DCIT, Bangalore V. M/s G.E. Intelligent Platforms Pvt. Ltd.,, Bangalore

ITA 148/BANG/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5560 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 18-01-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 13-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RAJA SHEKAR REDDY
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, B ENGALURU BEFORE SHRI GEORGE GEORGE K , JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) A NO. 148 / BANG/20 1 5 (ASSESSMENT YEAR: 2010 - 11 ) DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 3(1)(2 ), BENGALURU. VS. M/S. GE INTELLIGENT PLATFORM PVT. LTD., APPELLANT 1 ST FLOOR, BUILDING 9, 43, ELECTRONIC CITY, HOSUR ROAD, BENGALURU - 560 100. PAN: AAACG 7573 K RESPONDENT AND IT (TP) A NO. 164/ BANG/20 15 (ASSESSMENT YEAR: 2010 - 1 1 ) M/S. GE INTELLIGENT PLATFORM PVT. LTD., BENGALURU. APPELLANT VS. DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 3(1)(2), BENGALURU. RESPONDENT REVENUE BY : SHRI RAJAN VORA, CA. ASSESSEE BY : SHRI RAJA SHEKAR REDDY, CIT(DR ) DATE OF HEARING : 18/01/2017 DATE OF PRONOUNCEMENT : 04 /04 /2017 O R D E R PER I NTURI RAMA RAO, AM : THESE ARE CROSS APPEALS BY THE REVENUE AS WELL AS THE ASSESSEE DIRECTED AGAINST THE ASSESSMENT ORDER PASSED U/S IT (TP) A NO S . 148 & 164 /BANG/201 5 PAGE 2 OF 11 143(3) R.W.S. 144C INCOME - T AX ACT, 1961 ['THE ACT' FOR SHORT] DATED 15/12/2014 FOR THE ASSESSMENT YEAR 2010 - 11. 2. BRIEFLY FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY DULY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINESS OF MANUF ACTURE OF PROGRAMMABLE LOGIC CONTROLLERS, AUTOMATION SOFTWARE AND RELATED AUTOMATION PRODUCTS. IT IS A SUBSIDIARY OF M/S.GE INTELLIGENT PLATFORMS INC. 3. RETURN OF INCOME FOR ASSESSMENT YEAR 2010 - 11 WAS FILED ON 08/10/2010 DECLARING TOTAL INCOME OF RS.5,30,33,789/ - . THE ASSESSEE - COMPANY ALSO REPORTED IN FORM 3C E B THE FOLLOWING INTERNATIONAL TRANSACTION WITH ITS AES: THE ASSESSEE SOUGHT TO JUSTIFY CONSIDERATION RECEIVED FOR INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ITS AE TO BE AT ARM S LENGTH PRICE. THE ASSESSEE - COMPANY SUBMITTED THAT TRANSFER PRICING (TP) STUDY ADOPTING OPERATING PROFIT TO SALES (OP/TO SALES) AS PROFIT LEVEL INDICATOR FOR TP STUDY. THE ASSESSEE - COMPANY APPLIED TNMM WHICH WAS CONSIDERED TO BE MOST APPROPRIATE METHOD FOR THE PURPOSE OF BENCH MARKING ITS INTERNATIONAL IT (TP) A NO S . 148 & 164 /BANG/201 5 PAGE 3 OF 11 TRANSACTIONS. THE ASSESSEE - COMPANY S PROFIT MARGIN WAS COMPUTED AT 4.9% IN RESPECT OF MANUFACTURING SEGMENT. FOR THE PURPOSE OF COMPARISON, THE ASSESSEE - COMPANY HAD CHOSEN 3 COMPARABLE ENTITIES AND ARITHMETICAL A VERAGE OF THE SAID COMPANY WAS COMPUTED AT 4.77%. ACCORDING TO THE ASSESSEE - COMPANY, ITS PLI WAS WITHIN RANGE OF +/ - OF THE ARITHMETICAL MEAN OF THE COMPARABLE ENTITIES. HENCE, IT WAS CLAIMED THAT INTERNATIONAL TRANSACTION OF THE ASSESSEE WITH ITS AES AR E AT ARM S LENGTH PRICE. THE ASSESSEE - COMPANY HAD CHOSEN THE FOLLOWING 3 ENTITIES WHOSE AVERAGE MARGIN OF SALES WAS COMPUTED AT 4.77%, AS COMPARABLES: I. AMTECH ELECTRONICS (INDIA) LTD., II. CHEMTROLS INDUSTRIES LTD. III. PMA CONTROLS INDIA LTD. THE ASSESSING OFFI CER (AO) REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER (TPO) FOR THE PURPOSE OF BENCH MARKING ITS INTERNATIONAL TRANSACTION. TPO, BY ORDER DATED 30/01/2014 PASSED U/S 92CA(3) COMPUTED TP ADJUSTMENT AT RS.5,58,02,486/ - THE TPO ACCEPTED TNMM ADOPTED B Y THE ASSESSEE - COMPANY BUT REJECTED TP STUDY REPORT. WHILE DOING SO, TPO APPLIED THE FOLLOWING FILTERS: I) USING CURRENT DATA ALONE II) THE TPO REJECTED THE ASSESSEE S CLAIM FOR ADJUSTMENT TO ITS OWN OPERATING MARGIN TOWARDS EXTRAORDINARY AND NON - RECURRING EXP ENSES WHICH RESULTED IN LOSS TO THE COMPANY. IT (TP) A NO S . 148 & 164 /BANG/201 5 PAGE 4 OF 11 THE TPO ALSO HELD THAT PROFIT ADJUSTMENT CAN BE MADE ONLY TO NET PROFIT MARGIN OF THE COMPARABLE COMPANIES AND NOT TO MARGINS OF TESTED PARTY. THE TPO DID NOT PROVIDE ANY ADJUSTMENT TO WORKING CAPITAL BETWEEN AS SESSEE AND COMPARABLE ENTITY. THE TPO REJECTED MEGA TECH C ONTRO L LTD. O N THE GROUND THAT THE COMPANY INCURRED ABNORMAL LOSSES DURING THE FINANCIAL YEAR . BY ADOPTING THE ABOVE, THE TPO SELECTED THE FOLLOWING COMPANIES AS COMPARABLES: NAME OF THE COMPANY AVERAGE MARGIN AMTECH ELECTRONICS (INDIA) LTD., 4.66% CHEMTROLS INDUSTRIES LTD. 4.00% PMA CONTROLS INDIA LTD. 5.66% THE TPO COMPUTED AVERAGE MARGIN OF THE COMPARABLES FINALLY SELECTED AT 4.77% . ON THE SAID BASIS, THE TPO COMPUTED TP ADJUSTMENT: 4. THE A SSESSING OFFICER (AO) PASSED DRAFT ASSESSMENT ORDER DATED 28/02/2014 AND THE SAME WAS SERVED ON THE ASSESSEE. AFTER RECEIPT OF DRAFT ASSESSME NT ORDER, ASSESSEE - COMPANY FILED OBJECTIONS BEFORE THE DISPUTES RESOLUTION PANEL (DRP) CONTENDING INTER ALIA THAT THE TPO WAS NOT JUSTIFIED IN REJECTING TP DOCUMENTATION MAINTAINED BY THE ASSESSEE - COMPANY AND NOT TREATING INCOME FROM ADMINISTRATIVE SERVICE S AS OPERATING REVENUE AND NOT PROVIDING FOR ADJUSTMENT FOR NON - RECURRING IT (TP) A NO S . 148 & 164 /BANG/201 5 PAGE 5 OF 11 EXPENDITURE AND CHALLENGING EXCLUSION OF M EGATECH CONTROL L TD., FROM THE LIST OF COMPARABLES. THE DRP DIRECTED THE AO/TPO TO TREAT INCOME FROM ADMINISTRATIVE SERVICES AS PART OF OPE RATING REVENUE AS THE EXPENSES INCURRED IN DERIVING INCOME FROM ADMINISTRATIVE SERVICES IS NOT EXCLUDED FROM OPERATING COST. HOWEVER, THE DRP UPHELD THE ACTION OF THE TPO NOT ADJUSTING THE OPERATING COST TOWARDS NON - RECURRING EXPENDITURE. THE DRP ALSO CO NFIRMED THE ACTION OF THE TPO IN EXCLUDING MEGATECH CONTROL LTD. 5. THE AO, AFTER RECEIPT OF DIRECTIONS OF THE DRP, PASSED FINAL ASSESSMENT ORDER DATED 15/12/2014 U/S 143(3) R.W.S. 144C OF THE ACT MAKING TP ADJUSTMENT OF RS.5,28,59,604/ - AFTER MAKIN G DISALLOWANCE TOWARDS PROVISION FOR WARRANTY OF RS.17,28,452/ - AND TOWARDS PROVISIONS FOR OBSOLESCENCE OF RS.43,54,177/ - . 6. BEING AGGRIEVED BY THE ORDER OF ASSESSMENT, THE ASSESSEE IS IN APPEAL IN ITA NO.164/BANG/2015 RAISING THE FOLLOWING GROUNDS OF APPEAL: IT (TP) A NO S . 148 & 164 /BANG/201 5 PAGE 6 OF 11 IT (TP) A NO S . 148 & 164 /BANG/201 5 PAGE 7 OF 11 7 . GRO UND NOS.1, 2 AND 3 ARE GENERAL IN NATURE. GROUND NO.4 WAS NOT PRESSED DURING THE COURSE OF HEARING. 8 . GROUND NO.5 CHALLENGES THE ACTION OF THE TPO AS CONFIRMED BY THE DRP FOR NOT ADJUSTING FOR EXTRAORDINARY EXPENSES /OF NON - RECURRING EXPENSES MADE BY THE ASSESSEE - COMPANY TO OPERATING COST LIKE HIGH MANUFACTURING COST, HIGH PERSONNEL COST, EXECUTION OF LOW MARGIN DEALS AND HIGH IMPORT CONTENT COST WHILE COMPUTING THE OPERATING MARGIN OF THE COMPANY. IT IS THE CONTENTION OF THE ASSESSEE - COMPANY THAT DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION, LEVEL OF SALES I.E. OPERATING CAPACITY WAS NOT SUFFICIENT TO ABSORB EXTRAORDINARY EXPENSES/LOSS INCURRED ON ACCOUNT OF BUSINESS STRATEGY, HIG H BASE COST DUE TO LOW SALES, HIGH IMPORT CONTENT DURING THE YEAR WITH THE INTENTION OF EXPANDING BUSINESS. IT WAS SUBMITTED THAT THESE EXPENSES WERE INCURRED KEEPING IN VIEW ANTICIPATED EXPENSES OF OPERATION OF THE IT (TP) A NO S . 148 & 164 /BANG/201 5 PAGE 8 OF 11 COMPANY IN FUTURE AND DIRECTLY RELATABL E TO MANUFACTURING ACTIVITY OF THE COMPANY. ACCORDING TO THE ASSESSEE - COMPANY THE FOLLOWING EXPENSES ARE REQUIRED TO BE EXCLUDED WHILE COMPUTING THE OPERAT ING MARGINS OF THE COMPANY: AFTER HEARING RIVAL SUBMISSIONS AND PERUSING MATERIAL ON RECORD, NOW T HE LAW IS QUITE SETTLED TO THE EXTENT THAT ONCE THERE IS UNUTILIZED CAPACITY OR MEN POWER , SUCH UNDERUTILIZATION IMPACT S MARGIN AND THEREFORE, THE ADJUSTMENT SHOULD BE MADE WHILE COMPUTING THE ALP. BUT THE ONUS LIES ON THE ASSESSEE TO ESTABLISH THERE IS U NDER - UTILIZATION OF THE CAPACITY AND UNDER - UTILIZATION IS MORE THAN AVERAGE UNDERUTILIZATION IN THE INDUSTRY . IF THE UNDERUTILIZATION IS MORE THAN AVERAGE UNDERUTILIZATION OF THE INDUSTRY THEN NECESSARY ADJUSTMENT IS REQUIRED TO BE MADE TO THE MARGIN OF C OMPUTING ALP. BUT IN THE PRESENT CASE, THE ASSESSEE - COMPANY FAILED TO DEMONSTRATE UNDER - U TILISATION OF THE CAPACITY IN ASSESSEE S OWN CASE AND ALSO NOT FALLING BELOW AVERAGE RATE OF UNDERUTILIZATION IN THE INDUSTRY. IN THE CIRCUMSTANCES, WE REMAND THE MAT TER BACK TO THE FILE OF THE AO/TPO TO ADJUDICATE THIS ISSUE IT (TP) A NO S . 148 & 164 /BANG/201 5 PAGE 9 OF 11 IN ACCORDANCE WITH LAW AFTER DUE OPPORTUNITY TO THE ASSESSEE - COMPANY. 9. THE ASSESSEE ALSO RAISED THE FOLLOWING ADDITIONAL GROUNDS OF APPEAL: IT IS PRAYED THAT THE ADDITIONAL GROUNDS MAY BE ADMITTED AS THE ADDITIONAL GROUNDS ARE ONLY CONSEQUENTIAL AND MAY BE ADMITTED IN THE LIGHT OF THE FOLLOWING DECISIONS: I. NATIONAL THERMAL POWER CO. LTD. VS. CIT (229 ITR 383)(SC) II. JUTE CORPORATION OF INDIA LTD. (187 ITR 68)(SC) AND III. AHMEDABAD ELECTRICITY CO. LTD . (199 ITR 351)(BOM)(FB) 10. THE ADDITIONAL GROUNDS OF APPEAL ARE ADMITTED IN VIEW OF THE FACT THAT NO FRESH INVESTIGATION OF MATERIAL IS REQUIRED. HOWEVER, SINCE THE TPO HAD NO OCCASION TO ADJUDICATE ON THIS MATTER, SINCE THESE GROUNDS WERE NOT RAISED BEFORE HIM, WE IT (TP) A NO S . 148 & 164 /BANG/201 5 PAGE 10 OF 11 REMAND THE MAT T ER BACK TO THE FILE OF THE TPO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. 11. IN REGARD TO O THER GROUNDS RELATING TO CORPORATE ISSUES, DRP HAS ALREADY RENDERED A FINDING DIRECT ING THE AO/TPO TO VERIFY TAX CREDIT AND BROUGHT FORWARD LOSSES. THEREFORE, THE ASSESSEE - COMPANY IS NOT AGGRIEVED BY THE DIRECTIONS OF THE DRP. HENCE, THE APPEAL IS DISMISSED. 12. THE REVENUE IS IN APPEAL CHALLENGING THE DIRECTION OF THE DRP DIRECTING INCOME FROM ADMINISTRATIVE S ERVICES AS PART OF OPERATING REVENUE. THE REVENUE RAISED THE FOLLOWING GROUNDS OF APPEAL: THE FINDING OF THE DPO IS AS FOLLOWS : IT (TP) A NO S . 148 & 164 /BANG/201 5 PAGE 11 OF 11 THE FINDING OF THE DRP IS BASED ON SETTLED POSITION OF LAW AND DO NOT REQUIRE ANY INTERFERENCE . 13. IN THE RESULT , THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH APRIL, 201 7 S D/ - SD/ - ( GEORGE GEORGE K ) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : BENGALURU . D A T E D : 04 / 0 4 /2017 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER ASSIS TANT REGISTRAR INCOME - TAX APPELLATE TRIBUNAL BANGALORE .