M/s. Corning SAS-India Branch Office, Gurgaon V. DDIT, New Delhi

ITA 3235/DEL/2014

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1796 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 27-11-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 26-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction

Judgement Text

1 ITA NO. 32 35/DEL/2014 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER & SMT. BEENA PILLAI, JUDICIAL MEMBER I.T.A .NO.-3235/DE L/2014 (ASSESSMENT YEAR-2004- 05) CORNING SAS - INDIA BRANCH OFFICE, 2 ND FLOOR, DLF BUILDING 9B, DLF CYBER CITY, PHASE-III, GURGAON. AAACC3889Q VS DDIT, CIRCLE 1(2), INTERNATIONAL TAXATION, NEW DELHI. APPELLANT BY SHRI AJAY VOHRA, SR. ADV. SHRI NEERAJ JAIN, ADV. RESPONDENT BY MS. DEEPIKA AGARWAL, CA MS. AVERANA SHARMA, CIT DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER : THE ASSESSEE HAS FILED THE PRESENT APPEAL AGAINST THE ORDER PASSED BY THE LD. DDIT, CIRCLE 1(2), NEW DELHI, VID E ORDER DATED 18/02/2014 FOR A.Y. 2004-05 ON THE FOLLOWING GROUND S: 1. THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN SUSTA INING ADDITION OF RS. 28,40,048/- ON ACCOUNT OF THE ALLEG ED DIFFERENCE IN THE ARMS LENGTH PRICE OF THE INTERNA TIONAL TRANSACTIONS, ON THE BASIS OF THE ORDER PASSED U/S 92CA(3) OF THE ACT BY THE TPO. DATE OF HEARING 27.11.2015 DATE OF PRONOUNCEMENT 30.11.2015 2 ITA NO. 32 35/DEL/2014 2. THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN INAPPR OPRIATELY AGGREGATING THE INTERNATIONAL TRANSACTION OF PROVIS ION OF AGENCY SERVICES WITH MARKET SUPPORT SERVICES, WITHO UT APPRECIATING THAT SUCH SERVICES OUGHT TO HAVE BEEN AGGREGATED WITH THE DISTRIBUTION SEGMENT, BEING CLO SELY LINKED WITH SUCH SEGMENT. 2.1 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE DISTRIBUTION AND AGENCY SEGME NT RELATES TO THE SAME PRODUCTS, VIZ., ROBS AND INVOLV ES PERFORMING SOME OF THE COMMON FUNCTIONS BY THE SAME EMPLOYEES AND IT IS NOT FEASIBLE TO SEGREGATE THE C OST RELATING TO THE SAME. 2.2 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE APPELLANT DOES NOT EMPLOY ANY SEPARATE/SPECIFIC PERSONNEL/ASSET FOR PROVISION OF AGENCY SERVICES AND SAME EMPLOYEES ENGAGED IN THE DISTRIBU TION SEGMENT PERFORM THE NECESSARY FUNCTIONS FOR PROVISI ON OF AGENCY SERVICES. 2.3 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN ALLOCA TING COMMON EXPENSES TO THE AGENCY SEGMENT IN THE RATIO OF SALES, RESULTING IN DISPROPORTIONATE ALLOCATION OF EXPENSES NOT COMMENSURATE WITH THE FUNCTIONS PER NOT APPRECI ATING THAT SUCH EXPENSES OUGHT TO HAVE BEEN ALLOCATED IN THE GROSS PROFIT RATIO. 2.4 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN SUSTAI NING INTERNATIONAL TRAVEL HOUSE LIMITED IN THE FINAL SET OF COMPARABLE COMPANIES CONSIDERED FOR THE PURPOSE OF BENCHMARKING AGENCY SERVICES WITH MARKET SUPPORT SERVICES, WITHOUT APPRECIATING THAT THE COMPANY HAD RELATED PARTY TRANSACTIONS IN EXCESS OF 25% OF REVE NUE. 2.5 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NOT CONSIDERING MULTIPLE YEAR DATA OF THE COMPARABLE COMPANIES, REQUIRED TO IRON OUT THE FLUCTUATIONS CA USED BY BUSINESS/ECONOMIC/PRODUCT LIFE CYCLE. 2.6 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT USE OF SINGLE YEAR DATA OF THE COMPARABLE COMPANIES MAY NOT ADEQUATELY CAPTURE THE MARKET AND BUSINESS CYCLE REFLECTED IN THE INDUSTRY . 3 ITA NO. 32 35/DEL/2014 2.7 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT ALLOWING APPROPRIATE RISK ADJUSTMENT TO ESTABLISH COMPARABILITY ON ACCOUNT OF THE APPELLANT BEING A L OW- RISK-BEARING CAPTIVE SERVICE PROVIDER AS OPPOSED TO THE COMPARABLE COMPANIES WHO WERE INDEPENDENT ENTREPRENEURS. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR VARY FROM THE AFORESAID GROUNDS OF APPEAL BEFORE OR AT T HE TIME OF HEARING. 2. FROM THE ABOVE GROUNDS, THE ASSESSEE SUBMITTED T HAT GROUND NOS. 1, 2.1, 2.2, 2.4, 2.5, 2.6 & 2.7 ARE NOT PRESS ED. THE LD.AR SUBMITTED THAT THE REMAINING GROUNDS HAVE BEEN DEAL T WITH BY THIS TRIBUNAL IN ASSESSEE OWN CASE VIDE ORDER DATED 28.0 8.2015, OF THE FOR A.Y. 2003-04 IN ITA NO. 2564/DEL/2011. HE SUBMI TTED THAT THE FACTS AND CIRCUMSTANCES ARE IN THE YEAR UNDER CONSI DERATION ARE SIMILAR. HE THUS SUBMITTED THAT THE GROUNDS STANDS COVERED BY THE ORDER OF THE TRIBUNAL IN THE PRECEDING ASSESSMENT Y EAR IN ASSESSEES OWN CASE. LD.DR HAS VERIFIED THE SAME AND HAS NOT O BJECTED TO THIS SUBMISSION MADE BY THE LD.AR. 3. GROUND NO. 2: THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN INAPP ROPRIATELY AGGREGATING THE INTERNATIONAL TRANSACTION OF PROVIS ION OF AGENCY SERVICES WITH MARKET SUPPORT SERVICES, WITHO UT APPRECIATING THAT SUCH SERVICES OUGHT TO HAVE BEEN AGGREGATED WITH THE DISTRIBUTION SEGMENT, BEING CLO SELY LINKED WITH SUCH SEGMENT. 3.1. WE SEE THAT THE ABOVE GROUND HAS BEEN DEALT WI TH BY THE TRIBUNAL FOR A.Y. 2003-04 IN PARAGRAPHS 24 & 25 WHI CH HAVE BEEN REPRODUCED HEREIN BELOW: 24. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIAL ON RECORD. THE FIRST ISSUE WHICH INVOLVES 4 ITA NO. 32 35/DEL/2014 CONSIDERATION AS CONTENDED BY THE LD. COUNSEL FOR T HE ASSESSEE IS THAT, THE TPO/CIT(A) WERE INCORRECT IN NOT BENCH- MARKING THE FUNCTIONING OF IMPORT OF PRODUCTS FROM M/S CORNING SA FRANCE AND RECEIPT OF AGENCY COMMISSION FROM M/S CORNING SA FRANCE. ACCORDING TO THE ASSESSEE S INCE BOTH THE FUNCTIONS DEALT WITH THE SAME PRODUCTS/SAM E AE AND WERE IN RESPECT OF SALES MADE TO CUSTOMER IN IN DIA, THEREFORE, OUGHT TO HAVE BEEN BENCH MARKED TOGETHER , AS WAS DONE BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION. THE CONCLUSION HOWEVER OF THE AUTHO RITIES BELOW IS THAT THE DISTRIBUTION FUNCTION AND AGENCY SERVICE FUNCTION ARE NOT COMPARABLE. IT HAS BEEN FOUND THA T DISTRIBUTION FUNCTION INVOLVES IMPORT OF FURNISHED GOODS, ITS WAREHOUSING, ADVERTISEMENT MARKETING AND DISTRIBUTION/SALE OF PRODUCTIONS; WHEREAS AGENCY FU NCTION INVOLVES COORDINATION BETWEEN CUSTOMERS AND THE HEA D OFFICE AND UNDERTAKING CERTAIN MARKETING AND LOGISTIC SERV ICES. FURTHERMORE THE RISKS ASSUMED IN DISTRIBUTION FUNCT ION ARE CONTRACT RISK, MARKETING RISK, CREDIT RISK, INVENTO RY RISK ETC.; WHEREAS AN AGENCY FUNCTIONS ASSESSEE DOES NOT UNDER TAKE CONTRACT RISK, INVENTORY RISK, CREDIT RISK, ETC. T HERE IS NO DISPUTE TO THE ABOVE FINDINGS ARRIVED AT BY THE AUT HORITIES BELOW. 25. HAVING REGARD TO THE ABOVE FACTUAL MATRIX WE A RE THUS INCLINED TO UPHOLD THE CONCLUSION OF THE CIT(A) TO BENCHMARK THE TWO INDEPENDENT FUNCTIONS SEPARATELY. WE DO NO T FIND ANY MERIT IN THE CONTENTION RAISED BY THE LD. COUNS EL THAT THESE ARE CLOSELY LINKED TRANSACTIONS UNDERTAKEN BY THE APPELLANT. ON THE CONTRARY THE NATURE OF TRANSACTI ONS ARE FUNCTIONALLY DIFFERENT AND EVEN THE RISK ASSUMED AR E DIFFERENT. WE THUS NEGATE THE STAND OF THE ASSESSEE AND UPHOLD THE FINDINGS OF CIT(A) IN BENCHMARKING THE DISTRIBUTION/AGENCY FUNCTION SEPARATELY. 3.2. ACCORDINGLY, FOLLOWING THE ORDER OF THE TRIBU NAL IN THE PRECEDING ASSESSMENT YEAR, BEING DISMISSED THIS GRO UND OF APPEAL FILED BY THE ASSESSEE. 5 ITA NO. 32 35/DEL/2014 4. GROUND NO. 2.3: THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN ALLOC ATING COMMON EXPENSES TO THE AGENCY SEGMENT IN THE RATIO OF SALES, RESULTING IN DISPROPORTIONATE ALLOCATION OF EXPENSES NOT COMMENSURATE WITH THE FUNCTIONS PER NOT APPRECI ATING THAT SUCH EXPENSES OUGHT TO HAVE BEEN ALLOCATED IN THE GROSS PROFIT RATIO. 4.1. WE SEE THAT THIS GROUND HAS BEEN DEALT WITH BY THE TRIBUNAL IN THE PRECEDING ASSESSMENT YEAR AT PARA 26 TO 29 WHIC H HAVE BEEN REPRODUCED HEREIN BELOW: 26. SO FAR AS THE ALLOCATION OF EXPENSES IS CONC ERNED IT IS NOTED THAT THE TPO HAD IDENTIFIED INDIRECT EXPENSES COMMON TO BOTH THE FUNCTIONS AT RS. 1,93,29,321/- D ETAILS OF WHICH ARE AS UNDER: PARTICULARS AMOUNT (RS.) SALARIES 42,72,231/- ADVERTISEMENT 30,78,570/- INSURANCE 3,77,758/- REPAIRS & MAINTENANCE 8,24,105/- PROFESSIONAL FEE 28,31,227/- RENT 12,57,636/- COMMUNICATION 5,93,240/- TRAVELLING & CONVEYANCE 33,79,299/- MISC. 12,32,610/- DEPRECIATION 14,82,645/- TOTAL (A) 1,93,29,321/- 27. THE CIT(A) HAS HELD THAT OUT OF THE AFORESAID S UM OF RS. 30,78,570/- AND RS. 3,77,758/- PERTAINING TO ADVERTISEMENT AND INSURANCE HAVE NO NEXUS WITH THE AGENCY FUNCTION. 28. WE FIND MERIT IN THE SAID CONCLUSION AS NO MATE RIAL HAS BEEN LEAD TO DISCREDIT THE ABOVE CONCLUSION. T HUS WE HOLD THAT AGGREGATE INDIRECT EXPENSES COMMON TO BOT H THE FUNCTIONS ARE OF RS. 1,58,72,993/- (RS. 1,93,29,321 /- - RS. 30,78,570/- - RS. 3,77,758/-). THE CIT(A) FURTHER MORE HELD THAT ALLOCATION OF SUCH EXPENSES SHOULD BE DON E ON THE BASIS OF GROSS MARGIN OF DISTRIBUTION FUNCTION AND COMMISSION INCOME RECEIPTS AND NOT ON THE BASIS OF SALES, AS ADOPTED BY THE TPO. HERE TOO, WE DO NOT FIND AN Y 6 ITA NO. 32 35/DEL/2014 INFIRMITY IN THE APPROACH ADOPTED BY THE CIT(A). T HE CIT(A) HAS CORRECTLY HELD THAT ALLOCATION OF EXPENS ES IN PROPORTION TO SALES[ THE LD.COUNSEL SUBMITTED THAT IT SHOULD BE GROSS MARGINS AS HELD BY LD.CIT(A)] WOULD AMOUNT TO GIVE EQUAL WEIGHTAGE IN TERMS OF FUNCTION S PERFORMED, ASSETS UTILIZED AND RISKS ASSUMED TO BOT H DISTRIBUTION FUNCTION AS WELL AS AGENCY SERVICE ACT IVITY, WHICH OTHERWISE INVOLVES MUCH LESSER FUNCTIONS AND UTILIZATION OF ASSETS AND RISK. THE CIT(A) HAS HEL D AS UNDER: IT WOULD NOT BE CORRECT TO ALLOCATE EXPENSES ATTRI BUTED TO PURCHASE/SALE OF FINISHED GOODS, WAREHOUSING AND HANDLING OF INVENTORY ETC., TO THE AGENCY SERVICE A CTIVITY, WHEREIN SUCH ACTIVITIES ARE NOT INVOLVED. ALLOCATI ON OF COMMON EXPENSES IN PROPORTION TO GROSS MARGIN/INCOM E FROM THE DISTRIBUTION FUNCTION AND THE COMMISSION I NCOME, IRONS OUT OR ELIMINATE THE IMPACT OF PURCHASE OF FI NISHED GOODS, HANDLING OF INVENTORY AND UNDERTAKING DISTRI BUTION FUNCTION, ETC. ALLOCATION OF COMMON EXPENSES IN PR OPORTION TO GROSS MARGIN FROM DISTRIBUTION FUNCTION AND COMM ISSION INCOME IS A REASONABLE AND, RATIONALE BASIS OF ALLO CATING OF SUCH COMMON EXPENSES BETWEEN THE TWO ACTIVITIES. I ACCORDINGLY UPHOLD ALLOCATION OF COMMON COST BY THE ASSESSEE AND ACCORDINGLY COMPUTED THE ADJUSTMENT AF TER COMBINING THE AGENCY SERVICE ACTIVITY WITH MARKETIN G SERVICE FUNCTION, AS FOLLOWS: PARTICULARS RUPEES INCOME FROM MARKET SUPPORT SERVICES 3,41,76,307 ADD: COMMISSION INCOME 55,94,311 TOTAL INCOME FROM MARKET SUPPORT AND AGENCY SERVICE ACTIVITY 3,97,70,618 COST FOR MARKET SUPPORT (FROM LETTER DT. 16.11.2000) 3,21,05,659 COST FOR COMMISSION INCOME (AS DETERMINED IN PARA 21.3 ABOVE) 27,55,968 TOTAL AGGREGATED COST 3,48,61,627 ARMS LENGTH MARKETING SUPPORT SERVICE AND AGENCY SERVICE INCOME (A) 3,75,38,999 MARKETING SUPPORT AND AGENCY SERVICE INCOME EARNED BY THE APPELLANT (B) 3,97,70,618 DIFFERENCE (A-B) (-) 22,31,619 SINCE TOTAL INCOME FROM MARKET SUPPORT AND AGENCY S ERVICE ACTIVITIES AT RS. 3,97,70,618/- IS HIGHER THAN THE ARMS LENGTH PRICE OF SUCH SERVICES, COMPUTED AS PER BASI S ADOPTED BY THE TPO AT RS. 3,75,38,999/-, NO ADJUSTM ENT 7 ITA NO. 32 35/DEL/2014 ON THIS ACCOUNT IS WARRANTED. ACCORDINGLY, ADJUSTM ENT OF RS. 20,87,795/- IN RESPECT OF INTERNATIONAL TRANSAC TIONS OF AGENCY SERVICE ACTIVITY IS, THEREFORE, NOT SUSTAINA BLE AND IS DIRECTED TO BE DELETED. 29. HAVING REGARD TO THE ABOVE FACTUAL CONCLUSION W E UPHOLD THE ACTION AND REJECT THE GROUNDS RAISED BY THE REVENUE. GROUND NO. 1 THUS STANDS DISMISSED. 4.2. WE, THEREFORE, FOLLOWING THE ORDERS OF THE TR IBUNAL FOR ASSESSMENT YEAR 2003-04, ALLOW THIS GROUND IN THE A PPEAL FILED ASSESSEE. 5. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30/11/ 2015 SD/- SD/- (S.V. MEHROTRA) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 30.11.2015 *KAVITA, P.S. COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 8 ITA NO. 32 35/DEL/2014 DATE 1. DRAFT DICTATED ON 30.11.2015 2. DRAFT PLACED BEFORE AUTHOR 30.11.2015 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 5. APPROVED DRAFT COMES TO THE SR.PS/PS 30.11.2015 6. KEPT FOR PRONOUNCEMENT ON 30.11.2015 7. FILE SENT TO THE BENCH CLERK 30.11.2015 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.