M/s. TACKE WIND ENERGY INDIA P. LTD., MUMBAI V. ACIT - 7(3), MUMBAI

ITA 2874/MUM/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1462 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 22-03-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 13-04-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDER SINGH
• Assessee Lawyers: KISHORE PODDAR
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts

Judgement Text

ITA NO. 2873 & 2874/MUM/2007 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE SHRI R S PADVEKAR, JM & SHRI R K PANDA, AM ITA NOS. 2873 & 2874/MUM/2007 (ASST YEARS 2002-03 & 2003-04) TACKE WIND ENERGY INDIA P LTD 229/230 ARN CHAMBERS 2 ND FLOOR, TARDEO MUMBAI 39 VS THE ASST COMMR OF INCOME TAX 7(3), MUMBAI (APPELLANT) (RESPONDENT) PAN AABCT0794Q ASSESSEE BY: SHRI KISHORE PODDAR REVENUE BY: SHRI NARENDER SINGH O R D E R PER R S PADVEKAR: THESE TWO APPEALS, BY THE ASSESSEE, ARE FILED CHA LLENGING THE COMMON ORDER OF THE LD CIT(A)-XXII, MUMBAI DATED 10 .1.2007 FOR THE ASSESSMENT YEARS 2002-03 & 2003-04. AS THE ISSUES A S WELL AS THE FACTS ARE IDENTICAL IN BOTH THESE APPEALS; THEREFORE, THEY AR E DISPOSED OFF BY THIS COMMON ORDER. 2 FIRST, WE WILL TAKE THE APPEAL FOR AY 2002-03 BEI NG ITA NO.2873/MUM/2007: 3 THE FIRST ISSUE IS IN RESPECT OF DISALLOWANCE CLA IMED BY THE ASSESSEE OF RS. 9,752,653/- WHICH WAS DUE TO THE LOSS ARISEN ON FOREIGN EXCHANGE FLUCTUATION. 4 WE HAVE HEARD THE PARTIES. THE ASSESSEE HAS DEBI TED AN AMOUNT OF RS. 9,752,653/- TOWARDS FOREIGN EXCHANGE LOSS AND T HE SAME WAS CLAIMED AS DEDUCTION. THE AO SOUGHT EXPLANATION OF THE ASSESS EE ON THE SAID CLAIM. THE ASSESSEE EXPLAINED THAT DURING THE FINANCIAL YE AR, HE HAD MADE CERTAIN ITA NO. 2873 & 2874/MUM/2007 2 IMPORTS AND THE FOREIGN EXCHANGE LOSS WAS AS A RESU LT OF FLUCTUATION IN FOREIGN CURRENCY. THE AO DISALLOWED THE ASSESSEES CLAIM AND MADE ADDITION IN THE COMPUTATION OF THE TOTAL INCOME. THE ASSESSE E CARRIED THE ISSUE BEFORE THE LD CIT(A); BUT WITHOUT SUCCESS. 5 THE LD COUNSEL OF THE ASSESSEE SUBMITTED THAT NOW THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2001-02 BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT AS THE APPEAL FILED BY THE REVENUE BEING INCOME TAX APPEAL NO.418 OF 2009 HAS BEEN DISMISSED BY THE HIGH COURT BY CONFIRMING THE ORDER OF THE TRIBUNAL. THE LD COUNSEL OF THE ASSESSEE FILED A COPY OF THE JUDGEMENT OF THE HONBLE HIGH COURT OF BOMBAY IN CIT VS M/S TACKE WIND ENERG Y INDIA P LTD BEING ITA NO.418 OF 2009 DATED 21.4.2009. THE LD DR FAIR LY CONCEDED THAT THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE HONBLE BOMBAY HIGH COURT. MOREOVER, WE FIND THAT THIS ISSUE IS AL SO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE SUPREME COURT IN TH E CASE OF CIT VS WOODWARD GOVERNOR INDIA P LTD & OTHER IN 2009 TIOL- 50(SC). WE, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDIC TIONAL HIGH COURT IN ASSESSEES OWN CASE AS WELL AS THE SUPREME COURT CI TED SUPRA , REVERSE THE ORDER OF THE LD CIT(A) ON THIS ISSUE AND ALLOW THE GROUND OF THE ASSESSEE. 6 NEXT ISSUE RELATES TO ADDITION MADE BY THE AO BAS ED ON THE TPOS ORDER DATED 30.6.2004 WHILE DETERMINING THE ARMS L ENGTH PRICE (ALP) OF RS. 4,86,55,800/-. 7 THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS O F SELLING WIND TURBINES IN INDIA. THE ASSESSEE IS A PART OF ENRON GROUP COMPANIES. THE ASSESSEE HAD BUSINESS TRANSACTIONS WITH OTHER GROUP OF COMPANIES; I) ENRON WIND CORPN. BV WHICH IS THE HOLDING COMPA NY II)ENRON WIND SERVICE GMBH WHICH IS ENGAGED IN THE BUSINESS OF MAINTENANCE OF WIND TU RBINE III)TACKE WIND ENERGY GMBH WHICH IS ENGAGED IN THE MANUFACTURE AND SALE OF TURBINE GENERA TOR IV)TACKE ENERGIA EOLICA SL WHICH IS ENGAGED IN THE ITA NO. 2873 & 2874/MUM/2007 3 MANUFACTURE OF WIND TURBINES. 7.1 THE ASSESSEE IMPORTS RAW MATERIAL I.E. TURBINE COMPONENTS; CONSUMABLES, EQUIPMENTS AND TOOLS FROM OVERSEAS EN RON GROUP COMPANIES MENTIONED ABOVE WHICH ARE THE ASSOCIATED ENTERPRISE (AE). AS PER NORMAL INDUSTRY PRACTICE, THE CONTRACT FOR SALE OF WIND TU RBINES GENERALLY INCLUDES ITS ERECTION, COMMISSIONING ETC. THE ASSESSEE HAS T O CARRY OUT THE CIVIL FOUNDATION, FABRICATION OF TOWER, PROCURING SUITABL E LAND AND OBTAINING REGULATORY APPROVAL FOR ITS CUSTOMERS OF WIND TURBI NE GENERATORS. THE ASSESSEE HAS ADOPTED RESALE PRICE METHOD (RPM) IN R ESPECT OF THE TRANSACTIONS WITH ITS AES. THE DETAILS OF VARIOUS INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE AND ALP FOR THE SAME W HICH HAVE BEEN DETERMINED BY THE ASSESSEE BY FOLLOWING RPM METHOD ARE MENTIONED IN THE TPOS ORDER AT PAGE 2. 7.2 THE TRANSACTIONS ARE MAINLY WITH (I) TACKE ENER GIA EOLICA S.L NOBLEJAS (TOLEDO) (II) TACKE WINDENERGIE GMBH, HOLSERFELD, G ERMANY (III) ENRON WIND SERVICE GMBH, HOLSTERFELD, GERMANY. THE ASSESSEE H AS IMPORTED RAW MATERIAL AS WELL AS CONSUMABLE, EQUIPMENTS AND TOOL S FROM THE ABOVE AES. THE TPO HAS OBSERVED THAT IN RESPECT OF THE IMPORT OF RAW MATERIAL, THE ASSESSEE APPLIED RPM. THE TPO HAS FURTHER OBSERVED THAT OUT OF THE TOTAL TRANSACTIONS OF IMPORT, THE ASSESSEE HAS IDENTIFIED ONE ITEM I.E NASCELLE (TURBINE) HAVING VALUE OF RS.2,94,24,908/- WHICH HA S BEEN EXCLUDED FROM THE PROFIT MARGIN CALCULATION FOR DETERMINATION OF ALP. THE ASSESSEE EXPLAINED THAT THE SAID ITEM WAS PART OF THE CLOSIN G STOCK AT THE END OF THE YEAR AND THE SAME DOES NOT HAVE ANY IMPACT IN DETER MINING THE ALP. THE ASSESSEE ADOPTED RPM AS THE APPROPRIATE METHOD FOR DETERMINING OF THE ALP AND GROSS PROFIT MARGIN COMPARED TO THE PROFIT MARG IN OF AES. THE ASSESSEE CONTENDED BEFORE THE AO THAT ITS MARGINS ARE BETTER THAN THE COMPARABLE COMPANIES MARGIN; HENCE, THE PROFIT MARGIN OF AES I N RESPECT OF IMPORT OF RAW MATERIAL, CONSUMABLES, TOOLS AND EQUIPMENTS ARE MADE FROM THE AES AT ALP. ITA NO. 2873 & 2874/MUM/2007 4 7.3 FOR DETERMINING THE ALP IN RESPECT OF THE GOODS , THE ASSESSEE HAS DIVIDED THE SAME INTO TWO CATEGORIES: I) TURBINE COMPONENTS; II) CONSUMABLES, EQUIPMENTS AND TOOLS 7.4 IN RESPECT OF THE CONSUMABLES, TOOLS AND EQUIPM ENTS, THE ASSESSEE HAS CONTENDED THAT AS NO METHOD IS APPLICABLE AND H ENCE, NO ALP CAN BE DETERMINED AND THE TRANSACTION VALUE IN RESPECT OF THE IMPORTED ITEMS IS TO BE ACCEPTED AS ALP. 7.5 SO FAR AS THE ALP IN RESPECT OF RAW MATERIAL IS CONCERNED, THE ASSESSEE HAS ADOPTED THE RPM. THE TPO HAS REJECTED THE METHO D ADOPTED BY THE ASSESSEE I.E. RPM FOR DETERMINING THE ALP. THE SUMM ARY OF THE REASONS GIVEN BY THE TPO FOR REJECTING THE RPM METHOD ADOPT ED BY THE ASSESSEE AND THE OTHER METHOD AS APPROPRIATE METHOD ARE AS UNDER : THE REASONS IN BRIEF FOR REJECTING/ACCEPTING THE O THER METHODS ARE AS FOLLOWS: I) CUP METHOD HAS BEEN REJECTED AS NEITHER INTERNAL CO MPARABLES NOR EXTERNAL COMPARABLE COULD BE OBTAINED BY THE AS SESSEE. II) COST PLUS METHOD HAS BEEN REJECTED AS THE ASSESSEE IS THE RESELLER AND NOT THE SUPPLIER; III) THE PROFIT SPLIT METHOD HAS BEEN REJECTED AS THERE IS NO TRANSFER OF INTANGIBLES NOR THE TRANSACTIONS CLOSELY INTER-RELA TED. IV) THE TRANSACTION NET MARGIN METHOD (TNMM) HAS BEEN R EJECTED AS RESALE PRICE METHOD (RPM) IS PREFERABLE TO THE SAME . V) RESALE METHOD HAS BEEN ADOPTED AS THE MOST APPROPRI ATE METHOD AS SALES MADE BY THE ASSESSEE ARE TO THIRD PARTIES. FURTHER, IT HAS BEEN CONTENDED THAT THE TURBINE COMPONENTS CAN BE IDENTIFIED AND RELATED TO A PARTICULAR WIND TURBINE SOLD. 8. THE TPO WAS OF THE FURTHER OPINION THAT TO APPLY RPM, THE ASSESSEE HAS TO COMPARE ITS GROSS PROFIT MARGIN WITH THE GRO SS PROFIT MARGIN OF OTHER COMPANIES ENGAGED IN SIMILAR ACTIVITIES. IT APPEAR S THAT THE ASSESSEE HAS ITA NO. 2873 & 2874/MUM/2007 5 FURNISHED COMPARABLE TRANSACTIONS BY NAME M/S CAPIT AL LINE 2000 WHICH WAS THE DATA BASE CREATED AND MAINTAINED BY A PRIVA TE COMPANY WHEREIN THE FINANCIAL INFORMATION RELATING TO 7000 INDIAN C OMPANIES ARE AVAILABLE. THE ASSESSEE TOOK THE SAID DATA BASE AND TRIED TO S UPPORT HIS RPM METHOD. THE TPO HAS OBSERVED THAT THE GROSS PROFIT MARGIN O F THE ASSESSEE HAS BEEN WORKED OUT TO 3.26% WHEREAS THE GP OF THE COMPARABL E COMPANIES HAVE BEEN WORKED OUT AT 6.39%. AS PER THE FINAL WORKING GIVEN BY THE ASSESSEE, THE GP MARGIN OF THE ASSESSEE HAS BEEN WORKED TO 3. 26% WHEREAS THAT OF THE COMPARABLE COMPANIES AT 1.89%. 9. THE TPO HAS OBSERVED THAT THE ASSESSEE WAS UNABL E TO SUBSTANTIATE HOW THE PURCHASE PRICE FOR THE RAW MATERIALS, CONSU MABLES, TOOLS AND EQUIPMENTS ARE A NEGOTIATED PRICE OR THE MARKET PRI CE. IT IS NOT DISPUTED THAT AE IS MAKING SALES OF SIMILAR ITEMS TO UNCONTR OLLED PARTIES ALSO BUT THE ASSESSEE COULD NOT SHOW THE PURCHASE BILL OF THE TH IRD PARTY. THE TPO FINALLY DECIDED THAT THE TNMM METHOD WHICH IN HIS VIEW WAS THE APPROPRIATE METHOD. THEREAFTER, THE TPO HAS DISCUSSED HOW THE P RICE PAID TO AES WAS NOT ALP. THE AO HAS DISCUSSED THE DETERMINATION OF THE ALP AND RPM METHOD IN PARAS 11 TO 18 OF HIS ORDER. THE AO ADOPT ED THE RATIO OF M/S VESTAS RRB AND M/S CWEL AS COMPARABLE TO THE ASSESS EES TRANSACTIONS AND CONSIDERING THEIR PROFIT MARGINS WORKED OUT THE ALP OF THE INTERNATIONAL TRANSACTIONS AT RS.31,17,252,094/- AND FINALLY MAD E THE ADDITION OF RS. 4,86,55,800/- WHICH WAS IN THE OPINION OF THE T PO WAS ON ACCOUNT OF EXCESS LOSS CLAIMED BY THE ASSESSEE, AS UNDER: CALCULATION OF OPERATING PROFITS FOR THE YEAR ENDED 31.3.2002: PARTICULARS TACKE VESTAS CWEL PROFIT BEFORE TAX (-) 109,121,174 75,794,440 2,980,527 ADD: INTEREST 189,605 - - NON OPERATING EXPENSES 77,245,835 - - (-) 31,685,734 75,794,440 2,980 ,527 LESS:NON OPERATING PROFIT - 38,150,125 OPERATING PROFIT (-) 31,685,734 37,644,31 5 2,936,843 SALES 418,497,895 952,122,949 70, 660,637 ITA NO. 2873 & 2874/MUM/2007 6 OP. MARGIN RATES (7.57%) (3.95%) ( 4.16%) THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD CIT(A) BUT WITHOUT SUCCESS. THE LD CIT(A) CONFIRMED THE ACTION OF THE AO. NOW, THE ASSESSEE IS IN APPEAL HERE BEFORE US. 10 WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTI ES AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LD COUNSEL OF THE ASSESSEE SUBMITS THAT THE ASSESSEE IS BASICALLY ENGAGED IN THE BUSINESS OF SE LLING WIND TURBINES IN INDIA AND THE APPROPRIATE METHOD IS TO BE ADOPTED F OR DETERMINING OF THE ALP IS RPM METHOD. IT IS ARGUED THAT THE ASSESSEE H AS PROVIDED SUFFICIENT DATA TO SUPPORT THE SAID METHOD BUT THE SAME WAS RE JECTED. IT IS ARGUED THAT APART FROM THE IMPORTING THE SPARES, CONSUMABL ES, OF WIND TURBINES, THE ASSESSEE HAS TO DO OTHER EXERCISE OF INSTALLATI ON AND COMMISSIONING OF WIND TURBINES AND SET UP THE PLANT ETC. IT IS ARGUE D THAT THE LOSS REFLECTED WAS DUE TO THE ACTIVITIES CARRIED IN INDIA. HOW THE LOSS IS NOTHING TO DO WITH THE SALE OF THE IMPORTED TURBINES. IT IS FURTHER AR GUED THAT THE TPO ADOPTED TWO COMPARABLES IN FACT THE GP MARGIN IS LESS COMPA RE TO THE PRICE PAID BY THE ASSESSEE TO AES. HE, THEREFORE, PLEADED THAT T HE TPO HAS NOT PROPERLY CONSIDERED THE SUBMISSIONS AS WELL AS THE DATA FILE D BY THE ASSESSEE. HENCE, THE MATTER MAY BE SET ASIDE TO THE FILE OF THE AO F OR RECONSIDERATION. WE ALSO HEARD THE LD DR. THE LD DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 11 WE HAVE PERUSED THE ORDER OF THE TPO. IT IS SEEN THAT THE TPO HAS NOT CONSIDERED THE IMPORTANT ASPECT OF THE ISSUE THAT T HE WIND TURBINES APART FROM IMPORTING THE SAME FROM THE AES, THE ASSESSEE HAS TO UNDERTAKE OTHER OPERATIONS FOR THE INSTALLATION AND COMMISSIONING O F THE WIND TURBINES. WHILE CONSIDERING THE PROFIT MARGIN, THE TPO HAS CO NSIDERED THE ENTIRE COST OF THE WIND TURBINES. IN OUR OPINION THE COST OF THE OPERATION CARRIED OUT BY THE ASSESSEE FOR INSTALLATION AND COMMISSIONING OF THE EQUIPMENTS OF THE WIND TURBINES IN INDIA SHOULD BE EXCLUDED AND ONL Y THE COST PERTAINING TO ITA NO. 2873 & 2874/MUM/2007 7 THE IMPORT OF THE PLANT AND MACHINERY, TOOLS AND CO NSUMABLES SHOULD BE CONSIDERED. IN OUR OPINION, THE ISSUE HAS TO BE CON SIDERED AFRESH; ACCORDINGLY, WE SET ASIDE THIS ISSUE TO THE FILE OF THE AO WITH THE DIRECTION TO CONSIDER THE ISSUE IN LIGHT OF THE ABOVE DISCUSSION . THE ASSESSEE SHOULD BE GIVEN A REASONABLE OPPORTUNITY OF BEING HEARD TO TH E ASSESSEE. 12 NEXT ISSUE IS IN RESPECT OF THE DISALLOWANCE OF BAD DEBTS OF RS. 3,89,465/-. 13 WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD COU NSEL OF THE ASSESSEE SUBMITTED THAT NOW THIS ISSUE STANDS COVERED IN FAV OUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF TRF LTD VS CIT (230 CTR 14 (SC) AS WELL AS BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF OMAN INTERNATIONAL BANK S AOG (313 ITR 128). THE LD DR FAIRLY CONCEDED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE AS SUBMITTED BY THE LD COUNSEL OF THE ASSESSEE. WE , ACCORDINGLY, RESPECTFULLY FOLLOWING THE PRECEDENTS CITED ABOVE D ELETE THE ADDITION MADE BY THE AO 14 NOW, WE WILL TAKE UP THE APPEAL FOR AY 2003-04 I N ITA NO.2874/MUM/2007. 15 THE ONLY ISSUE IN THIS APPEAL IS IN RESPECT OF T HE DISALLOWANCE OF THE CLAIM OF RS. 3,60,25,041/- TOWARDS THE LOSS ARISING ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS. 16 THE FACTS IN THIS YEAR ARE IDENTICAL TO THE FACT S FOR AY 2002-03. WE, THEREFORE, FOLLOWING THE REASONS GIVEN ABOVE IN THI S ORDER WHILE DECIDING THE APPEAL FOR AY 2002-03, ALLOW THE GROUND OF THE ASSE SSEE IN THIS YEAR ALSO. 17 IN THE RESULT, THE APPEAL FOR AY 2002-03 IS ALLO WED PARTLY FOR STATISTICAL PURPOSE AND THE APPEAL FOR AY 2003-04 IS ALLOWED. ITA NO. 2873 & 2874/MUM/2007 8 ORDER PRONOUNCED ON THE 18 TH DAY OF JUNE 2010. SD/- SD/- ( R K PANDA ) ACCOUNTANT MEMBER (R S PADVEKAR ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 18 TH JUNE 2010 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI