ADVANCE POWER DISPLAY SYSTEMS LTD, MUMBAI V. DCIT CIR 8(1), MUMBAI

ITA 1653/MUM/2014

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2328 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 23-07-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 10-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: Y P TRIVEDI
• Keywords: Depreciation; Transfer pricing; International transaction; Rule of consistency
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER & SHRI N K BILLAIYA, AM ./ ITA NO.1653/MUM/2014 / ASSESSMENT YEAR 2009-10 ADVANCE POWER DISPLAY SYSTEMS LTD. UNIT NO.8 SDF, SEEPZ, ANDHERI (E), MUMBAI 400 096 PAN AAACA5970G VS. THE DCIT CIR 8(1), MUMBAI ( /APPELLANT) ( /RESPONDENT) APPELLANTS BY : SHRI Y P TRIVEDI & MS. USHA DALAL RESPONDENT BY : SHRI N K CHAND !' / DATE OF HEARING :16.11.2015. !' / DATE OF PRONOUNCEMENT : 20.11.2015 / O R D E R PER N K BILLAIYA, ACCOUNTANT MEMBER: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ASSESSMENT ORDER DATED 20.01.2014 MADE U/S. 143(3) R.W.S. 144C(13) OF THE ACT. THE ASSESSEE IS AGGRIEVED BY THE TRANSFER PRICING ADJUSTMENT OF RS.13,46,11,0 58/-. 2. THE ASSESSEE IS AN EXPORT ORIENTED UNIT ENGAGED IN THE BUSINESS OF ELECTRONIC MANUFACTURING SPECIALIZING IN ASSEMBLY AND TEST OF SWITCH MODE POWER SUPPLIES. 3. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES: ITA NO.1653/MUM/2014 ADVANCE POWER DISPLAY SYSTEMS LTD. 2 S.NO. DESCRIPTION OF THE TRANSACTIONS ASSOCIATED ENTERPRISE AMOUNT (RS. IN CRORES) A.Y. 2009-10 1 IMPORT OF RAW MATERIALS QCS QCSYS 106.87 6.84 2 EXPORT OF FINISHED GOODS QCSYS 172.02 3 PURCHASE OF FIXED ASSETS QCS QC SYS 1.07 0.2058 A REFERENCE WAS MADE TO THE TPO FOR THE DETERMINATI ON OF ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE AS PER THE PROVISIONS OF LAW. 4. DURING THE COURSE OF TRANSFER PRICING PROCEEDING S, THE TPO NOTICED THAT THE ASSESSEE HAS NOT PRODUCED ANY FRESH TRANSFER PRICIN G STUDY REPORT BUT HAS RELIED UPON THE TRANSFER PRICING STUDY FOR F.Y 2007-08 REL EVANT TO A.Y. 2008-09 ON THE GROUND THAT THE ASSESSEE AS WELL AS THE TRANSACTION S AS REGARDS FAR ANALYSIS ESSENTIALLY REMAINED THE SAME. THE TPO PROCEEDED B Y THIS ADMISSION OF THE ASSESSEE. 5. THE ASSESSEE WAS ASKED TO SUBMIT THE WORKING OF ADJUSTMENT FOR THE YEAR UNDER CONSIDERATION ON THE SAME LINES AS WAS DONE I N AY 2008-09. THE ASSESSEE GAVE THE WORKING OF THE SAME COMPARABLE WITH UPDATE D MARGINS FOR THE CURRENT YEAR. THE SAME COMPARABLES WERE ADOPTED BY THE TPO IN A Y 2008-09. 6. THE ASSESSEE HAS SHOWN COST PLUS MARGIN AT 6.26% . THE WORKING OF THE SAME READ AS UNDER: PARTICULARS AMOUNT (RS.) OPERATING INCOME 1,720,276,369 OPERATING COST MANUFACTURING EXPENSES 1,367,538,644 EMPLOYEE COST 158,616,665 GENERAL & ADMINISTRATIVE EXPENSES 49,326,000 DEPRECIATION 44,010,583 CHANGE OF STOCK 13,000,532 FOREIGN EXCHANGE FLUCTUATION 10,523,084 OPERATING COSTS 1,643,015,508 LESS: ADJ. FOR ACCELERATE DEPRECIATION 9,004,050 ADJ. FOR FIXED COST 16,669,851 ITA NO.1653/MUM/2014 ADVANCE POWER DISPLAY SYSTEMS LTD. 3 TOUR ADJUSTMENT 25,673,901 ADJUSTED OPERATING COST 1,617,341,607 OPERATING PROFIT 102,934,762 COST PLUS MARGIN 6.26% THE ASSESSEE WAS ASKED TO JUSTIFY THE REASONS FOR W HICH ADJUSTMENT OF FIXED COST AND ACCELERATED DEPRECIATION SHOULD BE ALLOWED. TH E ASSESSEE FILED DETAILED REPLY VIDE LETTER DATED 17.12.2012. THE ASSESSEES REPLY WAS TWO-FOLD; FIRSTLY, ON ACCOUNT OF ACCELERATED DEPRECIATION AND SECONDLY, ON ACCOUN T OF LOWER CAPACITY UTILIZATION OF THE ASSETS. IN SO FAR AS THE CLAIM OF LOWER CAPACI TY OF UTILIZATION IS CONCERNED, THE TPO FOLLOWED THE STAND TAKEN BY THE TPO IN THE EARL IER A.Y. I.E. 2008-09 AND HAS DRAWN SUPPORT FROM THE FINDINGS GIVEN FOR A.Y. 2008 -09. THE TPO DISMISSED THE CLAIM OF THE ASSESSEE. 7. IN SO FAR AS THE CLAIM OF ADJUSTMENT FOR ACCELER ATED DEPRECIATION IS CONCERNED, THE TPO WAS OF THE FIRM BELIEF THAT THE ADJUSTMENTS, IF ANY, HAVE TO BE MADE ONLY TO THE MARGINS OF THE COMPARABLE COMPANIE S AND NOT TO THE TESTED PARTIES AS HAS BEEN CLAIMED BY THE ASSESSEE. THE T PO REJECTED THE CLAIM ON THIS POINT ALSO. THE TPO PROCEEDED BY COMPUTING THE MAR GINS OF THE TESTED PARTIES AFTER REJECTING THE CLAIM OF THE ASSESSEE AND THE S AME READS AS UNDER: PARTICULARS AMOUNT (RS.) OPERATING INCOME 1,720,276,369 OPERATING COST MANUFACTURING EXPENSES 1,367,538,644 EMPLOYEE COST 158,616,665 GENERAL & ADMINISTRATIVE EXPENSES 49,326,000 DEPRECIATION 44,010,583 CHANGE OF STOCK 13,000,532 FOREIGN EXCHANGE FLUCTUATION 10,523,084 OPERATING COSTS 1,643,015,508 OPERATING PROFIT 7,72,60,861 COST PLUS MARGIN 4.70% ITA NO.1653/MUM/2014 ADVANCE POWER DISPLAY SYSTEMS LTD. 4 8. IN SO FAR AS THE COMPARABLES ARE CONCERNED, THE ASSESSEE HAS SELECTED FOLLOWING COMPARABLES AS HAS BEEN DONE IN THE EARLI ER ASSESSMENT YEAR. SR. NO. NAME OF THE COMPANY OP/OC 1 ALPHA TRANSFORMERS 22.53 2 BBC FUBA INDIA - 13.68 3 CIRCUIT SYSTEMS II 6.26 4 ECE INDUSTRIES (SEG) 8.22 5 INCAP 5.28 6 TOYAMA ELECTRIC 5.91 7 VOLTAMP TRANSFORMERS 22.53 8 HYDERABAD FLEXTECH - 26.92 THE TPO DID NOT ACCEPT HYDERABAD FLEXTECH AS A COMP ARABLE COMPANY SINCE IT WAS A PERPETUAL LOSS MAKING COMPANY. 9. AFTER EXCLUDING HYDERABAD FLEXTECH AS A PERPETUA LLY LOSS MAKING COMPARABLE AND AFTER CONSIDERING THE SEGMENTAL PROFITS OF ECE ON THE BASIS TAKEN DURING THE PRECEDING A.Y. 2008-09, THE PROFIT IS WORKED OUT @ 1.94% AND THE TPO CONCLUDED BY MAKING THE ADJUSTMENT WORKED OUT AS UNDER:- PARTICULARS AMOUNT (RS.) OPERATING INCOME (A) 1,720,276,369 OPERATING COST MANUFACTURING EXPENSES 1,367,538,644 EMPLOYEE COST 158,616,665 GENERAL & ADMINISTRATIVE EXPENSES 49,326,000 DEPRECIATION 44,010,583 CHANGE OF STOCK 13,000,532 FOREIGN EXCHANGE FLUCTUATION 10,523,084 OPERATING COSTS (B) 1,643,015,508 OPERATING PROFIT (C) 7,72,60,861 OP/OC (ACTUAL) 4.70% ARMS LENGTH OP/OC 9.14% ARMS LENGTH OPERATING PROFIT (D) = B X 9.14% 15,01,71,617 ARMS LENGTH OPERATING INCOME (E)= D +B 179,31,87,125 ADJUSTMENT = E - A 7,29,10,756 THE TPO MADE AN ADJUSTMENT OF RS.7,29,10,756/- ITA NO.1653/MUM/2014 ADVANCE POWER DISPLAY SYSTEMS LTD. 5 10. THE MATTER WAS CARRIED BEFORE THE DRP. THE ASS ESSEE STRONGLY OBJECTED TO THE ADJUSTMENTS MADE BY THE TPO. THE OBJECTIONS RA ISED BEFORE THE DRP WERE ON THE SAME LINES AS WERE TAKEN BEFORE THE TPO. 11. THE CONTENTIONS/OBJECTIONS OF THE ASSESSEE DID NOT FIND FAVOUR WITH THE DRP, WHO WAS OF THE OPINION THAT THE DRP HAS ALREADY TAK EN A VIEW IN THE EARLIER ASSESSMENT YEAR AGAINST THE ASSESSEE. HOWEVER, ON GOING THROUGH THE COMPARABLES, THE DRP FOUND THAT THE TPO HAS CONSIDE RED BCC FUBA INDIA LTD., AS A COMPARABLE. THE DRP OBSERVED THAT IN AY 2003-04, T HIS COMPANY WAS REJECTED AS A COMPARABLE BY THE TRIBUNAL ON ACCOUNT OF THE FACT T HAT IT WAS SHOWING PERSISTENT LOSSES. ACCORDINGLY, IN EXERCISE OF POWERS VESTED UPON THE DRP U/S. 144C(8) READ WITH EXPLANATION, THE DRP EXCLUDED THIS COMPANY FRO M THE FINAL LIST OF COMPARABLES AND ISSUED NECESSARY DIRECTIONS FOR THE COMPLETION OF THE ASSESSMENT. FOLLOWING THE DIRECTIONS OF THE DRP AN UPWARD ADJUSTMENT OF R S.13,46,11,058/- WAS MADE BY THE AO. AGGRIEVED BY WHICH THE ASSESSEE IS BEFORE US. 12. BEFORE US THE LEARNED SENIOR COUNSEL PRESENTED HIS SUBMISSIONS, WHICH WERE THREE FOLD. FIRSTLY, HE STRONGLY ARGUED UPON THE P OINT RAISED DURING THE PROCEEDINGS BEFORE THE LOWER AUTHORITIES RELATING TO INSTALLED CAPACITY QUA UTILIZATION CAPACITY. IT IS THE SAY OF THE LEARNED SENIOR COUNSEL THAT THE I NSTALLED CAPACITY WAS 17 LACS WHEREAS THE UTILIZED CAPACITY WAS MUCH LESS BECAUSE OF WHICH THE FIXED COST HAVE BECOME VERY HEAVY. THE LEARNED COUNSEL FURTHER POI NTED OUT THAT IN SUPPORT OF THIS CONTENTION THE ASSESSEE HAD PRODUCED CERTIFICATE FR OM THE CHARTERED ACCOUNTANT, WHICH DID NOT FIND ANY FAVOUR WITH THE REVENUE AUTH ORITIES. THE COUNSEL FURTHER STATED THAT AN IDENTICAL ISSUE WAS THERE BEFORE THE TRIBUNAL IN A.Y. 2008-09 AND THE TRIBUNAL HAS RESTORED THE MATTER BACK TO THE FILE O F THE TPO WITH A DIRECTION TO EXAMINE THE VERACITY OF THE ASSESSEES CONTENTION A BOUT THE INSTALLED CAPACITY AND THE ACTUAL UTILIZATION. 13. SECONDLY, THE LEARNED SENIOR COUNSEL ARGUED ON THE CLAIM OF ACCELERATED DEPRECIATION. IT IS THE SAY OF THE LEARNED COUNSEL THAT THE ASSESSEE WANTED TO RE- ADJUST THE HIGHER DEPRECIATION. THIS CLAIM WAS ALS O NEGATED BY THE TPO AND THE DRP. THE COUNSEL BROUGHT TO THE NOTICE OF THE BENC H THE DECISION OF THE TRIBUNAL IN ITA NO.1653/MUM/2014 ADVANCE POWER DISPLAY SYSTEMS LTD. 6 A.Y. 2008-09, WHEREIN THE BENCH HAS FOLLOWED THE FI NDINGS OF THE CO-ORDINATE BENCH IN THE CASE OF PETRO ARALDITE (P.) LTD., 35 TAXMANN .COM 590 IN ITA NO. 3782/MUM/2011. 14. THIRDLY, THE COUNSEL SUBMITTED HIS CASE ON THE SELECTION OF THE FINAL COMPARABLES. IT IS THE SAY OF THE COUNSEL THAT ONE COMPARABLE WAS IGNORED BY THE TPO WHILE THE DRP REMOVED ONE MORE WITHOUT REFERRIN G THE MATTER BACK TO THE TPO. THE COUNSEL STRONGLY RELIED UPON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE FOR A.Y. 2003 -04. 15. PER CONTRA, THE DR STRONGLY SUPPORTED THE FINDI NGS OF THE REVENUE AUTHORITIES. THE DR OBJECTED TO THE CLAIM OF EXCLUSION OF TWO CO MPARABLES. IT IS THE SAY OF THE DR THAT BOTH THE COMPANIES FAIL TO PASS THE TEST OF FILTER ADOPTED BY THE ASSESSEE ITSELF. HE FURTHER POINTED OUT THAT BOTH THESE COM PANIES VIZ., HYDERABAD FLEXTECH LTD. AND BCC FUBA INDIA LTD ARE PERPETUAL LOSS MAKI NG COMPANIES AND BY ASSESSEES OWN FILTERS THESE COMPANIES DO NOT PASS THE TEST. THEREFORE, THERE IS NO REASON WHY THESE TWO COMPANIES SHOULD NOT BE EXCLUDED. 16. WE HAVE HEARD THE RIVAL SUBMISSIONS AT LENGTH. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ORDER OF THE AUTHORITIES BELOW AND WITH THE ASSISTANCE OF THE LEARNED SENIOR COUNSEL WE HAVE CONSIDERED THE RELEV ANT DOCUMENTARY EVIDENCE BROUGHT ON RECORD BEFORE US. IN SO FAR AS THE ISSU E OF CAPACITY UTILIZATION QUA ACTUAL UTILIZATION IS CONCERNED, THE SAME WAS CONSIDERED B Y THE TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO. 6490/MUM/2012 FOR A.Y. 2008-09. THE ISSUE FINDS PLACE AT PARA 14, WHEREIN THE CO-ORDINATE BENCH HAS FOLLOWED THE PRINCIPLE LAID DOWN BY THE TRIBUNAL IN THE CASE OF M/S. PETRO ARALDITE (P.) LT D. (SUPRA). AFTER DISCUSSING THE DECISION OF THE TRIBUNAL IN THE CASE OF PETRO ARALD ITE (P.) LTD AT LENGTH THE TRIBUNAL FINALLY CAME TO THE CONCLUSION IN VIEW OF THE ABOVE, THE ENTIRE MATTER OF TRANSFE R PRICING ADJUSTMENT IS RESTORED TO THE FILE OF THE A O TO DEAL AND DECIDE THIS ISSUE AFRESH AND IN ACCORDANCE WITH THE PROVISIONS OF LAW AND ALSO AFTER CONSIDERING THE RATIO OF THE AFORESAID DECISIONS OF THE TRIBUNAL. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH AND FOLLOWING THE RULE OF CONSISTENCY, WE RESTORE THE ISSUES ITA NO.1653/MUM/2014 ADVANCE POWER DISPLAY SYSTEMS LTD. 7 RELATING TO THE TRANSFER PRICING ADJUSTMENT TO THE FILE OF THE AO. THE AO IS DIRECTED TO DECIDE THE SAME IN LINE WITH THE DIRECTIONS GIVE N FOR A.Y. 2008-09. 17. IN SO FAR AS THE CLAIM OF ACCELERATED DEPRECIAT ION IS CONCERNED, THIS ISSUE IS TAKEN CARE OF BY THE DECISION OF THE TRIBUNAL FOR A .Y. 2008-09, WHICH WE HAVE RELIED UPON AND DIRECT THE AO TO DECIDE THE ISSUE FOR THE YEAR UNDER CONSIDERATION ALSO FOLLOWING THE ORDER FOR A.Y. 2008-09. 18. IN SO FAR AS THE THIRD CONTENTION RELATING TO T HE EXCLUSION OF TWO COMPARABLES VIZ. HYDERABAD FLEXTECH LTD. AND BCC FUBA INDIA LTD . IS CONCERNED, UNDISPUTEDLY, THESE TWO COMPANIES ARE LOSS MAKING COMPANIES AS DE MONSTRATED BY THE LEARNED DR SUCCESSFULLY. HOWEVER, THE TPO EXCLUDED HYDERAB AD FLEXTECH LTD. AND CONSIDERED BCC FUBA INDIA LTD. ON THE SAME GROUND T HAT THE COMPANY IS LOSS MAKING; THIS IS SELF CONTRADICTORY AND, THEREFORE, IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE RESTORE THIS ISSUE ALSO TO THE FILES OF TH E AO. THE AO IS DIRECTED TO DECIDE THE ISSUE AFRESH AFTER VERIFYING WHETHER THESE TWO COMPANIES ARE PERPETUAL LOSS MAKING COMPANIES OR HAVE SHOWN LOSS FOR THE YEAR UN DER CONSIDERATION ONLY. THE ASSESSEE IS DIRECTED TO FURNISH ALL NECESSARY DETAI LS, WHICH WILL INCLUDE THE UNDER UTILIZATION OF CAPACITY BY THE COMPARABLE, PERPETUA L LOSS OR OTHERWISE MADE BY THE TWO COMPANIES VIZ. HYDERABAD FLEXTECH LTD. AND BCC FUBA INDIA LTD. THE AO IS DIRECTED TO CONSIDER THE DETAILS AND DECIDE THE ENT IRE ISSUE OF TRANSFER PRICING ADJUSTMENT AFTER GIVING A REASONABLE AND FAIR OPPOR TUNITY OF BEING HEARD TO THE ASSESSEE. 19. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF NOVEMBER, 2015. SD/- SD/- (SAKTIJIT DEY) (N K BILLAIYA) %& /JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; '% DATED : 20 TH NOVEMBER, 2015. SA ITA NO.1653/MUM/2014 ADVANCE POWER DISPLAY SYSTEMS LTD. 8 / COPY OF THE ORDER FORWARDED TO : 1. /THE APPELLANTS. 2. / THE RESPONDENT. 3. (! ( ) / THE CIT(A), MUMBAI. 4. (! / CIT 5. )*+ ! , , / DR, K BENCH, ITAT, MUMBAI % / BY ORDER, )! ! //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI