DCIT, New Delhi V. M/s. Insilco Ltd., New Delhi

ITA 282/DEL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81971 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 9 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 30-10-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 18-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PEEYUSH JAIN
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI GEORGE GEORGE K. JM ITA NO.282/DEL/2012 ASSESSMENT YEAR : 2003-04 DCIT, CIRCLE 11(1), ROOM NO.312, CR BUILDING, NEW DELHI. VS. INSILCO LTD., 3 RD FLOOR, CENTRAL WING, 124, JANPATH, NEW DELHI. PAN: AAACI1203N ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI PEEYUSH JAIN, CIT, DR DEPARTMENT BY : S HRI V.P. GUPTA, ADVOCATE ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE REVENUE ARISES OUT OF THE ORDER PASSED BY THE CIT(A) ON 22.11.2011 IN RELATION TO THE ASSESSM ENT YEAR 2003- 04. 2. FIRST GROUND IS AGAINST THE DELETION OF ADDITI ON OF `50,10,463/- MADE BY THE AO ON ACCOUNT OF TRANSFER PRICING ADJUS TMENT. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE WAS INITIALLY ITA NO.282/DEL/2012 2 FORMED AS A JOINT VENTURE IN 1988. SUBSEQUENTLY, I N APRIL, 1999, IT BECAME A SUBSIDIARY OF DEGUSSA A.G., GERMANY, WHICH HOLDS 68.25% OF THE SHARES IN THE ASSESSEE COMPANY. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE O F SILICA. DURING THE YEAR UNDER CONSIDERATION, IT ENTERED INT O INTERNATIONAL TRANSACTIONS WITH THREE OF ITS ASSOCIATED ENTERPRIS ES, NAMELY, DEGUSSA AG, GERMANY; J.J. DEGUSSA CHEMICALS, INDON ESIA; AND J.J. DEGUSSA CHEMICALS, PHILIPPINES. THESE INTERNAT IONAL TRANSACTIONS WERE ON ACCOUNT OF EXPORT OF SILICA WI TH SALE VALUE OF `5,12,00,053/-. THE ASSESSEE BENCHMARKED THESE INT ERNATIONAL TRANSACTIONS BY USING COMPARABLE UNCONTROLLED PRICE (CUP) AS THE MOST APPROPRIATE METHOD. ON COMPARISON OF THE RATE S CHARGED BY THE ASSESSEE FROM ITS AES AND UNRELATED PARTIES , IT WAS FOUND BY THE TPO THAT IN CERTAIN TRANSACTIONS, THE PRICE CHARGED FROM ITS AES WAS LOWER AS COMPARED TO THAT CHARGED FROM NON- AES AND FURTHER SUCH DIFFERENCE WAS MORE THAN 5%. ON BEING SHOW- CAUSED TO EXPLAIN THE REASONS FOR CHARGING LOWER PR ICE FROM ITS AES, THE ASSESSEE CONTENDED THAT THERE WERE CERTAIN GEOGRAPHICAL DIFFERENCES AND ECONOMIC ADJUSTMENTS WHICH LED TO T HE DIFFERENCE IN THE RATES CHARGED FROM AES AND NON-AES. APART F ROM THAT, ITA NO.282/DEL/2012 3 CERTAIN OTHER OBJECTIONS WERE ALSO TAKEN BY THE ASS ESSEE TO THE WORKING OF THE TPO, DIVULGING DIFFERENCE IN THE RAT E CHARGED FROM NON-AES. THE TPO REQUIRED THE ASSESSEE TO SUPPLY I NFORMATION ABOUT THE RESALE PRICE OF THE GOODS SOLD BY THE AES AS, IN SOME CASES, THE GOODS PURCHASED BY THE AES FROM THE ASSE SSEE WERE RESOLD TO OTHER CUSTOMERS. NO SUCH INFORMATION WAS SUPPLIED BY THE ASSESSEE. IT WAS ALSO NOTICED THAT THE ASSESSEE MADE SALE TO GROUP ENTITIES IN SOUTH AFRICA AND LATIN AMERICA TH ROUGH DEGUSSA, WEST GERMANY. ON THE ANALYSIS OF THE TRANSFER PRIC ING REPORT, THE TPO NOTED THAT THE 2/3 RD OF THE RELATED ENTERPRISES WERE LOCATED IN INDONESIA AND PHILIPPINES AND THE UNRELATED ENTERPR ISES WERE LOCATED IN INDONESIA, PHILIPPINES, SRI LANKA AND BA NGLADESH. THE ONLY OTHER AE WAS LOCATED IN GERMANY. AFTER TAKING INTO CONSIDERATION OF THE RELEVANT ARGUMENTS MADE ON BEH ALF OF THE ASSESSEE, THE TPO PROPOSED THE TRANSFER PRICING ADJ USTMENT OF `54,10,463/-, WHICH WAS MADE BY THE AO. IN THE APP EAL BEFORE THE LD. CIT(A), THE ASSESSEE RAISED ADDITIONAL GROU ND TO THE EFFECT THAT TRANSACTIONAL NET MARGIN METHOD (TNMM) SHOULD BE ADOPTED AS THE MOST APPROPRIATE METHOD FOR COMPUTING THE AR MS LENGTH PRICE (ALP). THE LD. CIT(A) REMITTED THE ADDITIONA L GROUND ALONG ITA NO.282/DEL/2012 4 WITH THE NECESSARY DOCUMENTS TO THE TPO FOR COMMENT S. THE TPO, VIDE HIS REMAND REPORT DATED 13.09.2011, OBJECTED T O THE ADMISSION OF ADDITIONAL GROUND AND CONTENDED THAT T HE SAME BE REJECTED. TAKING INTO CONSIDERATION THE SPECIAL BE NCH DECISION IN THE CASE OF QUARK SYSTEMS PVT. LTD. VS. ITO 2010-TIOL-31-ITAT- CHD-SB, THE LD. CIT(A) ADMITTED THE ASSESSEES ADDITIONAL GROUND. THE ASSESSEE CONTENDED THAT THE INTERNAL TNMM SHOUL D BE APPLIED TO BENCHMARK THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY IT. CREATING THE SEGMENTAL ACCOUNTS FOR THIS PU RPOSE, THE ASSESSEE ALLOCATED EXPENSES AND INCOMES IN CERTAIN PERCENTAGE AND DEMONSTRATED TO THE CIT(A) THAT THE PROFIT CHAR GED FROM AES WAS HIGHER THAN THAT CHARGED FROM NON-AES. THE LD. CIT(A) GOT CONVINCED WITH THE ASSESSEES SUBMISSIONS AND ORDER ED FOR THE DELETION OF ADDITION. IN REACHING THIS CONCLUSION, THE LD. CIT(A) ALSO REFERRED TO THE TRIBUNAL ORDER PASSED FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, NAMELY, 2002-03, REMANDI NG THE MATTER TO THE AO/TPO AND ALSO THE VIEW TAKEN BY THE TPO FOR THE AYS 2007-08 AND 2008-09 ACCEPTING THE APPLICATION O F TNMM. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT T HE ASSESSEE ITA NO.282/DEL/2012 5 APPLIED CUP AS THE MOST APPROPRIATE METHOD FOR BENC HMARKING THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY IT. TH E ASSESSEE DID NOT DISPUTE BEFORE THE TPO THAT THE CUP WAS THE MOS T APPROPRIATE METHOD. HOWEVER, IT WAS ONLY DURING THE COURSE OF FIRST APPELLATE PROCEEDINGS THAT THE ASSESSEE CAME OUT WITH AN ADDI TIONAL GROUND CONTENDING THAT THE MOST APPROPRIATE METHOD WAS TNMM AND THE SAME SHOULD BE APPLIED. THE REASON ADVANCE D FOR NOT APPLYING THE CUP METHOD WAS THAT THERE WERE NO INST ANCES OF UNCONTROLLED TRANSACTIONS IN GERMANY AND THE ASSESS EE HAD ALSO ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WIT H DEGUSSA AG, GERMANY. THE LD. AR VEHEMENTLY ARGUED THAT THE TRI BUNAL WAS PLEASED NOT TO ACCEPT THE APPLICATION OF CUP AS THE MOST APPROPRIATE METHOD IN ITS ORDER FOR THE AY 2002-03 BECAUSE IN THAT YEAR ALSO, LIKE THE CURRENT YEAR, THERE WERE INTERNATIONAL TRANSACTIONS WITH DEGUSSA AG, GERMANY AND NO TRANSA CTIONS WITH NON-AES SITUATED AT GERMANY WERE UNDERTAKEN BY THE ASSESSEE. THESE FACTS INDICATE THAT THE FACTS AND CIRCUMSTANC ES OF THE INSTANT YEAR ARE, MUTATIS MUTANDIS , SIMILAR TO THOSE FOR THE ASSESSMENT YEAR 2002-03. WE HAVE PERUSED THE ORDER DATED 05.08.2011 PASSED BY THE TRIBUNAL IN ASSESSEES CAS E FOR THE AY ITA NO.282/DEL/2012 6 2002-03, A COPY OF WHICH HAS BEEN PLACED ON RECORD. IN SUCH EARLIER YEAR ALSO, THE ASSESSEE APPLIED THE CUP MET HOD FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS. IT WA S CONTENDED BEFORE THE TRIBUNAL THAT NO EXPORTS WERE MADE TO AN Y UNCONTROLLED PARTIES IN SOUTH AMERICAN COUNTRIES AN D, HENCE, CUP METHOD COULD NOT BE APPLIED IN RESPECT OF SALES MAD E THROUGH DEGUSSA AG, GERMANY TO VARIOUS JURISDICTIONS IN SOU TH AMERICAN COUNTRIES. AFTER CONSIDERING THE ENTIRE GAMUT OF T HE CONTENTIONS AND THE FACTUAL POSITION, THE TRIBUNAL HELD IN PARA 8.4 OF ITS ORDER AS UNDER:- 8.4 WE HAVE CONSIDERED THE FACTS OF THE CASE AND RIVAL SUBMISSIONS. WE DO AGREE WITH THE SUBMISSION S OF THE LEARNED COUNSEL THAT CUP METHOD IS NOT APPROPRI ATE IN RESPECT OF SALES MADE TO THE DEGUSSA, AG, GERMAN Y. THE REASON IS THAT THERE IS NO INSTANCE OF UNCONTRO LLED SALE EITHER TO GERMANY OR TO SOUTH AMERICAN COUNTRI ES WHERE THE GOODS WERE ACTUALLY SHIPPED BY THE ASSESS EE ON CIF BASIS. IN THESE CIRCUMSTANCES, WE THINK IT FIT TO RESTORE THE WHOLE MATTER TO THE FILE OF THE ASSESSI NG OFFICER FOR FRESH DETERMINATION OF THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS WITH AES BY APPLYING AN APPROPRIATE METHOD AND AFTER HEARING THE ASSESSEE. IT IS SPECIFICALLY MENTIONED THAT THE ASSESSING OFFICE R IS NOT BOUND BY ANY ARGUMENT MADE BEFORE US OR OBSERVATION MADE BY US AND HE SHALL PROCEED IN A MANNER AS IF THIS ISSUE IS BEING DECIDED FOR THE FI RST TIME. THUS, GROUND NO.2 IN THE APPEAL OF THE ASSES SEE AND GROUND NO.1 IN THE APPEAL OF THE REVENUE ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ITA NO.282/DEL/2012 7 4. A CURSORY LOOK AT THE OBSERVATIONS MADE BY THE T RIBUNAL IN ASSESSEES CASE FOR THE IMMEDIATELY PRECEDING YEAR DIVULGES THAT THE TRIBUNAL DID NOT UPHOLD THE APPLICATION OF TNMM . RATHER, THE ENTIRE MATTER FOR FRESH DETERMINATION OF THE ALP, BY APPLYING AN APPROPRIATE METHOD, STOOD RESTORED. 