ITO, New Delhi V. M/s. EDAG Enginnering & Design India Pvt. Ltd, New Delhi

ITA 3618/DEL/2009

• Counselvise Citation: 361820114 RSA 2009
• Duration Of Justice: 5 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 01-09-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 21-08-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: G C SRIVASTAVA; SAURABH SRIVASTAVA RESP
• Keywords: Depreciation; Transfer pricing; International transaction; Bad and doubtful debts
• Section: 143(3)

Judgement Text

I.T.A. NO.: 3618/DEL/2009 ASSESSMENT YEAR: 2003-04 PAGE 1 OF 4 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI I BENCH, NEW DELHI [CORAM: PRAMOD KUMAR AM AND C. M. GARG JM] I.T.A. NO.: 3618/DEL/2009 ASSESSMENT YEAR: 2003-04 INCOME TAX OFFICER WARD 11(1), NEW DELHI .APPELLANT VS. EDAG ENGINEERS & DESIGN INDIA PVT LTD .RESPONDENT SANKALP, C 227 GROUND FLOOR, WESTEND MARG, PARYAVARAN COMPLEX, NEW DELHI 110 030 [ PAN: AAACE6666K] APPEARANCES BY: PEEYUSH JAIN , FOR THE APPELLANT G C SRIVASTAVA AND SAURABH SRIVASTAVA FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : SEPTEMBER 01, 20 14 DATE OF PRONOUNCING THE ORDER : OCTOBER 13, 2014 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE APPELLANT ASSESSING O FFICER HAS CHALLENGED CORRECTNESS OF LEARNED COMMISSIONER (APPEALS)S ORD ER DATED 26 TH JUNE 2009, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF TH E INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), FOR THE ASS ESSMENT YEAR 2003-04. 2. GRIEVANCES RAISED BY THE ASSESSING OFFICER, WHIC H ARE SOMEWHAT INTERCONNECTED AND WHICH WE WILL TAKE UP TOGETHER, ARE AS FOLLOWS: 1. THE CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF R S 5,88,254 TOWARDS SUPERANNUATION FUND WAS EXTRAORDINARY EXPEN DITURE. THIS AMOUNT HAS BEEN CHARGED AS A NORMAL COST BY THE ASS ESSEE TO THE PROFIT AND LOSS ACCOUNT, AND NOTHING HAS BEEN INFER RED BY THE AUDITIRS TO THE CONTRARY. 2. THE CIT(A) ERRED IN HOLDING THAT DEPRECIATION OF RS 8,21,628 ON SOFTWARE WAS EXTRA ORDINARY EXPENDITURE. THIS AMOUN T HAS BEEN I.T.A. NO.: 3618/DEL/2009 ASSESSMENT YEAR: 2003-04 PAGE 2 OF 4 CHARGED AS AN ALLOWABLE COST TO THE AUDITED PROFIT AND LOSS ACCOUNT AND NOTHING CONTRARY HAS BEEN INFERRED BY THE AUDIT ORS IN THE TAX AUDIT REPORT. 3. THE CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF F OREX GAIN BY THE ASSESSEE IS AN OPERATING INCOME. THIS IS CONTRA RY TO THE FINDING OF THE ASSESSEE ON PAGE 24 OF THE TP REPORT WHERE IT W AS HELD THAT SUCH ITEM OF INCOME TO BE NON OPERATING IN NATURE. SUCH DECISION OF THE CIT(A) WAS BASED ON CALCULATION OF OPERATING MARGIN IN CASE OF A COMPARABLE NAMELY M/S FEDERAL TECHNOLOGIES WHICH WA S REJECTED BY THE CIT(A) HIMSELF FOR ALL PURPOSES OF COMPARABILIT Y. 4. THE CIT(A) HAS ERRED IN MAKING ADJUSTMENT TO THE OPERATING INCOME OF THE ASSESSEE ON THE BASIS OF A COMPARABLE WHICH WAS REJECTED BY THE CIT(A) HIMSELF. 5. THE CIT(A) ERRED IN DECIDING THAT THE OPERATING PROFIT MARGINS OF COMPARABLES SHOULD BE CALCULATED AFTER CONSIDERI NG BAD DEBTS, AMORTIZATIONS AND PROVISIONS. THERE IS NOTHING ON R ECORD TO SHOW THAT THESE COSTS, IN THE CASES OF COMPARABLES, WERE OPERATING IN NATURE AND THE OPERATING PROFIT MARGIN OF THE ASSES SEE DOES NOT INCLUDE COSTS OF THIS NATURE. 3. TO ADJUDICATE ON THIS APPEAL, ONLY A FEW MATERIA L FACTS NEED TO BE TAKEN NOTE OF. THE ASSESSEE BEFORE US IS A SUBSIDIARY OF A GERMAN COMPANY BY THE NAME OF EDAG ENGINEERING & DESIGNS AG, ENGAGED IN T HE BUSINESS AS AN ENGINEERING EXPERT IN THE AUTOMOTIVE INDUSTRY AND I S SAID TO BE ONE OF THE GLOBAL LEADERS IN OFFERING CLOSED PROCESS CHAIN SERVICES I.E. COMPLETE SERVICES FOR INTEGRATED DEVELOPMENT- INCLUDING DESIGN AND PRODUC T DEVELOPMENT, TEMPLATE AND PROTOTYPE CONSTRUCTION AND FROM TESTING DIVISIO N TO TURNKEY MANUFACTURING FACILITIES. THE ASSESSEE IS A CAPTIVE UNIT FOR ITS GERMAN PARENT COMPANY AND IS ENGAGED IN THE BUSINESS OF PROVIDING COMPUTER AIDED SERVICES, FOR ENGINEERING AND DESIGN OF AUTOMOBILE COMPONENTS, ON PROJECT BAS IS. DURING THE RELEVANT FINANCIAL YEAR, THE ASSESSEE REPORTED INTERNATIONAL TRANSACTIONS IN RESPECT OF (1) CAD AND DEVELOPMENT OF AUTOMOBILES PARTS AND PRODUC TION EQUIPMENT FOR RS 4.82 CRORES; (2) TECHNICAL CONSULTANCY, SALES COMMI SSION AND TRANSLATION CHARGES FOR RS 1.81 CRORE; AND (3) LOAN FOR RS 1.02 CRORES (INTEREST OF RS 4.36 LAKHS). TO BENCHMARK ARMS LENGTH PRICE OF THESE T RANSACTIONS, THE ASSESSEE USED THE TNMM METHOD WITH OP/ SALES AS THE PROFIT L EVEL INDICATOR. SO FAR AS THE DISPUTE BEFORE US IS CONCERNED, THE ONLY RELEVA NT ASPECT IS THAT IN THE I.T.A. NO.: 3618/DEL/2009 ASSESSMENT YEAR: 2003-04 PAGE 3 OF 4 COMPUTATION OF OPERATING PROFIT, THE ASSESSEE DID N OT TAKE INTO ACCOUNT SUPERANNUATION CONTRIBUTION OF RS 5,88,254 AS IT PE RTAINED TO AN EARLIER YEAR, AND RS 8,21,628 AS IT PERTAINED TO PAYMENT FOR SOFT WARE WHICH WAS PUT TO USE IN A LATER YEAR. WHILE FOREIGN EXCHANGE GAIN WAS NOT I NCLUDED BY THE ASSESSEE AS ITS OPERATIONAL INCOME, THE TPO, IN MAKING COMPARABILIT Y ADJUSTMENTS IN THE COMPARABLES, EXCLUDED THE FOREIGN EXCHANGE LOSSES E VEN AS HE INSISTED THAT FOREIGN EXCHANGE GAINS CANNOT BE INCLUDED IN OPERAT IONAL INCOME. IN ANY EVENT, FOREIGN EXCHANGE GAIN IS INEXTRICABLY LINKED TO THE REVENUE REALIZATION AND, THEREFORE, IT CANNOT BE CONSIDERED IN ISOLATION WIT H OPERATIONAL REVENUES. THE TPO MADE ADJUSTMENTS, INTER ALIA, IN RESPECT OF THE SE ITEMS AND HELD THAT THE EXPENSES OF RS 5,85,254 TOWARDS SUPERANNUATION CONT RIBUTION AND DEPRECIATION ON SOFTWARE TO THE TUNE OF RS 8,21,628 IS TO BE TAK EN INTO ACCOUNT FOR COMPUTATION OF OPERATING INCOME WHILE FOREX GAIN IS TO BE EXCLUDED FOR THIS PURPOSE. ACCORDINGLY, THE OPERATING PROFIT WAS RECO MPUTED, AND, BASED ON THIS RECOMPUTATION, ALP ADJUSTMENT WAS MADE. AGGRIEVED B Y THE STAND SO TAKEN BY THE ASSESSING OFFICER, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). LEARNED CIT(A) REVERSED THE ADJUSTMENTS SO MADE. NO W THE ASSESSING OFFICER IS AGGRIEVED AND IS IN APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 5. WE FIND THAT THERE IS A CATEGORICAL FINDING BY T HE CIT(A) THAT SUPERANNUATION CONTRIBUTION OF RS 5,88,254 PERTAINS TO THE ASSESSMENT YEAR 2000-01 AND 2001-02. THIS FINDING REMAINS UNCONTROV ERTED. IN THIS VIEW OF THE MATTER, THERE CANNOT INDEED BE ANY RATIONALE IN TAK ING INTO ACCOUNT THIS EXPENDITURE FOR COMPUTATION OF OPERATING PROFITS OF THE ASSESSEE FOR THE CURRENT YEAR. SIMILARLY, THERE IS A CATEGORICAL FINDING THA T CATIA SOFTWARE, IN RESPECT OF WHICH AMOUNT OF RS 8,21,628 WAS EXCLUDED, WAS NOT U SED FOR THE PURPOSE OF ANY WORK IN THE RELEVANT PREVIOUS YEAR AND IT WAS ONLY SUBSEQUENT YEAR THAT THIS SOFTWARE WAS ACTUALLY USED. THIS FINDING ALSO REMAI NS UNCONTROVERTED. CLEARLY, THEREFORE, THIS EXPENSE CANNOT BE INCLUDED IN THE C OMPUTATION OF OPERATING PROFIT FOR THE CURRENT YEAR. AS REGARDS FOREX GAIN, THE RELIEF GRANTED BY THE I.T.A. NO.: 3618/DEL/2009 ASSESSMENT YEAR: 2003-04 PAGE 4 OF 4 CIT(A) IS ONLY A NATURAL COROLLARY TO THE STAND TAK EN BY THE TPO TO THE EFFECT THAT THE FOREX LOSSES ARE TO BE INCLUDED IN COMPUTATION OF OPERATING INCOME. WHEN HE DOES SO, IT CANNOT BE OPEN TO HIM TO TAKE A STAND T HAT INCOME FROM FOREX GAIN IS TO BE TREATED AS NON OPERATIONAL INCOME. IN ANY EV ENT, FOREX GAINS CANNOT BE CONSIDERED IN ISOLATION OF THE REVENUES GENERATED. IT IS IN RESPECT OF SUCH REVENUES THAT FOREX GAINS ARE RECEIVED. AS FOR THE EXCLUSION OF BAD DEBTS, AMORTIZATIONS AND PROVISIONS, IN COMPUTATION OF THE PLI OF THE COMPARABLES, WE ARE UNABLE TO SEE ANY RATIONALE IN THE SAME NOR HAS IT BEEN JUSTIFIED BEFORE US. IN VIEW OF THESE DISCUSSIONS, IN OUR CONSIDERED OPINIO N, THE STAND TAKEN BY THE CIT(A) DOES NOT MERIT ANY INTERFERENCE BY US. 6. FOR THE REASONS SET OUT ABOVE, AS ALSO BEARING I N MIND ENTIRETY OF THE CASE, WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 7. IN THE RESULT, THE APPEAL IS DISMISSED. PRONOUNC ED IN THE OPEN COURT TODAY ON 13 TH DAY OF OCTOBER, 2014. SD/- SD/- C M GARG PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NEW DELHI, 13 TH DAY OF OCTOBER 2014 COPIES TO : (1) THE ASSESSEE (2) THE ASSESSING OFF ICER (3) CIT (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI