DCIT, New Delhi V. M/s. Alcatel India Ltd., Gurgaon

ITA 339/DEL/2012

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3084 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 17-07-2017
• Assessment Year: 2002-2003
• Appeal Filed On: 23-01-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AMRENDER KUMAR
• Keywords: Transfer pricing; International transaction; Bad and doubtful debts

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 1 : NEW DELHI BEFORE SHRI BHAVNESH SAINI , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 339/DEL/2012 (ASSESSMENT YEAR: 2002 - 03 ) DCIT, CIRCLE - 1(1), ROOM NO. 390, CR BUILDING, NEW DELHI VS. ALCATEL INDIA LTD, 15 TH FLOOR, TOWER CYBER GREEN, DLF CITY PHASE - III, GURGAON PAN: AACCA8667N (APPELLANT) (RESPONDENT) ITA NO. 298/DEL/2012 (ASSESSMENT YEAR: 2002 - 03) ALCATEL INDIA LTD, 15 TH FLOOR, TOWER CYBER GREEN, DLF CITY PHASE - III, GURGAON PAN: AACCA8667N VS. ITO, WARD - 1(4), NEW DELHI (APPELLANT) (RESPONDENT) REVENUE BY : SHRI AMRENDER KUMAR, CIT DR ASSESSEE BY: SHRI RAKESH GUPTA, ADV SHRI SHANTANU JAIN, ADV SHRI ASHWANI TANEJA, ADV DATE OF HEARING 14 /09/2017 DATE OF PRONOUNCEMENT 06 / 12 / 2017 O R D E R PER PRASHANT MAHARISHI , A. M. 1. TH ESE ARE THE APPEALS FILED BY THE REVENUE AND THE ASSESSEE AGAINST THE ORDER OF THE LD CIT(A) - XX, NEW DELHI DATED 21.11.2011 FOR THE ASSESSMENT YEAR 2002 - 03. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THE LD CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS. 19601568/ - (RS. 11292599/ - MADE BY THE AO ON ACCOUNT OF ARMS LENGTH PRICE. THE LD CIT(A) SHOULD NOT HAVE ALLOWED THE DEDUCTION OF CERTAIN EXPENDITURE PERTAINING TO THE TRADING SEGMENT WHERE THE TPO HAS ALREADY NOT TAKEN THESE EXPENSES AS OPERATING. 3. THE ASSESSEE HAS RAISED THE FO LLOWING GROUNDS OF APPEAL: - THAT ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW: 1. THE ORDERS PASSED BY THE INCOME TAX OFFICER, WARD 1(4), NEW DELHI (LD AO) AND THE LD COMMISSIONER OF INCOME TAX (APPEALS) - XX [LD CIT(A)], ARE BAD IN LAW A ND VOID AB - INITIO; DCIT VS. ALCATEL INDIA LTD, ITA NO. 339 AND 298 /DEL/2012 (ASSESSMENT YEAR: 2002 - 03) PAGE | 2 2. THE LD CIT(A) GROSSLY ERRED IN CONFIRMING TRANSFER PRICING (TP) ADJUSTMENT OF RS 1,96,01,568 OUT OF THE TOTAL ADJUSTMENT OF RS 3,08,95,167 MADE BY THE LD AO TO THE RETURNED INCOME OF THE APPELLANT. IN DOING SO: 2.1 THE LD CIT(A) GROSSLY ERRED IN NOT ACCEPTING THE COMPARABLE UNCONTROLLED PRICE (CUP) DETAILS SUBMITTED BY THE APPELLANT IN CASE OF INTERNATIONAL TRANSACTIONS PERTAINING TO IMPORT OF COMPONENTS FOR VOICE NETWORK DIVISION - MANUFACTURING DIVISION; 2.2 THE LD CIT(A) GROSSL Y ERRED IN NOT ACCEPTING THE DETAILS SUBMITTED IN THE FORM OF PUBLICALLY AVAILABLE WEBSITE ARTICLE TO SUPPORT THE PURCHASE PRICE OF COMPONENT 1AB109210001 (I.E. DRAM) IMPORTED BY THE APPELLANT FROM ITS ASSOCIATED ENTERPRISES; 3. THE LD CIT(A) GROSSLY ERRED IN CONCLUDING THAT THE REFERENCE MADE BY THE LD AO TO THE JOINT COMMISSIONER OF INCOME - TAX, TRANSFER PRICING (TP) OFFICER - 1 (LD TPO), UNDER SECTION 92CA(3) OF THE INCOME TAX ACT, 1961 (ACT) WAS VALIDLY MADE, THEREBY FAILING TO APPRECIATE THAT THE LD AO HAD NOT RECORDED ANY REASONS UNDER SECTION 92CA OF THE ACT WHICH MADE IT EXPEDIENT AND NECESSARY FOR HIM TO MAKE A REFERENCE UNDER THAT PROVISION. 4. THE BRIEF FACTS ARE THAT THE ASSESSEE IS A PUBLIC LTD COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURIN G AND MARKETING OF DIGITAL SWITCHING EQUIPMENT AND RELATED SOFTWARE, CELLULAR EXCHANGE EQUIPMENT AND RELATED SERVICES. IT FILED ITS RETURN OF INCOME ON 31.02.2002 FOR RS. ( - ) 116886000/ - . THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS OF RS. 1004 364417/ - AND THEREFORE, REFERENCE U/S 92CA(3) WAS MADE TO THE LD TRANSFER PRICING OFFICER FOR DETERMINING ARMS LENGTH PRICE (ALP) . THE LD TRANSFER PRICING OFFICER DETERMINED THE ALP OF EXPORT / IMPORT OF GOODS TO M/S. AE ALCATEL CTT OF RS. 156569905/ - IN P LACE OF RS. 145276306/ - . THEREFORE, ALP ADJUSTMENT OF RS. 11293599/ - WAS MADE BY THE LD ASSESSING OFFICER. THE LD TRANSFER PRICING OFFICER HELD THAT WITH RESPECT TO THE PURCHASE OF THE EQUIPMENT THE ASSESSEE HAS PAID EURO 204.64 IN THE MONTH OF OCTOBER 200 1, WHEREAS THE SAME COMPONENT PURCHASED BY THE ASSESSEE IN FEBRUARY 2002 WAS AT EURO 75/ UNIT. IT WAS FURTHER NOTED BY HIM THAT SALES MADE TO ITI LTD IS ALSO AT EURO 75/ UNIT. FURTHER, WITH RESPECT TO EXPORT TO FRANCE TPO REJECTED THE RESALE PRICE METHOD U SED BY THE ASSESSEE ADOPTING PLI OF GROSS PROFIT BY SALES. HE ALSO FOUND THE SEGMENTAL ACCOUNTING OF THE ASSESSEE WRONG AND ALSO ALLOCATED THE EXPENDITURE TO MANUFACTURING DIVISION AFTER EXCLUDING WARRANTY EXPENDITURE, BUSINESS PROMOTION AND PROVISION FOR DOUBTFUL DEBTS HOLDING THAT THEY ARE NOT RELATABLE TO THE EXPORT TO AE. THE LD TRANSFER PRICING OFFICER REJECTING THE CONTENTION OF THE ASSESSEE CALCULATED THE OPERATING PROFIT BY SALES AS THE PLI AT ( - ) 1.15%. ON THIS BASIS HE DETERMINED THE ARMS LENGTH PRICE OF EXPORT OF GOODS MANUFACTURED BY THE ASSESSEE AT RS. 156569905/ - IN PLACE OF RS. 145276306/ - AND THEREBY, PROPOSE AN ADJUSTMENT OF RS. DCIT VS. ALCATEL INDIA LTD, ITA NO. 339 AND 298 /DEL/2012 (ASSESSMENT YEAR: 2002 - 03) PAGE | 3 11293599/ - . WITH RESPECT TO THE IMPORT OF RAW MATERIALS HE DETERMINED THE ALP OF RS. 11340000/ - IN PLACE OF RS. 30941568/ - AND ACCORDINGLY, ADJUSTMENT OF RS. 19601568/ - WAS MADE FOR PURCHASE OF THE COMPONENTS. ACCORDINGLY, THE TOTAL ADJUSTMENT WAS PROPOSED AT RS. 30895167/ - . THE ABOVE ADJUSTMENT INCORPORATED BY THE LD ASSESSING OFFICER IN HIS ASSESSMENT ORDER. 5. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD CIT(A) WHO DELETED THE ADDITION WITH RESPECT TO THE SOFTWARE EXPENDITURE RELYING ON THE DECISION OF THE COORDINATE BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002 - 03. FURTHER, HE UPHELD THE ADDITION MADE WITH RESPECT TO IMPORT OF TRANSACTION OF RS. 1960568/ - AND DELETED THE ADDITION OF EXPORT OF TRANSACTION AMOUNTING TO RS. 11293599/ - . THEREFORE, BOTH THE PARTIES ARE IN APPEAL BEFORE US ON THE RESPECTIVE ACCOUNT ON ACCOUNT OF DETERMINATION OF ARM LENGTH PR ICE ON IMPORT AND EXPORT OF GOODS. 6. THE LD AUTHORISED REPRESENTATIVE AVERTING ON HIS WRITTEN SUBMISSION SUBMITTED THAT PRICE OF THE EQUIPMENTS IMPORTED ARE GIVEN IN THE CATALOG ISSUED BY ALCATEL CTT AND SAME CATALOG IS USED BY ASSESSEE . HE FURTHER SUBMITT ED THAT ITI LTD IS THE INDIAN COMPANY OWNED BY GOVT. OF INDIA AND IS THE ONLY OTHER NON GROUP LICENSEE TO MANUFACTURE THE ALCATEL SWITCH. HE FURTHER REFERRED THAT THE RATE OF OCTOBER 2001 IS COMPARED WITH THE RATE OF FEBRUARY 2002. HE ALSO REFERRED THE EM AIL DATED 13.12.2001, WHEREIN IT WAS STATED THAT THIS COMPONENT WERE EARLIER PURCHASED FROM THE OPEN MARKET. HE FURTHER STATED THAT THE PRICE HAS FALLEN DRASTICALLY DURING THESE THREE MONTHS AND TO SUPPORT IT HE RELIED ON AN ARTICLE WHICH SAID THAT DURING THIS MONTH THERE WERE DRASTIC DOWNWARD MOVEMENTS OF PRICES OF THESE COMPONENTS. THEREFORE, HE STATED THAT CUP METHOD SHOULD BE ADJUSTED WITH CERTAIN PRICE MOVEMENT DURING THE INTERVENING PERIOD. FOR THIS HE RELIED ON THE DECISION OF CIT VS. ADANI WILMAR LT D (TA NO. 240/2014) ( GUJARAT ) DATED 07.04.2014. THEREFORE, HE STATED THAT ASSESSEE MUST BE GRANTED THE BENEFIT OF PRICE FLUCTUATION. 7. THE LD DEPARTMENTAL REPRESENTATIVE VEHEMENTLY RELIED ON THE ORDER OF THE LD TRANSFER PRICING OFFICER WITH RESPECT TO EXPOR T OF FINISHED GOODS. HE SUBMITTED THAT THE LD CIT(A) HAS DELETED THE ADDITION BY REDUCING THE EXPENSES ON ACCOUNT OF FOREIGN EXCHANGE LIABILITY, THE AMORTIZATION OF PURCHASE OF SOFTWARE AND LEASE RENT WAS ALSO CONSIDERED BY HIM FOR THE EXCLUSIVELY DOMESTIC SEGMENT . HE THEREFORE, SUBMITTED THAT THE LD CIT(A) SHOULD NOT HAVE GRANTED DEDUCTION FROM EXPENSES OF THESE THREE ITEMS. WITH RESPECT TO THE IMPORT OF GOODS IT WAS STATED THAT THERE IS NO INFIRMITY IN THE ORDER OF LOWER AUTHORITIES. HE STATED THAT LD CIT (A) DCIT VS. ALCATEL INDIA LTD, ITA NO. 339 AND 298 /DEL/2012 (ASSESSMENT YEAR: 2002 - 03) PAGE | 4 HAS CORRECTLY DISCARDED THE ARTICLE APPEARING ON THE WEBSITE. HE STATED THAT CUP CANNOT BE USED WITH A MARKET QUOTE BUT WITH ACTUAL PRICE. 8. THE LD AR IN REJOINDER SUBMITTED THAT THREE EXPENSES DISCARDED BY THE LD CIT(A) WAS CORRECT AS THESE EXPENDITURE DOES NOT HAVE ANY IMPACT ON THE PROFITABILITY OF THE GOODS EXPORTED TO AN AE. HE FURTHER STATED THAT SOFTWARE EXPENDITURE IS ONE TIME EXPENDITURE AND CANNOT BE CONSIDERED AS OPERATING EXPENDITURE. FOR CONSIDERATION OF MARKET QUOTE IN CASE OF IMPORT OF GOO DS HE VEHEMENTLY RELIED ON THE DECISION OF HON'BLE GUJARAT HIGH COURT STATED ABOVE. 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND ALSO PERUSED THE ORDERS OF THE LOWER AUTHORITIES. THE ONLY TWO TRANSACTION WHICH ARE IN DISPUTE ARE OF IMPORT AND EX PORT OF GOODS. 10. THE ASSESSEE HAS IMPORTED GOODS FROM ITS AE IN OCTOBER 2001 AT EURO 204.64 AND FOR 3500 PIECES. THE ASSESSEE HAS ACCOUNTED FOR SUCH IMPORT AT RS. 30941568/ - . THE ASSESSEE HAS PURCHASED THE SAME UNIT FOR 75 EUROS PER UNIT IN FEBRUARY 2002 . THE SALES MADE BY THE ASSESSEE TO ITI LTD HAS ALSO BEEN MADE AT RS. 75/ UNIT. THEREFORE, THE LD ASSESSING OFFICER ADOPTED EURO 75/ UNIT AS THE CORRECT CUP OF THE ABOVE PRODUCT AND ACCORDINGLY DETERMINED THE ALP AT RS. 11340000/ - IN PLACE OF RS. 30941568/ - . CONSEQUENT ADJUSTMENT OF RS. 19601568/ - WAS MADE. THE LD CIT(A) ALSO CONFIRMED THE SAME. THE LD CIT(A) HAS REJECTED THE CONTENTION OF THE ASSESSEE THAT THERE IS A DRASTIC FALL IN THE PRODUCT PRICES. THE LD CIT(A) REJECTED THE RELIANCE ON SUCH A MARKET Q UOTE BASED ON THE ARTICLES WHICH ARE NOT ACTUAL TRANSACTION PRICE. THE HON'BLE GUJARAT HIGH COURT CIT VS. ADANI WILMAR LTD CONSIDERED THE APPLICABILITY OF THE MARKET QUOTE ON PRICE PUBLICATION WHICH WERE AUTHENTIC AND RELIABLE AND HELD THEM TO BE RELEVANT MATERIAL WHILE DETERMINING THE ALP EMPLOYING THE CUP METHOD. IN THE PRESENT CASE THE LD CIT(A) HAS REJECTED THE EVIDENCE PLACED BY THE ASSESSEE AT THE THRESHOLD WITHOUT EXAMINING THAT WHETHER SUCH MATERIAL IS AUTHENTIC AND RELIABLE OR NOT. IN VIEW OF THE DECISION OF THE HON'BLE GUJARAT HIGH COURT IN ADANI WILMAR LTD WE SET ASIDE THE ISSUE OF DETERMINATION OF ALP OF IMPORT OF GOODS BACK TO THE FILE OF THE LD CIT(A) TO FIRST EXAMINE THE EVIDENCE SUCH AS MARKET QUOTE PRODUCED BEFORE HIM ABOUT THEIR AUTHENTICI TY AND RELIABILITY. IF HE FINDS THEM SO, HE MAY CONSIDER THE SAME. IN ANY CASE HE SHOULD NOT REJECT THE SAME AT THE THRESHOLD LEVEL. IN VIEW OF THIS RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE GUJARAT HIGH COURT , THE APPEAL OF THE ASSESSEE IS SET AS IDE TO THE FILE OF THE LD CIT(A) FOR FRESH ADJUDICATION FOR DETERMINATION OF ALP OF GOODS IMPORTED. IN THE RESULT THE ITA NO. 298/DEL/2012 FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSED WITH ABOVE DIRECTION. 11. NOW WE COME TO THE APPEAL OF THE REV ENUE WHERE ASSESSEE HAS EXPORTED CERTAIN GOODS AND MARGINS WERE DETERMINED BY THE LD ASSESSING OFFICER TAKING THE ALLOCATION OF OPERATING DCIT VS. ALCATEL INDIA LTD, ITA NO. 339 AND 298 /DEL/2012 (ASSESSMENT YEAR: 2002 - 03) PAGE | 5 EXPENSES ON THE BASIS OF TWO SEPARATE SEGMENTS OF V N D DIVISION AND MANUFACTURING EXPENDITURE WITH RESPECT TO EXPORTS. IN SHORT , HE CONSIDERED THE TOTAL COST INCURRED BY THE ASSESSEE OF MANUFACTURING ACTIVITY AND THEN ALLOCATED THE SAME ON THE BASIS OF SALES TO DOMESTIC PARTIES AS WELL AS EXPORTS TO AE. THE MAIN CONTENTION OF THE ASSESSEE WAS THAT FOREIGN EXCHANGE LOSS OF RS. 24319889/ - , AMORTIZATION OF SOFTWARE OF RS. 40437963/ - AND LEASE EXPENSES OF RS. 106005756/ - ARE NOT RELATED COST TO THE EXPORT OF GOODS TO THE AE. ACCORDING TO ASSESSEE THESE ARE NON OPERATING COST. THE LD TPO HAS NOT CONSIDERED THE ABOVE ASPECT WHILE WORKING OUT THE OPERATING PROFIT OF THE ASSESSEE. THE ASSESSEE , BEFORE THE LD CIT(A) STATED THAT FOREIGN EXCHANGE LOSS HAS NOT BEEN CLAIMED AS DEDUCTION WHILE CALCULATION OF TAXABLE INCOME OF THE ASSESSEE AND FURTHER SAME IS ALSO NOT PART OF THE OPERATING EXPENDITURE. SIMILARLY, THE AMORTIZATION OF SOFTWARE EXPENDITURE WAS CLAIMED TO BE NOT AT ALL RELATED TO THE EXPORT DIVISION. THE LD CIT(A) HAS GIVEN HIS REASON S AT PAGE NO. 9 AND 10 FOR EXCLUSION OF FOREIGN EXCHANGE LOSS, AMORTIZATION OF SOFTWARE EXPENSE S AND LEASE EXPENSES. EXCLUSION DIRECTED BY THE LD CIT(A) OF ALL THESE THREE EXPENSES IS ALSO SUPPORTED BY REASONS WHICH COULD NOT BE CONTROVERTED BY REVENUE. IN VIEW OF THIS WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD CIT(A) IN EXCLUDING THE ABOV E THREE EXPENDITURE WHILE WORKING OUT OPERATING PROFIT OF THE ASSESSEE FROM EXPORT OF GOODS TO ITS AE. IN VIEW OF THIS WE CONFIRM THE FINDING OF THE LD CIT(A) AND DISMISS THE APPEAL OF THE REVENUE. 12. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AND APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 0 6 / 1 2 /2017. - S D / - - S D / - ( BHAVNESH SAINI ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 6 / 1 2 /2017 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI