AVL Technical Centre Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 431/DEL/2013

• Counselvise Citation: 43120114 RSA 2013
• Duration Of Justice: 2 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 03-08-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 23-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: UTSAV VIJAY; S P SINGH SH GAURAV BHUTANI
• Assessee Lawyers: Y KAKKAR; AMRENDRA KUMAR
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SHRI N.K.SAINI, ACCOUNTANT MEMBER I.T.A .NO. - 368/ DEL/201 3 (ASSESSMENT YEAR - 2008 - 09 ) DCIT, CIRCLE - 2(1), ROOM NO.398D, C.R. BUILDING, NEW DELHI (APPELLANT ) VS AVL TECHNICAL CENTRE PVT.LTD., C/9, CSC, VASANT KUNJ, NEW DELHI - 110070. PAN - AADCA1470C (RESPONDENT ) I.T.A .NO. - 431/ DEL/201 3 (ASSESSMENT YEAR - 2008 - 09 ) AVL TECHNICAL CENTRE PVT. LTD., C/9, CSC, VASANT KUNJ, NEW DELHI - 110070. PAN - AADCA1470C (APPELLANT ) VS ACIT, CIRCLE - 2(1), C.R. BUILDING, NEW DELHI (RESPONDENT ) APPELLANT BY SH.AMRENDRA KUMAR, CIT DR & MS.Y.KAKKAR, SR. DR RESPONDENT BY SH.S.P.SINGH, SH. GAURAV BHUTANI & SH. UTSAV VIJAY, AR ORDER PER DIVA SINGH, JM BOTH THE ASSESSEE AND THE REVENUE HAVE ASSAILED THE CORRECTNESS OF THE ORDER DATED 22.11.2012 OF CIT(A) - XX, NEW DELHI PERTAINING TO 2008 - 09 ASSESSMENT YEAR ON VARIOUS GROUNDS IN THEIR RESPECTIVE APPEALS. 2. ADDRESSING THE GROUNDS RAISED IN THE ASSESSEE S APPEAL THE LD. AR AT THE TIME OF HEARING, INVIT ING ATTENTION TO THE GROUNDS RAISED BY THE ASSESSEE DATE OF HEARING 03 .0 8 .2015 DATE OF PRONOUNCEMENT 04 .0 9 .2015 I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 2 OF 12 SUBMITTED THAT GROUND NO S . - 1 & 2 ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY SPECIFIC ADJUDICATION. GROUND NO. - 4 IT WAS STATED IS CONSEQUENTIAL IN NATURE . ADDRESSING THE REMAINING GROUND, IT WAS HIS SUB MISSION THAT HE WOULD BE ADDRESSING ONLY THE ISSUES IN THE FOLLOWING SUB - GROUNDS OF GROUND NO.3 NAMELY GROUND NOS. 3(A), 3(C), 3(D) AND 3(G) AND THE OTHER SUB - GROUNDS MAY BE DISMISSED AS NOT PRESSED. THE SPECIFIC GROUNDS ON WHICH THE LD. AR REQUESTS A FIND ING READ AS UNDER: - 3. (A) THE LD.CIT(A) ERRED IN UPHOLDING REJECTION OF THE APPELLANT S TP DOCUMENTATION, COMPARABLE COMPANIES AND ANALYSIS THEREOF. (C) THE LD.CIT(A) ERRED IN NOT CONSIDERING AND APPRECIATING THE BUSINESS MODEL OF THE APPELLANT AND ITS AES AND CLASSIFIED IT AS A TECHNICAL SERVICE PROVIDER . (D) THE LD.CIT(A ERRED IN CONFIRMING COMPANIES, SELECTED BY LD.TPO/AO, WHICH WERE NOT FUNCTIONALLY COMPARABLE TO THE APPELLANT AND IN REJECTING COMPARABLE COMPANIES SELECTED BY THE APPELLANT. (G) THE LD.CIT(A) ERRED IN TREATING LOSS ON FOREIGN EXCHANGE FLUCTUATION AS OPERATING IN NATURE FOR DETERMINING THE MARGIN OF THE APPELLANT. ALSO, WITHOUT PREJUDICE TO THIS CONTENTION, EVEN THOUGH THE SAME IS TREATED AS OPERATING, FOREIGN EXCHANGE LOSS NOT RELAT ING TO INTERNATIONAL TRANSACTIONS SHOULD BE EXCLUDED WHILE COMPUTING THE OPERATING MARGIN OF THE APPELLANT. 3. THE LD.AR INVITING ATTENTION TO PAPER BOOK PAGE 248 294 WHICH CONTAINS THE TRANSFER PRICING OFFICER S (HEREINAFTER REFERRED TO AS TPO ) AND PAGES 39 TO 176 WHICH CONTAINS THE TRANSFER PRICING STUDY SUBMITTED THAT IN THE FACTS OF THE PRESENT CASE THE BUSINESS MODEL OF THE ASSESSEE HAS NOT BEEN CORRECTLY APPRECIATED. AS A RESULT OF THIS, IT WAS SUBMITTED MISTAKES HAVE OCCURRED IN THE SUBSEQUENT STEPS OF SELECTION OF COMPARABLES ETC. IT WAS HIS SUBMISSION THAT IT IS NOT A NEW LINE OF ARGUMENT TAKEN AT THIS STAGE AS THIS STAND HAS BEEN TAKEN BEFORE THE DRP ALSO. 3.1. IN SUPPORT OF THE SAID SUBMISSION ATTENTION WAS INVITED TO PAGES 44 & 45 OF THE PAPER BOOK AND SPECIFICALLY PARA 2.2 TITLED AS PROFILE OF THE AVL TECHNICAL CENTRE PVT. LTD. (HEREINAFTER REFERRED TO AS AVLTC ) SO AS TO SUBMIT THAT THE TPO HAS FAILED TO CONSIDER THAT THE TRANSACTION WITH NON AE S ARE FAR MORE COMPREHENSIVE THEN THE TRA NSACTION WITH AE S AND WHILE I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 3 OF 12 CARRYING OUT THE FAR ANALYSIS OF THE ASSESSEE THIS FACT IT WAS SUBMITTED HAS C OMPLETELY BEEN LOST SIGHT OF . 3.2. ADDRESSING THE FACTS IT WAS SUBMITTED THAT THE MOST APPROPRIATE METHOD SELECTED BY THE ASSESSEE WAS TRANSACTION AL NET MARGIN METHOD (HEREINAFTER REFERRED TO AS TNMM ) AND IT HAS NOT BEEN DISPUTED BY THE TPO. SIMILARLY THE PROFIT LEVEL INDICATOR (HEREINAFTER REFERRED TO AS PLI ) TAKEN BY THE ASSESSEE WAS OPERATING PROFIT/TOTAL COST (HEREINAFTER REFERRED TO AS OP/TC ) HAS ALSO NOT DISPUTED BY THE REVENUE. THE MISTAKE THUS OCCURRED IN CHARACTERIZING THE ASSESSEE DUE TO NON - APPRECIATION OF THE BUSINESS MODEL OF THE ASSESSEE HAS THEREAFTER DE - RAILED THE SELECTION OF COMPARABLES ALSO. IT WAS HIS SUBMISSION THAT AL THOUGH GROUNDS HAVE BEEN RAISED ASSAILING SELECTION OF COMPARABLES AND BASED ON THAT SYNOPSIS HAS ALSO BEEN PREPARED HOWEVER IN THE FACTS OF THE PRESENT CASE IT WOULD BE INJUSTICE TO ADDRESS THE ISSUE PIECEMEAL AS THERE IS A FUNDAMENTAL ERROR ON FACTS WHIC H SURVIVES TILL DATE AND IT NEEDS TO BE ADDRESSED. INVITING ATTENTION TO PAGES 312 TO 388 OF THE PAPER BOOK WHICH CONTAINS THE DETAILED SUBMISSIONS DATED 26.12.2012 BEFORE THE CIT(A), IT WAS SUBMITTED THAT THIS SPECIFIC PLEADING WAS MADE BEFORE THE LD. CIT (A) AND IT CAN BE FOUND ADDRESSED AT PAGES 338 - 343 ON RECORD. INVITING ATTENTION TO THE IMPUGNED ORDER IT WAS HIS SUBMISSION THAT DESPITE THE RECORDING OF DETAILED PLEADINGS ON THE SAID ISSUE THERE IS NO DISCUSSION WHATSOEVER IN THE FINDING. 3.3. ON THE BASIS OF THESE ARGUMENTS IT WAS HIS SUBMISSION THAT THE ISSUE MAY BE REMANDED TO THE TPO TO RE - CONSIDER THE BUSINESS MODEL OF THE ASSESSEE AS ONCE THE BUSINESS MODEL OF THE ASSESSEE IS CORRECTLY APPRECIATED THEN THE SELECTION OF COMPARABLE S IT WAS SUBMITT ED CAN BE CARRIED OUT. 4. THE LD. SR. DR SUBMITTED THAT ON FACTS THE ASSESSEE S BUSINESS MODEL HA S BEEN CONSIDERED BY THE TPO AND A SPEAKING ORDER HAS BEEN PASSED . IT WAS HER SUBMISSION THAT ONCE THERE IS NO DISCUSSION IN THE FINDING GIVEN BY THE CIT(A) THEN IT CAN BE SAFELY DEEMED TO HAVE BEEN REJECTED. SIMILARLY THE ARGUMENTS FOR AC CEPTING OR REJECTING THE COMPARABLE S AS ARGUED BY THE ASSESSEE BEFORE THE CIT(A) CAN ALSO BE STATED TO BE FULLY CONSIDERED AND REJECTED. THUS REMAND TO THE TPO WAS OBJECTED TO . I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 4 OF 12 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. BEFORE WE ADDRESS THE ISSUES CANVASSED BEFORE US, IT IS APPROPRIATE TO ADDRESS THE RELEVANT FACTS. THE ASSESSEE I.E. AVLTC IS A SUBSIDIARY OF AVL INDIA PRIVATE LIM ITED WHO HOLDS 70% OF ITS SHARES AND THE REMAINING 30% SHARES ARE HELD BY AVL HOLDING GMBH, AUSTRIA. 5.1. AVLTC IS STATED TO BE ENGAGED IN PROVIDING BROAD RANGE OF POWERTRAIN DESIGN DEVELOPMENT AND TESTING SERVICES TO ITS ASSOCIATED ENTERPRISES ( AES ) A ND NON - AES AS WELL. THE APPELLANT ASSESSEE CLAIMS TO HAVE COMPLETE CAPABILITY FOR SIMULATION, ANALYZE AND DESIGN, ENGINE AND POWER TRAIN DEVELOPMENT, CALIBRATION, VALIDATION ETC. IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE IN ITS RETURN FILED ON 25 TH S EPTEMBER, 2008, DECLARED A LOSS OF RS.34,686,270/ - UNDER THE NORMAL PROVISIONS OF THE INCOME TAX ACT, 1961 ( THE ACT ). THE RETURN WAS PROCESSED UNDER SECTION 143(1) ACCEPTING THE RETURNED INCOME AND SUBSEQUENTLY AFTER ISSUANCE OF NOTICE ETC. U/S 143(2) ETC. WAS SELECTED FOR SCRUTINY ASSESSMENT. THE AO AFTER REFERRING THE TRANSFER PRICING ISSUES TO THE TPO PASSED THE ASSESSMENT ORDER U/S 143(3) RESULTING IN VARIOUS ADDITIONS INCLUDING THE ADDITIONS PROPOSED BY THE TPO THEREBY REDUCING THE ASSESSED LOSS T O RS.98,18,940/ - AS AGAINST THE CLAIMED LOSS OF RS.3,46,86,270/ - . 6. AGGRIEVED BY THIS THE ASSESSEE CAME IN APPEAL BEFORE THE CIT(A) WHERE THE ASSESSEE SUCCEEDED PARTLY. AGGRIEVED BY THIS BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL. 7. IN ORDER TO ADDRESS THE ISSUES CANVASSED BEFORE US IT IS APPROPRIATE TO BRING OUT FROM THE RECORD THE BACKGROUND OF THE ASSESSEE. AS PER THE TRANSFER PRICING STUDY MADE AVAILABLE BY THE ASSESSEE THE PROFILE OF THE AVL GROUP AND OF THE ASSESSEE IS STATED AS UNDER: - 2 .1. PROFILE OF AVL GROUP FOUNDED IN 1948, AVL IS THE WORLD'S LARGEST PRIVATELY OWNED AND INDEPENDENT COMPANY SPECIALIZED IN THE DESIGN AND DEVELOPMENT OF INTERNAL COMBUSTION ENGINES, CONVENTIONAL AND HYBRID POWERTRAINS, POWERTRAIN TEST INSTRUMENTATION AND TEST SYSTEMS WITH GLOBAL MANPOWER OF OVER 4,000 EMPLOYEES IN MORE THAN 45 COUNTRIES. POWERTRAIN ENGINEERING DIVISION ACTIVITIES EMBRACE ALL FUNCTIONS FROM CONCEPT DEFINITION THROUGH TO PRODUCTION DEVELOPMENT. SUPPORTED BY COMPREHENSIVE IN - HOUSE RESEARCH, AVL SETS NEW BENCHMARKS WORLD - WIDE. I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 5 OF 12 AVL HAS BEEN ACTIVE IN THE DEVELOPMENT OF HYBRID DRIVES FOR OVER 15 YEARS AND HAS EXPANDED CAPACITY SIGNIFICANTLY IN RECENT YEARS TO MEET A RAPIDLY INCREASING DEMAND FOR DEVELOPMENT AND TESTING SOLUTIONS. MANY POWERTRAIN DEVELOPMENT AND TESTING PROJECTS HAVE BEEN COMPLETED BY AVL ENGINEERING CENTRES IN EUROPE AND THE U.S.A. FOR CUSTOMERS AROUND THE GLOBE. WITH WIDE - RANGING PRODUCTION ENGINEERING EXPERIENCE, INCLUDING THE PLANNING OF ENGINE AND TRANSMISSION MANUFACTURING F ACILITIES, PLUS CUTTING EDGE - APPLICATION AND RELIABILITY ENGINEERING CAPABILITIES, AVL IS FULLY EQUIPPED TO PROVIDE ITS CUSTOMERS WITH MATURE SOLUTIONS READY FOR SERIES PRODUCTION. AIL AVL'S SOFTWARE AND METHODOLOGY DEVELOPMENT CAPABILITIES FOR ENGINE AND POWERTRAIN SIMULATION ARE CONCENTRATED IN ITS 'SOFTWARE HOUSE', ADVANCED SIMULATION TECHNOLOGIES. THE AVL - DESIGNED SOFTWARE TOOLS REPRESENT STATE - OF THE - ART TECHNOLOGY BASED ON LONG EXPERIENCE IN ENGINE AND DRIVETRAIN DEVELOPMENT. THESE TOOLS ARE NOT ONLY USED IN - HOUSE, BUT ALSO BY LEADING ENGINE AND VEHICLE MANUFACTURER'S WORLDWIDE. AVL IS A MANUFACTURER AND SYSTEM INTEGRATOR OF COMPLETE TEST BED SYSTEMS DELIVERING TECHNOLOGICALLY SUPERIOR TOOLS FOR SPECIFIC TASKS, WHICH CAN BE INDIVIDUALLY ADAPTED TO THE NEEDS OF DIFFERENT GROUP OF USER. THE INTELLIGENT MODULAR ORGANIZATION OF THE PRODUCT RANGE ENSURES OPTIMUM FLEXIBILITY, FROM PROFESSIONAL SINGLE - USER APPLICATIONS TO FULLY INTEGRATED SYSTEMS DESIGNED TO MAXIMIZE PRODUCTIVITY. PROVIDED BELOW IS A BRIEF DE SCRIPTION OF EACH OF THE SEGMENTS IN WHICH THE AVL GROUP OPERATES: DEVELOPMENT OF POWERTRAIN SYSTEMS : AVL DEVELOPS AND IMPROVES ALL KINDS OF POWERTRAIN SYSTEMS AND IS A COMPETENT PARTNER TO THE ENGINE AND AUTOMOTIVE INDUSTRY. IN ADDITION, AVL DEVELOPS AND MARKETS THE SIMULATION METHOD THAT ARE NECESSARY FOR THE DEVELOPMENT WORK. ENGINE - INSTRUMENTATION AND TEST SYSTEMS : THE PRODUCTS OF THIS BUSINESS AREA COMPRISE ALL THE INSTRUMENTS AND SYSTEMS REQUIRED FOR ENGINE AND VEHICLE TESTING. IN ITS ROLE AS GENERAL CONTRACTOR , AVL ASSUMES RESPONSIBILITY FOR TEST BEDS, TECHNOLOGY AND BUILDINGS. THE RANGE OF SERVICES COVERS CONSULTANCY, TECHNOLOGY DEVELOPMENT AND CONCEPT PLANNING, DETAILED PLANNING, GLOBAL PROCUREMENT, COMPONENT SUPPLY, BUILDING, INSTALLATION, COMMISS IONING AND PROJECT MANAGEMENT. 2.2. PROFILE OF AVLTC AVLTC SERVES AS A SINGLE WINDOW FACILITY OFFERING A BROAD RANGE OF POWERTRAIN DESIGN DEVELOPMENT AND TESTING SERVICES TO THE INDIAN AUTOMOTIVE INDUSTRY. THE WORLDWIDE NETWORK OF AVLTC AND AVL S INSTRUM ENTATION & TEST SYSTEMS DIVISIONS PROVIDES ADDITIONAL SUPPORT. THIS POOL OF IN - HOUSE EXPERTISE AND RESOURCES ENSURES RAPID RESPONSE TO CUSTOMER REQUIREMENTS. AVLTC HAS COMPLETE CAPABILITY FOR SIMULATION, ANALYSIS & DESIGN, ENGINE & POWERTRAIN DEVELOPMENT, CALIBRATION, VALIDATION, ETC. I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 6 OF 12 8. THE SHAREHOLDING PATTERN DISCLOSED IN THE TP STUDY REPORT IS SHOWN AS UNDER: - 9. THE RECORD SHOWS THAT BOTH THE ASSESSEE AND THE TPO CHOSE TNMM AS THE MOST APPROPRIATE METHOD AND EVEN ON PLI BOTH WERE IN AGREEMENT THAT OP/TC WAS TO BE TAKEN. THE COPY OF TPO S ORDER IT IS SEEN IS FOUND PLACED AT PAGES 248 - 294 OF THE RECORD. IT IS FURTHER SEEN THAT DETAILED OBJECTIONS WERE MADE BY THE ASSESSEE BEFORE THE CIT(A) IN SUPPORT OF THE FOLLOWING GROUND RAISED BEFORE THE C IT(A): - 4.2. THE LD.TPO ERRED TO CONSIDER AND APPRECIATE THE BUSINESS MODEL FOLLOWED BY THE APPELLANT AND ITS AES. 10. IN SUPPORT OF THE SAID GROUND, THE ASSESSEE S DETAILED OBJECTIONS ARE FOUND PLACED AT PAGES 338 TO 342. FOR READY - REFERENCE THE SAME IS REPRODUCED BELOW: - GROUND NO. 4.2 - THE LD. TPO ERRED TO CONSIDER AND APPRECIATE THE BUSINESS MODEL FOLLOWED BY THE APPELLANT AND ITS AES. 2.40 AT THE OUTSET, THE APPELLANT STRONGLY OBJECTS TO THE FACT THAT THE LD. TPO HAS WRONGLY CLASSIFIED THE AP PELLANT AS A TECHNICAL SUPPORT SERVICE PROVIDER. IN TURN THE COMPARABLES USED BY THE LD. TPO ARE ALL ENGAGED IN HIGH - END TECHNICAL CONSULTANCY SERVICES AND HENCE REFLECTS HIGH MARGINS COMMENSURATE WITH THE FUNCTIONS PROVIDED BY THEM. THE BUSINESS MODEL OF AVLTC IS SUCH THAT IT CAN CATER TO LIMITED REQUIREMENTS OF THE ULTIMATE CUSTOMER. IN CASE THE CUSTOMER REQUIRES HIGH - END SERVICES LIKE TRUCK - ENGINES, BUS ENGINES, RAILWAY ENGINES, ETC. THEN THE APPELLANT DOES NOT HAVE THE REQUISITE SKILLS AND INFRASTRUCTUR E TO CATER. SET OUT BELOW IS THE BUSINESS MODEL OF THE APPELLANT FOR YOUR HONOUR'S KIND PERUSAL: 2.41 BUSINESS MODEL I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 7 OF 12 AVLTC SERVES A BROAD RANGE OF POWERTRAIN DESIGN DEVELOPMENT AND TESTING SERVICES TO THE AUTOMOTIVE INDUSTRY. AVLTC HAS CAPABILITY FOR SIMULATION, ANALYSIS & DESIGN, ENGINE & POWERTRAIN DEVELOPMENT, CALIBRATION, VALIDATION, ETC. THE FIRST REQUIREMENT IN POWERTRAIN ENGINEERING PROCESS IS, TO ESTABLISH CLEAR BOUNDARIES AND EXPECTATION OF THE PROJECT. ONCE THE PROJECT IS DEFINED, PROGRAM MA NAGEMENT DISCIPLINES ARE USED TO BUILD THE MOST APPROPRIATE PROJECT TEAM. THE NEXT STAGE USUALLY CONSISTS OF DETAIL DESIGN SUPPORTED BY FULL ANALYSIS. AVLTC USES MAJOR CAD PACKAGES TO OFFER COMPATIBILITY WITH CLIENT PREFERENCE AND APPLIES ADVANCED SIMULATI ON AND ANALYSIS TOOLS INCLUDING AVL'S (AE) SOFTWARE SUITE TO GUIDE AND VALIDATE THE DESIGN AT AN EARLY STAGE. PRELIMINARY DESIGN RELEASES ARE MADE TO PERMIT PROTOTYPE MANUFACTURE OF PARTS. THE DEVELOPMENT WORK IS CARRIED OUT USING THE MOST MODERN TEST FACI LITIES AVAILABLE, INCLUDING STATE - OF - ART EMISSION TEST SYSTEM AND COMBUSTION & ANALYSIS EQUIPMENT, WHICH COVERS A RANGE FROM A SMALL TWO AND THREE WHEELER ENGINES TO SMALL COMMERCIAL VEHICLE AND STATIONARY ENGINES. ALL KINDS OF DEVELOPMENT INCLUDING TESTIN G AND ANALYSIS IS DONE USING DIFFERENT TEST BEDS, WHICH MAY BE DIFFERENT, TYPES DEPENDING UPON THEIR CAPABILITIES AND FEATURES. THE SERVICES OFFERED BY AVLTC CAN BE DIVIDED INTO TWO CATEGORIES MENTIONED BELOW ALONG WITH THE PROCESS FLOW CHART: 1. DES IGN & DEVELOPMENT SERVICES * DESIGN AND SIMULATION / CALCULATION OF ENGINE * PERFORMANCE MEASUREMENT AND EMISSION DEVELOPMENT * ENGINE CONTROL UNIT (ECU), SOFTWARE DEVELOPMENT & CALIBRATION AND VEHICLE CALIBRATION TO MEET INDIAN CLIMATE, FUEL AND DRIVABILITY * ALTERNATIVE FUEL (CNG/LPG) DEVELOPMENT * CALCULATION, FINITE ELEMENT (FE) ANALYSIS & DYNAMIC SIMULATION * DURABILITY TESTING AND ANALYSIS * MASS EMISSION TESTING * OIL/FUEL TESTING * MECHANICAL DEVELOPMENT OF ENGINE S II. ANALYSIS & SIMULATION SERVICES * PERFORMANCE & FUEL CONSUMPTION PERDITION * THERMAL LOAD AND HEAT FLOW CALCULATION * COMBUSTION AND EMISSION CALCULATION * STRUCTURAL STRENGTH AND DYNAMIC ANALYSIS IT MAY BE NOTED THAT THE APPELLANT PROVIDES RESEARCH & DEVELOPMENT SERVICES TO ITS AE'S AS WELL AS AVAILS THESE SERVICES FROM THE AE'S. THE FOLLOWING DESCRIBES THE CIRCUMSTANCES IN WHICH EACH OF THE FOLLOWING SERVICES IS ENTERED: I. PROVISION OF SERVICES: THE AES, AFTER THE CONTRACT HAS BEEN AWA RDED TO THEM BY THE ULTIMATE CUSTOMER, SUBCONTRACTS DIFFERENT TASKS PROJECT TO DIFFERENT AVL GROUP COMPANIES DEPENDING ON THEIR CORE COMPETENCY. THE FINAL SERVICE PROVIDED TO THE END - USER GENERALLY I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 8 OF 12 REQUIRES INTEGRATION OF DIFFERENT SERVICES, SUBCONTRACTED TO DIFFERENT AVL GROUP COMPANIES. AVLTC PROVIDES TWO TYPES OF SERVICES TO AES: A) MESHING: MESHING DEPARTMENT CREATES THE GRID OF THE STRUCTURE (3D CAD MODEL) IN SOFTWARE TOOLS WHICH IS REQUIRED FOR FINITE ELEMENT ANALYSIS. IN SHORT, MESHING IS A PREREQ UISITE OF UNITE ELEMENT ANALYSIS. THIS FINITE ELEMENT ANALYSIS METHOD CAN BE PERFORMED IN READYMADE SOFTWARE. MESHING MEANS DIVIDING THE TOTAL STRUCTURE (3D CAD MODEL) IN VERY SMALL ELEMENTS OR PARTS USING FINITE ELEMENT SOFTWARE. B) DESIGN: THE DESIGN T EAM IN AVLTC HAS ENGINEERS WHO HAVE UNDERGONE PROJECT RELATED TRAINING AT AVL GRAZ FOR UNDERSTANDING THE SPECIFIC REQUIREMENTS OF AVL DESIGN METHODOLOGY AS APPLIED TO AUTOMOTIVE ENGINE COMPONENTS AND SYSTEMS. THE TECHNICAL LEAD FOR DESIGN PROJECTS INVOLVIN G COMMERCIAL VEHICLES TO BE DEVELOPED TO MEET THE MORE STRINGENT EMISSION NORMS ARE TAKEN BY AVL GRAZ. THE INITIAL CONCEPT AND ENGINE REQUIREMENTS ARE FINALIZED BY AVL GRAZ IN CONSULTATION WITH THE CUSTOMER. LATER ACTIVITIES LIKE LAYING OUT OF THE SYSTEM D ESIGN AND DETAILED DRAWINGS IS HANDLED BY ENGINEERS FROM TECHNICAL CENTRE UNDER THE OVERALL GUIDANCE OF AVL GRAZ DESIGN EXPERTS. THE SOFTWARE TOOL IS PURCHASED TO DELIVER THE PROJECT; THE INVOICE OF THE SAME IS ATTACHED AS ANNEXURE - 1 OF APPENDIX XI. THE FINAL PRODUCT IS IN THE NATURE OF THE DESIGN WHICH IS PROVIDED AS A SOFTCOPY TO THE AE. THE LIFE CYCLE OF A PROJECT IN RELATION TO THE APPELLANT CAN BE EXPLAINED AS A DIAGRAM PRESENTED BELOW: DIAGRAM II. AVAILING OF SERVICES: IN THIS REGARD IT IS W ORTH MENTIONING THAT AVLTC HAD SECURED A PROJECT OF TATA MOTORS LTD. THE WORK ENTAILED CONCEPT DESIGN, LAYOUT DESIGN, DETAIL DESIGN, PROCUREMENT/PROJECT LOGISTICS, MECHANICAL DEVELOPMENT, ENGINE CERTIFICATION ETC. HOWEVER, AVLTC DOES NOT HAVE THE EXPERTISE TO HANDLE THE PROJECT AND HENCE IT WAS SUB - CONTRACTED TO AES. AVLTC IS INVOLVED ONLY IN LIAISING ACTIVITY FOR THIS PROJECT. THE CONTRACTUAL LIABILITY OF THE PROJECT IS BORNE BY AVL LIST, GMBH. THE LIABILITY STATEMENT IN THIS REGARD HAS BEEN ATTACHED AS AN NEXURE - 2 OF APPENDIX XI. THE ENTIRE TECHNICAL WORK IS EXECUTED BY AE. THE NATURE OF THE SERVICES AVAILED BY THE APPELLANT FROM THE AES ARE OF MUCH HIGHER GRADE THAN THE SERVICES PROVIDED BY IT TO ITS AE'S. 2.42 DURING THE YEAR, IN RESPECT OF THE INT ERNATIONAL TRANSACTIONS RELATING TO PROVISION OF SERVICES, THE MAIN CONTRACTOR TO THE PROJECT IS AVL LIST, GMBH. HENCE THE PRIMARY RESPONSIBILITY OF THE DELIVERY TO THE FINAL CUSTOMER IS OF THAT ENTITY. THIS WOULD ENTAIL, MAINTAINING ADEQUATE INFRASTRUCTUR E, RESOURCE, SKILLS, IN TERMS OF QUALIFIED PEOPLE AND QUALITY ASSURANCE OF THE DELIVERED PRODUCT. ONLY PART OF THE MAIN CONTRACT IS SUBCONTRACTED TO AVLTC. AVLTC IS INVOLVED ONLY IN DESIGN DEVELOPMENT AND TESTING SERVICES FOR THE AE. IT FUNCTIONS AS A CONT RACT SERVICE PROVIDER TO ITS AE. AVLTC USES MAJOR CAD PACKAGES TO PROVIDE THESE DESIGN SERVICES. I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 9 OF 12 IT IS IN NO WAY, INVOLVED IN ANY FORM OF CONSULTANCY; INSTEAD IT PROVIDES DESIGNS BASED ON THE PARAMETERS REQUIRED BY CUSTOMER / THE AE. THE FINAL PRODUCT DELI VERED TO THE AE IS A DESIGN THAT IS IN SOFTCOPY. THE PURCHASE ORDER OF THE SOFTWARE PURCHASED FOR THE PROVISION OF THESE SERVICES IS ALSO ATTACHED AS ANNEXURE - 1 OF APPENDIX XI. 2.43 THIS WAS FURTHER SUBSTANTIATED BEFORE THE LD. TPO BY THE FACT THAT AVLTC AVAILS SERVICES FROM AE OF THE SAME QUANTUM IN TERMS OF VALUE. THE NATURE OF THE SERVICES AVAILED BY IT ARE OF MUCH HIGHER GRADE THAN THE SERVICES PROVIDED BY IT. IN THIS REGARD IT IS WORTH MENTIONING THAT AVLTC HAD SECURED A PROJECT OF TATA MOTORS L TD. THE WORK ENTAILED CONCEPT DESIGN, LAYOUT DESIGN, DETAIL DESIGN, PROCUREMENT/PROJECT LOGISTICS, MECHANICAL DEVELOPMENT, ENGINE CERTIFICATION ETC. HOWEVER, AVLTC DID NOT HAVE THE EXPERTISE TO HANDLE THE PROJECT AND HENCE IT WAS SUB - CONTRACTED TO AES. AVL TC IS INVOLVED ONLY IN LIAISING ACTIVITY FOR THIS PROJECT. THE ENTIRE TECHNICAL WORK IS EXECUTED BY AE. THE CONTRACTUAL LIABILITY FOR THESE SERVICES LIE WITH THE AE, REFER ANNEXURE - 2 OF APPENDIX XI FOR THE PURPOSE. 11. ON A CONSIDERATION OF THE IMPUGNED ORDER IT IS SEEN THAT THERE IS NOT EVEN A WHISPER OF A DISCUSSION WHATSOEVER ON THIS ASPECT. A PERUSAL OF THE IMPUGNED ORDER AT PAGE 5 PARA 5 TO 5.4 AT PAGE 6 SHOWS THAT ON THE ISSUES AGITATED IN PAPER BOOK PAGE 338 TO 342 THE LD. CIT(A ) PROCEED ED TO TAKE ALL THESE GROUNDS AS BEING LINKED TO EACH OTHER. IN PARA 6 THE LD. CIT(A) SUMS UP THE ISSUES TO BE CONSIDERED IN THE FOLLOWING MANNER: - 6. THE APPELLANT RAISED VARIOUS ISSUES DURING THE COURSE OF THE TP PROCEEDINGS. THE SUBMISSIONS OF THE APPELLANT AS WELL AS ORDER OF THE TPO ARE CONSIDERED CAREFULLY. THE FOLLOWING ISSUES EMANATE FO R A DECISION IN THIS CASE: - 1. USE OF SINGLE YEAR DATE VS MULTIPLE YEAR DATA. 2. USE OF POWERS U/S 133(6) BY THE TPO. 3. REJECTION OF THE TP DOCUMENTATION BY THE TPO AND THE COMPARABLES. 4. WHICH SHOULD BE COMPARABLES IN THIS CASE AND HOW THEY SHOULD BE SELECTED? 5. WHETHER ANY ECONOMIC ADJUSTMENT IN THIS CASE AND HOW THEY SHOULD BE SELECTED? 6. CORRECT COMPUTATION OF THE MARGIN OF THE APPELLANT - THE ISSUE OF FOREIGN EXCHA NGE FLUCTUATION LOASS AS OPERATING IN NATURE. 7. HOW TO COMPUTE THE +/ - 5% AS PER PROVISO TO SECTION 92C(2) OF THE IT ACT? 12. ON A READING OF THE SAME THE LD. SR.DR WHO HAD INITIALLY TAKEN THE STAND THAT NON - DISCUSSION WOULD AMOUNT TO NON - ACCEPTANCE FRO M A READING I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 10 OF 12 OF THE ABOVE WAS UNABLE TO POINT OUT WHETHER THE ISSUE WAS CONSIDERED AT ALL. IN THE CIRCUMSTANCES IT WAS HER SUBMISSION THAT IF THE BUSINESS MODEL NEEDS TO BE ADDRESSED FIRST THEN THE FINDING OF THE CIT(A) GIVING PART RELIEF TO THE ASSESSEE S HOULD ALSO BE SET ASIDE AS THE REMAINING ISSUES IN BOTH THE ASSESSEE S APPEAL AND THE DEPARTMENT S APPEAL BE TREATED ON THE SAME PLATFORM. THUS THE GROUNDS IN THE DEPARTMENTAL APPEAL ALSO SHOULD BE RESTORED BACK. THE LD. AR STATED THAT QUA THE REMAINING GROUNDS ON BEHALF OF THE ASSESSEE THE SUBMISSIONS ARE IN THE SYNOPSIS. HOWEVER HE AGREED THAT IN THE CIRCUMSTANCES THE ISSUE MAY BE RESTORED SO AS TO ADDRESS THE FIRST ISSUE FIRST. 13. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES IN THE CONTEXT OF T HE FACTS AS AVAILABLE ON RECORD. IT IS SEEN THAT THE DEPARTMENT HAS TAKEN THE FOLLOWING GROUNDS: - 1. THE LD. CIT(A HAS ERRED ON FACTS IN RESTRICTING THE ADJUSTMENT U/S 92CA TO RS.2,27,111,706/ - AS AGAINST RS.2,47,70,365/ - . (A) THE LD.CIT(A) HAS ERRED IN DELETING THE M/S SEMAC LTD. FROM THE FINAL LIST OF COMPARABLES USED BY THE TPO IN THE TPO AUDIT MERELY ON THE OBJECTIONS RAISED BY THE ASSESSEE. (B) THE LD.CIT(A) ERRED IN DELETING THIS COMPANY MERELY ON THE SUBMISSION OF THE ASSESSEE AND WITHOUT GOING FACTS O F THE CASE AND OBTAINING COMMENTS OF THE TPO IN THAT REGARDS. 2. WHETHER THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE ON ACCOUNT OF PROVISION OF DIMINUTION OF VALUE OF INVENTORY AMOUNTING TO RS.34,797/ - IGNORING THE FACTS THAT THE TIME OF ASSESSMENT PROCEEDINGS, ASSESSEE HAS FAILED TO SUPPLY THE RELEVANT EVIDENCES IN THE FORMS OF INVENTORY, METHOD AND VALUATION THEREOF SO AS TO ENABLE ONE TO INFER WHETHER THE LIABILITY WAS ASCERTAINED OR UNASCERTAINED. 3. THE APPELLANT CRAVES LEAVE FO R RESERVING THE RIGHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) OF APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. 14. IN VIEW OF THE FACT THAT THE ISSUE HAS TO BE RESTORED TO THE TPO/AO FOR FIRST CONSIDERATION ON MERITS THE FU NDAMENTAL ISSUE OF CHARACTERIZATION OF THE ASSESSEE ON THE BASIS OF ITS FAR THE APPEAL OF THE REVENUE ACCORDINGLY NECESSARILY ALSO HAS TO BE ALLOWED AS THE ENTIRE ISSUE IS RESTORED . I N THE FACTS OF THE PRESENT CASE WHERE THE LD. AR HAS TAKEN THE ARGUMENT THAT THE INTENSITY OF FUNCTIONS WITH THE NON - AES ARE HIGHER THAN THE INTENSITY OF FUNCTIONS WITH THE AE S THE NUANCED DIFFERENCE IF ANY ON THE BUSINESS MODEL OF THE ASSESSEE HAS TO BE SEEN . THIS DIFFERENCE IN THE INTENSITY OF FUNCTIONS I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 11 OF 12 IS STATED TO BE IMP ACTING THE CHARACTERIZATION OF THE BUSINESS MODEL ITSELF WHICH DIFFERENCE IS STATED TO BE NOT CONSIDERED EITHER BY THE DRP OR THE TPO A POSITION WHICH IS BORNE OUT FROM THE RECORD. WE FIND THAT IN THE CASE OF BMW INDIA PVT. LTD. VS ACIT (2014 ) 146 ITD 165 (DEL.) WHILE EXAMINING THE PLEA OF THE TAX PAYER THAT IT WAS A ROUTINE DISTRIBUTOR IT WAS FOUND ON ANALYZING THE AGREEMENTS AND CONSIDERING THE CONDUCT AS BORNE OUT FROM THE RECORD THAT BASED ON ITS INTENSITY OF FUNCTIONS PERFORMED THAT THE TAX PAYER WAS NOT A ROUTINE NORMAL DISTRIBUTOR. ANALYZING THE AGREEMENTS AND THE FUNCTIONS UNDERTAKEN THE TAX PAYER S CLAIM THAT IT WAS A NORMAL DISTRIBUTOR WAS NOT ACCEPTED AND THE TAX PAYER ON AN ANALYSIS OF ITS AGREEMENT WITH ITS AE WAS FOUND TO HAVE PERFORMED A GRE ATER INTENSITY OF FUNCTION S AS OPPOSED TO A ROUTINE DISTRIBUTOR WHO MAY NOT BE CALLED UPON TO PERFORM THE INTENSITY OF FUNCTIONS UNDERTAKEN BY THE BMW . TH US THE RELEVAN CE OF THE INTENSITY OF FUNCTIONS PERFORMED AS A RELEVANT CRITERIA FOR CHARACTERIZING THE TAX PAYER AS PER JUDICIAL PRECEDENT IS WELL - ACCEPTED. THE SAID RATIO IT IS SEEN HAS BEEN FOLLOWED IN BOSE CORPORATION OF INDIA PVT. LTD. VS ACIT (2014) 150 ITD 609 (DELHI) AND AGAIN IN BMW INDIA PVT. LTD. VS ACIT (2013) 28 ITR (T) 718 (DEL. TRIB.). THUS CONSIDERATION OF THE DIFFERENCE IN THE INTENSITY OF FUNCTIONS WITH NON - AES AS COMPARABLE TO LESSER INTENSITY OF FUNCTION WITH AE S ALSO AS PER JUDICIAL PRECEDENT ON FACTS IS WARRANTED. THE OBJECTIONS TO THE BUSINESS MODEL AS CONSID ERED BY THE TPO WE FIND WERE RAISED BEFORE THE DRP AND THESE REMAIN UNADDRESSED THE SAID POSITION IS ACCEPTED BY THE PARTIES. IN THESE PECULIAR FACTS AND CIRCUMSTANCES, WE FIND THAT THE SUBMISSIONS OF THE LD. SR. DR INASMUCH THAT THE RELIEF GRANTED TO THE ASSESSEE RELATABLE TO THE EXCLUSION OF A COMPARABLE CHALLENGED BY THE REVENUE BEFORE THIS FORUM ALSO NEEDS TO BE SET ASIDE. THE SAID APPROACH WOULD IN ALL FAIRNESS BE APPROPRIATE AS ONCE THE ENTIRE EDIFICE OF THE BUSINESS MODEL FOR NON - APPRECIATION OF R ELEVANT FACTS IS DEMOLISHED THE OCCASION TO CONSIDER THE APPROPRIATENESS OF SELECTION OF THE COMPARABLES WITH THE DEMOLISHED EDIFICE DOES NOT ARISE. 15. ACCORDINGLY FOR THE DETAILED REASON GIVEN HEREINABOVE AND CONSIDERING THE ARGUMENTS OF THE PARTIES ON T HE GROUNDS AGITATED BEFORE US, WE SET ASIDE I.T.A .NO S . - 368 & 431 /DEL/2013 PAGE 12 OF 12 THE IMPUGNED ORDER . THE ISSUES ARE RESTORED BACK TO THE FILE OF THE AO/TPO WITH THE ABOVE DIRECTI O N S. 16. SINCE THE ENTIRE ISSUE INCLUDING THE ISSUES IN THE DEPARTMENTAL APPEAL IS BEING RESTORED AS PER THE PLE A OF THE SR.DR , CONSEQUENTLY THE FINDING ON DIMINUTION OF VALUE OF INVENTORY CHALLENGED BY THE REVENUE IN ITS APPEAL ; AND THE ISSUE OF FOREIGN EXCHANGE FLUCTUATION LOSS TREATED AS A PART OF OPERATING IN NATURE ASSAILED BY THE ASSESSEE IN ITS APPEAL IS ALS O AS AGREED BY THE PARTIES ARE RESTORED BACK TO THE TPO/AO WITH THE DIRECTION TO FIRST ADDRESS THE FUNDAMENTALS. 17. ACCORDINGLY, THE TPO/AO IS DIRECTED TO PASS A SPEAKING ORDER IN ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. 1 8 . IN THE RESULT THE APPEALS OF THE ASSESSEE AND THE REVENUE ARE ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 0 4 T H OF SEPTEMBER , 2015. S D / - S D / - ( N.K.SAINI ) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 0 4 /09 /2015 * AMIT KUMAR * COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI