFT, MODELLIN G, DESIGN, TESTING AND SIMULATION SERVICES. 4. THE TPO IN HIS SHOW CAUSE NOTICE DATED 24/11/201 4 CHARACTERIZED THE NATURE OF THE TRANSACTION BETWEEN THE ASSESEE A ND ITS AE AS INFORMATION TECHNOLOGY ENABLED SERVICES (ITES). AC CORDINGLY THE TPO PROCEEDED TO DETERMINE THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION OF RENDERING ENGINEERING DESIGN SERVICE S, WHICH WAS IT(TP)A NOS.116 & 252/BANG/2016 PAGE 4 OF 7 CHARACTERIZED BY THE TPO AS ITES, TREATING THE NAT URE OF SERVICE PROVIDED BY THE ASSESSEE AS ITES. 5. IN THE OBJECTIONS BY THE ASSESSEE BEFORE THE DR P AGAINST THE DRAFT ORDER OF ASSESSMENT PASSED BY THE AO INCORPORATING THE DI RECTIONS OF THE TPO, ASSESSEE RAISED ISSUE THAT IT WAS NOT AN ITES COMP ANY AND, THEREFORE, COMPARABLES CHOSEN BY THE TPO ON THE ASSUMPTION THA T IT WAS AN ITES COMPANY WAS ERRONEOUS AND THAT COMPARABLES CHOSEN B Y THE ASSESSEE IN ITS TP STUDY ON THE BASIS THAT THE NATURE OF SERVIC ES RENDERED WERE ENGINEERING DESIGN SERVICES SHOULD BE ACCEPTED 6. THIS ASPECT WAS DEALT WITH BY THE DRP IN THE FOL LOWING MANNER. 2.5 THAT THE 'EARNED AO/LEARNED TPO ERRED IN DISREGARDING THE FUNCTIONAL PROFILE OF THE ASSESSEE AND IN COMPARING THE LOW END ENGINEERING DESIGN SERVICE S PROVIDED BY THE ASSESSEE WITH COMPANIES PROVIDING IT ENABLED SERVICES IN THE NATURE OF MEDICAL TRANSCRIP TION, RECEIVABLES MANAGEMENT, PRODUCT DEVELOPMENT, TRANSLATION SERVICES, DATA EXTRACTION, AGGREGATION, ELECTRONIC CONVERSION OF FINANCIAL STATEMENTS, VALI DATION AND ANALYSIS, ACCOUNTING AND FINANCE, RESEARCH AND ANALYTICS ETC. HAVING CONSIDERED THE SUBMISSION, IT IS NOTICED BY US THAT IN THE SAFE HARBOR RULES FOR TRANSFER PRICI NG NOTIFIED BY THE CBDT, 'KNOWLEDGE PROCESSES OUTSOURCING SERVICES' INCLUDE ENGINEERING AND DESIG N SERVICES; , THEREFORE, WE ARE OF THE VIEW THAT THE FUNCTIONS PERFORMED BY THE ASSESSEE ARE AKIN TO KPO AND THEREFORE THERE IS NO INFIRMITY IN SELECTING TH E ITES COMPARABLES. HOWEVER, THE OBJECTION IN REGARD TO SPECIFIC COMPANIES HAVE BEEN DISCUSSED AND DECIDED IN THE SUBSEQUENT PARAGRAPHS. IT(TP)A NOS.116 & 252/BANG/2016 PAGE 5 OF 7 7. BEFORE US, THE LD COUNSEL FOR THE ASSESEE SUBMIT TED THAT AN IDENTICAL ISSUE HAD COME UP FOR CONSIDERATION BEFORE THIS TRI BUNAL IN THE CASE OF M/S FLOWSERVE INDIA CONTROLS PVT. LTD., VS. DCIT TP 127 7/BANG/2011 FOR ASST. YEAR 2007-08 DATED 2/5/2018 AND THIS TRIBUNAL SET A SIDE THE ORDERS OF THE REVENUE AUTHORITIES WITH A DIRECTION TO FIRST DECID E ON THE CHARACTERIZATION OF THE FUNCTIONS PERFORMED BY THE ASSESSEE. FOLLOW ING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE AND THE MATERIAL ON RECORD AND ARE OF THE VIEW THAT IT WAS NOT CORRECT TO CHARACTERIZE THE ASSESSEE AS PROVIDING L IES. FIRST OF ALL, THE TPO DOES NOT APPEAR TO BE FOLLOWING A C ONSISTENT POSITION OVER THE YEARS. FURTHER, IN ASSESSMENT YEA R 2011- 12, REVENUE HAS ALSO ACCEPTED THE SERVICES RENDERED BY THIS SEGMENT AS 'ENGINEERING & DESIGN SERVICES'. WE ALSO FIND THAT THE CHARACTERIZATION IS NOT IN TUNE WITH THE FUNCTIONAL ANALYSIS DONE IN THE TP STUDY AS THE IPO HAS NOT BR OUGHT ON RECORD ANY EVIDENCE WHICH MIGHT ESTABLISH THAT THE CHARACTERIZATION HAS TO BE ITES ONLY. IN VIEW OF TH E UNCLEAR / UNESTABLISHED FACTUAL POSITION AS EMERGES FROM AN APPRECIATION OF THE DETAILS ON RECORD, WE DEEM IT A PPROPRIATE TO REMAND THE MATTER BACK TO THE FILE OF THE TPO AN D DIRECT THAT THE CHARACTERIZATION OF THE ASSESSEE SHALL BE DONE IN ACCORDANCE WITH LAW, AFTER AFFORDING THE ASSESSEE A DEQUATE OPPORTUNITY OF BEING HEARD AND TO MAKE SUBMISSIONS AND FILE DETAILS ETC REQUIRED WHICH SHALL BE DULY CONSIDERE D. CONSEQUENTLY, GROUNDS 2 TO 5 AND THE ADDITIONAL GRO UND (SUPRA) ARE TREATED AS ALLOWED FOR STATISTICAL PURP OSES. 8. WE FIND THAT THE FACTS IN THE PRESENT APPEAL AR E IDENTICAL TO THE FACTS AS DECIDED BY THE TRIBUNAL. FOLLOWING THE AFORESAI D RULING, WE SET ASIDE THE ORDER OF THE AO ON THE ISSUE OF DETERMINATION O F ALP AND REMAND THE MATTER BACK TO THE FILE OF THE TPO WITH A DIRECTION TO DECIDE THE CHARACTERIZATION OF THE SERVICES PERFORMED BY THE A SSESSEE. IN THIS REGARD, IT(TP)A NOS.116 & 252/BANG/2016 PAGE 6 OF 7 THE SUBMISSION OF THE LD COUNSEL FOR THE ASSESEE WA S THAT THE CBDT CIRCULAR ON WHICH RELIANCE WAS PLACED BY THE DRP DO NOT APPLICABLE IN THIS CASE. THIS ASPECT IS ALSO LEFT OPEN FOR CONSIDERAT ION BY THE TPO IN THE SET ASIDE PROCEEDINGS. 9. IN VIEW OF THE ABOVE AFORESAID DECISION AND GROU ND NO.4, THE OTHER ISSUES RAISED BY THE ASSESSEE AND THE REVENUE IN TH EIR RESPECTIVE APPEALS DO NOT REQUIRE ANY CONSIDERATION AT THIS STAGE. 10. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS TR EATED AS ALLOWED FOR STATISTICAL PURPOSES WHILE THE APPEAL BY THE REVENU E IS DISMISSED AS NOT REQUIRING CONSIDERATION AT THIS STAGE. ORDER PRONOUNCED IN THE OPEN COURT ON 24TH APRIL, 2019 . SD/- SD/- ( B.R BASKARAN ) ( N.V. VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, 24 TH APRIL , 2019. / VMS / COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.