Magotteaux Industries Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 1592/DEL/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6911 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 08-08-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 18-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUNESH KUMAR
• Assessee Lawyers: VIDUR PURI
• Keywords: Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction
• Section: 92C; 92A; 234B

Judgement Text

.IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I : NEW DELHI) BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1592/DEL./2014 (ASSESSMENT YEAR : 2009-10) M/S. MAGOTTEAUX INDUSTRIES PVT.LTD., VS. DCIT, CO.C IRCLE 6(1), 410, 4 TH FLOOR, SURYA KIRAN BUILDING, NEW DELHI. 19, KASTURBA GANDHI MARG, NEW DELHI 110 001. (PAN : AAACM9907B) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIDUR PURI, CA REVENUE BY : SHRI MUNESH KUMAR, CIT DR DATE OF HEARING : 09.08.2016 DATE OF ORDER : 22.09.2016 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. MAGOTTEAUX INDUSTRIES PVT. LTD. (HE REINAFTER REFERRED TO AS THE ASSESSEE), BY FILING THE PRESE NT APPEAL SOUGHT TO SET ASIDE THE ORDER PASSED BY THE AO/TPO/DRP UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1 961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2009-10 ON THE G ROUNDS INTER ALIA THAT :- ITA NO.1592/DEL./2014 2 1. ON THE (ACTS AND IN LAW THE LEARNED ASSESSING OFFICER (LD. AO), LEARNED TRANSFER PRICING OFFICER (LD. TPO) ERRED AND HON'BLE DRP ERRED IN CONFIRMING THE ADDITION OF INCOME BY RS.4,42,08,235 AS ADJUSTMENT AT ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. 2.1 ON THE FACTS AND IN LAW, THE LD. AO, LD. TPO A ND HON'BLE DRP ERRED IN DETERMINING THE ARM'S LENGTH P RICE OF ROYALTY PAYMENTS TO ITS A.E. AT NIL 2.2 ON THE FACTS AND IN LAW, THE ID. AO, LD. TPO A ND HON'BLE DRP ERRED IN HOLDING THAT THE ASSESSEE COUL D NOT JUSTIFY THE PAYMENT OF ROYALTY TO ITS AE. 2.3 ON THE FACTS AND IN LAW, THE LD. AO, LD. TPO A ND HON'BLE DRP ERRED IN TREATING RS.1,20,70,435 AS ADJUSTMENTS U/S 92A ON ACCOUNT OF PAYMENT OF ROYALT Y TO ITS AE WHEN THE ACTUAL ROYALTY CHARGED TO PROFIT AN D LOSS ACCOUNT WAS RS.1,12,70,219 AND CLAIMED IN RETURN OF INCOME FOR THE YEAR, AFTER OFFERING RS.8,00,216 AS PRIOR PERIOD EXPENSE. 3.1 ON THE FACTS AND IN LAW, THE LD. AO, LD. TPO A ND HON'BLE DRP ERRED IN LAW AND ON FACTS IN DETERMININ G THE ARM'S LENGTH PRICE OF INTRA GROUP SERVICES RECEIVED AT NIL. 3.2 ON THE FACTS AND IN LAW, THE ID. AO, LD. TPO A ND HON'BLE DRP ERRED IN HOLDING THAT THERE WERE NO INT RA GROUP SERVICES ACTUALLY RECEIVED BY THE ASSESSEE FR OM ITS AE'S. 3.3 ON THE FACTS AND IN LAW, THE LD. AO, LD. TPO AN D HON'BLE DRP ERRED IN TREATING RS.3,14,87,895 AS ADJUSTMENTS U/S 92A ON ACCOUNT OF INTRA GROUP SERVI CES WHEN THE ASSESSEE HAS ACTUALLY CHARGED TO PROFIT AN D LOSS ACCOUNT RS.2,57,91,160 FOR INTRA GROUP SERVICES REC EIVED AND CLAIMED IN RETURNED INCOME FOR THE YEAR, AFTER OFFERING RS.48,20,700 AS PRIOR PERIOD EXPENSE. 4. THE HON'BLE DRP ERRED ON FACTS AND IN LAW IN NOT CONSIDERING THE SUPPORTING DOCUMENTS IN RESPECT OF ROYALTY AND INTRA-GROUP SERVICES FILED DURING THE C OURSE OF THE PROCEEDINGS. ITA NO.1592/DEL./2014 3 5. ON THE FACTS AND IN LAW, THE LD. AO, LD. TPO AND HON'BLE DRP ERRED IN ENHANCING THE ARM'S LENGTH PRI CE OF MARKET SUPPORT SERVICE CHARGED BY RS.6,49,905 TO RS.54,28,236 INSTEAD OF ACTUAL RECEIPTS OF RS.47,78 ,331. 6. ON THE FACTS AND IN LAW, THE LD. AO, LD. TPO AND HON'BLE DRP ERRED IN NOT ALLOWING BENEFIT OF VARIAT ION OF 5% WHILE DETERMINING THE ADDITIONS OF RS.4,42,08,23 5 ON THE BASIS OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION, WHICH IS ALLOWABLE AS PER PROVISO TO S ECTION 92C (2) OF THE INCOME TAX ACT, 1961. 7. ON THE FACTS AND IN LAW, THE LD. AO ERRED IN NOT ALLOWING MAT CREDIT OF RS.56,28,145 U/S 115JAA OF T HE INCOME TAX ACT, 1961. 8. ON THE FACTS AND IN LAW, THE LD. AO ERRED IN EX CESS INTEREST CHARGED U/S 234B OF THE INCOME TAX ACT. 9. ON THE FACTS AND IN LAW, THE LD. AO, LD. AO ERRE D IN EXCESS INTEREST OF RS.3,96,342 CHARGED U/S 234C OF THE INCOME TAX ACT, 1961 WHICH IS CHARGEABLE ON THE RETURNED INCOME. 2. BRIEFLY STATED THE FACTS OF THIS CASE ARE : ASSE SSEE GROUP COMPRISES MAGOTTEAUX GROUP SA FOUNDED IN 1920 IN LI EGE BY LUCIEN MAGOTTEAUX AND IS MARKET LEADER IN BOTH GRIN DING MEDIA AND CASTINGS. ASSESSEE GROUP PROVIDES WORLDWIDE AD APTED SOLUTIONS I.E. PRODUCTS AND EXPERTISE TO INCREASE T HE WEAR RESISTANCE TO ABRASION, CORROSION OR IMPACT OF SPECIALIZED CAS TING PRODUCTS USED IN GRINDING, CRUSHING AND OTHER PROCESSES. AS SESSEE FILED RETURN OF INCOME DECLARING TAXABLE INCOME AT RS.4,1 4,45,462/- WHICH IT HAS REVISED ON THE SAME DATE DECLARING SAM E INCOME BY ITA NO.1592/DEL./2014 4 EXPLAINING THAT IT HAD NOT ADJUSTED CREDIT OF TAX A VAILABLE TO THE ASSESSEE COMPANY U/S 115JAA OF THE ACT IN THE ORIGI NAL RETURN DUE TO INADVERTENT ERROR. DURING SCRUTINY PROCEEDINGS, SHRI AFSAR JAMIL, CA/AR FOR THE ASSESSEE PUT IN APPEARANCE, FU RNISHED REQUISITE DETAILS, BOOKS OF ACCOUNT AND BILLS/VOUCH ERS. 3. PURSUANT TO THE REFERENCE MADE TO THE TRANSFER P RICING OFFICER (TPO) U/S 92CA(1) OF THE ACT TPO HAS PASSED ORDER DATED 30.01.2013 U/S 92CA(3) OF THE ACT PROPOSING AN ADJU STMENT OF RS.4,42,08,235/- BEING DIFFERENCE IN ARMS LENGTH P RICE (ALP). DISPUTE RESOLUTION PANEL (DRP), AFTER CONSIDERING O BJECTIONS RAISED BY THE ASSESSEE COMPANY TO THE DRAFT ASSESSM ENT ORDER PASSED BY THE AO, UPHELD THE UPWARD TP ADJUSTMENT O F RS.4,42,08,235/- MADE BY THE TPO. PURSUANT TO THE ORDER PASSED BY TPO/LD. DRP, THE AO ASSESSED THE INCOME OF THE A SSESSEE COMPANY AT RS.8,56,53,697/- (RS.4,14,45,462/- INCOM E DECLARED BY THE ASSESSEE COMPANY + RS.4,42,08,235/- ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT). 4. FEELING AGGRIEVED, THE ASSESSEE HAS COME UP BEFO RE THE TRIBUNAL BY CHALLENGING THE IMPUGNED ORDER PASSED B Y AO/TPO/DRP BY WAY OF PRESENT APPEAL. 5. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ITA NO.1592/DEL./2014 5 ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 6. AT THE VERY OUTSET, LD. AR FOR THE ASSESSEE COMP ANY FAIRLY CONCEDED THAT HE DOES NOT WANT TO PRESS GROUNDS NO. 5 & 7 AND CONSEQUENTLY, GROUNDS NO.5 & 7 ARE DISMISSED HAVING NOT BEEN PRESSED BY THE ASSESSEE COMPANY. GROUND NO.1 7. GROUND NO.1 IS GENERAL IN NATURE WHICH WOULD BE COVERED AND DISCUSSED UNDER GROUNDS NO.2.1, 2.2, 2.3, 3.1, 3.2, 3.3 AND 4. GROUNDS NO.2.1, 2.2 & 2.3 8. UNDISPUTEDLY, ASSESSEE COMPANY HAS ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATE ENTERP RISES (AES) DURING FY 2008-09 AS UNDER :- S.NO. NATURE OF TRANSACTION AMOUNT (IN INR) 1. PURCHASE OF RAW MATERIALS 6,68,11,684 2. SALE OF FINISHED GOODS 23,16,64,685 3. PAYMENT OF ROYALTY 1,20,70,435 4. RECEIPT OF SERVICES 3,14,87,895 5. PROVISION OF SUPPORT SERVICES (AMOUNT RECEIVED) 47,78,331 6. COST REIMBURSEMENT (PAID) 2,50,51,980 7. OTHER RECEIPTS 16,99,028 8. INTEREST ON LOANS 42,26,328 ITA NO.1592/DEL./2014 6 9. IT IS ALSO NOT IN DISPUTE THAT ASSESSEE COMPANY HAD DEBITED THE PAYMENT TO THE TUNE OF RS.1,20,70,435/- ON ACCO UNT OF PAYMENT OF ROYALTY DURING THE YEAR UNDER CONSIDERATION AND JUSTIFIED THE PAYMENTS OF THESE AMOUNTS BY AGGREGATING TRANSACTIO NS ALONG WITH OTHER INTERNATIONAL TRANSACTIONS BASED ON CUP. ASS ESSEE CLAIMED THAT THE COMPARABLES OPERATING MARGIN IS 5.25% AND THAT OF ASSESSEE IS 6% (ON THE NET SALES OF XWIN PRODUCTS), 4.5% (ON NET SALES OF CLASSIC PRODUCTS) AND HOWEVER, EFFECTIVE R ATE OR ROYALTY IS 1.91%. 10. TPO AS WELL AS DRP CAME TO THE CONCLUSION THAT SINCE THE ASSESSEE COMPANY COULD NOT JUSTIFY THE PAYMENT OF R OYALTY TO ITS AES ADJUSTMENT ON THIS ACCOUNT HAS TO BE MADE. LD. AR FOR THE ASSESSEE HAS ALSO RAISED A GROUND THAT TPO/DRP HAVE ERRED IN TREATING THE AMOUNT OF RS.1,20,70,435/- AS ADJUSTME NTS U/S 92A ON ACCOUNT OF PAYMENT OF ROYALTY TO ITS AES WHEN THE A CTUAL ROYALTY CHARGED TO THE PROFIT AND LOSS ACCOUNT WAS RS.1,12, 70,219/- AND CLAIMED IN RETURN OF INCOME FOR THE YEAR UNDER ASSE SSMENT AFTER OFFERING RS.8,00,216/- AS PRIOR PERIOD EXPENSES. L D. AR FURTHER CONTENDED THAT IN THE LIGHT OF THE JUDGMENT CITED A S CIT VS. EKL APPLIANCES (2012) 345 ITR 241 (DELHI) AND CIT VS. CUSHMAN & WAKEFIELD INDIA (P) LTD. 367 ITR 730 (DELHI) , THE MATTER IS REQUIRED TO BE REMANDED BACK TO THE TPO FOR VERIFYI NG THE FACTS. ITA NO.1592/DEL./2014 7 11. HONBLE JURISDICTIONAL HIGH COURT IN JUDGMENT C ITED AS CIT VS. EKL APPLIANCES (SUPRA) WHILE DEALING WITH THE IDENTICAL ISSUES RETURNED THE FOLLOWING FINDINGS :- SECTION 92C OF THE INCOME-TAX ACT, 1961 - TRANSFER PRICING - COMPUTATION OF ARM'S LENGTH PRICE - ASSES SMENT YEARS 2002-03 AND 2003-04 - WHETHER IT IS NOT NECES SARY FOR ASSESSEE TO SHOW THAT ANY LEGITIMATE EXPENDITUR E INCURRED BY HIM WAS INCURRED OUT OF NECESSITY; AND THAT ANY EXPENDITURE INCURRED BY HIM FOR PURPOSE OF BUSI NESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT - HELD, YES - WHETHER QUANTUM OF EXPENDITURE CAN, NO DOUBT, BE EXAMINED BY TPO, BUT IN JUDGING ALLOWABILITY THEREO F AS BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALL OW ENTIRE EXPENDITURE OR A PART THEREOF ON GROUND THAT ASSESSEE HAS SUFFERED CONTINUOUS LOSSES - HELD, YES - ASSESSEE-COMPANY ENTERED INTO KNOW-HOW/BRAND FEE AGREEMENT WITH ITS ASSOCIATED ENTERPRISE UNDER WHIC H IT PAID BRAND FEE/ROYALTY FOR USING ITS BRAND NAME - I N' COMPUTATION OF ALP, TPO HELD THAT ASSESSEE HAD BEEN CONTINUOUSLY INCURRING HUGE LOSSES AND, THEREFORE, PAYMENT OF BRAND FEE/ROYALTY WAS UNJUSTIFIED AS AGREEMENT WITH ASSOCIATED ENTERPRISE HAD NOT BENEFI TED ASSESSEE IN ACHIEVING PROFITS FROM ITS OPERATIONS - ACCORDINGLY, HE DISALLOWED SAME - WHETHER WHEN FULL JUSTIFICATION SUPPORTED BY FACTS AND FIGURES HAD BE EN GIVEN BY ASSESSEE TO DEMONSTRATE THAT INCREASE IN EMPLOYEES COST, FINANCE CHARGES, ADMINISTRATIVE EXPENSES, DEPRECIATION COST AND CAPACITY INCREASE H AD CONTRIBUTED TO CONTINUOUS LOSSES, TPO WAS NOT JUSTI FIED IN DISALLOWING BRAND FEE IN COMPUTATION OF ALP - HELD , YES [IN FAVOUR OF ASSESSEE] 12. KEEPING IN VIEW THE LAW LAID DOWN BY THE HONBL E JURISDICTIONAL HIGH COURT AND THE FACT THAT THE CON TENTION OF THE ASSESSEE COMPANY THAT THE PAYMENT ON ACCOUNT OF ROY ALTY BY AGGREGATING TRANSACTION ALONG WITH ALL OTHER INTERN ATIONAL ITA NO.1592/DEL./2014 8 TRANSACTIONS BASED ON CUP HAS BEEN ACCEPTED BY THE REVENUE IN ASSESSEES OWN CASE QUA AY 2010-11 AND 2012-13 (TPO VIDE ORDER DATED 30.01.2014 QUA AY 2010-11 HELD THAT ON THE BA SIS OF FUNCTIONAL AND ECONOMIC ANALYSIS OF ASSESSEE COMPAN Y AND THAT OF COMPARABLES, NO ADVERSE INFERENCE IS DRAWN IN RESPE CT OF THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSE E DURING FY 2009-10), WE ARE OF THE CONSIDERED VIEW THAT THE MA TTER IS REQUIRED TO BE REMANDED TO THE TPO TO DECIDE AFRESH ON FURNI SHING THE FACTS BY THE ASSESSEE AFTER PROVIDING AN OPPORTUNITY OF B EING HEARD TO THE ASSESSEE. CONSEQUENTLY, GROUNDS NO.2.1, 2.2 & 2.3 ARE DETERMINED IN FAVOUR OF THE ASSESSEE FOR STATISTICAL PURPOSES. GROUNDS NO.3.1, 3.2, 3.3 & 4 13. LD. TPO/DRP HAVE MADE ADJUSTMENT IN RESPECT OF INTER- CORPORATE SERVICES TO THE TUNE OF RS.3,14,87,895/- ON THE GROUND THAT THE ASSESSEE COULD NOT FURNISH ANY DETAILS OF EXPENSES IN THE SHAPE OF SERVICE CHARGES AND CORPORATE SERVICES REC EIVED FROM ITS AES. DRP ALSO CAME TO THE CONCLUSION THAT SO FAR A S ADVISE ON FINANCIAL ACCOUNTING AND AUDITING MATTER IS CONCERN ED, THIS WORK IS PART AND PARCEL OF AUDIT PROCESS IN INDIA WHICH IS CARRIED OUT BY INDEPENDENT AUDITORS IN INDIA. TPO/DRP CAME TO THE CONCLUSION ITA NO.1592/DEL./2014 9 THAT THERE WERE NO INTRA-GROUP SERVICES RECEIVED BY THE ASSESSEE FROM ITS AES. 14. LD. AR FOR THE ASSESSEE COMPANY AGAIN RELIED UP ON CIT VS. EKL APPLIANCES (SUPRA) AND FURTHER CONTENDED THAT DURING THE AY 2010-11 AND AY 2012-13 IN ASSESSEES OWN CASE, THE REVENUE HAS ACCEPTED THE CONTENTION OF THE ASSESSEE THAT INTRA- GROUP SERVICES HAVE ACTUALLY BEEN RECEIVED BY THE ASSESSEE FROM IT S AES. EVEN OTHERWISE, THERE IS A MISTAKE APPARENT ON RECORD TH AT THE TPO/DRP HAVE TREATED RS.3,14,87,895/- AS ADJUSTMENT U/S 92A ON ACCOUNT OF INTRA-GROUP SERVICES WHEN THE ASSESSEE HAS ACTUALLY CHARGED TO PROFIT & LOSS ACCOUNT OF RS.2,57,91,160/- FOR INTRA -GROUP SERVICES RECEIVED AND CLAIMED IN RETURNED INCOME FOR THE YEA R UNDER ASSESSMENT AFTER OFFERING RS.48,20,700/- AS PRIOR P ERIOD CHARGES. SO, THE TPO REQUIRED TO VERIFY ALL THESE FACTS AND TO DECIDE THE ISSUE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEIN G HEARD TO THE ASSESSEE. SO, THIS ISSUE IS ALSO RESTORED TO THE T PO. CONSEQUENTLY, GROUNDS NO.3.1, 3.2, 3.3 & 4 ARE DETERMINED IN FAVO UR OF THE ASSESSEE FOR STATISTICAL PURPOSES. GROUND NO.6 15. GROUND NO.6 RAISED BY THE ASSESSEE COMPANY IS CONSEQUENTIAL IN NATURE. TPO/DRP IS DIRECTED TO AL LOW THE BENEFIT ITA NO.1592/DEL./2014 10 TO THE ASSESSEE AS PER PROVISO TO SECTION 92C(2) OF THE ACT IN CASE THERE IS VARIATION OF 5% IN DETERMINING THE ADDITIO N OF RS.4,42,08,235/- ON THE BASIS OF ALP. SO, CONSEQUE NTLY, THIS ISSUE IS ALSO DETERMINED IN FAVOUR OF THE ASSESSEE FOR ST ATISTICAL PURPOSES. GROUNDS NO.8 & 9 16. THE ISSUE RAISED IN GROUNDS NO.8 & 9 ARE CONSEQ UENTIAL IN NATURE AND AT THE SAME TIME, ARE PREMATURE ALSO. HE NCE, DO NOT REQUIRE ANY ADJUDICATION AT THIS STAGE. 17. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, THE I MPUGNED ORDER PASSED BY THE AO ON THE BASIS OF THE DIRECTIO NS ISSUED BY TPO/DRP IS SET ASIDE AND THE FILE IS ORDERED TO BE RESTORED TO THE FILE OF TPO TO DECIDE AFRESH. NEEDLESS TO SAY THAT ASSESSEE IS PROVIDED WITH AN OPPORTUNITY OF BEING HEARD. CONSEQ UENTLY, PRESENT APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS DAY 22 ND OF SEPTEMBER, 2016. SD/- SD/- (S.V. MEHROTRA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 22 ND DAY OF SEPTEMBER, 2016 TS ITA NO.1592/DEL./2014 11 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.