M/s. Spectris Technologies (P) Ltd., New Delhi V. DCIT, New Delhi

ITA 1818/DEL/2013

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 8361 (ITAT-DELHI)
• Duration Of Justice: 10 year(s) 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 03-03-2024
• Assessment Year: 2007-2008
• Appeal Filed On: 31-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANISH KUMAR DABAS
• Keywords: Transfer pricing; International transaction
• Section: 9(1); 9(1); 9(1); 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI ‘I’ BENCH, NEW DELHI BEFORE SHRI SAKTIJIT DEY, VICE PRESIDENT, AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ITA No. 1818/DEL/2013 [A.Y. 2007-08] M/s Spectris Technologies [P] Ltd Vs. The Dy.C.I.T. 202, Anarkali Complex. Circle – 9(1) Jhandewalan Extn, New Delhi New Delhi PAN – AAGCS 6654 R (Applicant) (Respondent) Assessee By : Shri Tarandeep Singh, Adv Shri Sandeep Yadav, Adv Department By : Shri Manish Kumar Dabas, Sr. DR Date of Hearing : 04.03.2024 Date of Pronouncement : 07.03.2024 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER:- This appeal by the assessee is preferred against the order of the ld. CIT(A) - 20, New Delhi dated 31.01.2013 pertaining to A.Y. 2007-08. 2 2. The grievances of the assessee read as under: “1. That having regard to the facts and circumstances of the case , Ld.CIT(A) has erred in law and on facts in upholding the action of Ld. AO. in determining the ALP of international transactions of the appellant at Rs.ll,85,928301- and thereby making an addition of 1,80,70,738/- on account of alleged difference in ALP, on the basis of order of Ld.TPO uls 92CA (3), more so when the same was beyond jurisdiction of the A.O and was made by recording incorrect facts and findings. 1. That having regard to the facts and circumstances of the case, the Ld.CIT(A) has erred in holding that the reference made to the transfer pricing officer uls 92CA(3) b y Ld.A.O. is in conformity with law and facts of the case. 2. That having regard to the facts and circumstances of the case, Ld.CIT(A) has erred in upholding the action of the Ld. TPO in rejecting the appellant's TP analysis and applying TNMM at the enterprise level by rejecting the segmental accounts of the appellant and holding them to be not trustworthy. 4. That having regard to the facts and circumstances of the case, Ld.CIT(A) has erred in holding that the same set of comparables as used by the appellant for its AMC segment should be used for determining the ALP of the international transactions based on entity level financials of the appellant. 3 5. That having regard to facts & circumstances of the case, Ld. CIT(A) has erred in law and on facts in passing the impugned order contrary to law and facts and without providing adequate opportunity of hearing and without considering the principles of natural justice. 6. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.” 3. Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules. Judicial decisions relied upon duly considered. 4. The assessee is an Indian company having its registered office in New Delhi. The assessee is a supplier of equipment and products relating to material analysis. The assessee also provides installation and commissioning services and after sales support services to its clients in India. 5. The following transactions between the assessee and its Associated Enterprise [AE] have been identified to be international transactions: 4 (1) Provision of Administrative and Agency Services The assessee provides administrative and marketing support services to four of its AEs – namely: (i) NCD Infrared Engineering Ltd – UK, (ii) Red Lions Controls Inc – USA, (iii) Servomex Group – UK and (iv) Ircon Inc - Us For providing such services, the assessee receives fees on cost plus mark-up basis and mark-up basis is 6% on cost in case of Servomex Group and 10% on cost in case of other AEs. The assessee also provides Agency services to Spectris Singapore for selling the equipment and spare parts in India, Nepal and Sri Lanka. For providing such services, Spectris India receives commission @ 7% on Free On Board [FOB] value of the main equipment and 20% commission on FOB value of the spare parts. (2) Purchase of Spare parts and equipment from Spectris PTE Ltd During the year, the assessee has purchased spare parts and equipment from its AE Spectris PTE Ltd for resale in India. Such resale can be divided into two categories: 5 (i) Category 1 – Purchase for normal sales (ii) Category 2 - Purchase against confirmed order (3) Payment for automation charges to PANalytical BV Netherlands (4) Payment for training charges to Spectris - UK 6. Bench marking analysis of the assessee can be understood from the following : “For international transactions relating to ‘Provision of Marketing and Administrative Support Services', 'Provision of Agency services'. 'Purchase against confirmed order', 'Payment for Automat ion charges' and ' Payment for training charges’., assessee has used TNMM and PLI of OP/OC. The results of the tested party were calculated at 35.06% as against results of comparables using three years data at 22.48%. For the international transaction relating to 'Purchase for normal sales', assessee has used Resale Price Method (RP ) with PLI of gross margin /selling price. The tested party margin of the assessee has been calculated at 22 .18% as against 8.02% of the comparables. 6 7. Before us, the ld. counsel for the assessee vehemently stated that the TPO/CIT(A)/Assessing Officer has misunderstood the facts in true perspective while doing FAR analysis of the assessee. 8. The quarrel revolves around the following observations of the TPO confirmed by the ld. CIT(A): “5.2 The FAR analysis of the assessee revealed that the 'Provision of AMC services' was inextricably linked to other functions being performed by the assessee, i.e, Purchase of equipment, Provision of marketing and administrative support services, Provision of agency services, purchase of spare parts and equipments and other related activities. However, it was found that the assessee had artificially segmented its accounts into two segments viz. AE and non AE segments for Transfer Pricing purposes. This has been carried out so as to show profitability in the AE related services and losses in the AMC business” “3. The assessee, Spectris India utilizes tangible assets for carrying out the above functions. However, with respect to intangible assets, it is stated that Spectris India uses the intangibles provided by the AE. It is also stated that the assessee performs after- sales services for the AE and carries out sales of spares parts on behal f of the AE. From the functions performed, assets utilized and risks assumed, FAR analysis of the assessee, it is .clear that the provision of AMC Services are 7 inextricably linked to other functions with respect to purchase of equipment and provision of other support services to the AE. The assessee, being a 95% subsidiary of its parent is importing spare parts and equipments relating to precession instrumentation and controls and is engaged in reselling and providing after sales services, sales of spare parts and AMC services with respect to above equipments imported from its AE. The assessee is also engaged in provision of ancillary support services such as administrative and agency services and marketing support to its AE. It is also important to mention that all technical input with respect to provision of services is provided by the AE. The AE is in fact the owner of all Intangibles which are required by the assessee to carry out its operations in India. From the above facts it also emerges that the provision of AMC services is ~art and parcel of the after-sales support function and provision of agency support function performed y the assessee. 4. In view of above analysis, it is proposed to aggregate the income and expenditure with respect to AE and non AE segments which have been artificially created for transfer pricing purposes to show profitability in the AE related services and losses in the C business wherein the AMC business is clearly and inextricably linked to the main business of the assessee.” 9. The ld. counsel for the assessee further objected to the observations of the TPO that no basis for allocation of expenses relating to income streams between two segments have been furnished 8 by the assessee and also pointed out that the TPO has grossly erred in analyzing the assets utilized and risks assumed by the assessee while considering the FAR analysis of the assessee. 10. We have given thoughtful consideration to the TP study report of the assessee, purchase of spare parts for normal business, AMC. We find that Research and Development are undertaken by the AE of the assessee. All the equipments and spare parts supplied to the assessee by its AE are manufactured by its group companies. The assessee is responsible for all functions relating to inventory management and the assessee enters into a contract with the customers for providing AMC services and accordingly, it is responsible for delivery of services to the customer. 11. Regarding sale of spare parts and equipments, the assessee is responsible for making sale of spare parts and equipment imported by it from its AE. Sale of spare parts under AMC business can be broadly categorized into three types: (i) Over the counter sale wherein the customer has not taken any AMC and he purchases only spare parts or equipment from the assessee. 9 (ii) Sale to AMC customer wherein the customer has taken AMC from the assessee. (iii) Replacement under AMC wherein the customer has taken AMC from the assessee and spare part required to be replaced is covered under AMC 12. For contracts entered into between the assessee and its customers, the assessee is responsible for delivery of equipment and spare parts and services and, accordingly, it is also responsible for invoicing and collection of charges relating to it. The assessee deploys necessary assets for performing its business. It does not own any manufacturing facilities, research and development facilities or other significant assets for this activity. Employees of the assessee possess technical knowledge especially those who are involved in providing AMC services. 13. However, under provision of Agency and Marketing support services, R & D are undertaken by the AE of the assessee. All the spare parts and equipment supplied to the assessee are manufactured by its AE. The AE of the assessee is responsible for maintaining the requisite 10 inventory levels of all the spare parts and equipment. The assessee does not employ any specific assets, tangible asset for providing agency and administrative services to its AEs or intangible including human resources and does not bear any inventory risk. The assessee does not bear any credit risk. 14. Based on the facts mentioned in the TP Study Report, it can be safely concluded that the assessee’s business can be divided into two business segments: (i) AMC service provider, and (ii) Agency and marketing support service provider. 15. During the course of TP assessment proceedings, the assessee has explained that for the purpose of TP analysis, it has divided its revenue and expenditure broadly into two segments based on functional, asset and risk analysis and providing AMC services including sale of goods. The assessee has also given basis of allocation/apportionment of revenue and expenses which is as under: 11 12 13 14 16. From the above charts, it can be seen that the assessee has allocated common expenses and has also given basis of apportionment. We find that the ld. CIT(A) has put a doubt on whether segmental accounts are to be accepted and the only reason given by the authorities, as we understand from the respective orders, is that it is not audited. 17. Merely because segmental accounts are not audited cannot make them untrustworthy without pointing out any specific defect/error/fallacy in them. Observations of the ld. CIT(A) that non compete fee and good will has not been allocated is not accepted as the TPO himself has not allocated these expenses. 15 18. As mentioned elsewhere, the assessee has not only provided segmental account but has also allocated expenses and has given basis of allocation. Considering the facts of the case in totality, we do not find any merit in the stand taken by the TPO/Assessing Officer as confirmed by the ld. CIT(A). We, accordingly, direct the Assessing Officer to delete the impugned adjustment. 19. In the result, the appeal of the assessee in ITA No. 1818/DEL/2013 is allowed. The order is pronounced in the open court on 07.03.2024. Sd/- Sd/- [SAKTIJIT DEY] [N.K. BILLAIYA] VICE PRESIDENT ACCOUNTANT MEMBER Dated: 07 TH MARCH, 2024. VL/ Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi 16 Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr.PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order