Asst. C.I.T., Bangalore V. M/s Yokogawa India Limited, Bangalore

ITA 342/BANG/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5266 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-06-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 11-04-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 09-03-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NAGESHWAR RAO MS NEERA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Commercial expediency
• Section: 143(3); 234B; 154; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE S HRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO , ACCOUNTANT MEMBER I.T . (T.P) A. NO. 342 /BANG/20 15 (ASSESSMENT YEAR : 20 10 - 11 ) ASST. COMMISSIONER OF INCOME TAX, LTU, CIRCLE 1, BANGALORE. . APPELLANT. VS. M/S. YOKOGAWA INDIA LIMITED, PLOT NO.96, ELECTRONIC CITY, HOSUR ROAD, BANGALORE - 560 100 . .. RESPONDENT. PAN AAACY 0840P I.T. (T.P) A. NO. 464/BANG/2015 (ASSESSMENT YEAR : 20 10 - 11 ) (BY ASSESSEE) ASSESSEE BY : SHRI NAGESHWAR RAO, ADVOCATE. R E SPONDENT BY : MS. NEERA MALHOTRA, CIT (DR) (ITAT) - 2, BENGALURU. DATE OF H EARING : 11.04.2017. DATE OF P RONOUNCEMENT : 09 .0 6 .201 7 . O R D E R PER SHRI VIJAY P AL RAO, J .M . : THESE CROSS APPEALS ARE DIRECTED AGAI NST THE ASSESSMENT ORDER DT.25.01.2015 PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME 2 IT A NO S . 3 42 & 464 /BANG/201 5 TAX ACT, 1961 (IN SHORT 'THE ACT') IN PURSUANT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (IN SHORT DRP ) DT.29.12.2014 FOR THE ASSESSMENT YEAR 2010 - 11. 2. THE ASSESSEE IS A COMPANY REGISTERED UNDER THE PROVISIONS OF COMPANIES ACT, 1956 AND SUBSIDIARY OF YOKOGAWA ELECTRIC CORPORATION, JAPAN. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF INDUSTRIAL AUTOMATION AND CONTROL, TEST AND MEASUREMENT, INFORMATION SYSTEM AND INDUSTRY SUPPORT. THE BUSINESS OF THE ASSESSEE HAS BEEN DIVIDED INTO THREE SEGMENTS NAMELY SYSTEM, TRADING AND PRODUCTS & SOFTWARE DEVELOPMENT SERVICES. THE FINANCIAL RESULTS AND SEGMENTAL INFORMATION HAS BEEN REPRODUCED BY THE TPO IN PARAS 3.1 AND 3.2 AS UNDER : 3 IT A NO S . 3 42 & 464 /BANG/201 5 THE TPO ACCEPTED THE OTHER INTERNATIONAL TRANSACTIONS OF THE ASSESSEE AT ARM S LENGTH EXCEPT THE TRANSACTIONS OF GLOBAL SALE AND MARKETING ACTIVITY FEES PAID BY THE ASSESSEE TO THE ASSOCIATED ENTERPRISE (AE) OF RS.5,73,22,150 . THE TPO HELD THAT THE SERVICES RENDERED UNDER GLOBAL SALE AND MARKETING ACTIVITY FEES IS NOT DISTINCT FROM THE SERVICE UNDER MANAGEMENT FEES AND THEREFORE THE SERVICES ARE ALREADY COVERED UNDER MANAGEMENT FEES SERVICES AND NO SEPARATE PAYMENT UNDER GL OBAL SALE AND MARKETING ACTIVITY FEES WAS REQUIRED OR NECESSARY. THE TPO ALSO APPLIED THE BENEFIT TEST. ACCORDINGLY, THE TPO HELD THAT THE ARM S LENGTH PRICE (ALP) OF GLOBAL SALE AND MARKETING ACTIVITY FEES IS NIL AND CONSEQUENTLY PROPOSED AN ADJUSTMENT OF ENTIRE AMOUNT OF RS.5,73,22,150. THE ASSESSEE CHALLENGED THIS ACTION OF THE TPO BEFORE 4 IT A NO S . 3 42 & 464 /BANG/201 5 THE DISPUTE RESOLUTION PANEL (DRP). THE DRP HELD THAT THE TPO IS NOT JUSTIFIED IN EXAMINING THE NECESSITY AND COMMERCIAL EXPEDIENCY OF PAYMENT MADE BY THE ASSESSEE AS IT WAS BEYOND THE JURISDICTION OF THE TPO. THE DRP FOLLOWED THE DECISION OF THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2007 - 08 AND DIRECTED THE TPO TO DETERMINE THE ALP BY APPLYING THE METHOD RECOGNIZED UNDER THE ACT. FURTHER, THERE W AS A DISPUTE REGARDING MOST APPROPRIATE METHOD (MAM) ADOPTED BY THE ASSESSEE AS TRANSACTIONAL NET MARGIN METHOD (TNMM) WHEREAS THE TPO APPLIED CUP AS MAM. THE DRP AFTER EXAMINATION OF THE RELEVANT FACTS DIRECTED THE TPO TO ANALYSE THE CASE LAW ON THE POIN T AND ALSO GIVE THE BENEFIT OF COMPARABILITY ANLAYSIS FOR IDENTIFYING THE COMPARABLES. THEREFORE THE DRP HAS NOT GIVEN THE CONCLUDING FINDING ON THE ISSUE OF MAM. SINCE THE TPO/A.O. HAS NOT GIVEN EFFECT TO THE DIRECTIONS OF THE DRP PROPERLY THEREFORE THE ASSESSEE IS ALSO AGGRIEVED BY THE FINAL ORDER PASSED BY THE TPO/A.O. THUS B OTH REVENUE AS WELL AS ASSESSEE ARE AGGRIEVED BY THE ORDERS OF THE AUTHORITIES BELOW AND FILED THE CROSS APPEALS WHEREIN THE FOLLOWING GROUNDS HAVE BEEN RAISED. 5 IT A NO S . 3 42 & 464 /BANG/201 5 REVENUE S GROUND S OF APPEAL 1. THE DIRECTIONS OF DRP ARE OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE HON'BLE DRP HAS ERRED IN GIVING DECISION IN FAVOUR OF THE ASSESSEE WITHOUT GIVING OPPORTUNITY OF BEING HEARD TO THE REVENUE AS PER PROVISION OF SECTION 144C(11). 3. F OR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING. ASSESSEE'S GROUNDS OF APPEAL 6 IT A NO S . 3 42 & 464 /BANG/201 5 3. THE GROUNDS RAISED IN THE APPEAL OF THE REVENUE AND THE GROUND NOS.1 TO 5 OF THE ASSESSEE'S APPEAL ARE REGARDING COMMON ISSUE OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF GLOBAL SALE AND MARKETING ACTIVITY FEES AND MAM APPLIED BY THE TPO. 4. WE HAVE HEARD THE LEARNED D.R. AS WELL AS LEARNED A.R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAS CARRIED OUT MULTIPLE AND DIVERSIFIED INTERNATIONAL TRANSACTIONS IN 7 IT A NO S . 3 42 & 464 /BANG/201 5 DIFFERENT SEGMENTS. THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE INVOLVE CHARGES FOR RAW MATERIAL AND COMPONENTS, SALES AND MANUFACTURING GOODS, REIMBURSEMENT OF EXPENSE S, PAYMENT TOWARDS ROYALTY AN D MANAGEMENT FEES, CHARGES OF CAPITAL EQUIPMENT, PAYMENT OF INTRA - GOODS SERVICES, CHARGES OF MATERIAL, COMMISSION INCOME, RENDERING OF SOFTWARE SERVICES, REIMBURSEMENT OF EXPENSES AND GLOBAL SALE AND MARKETING ACTIVITY FEES. THE TPO HAS ACCEPTED ALL OTHER TRANSACTIONS EXCEPT THE INTERNATIONAL TRANSACTIONS REGARDING GLOBAL SALE AND MARKETING ACTIVITY FEES. IT IS PERTINENT TO NOTE THAT THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE ARE COMPRISING OF REVENUE RECEIPT FROM THE AE AS WELL AS REVENUE PAYMENT TO THE AE. THEREFORE IN THESE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT WHEN THE OTHER INTERNATIONAL TRANSACTIONS REGARDING REVENUE RECEIPT FROM THE AE ARE TESTED UNDER THE TNMM ANALYSIS THEN THE TRANSACTION OF FE E PAYMENT BY THE ASSESSEE TOWARDS TH E SERVICES RENDERED BY THE AE SHOULD NOT BE SEPARATELY TESTED BUT ALL THE INTERNATIONAL TRANSACTIONS HAVING RECEIPT FROM THE AE AND PAYMENT TO THE AE SHALL BE CLUBBED TOGETHER AND THEN HAS TO BE ANALYSED UNDER TNMM. WE FURTHER NOTE THAT THE DRP HAS DIRECT ED THE TPO TO 8 IT A NO S . 3 42 & 464 /BANG/201 5 DETERMINE THE ALP IN RESPECT OF THE GLOBAL SALE AND MARKETING ACTIVITY FEES INSTEAD OF CONSIDERING THE ALP AT NIL. THEREFORE IN PRINCIPLE WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE DIRECTIONS OF THE DRP HOWEVER HAVING REGARD TO THE PECULI AR FACTS AND CIRCUMSTANCES OF THE CASE WHEREIN THE ASSESSEE IS HAVING MULTIPLE AND DIVERSIFIED INTERNATIONAL TRANSACTIONS INVOLVING RECEIPT AS WELL AS PAYMENT, WE ARE OF THE CONSIDERED VIEW THAT THE PAYMENT IN RESPECT OF MANAGEMENT FEES AS WELL AS GLOBAL S ALE AND MARKETING ACTIVITY FEES SHALL BE CONSIDERED AS OPERATING COST AND HAS TO ALLOCATED IN THE RATIO OF TURNOVER OF THE OTHER INTERNATIONAL TRANSACTIONS AND THEN THE ALP OF THE OTHER INTERNATIONAL TRANSACTIONS HAS TO BE DETERMINED UNDER TNMM ANALYSIS. HENCE WE SET ASIDE THE ENTIRE ISSUE OF DETERMINATION OF ALP AND TP ADJUSTMENT TO THE RECORD OF THE TPO/A.O. FOR CARRYING OUT FRESH EXERCISE OF DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS BY CONSIDERING THE PAYMENT IN RESPECT OF MANAGE MENT FEES AND GLOBAL SALE AND MARKETING ACTIVITY FEES AS PART OF THE OPERATING COST AND ALLOCATI NG THE SAME IN THE RATIO OF THE TURNOVER OF THE OTHER INTERNATIONAL TRANSACTIONS. 9 IT A NO S . 3 42 & 464 /BANG/201 5 5. IN THE RESULT, THE REVENUE S APPEAL AS WELL AS GROUND NOS.1 TO 5 OF AS SESSEE'S APPEAL ARE ALLOWED FOR STATISTICAL PURPOSE. 6. GROUND NOS.6 & 7 OF ASSESSEE'S APPEAL ARE REGARDING THE FOREIGN TAX CREDIT AND TDS CREDIT NOT GRANTED BY THE ASSESSING OFFICER DESPITE THE DIRECTIONS OF THE DRP. 7. WE HAVE HEARD THE LEARNED AUTHORISED REPRESENTATIVE AS WELL AS LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE'S GRIEVANCE IS LIMITED TO THE EXTENT THAT WHILE PASSING HE FINAL ORDER THE TPO/A.O. HAS NOT GIVEN THE BENEFIT OF FOREIGN T AX CREDIT AS WELL AS TDS CREDIT IN TERMS OF THE DIRECTIONS OF THE DRP. THE ASSESSEE HAS ALSO FILED A PETITION UNDER SECTION 154 OF THE ACT WHICH IS PENDING DISPOSAL BEFORE THE TPO/A.O. THERE IS NO QUARREL ON THE POINT THAT THE ASSESSING OFFICER IS BOUND TO FOLLOW THE DIRECTIONS OF THE DRP AND PASS THE FINAL ORDER IN PURSUANT TO THE DIRECTIONS OF THE DRP. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO STRICTLY GIVE EFFECT TO THE DIRECTIONS OF THE DRP AND DISPOSE OF THE PETITION FILED BY THE ASSESSEE UNDE R SECTION 154 OF THE ACT. 10 IT A NO S . 3 42 & 464 /BANG/201 5 8. GROUND NOS.8 & 9 ARE CHARGING OF INTEREST UNDER SECTION 234B & 234C OF THE ACT WHICH ARE CONSEQUENTIAL IN NATURE. 9. IN THE RESULT , THE APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE AND THE APPEAL OF THE ASSE SSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 9TH DAY OF JUNE , 2 01 7 . SD/ - ( INTURI RAMA RAO ) ACCOUNTANT MEMBER SD/ - ( VIJAY PAL RAO ) JUDICIAL MEMBER BANGALORE, DT. 09 .0 6 .2017. *REDDY GP COPY TO : 1 APPELLANT 4 CIT(A) 2 RESPONDENT 5 DR. ITAT, BANGALORE 3 CIT 6 GUARD FILE ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL BANGALORE.