Euroflex Transmissions (India) Private Limited, Hyderabad, Hyderabad V. ACIT,Circle-17(1) Hyderabad, Hyderabad

ITA 1717/HYD/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2532 (ITAT-HYDERABAD)
• Duration Of Justice: 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 21-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 22-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M SITARAM
• Assessee Lawyers: S RAGHUNATHAN
• Keywords: Transfer pricing
• Section: 92C; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 1717/HYD/2016 ASSESSMENT YEAR: 2012-13 EUROFLEX TRANSMISSION (INDIA) PVT. LTD., HYDERABAD. PAN AAACE 5313K VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 17(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S. RAGHUNATHAN REVENUE BY : SHRI M. SITARAM DATE OF HEARING : 10-10-2017 DATE OF PRONOUNCEMENT : 24-10-2017 O R D E R PER P. MADHAVI DEVI, J.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX - 5, HYD ERABAD, DATED 30-09-2016 FOR AY 2012-13. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: G ENERAL GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, EUROFLEX TRANSMISSIONS INDIA PRIVATE LIMITED RESPEC TFULLY CRAVES LEAVE TO PREFER AN APPEAL AGAINST THE ORDER PASSED UNDER SECTION 250(6) OF THE INCOME-TAX ACT, 1961 ('THE AC T') BY THE COMMISSIONER OF INCOME TAX (APPEALS)-5, HYDERABAD [ 'LD. CIT(A)'] DATED 30 SEPTEMBER 2016 RECEIVED BY THE AP PELLANT ON 24 OCTOBER 2016. TRANSFER PRICING RELATED GROUNDS: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ORDER PASSED BY THE LD. CIT(A) UNDER SECTION 25 0(6) OF THE ACT IS BAD IN LAW AND VOID AB-INITIO. 2 ITA NO. 1717/H/16 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED ASSESSING OFFICER ('LD.AO') ERRED AND T HE LD. CIT(A) FURTHER ERRED BY NOT ACCEPTING THE ARM'S LEN GTH PRICE (ALP) AS DETERMINED BY THE APPELLANT WITH RESPECT T O THE PAYMENT OF ROYALTY TO ITS ASSOCIATED ENTERPRISE ('A E'). 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED AND THE LD. CIT(A) FURTHER ERRED I N MAKING AN ADJUSTMENT TO THE INCOME OF THE APPELLANT BY ARBITR ARILY DETERMINING THE ALP OF ROYALTY PAID BY THE APPELLAN T AT 2.45% ON EXPORT SALES AND 2.00% ON DOMESTIC SALES INSTEAD OF 4.00% ON EXPORT SALES AND 2.50% ON DOMESTIC SALES ON THE GROUND THAT NO TANGIBLE BENEFIT WAS DERIVED BY THE APPELLA NT OUT OF PAYMENT OF ROYALTY. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN MAKING SEVERAL OBSERVATIONS AND FINDINGS WITHOUT APPRECIATING THE EVIDENCE AND UNDE RSTANDING THE INTRICACIES OF THE CASE. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED AND LD. CIT(A) FURTHER ERRED IN DI SREGARDING THE COMMERCIAL AGREEMENTS ENTERED INTO BY THE APPEL LANT WITHOUT ANY VALID AND COGENT REASONS AND FURTHER MA KING SEVERAL OBSERVATIONS AND FINDINGS WITHOUT APPRECIAT ING EVIDENCE AND UNDERSTANDING THE INTRICACIES OF THE FACTS OF T HE CASE. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED AND THE LD. CIT(A) FURTHER ERRED I N ALLEGING THAT THE APPELLANT IS REQUIRED TO SATISFY THE BENEF IT TEST DESPITE THE FACT THAT APPELLANT HAD DERIVED BENEFIT UNDER T HE ROYALTY AGREEMENT WITH ITS AE AND EARNED A NET PROFIT MARGI N OF 44.64 % FOR THE YEAR UNDER CONSIDERATION. 8. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) AND THE LD. AO ERRED IN RECOGNIZING THE FACT THAT PAYMENT OF ROYALTY IS ESSENTIAL TO THE APPELLANT'S BUSINESS AND OUGHT TO HAVE CONSIDERED THE TRANSACTIONAL NET MARG IN METHOD AS THE MOST APPROPRIATE METHOD TO BENCHMARK THE ROY ALTY PAID BY APPELLANT TO ITS AE. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED AND THE LD. CIT(A) FURTHER ERRED B Y ACTING IN AN ARBITRARY MANNER AND NOT FOLLOWING ANY PRESCRIBE D TRANSFER PRICING METHODOLOGY (AS REQUIRED UNDER SECTION 92C OF THE ACT READ WITH RULE 10B OF INCOME TAX RULES, 1962) WHILE DETERMINING THE ALP FOR PAYMENT OF ROYALTY. 3 ITA NO. 1717/H/16 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. 10. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED AND THE LD. CIT(A) FURTHER ERRED IN CO NSIDERING THAT THE COMPARABLE UNCONTROLLED PRICE (HEREINAFTER REFERRED TO AS 'CUP') METHOD AS THE MOST APPROPRIATE METHOD UND ER SECTION 92C OF THE ACT TO ARRIVE AT THE ALP OF THE ROYALTY PAID BY THE APPELLANT TO ITS AE. 11. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO ERRE D AND LD. CIT(A) FURTHER ERRED IN DISREGARDING THE APPROVAL G IVEN BY THE RESERVE BANK OF INDIA WITH REGARD TO THE RATE AT WH ICH THE PAYMENT OF ROYALTY MADE TO THE AE. ]2. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO ERRE D AND LD. CIT(A) FURTHER ERRED IN NOT FOLLOWING THE HON'BLE J URISDICTIONAL TRIBUNAL'S JUDGMENT IN THE CASE OF OWENS CORNING IN DUSTRIES (INDIA) PVT. LTD (ITA NO. 549/HYD/20]4) FOR ACCEPTI NG RATES AS APPROVED BY THE RBI AS THE ALP FOR PAYMENT OF ROYAL TY. THE APPELLANT CRAVES LEAVE OF YOUR HONORS TO ADD OR TO ALTER, BY DELETION, SUBSTITUTION, MODIFICATION OR OTHERWISE, THE ABOVE GROUNDS OF APPEAL, EITHER BEFORE OR DURING THE HEAR ING OF THE APPEAL. 3. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE COMPAN Y, WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF TRANSMI SSION SHAFTS, COUPLINGS AND SPARES, FILED ITS RETURN OF INCOME FO R AY 2012-13 ON 25/09/2012 DECLARING TAXABLE INCOME OF RS. 51,29,16 ,270/-. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, T HE AO NOTICED THAT THE ASSESSEE HAD PAID ROYALTY AMOUNTING TO RS . 2,67,89,704/- TO ITS AE ELECTROFLUX TRANSMISSIONS LTD., UK. THEREFOR E, THE AO PROCEEDED TO DETERMINE THE ALP OF THE SAID INTERNAT IONAL TRANSACTION. ASSESSEE WAS ASKED TO SUBMIT THE COPY OF THE ROYALT Y AGREEMENT AND ALSO TO JUSTIFY THE BENEFITS DERIVED FROM THE PAYME NTS. ASSESSEE SUBMITTED THE SAID DETAILS AND AFTER EXAMINATION OF THE SAME, AO OBSERVED THAT THE ASSESSEE HAD ENTERED INTO A FOREI GN COLLABORATION AGREEMENT WITH ITS AE AT UK INITIALLY ON 11 TH JANUARY, VALID UP TO 2002, WHICH WAS SUBSEQUENTLY EXTENDED UP TO 2006 AN D FURTHER EXTENDED UP TO 2013 AND AGAIN EXTENDED UP TO 2020. HE OBSERVED THAT AS PER THE EXTENDED AGREEMENT DATED 02/03/2002 , IT WAS AGREED BETWEEN ASSESSEE AND ITS AE THAT THE ASSESSEE IS RE QUIRED TO PAY ROYALTY FEES OF 4% ON EXPORT SALES AND 2.5% ON INDI GENOUS SALES. 4 ITA NO. 1717/H/16 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. SINCE THE EXTENDED AGREEMENT FOR THE PERIOD 1 ST APRIL, 2002 TO 31 ST MARCH, 2006 WAS NOT AVAILABLE TO VERIFY THE RATES O F ROYALTY, ASSESSEE WAS ASKED TO SUBMIT THE DETAILS. THE ASSESSEE FILED THE COPY OF AGREEMENT AND ON PERUSAL OF THE SAME, THE AO OBSERV ED THAT THE ASSESSEE HAD ADOPTED CUP METHOD TO HOLD THE TRANSAC TION TO BE AT ALP. AO HELD THAT TP DOCUMENTATION OF THE ASSESSEE IS NOT ACCORDING TO RULES REQUIRING THE MAINTENANCE OF THE TP DOCUME NTATION AND ALSO ANALYSIS CONDUCTED BY THE ASSESSEE WAS NOT BASED ON APPROVED DATA BASES, WHICH ARE PUBLICLY AVAILABLE. THEREFORE, HE TREATED THE ENTIRE AMOUNT OF RS. 2,67,89,074/- AS EXCESS PAYMENT AND A DDED THE SAME TO THE RETURNED INCOME OF THE ASSESSEE TREATING IT AS AN ADJUSTMENT U/S 92CA(3). 4. AGGRIEVED BY THE ORDER OF THE AO, ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A) BY RAISING VARIOUS GROUNDS OF APP EAL. IN ADDITION THERETO, VIDE LETTER DATED 1 ST JULY, 2016 THE ASSESSEE HAS ALSO FILED AN ADDITIONAL GROUND OF APPEAL THAT AO OUGHT TO HAVE A DOPTED TNMM AS THE MOST APPROPRIATE METHOD TO BENCH MARK ROYALTY P AID BY THE ASSESSEE TO ITS AE. 5. THE CIT(A), HOWEVER, CONSIDERED THAT HE HAD DECI DED IDENTICAL ISSUE IN ASSESSEES OWN CASE FOR THE PRECEDING AY 2 011-12 AND FOLLOWING THE SAME, HE HELD THAT THE CUP METHOD IS THE MOST APPROPRIATE METHOD AS THE ASSESSEE HAS ADOPTED THE SAME IN ITS TP STUDY. THEREAFTER, HE DIRECTED THE EXCLUSION ONE OF THE COMPANIES I.E. MARUTHI SUZUKI INDIA LTD. FROM THE LIST OF COMPARAB LES AND DIRECTED THE AO TO COMPUTE ALP OF THE ROYALTY PAYMENT ACCORD INGLY. 6. AGAINST THIS ORDER OF THE CIT(A), ASSESSEE IS IN APPEAL BEFORE US. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE VERY SAME ISSUE OF ALP OF ROYALTY PAYMENT HAD ARISEN IN THE O WN CASE OF THE 5 ITA NO. 1717/H/16 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. ASSESSEE FOR AY 2011-12 AND THE ISSUE HAD TRAVELLED UP TO ITAT IN ITA NO. 931/HYD/2016. HE SUBMITTED THAT VIDE ITS OR DER DATED 30 TH NOVEMBER, 2016, THIS TRIBUNAL HAD SET ASIDE THE ISS UE TO THE FILE OF THE AO WITH A DIRECTION TO ADOPT TNMM AS THE MOST A PPROPRIATE METHOD. A COPY OF THE SAID ORDER IS FILED BEFORE US . HE ALSO POINTED OUT THAT THOUGH THE ASSESSEE HAS RAISED AN ADDITION AL GROUND BEFORE THE CIT(A) TO ADOPT TNMM AS THE MOST APPROPRIATE ME THOD TO BENCH MARK ROYALTY PAID BY THE ASSESSEE TO ITS AE, THE CI T(A) HAS FAILED TO ADJUDICATE THE SAME. 8. LD. DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 9. HAVING REGARD TO THE RIVAL CONTENTIONS AND MATER IAL ON RECORD, WE FIND THAT THE ASSESSEE HAD ENTERED INTO THE AGRE EMENT WITH ITS AE IN UK FOR PAYMENT OF ROYALTY AND THIS ISSUE IS CONT INUOUSLY ARISING FROM THE EARLIER AYS IN ASSESSEES OWN CASE. WE ALS O FIND THAT THE VERY SAME ISSUE HAD ARISEN IN AY 2011-12 WHEREIN ON SIMILAR GROUNDS, AO AND CIT(A) HAVE HELD THAT THE METHOD AD OPTED BY THE ASSESSEE I.E. CUP METHOD IS THE MOST APPROPRIATE ME THOD FOR ARRIVING AT ITS ALP. WE FIND THAT THE TRIBUNAL, TO WHICH ONE OF US (JM) IS SIGNATORY, HAS CONSIDERED THE ISSUE AT LENGTH AND A T PARA 5 OF THE ORDER HAS HELD AS UNDER: 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE AGREE WITH THE LEARNED COUNSEL FOR THE ASSESSEE THAT FOR ADOPTING THE CUP METHOD, THE HIGHEST DEGREE OF SIMILARITIES HAVE TO BE CONSIDERED AND AS BROUGHT OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, THERE ARE VARYING CONDITIONS BETWEEN THE ASSESSEE AND THE COMPARABLES BOTH IN THE PRODUCTS MANUFACTURED BY THEM AND ALSO THE MARKET CONDITIONS. THEREFORE, WE AGREE WITH THE FINDINGS OF THE CIT (A) THAT THE CUP IS NOT THE MOST APPROPRIATE METHOD. HOWEVER, WE DO NOT AGREE WITH THE CONCLUSION OF THE CIT (A) THAT SINCE THE ASSESSEE 6 ITA NO. 1717/H/16 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. HAS ADOPTED THE CUP METHOD IN ITS TP STUDY, THE SAME HAS TO BE FOLLOWED. THE REQUIREMENT OF LAW IS THAT THE MOST APPROPRIATE METHOD SUITABLE FOR DETERMINING THE ALP IS TO BE ADOPTED. MERELY BECAUSE THE ASSESSEE HAS ADOPTED THE CUP METHOD, IT WILL NOT BECOME THE MOST APPROPRIATE METHOD. THE AO, AFTER CONDUCTING THE FAR ANALYSIS HAS TO DETERMINE THE MOST APPROPRIATE METHOD. IT HAS BEEN HELD TIME AND AGAIN THAT THE PROCEEDINGS BEFORE THE FIRST APPELLATE AUTHORITY ARE CONTINUATION OF THE ASSESSMENT PROCEEDINGS ITSELF. IN SUCH CIRCUMSTANCES, IT IS THE BOUNDEN DUTY OF THE CIT (A) TO EXAMINE THE MOST APPROPRIATE METHOD FOR DETERMINATION OF THE ALP PARTICULARLY WHEN THE ASSESSEE ITSELF IS CHALLENGING THE METHOD ADOPTED BY IT IN ITS TP STUDY. IN VIEW OF THE SAME, WE ARE SATISFIED THAT THE TNMM IS THE MOST APPROPRIATE METHOD AND THEREFORE, WE DEEM IT FIT AND PROPER TO SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND REMAND THE ISSUE OF DETERMINATION OF THE ALP TO THE FILE O F THE AO BY ADOPTING THE TNMM AS THE MOST APPROPRIATE METHOD. THE OTHER GROUNDS ARE NOT PRESSED BY THE ASSESSEE AND THEREFORE, ARE REJECTED. IN VIEW OF THE SET ASIDE AND THE CHANGE OF THE MOST APPROPRIATE METHOD, THE REVENUES APPEALS BECOME INFRUCTUOUS. SINCE THE ISSUE BEFORE US IS ALSO THE SAME, WE SET SIDE THE ORDER OF CIT(A) AND DIRECT THE AO TO ADOPT TNMM AS THE MOST APPROPRIATE METHOD AND TO RECOMPUTE THE ALP AFTER CONSIDERING A SSESSEES OBJECTIONS, IF ANY. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS TREATE D AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 24 TH OCTOBER, 2017. SD/- SD/- (B. RAMAKOTAIAH) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDI CIAL MEMBER 7 ITA NO. 1717/H/16 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. HYDERABAD, DATED: 24 TH OCTOBER, 2017. KV COPY TO:- 1) EUROFLEX TRANSMISSION (INDIA) PVT. LTD., PLOT NO . 99, CIE, PHASE II, GANDHINAGAR, BALANAGAR, HYDERABAD. 2) ACIT, CIRCLE 17(1), 6 TH FLOOR, IT TOWERS, AC GUARDS, HYD. 3) CIT(A) 5, HYDERABAD 4) PR. CIT - 5, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE