Lear Automotive India Private ltd., Pune V. Assistant Commissioner of Income-tax,

ITA 421/PUN/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9272 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-07-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 09-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Rule of consistency; Additional evidence

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE . . . . , , BEFORE SHRI D.KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO. 421/PUN/2015 / ASSESSMENT YEAR : 2010-11 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED, E-25,26,27, BHOSARI, MIDC, PUNE 411 026 PAN : AAACL1978K . / APPELLANT V/S AC IT, CIRCLE - 9 , PUNE . / RESPONDENT ASSESSEE BY : SHRI DHANESH BAFNA REVENUE BY : SHRI RAJEEV KUMAR, CIT / ORDER PER D. KARUNAKARA RAO, AM : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DERS OF AO/TPO/DRP, PUNE FOR THE ASSESSMENT YEAR 2010-11. 2. THE GROUND NO.2 CONSTITUTES AN EFFECTIVE ONE AND THE SAME IS REPRODUCED HERE AS UNDER. OTHERWISE, GROUNDS NOS. 1 AND 3 EITHER GENERAL OR CONSEQUENTIAL IN NATURE. THEREFORE, THEY ARE DISMI SSED AS EITHER GENERAL OR AS PREMATURE : 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.AO, UNDER THE DIRECTIONS OF THE HONBLE DRP, HAS ERRED IN HOLDING THAT THE INTERNATIONAL TRANSACTION OF COST ALLOCATION FROM THE ASSOCIATED ENTERPRISE (AE) TO THE APPELLANT DOES NOT SATISFY THE ARMS LENGTH PRINCIP LE ENVISAGED UNDER THE ACT. IN DOING SO, THE LD. AO/HONBLE DRP HAVE ERRED IN: / DATE OF HEARING :11.07.2017 / DATE OF PRONOUNCEMENT: 11.07.2017 2 ITA NO.421/PUN/2015 2.1 REJECTING THE COMPARABLE UNCONTROLLED PRICE (C UP') METHOD APPLIED BY THE APPELLANT TO DEMONSTRATE THE ARMS LENGTH NATUR E OF THE PRICING OF THE TRANSACTION OF COST ALLOCATION FROM AE. 2.2 DISREGARDING THE CORROBORATIVE ANALYSIS CONDUCT ED BY THE APPELLANT USING TRANSACTIONAL NET MARGIN METHOD (TNMM) TO D EMONSTRATE THE ARMS LENGTH NATURE OF THE PRICING OF THE TRANSACTION OF COST ALLOCATION FROM AE. 2.3 DISALLOWING THE ENTIRE VALUE OF TRANSACTION OF COST ALLOCATION WITHOUT TAKING COGNIZANCE OF THE FACT THAT THE AMOUNT ALLOC ATED TO THE ENGINEERING SERVICES BUSINESS SEGMENT (I.E. INDIA ENGINEERING C ENTRE) HAS BEEN HELD TO BE AT ARMS LENGTH BY THE LD. TPO. 2.4 ALLOWING ONLY A PARTIAL RELIEF ONLY TO THE EXT ENT OF REFERENCE OF THE LOCATION OF THE APPELLANTS PREMISES IN INDIA IN TH E THIRD PARTY DOCUMENTS FURNISHED. 2.5 DISREGARDING THE ADDITIONAL SUBMISSION MADE BY THE APPELLANT TO THE HONBLE DRP SUPPORTED WITH A DETAILED CERTIFICATE F ROM THE APPELLANTS AE CONFIRMING THAT THE ALLOCATIONS MADE TO THE APPELLA NT ARE COST-TO-COST REIMBURSEMENTS OF THIRD PARTY COSTS WITHOUT ANY MAR K-UP. 3. THE ISSUE THAT IS RAISED IN THE ABOVE GROUND NO. 2 RELATES TO AN APPROPRIATE METHOD OF ACCOUNTING FOR BENCHMARKING T HE INTERNATIONAL TRANSACTION OF COST ALLOCATION AND CORRECTNESS OF C OST ALLOCATION OF EXPENDITURE BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES . 4. BRINGING OUR ATTENTION TO THE ABOVE SAID ISSUES, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SAID ISSUES ARE PERENNI ALLY A SUBJECT MATTER OF LITIGATION SINCE A.Y. 2007-08 ONWARDS. IN ALL THE YEARS, THE ISSUES ARE AGITATED BEFORE THE TRIBUNAL AND, IN THE TRIBUNAL, THE ASSES SEE WAS CONSISTENTLY FILING ADDITIONAL EVIDENCES IN SUPPORT OF THE SAID COST AL LOCATION BY THE ASSESSEE AND THE CORRECTNESS OF THE CUP METHOD AS AN APPROPRIA TE METHOD OF ACCOUNTING. THE TRIBUNAL HAS BEEN CONSISTENTLY REMANDING THIS I SSUE TO THE FILE OF THE TPO/AO FOR TAKING FRESH DECISION IN ACCORDANCE WITH LAW. 5. IN SUPPORT OF THE SAME, TO START WITH, LD. COUNS EL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE TRIBUNALS ORDER FOR A .Y. 2007-08 VIDE ITA NO.5612/DEL./2011 ORDER DATED 22-12-2014 AND SUBMIT TED THAT THE PARAGRAPH NOS. 2.1 TO 2.4 RELATES TO THE ISSUE OF ADDITION ON ACCOUNT OF TP ADJUSTMENTS MADE TO THE INTERNATIONAL TRANSACTIONS OF COST ALLO CATION FROM ASSOCIATED 3 ITA NO.421/PUN/2015 ENTERPRISES. EVENTUALLY, THE FACT OF REMANDING WIT H THE NEEDED DIRECTION BY THE TRIBUNAL TO THE FILE OF THE TPO/AO WAS ALSO DISCUSS ED IN THE SAID PARAGRAPHS. 6. AFTER HEARING BOTH THE COUNSELS TO THE LITIGATIO N AND AFTER HEARING THE LD. DEPARTMENTAL REPRESENTATIVE ON THE NEED FOR REMANDI NG, WE FIND RELEVANT TO EXTRACT THE PARAGRAPH NOS. 2.2 TO 2.4 OF THE SAID O RDER OF THE TRIBUNAL, WHICH EXEMPLIFY THE STAND OF THE TRIBUNAL IN ALL THE YEAR S SINCE 2007-08 ONWARDS : 2.2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A SUBSIDIARY OF LEAR CORPORATION USA, WHICH HOLDS THE ENTIRE SHARE CAPITAL OF THE ASSESSEE- COMPANY THROUGH ITS AFFILIATE VIZ., LEAR CORPORATIO N (MAURITIUS) LTD. THE ASSESSEE IS PRIMARILY ENGAGED IN THE MANUFACTURE/AS SEMBLY OF AUTOMOTIVE SEATING SYSTEMS (I.E. SEATS AND SEAT TRIMS) AND INT ERIOR PARTS. THE ASSESSEE PROVIDES DESIGN AND ENGINEERING SUPPORT SERVICES AL ONG WITH EMBEDDED SOFTWARE DEVELOPMENT SUPPORT SERVICES TO GROUP COMP ANIES, AND DESIGN AND ENGINEERING SERVICES TO AUTOMOTIVE INDUSTRY CUSTOME RS, LIKE GENERAL MOTORS LTD. AND MAHINDRA & MAHINDRA (M&M). APART FROM CERTAIN O THER INTERNATIONAL TRANSACTIONS, THE ASSESSEE REPORTED A PAYMENT OF RS .1,99,22,532/- TO ITS ASSOCIATED ENTERPRISES (AES) TOWARDS 'COST ALLOCATI ON'. ON A REFERENCE BEING MADE BY THE AO, THE TRANSFER PRICING OFFICER (TPO) NOTICED THAT THE ASSESSEE HAD PAID CERTAIN ALLOCATED COSTS TO GROUP COMPANIES . ON BEING CALLED UPON TO EXPLAIN OF NATURE OF SUCH PAYMENT, THE ASSESSEE STA TED THAT THESE COSTS PRIMARILY RELATED TO CERTAIN SOFTWARES USED BY IT A ND COULD BE BROADLY CLASSIFIED INTO TWO PARTS. FIRST PART WAS STATED TO BE THE COS TS RELATING TO PRE-LOADED DESKTOP SOFTWARE ON SOME OF THE COMPUTERS OF THE AS SESSEE COMPANY AS WELL AS THE COSTS OF THEIR MAINTENANCE. THE ASSESSEE SUB MITTED THAT THE COST FOR SUCH DESKTOP SOFTWARES AND THEIR MAINTENANCE WERE I NCURRED BY THE GROUP COMPANIES ON A PER COMPUTER BASIS TO THIRD PARTIES AND CHARGED TO THE ASSESSEE ON THE SAME BASIS. THE SECOND PART OF SUCH OVERALL COSTS WAS STATED TO BE THE COSTS RELATING TO THE MAINTENANCE COSTS F OR CERTAIN CAD/CAE SOFTWARES USED BY IT, THE LICENSES FOR WHICH WERE OWNED BY GR OUP COMPANIES. OUT OF THE TOTAL LICENSES, THE GROUP COMPANIES SET ASIDE A FIX ED NUMBER OF LICENSES AS PER THE REQUEST OF THE ASSESSEE FOR ITS USE, FOR WHICH ANNUAL MAINTENANCE CHARGES WERE PAID TO THIRD PARTIES SOFTWARE VENDORS ON A PE R LICENSE BASIS. THE ASSESSEE CLAIMED THAT ALL THE COSTS ALLOCATED BY GROUP COMPA NIES TO THE ASSESSEE REPRESENTED THE AMOUNTS PAID BY GROUP COMPANIES TO THIRD PARTIES DEPENDING ON THE ACTUAL UTILIZATION OF SOFTWARES BY THE ASSES SEE. THE ASSESSEE SOUGHT TO BENCHMARK THIS INTERNATIONAL TRANSACTION ON THE BAS IS OF COMPARABLE UNCONTROLLED PRICE (CUP) METHOD UNDER WHICH THE PRI CE PAID BY THE GROUP COMPANIES TO THE THIRD PARTIES WAS CONSIDERED AS A COMPARABLE INSTANCE. THE TPO TREATED SUCH PAYMENTS AS TOWARDS INTRA- GROUP S ERVICES AND OBSERVED THAT THE DEDUCTION COULD BE ALLOWED ONLY WHEN THE FACTU M OF THE ASSESSEE HAVING ACTUAL RECEIVED SUCH SERVICES WAS PROVED. IN THE AB SENCE OF THE ASSESSEE PROVIDING ANY DETAILS OF INVOICES AND OTHER BACK-UP DOCUMENTS TO SHOW THAT SUCH PAYMENTS ACTUAL REPRESENTED REIMBURSEMENT OF C OSTS INCURRED BY THE GROUP COMPANIES TO THE THIRD PARTIES, THE TPO HELD THAT THE ARM'S LENGTH PRICE (ALP) OF THIS TRANSACTION WAS TO BE TAKEN AS NIL. T HE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DRP. THAT IS HOW, AN ADDITI ON OF RS.1,99,22,532/- WAS MADE IN THE FINAL ORDER PASSED BY THE AO, AGAINST W HICH THE ASSESSEE IS AGGRIEVED BEFORE US. 2.3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED FROM THE TPO'S O RDER THAT THE INSTANT ISSUE WAS ALSO THERE IN THE PRECEDING YEAR. A USEFUL REFE RENCE CAN BE MADE TO PARA 4 ITA NO.421/PUN/2015 5.2 OF THE TPO'S ORDER IN WHICH HE OBSERVED THAT SI MILAR TP ADJUSTMENT WAS ALSO MADE IN THE PRECEDING YEAR. THE LD. AR SUBMITT ED THAT FOR SUCH IMMEDIATELY PRECEDING YEAR, THE ASSESSEE PLACED SOM E ADDITIONAL EVIDENCE BEFORE THE TRIBUNAL INDICATING THAT THE PAYMENT MAD E TO ITS FOREIGN AES REPRESENTED A SIMPLE REIMBURSEMENT OF COST INCURRED BY THEM TO THIRD PARTIES. IT CAN BE SEEN FROM PAGE 21 PARA 5.1 OF THE COMBINE D TRIBUNAL ORDER DATED 18.12.2013 PASSED FOR THE ASSESSMENT YEARS 2005-06, 2006-07 & 2008-09 THAT THERE IS SOME DISCUSSION ABOUT THE ASSESSEE MOVING AN APPLICATION UNDER RULE 29 OF THE ITAT RULES, 1963 SEEKING PERMISSION FOR F ILING ADDITIONAL EVIDENCE FOR CONSIDERATION. AFTER GOING THROUGH THE ENTIRE GAMUT OF THE AVAILABLE MATERIAL, BUT WITHOUT COMMENTING ON SUCH ADDITIONAL EVIDENCE, THE TRIBUNAL RESTORED THE ENTIRE ISSUE TO THE TPO FOR TAKING A FRESH DECISION IN ACCORDANCE WITH LAW. 2.4. BOTH THE SIDES BEFORE US ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES FOR THE INSTANT YEAR ARE MUTATIS MUTANDIS SIMILAR T O THOSE OF THE PRECEDING YEAR. IT CAN BE SEEN THAT FOR THIS YEAR ALSO, THE ASSESSE E HAS MOVED AN APPLICATION UNDER RULE 29 OF THE ITAT RULES SEEKING TO FILE SOM E ADDITIONAL EVIDENCE. WITHOUT GOING INTO THE MERITS OF THIS ISSUE AND RES PECTFULLY FOLLOWING THE PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND SEND THE MATTER BACK TO TPO/AO FOR A FRESH DECISION AS PER L AW AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. NEEDLESS TO SAY, THE ASSESSEE WILL BE AT LIBERTY TO FILE ANY FR ESH EVIDENCE BEFORE THE AUTHORITIES IN SUCH DE NOVO EXAMINATION. (EMPHASIS SUPPLIED) 7. CONSIDERING THE RULE OF CONSISTENCY AS MADE OUT BY THE LD. AUTHORISED REPRESENTATIVE, WITH THE IDENTICAL DIRECTIONS, WE A RE OF THE OPINION THAT THE MATTER SHOULD BE REMANDED TO THE FILE OF THE TPO/AO FOR FRESH CONSIDERATION OF THE ISSUE. ASSESSEE IS FREE TO FILE ANY ADDITIONAL EVIDENCES RELATING TO THE ISSUE UNDER CONSIDERATION. WITH THIS LIBERTY, WE ALLOW T HIS GROUND OF THE ASSESSEE FOR STATISTICAL PURPOSES. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 11 TH DAY OF JULY, 2017. SD/- SD/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE; DATED : 11 TH JULY, 2017. 5 ITA NO.421/PUN/2015 / COPY OF THE ORDER FORWARDED TO : / BY ORDER , // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE PR.CIT - 5, PUNE 4. THE DCIT, CIRCLE - 9, PUNE 5 . DR, ITAT, A BENCH PUNE; 6 . / GUARD FILE.