Global Turbine Services Inc., New Delhi V. ADIT, New Delhi

ITA 3484/DEL/2011

• Counselvise Citation: 348420114 RSA 2011
• Duration Of Justice: 2 year(s) 1 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 08-07-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 11-07-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SATPAL SINGH
• Keywords: Transfer pricing; International transaction; Additional evidence

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C: NEW DELHI BEFORE SHRI R P TOLANI, JUDICIAL MEMBER AND SHRI J. S. REDDY, ACCOUNTANT MEMBER (ITA NO. 3484/DEL/2011) ASSESSMENT YEAR: 2005-06 GLOBAL TURBINE SERVICES INC., (NOW KNOWN AS GRANITE SERVICES INTERNATIONAL INC.), B-6/8 LOCAL COMMERCIAL COMPLEX, SAFDARJUNG ENCLAVE, NEW DELHI-110019 PAN AABCG9134D VS ADIT, CIRCLE-1(2), INTERNATIONAL TAXATION, NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ROHIT TIWARI, CA RESPONDENTS BY: SMT. SATPAL SINGH, SR. DR O R D E R PER SHRI R. P. TOLANI, J. M . THIS IS AN ASSESSEES APPEAL CHALLENGING ASSESSING OFFICER ACTION OF MAKING AN ADJUSTMENT OF RS. 8,008,161 IN THE INTERNATIONAL TRANSACTIONS ON VARIOUS ISSUES. AT TH E TIME OF HEARING LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT EXCEPT ISSUE RAISED IN GROUND NO. 2. NO OTHER ISSUES ARE PRESSED WHICH ARE DISMISSED ACCORDINGLY. THIS LEAVES US WITH GROUND N O.2 WHICH IS AS UNDER: 2. THE LD. CIT(A)/ASSESSING OFFICER GROSSLY FAILE D TO APPRECIATE THAT DURING THE RELEVANT ASSESSMENT YEAR , THE APPELLANTS BUSINESS WAS ADVERSELY IMPACTED BY UNUT ILIZED 2 CAPACITY WHICH RESULTED IN UNABSORBED OVERHEADS AND OPERATING LOSSES. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A GLOBAL TURBINE SERVICES INC. (INDIA BRANCH OFFICE) (GTSI INDIA FOR SHORT) WAS INCORPORATED ON 22.09.2003 AS INDIAN BRANCH OF THE PARENT COMPANY. THIS IS THE FIRST AND LAST OF THE ASSESSME NT OF THE BRANCH OFFICE ENTITY AS THERE AFTER THE PARENT COMP ANY STARTED A SUBSIDIARY IN THE NAME AND STYLE OF GLOBAL TURBINE SERVICE INDIA LTD ON THE SAME LINE OF BUSINESS ACTIVITY AS THAT O F ASSESSEE. 3. DURING THIS FINANCIAL YEAR THE ASSESSEE WAS ENGA GED IN MANPOWER SOURCING AND SUPPORT SERVICES TO ITS ASSOC IATED ENTERPRISES (AES) THE AES WERE RESPONSIBLE FOR ID ENTIFYING THEIR PERSONNEL REQUIREMENTS INCLUDING SKILLS, EXPERIENCE , AND OTHER QUALIFICATIONS. THE ASSESSEE WAS REQUIRED TO PROVID E SUCH PERSONAL STAFF FOR SPECIFIC PROJECT AND DURATION. T HE SERVICES PROVIDED BY ASSESSEE TO AES, ADDITION MADE BY TPO A RE AS UNDER: S. NO. NATURE OF TRANSACTION VALUE (INR IN CRORE)) ADJUSTMENT BY AO 1. PROVISION OF SOURCING AND SUPPORT SERVICES 4.35 TP ADJUSTMENT OF RS. 86.65 LACS 2. COST ALLOCATION ARRANGEMENT 0.06 NO ADJUSTMENT 3. PAYMENT OF VEHICLE LEASE RENTALS 0.03 NO ADJUSTMENT 4. REIMBURSEMENT OF EXPENSES 0.40 NO ADJUSTMENT 4. THE TPO MADE THE ABOVE ADJUSTMENT ON VARIOUS GRO UNDS AND BY FURTHER HOLDING THAT THE ASSESSEE WAS WORKIN G AS MANPOWER SOURCING AND SUPPORT SERVICES PROVIDER AND ASSUMED ALL THE OPERATIONAL/ BUSINESS RISKS LIKE MARKET RIS KS, FOREIGN EXCHANGE RISKS, CAPACITY RISKS. 3 5. AGGRIEVED ASSESSEE PREFERRED FIRST APPEAL LD CIT (A) DISMISSED THE ASSESSEE APPEAL BY UPHOLDING THE TPO/ASSESSING OFFICER AND ALSO HOLDING/ REJECTING ASSESSEES PLEA ABOUT CAPAC ITY UNDER UTILIZATION AND HELD THAT SINCE THE APPELLANT WAS E NGAGED IN RECRUITING HIGHLY TECHNICAL AND SKILLED EMPLOYEES, AND THUS IN THE BUSINESS OF SERVICES, A BUSINESS LOSS IS LEAST EXPE CTED AND HENCE THE LOSS WAS OBVIOUSLY DUE TO THE TRANSFER PRICE OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO SERVICES. 6. AGGRIEVED ASSESSEE IS BEFORE US, LD. COUNSEL SHR I ROHIT TIWARI CONTENDS THAT:- I) THE APPELLANT HAD COMMENCED ITS OPERATIONS IN SEPTEMBER 2003 AND FY 2004-05 WAS THE FIRST FULL YE AR OF ITS OPERATIONS. IN AY 2005-06, THE APPELLANT HAD SHOWN INCOME OF RS.43, 539,119 AGAINST THE EXPENDITURE OF RS. 44,271,913 RESULTING IN A LOSS O F RS. 732, 795 IN THIS GESTATION PERIOD ON ACCOUNT OF INADEQUATE VOLUMES OF WORK GENERATED DURING THE YEA R. II) CREATION OF CAPACITY WAS A BUSINESS INVESTMENT FOR THE APPELLANT AND SUCH AN INVESTMENT WAS NECESSARY DURI NG THE GESTATION PERIOD AND WOULD BE BORNE BY ANY INDEPENDENT COMPANY IN ITS INITIAL YEARS. EVEN FROM THE ACCOUNTING POINT OF VIEW, WITH THE INCREASE IN TURN OVER, THE FIXED COST GETS APPORTIONED. WHEN THE TURNOVER IS LESS, ON NET SCALE THERE WILL BE LOSS BUT WITH THE INCREASE IN TURNOVER THERE WILL BE PROFIT ALTHOUGH THE GROSS MARGIN MAY BE SAME. III) FURTHER THE APPELLANT WOULD LIKE TO BRING TO YOUR 4 HONOURS' ATTENTION THAT BOTH THE COMPANIES SELECTED BY THE LD AO WERE INCORPORATED MUCH PRIOR TO THE FY 20 00, AND WERE NOT IN THEIR FIRST FULL YEAR OF OPERATIONS . THEY WERE NOT OPERATING IN THE GESTATION PHASE AND HENCE WOULD NOT BE INCURRING SIMILAR LEVELS OF EXCESS CAP ACITY. ACCORDINGLY, IN ORDER TO ENSURE CLOSER COMPARABILIT Y, THE APPELLANT CRAVES THAT CAPACITY ADJUSTMENT BE ALLOWE D. IV) IN THIS REGARD, THE APPELLANT PLACES RELIANCE ON THE RECENT JUDGEMENT PRONOUNCED BY THE TRIBUNAL IN CASE OF AMDOCS BUSINESS SERVICES PRIVATE LIMITED WHEREIN IT AT HAS HELD THAT THE ECONOMIC ADJUSTMENT ON ACCOUNT OF UNDER CAPACITY UTILIZATION BEING THE FIRST YEAR OF OPERATION IS APPROPRIATE IN THE MECHANISM OF TRANSF ER PRICING ASSESSMENTS THE RELEVANT OBSERVATIONS ARE A S UNDER:- THE PLEA SET-UP BY THE ASSESSEE FOR ECONOMIC ADJUSTMENTS ON ACCOUNT OF UNDER CAPACITY UTILIZATIO N AND BEING IN START UP PHASE, IS NOT SOMETHING WHICH IS UNREASONABLE AND NEITHER IT IS OTIOSE TO THE MECHAN ISM OF TRANSFER PRICING ASSESSMENTS. IN OUR VIEW, THE MATT ER REQUIRING FACTUAL APPRECIATION, THE SAME IS REMANDED BACK TO THE FILE OF THE ASSESSING OFFICER, WHO SHALL CONSIDER THE PROPOSITION PUT FORTH BY THE ASS ESSEE AND ALLOW ECONOMIC ADJUSTMENTS ON A REASONABLE BASI S . 7. FURTHER, THE PRINCIPLE OF CAPACITY ADJUSTMENT FO R CONSIDERATION OF T.P. ADJUSTMENTS HAS ALSO BEEN UPH ELD BY THE ITAT IN THE BELOW MENTIONED RULINGS MENTOR GRAPHICS NOIDA PRIVATE LIMITED (2007) 109 IT D 101) M/S. FIAT INDIA PRIVATE LIMITED ITA NO. 1848/MUM/2009 5 CRM SERVICES INDIA PRIVATE LIMITED. GENISYS INTEGRATING SYSTEMS (INDIA) PVT LTD (2011-T II- 96-ITAT-BANG-TP, ITA NO. 1231 (BANG.)/2010, ITAT BANGALORE, ASSESSMENT YEAR: 2006-07) BRINTONS CARPETS ASIA PRIVATE LIMITED (ITA NO. 1296/PN/10. 8. LD. COUNSEL FOR THE ASSESSEE FURTHER REQUESTS TO ADMIT THE ADDITIONAL EVIDENCE WHICH IS PROPOSED TO BE FIL ED. THE SAME ELABORATES THE DATE TO UTILIZE NON UTILIZATION CAPACITY OF THE ASSESSEE AND THE EFFECT OF CAPACITY NON UTILIZA TION OF THE ASSESSEE PROFITABILITY AND IT IS FURTHER AFFECTS TH E FOREIGN EXCHANGE PRICES. IT IS CONTENDS THAT THE PLEAS OF T HE ASSESSEE IN THIS BEHALF HAVING BEEN NOT CONSIDERED BY THE LO WER AUTHORITIES IN OBJECTIVE TERMS THE MATTER REQUIRES TO BE SET ASIDE BACK TO THE FILE OF ASSESSING OFFICER TO DECI DE THE SAME AFRESH. SINCE WE ARE SETTING ASIDE THE ISSUE TO ASS ESSING OFFICER WHO WILL CONSIDER THE EVIDENCE FILED BY THE ASSESSEE IN THIS BEHALF. 9. LD. DR RELIES ON THE ORDER OF THE LOWER AUTHORIT Y. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE SUITABLE ADJUSTME NT FOR NON- UTILISATION OF CAPACITY IS TO BE TAKEN IN TO ACCOUN T AFTER CONSIDERING THE ALP WHILE WORKING OUT TP ADJUSTMENT , THIS PROPOSITION HAS BEEN HELD BY CO-ORIDNATE BENCH IN T HE CASE OF THE AMDOCS BUSINESS SERVICES PRIVATE LIMITED (SUPRA ) AND VARIOUS OTHER CASES AS CITED HERE IN ABOVE. 11. IN THE GIVEN FACTS AND CIRCUMSTANCES IT WAS REQ UIRED ON THE PART OF THE LOWER AUTHORITIES TO HAVE GIVEN DUE EFFECT TO UNDER CAPACITY UTILIZATION OF THE ASSESSEE WHICH HA S NOT BEEN 6 DONE TPO FOR ADJUSTMENT FOR ALP DETERMINATION. IN V IEW OF THE FACTS AND CIRCUMSTANCES WE ARE INCLINED TO SET ASIDE THE MATTER AND RESTORE THE ISSUE OF UNDER CAPACITY UTIL IZATION BACK TO THE FILE OF THE ASSESSING OFFICER /TPO TO D ECIDE THE SAME AFRESH AFTER GIVING ASSESSEE ADEQUATE OPPORTUN ITY OF BEING HEARD AND TO FILE THE NECESSARY EVIDENCE ON T HIS BEHALF. NEEDLESS TO SAY THAT A PROPER AND SPEAKING ORDER WI LL BE PASSED DECIDING THE ISSUE IN ACCORDANCE WITH LAW. 12. IN THE RESULT THE ASSESSEES APPEAL IS PARTLY A LLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 06.09.2013. SD/- SD/- (J. S. REDDY) (R P TOLANI) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED 06/09/2013 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR