M/S ROTROK CONTROL INDIA PRIVATE LIMITED, CHENNAI V. DCIT CORPORTE CIRCLE 5 (2), CHENNAI

ITA 2581/CHNY/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 1982 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 26-10-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS V S SREELEKHACITD R
• Assessee Lawyers: ABHINAYA RAMANUJAMC A
• Keywords: Depreciation; Transfer pricing

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , . , BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER & SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER . / I.T.A.NOS.2581/CHNY/2017 & 122/CHNY/2018 / ASSESSMENT YEARS : 2013-14 & 2012-13 M/S.ROTORK CONTROLS INDIA PVT. LTD., 23B,AMBATTUR INDUSTRIAL ESTATE(NORTH), AMBATTUR, CHENNAI 600 098. VS. DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 5(2), CHENNAI. [PAN AAACR 3438 C] ( / APPELLANT) ( /RESPONDENT) ! ' # / APPELLANT BY : MS.ABHINAYA RAMANUJAM,C.A $% ! ' # /RESPONDENT BY : MRS.V.S.SREELEKHA,CIT,D.R & ' ' () / DATE OF HEARING : 14 - 11. 201 8 * ' () / DATE OF PRONOUNCEMENT : 14 - 11 - 201 8 / O R D E R PER GEORGE MATHAN, JUDICIAL MEMBER I.T.A.NOS.2581/CHNY/2017 IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)- 3,CHENNAI IN APPEAL NO.189/2016-17/A-3 DATED 30.0 6.2017 FOR THE ASSESSMENT YEAR 2013-14, AND ITA NO. 122/CHNY/2018 IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIO NER OF INCOME-TAX ITA NOS.2581/CHNY/17 ITA NO.122/CHNY/2018 :- 2 -: (APPEALS)-3,CHENNAI IN APPEAL NO.262/2016-17/A-3 DA TED 29.09.2017 FOR THE ASSESSMENT YEAR 2012-13. SINCE THE ISSUES IN BOTH THE APPEALS ARE IDENTICAL, THESE APPEALS ARE DISPOSED OFF THROU GH A COMMON ORDER. 2. MS.ABHINAYA RAMANUJAM REPRESENTED ON BEHALF OF THE ASSESSEE, AND MRS.V.S.SREELEKHA REPRESENTED ON BEHALF OF THE REVENUE. 3. IT WAS SUBMITTED BY LD.A.R THAT THE ISSUES INVO LVED IN THESE APPEALS ARE TRANSFER PRICING ISSUE. IT WAS A SUBMIS SION THAT THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING ACTUAT ORS, WHICH ARE INSTALLED ONTO VALVES FOR CARRYING OUT THE FUNCTION OF REGULATING TRANSPORTATION OF LIQUIDS/GASES THROUGH PIPE LINES. IT WAS A SUBMISSION THAT ASSESSEES BUSINESS IN FOUR STREAMS WERE CONSI DERED UNDER TRANSFER PRICING STUDY; FIRST ONE BEING IMPORT OF RAW MATERIALS AND COMPONENTS, THE SECOND ONE SALE OF VALVE ACTUATO R, THE THIRD ONE RENDERING OF SERVICES (RESEARCH & DEVELOPMENT) AN D THE LAST ONE MANAGEMENT AND TECHNICAL FEES. IT WAS A SUBMISSIO N THAT IN RESPECT TO IMPORT OF RAW MATERIALS AND COMPONENTS, SALE O F VALVE ACTUATOR AND RENDERING OF SERVICES (RESEARCH & DEVELOPMENT) , NO ADJUSTMENT WAS FOUND NECESSARY. IN RESPECT OF MANAGEMENT AND TECHNICAL FEES PAID BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES( A.E), THE TRANSFER ITA NOS.2581/CHNY/17 ITA NO.122/CHNY/2018 :- 3 -: PRICING OFFICER (TPO) TOOK A VIEW THAT THE TRANSACT IONAL NET MARGIN METHOD (TNMM) COULD NOT BE APPLIED, AND CONSEQUENTL Y, THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD WAS APPL IED. IT WAS A SUBMISSION THAT BY APPLYING THE CUP METHOD AS IT WA S FOUND THAT THERE WAS NO OTHER COMPARABLE TO THAT OF THE ASSESSEE, T HE LD. ASSESSING OFFICER /LD.TPO ADOPTED THE TECHNICAL SUPPORT SERV ICES MORE SPECIFICALLY THE MANAGEMENT SERVICES AT NIL. THE TPO ACCEPTED THE CLAIM OF ASSESSEE IN RESPECT OF THE OPERATIONAL SU PPORT SERVICES AND THE REIMBURSEMENTS. IT WAS A SUBMISSION THAT THE IS SUE WAS NOW SQUARELY COVERED BY THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S.BONFIGIOLI TRANSMISSIONS PRIVATE LIMITED., IN I.T.A.NO.2977/CHNY/2017 VIDE ORDER DATED 14-05-2018 WHEREIN IN PARA NOS. 8 TO 10, IT HAS BEEN HELD AS UNDER :- 8. IN RESPECT OF GROUND NOS.11 TO 13, IT WAS SUBM ITTED BY THE LD.A.R THAT THE ASSESSEE HAD MADE PAYMENTS FOR CORP ORATE SERVICES AVAILED BY THE ASSESSEE FROM ITS A.ES. LD .A.R DREW OUR ATTENTION TO THE AGREEMENT ENTERED INTO BY THE ASSE SSEE WITH ITS A.ES AT PAGE NO.393 OF THE PAPER BOOK. IT WAS SUBMI TTED THAT THE AGREEMENT WAS BETWEEN THE PARENT COMPANY, BONFIGLIO LI RIDUTTORI SPA (BRI), ITALY AND 20 SUBSIDIARIES. THE ASSESSEE WAS SHOWN AT PARTY NO.16 IN THE SAID AGREEMENT. IT WAS SUBMITTED THAT THERE WERE FOUR TYPES OF SERVICES PROVIDED I.E. INFORMATI ON & TECHNOLOGY SERVICES, ACCOUNTING & FINANCE, QUALITY CONTROL SYS TEM & MARKETING SERVICES. IT WAS SUBMITTED THAT LD. ASSES SING OFFICER ALLOWED THE CLAIM OF INFORMATION TECHNOLOGY FEES, B UT HELD THAT THERE WAS NO NECESSITY FOR THE ASSESSEE TO MAKE ANY PAYMENTS ITA NOS.2581/CHNY/17 ITA NO.122/CHNY/2018 :- 4 -: TOWARDS THE MARKETING FEES, FINANCIAL CONTROLLING F EES AS ALSO QUALITY CONTROLLING FEES. IT WAS A SUBMISSION THAT THESE WERE AGGREGATED AMOUNTS PAYABLE BY THE ASSESSEE IN RESPE CT OF EXPENDITURE INCURRED BY THE PARENT COMPANY. THE LD .A.R DREW OUR ATTENTION TO THE DECISION OF HONBLE DELHI HIGH CO URT IN THE CASE OF CIT VS. EKL APPLIANCES LTD., (345 ITR 241) WHEREIN THE HONBLE DELHI HIGH COURT HAD HELD AS FOLLOWS:- 22. EVEN RULE 10B(1)(A) DOES NOT AUTHORISE DISALLO WANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUNERATIVE O R THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASSESS EE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INC URRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FO R THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER INTO THE TRANS ACTION IS FOR THE ASSESSEE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TRANSFER PRICING OFFICER A S PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXP ENDITURE, HE HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERE D CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF THE ASSESSEE CAN NE VER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EXPENSE ; THE RE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TRANSFER PRICING OF FICER HAS DONE IN THE PRESENT CASE IS TO HOLD THAT THE ASSESSEE OU GHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/BRAN D FEE, BECAUSE IT HAS BEEN SUFFERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSIN ESS, IT IS NO CONCERN OF THE TRANSFER PRICING OFFICER TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD G UIDELINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSAC TION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJU STMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTIC ULARLY ON THE ITA NOS.2581/CHNY/17 ITA NO.122/CHNY/2018 :- 5 -: GROUNDS WHICH HAVE BEEN GIVEN BY THE TRANSFER PRICI NG OFFICER IS NOT CONTEMPLATED OR AUTHORISED. 23. APART FROM THE LEGAL POSITION STATED ABOVE, EVE N ON THE MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE/ROY ALTY PAYMENT WAS NOT WARRANTED. THE ASSESSEE HAS FURNISHED COPIO US MATERIAL AND VALID REASONS AS TO WHY IT WAS SUFFERING LOSSES CONTINUOUSLY AND THESE HAVE BEEN REFERRED TO BY US EARLIER. FULL JUSTIFICATION SUPPORTED BY FACTS AND FIGURES HAVE BEEN GIVEN TO D EMONSTRATE THAT THE INCREASE IN THE EMPLOYEES' COST, FINANCE C HARGES, ADMINISTRATIVE EXPENSES, DEPRECIATION COST AND CAPA CITY INCREASE HAVE CONTRIBUTED TO THE CONTINUOUS LOSSES. THE COMP ARATIVE POSITION OVER A PERIOD OF FIVE YEARS FROM 1998 TO 2 003 WITH RELEVANT FIGURES HAVE BEEN GIVEN BEFORE THE COMMISS IONER OF INCOME-TAX (APPEALS) AND THEY ARE REFERRED TO IN A TABULAR FORM IN HIS ORDER IN PARAGRAPH 5.5.1. IN FACT THERE ARE FOUR TABULAR STATEMENTS FURNISHED BY THE ASSESSEE BEFORE THE COM MISSIONER OF INCOME-TAX (APPEALS) IN SUPPORT OF THE REASONS F OR THE CONTINUOUS LOSSES. THERE IS NO MATERIAL BROUGHT BY THE REVENUE EITHER BEFORE THE COMMISSIONER OF INCOME-TAX (APPEA LS) OR BEFORE THE TRIBUNAL OR EVEN BEFORE US TO SHOW THAT THESE ARE INCORRECT FIGURES OR THAT EVEN ON THE MERITS THE RE ASONS FOR THE LOSSES ARE NOT GENUINE. IT WAS A SUBMISSION THAT SIMILAR EXPENSES HAVE NOT BEEN CLAIMED SEPARATELY IN THE ACCOUNTS OF THE ASSESSEE. IT WAS SUBMITTED THAT ASSESSEE WAS ENTITLED TO ITS CLAIM OF EXPENDITURE. 9. IN REPLY, LD.D.R SUBMITTED THAT CORPORATE SERVI CES EXPENDITURE CANNOT BE AGGREGATED. IT WAS A SUBMISS ION THAT THE ORDER OF TPO/A.O AND DIRECTION OF THE DRP IS LIABLE TO BE SUSTAINED ON THIS ISSUE. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIALS AVAILABLE ON RECORD. ADMITTEDLY THE BUSI NESS OF THE ASSESSEE IS A CONSOLIDATED ONE. THE SERVICES REFERR ED UNDER ITA NOS.2581/CHNY/17 ITA NO.122/CHNY/2018 :- 6 -: CORPORATE SERVICES ARE INTRINSICALLY LINKED TO IT S MANUFACTURING AND SALES ACTIVITY. THESE TWO SERVICES CANNOT BE SE PARATELY DEMARCATED. CORPORATE SERVICES ARE THE SERVICES REN DERED, WHICH HAS HELPED THE ASSESSEE IN GENERATING THE BUSINESS IN RESPECT OF MARKETING AND TRADING. THIS BEING SO, IN VIEW OF TH E DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES LTD., REFERRED TO SUPRA, THE LD. ASSESSING OFFICER IS DIR ECTED TO ALLOW THE ASSESSEES CLAIM OF THE CORPORATE SERVICES EXPENDIT URE INCURRED BY ASSESSEE. CONSEQUENTLY, GROUNDS NOS.11 TO 13 OF THE ASSESSEE STAND ALLOWED. THE LD.A.R DREW OUR ATTENTION TO PAGES 51-55 OF PAP ER BOOK, WHICH WAS IN APPENDIX-A BEING THE SUPPORTING DOCUMENTS DE MONSTRATING THE FLOW OF MANAGEMENT AND TECHNICAL SERVICES. THE LD.A .R ALSO DREW OUR ATTENTION TO PAGES 56 TO 67 OF THE PAPER BOOK WHICH SHOW THE COPIES OF THE VARIOUS E-MAILS BETWEEN THE ASSESSEE AND ITS AE. IT WAS A SUBMISSION THAT THE MANAGEMENT FEES COULD NOT BE TAKEN AS NIL AND THE PAYMENTS HAVE BEEN MADE ON THE BASIS OF THE AGR EEMENT BETWEEN THE ASSESSEE AND ITS A.ES TAKING INTO CONSIDERATION THE NUMBER OF MAN HOURS. IT WAS A SUBMISSION THAT THE ADDITION AS CO NFIRMED BY THE ORDER OF LD.CIT(A) IS LIABLE TO BE DELETED. 4. IN REPLY, THE LD.D.R VEHEMENTLY SUPPORTED THE O RDERS OF LD.TPO AND THE LD.CIT(A). IT WAS A SUBMISSION THAT THERE WAS NO NEED FOR THE ASSESSEE TO PAY THE MANAGEMENT FEES AND MANAGEMENT FEES ARE MORE THAN TECHNICAL SERVICES. IT WAS A SU BMISSION THAT THE ORDER OF THE CIT(APPEALS) WAS LIABLE TO BE UPHELD. ITA NOS.2581/CHNY/17 ITA NO.122/CHNY/2018 :- 7 -: 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS I T IS NOTICED THAT THE ISSUE IN THE APPEAL IS SQUARELY COVERED BY THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S.BONFIGIOLI TRANSMISSIONS PRIVATE LIMITED., REFERRED TO SUPRA, RESPECTFULLY FOLLOWING THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL, AND AS THE ASSESSEE HAS PROVED THE INCURRING OF THE EXPENDITURE ON MANAGEME NT FEES, THE ADDITION, AS MADE BY THE LD.A.O/TPO AND CONFIRMED BY THE LD.C IT(A), STANDS DELETED. 6. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE FOR ASSESSMENT YEARS 2013-14 & 2012-13 ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT AFTER CONCLUSION OF HEARING ON 14 TH NOVEMBER, 2018, AT CHENNAI. SD/ - SD/ - ( . ) (A.MOHAN ALANKAMONY) ! '# / ACCOUNTANT MEMBER ( ) (GEORGE MATHAN) $ '# / JUDICIAL MEMBER - ' / CHENNAI . / DATED: 14 TH NOVEMBER, 2018. K S SUNDARAM / ' $(01 2 1( / COPY TO: 1 . ! / APPELLANT 3. & 3( () / CIT(A) 5. 145 $(6 / DR 2. $% ! / RESPONDENT 4. & 3( / CIT 6. 57 8' / GF