Schneider Electric India (P) Ltd, New Delhi V. Addl. CIT, New Delhi

ITA 4492/DEL/2009

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7312 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-01-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 10-11-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 26-11-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMARENDRA KUMAR
• Keywords: Related party transaction; Transfer pricing; International transaction; Working capital adjustments
• Section: 92D; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 1 , NEW DELHI BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER ITA NO. 4492 /DEL/20 09 AY: 200 5 - 06 SCHNEIDER ELECTRIC INDIA P.LTD. VS. ACIT, RANGE 7 A 29, MOHAN COOP. INDL. ESTATE NEW DELHI MATHURA ROAD NEW DELHI 110 044 PAN: AABCS 1624 G (APPELLAN T) (RESPONDENT) APPELLANT BY : SH. K.M.GUPTA, ADV. RESPONDENT BY : SH. AMARENDRA KUMAR, CIT, D.R. ORDER PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF THE LD.COMMISSIONER OF INCOME TAX (APPEALS) - XX, NEW DELHI DATED 23.9.2009 PERTAINING TO THE ASSESSMENT YEAR (A.Y.) 200 5 - 06 . 2. FACTS IN BRIEF: - SCHNEIDER ELECTRIC INDIA PRIVATE LIMITED (THE ASSESSEE) IS A 100 PERCENT SUB SIDIARY OF SCHNEIDER FRANCE. SCHNEIDER INDIA IS ENGAGED IN MANUFACTURE OF LOW VOLTAGE AND MEDIUM VOLTAGE EQUIPMENT I.E. AIR CIRCUIT BREAKERS (ACB), MINIATURE CIRCUIT BREAKERS (MCB), MOULDED CASE CIRCUIT BREAKERS (MCCB), RM6, CONTRACTORS, PUSH BUTTONS AND R ING MASTER UNITS. SCHNEIDER INDIA M ARKETS PRODUCTS SOLD UNDER ITS INTERNATIONAL BRANDS - MERLIN GERIN, TELEMECANIQUE, SQUARE D, CLIPSAL AND LK. IN ADDITION, SCHNEIDER INDIA IS ENGAGED IN DISTRIBUTION OF THE FOLLOWING IMPORTED EQ U IPMENT: ITA NO. 4492/DEL/2009 A.Y. 2005 - 06 SCHNEIDER ELECTRIC INDIA P.LTD. 2 LOW VOLTAGE AND MEDIUM VOLTAGE ELECTRICAL DISTRIBUTION EQUIPMENT - THESE EQUIPMENT ARE UTILIZED FOR SUPPLYING ELECTRICITY WITH COMPLETE SAFETY, FROM MEDIUM VOLTAGE TO FINAL LOW VOLTAGE DISTRIBUTION TO THE CONSUMER. INDUSTRIAL CONTROL AND AUTOMATION EQUIPMENT - THESE EQUIPMENTS ARE U TILIZED FOR CONTROLLING, MONITORING, PROTECTING AND SUPERVISING MACHINES AND NETWORKS IN INDUSTRIAL PROCESSES, INFRASTRUCTURE AND BUILDING; AND PUSH BUTTON EQUIPMENTS. THE ABOVE ACTIVITIES OF MANUFACTURE AND TRADING CONST ITUTE THE CORE BUSINESS A CTIVITIES OF SCHNEIDER INDIA. FURTHER, DURING THE IMPUGNED FINANCIAL YEAR, SCHNEIDER INDIA HAS RENDERED THE FOLLOWING IT RELATED AND OTHER SERVICES TO ITS OVERSEAS AFFILIATES ON A LIMITED BASIS: THEY ARE E - SERVICES, IMPLEMENTATIO N AND DEVELOPMENT OF ERP SOFTWARE PACKAGES (SUCH AS SCALA, AN ACCOUNTING SOFTWARE PACKAGE), RESEARCH AND DEVELOPMENT SUPPORT ACTIVITIES; AND BUSINESS SUPPORT SERVICES. 2.1 . DURING THE A.Y. 2005 - 06 THE ASSESSEE WAS PRIMARILY ENGAGED IN THE FOLLOWING BUSINESS ACTIVITIES. (A) MANUFACTURING : MANUFACTURING AND SALE OF LOW VOLTAGE AND MEDIUM VOLTAGE EQUIPMENT I.E. AIR CIRCUIT BREAKERS, MINIATURE CIRCUIT BREAKERS, MOULDED CASE CIRCUIT BREAKERS, RM 6, CONTRACTORS, PUSH BUTTONS AND RING MASTER UNITS; (B) DIST RIBUTION: DISTRIBUTION OF ELECTRICAL EQUIPMENT IMPROTED FROM ITS AES TO THIRD PARTY CUSTOMERS IN INDIA, (C ) REPAIR AND MAINTENANCE SERVICES, ( D ) IMPLEMENTATION AND DEVELOPMENT OF ERP PACKAGES, ( E ) E - CONTENT/E - CATALOGUE SERVICES, ( F ) RESEARCH AND DEVELOPME NT SERVICES, (G) BUSINESS SUPPORT SERVICES. OUT OF THE ABOVE, BUSINESS ACTIVITIES, ACTIVITIES CORRESPONDING TO D, E, F AND G WERE PROVIDED ONLY TO ITS ASSOCIATED ENTERPRISES. 3. THE ASSESSEE, CONDUCTED A TRANSFER PRICING (T.P.) STUDY AND THEREAFTER MADE A SUO MOTTO ADJUSTMENT OF RS.1,09,39,880/ - TO ITS TOTAL INCOME ON ACCOUNT OF ADJUSTMENTS IN ARM S LENGTH PRICE (ALP) OF RESEARCH & DEVELOPMENT (R&D) EXPENSES. THE TRANSFER PRICING OFFICER (TPO) IN HIS ORDER SUGGESTED AN ADJUSTMENT OF RS.83,33,833/ - TO THE R ETURNED INCOME. ITA NO. 4492/DEL/2009 A.Y. 2005 - 06 SCHNEIDER ELECTRIC INDIA P.LTD. 3 ASSESSMENT ORDER WAS PASSED ACCORDINGLY. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL. 4. ON APPEAL THE FIRST APPELLATE AUTHORITY CONCURRED WITH THE LD.TPO AND DISMISSED THE APPEAL OF THE ASSESSEE . FURTHER AGGRIEVED THE ASSESSEE IS BEFORE US ON THE FOLLOWING GROUNDS. 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS WRONGLY CONFIRMED ADJUSTMENT OF RS. 3,71,49,605 IN RESPECT OF INTERNATIONAL TRANSACTION OF 'IMPORT OF COMPONENTS FOR MANUFACTURE OF ELECTRICAL EQUIPME NT' AND IN DOING SO INTER - ALIA HAVE GROSSLY: 1.1. ERRED IN RELYING ON THE INTERIM/UNAUDITED MARGINS OF COMPARABLES AND NOT CONSIDERING THE AUDITED FINANCIALS WHILE CALCULATING OPERATING MARGIN FOR DETERMINATION OF ARM'S LENGTH PRICE CONSIDERING WHICH APPELLANT WILL FALL WITHIN THE +/ - 5% RANGE AS PROVIDED UNDER SECOND PROVISO TO SECTION 92C(2) OF THE ACT; 1.2. ERRED BY SELECTING A COMPARABLE NAMELY LNDO ASIAN FUSEGEARS LIMITED NOT HAVING ANY INCOME FROM MANUFACTURING AND TRADING OPERATIONS IN THE RELEVANT FINANCIAL YEAR; 1.3. ERRED BY SELECTING CERTAIN C OMPARABLES WHICH HAVE RELATED PARTY TRANSACTIONS OF MORE THAN 25% OF THEIR TURNOVER; AND 1.4. ERRED IN NOT ALLOWING ADJUSTMENT ON ACCOUNT OF CUSTOMS DUTY PAID BY THE APPELLANT AND CLAIMED BEFORE LD. CIT(A). 2 . ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN ADJUSTMENT OF RS.7,41,79,393 IN RESPECT OF INTERNATIONAL TRANSACTION OF 'IMPORT OF E LECTRICAL EQUIPMENT FOR RESALE AND IN DOING SO INTER - ALIA HAVE GROSSLY: 2.1. ERRED IN RELYING ON THE INTERIM/UNAUDITED MARGINS OF COMPARABLES AND NOT CONSIDERING THE AUDITED FINANCIALS WHILE CALCULATING OPERATING MARGIN FOR DETERMINATION OF ARM'S LENGTH PRICE; AND 2.2. ERRED IN NOT ALLOWING BENEFIT OF +/ - 5% RANGE PROVIDED UNDER SECOND PROVISO TO SECTION 92C(2) OF THE ACT. 3. ON THE FACTS AN D CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS WRONGLY CONFIRMED ADJUSTMENT OF RS. 23, 72, 729 IN RESPECT OF INTERNATIONAL TRANSACTION ITA NO. 4492/DEL/2009 A.Y. 2005 - 06 SCHNEIDER ELECTRIC INDIA P.LTD. 4 OF 'E - CONTENT AND/ E - CATALOGUE SERVICES' AND IN DOING SO INTER - ALIA HAVE GROSSLY: 3.1. ERRED IN RELYING ON THE INTERIM /UNAUDITED MARGINS OF COMPARABLES AND NOT CONSIDERING THE AUDITED FINANCIALS WHILE CALCULATING OPERATING MARGIN FOR DETERMINATION OF ARM'S LENGTH PRICE CONSIDERING WHICH APPELLANT WILL FALL WITHIN THE +/ - 5% RANGE AS PROVIDED UNDER SECOND PROVISO TO SECTION 92C(2) OF THE ACT; AND 3.2. ERRED BY SELECTING CERTAIN COMPARABLES WHICH HAVE RELATED PARTY TRANSACTIONS OF MORE THAN 25% OF THEIR TURNOVER; 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS WRONGLY CONFIRMED ADJUSTMENT OF RS. 1,43,66,38 3 (REVISED TO RS. 34,26,505 AS PER ORDER UNDER SECTION 154 OF THE ACT, ISSUED BY ADDL. DIRECTOR OF INCOME - TAX, TRANSFER PRICING OFFICER - II(2) ), NEW DELHI) IN RESPECT OF THE APPELLANT'S INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF RESEARCH & DEVELOP MENT SERVICES AND IN DOING SO HAVE INTER - ALIA GROSSLY: 4.1. ERRED IN RELYING ON THE INTERIM/UNAUDITED MARGINS OF COMPARABLES AND NOT CONSIDERING THE AUDITED FINANCIALS WHILE CALCULATING OPERATING MARGIN/RETURN ON COST FOR DETERMINATION OF ARM'S LENGTH PRI CE; 4.2. ERRED BY SELECTING CERTAIN COMPARABLES WHICH HAVE RELATED PARTY TRANSACTIONS OF MORE THAN 25% OF THEIR TURNOVER; AND 4.3. ERRED IN NOT ALLOWING BENEFIT OF + / - 5% RANGE PROVIDED UNDER SECOND PROVISO TO SECTION 92C(2) OF THE ACT. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN ADJUSTMENT OF RS.12,05,601 IN RESPECT OF INTERNATIONAL TRANSACTION OF 'BUSINESS SUPPORT SERVICES' AND IN DOING SO HAVE INTER - ALIA GROSSLY: 5.1. ERRED IN RELYING ON THE INTERIM/UNAUDI TED MARGINS OF COMPARABLES AND NOT CONSIDERING THE AUDITED FINANCIALS WHILE CALCULATING OPERATING MARGIN/RETURN ON COST FOR DETERMINATION OF ARM'S LENGTH PRICE; AND 5.2. ERRED IN NOT ALLOWING BENEFIT OF +/ - 5% RANGE PROVIDED UNDER SECOND PROVISIO TO SECT ION 92C(2) OF THE ACT. 6. ON THE FACTS & CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN NOT ALLOWING 5% BENEFIT, AS PER THE PROVISO TO SECTION 92C(2) OF THE ACT AS THE ITA NO. 4492/DEL/2009 A.Y. 2005 - 06 SCHNEIDER ELECTRIC INDIA P.LTD. 5 APPELLANT COMPANY'S CASE WAS FINALIZED BEFORE THE CUT OFF DATE OF 1 ST OCTOBER, 2009. 7. ON THE FACTS & CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN NOT CONSIDERING APPELLANT COMPANY'S CALCULATION OF +/ - 5% RANGE IN RESPECT OF ALL THE INTERNATIONAL TRANSACTIONS UNDER REVIEW, DESPITE THE SUBMISSIONS MADE BY THE APPELLANT CO MPANY. 8. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ENTIRE ADDITION OF INR 1,43,66,383 IN RESPECT OF THE APPELLANT'S INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF RESEARCH & DEVELOPMENT TRANSACTION BY IG NORING THE CONTENTION OF THE APPELLANT THAT IT HAD ITSELF OFFERED AN AMOUNT OF INR 1,09,39,880 FOR TAXATION IN ITS RETURN OF INCOME IN RESPECT OF THE SAID TRANSACTION. 9. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN NOT GRANTIN G WORKING CAPITAL ADJUSTMENT WHILE COMPUTING MARGINS OF THE COMPARABLES; 10. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN IGNORING THE BUSINESS/COMMERCIAL REALITY THAT SINCE THE APPELLANT IS REMUNERATED ON AN ARM'S LENGTH COST P LUS BASIS, I.E. IT IS COMPENSATED FOR ALL ITS OPERATING COSTS PLUS A PRE - AGREED MARK - UP BASED ON A BENCHMARKING ANALYSIS FOR SERVICES PROVIDED BY IT TO ITS ASSOCIATED ENTERPRISES ('AES'), THE APPELLANT UNDERTAKES MINIMAL BUSINESS RISKS AS AGAINST COMPARABL E COMPANIES THAT ARE FULL - FLEDGED RISK TAKING ENTREPRENEURS, AND BY NOT ALLOWING A RISK ADJUSTMENT TO THE APPELLANT ON ACCOUNT OF THIS FACT. 11 . ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT (A) HAS ERRED IN DISREGARDING THE ARM'S LENGTH PRICE (,ALP') AS DETERMINED BY THE APPELLANT IN THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WI TH RULE 10 D OF THE INCOME - TAX RULES, 1962 (' THE RULES'). THE APPELLANT CRAVES LEAVE TO ADD, AVOID, FORGO OR ALTER ANY OF THE AFORESAID GROUNDS OF APPEAL IF IT BECOMES NECESSARY TO DO SO IN THE INTEREST OF JUSTICE, AT OR BEFORE THE TIME OF HEARING OF THE AFORESAID APPEAL. 5. WE HAVE HEARD SHRI KM GUPTA, THE LD.COUNSEL FOR THE ASSESSEE AND SHRI AMARENDRA KUMAR, LD.CIT, D.R. ON BEHALF OF THE REVENUE. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, PERUSAL OF MATERIAL ON RECORD, ORDERS OF LOWER AUTHORITIES, CASE LAWS CITED, WE H OLD AS FOLLOWS. 6. THE SUM AND SUBSTANCE OF THE SUBMISSIONS OF THE LD.COUNSEL FOR THE ASSESSEE IS THAT, AT THE TIME OF TRANSFER PRICING ( T.P. ) STUDY , THE AUDITED FINANCIAL STATEMENTS OF THE COMPARABLES OF ALL THE SEGMENTS WERE NOT ITA NO. 4492/DEL/2009 A.Y. 2005 - 06 SCHNEIDER ELECTRIC INDIA P.LTD. 6 AVAILABLE AND HENCE THE ASSESSEE W AS FORCED TO TAKE UNAUDITED FINANCIAL STATEMENTS, FOR THE PURPOSE OF ARRIVING AT THE A.L.P. HE PLEADED THAT SUBSEQUENTLY THE AUDITED FINANCIAL STATEMENTS CAME TO BE AVAILABL E IN THE PUBLIC DOM AIN AND THAT WHEN THESE FINANCIAL STATEMENTS ARE TAKEN INTO CONSIDERATION, THE ALP COMPUTED BY THE TRANSFER PRICING OFFICER ( TPO ) WOULD REQUIRE REVISION. HE PLEADED THAT THE ISSUE MAY BE SET ASIDE TO THE FILE OF THE TPO FOR RECOMPUTING THE ALP OF EACH OF THE INTERNATIONAL TRANSACTIONS IN QUESTION, BY TAKING INTO ACCOUNT AUDITED FINANCIAL STATEMENTS. 6. 1 . HE FURTHER PLEADED THAT THE TPO BE DIRECTED NOT TO MAKE AN ADJUSTMENT , IF THE A L P ARRIVED AT BY THE ASSESSEE /T.P.O., AFTER TAKING INTO ACCOUNT THE AUDITED FINANCIAL STATEMENTS , FALLS WITHIN THE RANGE OF 5%, AS PROVIDED UNDER THE SECOND PROVISO TO S.92C(2) OF THE ACT. HE FURTHER CONTENDED THAT COMPARABLES WHERE RELATED PARTY TRANSACTIONS ARE MORE THAN 25% , SHOULD BE DIRECTED TO BE EXCLUDED. FUR THER HE ARGUED THAT WORKING CAPITAL ADJUSTMENT SHOULD BE DIRECTED TO BE GRANTED TO THE ASSESSEE. ON A QUERY FROM THE BENCH HE SUBMITTED THAT HE IS NOT PRESSING GROUND NOS. 1.2, 1.3 AND 8 AND THAT HE IS CONFINING HIS ARGUMENTS TO THE RELIEF MENTIONED IN TH ESE ARGUMENTS RECORDED ABOVE. 7. THE LD.D.R. MR.AMARENDRA KUMAR ON THE OTHER HAND, OPPOSED THE CONTENTIONS OF THE ASSESSEE. HE WONDERED AS TO WHY THE ASSESSEE HAS TAKEN INTO ACCOUNT INTERIM AND UNAUDITED FINANCIAL STATEMENTS WHILE COMPUTING ALP IN ITS T. P. REPORT. ON A QUERY FROM THE BENCH, THOUGH NOT LEAVING HIS GROUND, HE SUBMITTED THAT AUDITED FINANCIAL STATEMENTS SHOULD BE CONSIDERED IN PREFERENCE TO INTERIM AND UNAUDITED FINANCIAL STATEMENTS. HE SUBMITTED THAT THE ASSESSING OFFICER SHOULD NOT BE G IVEN SPECIFIC DIRECTIONS ON THE ISSUE OF 5% RANGE, AND WITH RESPECT TO RELATED PARTY TRANSACTIONS, OR REGARDING WORKING CAPITAL ADJUSTMENTS ETC. AND THAT THE SET ASIDE SHOULD BE AN OPEN REMAND. 8. AFTER CONSIDERING RIVAL SUBMISSIONS WE ARE OF THE CONSIDE RED OPINION THAT WE HAVE TO RESTORE THE ENTIRE ISSUE OF DETERMINATION OF ALP TO THE FILE OF ITA NO. 4492/DEL/2009 A.Y. 2005 - 06 SCHNEIDER ELECTRIC INDIA P.LTD. 7 THE A.O. FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. WHEN AUDITED FINANCIAL STATEMENTS ARE AVAILABLE IN THE PUBLIC DOMAIN, COMPUTATION OF ALP BASED ON INTERIM AND UNAUDITED FINANCIAL STATEMENTS CANNOT BE ACCEPTED . A FRESH EXERCISE HAS TO BE DONE BASED ON THE AUDITED FINANCIAL STATEMENTS OF EACH OF THE PARTIES FOR ALL THE SEGMENTS/INTERNATIONAL TRANSACTIONS. 8.1. REGARDING THE PLEA OF THE ASSESSEE TO DIRECT THE A.O. TO APPLY THE SECOND PROVISO TO S.92(2) OF THE ACT AND TO EXCLUDE COMPARABLES HAVING RELATED PARTY TRANSACTIONS IN EXCESS OF 25% AND TO DIRECT THE AO TO GRANT WORKING CAPITAL ADJUSTMENT, WE HOLD THAT THE ASSESSEE WOULD BE FREE TO TAKE UP ANY LEGAL AR GUMENT OR CONTENTIONS BEFORE THE A.O. THE LAW WITH RESPECT TO TRANSFER PRICING HAS DEVELOPED OVER THE PERIOD OF TIME AND THE ASSESSEE/REVENUE SHOULD NOT BE DEPRIVED OF TAKING BENEFIT OF THE LATEST LEGAL DEVELOPMENTS ON ANY ISSUE. THE AO IS DIRECTED TO CONSIDER ALL THESE FRESH CONTENTIONS AND ARGUMENTS RAISED BY THE ASSESSEE AND DISPOSE OF THE SAME AND ARGUMENTS IN ACCORDANCE WITH LAW. THE AO/TPO SHALL AFFORD ADEQUATE OPPORTUNITY TO THE ASSESSEE. 9. IN THE RESULT ASSESSEE S APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH JANUARY, 2016 . SD/ - SD/ - ( DIVA SINGH ) (J. SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: THE 11 TH JANUARY, 2016 MANGA ITA NO. 4492/DEL/2009 A.Y. 2005 - 06 SCHNEIDER ELECTRIC INDIA P.LTD. 8 COPY FORWARDED TO: - 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR