M/s. Control Techniques India Pvt. Ltd., CHENNAI V. JCIT (OSD), CHENNAI

ITA 2575/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7906 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 26-10-2016
• Assessment Year: 2012-2013
• Appeal Filed On: 02-09-2016
• Court: TRIBUNAL
• Department Lawyers: VIVEKANDANDAN
• Keywords: Transfer pricing; Fair market value
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , . ! '# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.2575/MDS./2016 / ASSESSMENT YEAR :2012-13 M/S. CONTROL TECHNIQUES INDIA PVT LTD., 117-B,DEVELOPED PLOTSESTATE, PERUNGUDI, CHENNAI. VS. THE JCIT, CORPORATE CIRCLE 1(2), CHENNAI. [PAN AAACC 1343 B ] ( $% / APPELLANT) ( &'$% /RESPONDENT) / APPELLANT BY : MR.SRIRAM SESHADRI C.A MR.ASHOK SHAH, C.A /RESPONDENT BY : MR.VIVEKANDANDAN, CIT,D.R / DATE OF HEARING : 26 - 1 0 - 201 6 !' / DATE OF PRONOUNCEMENT : 16 - 12 - 2016 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE ARE DIRECTED AGAINST AS SESSMENT ORDERS DATED 30.06.2016 FOR A.Y 2012-13, CONSEQUENT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL-2 (DRP), BANGALORE, DATED 31.05.2016 U/S. 143(3) R.W.S.144C(1) OF THE ACT. ITA NO. 2575/MDS./2016 :- 2 -: 2. THE ONLY ISSUE FOR OUR CONSIDERATION IS WITH RE GARD TO TRANSFER PRICING (T.P) ADJUSTMENTS OF ` 78,57,058/- TOWARDS MANAGEMENT SERVICES. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE COM PANY, I.E. M/S.CONTROL TECHNIQUES INDIA PVT LTD. IS A WHOLLY O WNED SUBSIDIARY OF CONTROL TECHNIQUES LTD., UNITED KINGDOM(CTL, UK). T HE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING DRIVES AND CONTROL APPLICATIONS WHICH ARE USED IN CONTROLLING SPEED, VOLTAGE ETC., AND HAS APPLICATION IN OFFSET PRINTER MACHINES, NEW SPAPER PRINTING MACHINES, CEMENT PLATES, TEXTILE INDUSTRIES ETC. TH E CONTROL TECHNIQUES GROUP IS INVOLVED IN THE BUSINESS OF ELECTRONIC CON TROL, VARIABLE SPEED AND SERVO DRIVE SYSTEMS AND HELPS IN SAVINGS OF ELE CTRICITY. IN THIS CASE, T.P ADJUSTMENTS OF ` 78,57,058/- HAS BEEN MADE IN RESPECT OF PAYMENTS MADE BY THE ASSESSEE TO THE ASS OCIATED ENTERPRISE (A.E). LD. TPO HAS SEGREGATED CERTAIN TR ANSACTIONS AND APPLIED CUP METHOD FOR PURPOSES OF DETERMINING ALP, THE ISSUE HAS BEEN DEALT IN DETAIL BY THE TPO IN HIS ORDER WHEREI N HE HAVE DULY EXAMINED THE OBJECTIONS RAISED BY THE ASSESSEE AND HE HAS GIVEN REASONS FOR NOT ACCEPTING THE SAME. TPO HAS TAKEN G UIDANCE FROM OECD GUIDELINES IN PARA 1.42 WHICH REQUIRE THAT AL P SHOULD BE APPLIED ON A TRANSACTION BY TRANSACTION BASIS FOR A RRIVING AT THE MOST PRECISE APPROXIMATION OF FAIR MARKET VALUE. ACCORDI NG TO DRP, IT IS VERY ITA NO. 2575/MDS./2016 :- 3 -: CLEAR FROM THE TPOS ORDER THAT THE SERVICES WERE E ITHER IN NATURE OF STEWARDSHIP SERVICES OR THE ASSESSEE FAILED TO SUBS TANTIATE ITS CLAIM THAT THERE SERVICES WERE ACTUALLY RECEIVED BY IT. FURTHER, THE ASSESSEES CONTENTION IS THAT THERE WAS NOT ANY MOT IVE TO SHIFT PROFITS OUTSIDE INDIA. DRP OBSERVED THAT THE TRANSFER PRIC ING RULES SHALL APPLY WHEN ONE OF THE PARTIES TO THE TRANSACTION IS A NON -RESIDENT, EVEN IF THE TRANSACTION TAKES PLACE WITHIN INDIA. EXISTENCE OF ACTUAL CROSS BORDER TRANSACTIONS OR MOTIVE TO SHIFT PROFITS OUTS IDE INDIA OR TO EVADE TAXES ARE NOT PRECONDITIONS FOR TRANSFER PRICING PR OVISIONS TO APPLY. ACCORDING TO DRP, THE AUTHORITIES, DURING TRANSFER PRICING ASSESSMENT, ARE NOT REQUIRED TO DEMONSTRATE THE MOTIVE OF THE A SSESSEE COMPANY TO SHIFT THE PROFITS OUTSIDE INDIA BY MANIPULATING THE PRICES. HENCE, THE DRP DID NOT ACCEPT THE ASSESSEES CONTENTION. 3.1 ACCORDING TO DRP, THE TPO HAS EXAMINED THE AGREEMEN TS ENTERED INTO BY THE ASSESSEE WITH ITS AE AS WELL AS THE EMA IL CORRESPONDENCE BETWEEN THEM, BUT HE FOUND THAT THE ACTIVITIES FOR WHICHPAYMENTS HAD BEEN MADE WERE IN THE NATURE OF STEWARDSHIP ONLY AND THU S DO NOT REQUIRE TO BE REMUNERATED SEPARATELY. THE TPO HAS DISCUSSED IN DE TAIL THE NATURE OF VARIOUS SERVICES, CLAIMED TO HAVE BEEN RECEIVED BY THE ASSESSEE FROM ITS AE. HOWEVER, THE IMPORTANT FACT IS THAT THE ASSESSEE FA ILED TO PRODUCE ANY DOCUMENT TO SUBSTANTIATE ITS CLAIM THAT MANY OF THE SE SERVICES WERE ACTUALLY RENDERED BY THE AE TO IT. WHEREVER NECESSARY DETAIL S WERE PROVIDED, NO ADJUSTMENT HAS BEEN MADE BY THE TPO. IT IS NOT THE STAND OF THE TPO THAT ITA NO. 2575/MDS./2016 :- 4 -: ASSESSEE SHOULD NOT HAVE TAKEN THESE SERVICES OR IN OTHER WORDS TPO IS NOT CHALLENGING AS TO HOW THE ASSESSEE RUNS OR WANTS TO RUN ITS BUSINESS BUT TPO JUST WANTS THE ASSESSE TO SHOW THAT THE SERVIC ES WERE ACTUALLY RENDERED AND THE PAYMENT MADE FOR THE SAME WERE AT ARMS LENGTH E.G. THE ASSESSEE HAS INCURRED AN EXPENDITURE OF 49,26,678/- AS LEGAL AND PROFESSIONAL CHARGES TO VARIOUS INDEPENDENT PARTIES BUT AT THE SAME TIME IT IS PAYING TO AE FOR SIMILAR PURPOSES WITHOUT BRINGI NG ANYTHING ON RECORD TO SHOW AS TO HOW, WHEN AND FOR WHAT PURPOSE THE SAME WERE RENDERED. ANOTHER EXAMPLE OF THE SAME IS THAT THE INVOICES SU BMITTED BY THE ASSESSEE PERTAIN TO FEES COUNTRY WITH HARDLY ANYTHING TO SHO W AS TO HOW THE ASSESSEE BENEFITTED FROM THE SAME IN HIS CONSIDERATION. DURI NG PROCEEDINGS BEFORE THIS PANEL TOO, ASSESSEE FAILED TO SUBSTANTIATE ITS CLAIM THAT SUCH SERVICES WERE ACTUALLY RECEIVED OR THAT THE SERVICES WERE NO T IN THE NATURE OF STEWARDSHIP SERVICES THE CLAIM OF THE ASSESSEE THAT BY ASKING IT TO SUBSTANTIATE ITS ENTIRE CLAIM OF EXPENDITURE, IT IS BEING PUT TO UNDUE HARDSHIP, CAN ALSO NOT BE ACCEPTED FOR THE REASON THAT IF THE ASSESSEE WANTS TO CLAIM THAT IT HAS RECEIVED SOME SERVICES AND THAT THE SAM E WERE AT ARMS LENGTH, THEN ONUS IS ON IT TO PROVE THE SAME. OF THE TOTAL EXPENSES OF RS 1,41,48,355/- THE ASSESSEE FAILED TO SUBSTANTIATE I N RELATION TO AN AMOUNT OF RS 78,57,058/-, WHICH IS MORE THAN 55% OF THE TOTA L PAYMENT IN RELATION TO SUCH SERVICES. SO ASSESSEE CANNOT RUN AWAY FROM THE ONUS CAST ON IT TO PROVE THAT THESE SERVICES WERE ACTUALLY RECEIVED BY IT. BEFORE DRP, THE ASSESSEES CLAIM (AND LATER IN WRITTEN SUBMISSIONS DT 25 MAY 2016) THAT IT HAS NOT DOCUMENTED ITS ENTIRE COMMUNICATION IN RELA TION TO SERVICES RECEIVED ITA NO. 2575/MDS./2016 :- 5 -: BY IT. HENCE, DRP OBSERVED THAT AS THE ONUS WAS ON THE ASSESSEE TO MAINTAIN SUFFICIENT RECORDS TO PROVE ITS CLAIM BEFO RE THE TAX ABOVE, THIS PANEL DOES NOT FIND ANY MERITS IN THE OBJECTIONS OF THE A SSESSEE AND REJECTED THE ASSESSEES CLAIM. CONSEQUENTLY, THE AO PASSED THE F INAL ORDER. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN PLEA OF THE ASSESSEE IS THAT THE TPO ANALY SES THE ASSESSEES PROFITABILITY AND ARRIVED OPERATION MARGINS OF THE ASSESSEE AT 13.96% AS AGAINST THE ARITHMETIC MEAN OF THE OPERATING MARGIN OF 13 COMPARABLES AT 7.02%. AFTER TESTING THAT THE OPERATING MARGIN OF THE ASSESSEE IS ON HIGHER SIDE, HE STEPPED INTO THE BENCH MARKED THE MANAGEME NT SERVICES FEE BY APPLYING THE CUP METHOD OVERWHELMING THAT TNMM IS N OT MOT APPROPRIATE METHOD. ACCORDING TO HIM, THE TPO IS NOT AN ASSESS ING OFFICER AND HE IS CONCERNED WITH ONLY IN RESPECT OF T.P ADJUSTMENTS A ND HE CANNOT HAVE JURISDICTION TO DECIDE ALLOWABILITY OF EXPENDITURE U/S.37 OF THE ACT. FURTHER, HE RELIED ON THE JUDGEMENT OF HYDERABAD TRIBUNAL IN THE CASE OF DCIT VS. M/S.AIR LIQUID ENGINEERING IN ITANO.1040/HYD./2011 & OTHERS VIDE ORDER DATED 13.02.2014 WHEREIN HELD THAT:- 20. FURTHERMORE, WE ARE OF THE OPINION THAT ONCE TN MM HAS BEEN APPLIED TO THE ASSESSEE COMPANYS TRANSACTION, IT C OVERS UNDER ITS AMBIT THE ROYALTY TRANSACTIONS IN QUESTION TOO AND HENCE SEPARATE ANALAYSIS AND CONSEQUENT DELETION OF THE R OYALTY PAYMENTS BY THE TPO IN THE INSTANT CASE SEEMS ERRON EOUS. WE DRAW SUPPORT FROM THE HONBLE MUMBAI ITAT DECISION, CADBURY ITA NO. 2575/MDS./2016 :- 6 -: INDIA LTD. VS. ACIT (ITA NO 7408/MUM/2010 AND ITA NO.7641/MUM/2010 DATED 13-11-2013) WHEREIN THE HON BLE ITAT UPHELD THE USE OF TNMM FOR ROYALTY AS WELL AS RELIE D ON MANY OF THE ABOVE DECISIONS TO HOLD ADJUSTMENT BY TPO WAS E RRONEOUS: 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS RE GARD, IT IS SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMI NED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY LINKED WITH THESE ACTIVITIES. IN THE A BSENCE OF PRODUCTION AND SALE OF PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARDING PAYMENT OF ANY ROYALTY. RULE 1 OA(D) OF THE ITAT RULES DEFINES TRANSACTION AS A NUMBER OF CLOSELY LINKED TRANSACTIONS. ROYALTY, THE N, IS A TRANSACTION CLOSELY LINKED WITH PRODUCTION AND SALE S. FT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTERPRISE, BEING EMBEDDED THEREIN. THAT BEING SO, ROYALTY CAFINOT BE CONSIDERED AND EXAMINED IN ISOLA TION ON A STANDALONE BASIS. ROYALTY IS TO BE CALCULATED ON A SPECIFIED AGREED BASIS, ON DETERMINING THE NET SALE S WHICH, IN THE PRESENT CASE, ARE REQUIRED TO BE DETE RMINED AFTER EXCLUDING THE AMOUNTS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SINCE SUCH NET SALES DO NOT STAND RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THEREFORE, IT IS OUR CONSIDERED OPINION THAT THE AS SESSEE WAS CORRECT IN EMPLOYING AN OVERALL TNMM FOR EXAMIN ING THE ROYALTY. THE TPO WORKED OUT THE DZFFERENCE IN T HE PU OF THE OUTSIDE PARTY (THE ASSESSEE) AT 4.09% AND TH E COMPARABLES AT 7.05%. THIS HAS NOT BEEN SHOWN TO FA LL OUTSIDE THE PERMISSIBLE RANGE. 34. THE DECISION OF THE TRIBUNAL IN EKLA APPLIANCE S, 2012-TH-01-HCDE1- TP, HAS BEEN SOUGHT TO BE DISTINGUISHED BY THE TPO, OBSERVING THAT THE FACTS IN THAT CASE ARE NOT IN PAN MATENA WITH THOSE OF THE ASSESS EES CASE. HOWEVER, THEREIN ALSO, THE BENEFIT TEST HAD B EEN APPLIED BY THE TPO, AS IN THE PRESENT CASE. THE MAT TER WAS CARRIED IN APPEAL BEFORE THE HONBLE HIGH COURT . THE HONBLE DELHI HIGH COURT HAS HELD THAT THE SO-CALLE D BENEFIT TEST CANNOT BE APPLIED TO DETERMINE THE ALP OF ROYALTY PAYMENT AT NIL AND THAT THE TPO COULD APPLY ONLY ONE OF THE METHODS PRESCRIBED UNDER THE LAW. A SIMI LAR VIEW HAS BEEN TAKEN IN SONA OKEGAWA PRECISION FORGINGS LTD. (SUPRA) AND IN KHS MACHINERY PVT. L TD. VS. ITO, 53 SOT 100 (AHM) (URO). 35. IT IS, THUS, SEEN THAT THE ROYALTY PAYMENT @ 3% BY THE ASSESSEE IS AT ARMS LENGTH. THE TECHNICAL ITA NO. 2575/MDS./2016 :- 7 -: COLLABORATION AGREEMENT STANDS APPROVED BY THE GOVERNMENT OF INDIA. THE ROYALTY PAYMENT HAS BEEN ACCEPTED BY THE DEPARTMENT AS HAVING BEEN MADE BY T HE ASSESSEE WHOLLY AND EXCLUSIVELY FOR ITS BUSINESS PU RPOSES. FOR ASSESSMENT YEARS 2004-05 AND 2005-06, SUCH PAYMENT OF ROYALTY HAS BEEN ALLOWED BY THE CIT (A). AS PER THE FEMA REGULATIONS, ROYALTY CAN BE PAID ON NE T SALES @ 5% ON DOMESTIC SALES AND @ 8% ON EXPORT SALES. THE ROYALTY PAYMENT BY THE ASSESSEE FALLS WI THIN THESE LIMITS. FT ALSO FALLS WITHIN THE LIMITS OF PA YMENT OF ROYALTY IN THE AUTO MOBILE SECTOR, AS PER THE MARKE T TREND. THIS PAYMENT OF ROYALTY IS AT THE SAME PERCE NTAGE AS THAT PAID BY OTHER AUTO ANCILLARIES IN THE AUTOM OTIVE INDUSTRY. THEN, IN EKIA APPLIANCES (SUPRA) AND IN ERICSSON INDIA PVT. LTD. VS. DCIT, 2012-TII-48-IT AT-DEL- TP, IT HAS BEEN HELD THAT ROYALTY PAYMENT CANNOT BE DISALLOWED ON THE BASIS OF THE SO-CALLED BENEFIT TE ST AND THE DOMAIN OF THE TPO IS ONLY TO EXAMINE AS TO WHET HER THE PAYMENT BASED ON THE AGREEMENT ADHERES TO THE ARMS LENGTH PRINCIPLE OR NOT. THAT BEING SO, THE A CTION OF THE TPO IN THE PRESENT CASE, TO MAKE THE DISALLOWAN CE MAINLY ON THE GROUND OF THE BENEFIT TEST, IS UNSUST AINABLE IN LAW. 36. KEEPING IN VIEW ALL THE ABOVE FACTORS, THE DISALLOWANCE MADE ON ACCOUNT OF ROYALTY IS FOUND TO BE TOTALLY UNCALLED FOR AND IT IS DELETED AS SUCH. ... . 21. HENCE, FOLLOWING THE RATIO OF THE HONBLE DELHI HIGH COURT IN CIT VS. EKL APPLIANCES (SUPRA) AND VARIOUS OTHER DECISI ONS AS NOTED ABOVE AND GIVEN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, WE HOLD THAT THE ADDITION MADE BY THE TPO AND UPHELD B Y THE DRP IS UNSUSTAINABLE AND IS TO BE DELETED. HENCE GROUND NO . 2 IS HELD IN FAVOUR OF THE ASSESSEE. HENCE, THE APPEAL OF THE RE VENUE ITA.NO.1040/HYD/2011 IS DISMISSED AND ASSESSEES AP PEAL IN ITA.NO.1159/HYD/2011 IS ALLOWED. ITA NO. 2575/MDS./2016 :- 8 -: 5. FURTHER, HE DREW OUR ATTENTION TO CASE OF CIT V S. EKL APPLIANCES LTD.IN [2012] 345 ITR 241 (DEL) WHEREIN THE HONBLE DELHI HIGH COURT HAD OCCASION TO CONSIDER AN ISSUE OF DISALLOWANCE OF RO YALTY BY TPO BECAUSE THE ASSESSEE IN THAT CASE HAD BEEN SUFFERING LOSSES; TH E DELHI HIGH COURT, WHILE HOLDING THAT SO LONG AS THE EXPENDITURE OR PAYMENT BY ASSESSEE HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSE OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. THUS, ACCORDING TO THE LD.A.R, THE AO HA S NO JURISDICTION TO NULLIFY THE TRANSACTION, WHEN THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINESS AND OPERATING MARGIN OF ASSESSEE HIGHER TH AN THE ARITHMETIC MEAN OF THE OPERATING MARGIN OF THE COMPARABLES. IN PRIN CIPLE, WE AGREE WITH THE ARGUMENT OF THE LD.A.R. HOWEVER, WE FIND FROM THE O RDER OF LOWER AUTHORITIES THAT TPO WANTED THE ASSESSEE TO SHOW THAT SERVICES WERE ACTUALLY RENDERED TO THE ASSESSEE AND PAYMENT WAS MADE FOR THE SAME, ALSO IT WAS NOTED BY THE DRP THAT THE INVOICES SUBMITTED BY THE ASSESSEE PERTAINING TO THE FEES PAID BY THE ASSESSEE TO ITS AE FOR REGISTRATION OF PATENTS DEVELOPED BY AE IN THEIR OWN COUNTRY WITH HARDLY ANYTHING TO SHOW AS T O HOW THE ASSESSEE BENEFITTED FROM THE SAME IN ITS BUSINESS. SIMILARLY , IN RELATION TO INVOICE FOR MIS, THE SAME HAD BEEN PERTAINED TO THE YEAR UNDER CONSIDERATION AND ASSESSEE FAILED TO SUBSTANTIATE ITS CLAIM OF SERVIC E WERE ACTUALLY RECEIVED OR THAT SERVICES ARE NOT IN NATURE OF STEWARDSHIP SER VICES. FURTHER, DRP OBSERVED THAT THE TPO HAD DISCUSSED IN DETAIL THE N ATURE OF VARIOUS SERVICES, CLAIMED TO HAVE BEEN RECEIVED THE ASSESSEE FROM ITS A.E. HENCE, THE DRP DIRECTED THE AO FOR DISALLOWANCE OF ` 78,57,058/-. IN OUR OPINION, IF THE ITA NO. 2575/MDS./2016 :- 9 -: ASSESSEE PRODUCES THE PARTICULARS OF ACTUAL EXPENDI TURE FOR AVAILING THESE SERVICES, THEN IT IS TO BE ALLOWED. WITH THIS OBSE RVATION, WE REMIT THE ISSUE TO THE FILE OF AO FOR FRESH CONSIDERATION. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 16 TH DECEMBER, 2016, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) ! / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 16 TH DECEMBER, 2016 K S SUNDARAM &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF