M/s Snecma HAL Aerospace Private Limited, Bangalore V. ITO, Bangalore

ITA 432/BANG/2015

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4990 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 1 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 23-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO
• Keywords: Depreciation; Transfer pricing; International transaction; Unabsorbed depreciation
• Section: 143(3); 234B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER IT(TP)A NO.432/BANG/2015 ASSESSMENT YEAR : 2010-11 M/S SNECMA HAL AEROSPACE PVT. LTD., NO.140/1, HOODY WHITEFIELD, BANGALORE-560 066. PAN AAJCS 4358 M VS. THE INCOME-TAX OFFICER, WARD-6(1)(3), BANGALORE. APPELLANT RESPONDENT ASSESSEE BY : SHRI VISHAL KALRA, ADVOCATE REVENUE BY : SHRI C.H SUNDAR RAO, CIT DATE OF HEARING : 21.03.2019 DATE OF PRONOUNCEMENT : 17.05.2019 O R D E R PER B.R BASKARAN, ACCOUNTANT MEMBER THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) R.W.S. 1 44C(13) OF THE ACT FOR ASSESSMENT YEAR 2010-11 IN PURSUANCE OF DIRECTI ONS GIVEN BY LD DISPUTE RESOLUTION PANEL (DRP). 2. THE REVISED GROUNDS OF APPEAL FILED BY THE A SSESSEE READ AS UNDER:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSING OFFICER ('AO') HAS ERRED IN IT(TP)A NO.432/BANG/2015 PAGE 2 OF 11 COMPLETING THE ASSESSMENT OF THE APPELLANT AT INR 1,00,99,810/- AS AGAINST NIL INCOME RETURNED BY THE APPELLANT. GROUNDS OF APPEAL RELATING TO TRANSFER PRICING ADJUSTMENTS: 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AD / DISPUTE RESOLUTION PANEL (DRP') / TRANSFER PRICING OFFICER ('TPO') HAVE ERRE D IN MAKING TP ADJUSTMENT OF INR 1,00,99,809 IN RELATION TO THE INTERNATIONAL TRANSACTION PERTAININ G TO SALE OF FINISHED GOODS ALLEGING THE SAME TO NOT TO BE AT ARM'S LENGTH AS PER THE PROVISIONS OF CHAPTER-X. 3. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, TPO / DRIP / AD HAVE ERRED IN NOT CONSIDERING, (I) TALBROS ENGINEERING LIMITED, AND ( II) JOTINDRA STEEL & TUBES LIMITED, AS VALID COMPARABLE COMPANIES, WITHOUT PROVIDING ANY COGENT REASON FOR THE SAME. 4. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, AO/ DRP / TPO ERRED IN EXCLUDING INTEREST ON WORKING CAPITAL LOAN FROM OPERATING EXPENSES, WHILE COMPUTING NET OPERATING MARGINS OF (I) JMT AUTO LIMITED, AND (U) SAMKRG PISTONS & RINGS LIMITED, WITHOUT PROVIDING ANY COGENT REASON FOR TH E SAME. 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE AD/ DRP/TPO HAVE ERRED IN DISREGARDING THE SUBMISSIONS OF THE APPELLANT FOR CONSIDERING CASH PROFIT UPON COST AS THE PROFIT LEVEL INDICATOR ('PL I'), WITHOUT ANY COGENT REASON. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/DRP/ TPO HAVE ERRED IN NOT PROVIDING ANY COMPARABILITY, ECONOMIC AND CAPACITY UTILIZATION ADJUSTMENTS, AS REQUIRED UNDER RULE 10B(1)(E)(III) OF THE INCOME TAX RULES 1962 ('RULES '). IT(TP)A NO.432/BANG/2015 PAGE 3 OF 11 7. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP I AO / TPO HAVE ERRED IN NOT PROVIDING THE APPELLANT THE BENEFIT OF (+ / -) 5% RANGE AS PROVIDED BY THE PROVISO TO SECTION 92C(2) OF THE ACT. OTHER GROUNDS OF APPEAL: 8. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP HAVE ERRED IN NOT ALLOWING THE DEDUCTION UNDER SECTION 1 OB OF THE ACT, IN RESPECT OF PROFITS OF THE 100% EXPORT ORIEN TED UNIT (EOU'). 9. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO I DRP HAVE ERRED IN SETTING OFF BROUGHT FORWARD BUSINESS LOSSES AND UNABSORBED DEPRECIATION WHICH WERE PERTAINING TO THE EOU, AGAINST THE PROFIT OF THE EOU, BEFORE COMPUTING DEDUCTION UNDER SECTION L0B OF THE ACT. 10. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP HAVE ERRED IN NOT ALLOWING SET-OFF OF BROUGHT FORWARD BUSINESS LOSSES AND UNABSORBED DEPRECIATION AVAILABLE TO THE APPELLANT, AGAINST THE INCOME ASSESSED, POST THE ADJUSTMENTS MADE BY TPO / AO. 11. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN CHARGING INTEREST UNDER SECTIONS 234B AND 2340 OF THE ACT. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF M ANUFACTURE AND EXPORT OF AIRCRAFT ENGINE PARTS, COMPONENTS AND SUB -ASSEMBLIES. IT IS A 50:50 JOINT VENTURE BETWEEN HINDUSTAN AERONAUT ICS LIMITED, INDIA AND SNECMA S.A. FRANCE. IT COMMENCED ITS COM MERCIAL OPERATIONS ON 1 ST NOVEMBER, 2006 AS AN EXPORT ORIENTED UNIT. THE ASSESSEE HAS UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AE) IN THE FORM OF PURCHASE OF RAW IT(TP)A NO.432/BANG/2015 PAGE 4 OF 11 MATERIALS, EXPORT OF AIRCRAFT ENGINE PARTS AND REIM BURSEMENT OF EXPENSES. THE ASSESSEE APPLIED COST PLUS METHOD TO BENCH MARK TRANSACTIONS RELATING TO SALE OF AIRCRAFT ENGINE PA RTS AND ADOPTED OPERATING PROFIT TO OPERATING COST AS PROFIT LEVEL INDICATOR (PLI). THE TPO MADE ADJUSTMENTS AND THE SAME WAS CONFIRMED BY LD DRP. THE ASSESSEE IS AGGRIEVED BY THE SAME. BESID ES THAT, THE AO HAD MADE CERTAIN OTHER ADDITIONS AND THEY ARE ALSO CHALLENGED BY THE ASSESSEE. 4. THE GROUND NO.1 URGED BY THE ASSESSEE IS GEN ERAL IN NATURE. 5. THE GROUND NO.2 RELATES TO THE TRANSFER PRIC ING ADJUSTMENT MADE IN RESPECT OF SALE OF ENGINE PARTS BY WAY OF A DDITION OF STOCK DIFFERENCE AMOUNT. THE LD A.R SUBMITTED THAT THE A SSESSEE HAD SHOWN THE STOCK DIFFERENCE (CLOSING STOCK LESS OPEN ING STOCK) OF RS.352.72 LAKHS IN THE CREDIT SIDE OF PROFIT AND LO SS ACCOUNT. THE RAW MATERIAL CONSUMED WAS SHOWN AT RS.1172.18 LAKHS IN THE DEBIT SIDE OF PROFIT AND LOSS ACCOUNT. HOWEVER, WHILE CO MPUTING OPERATING MARGIN FOR THE PURPOSE OF T.P STUDY, THE ASSESSEE SHOWED THE COST OF GOODS SOLD AS RS.819.46 LAKHS (RS.1172. 18 (-) RS.352.72), I.E., THE ASSESSEE HAD NETTED OFF THE S TOCK DIFFERENCE CREDIT AGAINST RAW MATERIAL CONSUMED. THE TPO, HOW EVER, TOOK THE VIEW THAT THE ASSESSEE HAS BROUGHT THE STOCK DIFFER ENCE OF RS.352.72 LAKHS TO THE EXPENSES SIDE OF PROFIT AND LOSS ACCOUNT IN ORDER TO ARTIFICIALLY REDUCE THE OPERATING COST TO THE TAX PAYER AND COMPARABLES. HENCE HE DID NOT ACCEPT THE SAME AND ACCORDINGLY REWORKED THE PLI. THE LD DRP ALSO CONFIRMED THE SA ME. IT(TP)A NO.432/BANG/2015 PAGE 5 OF 11 6. WE HEARD THE PARTIES ON THIS ISSUE AND PERUS ED THE RECORD. IN THE FINANCIAL STATEMENTS, THE STOCK DIFFERENCE WAS SHOWN IN THE CREDIT SIDE OF PROFIT AND LOSS ACCOUNT, SINCE THE V ALUE OF CLOSING STOCK WAS MORE THAN THE VALUE OF OPENING STOCK. AC CORDINGLY, THE VALUE OF RAW MATERIAL CONSUMED WAS SHOWN AT GROSS F IGURE OF RS.1172.18 LAKHS. HOWEVER, WHILE COMPUTING PLI, TH E ASSESSEE HAS REDUCED THE VALUE OF STOCK DIFFERENCE FROM THE VALU E OF RAW MATERIAL CONSUMED, I.E., THE CREDIT FIGURE WAS NETTED OFF AG AINST THE DEBIT FIGURE. HENCE, THIS ACTION OF THE ASSESSEE WOULD N OT CHANGE THE NET PROFIT. ACCORDINGLY, WE ARE OF THE VIEW THAT THE T PO WAS NOT CORRECT IN PRESUMING THAT THE ASSESSEE HAS PURPOSEFULLY DON E THIS IN ORDER TO ARTIFICIALLY REDUCE THE OPERATING COST. EVEN IF IT IS ASSUMED FOR A MOMENT THAT THE TPO WAS RIGHT, THEN THE REDUCTION O F OPERATING COST SHOULD HAVE INCREASED THE PROFIT MARGIN, SINCE ANY REDUCTION IN EXPENSES SHOULD INCREASE THE PROFIT. WE NOTICE THA T THE ASSESSEE HAS ADOPTED DIFFERENT FORM OF DEPICTING THE PROFIT FOR THE PURPOSE OF PLI. SINCE THE CREDIT FIGURE HAS BEEN NETTED OFF A GAINST THE DEBIT FIGURE, IT SHALL NOT HAVE ANY EFFECT ON THE NET PRO FIT. WE NOTICE THAT AN IDENTICAL VIEW HAS BEEN EXPRESSED BY THE DELHI B ENCH OF TRIBUNAL IN THE CASE OF ITO VS. E VALUE SERVE.COM (2016)(52 ITR(T) 314). ACCORDINGLY, WE REJECT THE PRESUMPTION ENTERTAINED BY TPO HOLDING THE SAME AS FALLACIOUS. ACCORDINGLY WE DIRECT AO/ TPO TO RE-WORK THE PLI OF THE ASSESSEE. 7. GROUND NO.3 RELATES TO THE PLEA FOR INCLUSION OF TWO COMPARABLES NAMED M/S TALBROS ENGINEERING LIMITED A ND JOTINDRA STEEL & TUBES LIMITED. IT(TP)A NO.432/BANG/2015 PAGE 6 OF 11 8. WE HEARD THE PARTIES ON THIS ISSUE AND PERU SED THE RECORD. WE NOTICE THAT THE ASSESSEE HAS SOUGHT FOR INCLUSIO N OF BOTH THE COMPARABLES BEFORE THE TPO FOR THE FIRST TIME. IT IS THE CONTENTION OF THE ASSESSEE THAT THE TPO DID NOT INCLUDE THEM AND DID NOT PROVIDE ANY REASON FOR HIS ACTION AND THE LD DRP ALSO DID N OT EXAMINE THE FUNCTIONAL PROFILE OF BOTH THE COMPANIES. IN THE W RITTEN SUBMISSIONS, IT IS STATED THAT M/S TALBROS ENGINEER ING LIMITED IS ENGAGED IN THE BUSINESS OF PRODUCTION OF MOTOR VEHI CLE PARTS AND M/S JOTINDRA STEEL TUBES LIMITED IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF STEEL PIPES & TUBES. WE HAVE EARLIE R NOTICED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACT URE AND EXPORT OF AIRCRAFT ENGINE PARTS, COMPONENTS AND SUB-ASSEMB LIES. BEFORE US, THE ASSESSEE COULD NOT SHOW AS TO HOW THE FUNCT IONAL PROFILE OF BOTH THE COMPARABLE COMPANIES, REFERRED ABOVE, IS S IMILAR TO THAT OF ASSESSEE. ACCORDINGLY WE REJECT THIS GROUND OF THE ASSESSEE. 9. GROUND NO.4 RELATES TO THE COMPUTATION OF NET PROFIT MARGIN OF COMPARABLE COMPANIES. ACCORDING TO THE ASSESSEE, T HERE IS DIFFERENCE IN THE NET PROFIT MARGIN COMPUTED BY THE ASSESSEE AND THE TPO IN RESPECT OF COMPARABLE COMPANIES. ACCORD ING TO THE ASSESSEE, THE TPO HAS NOT PROVIDED THE METHODOLOGY OF COMPUTING NET PROFIT MARGIN OF COMPARABLE COMPANIES. FOR EXA MPLE, IN THE CASE OF JMT AUTO LIMITED, THE NET PROFIT MARGIN COM PUTED BY THE ASSESSEE WAS 5.60%, WHILE THE NET PROFIT MARGIN COM PUTED BY THE TPO WAS 11.69%. IT SHOWS THAT THERE IS DIFFERENCE IN THE METHODOLOGY ADOPTED BY THE ASSESSEE AND TPO FOR COM PUTING NET PROFIT MARGIN. IT IS A MATTER OF RECONCILIATION AN D HENCE, IN OUR VIEW, THE ASSESSEE SHOULD BE PROVIDED WITH AN OPPOR TUNITY TO IT(TP)A NO.432/BANG/2015 PAGE 7 OF 11 UNDERSTAND THE METHODOLOGY ADOPTED BY TPO OR EXPLAI N THE DIFFERENCE, IF ANY IN ORDER TO RECONCILE THE METHOD OLOGY ADOPTED BY IT WITH THAT OF THE TPO. ACCORDINGLY, THIS ISSUE REQU IRES FRESH EXAMINATION AT THE END OF AO/TPO. ACCORDINGLY WE R ESTORE THIS ISSUE TO THE FILE OF AO/TPO. 10. GROUND NO.5 RELATES TO THE COMPUTATION OF PLI BY ADOPTING CASH PROFIT. BY PLACING RELIANCE ON THE DECISION R ENDERED IN THE CASE OF BA CONTINUUM INDIA (P) LTD (2013)(28 ITR(T) 445), THE LD A.R SUBMITTED THAT THE CASH PROFIT SHOULD BE CONSID ERED FOR COMPUTING PLI. THE LD D.R, ON THE CONTRARY, SUBMIT TED THAT THE QUANTUM OF DEPRECIATION WOULD DEPEND UPON THE VALUE OF ASSETS. IF ANY OF THE COMPANIES HAVE REPLACED ITS ASSETS WITH LATEST ONE, THEN THE COST OF NEW ASSET WOULD BE HIGH RESULTING IN HI GH AMOUNT OF DEPRECIATION. ACCORDINGLY HE OPPOSED TO THE PLEA O F THE ASSESSEE. 11. WITH REGARD TO THIS CONTENTION OF THE ASSESS EE THAT THE CASH PROFIT (PROFIT BEFORE DEPRECIATION) SHOULD BE CONSI DERED AS PLI, WE NOTICE THAT THE SAME FINDS SUPPORT FROM THE DECISIO N RENDERED BY THE CO-ORDINATE BENCH IN THE CASE OF DCIT VS. M/S C ENTUM RAKON INDIA P LTD (IT(TP)A NO.472/BANG/2016 DATED 20-07-2 018), WHEREIN THE CO-ORDINATE BENCH HAS FOLLOWED THE DECISIONS RE NDERED IN THE CASE OF HONEYWELL TECHNOLOGY SOLUTIONS LAB VS. DCIT (61 SOT 61)(URO)(BANG.); 24/7 CUSTOMER.COM (P) LTD VS. DY C IT (2013)(140 ITD 344) AND BA CONTINUM INDIA P LTD VS. ACIT (2013 )(28 ITR (TRIB.) 445 (HYD). WE NOTICE THAT THE CO-ORDINATE BENCH HAS EXPRESSED THE VIEW THAT THE PROFIT BEFORE DEPRECIAT ION CAN BE TAKEN AS PLI, IF THERE IS SUBSTANTIAL VARIATION IN THE MA NNER OF CHARGING IT(TP)A NO.432/BANG/2015 PAGE 8 OF 11 DEPRECIATION BY THE ASSESSEE AND COMPARABLE COMPANI ES. ACCORDINGLY WE DIRECT THE AO/TPO TO TAKE INTO CONSI DERATION THE ABOVE SAID CONTENTION OF THE ASSESSEE. WE ALSO DIRE CT THE ASSESSEE TO FURNISH THE DETAILS TO PROVE THAT THERE IS SUBST ANTIAL VARIATION IN THE MANNER OF CHARGING DEPRECIATION. 12. GROUND NO.6 RELATES TO THE REJECTION OF CLAIM FOR CAPACITY UTILIZATION ADJUSTMENT. IT IS THE CONTENTION OF TH E ASSESSEE THAT IT HAS ACHIEVED CAPACITY UTILIZATION OF 72.10%, WHILE THE AVERAGE CAPACITY UTILIZATION OF COMPARABLE COMPANIES WAS 12 7.20%. THE DETAILS OF COMPARABLE COMPANIES ARE GIVEN AS UNDER: - COMPANY NAME ACTUAL TO INSTALLED CAPACITY JMT AUTO LIMITED ---- RANE ENGINE VALVES LTD 75.32 SAMKRG PISTONS & RINGS LTD 88.06 SUNDARAM FASTENERS LIMITED 218.24 AVERAGE % 127.20% WE NOTICE THAT THE AVERAGE CAPACITY UTILIZATION OF M/S RANE ENGINE VALVES LIMITED AND M/S SAMKRG PISTONS & RINGS LIMIT ED ARE COMPARABLE WITH THE ASSESSEE COMPANY. WE NOTICE TH AT THE CAPACITY UTILIZATION OF SUNDARAM FASTENERS LIMITED IS EXCEPTIONALLY HIGHER AT 218.24%. WE NOTICE THAT THE ASSESSEE ITS ELF HAS COMPUTED THE % OF CAPACITY UTILIZATION OF M/S SUNDARAM FASTE NERS LIMITED ON THE BASIS OF INSTALLED CAPACITY AND ACTUAL PRODUCTI ON. A CURSORY PERUSAL OF THE SAME, IN OUR VIEW, WOULD SHOW THAT T HERE MAY BE SOME ERROR IN IT, SINCE IT WOULD BE DIFFICULT TO AC HIEVE CAPACITY UTILIZATION OF 218% IN THE NORMAL INDUSTRY STANDARD . WE NOTICE THAT THE ASSESSEE HAS NOT ATTEMPTED TO ASCERTAIN THE FAC TS IN THIS REGARD IT(TP)A NO.432/BANG/2015 PAGE 9 OF 11 AND OFFER REASONABLE EXPLANATIONS. ACCORDINGLY WE DO NOT FIND MERIT IN THIS GROUND URGED BY THE ASSESSEE AND ACCORDINGL Y REJECT THE SAME. 13. GROUND NO.7 RELATES TO THE BENEFIT OF +/- 5% RANGE. IT IS CONSEQUENTIAL IN NATURE. IN VIEW OF THE ABOVE, THE ISSUE RELATING TO DETERMINATION OF ALP OF INTERNATIONAL TRANSACTIONS NEEDS TO BE RE- COMPUTED IN THE LIGHT OF DISCUSSIONS MADE SUPRA. 14. GROUND NO.8 & 9 RELATES TO THE COMPUTATION O F DEDUCTION U/S 10B OF THE ACT. ACCORDING TO LD A.R, THE AO WAS NO T JUSTIFIED IN DEDUCING THE BROUGHT FORWARD LOSSES AND UNABSORBED DEPRECIATION WHILE COMPUTING DEDUCTION U/S 10B OF THE ACT. THE LD A.R SUBMITTED THAT THE CONTENTION OF THE ASSESSEE IS SU PPORTED BY THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE C ASE OF CIT VS. YOKOGAWA INDIA LTD (2017)(391 ITR 274). ACCORDINGL Y WE RESTORE THIS ISSUE TO THE FILE OF THE AO FOR EXAMINING THE CLAIM OF THE ASSESSEE BY DULY CONSIDERING THE DECISION OF HONBL E SUPREME COURT, REFERRED ABOVE. 15. GROUND NO.10 RELATES TO THE METHOD OF ALLOW ING SET OFF OF BROUGHT FORWARD LOSSES AND UNABSORBED DEPRECIATION. THIS ISSUE ALSO NEEDS TO BE RESTORED TO THE FILE OF THE AO, AS THE DECISION TAKEN IN THE EARLIER GROUNDS SHALL HAVE IMPACT ON THIS IS SUE. ACCORDINGLY WE RESTORE THIS ISSUE TO THE FILE OF AO. 16. GROUND NO.11 RELATING TO CHARGING OF INTERES T U/S 234A AND 234B ARE CONSEQUENTIAL IN NATURE. IT(TP)A NO.432/BANG/2015 PAGE 10 OF 11 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH MAY, 2019. SD/ - (PAVAN KUMAR GADALE) JUDICIAL MEMBER SD/ - (B.R BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED, 17 TH MAY, 2019. / VMS / COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3 . THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER A SST. REGISTRAR, ITAT, BANGALORE.