KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED, PUNE V. Dy. CIT, Circle-14, PUNE

ITA 1958/PUN/2019

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 7546 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 11-12-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Set aside
• Section: 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE VIRTUAL COURT BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER . / ITA NO.1958/PUN/2019 / ASSESSMENT YEAR : 2015-16 KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED, S.NO.276/1, VILLAGE MANN, HINJEWADI, PHASE-II, TALUKA MULSHI, PUNE 411 057, MAHARASHTRA, INDIA PAN : AACCK1395D VS. DCIT, CIRCLE-14, PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER DATED 04-10-2019 PASSED BY THE ASSESS ING OFFICER (AO) U/S.143(3) R.W.S.144C(13) OF THE INCOME-TA X ACT, 1961 (HEREINAFTER CALLED THE ACT) IN RELATION TO THE ASSES SMENT YEAR 2015-16. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESS EE IS A WHOLLY OWNED SUBSIDIARY OF KNORR BREMSE, ASIA PACIFIC HOLDING LIMITED, HONG KONG. IT IS ENGAGED IN MANUFACTURING AIR BRA KING ASSESSEE BY SHRI RAJENDRA AGIWAL REVENUE BY SHRI SARDAR SINGH MEENA DATE OF HEARING 21-01-2021 DATE OF PRONOUNCEMENT 22-01-2021 ITA NO.1958/PUN/2019 KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED 2 SYSTEMS INCLUDING COMPRESSORS AND ELECTRONIC BRAKING SYSTEMS , COMPONENTS OF AIR BRAKING SYSTEM, SUCH AS, VALVES, BRAK E CYLINDERS, AIR TREATMENT, DISC BRAKES ETC. AND WHEEL-END PRODUCTS FOR COMMERCIAL VEHICLES. A RETURN WAS FILED DECLARING TOTAL INCOME AT NIL AFTER ADJUSTMENT OF CURRENT YEAR LOSSES. THE ASSESSEE REPORTED CERTAIN INTERNATIONAL TRANSACTIONS IN FORM NO.3CEB. THE AO MADE A REFERENCE TO THE TRANSFER PRIC ING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) O F THE INTERNATIONAL TRANSACTIONS. THE TPO OBSERVED THAT OUT OF TWELVE REPORTED INTERNATIONAL TRANSACTIONS, THE ASSESSEE APPLIED THE COMPARABLE UNCONTROLLED PRICE METHOD (CUP) IN RESPECT OF THE LAST TWO AND THE TRANSACTIONAL NET MARGINAL METHOD (TNMM), ON CONSOLIDATED BASIS, IN RESPECT OF THE FIRST TEN. THERE IS NO D ISPUTE IN RESPECT OF THE LAST TWO TRANSACTIONS. THE ASSESSEE COMPUTE D ITS PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO OPERATING REVENUE (OP/OR) AT (-) 9.10% IN RELATION TO THE FIRST TEN TRANSACTIONS ON AN AGGREGATE BASIS. CERTAIN COMPARABLES WE RE SELECTED. IN THE PROCESS OF THE ALP DETERMINATION, THE ASSES SEE SUO MOTU OFFERED TRANSFER PRICING ADJUSTMENT OF RS.2,88,11,571 /-, WHICH AMOUNT WAS ADDED TO THE TOTAL INCOME. THE TPO COMPUTE D THE PLI OF THE ASSESSEE AT (-)12.04%. CONSIDERING THE AVER AGE ITA NO.1958/PUN/2019 KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED 3 OP/OR OF COMPARABLES AT 4.06%, THE TPO COMPUTED THE TRANSF ER PRICING ADJUSTMENT OF RS.19,66,02,197/-. THE ASSESSEE ASSAILED THE ALP DETERMINATION BEFORE THE DISPUTE RESOLUTION PANEL (DRP), WHICH RESTRICTED THE AMOUNT OF TRANSFER PRICING ADDITIO N TO RS.16,77,90,626/- AFTER ALLOWING CREDIT FOR THE VOLUNTARY TR ANSFER PRICING ADJUSTMENT OF RS.2.88 CRORE OFFERED BY THE ASSE SSEE IN THE COMPUTATION OF TOTAL INCOME. THIS HAS BROUGHT THE ASSESSEE BEFORE THE TRIBUNAL. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS THROUGH VIRTUAL COURT AND SCANNED THROUGH THE RELEVANT MATERIAL ON RECORD. THE FIRST ISSUE IN THIS APPEAL IS AGAINST THE COMPUTATION OF ASSESSEES OWN PLI AT (-) 12.04% IN RESPECT OF THE FIRST TEN INTERNATIONAL TRANSACTIONS ON AN AGGREGATE BASIS, AS AGAINST THE ASSESSEE S COMPUTATION AT (-) 9.10%. THE AREA OF DISPUTE IS FURTHER NARROWED DOWN TO THE CONSIDERATION OF CERTAIN ITEMS CREDITED TO THE PROF IT AND LOSS ACCOUNT TREATED BY THE ASSESSEE AS OPERATING, WHIC H WERE RECLASSIFIED BY THE TPO AS NON-OPERATING. HE TREATED INTERE ST RECEIVED; RENTAL INCOME; FOREX GAIN; PROVISION FOR WRITE BAC K; AND MISCELLANEOUS INCOME, AS NON-OPERATING. THE ASSESSE E, IN THE EXTANT APPEAL, HAS NOT DISPUTED THE TREATMENT GIVEN BY THE ITA NO.1958/PUN/2019 KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED 4 TPO TO THE FIRST THREE ITEMS: INTEREST RECEIVED; RENTAL INCOME; AND FOREX GAIN. 4. WE ESPOUSE THE FIRST DISPUTED ITEM, NAMELY, PROVISION FO R WRITE BACK AT RS.41,59,867/-. ITS BREAK-UP HAS BEEN GIV EN AT PAGE 563 OF THE PAPER BOOK, CONSISTING OF TWO ITEMS OF WRITE BACK , VIZ., PROVISION FOR WARRANTY EXPENSES AT RS.32,59,867/- AND PR OVISION FOR IT SUPPORT CHARGES AT RS.9.00 LAKH. WE HAVE GONE THROUGH THE DETAIL OF THE PROVISION FOR WARRANTY THAT HAS BEEN SET OUT A T NOTE 27 IN THE NOTES TO FINANCIAL STATEMENTS OF THE ASSESSEE. IT SHOWS OPENING BALANCE OF THE PROVISION AT RS.1.11 CRORE . THEN THERE IS A REDUCTION OF PROVISION USED DURING THE YEAR AT RS .33.29 LAKH AND AN ADDITION OF RS.32,59,867/-, BEING, THE AMOU NT OF PROVISION REVERSED DURING THE YEAR. IT IS THIS AMOUNT OF THE PROVISION REVERSED DURING THE YEAR WHICH IS SUBJECT MATTER OF THE EXTANT DISPUTE. THE LD. AR WAS REQUIRED TO POINT OUT THE AMOU NT OF PROVISION CREATED DURING THE YEAR, IF ANY, FOR ASCERTAIN ING IF THAT WAS ALSO CONSIDERED AS PART OF OPERATING COST. IN REPLY , HE SUBMITTED THAT NO FRESH PROVISION WAS CREATED DURING THE YEAR BECAUSE THE BROUGHT FORWARD PROVISION WAS SUFFICIENT ENOUG H TO MEET THE WARRANTY EXPENSES DURING THE YEAR. ON A FURTH ER QUERY, THE LD. AR COULD NOT POINT OUT ANY BREAK-UP OF THE OPENING ITA NO.1958/PUN/2019 KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED 5 PROVISION OF RS.1.11 CRORE FOR ASCERTAINING AT OUR END I F THE SAME WAS TAKEN AS OPERATING COST IN DETERMINATION OF THE ALP OF THE RESPECTIVE YEARS. IT GOES WITHOUT SAYING THAT REVERSAL OF A PROVISION TAKES THE SAME COLOUR AS ITS CREATION. IF IT IS CONS IDERED AS OPERATING COST AT THE TIME OF ITS CREATION, THEN ITS REVERS AL IN THE LATER YEARS WILL ALSO QUALIFY TO BE CONSIDERED AS OPERATING REV ENUE AND VICE-VERSA . HERE IS A CASE IN WHICH THE ASSESSEE IS CLAIMING REVERSAL OF THE PROVISION MADE DURING THE YEAR AS OPERATING REVENUE WITHOUT DEMONSTRATING THE NATURE OF PROVISION AT THE TIM E OF ITS CREATION AS TO OPERATING OR NON-OPERATING. THE LD. AR SUBMITTED THAT NECESSARY DETAILS CAN BE CULLED OUT FROM THE REC ORD, WHICH WERE NOT READILY AVAILABLE. TAKING A HOLISTIC APPROACH, W E SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND REMIT THE MA TTER TO THE FILE OF AO/TPO FOR ASCERTAINING THE TREATMENT GIVEN TO THE WARRANTY PROVISION AT THE TIME ON ITS CREATION IN THE RELEVANT YEAR. IF THE AMOUNT OF PROVISION IN THE YEAR OF ITS CREATION WAS TAKEN AS PART OF OPERATING COST, THEN ITS REVERSAL DURING THE YEAR SHO ULD ALSO BE GIVEN THE SAME TREATMENT OF OPERATING REVENUE AND VICE-VERSA . 5. THE SECOND COMPONENT OF THE PROVISION REVERSED IS A SUM OF RS.9.00 LAKH REPRESENTING PROVISION OF IT SUPPORT SERVICE CHARGES. IN RESPONSE TO THE SAME QUERY, WHICH WAS RAI SED FOR THE ITA NO.1958/PUN/2019 KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED 6 PROVISION OF WARRANTY EXPENSES, THE LD. AR GAVE A SIMILAR REPLY THAT NECESSARY DETAILS WERE NOT AVAILABLE OFF-HAND. FOLLOWING THE VIEW TAKEN HEREINABOVE IN RESPECT OF REVERSAL OF PROVISION FOR WARRANTY EXPENSES, WE SET-ASIDE THE IMPUGNED ORDER IN RESPECT OF REVERSAL OF PROVISION FOR IT SUPPORT SERVICE CHARGES AS WELL AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR ASCERTAINING THE NATURE OF PROVISION OF IT SUPPORT SERVICE CHARGES AT THE TIME OF ITS CREATION. IF IT WAS TAKEN AS A PART OF OPERATING COST IN THE RELEVANT YEAR, THEN ITS REVERSAL IN THE YEAR UNDER CONSIDERATION SHOU LD ALSO ASSUME THE SAME SHADE AND VICE-VERSA. 6. THE NEXT CONTESTED ITEM IS MISCELLANEOUS INCOME OF RS.6,58,711/- THAT WAS TAKEN BY THE TPO AS NON-OPERATING AS AGAINST THE ASSESSEES CLAIM OF OPERATING REVENUE. DETAILS OF MISCELLANEOUS INCOME ARE AVAILABLE AT PAGE 576 OF THE PAPER BOOK. HERE IT IS APPOSITE TO MENTION THAT TOTAL MISCELLANEOUS INCOME CREDITED TO THE PROFIT AND LOSS ACCOUNT AT RS.38.90 LAKH WAS CONSIDERED BY THE ASSESSEE AS OPERATING REVENUE. T HE TPO ACCEPTED THE ASSESSEES CONTENTION IN RESPECT OF SERVICE CHA RGES OF RS.21.69 LAKH AND INSURANCE OF RS.10.63 LAKH. HE ONLY REFUTED THE ASSESSEES CLAIM IN RESPECT OF VAT REFUND OF RS.3, 63,363/- AND OTHER MISCELLANEOUS INCOME OF RS.2,95,348/-. ITA NO.1958/PUN/2019 KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED 7 7. IN RESPECT OF VAT REFUND OF RS.3.63 LAKH, THE LD. A R AGAIN COULD NOT DEMONSTRATE AS TO HOW THE PAYMENT OF VAT WAS CONSIDERED. WE, THEREFORE, SET-ASIDE THE IMPUGNED ORDE R IN RESPECT OF VAT REFUND HAVING BEEN TREATED AS NON-OPERA TING BY THE TPO AND SEND THE MATTER BACK TO THE FILE OF AO/TPO FOR ASCERTAINING WHETHER THE PAYMENT OF VAT WAS TAKEN AS OPERA TING OR NON-OPERATING COST. IN CASE THE PAYMENT OF REFUND W AS TAKEN AS NON-OPERATING EXPENSE, THEN NATURALLY, THE VAT REFUND WILL A LSO BE TAKEN AS NON-OPERATING AND VICE-VERSA . 8. THE LAST ITEM IS `OTHER MISCELLANEOUS INCOME OF RS.2.95 LAKH. THE LD. AR CANDIDLY ACCEPTED THAT NO DETAILS OF SUCH AMOUNT WERE AVAILABLE. IN THAT VIEW OF THE MATTER, IT IS MAN IFEST THAT THE SAME CANNOT BE CONSIDERED AS OPERATING INCOME AS TH E ASSESSEE HAS FAILED TO MAKE OUT ANY CASE. THE VIEW TAKEN BY THE AUTHORITIES BELOW IN RESPECT OF THIS ITEM IS COUNTENANCED. 9. THE NEXT ISSUE RAISED BY THE ASSESSEE IN THIS APPEAL IS A GAINST NOT ALLOWING THE PROPORTIONATE TRANSFER PRICING ADJUSTMENT. TH E TPO DETERMINED THE ARITHMETIC MEAN OF THE PLI OF THE COMPARABLES AT 4.06%. HE STARTED THE ALP DETERMINATION OF T HE ASSESSEE WITH A FIGURE OF OPERATING REVENUE OF RS.122.00 CRORE. THIS WAS DEDUCED BY CONSIDERING TOTAL REVENUE OF THE ASSE SSEE AT ITA NO.1958/PUN/2019 KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED 8 RS.125.78 CRORE AS REDUCED BY INTEREST RECEIVED, RENTAL INCOME, FOREX GAIN, PROVISION FOR WRITE BACK AND MISCELLANEOUS INCOME , GIVING THE AMOUNT OF OPERATING INCOME AT RS.122.01 CRORE. THE TPO TOOK UP THIS FIGURE AND COMPUTED THE TRANSFER PRICING ADJUSTMENT. THE ASSESSEE SPECIFICALLY RAISED THE ISSUE BEFO RE THE TPO THAT THE TRANSFER PRICING ADJUSTMENT SHOULD BE RESTRICTED TO THE AE TRANSACTIONS ONLY, WHICH DID NOT FIND FAVOUR WITH THE T PO AS WELL AS THE DRP. 10. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELE VANT MATERIAL ON RECORD, WE FIND THAT THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN CIT VS. PHOENIX MECANO (INDIA) PVT. LTD. (2019) 414 ITR 704 ( BOM.) HOLDING THAT THE TRANSFER PRICING ADJUSTMENT CAN BE MADE ONLY IN RESPECT OF AE TRANSACTIONS AND NOT THE ENTITY LEVEL TRANSACTIONS . IT IS FURTHER OBSERVED THAT THE DEPARTMENTS SLP AGAINST THIS JUDGMENT HAS SINCE BEEN DISMISSED BY THE HONBLE SUPREME COURT IN CIT VS. PHOENIX MECANO (INDIA) PVT. LTD. (2018) 402 ITR 32 (ST). IN VIEW OF THIS LEGAL POSITION, WE HOLD THAT THE TRANSFER PRICING ADJUSTMENT CANNOT EXTEND TO NON-AE TRANSACTIO NS. THE IMPUGNED ORDER TO THIS EXTENT IS SET-ASIDE AND THE MATTER IS REMITTED TO THE FILE OF AO/TPO FOR RESTRICTING THE TRANSFER PRICING ITA NO.1958/PUN/2019 KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED 9 ADJUSTMENT ONLY IN RESPECT OF THE AE TRANSACTIONS. NEEDLE SS TO SAY, THE ASSESSEE WILL BE ALLOWED REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 11. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JANUARY, 2021. SD/- SD/- ( PARTHA SARATHI CHAUDHURY ) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 22 ND JANUARY, 2021 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13, PUNE 4. 5. 6. THE PR.CIT-V, PUNE , , / DR C, ITAT, PUNE; / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE ITA NO.1958/PUN/2019 KNORR BREMSE SYSTEMS FOR COMMERCIAL VEHICLES INDIA PRIVATE LIMITED 10 DATE 1. DRAFT DICTATED ON 21-01-2021 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 21-01-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *