Deputy Commissioner Of Income Tax, Circle - 1(1)(1), Bangalore V. M/s. Ansaldo STS Transporation Systems Pvt. Ltd., Bangalore

ITA 213/BANG/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4328 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 8 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2020
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 13-10-2020
• Assessment Year: misc
• Appeal Filed On: 31-01-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Wholly owned subsidiary
• Section: 250; 264

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI. B.R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.213/BANG/2017 ASSESSMENT YEAR : 2011 12 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BENGALURU. VS. M/S ANSALDO STS TRANSPORTATION SYSTEMS PVT. LTD., NO.35, SLV COMPLEX, AVS COMPOUND, 80 FEET ROAD, IV BLOCK, KORAMANGALA, BENGALURU-560 034. PAN AAACU 4571 D APPELLANT RESPONDENT IT(TP)A NO.2331/BANG/2016 ASSESSMENT YEAR : 2011 12 M/S ANSALDO STS TRANSPORTATION SYSTEMS PVT. LTD., NO.35, SLV COMPLEX, AVS COMPOUND, 80 FEET ROAD, IV BLOCK, KORAMANGALA, BENGALURU-560 034. PAN AAACU 4571 D VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BENGALURU. APPELLANT RESPONDENT REVENUE BY : SHRI PRADEEP KUMAR, CIT (DR) ASSESSEE BY : SHRI PADAMCHAND KHINCHA, C.A PAGE 2 OF 9 IT(TP)A NO.2331/BANG/2016 IT(TP)A NO.213/BANG/2017 DATE OF HEARING : 13-10-2020 DATE OF PRONOUNCEMENT : 27-10-2020 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT CROSS APPEALS HAS BEEN FILED BY AS SESSEE AS WELL AS REVENUE AGAINST ORDER DATED 30/09/2016 PASSED BY LD .CIT(A)-1, BANGALORE FOR ASSESSMENT YEAR 2011-12. 2. LD.AR SUBMITTED THAT ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF ANSALDO STS, NETHERLANDS. IT HAS ALSO BEEN SUBMI TTED BY ASSESSEE THAT, ANSALDO STS, NETHERLANDS TRANSFERRED THE EQUITY SHARES HELD BY IT IN ASSESSEE COMPANY TO ANSALDO ST S, AUSTRALIA PTY LTD WHO BECAME THE IMMEDIATE HOLDING COMPANY W. E.F. JUNE 2008. 3. AT THE OUTSET LD.AR SUBMITTED THAT, DURING THE Y EAR UNDER CONSIDERATION ASSESSEE UNDERTOOK VARIOUS PROJECTS F OR INSTALLATION AND COMMISSIONING OF SIGNALLING SYSTEMS FOR INDIAN RAILWAYS. IT HAS BEEN SUBMITTED THAT THESE PROJECTS WERE PROCURE D BY ASSESSEE BY WAY OF OPEN TENDER FLOATED BY GOVERNMEN T OF INDIA. LD.AR SUBMITTED THAT ASSESSEE ON RECEIPT OF TENDER, UNDERTOOK THE ACTIVITY OF SUPPLY OF SIGNALLING SYSTEMS AND P ROVIDED ENGINEERING DESIGN SUPPORT SERVICES ARE AKIN TO SOF TWARE DEVELOPMENT SERVICES TO ANSALDO GROUP. LD.AR SUBMIT TED THAT, FOR YEAR UNDER CONSIDERATION ASSESSEE ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH: PAGE 3 OF 9 IT(TP)A NO.2331/BANG/2016 IT(TP)A NO.213/BANG/2017 PARTICULARS LICENSED SERVICES TOTAL SALES 650511930 45135334 695647264 COST 1,113939169 18677323 1132616492 OP 463427239) 26458011 (436969228) OP / OC - 41.60% 142% OP / SALES ( - ) 71.24% 4. LD. A.R. FURTHER SUBMITTED THAT ASSESSEE HAD PRO VIDED SEGMENTAL FINANCIAL RESULTS FOR YEAR UNDER CONSIDER ATION AS UNDER: SL. NO TYPE OF TRANSACTION AMOUNT (RS) 1 PURCHASE OF RAW MATERIALS & COMPONENTS 1 0,61,46,488/ - 2 PAYMENT OF ROYALTY 7,95,47,380/ - 3 PAYMENT OF TRADE MARK FEES 26,10,464/- 4 PAYMENT OF BANK GUARANTEE EXPENSES 264 06T 461/- 5 PAYMENT TOWARDS TECHNICAL CONSULTANCY 3,89,13,759/ - 6 INCOME FROM DESIGN SUPPORT SERVICES 1,47,74,036/ - 7 PAYMENT OF MANAGEMENT SERVICE FEES 4,83, 08 648/ 8 REIMBURSEMENT OF EXPENSES PAID 3 ,99,628/- 8 RECOVERY OF TRAVEL COSTS 1,80,53,916/- 10 REVERSAL OF EXPENSES 9,68,092//- TOTAL 56,28,872/- 5. IT HAS BEEN SUBMITTED BY HIM THAT, IN RESPECT OF SERVICES PERTAINING TO SWD, LD.TPO RAISED NO OBJECTION AND A CCEPTED THE MARGIN COMPUTED BY ASSESSEE. THE DISPUTE AROSE IN R ESPECT OF LICENSED MANUFACTURING SEGMENT IN WHICH ASSESSEE IN CURRED HUGE LOSS OF RS.46,34,27,239/-. THE LD.AR SUBMITTED THAT, SHOW CAUSE NOTICE WAS CONSEQUENTIALLY ISSUED TO ASSESSEE TO JUSTIFY THE CLAIM OF ADJUSTMENTS MADE UNDER THE LICENSED MANUFA CTURING SEGMENT BEING EXCHANGE FLUCTUATION, BANK CHARGES, I NTEREST CHARGES, MANAGEMENT FEE. LD.AR ALSO SUBMITTED THAT, LD.TPO PAGE 4 OF 9 IT(TP)A NO.2331/BANG/2016 IT(TP)A NO.213/BANG/2017 PROPOSED SUCH COMPARABLES THAT EITHER DID NOT HAVE SEGMENTAL DETAILS OR WERE NOT FUNCTIONALLY SIMILAR WITH ASSES SEE. 6. LD.TPO THUS AGGREGATED EXCHANGE FLUCTUATION, BAN K CHARGES, MANAGEMENT FEES WITH THE MANUFACTURING SEG MENT AND COMPUTED PROPOSED ADJUSTMENT BEING SHORTFALL AT RS.12,12,26,284/-. 7. LD. AO WHILE PASSING DRAFT ASSESSMENT ORDER FURT HER DISALLOWED A SUM OF RS.3,17,96,698/- BEING NOTIONAL FOREX LOSS COMPUTED BY LD. TPO/AO WHILE PASSING THE DRAFT ASSE SSMENT ORDER BY RELYING ON DECISION OF HONBLE MADRAS HIGH COURT IN CASE OF INDIAN OVERSEAS BANK VS CIT REPORTED IN 250 ITR 146 . 8. AGGRIEVED BY PROPOSED ADJUSTMENT, ASSESSEE RAISE D OBJECTION BEFORE LD.CIT(A) WHO UPHELD ACTION OF LD. TPO OF AGGREGATING THE EXPENSES TO MANUFACTURING SEGMENT. LD. CIT (A) HOWEVER DELETED THE ADDITION AMOUNTING TO RS.3,17,9 6,698/- BEING NOTIONAL FOREX LOSS COMPUTED BY LD. TPO/AO. 9. AGGRIEVED BY ADDITION CONFIRMED/DELETED BY LD.CI T(A), ASSESSEE AND REVENUE ARE IN APPEAL BEFORE US NOW. 10. LD.AR SUBMITTED THAT, THE PROJECTS UNDERTAKEN B Y ASSESSEE CONTRIBUTED APPROXIMATELY 70-75% OF OVERALL REVENUE ON AN ANNUAL BASIS AND WAS EXPECTED TO BE COMPLETED BY FI NANCIAL YEAR 2011-12. HE ALSO SUBMITTED THAT THE PROJECT TILL DA TE IS NOT COMPLETED THE DUE TO UNFORESEEN DELAY AND IN THE AB SENCE OF ESCALATION CLAUSE IN THE AGREEMENT ENTERED WITH IND IAN RAILWAY PAGE 5 OF 9 IT(TP)A NO.2331/BANG/2016 IT(TP)A NO.213/BANG/2017 DUE TO WHICH ASSESSEE SUFFERED SUBSTANTIAL LOSSES. AT THE OUTSET LD.AR SUBMITTED THAT THERE WAS INORDINATE DELAY IN COMPLETION OF PROJECTS UNDERTAKEN BY ASSESSEE DUE TO DELAY IN DES IGN APPROVAL BY INDIAN RAILWAYS, REPEATED CHANGE IN SCOPE BY IND IAN RAILWAYS, DELAY IN CONFIRMING THE ON-BOARD EQUIPMENT COMPATIB ILITY DUE TO NON-STANDARD PILOT, DELAY IN MAKING AVAILABLE FOR TRAILS ETC. LD.AR SUBMITTED THAT IN RESPECT OF PROJECTS UNDERTA KEN BY ASSESSEE FOR INDIAN RAILWAYS, IT HAD TO INCUR EXPE NSES BY WAY OF IMPORT OF RAW MATERIALS AND COMPONENTS LIKE INTERLO CKING SYSTEM, MICROLOCK II, AFTCS ETC., IN WHICH MAJORITY OF THE EXPENSES WERE WITH 3 RD PARTIES. 11. HE ALSO SUBMITTED THAT VARIOUS DOCUMENTS THAT H AS BEEN PLACED BEFORE THIS TRIBUNAL BY WAY OF ADDITIONAL EVIDENCE UNDER RULE 29 FOR ADMISSION, COULD NOT BE FILED BEFORE TH E AUTHORITIES BELOW DUE TO CIRCUMSTANCES BEYOND CONTROL. HE SUBMI TTED THAT THESE DOCUMENTS ESTABLISH THE LOSSES INCURRED BY AS SESSEE, WAS MAINLY DUE TO DELAY IN COMPLETION OF THE PROJECTS A RE NOT ATTRIBUTABLE TO TRANSACTION ENTERED WITH AE. 12. LD.AR FURTHER SUBMITTED THAT DURING THE TRANSFE R PRICING ASSESSMENT PROCEEDINGS, LD.TPO DID NOT DEMONSTRATE THE BASIS ON WHICH THE COMPARABLES WERE SELECTED IN THE SHOW CAUSE NOTICE. HE SUBMITTED THAT, LD.TPO ALSO HAS NOT DISC USSED THE FAR SIMILARITIES OF ASSESSEE WITH PROPOSED COMPARAB LES TO PAGE 6 OF 9 IT(TP)A NO.2331/BANG/2016 IT(TP)A NO.213/BANG/2017 ASCERTAIN FUNCTIONAL SIMILARITIES AS NECESSITATED U NDER TRANSFER PRICING PROVISIONS OF LAW. 13. LD.AR THUS REQUESTED FOR THE ISSUE TO BE REMAND ED FOR DE NOVO ASSESSMENT. 14. LD.CIT DR PLACED RELIANCE ON THE WRITTEN SUBMIS SION FILED BY HIM ON 13/10/2020 WHEREIN HE SUPPORTS THE ORDERS PASSED BY AUTHORITIES BELOW. 15. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. 16. WE ARE HEREBY CONSIDERING BOTH ASSESSEES AND R EVENUES APPEAL TOGETHER AS GROUNDS RAISED ALLEGED BY REVENU E OVERLAPS WITH ONE OF THE ISSUES ALLEGED BY ASSESSEE IN ITS A PPEAL. 17. PRIMARY ISSUE THAT NEEDS TO BE ADDRESSED BY LD. AO/TPO IS IN RESPECT OF AGGREGATION OF VARIOUS EXPENSES INCUR RED BY ASSESSEE WEATHER RELATABLE TO LICENSED MANUFACTURIN G SEGMENT. THERE IS NO REASONING GIVEN BY AUTHORITIES BELOW FO R AGGREGATING THE INTERNATIONAL TRANSACTION. IN OUR VIEW THE RISK ANALYSIS CARRIED OUT BY ASSESSEE IN TP DOCUMENTATION FILED B Y ASSESSEE NEEDS TO BE CONSIDERED WHILE ADDRESSING THE ISSUE O F AGGREGATION OF VARIOUS SEGMENTS. LD.CIT.DR SUBMITTED THAT ASS ESSEE DID NOT FILE ANY DETAILS REGARDING FOREIGN EXCHANGE LOSS CL AIMED BY ASSESSEE AS NON-OPERATING. IN OUR OPINION ADDITIO NAL EVIDENCES FILED BY ASSESSEE WOULD BE OF SOME RELEVANCE WHICH NEEDS TO BE PAGE 7 OF 9 IT(TP)A NO.2331/BANG/2016 IT(TP)A NO.213/BANG/2017 CONSIDERED TO UNDERSTAND ITS NEXES WITH LICENSED MA NUFACTURING SEGMENT. 18. WE NOTE THAT IN THE SHOW CAUSE NOTICE ISSUED TO ASSESSEE, REPRODUCED IN THE ORDER PASSED BY LD.TPO UNDER SECT ION 92CA, LD.TPO FAILED TO FOLLOW THE DUE PROCESS OF LAW IN R ESPECT OF PROPOSING COMPARABLES FOR COMPUTING THE ALP OF INTE RNATIONAL TRANSACTION IN MANUFACTURING SEGMENT. LD.TPO IS THE REFORE, DIRECTED TO ISSUE SHOW CAUSE NOTICE WITH PROPOSED C OMPARABLES IN ACCORDANCE WITH LAW. 19. ALSO, IN RESPECT OF BANK CHARGES, INTEREST CHAR GES, MANAGEMENT FEES ASSESSEE SHOULD ESTABLISH CATEGORIC ALLY BASED ON COGENT MATERIALS/EVIDENCES OF HOW IT SHOULD NOT BE CONSIDERED AS OPERATING FOR THE PURPOSES OF COMPUTING MARGIN O F LICENSED MANUFACTURING SEGMENT. 20. ASSESSEE IS THEREFORE DIRECTED TO FILE ALL RELE VANT DOCUMENTS/EVIDENCES/INFORMATION NECESSARY TO ESTAB LISH ITS CLAIM IN RESPECT OF AGGREGATION/SEGREGATION OF THE COSTS ALLEGED IN THE ORDER PASSED BY LD.CIT(A)/LD.TPO. ASSESSEE IS A LSO DIRECTED TO FILE ITS RESPONSE TO VARIOUS COMPARABLES PROPOSE D BY LD.TPO. LD.TPO SHALL THEN PASS A DETAILED ORDER CONSIDERING ALL THE MATERIAL EVIDENCES PLACED BY ASSESSEE AND COMPUTE T HE MARGIN IN ACCORDANCE WITH LAW. 21. WE THEREFORE, REMAND THE ISSUE TO LD.AO/TPO FOR DE NOVO ASSESSMENT AS PER TRANSFER PRICING PROVISIONS IN AC CORDANCE WITH PAGE 8 OF 9 IT(TP)A NO.2331/BANG/2016 IT(TP)A NO.213/BANG/2017 LAW. NEEDLESS TO SAY THAT ASSESSEE SHALL BE GRANTED PROPER OPPORTUNITY OF BEING HEARD. ACCORDINGLY GROUNDS RAISED BY ASSESSEE AND REVENUE STANDS ALLOWED FOR STATISTICAL PURPOSES. IN THE RESULT APPEAL IS FILED BY ASSESSEE AND REVEN UE STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH OCT, 2020 SD/- SD/- (B.R BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE, DATED, THE 27 TH OCT, 2020. /VMS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE PAGE 9 OF 9 IT(TP)A NO.2331/BANG/2016 IT(TP)A NO.213/BANG/2017 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR -10-2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -10-2020 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. -10-2020 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS -10-2020 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -10-2020 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -10-2020 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -10-2020 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS