M/s. Venture Power Systems India Pvt Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1703/CHNY/2011

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8187 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 2 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 21-12-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 14-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MILIND MADHUKAR
• Keywords: Depreciation; Transfer pricing; International transaction; Difference of opinion; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 144C; 13

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: CHENNAI . . . , ! ' .. # $!% , ' () BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ! ./ ITA NO.1703/MDS/2011 * +* /ASSESSMENT YEAR: 2007-08 M/S.VENTURE POWER SYSTEMS INDIA PVT. LTD., PLOT A-30, D5, PHASE II, ZONE B, MADRAS EXPORT PROCESSING ZONE, TAMBARAM, CHENNAI 600 045. [PAN: AABCV 2686 B] VS. THE DCIT, COMPANY CIRCLE-III(4), CHENNAI. ( ,- /APPELLANT) ( ./,- /RESPONDENT) ,- 0 1 / APPELLANT BY : MR.S.SRIDHAR, ADV. ./,- 0 1 /RESPONDENT BY : MR.MILIND MADHUKAR- BASHUHARI, CIT (DR) # 0 2' /DATE OF HEARING : 21.12.2016 34+ 0 2' /DATE OF PRONOUNCEMENT : 13.01.2017 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : 1.0 THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST T HE ORDER DATED 29.10.2010 OF COMMISSIONER OF INCOME TAX (APPEALS)- III, CHENNAI, IN ITA NO.880/2010 FOR THE AY 2007-08. ITA NO.1703/MDS/2016 :- 2 -: 2.0 THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFAC TURING AND EXPORT OF ELECTRICAL BALLASTS AND COMPONENTS. THE COMPANY FILED ITS RETURN OF INCOME FOR THE AY 2007-08 WITH A NET INCOME OF R S.55,52,222/-. M/S.VENTURE POWER SYSTEMS INDIA PVT. LTD., IS A COM PANY PROMOTED BY VENTURE LIGHTING INC.USA IS ENGAGED IN THE MANUFACT URE OF HIGH INTENSITY DISCHARGE BALLAST. DURING THE PREVIOUS YEAR RELEV ANT TO THE ASSESSMENT YEAR THERE WAS AN INTERNATIONAL TRANSACTION OF RS.6 9.41 CR. WITH THE AE. THEREFORE, THE AO MADE REFERENCE TO THE TPO FOR DET ERMINING THE ARMS LENGTH PRICE. THE ASSESSE FOLLOWED TNMM METHOD FOR BENCH MARKING THE TRANSACTIONS WITH AE. THE TESTED PARTY IS ASSESSE S COMPANY AND PLI ADOPTED IS OPERATING PROFIT TO SALES. THE TPO NOTI CED FROM THE TP DOCUMENT AND OTHER SUBMISSIONS MADE BY THE ASSESSEE THAT IT REVEALED AN OPERATING MARGIN OF 3.053% IN RESPECT OF COMPARABLE S COMPANIES AND THE ASSESSEE COMPANYS MARGIN WAS ONLY 1.39%. 3.0 THE TPO CONDUCTED INDEPENDENT T.P. STUDY AND SELEC TED 18 COMPARABLES AND ARRIVED AT THE ARITHMETIC MEAN OF T HE COMPARABLES AT 10.48%. THE AO AFTER ISSUING SHOW CAUSE NOTICE, AD OPTED THE MARGIN AT 10.48% ON THE BASIS OF COMPARABLE COMPANIES SELECTE D AND DETERMINED THE ALP AND SUGGESTED FOR ADDITION OF RS.13,48,65,9 95/-. THE AO PASSED ASSESSMENT ORDER U/S.143(3) R.W.S. 144C OF INCOME T AX ACT MAKING THE ADDITION OF RS.13,48,65,995/- AS SUGGESTED BY THE T PO. ITA NO.1703/MDS/2016 :- 3 -: 4.0 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSE WENT ON APPEAL BEFORE THE CIT(A) CHALLENGING THE ADOPTION OF COMPA RABLE MARGIN AT 10.48% AGAINST THE ASSESSEE COMPANYS MARGIN OF 1.3 9% AND ADOPTION OF ENTIRE TURNOVER FOR DETERMINING THE ALP INSTEAD OF AE TURNOVER. THE LD.CIT(A) GIVEN A PARTIAL RELIEF DIRECTING THE AO TO APPLY THE PLI ONLY ON THE TURNOVER OF THE AE AND MAKE NECESSARY ADJUSTMEN TS IN ALP, AS A RESULT, THE UPWARD REVISION WORKED OUT RS.5,66,40,8 25/- ON WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 5.0 APPEARING FOR THE ASSESSEE, THE LD.AR ARGUE D THAT THE ASSESSEE COMPANYS MARGIN WAS 2.28% AND THE TPO WORKED OUT 1 .39% DUE TO DIFFERENCE OF OPINION WITH REGARD TO TPOS APPROACH IN TAKING THE PLI OF THE TOTAL TURNOVER INCLUDING NON-AES TURNOVER, WHEREAS THE ASSESSEE REPORTED PLI AT 2.28% IN THE PROFIT WHICH IS ARRIVED AT BASE D ON THE TURNOVER PERTAINING TO AE. THE TPO ADOPTED PLI OF COMPARABL ES AT 10.48% AS AGAINST THE PLI OF THE COMPARABLES TAKEN BY THE ASS ESSEE IN THE TP DOCUMENT AT 3.053% ON COST. FURTHER, THE LD.AR ARG UED THAT THE ASSESSEE HAS SELECTED 8 COMPARABLES AND JUSTIFIED ITS ARMS LENGTH PRICE WHERE AS THE AO HAS SELECTED 18 COMPARABLES WITH A TURNOVER RANGING FROM RS.3.00 CR. TO RS.730.00 CR. AGAINST ASSESSEE S TURNOVER OF RS.148.00 CR. THE LD.AR ARGUED THAT THE ASSESSEE H AS SELECTED THE COMPARABLES WITH TURNOVER FILTER RANGING FROM RS.60 .00 CR. TO RS.240.0 CR. AND FROM THE COMPARABLES SELECTED BY THE TPO, EIGHT COMPARABLES ARE ABNORMAL IN SIZE SHOULD BE ELIMINATED AND RE-COMPUT E THE ALP. THE ITA NO.1703/MDS/2016 :- 4 -: LD.AR, FURTHER, ARGUED THAT COMPARABLES OF WELL-EST ABLISHED AND BIG SIZE COMPANIES WITH MEDIUM SIZE COMPANIES GIVES THE DIS TORTING PICTURE OF FINANCIALLS AND ECONOMIC INDICATORS. THE LD.AR STA TED THAT THE ASSESSE MADE A SUBMISSION BEFORE THE LD.CIT(A) TO REMOVE TH E EIGHT COMPARABLES WITH UNREASONABLE TURNOVER AND TO RE-COMPUTE THE PL I BUT THE LD.CIT(A) HAS NOT ADJUDICATED ON THIS ISSUE AND THE ORDER OF THE LD.CIT(A) IS SILENT ON EXCLUSION OF EIGHT COMPARABLES REQUESTED BY THE LD.AR OF THE ASSESSE. ON THE OTHER HAND, THE LD.DR ARGUED THAT THE EXCLUS ION OF THE EIGHT COMPARABLES REQUESTED BY THE ASSESSE NEED FURTHER S TUDY OF TP DOCUMENT, TURNOVER FILTERS, FAR ANALYSIS, ETC. THEREFORE, TH E LD.D.R. SUBMITTED THAT THE ISSUE SHOULD GO BACK TO THE TPO FOR FURTHER STU DY AND TO DECIDE WHETHER TO INCLUDE THE ALL THE COMPARABLES SELECTED BY THE TPO OR TO EXCLUDE ANY OF THE COMPARABLES. 6.0 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THERE IS NO DISPUTE ON METHOD ADOPTED BY THE ASSES SEE. BOTH THE ASSESSE AND TPO HAVE ACCEPTED THE TNMM AS MOST APPR OPRIATE METHOD. THE ASSESSE HAS SELECTED EIGHT COMPARABLES AND ARRI VED AT THE OPERATING MARGIN AT 3.053% AND THE LD.TPO HAS ADOPTED 18 COMP ARABLES WITH MARGIN 10.48% AFTER MAKING T.P STUDY AND THE DIFFERENCE IN MARGI N IS SUBSTANTIAL. THE LD.AR CONTENDED THAT THE COMPARAB LES SELECTED BY THE TPO FROM RS.3.00 CR. TO RS.730.00 CR. AGAINST THE T URNOVER RS.148 CR. OF THE ASSESSE. THE ASSESSEE INTENDS TO APPLY THE TU RNOVER FILTER OF RS.60.00 ITA NO.1703/MDS/2016 :- 5 -: CR. TO RS.240.00 CR. THE ASSESSE WAS OF THE OPINIO N THAT THE FOLLOWING EIGHT COMPARABLES NEED TO BE EXCLUDED FROM THE COMP ARATIVE STUDY TO DETERMINE THE PLI:- 1) ALPHA TRANSFORMERS LIMITED. 2) ECE INDUSTRIES LIMITED. 3) EMCO LIMITED. 4) MARSONS LIMITED. 5) TARAPORE TRANSFORMERS LTD. 6) TESLA TRANSFORMERS LTD. 7) TRANSFORMERS & RECTIFIERS INDIA LTD. 8) VOLT AMP TRANSFORMERS LTD. 6.1 THE ASSESSEE ARGUED THAT BEFORE THE LD.CIT(A) (AS EVIDENT FROM THE ORDER OF THE LD.CIT(A) IN PAGE NO.5 OF THE LD.CIT(A ) ORDERS) THAT THE TURNOVER OF THE COMPARABLE COMPANIES IS VERY VITAL FOR DETERMINATION OF THE ALP. RELEVANT PART OF CIT(A) IS EXTRACTED AS U NDER:- THE TURNOVER OF THE COMPARABLE COMPANIES IS VERY VI TAL FOR THE DETERMINATION OF THE ALP IN AS MUCH AS THE LARGER COMPANYS FINANCIAL RESULTS W OULD GIVE DISTORTED PICTURE IN THE EVENT OF MAKING COMPARISON OF SUCH FIGURES TO A MEDIUM SI ZED COMPANY. THEREFORE, THE PLEA FOR THE APPELLANTS ATTEMPT TO FILTER 8 COMPANIES BASED ON THE CORRECT TURN OVER FILTER MAY BE ACCEPTED WHILE THE TPOS ATTEMPT IN THIS REGARD RESU LTING IN DISTORTED AND UNREALISTIC COMPARABILITY ANALYSIS MAY BE REJECTED. 6.2 THE LD.CIT(A) HAS NOT COMMENTED AND GIVEN A FINDIN G ON THE 8 COMPARABLES REQUESTED BY THE ASSESSEE FOR EXCLUSION FROM THE LIST OF COMPARABLES. THE TPO HAS ALSO NOT DISCUSSED THE EX CLUSION OF THE EIGHT COMPARABLES REQUESTED TO BE ELIMINATED BY THE ASSES SE. THE TURNOVER OF THE COMPANY IS VERY VITAL FOR DETERMINING THE ALP S INCE FINANCIAL RESULTS WILL HAVE SUBSTANTIAL IMPACT ON THE BASIS OF THE TU RNOVER. WE ARE OF THE CONSIDERED OPINION THAT THE ISSUE REGARDING ELIMINA TION OF COMPARABLES BASED ON TURNOVER REQUIRED TO BE FURTHER EXAMINED A ND FINDING NEED TO BE GIVEN WHETHER THE COMPARABLE TO BE REMAINED OR TO B E EXCLUDED. ITA NO.1703/MDS/2016 :- 6 -: THEREFORE, WE REMIT THE MATTER BACK TO THE FILE OF THE AO/ TPO WHO IN TURN MAKE FURTHER STUDY OF COMPARABLES WITH RELEVANT TUR NOVER FILTERS, PLI AND DECIDE THE ISSUE AFRESH ON MERITS. THE ASSESSEE SHO ULD COOPERATE WITH THE AO/TPO AND SUBMIT SPECIFIC AND NECESSARY INFORMATIO N HOW THE COMPARABLE ARE UN-COMPARABLE INSTEAD OF GIVING GENE RALIZATION OF HUGE TURNOVER. ACCORDINGLY, THE ORDER OF LOWER AUTHORITI ES ON THIS ISSUE IS SET ASIDE AND REMITTED BACK TO THE FILE OF THE AO TO DE CIDE THE MATTER AFRESH ON MERITS. 7.0 SINCE THE ISSUE REGARDING SELECTION OF COMPARABLES IS SET ASIDE AND REMITTED BACK TO THE FILE OF THE AO/TPO ALL THE ISS UES RAISED IN THE APPEAL RELATING TO TRANSFER PRICING IS KEPT OPEN FOR FRES H CONSIDERATION AND THE ASSESSEE IS FREE TAKE UP THE ISSUES BEFORE THE AO/T PO. 8.0 THE NEXT ISSUE IS GROUND NO.20 RELATING TO DEPRECI ATION OF RS.4,15,023/-ON ELECTRICAL INSTALLATIONS. DURING T HE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAS CLA IMED DEPRECIATION OF RS.12,45,270/- @15% ON ELECTRICAL INSTALLATIONS. AS PER THE SCHEDULE THE ALLOWABLE DEPRECIATION ON ELECTRICAL INSTALLATIONS IS ONLY @10%. THEREFORE, THE AO HAS RESTRICTED THE DEPRECIATION AT RS.8,30,0 47/- @10% AND THE BALANCE AMOUNT OF RS.4,12,023/- WAS DISALLOWED AND ADDED BACK TO THE INCOME. THE ASSESSEE WENT ON APPEAL BEFORE THE LD.CIT(A) A ND THE LD.CIT(A) CONFIRMED THE ADDITION HOLDING THAT AS PE R APPENDIX-1 OF ITA NO.1703/MDS/2016 :- 7 -: INCOME TAX RULES EFFECTIVE FROM THE FY 2006-07, THE FURNITURE AND FITTINGS INCLUDING ELECTRICAL FITTINGS ARE ENTITLED FOR DEPR ECIATION @10% ONLY. AGGRIEVED BY THE ORDER OF THE LD.CIT(A), THE ASSES SEE FILED APPEAL BEFORE THIS TRIBUNAL AND THE ASSESSEES AR HAS NOT MADE ANY ARGUMENT ON THIS GROUND. THE LD.AR OF THE ASSESSEE DID NOT PLA CE ANY MATERIAL TO CONVERT THE FINDING OF THE LD.CIT(A) AND THE ELECTR ICAL INSTALLATIONS WERE IN FACT PLANT AND MACHINERY. AS PER APPENDIX-1 OF INC OME TAX RULES, THE ELECTRICAL FITTINGS ARE ELIGIBLE FOR DEPRECIATION @ 10%. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD.CIT(A) AN D THE SAME IS UPHELD AND THE ASSESSEES GROUND ON THE APPEAL IS DISMISSED . 9.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH JANUARY, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ' . . # $!% ) (D.S.SUNDER SINGH) ' /ACCOUNTANT MEMBER /CHENNAI, 5! /DATED: 13 TH JANUARY, 2017. TLN 0 .2$6 76+2 /COPY TO: 1. ,- /APPELLANT 4. # 82 /CIT 2. ./,- /RESPONDENT 5. 6 9 .2 /DR 3. # 82 ( ) /CIT(A) 6. * < /GF