5. THE CONTENTION OF THE LD. AR THAT THE VIEWPOINT TAKEN BY THE LD. CIT(A) IN ADOPTING TNMM SHOULD BE UPHELD, IN OU R CONSIDERED OPINION, IS NOT CAPABLE OF ACCEPTANCE AT THIS STAGE . THE LARGER QUESTION BEFORE US IS NOT ONLY THE APPLICATION OF A PARTICULAR METHOD FOR DETERMINATION OF ALP, BUT ALSO THE CALCU LATION PART. IT CAN BE SEEN FROM THE IMPUGNED ORDER THAT IN ORDER T O DEMONSTRATE THAT THE PRICE CHARGED FROM ITS AES WAS AT ALP, THE ASSESSEE CREATED SEGMENTAL ACCOUNTS. IT IS NOT A C ASE WHERE THE ASSESSEE HAD PREPARED SEPARATE ACCOUNTS IN RESPECT OF DIFFERENT SEGMENTS, WHICH WERE PRODUCED BEFORE THE TPO DURING THE COURSE OF ORIGINAL PROCEEDINGS. RATHER, THE CONSOLIDATED ACCOUNTS WERE BIFURCATED INTO THE TRANSACTIONS WITH AES AND NON-A ES BY ALLOCATING EXPENSES/INCOMES, MAINLY BASED ON SALES. SUCH ALLOCATION NEVER CAME TO BE CONSIDERED BY THE TPO B ECAUSE IT WAS ITA NO.282/DEL/2012 8 DONE FOR THE FIRST TIME BEFORE THE LD. CIT(A). WHE N THE LD. FIRST APPELLATE AUTHORITY SENT SUCH CALCULATIONS AND THE ASSESSEES REQUEST FOR ADMISSION OF ADDITIONAL GROUND ON THIS ASPECT, THE TPO RAISED A PRELIMINARY ISSUE BY OBJECTING TO THE ADMI SSION OF THIS ADDITIONAL GROUND AND, AS SUCH, DID NOT HAVE ANY OC CASION TO VERIFY THE CORRECTNESS OF ALLOCATION OF EXPENSES/IN COME. 6. FURTHER, THE LD. CIT(A) APPEARS TO HAVE BEEN SWAYED BY THE APPLICATION OF TNMM BY THE TPO FOR THE A.YS. 2007- 08 AND 2008- 09 IN HOLDING THAT THIS WAS THE MOST APPROPRIATE ME THOD FOR APPLICATION, DESPITE THE FACT THAT THE ORDER OF THE TRIBUNAL FOR THE IMMEDIATELY PRECEDING A.Y. 2002-03 WAS BEFORE HIM I N WHICH THE QUESTION OF THE APPLICATION OF THE APPROPRIATE METH OD WAS RESTORED. THERE IS NO MATERIAL ON RECORD THAT PURSU ANT TO SUCH DIRECTION GIVEN BY THE TRIBUNAL FOR THE PRECEDING Y EAR, THE TPO/AO HAVE ACCEPTED THE APPLICATION OF TNMM AS THE MOST A PPROPRIATE METHOD. 7. WE DO NOT FIND ANY FORCE IN THE ARGUMENT OF THE LD. AR THAT SIMPLY BECAUSE THE TPO HAS APPLIED TNMM FOR THE A.Y S 2007-08 AND 2008-09 AND HENCE THE APPLICATION OF THE SAME B Y THE LD. ITA NO.282/DEL/2012 9 CIT(A) BE UPHELD. THIS FACTOR, THOUGH SIGNIFICANT, BUT IS NOT CONCLUSIVE. WHAT PERSUADED THE TPO TO OBSERVE DEPAR TURE IN THESE TWO LATER YEARS FROM THE CONSISTENT STAND TAK EN BY HIM IN THE IMMEDIATELY PRECEDING FOUR YEARS UP TO A.Y. 200 6-07 IN FOLLOWING THE CUP METHOD, IS NOT AVAILABLE ON RECO RD. THERE MAY HAVE BEEN SOME CHANGE IN THE FACTUAL POSITION NECES SITATING THE ADOPTION OF TNMM IN THESE LATER YEARS. FURTHER, THE MERE FACT THAT THE TPO ADOPTED TNMM IN A LATER YEAR CAN BE NO GROU ND TO ARGUE BEFORE THE TRIBUNAL THAT THE SAME METHOD BE FOLLOWE D IN A PRECEDING YEAR, WHICH STAND HAS BEEN SPECIFICALLY R EJECTED BY HIM IN THE INSTANT YEARS. AS SUCH, WE CANNOT UPHOLD THE APPLICATION OF TNMM ON THIS REASON ALONE, MORE SPECIFICALLY, WHEN IN THE IMMEDIATELY PRECEDING YEAR, WHERE THE FACTS ARE AD MITTEDLY SIMILAR, THE TRIBUNAL HAS RESTORED THE MATTER TO TH E TPO FOR DE NOVO ADJUDICATION. SINCE THE FACTS AND CIRCUMSTANCES O F THE INSTANT YEAR ARE ADMITTEDLY SIMILAR TO THOSE OF THE IMMEDIATELY PRECEDING YEAR, IN RESPECT OF WHICH THE TRIBUNAL HA S GIVEN UNAMBIGUOUS DIRECTION FOR DE NOVO DETERMINATION, RESPECTFULLY FOLLOWING THE PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF TPO/AO FOR FRESH DE TERMINATION OF ITA NO.282/DEL/2012 10 THE ISSUE IN ACCORDANCE WITH THE DIRECTIONS GIVEN B Y THE TRIBUNAL FOR THE AY 2002-03. 8. GROUND NO.2 OF THE APPEAL IS AGAINST THE DELETIO N OF ADDITION OF `5,04,072/- MADE BY THE AO ON ACCOUNT OF DISALLO WANCE OF RENOVATION AND MAINTENANCE EXPENSES. THE FACTS APR OPOS THIS GROUND ARE THAT THE ASSESSEE CLAIMED DEDUCTION OF ` 2.24 CRORE UNDER THE HEAD MISCELLANEOUS EXPENSES. THIS INCLU DED A SUM OF `25,20,361/- INCURRED ON ACCOUNT OF RENOVATION AND MAINTENANCE OF VASANT VIHAR OFFICE. IN THE ABSENCE OF ANY DETAI LS FURNISHED ON BEHALF OF THE ASSESSEE, THE AO DISALLOWED 20% OF SU CH EXPENSES, WHICH RESULTED INTO ADDITION OF `5,04,072/-. THE L D. CIT(A) ORDERED FOR THE DELETION OF THIS APPEAL. 9. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT TH E SUM OF `25.20 LAC WAS NOT TOWARDS ANY RENOVATION OF BUILDING, BUT , PAID TO A COMPANY, NAMELY, TOWERBASE SERVICES PVT. LTD., AS MAINTENANCE CHARGES FOR VASANT VIHAR OFFICE ON MONTHLY BASIS. MONTH-WISE DETAILS OF SUCH PAYMENT MADE AGGREGATING TO `25.20 LAC WERE MADE AVAILABLE TO THE LD. CIT(A), WHICH WERE SENT TO THE AO FOR ITA NO.282/DEL/2012 11 COMMENTS. NO OBJECTION WAS TAKEN BY THE AO TO THE CORRECTNESS OF THE NATURE OF AMOUNT IN THE REMAND REPORT. UNDE R SUCH CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THA T THE VIEW TAKEN BY THE LD. CIT(A) IN ALLOWING DEDUCTION FOR T HE FULL AMOUNT, WHICH WAS INCURRED FOR THE MAINTENANCE OF OFFICE O N MONTHLY BASIS, DOES NOT REQUIRE ANY INTERFERENCE. THIS GRO UND IS NOT ALLOWED. 10. THE LAST GROUND OF THIS APPEAL IS AGAINST THE D ELETION OF ADDITION OUT OF `88,000/- MADE BY THE AO ON ACCOUNT OF ISO CERTIFICATION FEE PAID BY THE ASSESSEE. THE ASSESS EE PAID A SUM OF `88,000/- TOWARDS ISO CERTIFICATION FEE. CONSID ERING CERTAIN JUDGMENTS, THE AO CAME TO HOLD THAT THE ASSESSEE AC QUIRED AN ENDURING ADVANTAGE BY GETTING APPROVAL OF QUALITY M ANAGEMENT SYSTEM TO ISO-9002 NORMS AND, HENCE, IT WAS A CAPIT AL EXPENDITURE LIABLE FOR DEPRECIATION @ 25%. THAT IS HOW, THE ADDITION OF `66,000/- WAS MADE. THE LD. CIT(A) DEL ETED THIS ADDITION. 11. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED THAT THE PAYMENT OF ISO ITA NO.282/DEL/2012 12 CERTIFICATION FEE IS A ROUTINE EXPENDITURE INCURRED ON ANNUAL BASIS. BY NO STRETCH OF IMAGINATION IT CAN BE CONSIDERED A S AMOUNTING TO ACQUISITION OF A CAPITAL ASSET OR ADVANTAGE OF AN E NDURING NATURE. WE, THEREFORE, APPROVE THE VIEW TAKEN BY THE LD. CI T(A) ON THIS ISSUE. THIS GROUND FAILS. 12. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 31.10.201 4. SD/- SD/- [ GEORGE GEORGE K. ] [ R.S. SYAL ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 31 ST OCTOBER, 2014. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.