Interpump Hydraulics Pvt. Ltd., Bangalore V. ACIT, Hosur

ITA 459/CHNY/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4159 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 19-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 22-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Assessee Lawyers: R E BALASUBRAMANYAN
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Cost of acquisition; Fair market value; Valuation report
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH D, CHENNAI , ! ' ! # . $ , % &' ( BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ITA NO.459/MDS/2017 % ) *) / ASSESSMENT YEAR : 2012-13 INTERPUMP HYDRAULICS PVT. LTD., #6A, SIPCOT INDUSTRIAL COMPLEX, PHASE-1, ELASAGIRI ROAD, HOSUR 635 126, TAMIL NADU. [PAN: AABCI 5465R] VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1, HOSUR. TAMIL NADU. ( /APPELLANT ) ( / RESPONDENT ) +, . / / APPELLANT BY : SHRI R.E.BALASUBRAMANYAN, CA 01+, . / / RESPONDENT BY : SHRI PATHLAVATH PEERYA, CIT ! . 2 / DATE OF HEARING : 19.06.2017 3* . 2 / DATE OF PRONOUNCEMENT : 30.06.2017 /ORDER PER SANJAY ARORA, AM : THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINS T THE ORDER BY THE DISPUTES RESOLUTION PANEL-2, BANGALORE (DRP FOR S HORT) DATED 16.11.2016, CONTESTING ITS ASSESSMENT U/S. 143(3) R/W S.144C(1) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR ASSESSMENT YEAR (AY) 20 12-13 VIDE ORDER DATED 29.12.2016. 2. THE TRANSFER PRICING (TP) ADJUSTMENT UNDER DISP UTE IN THE PRESENT CASE IS IN RESPECT OF PURCHASE OF PLANT AND MACHINERY BY TH E ASSESSEE COMPANY FROM ITS ASSOCIATE ENTERPRISE (AES), IPH ITALY AND H.S. PENT A, ITALY. IPH ITALY IS A PART 2 ITA NO.459/MDS/2017 (AY 2012-13) I NTERPUMP HYDRAULICS PVT. LTD. V. ASST. CIT OF THE LARGER INTERPUMP GROUP OF COMPANIES, CONSIST ING OF MANY OTHER COMPANIES, SPREAD OVER MANY COUNTRIES, WITH THE FIN AL HOLDING AND CONTROL VESTING WITH A COMPANY BY THE NAME INTERPUMP GROUP S.P.A. INTERPUMP HYDRAULICS S.P.A., ITALY, IS A MANUFACTURER OF HYDR AULIC PUMPS, POWER PACKS AND POWER TAKE OFFS, USED IN TRUCKS AND OTHER HEAVY DUT Y EARTH MOVING EQUIPMENT AND COMMERCIAL VEHICLES. TILL THE YEAR 2006, THE CO MPANY WAS MARKETING ITS PRODUCTS IN INDIA THROUGH A DISTRIBUTOR, I.E., BEFO RE IT DECIDED TO CARRY OUT MANUFACTURE OF ITS PRODUCTS IN INDIA TOO. INTERPUMP HYDRAULICS INDIA PVT. LTD (HEREAFTER REFERRED TO AS IPH INDIA OR THE ASSESSEE, AS THE CONTEXT REQUIRES) WAS INCORPORATED IN JULY, 2006 AS A WHOLLY OWNED SUBSID IARY OF IPH INTERNATIONAL S.P.A., WHICH IN TURN IS A SUBSIDIARY OF IPH ITALY. THE COMPANY IS MANUFACTURING HYDRAULIC VALVES AT ITS MANUFACTURING PLANT AT HOSUR, TAMIL NADU, SINCE. DURING THE YEAR 2009, THE PARENT GROUP ACQUIRED A CONTROLLING INTEREST IN AN ENTITY CALLED H.S. PENTA WHICH WAS E NGAGED IN THE MANUFACTURE OF AUTOMOTIVE CYLINDERS IN ITALY. POST ACQUISITION, TH E MANAGEMENT OF THE GROUP FELT THAT SOME OF THE ACTIVITIES OF H.S. PENTA WERE IN D IRECT COMPETITION WITH THE BUSINESS OF SOME OF THE OTHER GROUP COMPANIES IN IT ALY. THEREFORE, THE BUSINESS OF H.S. PENTA IN ITS ENTIRETY WAS PLANNED TO BE SHIFTED TO THE RUDRAPUR UNIT IN TWO OR MORE PHASES TO TAKE ADVANTAGE OF THE LOWER C OSTS AND A BIGGER MARKET IN INDIA. IN ACCORDANCE WITH THIS SCHEME, THE FIRST PH ASE OF MACHINES, TOOLS, FIXTURES, DRAWINGS, DATABASE AND PROGRAMMES EMBEDDE D IN THE MACHINERY OF H.S. PENTA WERE SHIFTED TO THE RUDRAPUR PLANT IN TH E F.Y. 2009-10. NECESSARY RECONDITIONING AND SPARES WERE ALSO SHIPPED. THE AC QUISITION DURING THE CURRENT YEAR REPRESENTS THE SECOND PHASE OF THE TRANSFER OF PLANT AND MACHINERY OF H.S. PENTA. IT IS THE TRANSFER PRICE OF THESE MACHINERIE S, AN INTERNATIONAL TRANSACTION/S, WHICH IS SUBJECT TO DOWNWARD ADJUSTMENT BY THE REVE NUE, WHICH IS BEING DISPUTED BY THE ASSESSEE. WHILE THE ASSESSEE RELIES ON THE STATED CONSIDERATION, WHICH IS STATED AS BACKED BY A VALUATION REPORT BY A CHARTERED ENGINEER, THE REVENUE DOES ON THE WRITTEN DOWN VALUE (WDV) THEREO F, ADOPTING THE EXTANT 3 ITA NO.459/MDS/2017 (AY 2012-13) I NTERPUMP HYDRAULICS PVT. LTD. V. ASST. CIT RATE OF DEPRECIATION ON THE PLANT AND MACHINERY UND ER THE ACT (I.E., 15%), REJECTING THE ASSESSEES VALUATION REPORT AS SELF S ERVING AND, BESIDES, WITH A VIEW TO FACILITATE ITS APPROVAL BY THE CUSTOM AUTHORITIE S IN-AS-MUCH AS THE CUSTOM DUTY IS LEVIED AD VOLERM ON THE IMPORT COST. 3. THE RESPECTIVE CASES : THE ASSESSEE, WHO HAS NOT INCLUDED THIS INTERNATIO NAL TRANSACTION/S AS A PART OF ITS TP STUDY ON THE GROUND THAT ITS IMPACT SHALL BE FACTORED IN THE OVERALL OPERATING RESULTS, CONTENDS FOR THE MATTER BEING EX AMINED HOLISTICALLY. IT IS AN EN BLOCK TRANSFER OF PLANT AND MACHINERY, A PRODUCTION CE NTRE, SO THAT IT MUST BE REGARDED AS SUCH, I.E., AS THAT OF A PRODUCTION FAC ILITY. THE PRODUCTION WAS ABLE TO COMMENCED ALMOST IMMEDIATELY, I.E., WITHIN THREE MONTHS OF THE COMPLETION OF THE TRANSFER IN THE FIRST PHASE, YIELDING PROFIT AS WELL AS SAVINGS ON THE SET-UP COSTS, AGAIN, TRANSLATING INTO PROFITS, WHICH ANY B USINESSMAN WOULD LOOK AT / TAKE INTO ACCOUNT. THE VALUE OF THE TRANSFERRED ASSET/S, WHICH IS TO A LARGE EXTENT ON ACCOUNT OF SOFTWARE IMBEDDED THEREIN, IS THUS DIVOR CED FROM OR INDEPENDENT OF THE AGE AND, THUS, ITS DEPRECIATED VALUE; THE DEPRE CIATION RATES BEING STANDARD RATE/S WITH A VIEW TO ALLOW THE CAPITAL COST OVER A PRESUMED LIFE OF THE ASSETS, CATEGORIZED BROADLY. THOUGH SOME OF THE MACHINES A RE MORE THAN 20 YEARS OLD, HAVING BEEN PURCHASED (BY THE TRANSFEROR) IN 1970S/ 1980S/1990S, THE SAME HAVE A BALANCE LIFE OF NOT LESS THAN 10 YEARS, ON WHICH BASIS THE SAME WERE IMPORTED. THE REVENUE, ON THE OTHER HAND, WHILE NOT QUESTION ING THE BUSINESS DECISION OR WISDOM IN ACQUIRING THE PLANT AND MACHI NERY, QUESTIONS THE TRANSFER PRICE THEREOF, EVEN AS THE SAME IS ADMITTEDLY WITHO UT ANY STATED BASIS, WITH MOST OF THE MACHINES BEING IN FACT VERY OLD. COMPARABLE UNCONTROLLED PRICE (CUP) IS THE ONLY APPROPRIATE METHOD IN THE CIRCUMSTANCES, E VEN AS APPROVED BY THE TRIBUNAL IN THE ASSESSEES CASE FOR AY 2010-11 (IN ITA NO. 839/MDS/2015/COPY ON RECORD AT PB PGS. 115-118), WHICH IN THE PRESENT CASE HAS BEEN TAKEN AS THE WDV. 4 ITA NO.459/MDS/2017 (AY 2012-13) I NTERPUMP HYDRAULICS PVT. LTD. V. ASST. CIT 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. WE FIND LITTLE MERIT IN THE VALUES ADOPTED BY EITH ER SIDE. DEPRECIATION RATES AS PER THE ACT ARE DESIGNED TO ALLOW THE CAPI TAL COST OVER A REASONABLE PERIOD, SO THAT THE DEPRECIATED VALUE (WDV) HAS NOT HING TO DO WITH THE UTILITY OR THE PERCEIVED VALUE OF THE CAPITAL ASSETS, WHICH IN THE PRESENT CASE FORM PART OF ONE, INTEGRATED PRODUCTION CENTRE/FACILITY (ASSUMIN G THAT THE UNITS PURCHASED FROM IPH ITALY ARE ALSO FOR THE RUDRAPUR UNIT), WHI CH MUST THEREFORE BE REGARDED AS A COMPOSITE UNIT, AND VALUED IN TERMS O F ITS PRODUCTION CAPACITY. AS CLARIFIED BY THE TRIBUNAL FOR AY 2010-11, THE WDV C ANNOT FURNISH AN ADEQUATE VALUE OR SERVE AS A VALID BASIS FOR PRICE, WHICH MU ST REPRESENT THE FAIR MARKET VALUE OF THE MACHINE/S AS BETWEEN TWO INFORMED PERS ONS, I.E., THE BUYER AND THE SELLER. AND FOR WHICH REASON IT STATES THE VALUE OF THE MACHINERY TRANSFERRED IS TO BE COMPARED WITH UNCONTROLLED MARKET (REFER PARA 5 OF ITS ORDER), AND WHICH THE LD. DR REFERS TO AS CUP. AGAIN, THAT BEING THE CASE , HOW WE WONDER COULD THE ASSESSEES OPERATING RESULTS, BASED ON TRANSACTIONA L NET MARGIN METHOD (TNMM), VALIDATE THE ACQUISITION COST OF ITS PRODUC TION FACILITY - A CAPITAL COST? WHY, THE MACHINES WERE IN RUNNING CONDITION, IN OPE RATION FOR THE PAST SEVERAL YEARS AND, IN FACT, REPRESENT THE SECOND PHASE OF T RANSFER ON THE SUCCESSFUL COMPLETION OF THE FIRST PHASE THEREOF, SO THAT ITS PRODUCT/S IS WELL ESTABLISHED IN THE MARKET. IT IS IN FACT THIS THAT HAS PROMPTED IT TO PROCEED WITH THE SECOND PHASE (OF THE TRANSFER). CAPITAL COST THEREFORE CAN NOT BE IMPUTED WITH REFERENCE TO THE PROFITS, OR THE LATTER JUSTIFIED IN TERMS OF THE FORMER. WHY, AS WE INFER, DEPRECIATION IS ONLY A FRACTIONAL PART OF THE ASSES SEES OPERATING COST, EVEN AS THE REVENUE ALLEGES, IN VIEW OF THE LOW WDV, AN INFLATE D TRANSFER PRICE. AGAIN, THE COMPANY ONLY SEEKING TO RELOCATE THE PRODUCTION FAC ILITY, NOTHING MUCH TURNS ON THE SHORTER SET-UP TIME. IN FACT, RELOCATION INVOLV ING TIME AND COST, THE SAME ONLY ENTAILS LOSS OF PRODUCTION AND, RESULTANTLY, OF PRO FITS, SO THAT ITS ENDEAVOR WOULD BE TO MINIMIZE/OPTIMIZE THE SAME, CONTAINING COSTS. THE ASSESSEES METHOD OF 5 ITA NO.459/MDS/2017 (AY 2012-13) I NTERPUMP HYDRAULICS PVT. LTD. V. ASST. CIT VALUATION, WHICH IS UNSTATED, FAILS FOR THE SAME RE ASON, I.E., AS NOT REPRESENTATIVE OF A COMPARABLE UNCONTROLLED PRICE. THE MOOT QUESTION IN THE PRESENT CASE IS AS TO WHA T IS THE FAIR MARKET VALUE, WHICH COULD THEREFORE BE REGARDED AS THE ARMS LENG TH PRICE (ALP) BETWEEN THE PARTIES, THE ASSESSEE AND ITS AES, FOR THE PLANT AN D MACHINERY EXPORTED BY ITS AES TO IT. IN THIS REGARD, THE LD. AUTHORIZED REPR ESENTATIVE (AR) WAS DURING HEARING ASKED ABOUT THE PURCHASE COST OF THE PLANT AND MACHINERY OF H.S. PENTA BY THE INTERPUMP GROUP, TO WHICH HE STATED AS BEING NOT DETERMINABLE IN-AS- MUCH AS THE SAME WAS ACQUIRED BY WAY OF PURCHASE OF SHARES. TRUE, BUT THEN THE COST OF THE SHARES WOULD ONLY BE ARRIVED AT BY PLACING SOME VALUE ON THE ASSETS OF HS PENTA. IT IS THE PLANT AND MACHINERY, WHICH CONSTITUTES ITS PRODUCTION CAPACITY, WHICH HAS THUS BEEN IN EFFECT ACQUIRED BY THE INTERPUMP GROUP. THE SAID TRANSFER REPRESENTS AN INDEPENDENT, UNCONTROLLED TRANSACTION BETWEEN TWO PARTIES, WHICH CAN FORM THE BASIS FOR T HE TRANSFER CONSIDERATION OF THE PLANT AND MACHINERY SUBSEQUENTLY TRANSFERRED TO INDIA, I.E., TO THE ASSESSEE- COMPANY, AND WHICH HAS BEEN IN TWO INSTALLMENTS; TH E PRESENT (SECOND) FOLLOWING THE SUCCESSFUL IMPLEMENTATION OF THE FIRS T ONE. WITHOUT DOUBT, THE ENTIRE ASSETS OF H.S. PENTA, ALONG WITH LIABILITIES , SHALL HAVE TO BE VALUED IN-AS- MUCH AS A SHARE THEREIN REPRESENTS A FRACTIONAL I NTEREST IN ITS NET WORTH. THIS IS PARTICULARLY SO AS THE TRANSFER OF THE PLANT AND MA CHINERY COMMENCES SOON AFTER THE ACQUISITION OF H.S. PENTA IN 2009, WITH THE FIR ST PHASE OF TRANSFER COMPLETED IN F.Y. 2009-10 ITSELF. THAT IS, THERE IS HARDLY AN Y TIME LAG BETWEEN THE ACQUISITION OF CAPACITY OF H.S. PENTA AND ITS TRANS FER TO INDIA, FOR THE CONSIDERATION OF VARIATION IN PRICE ON ACCOUNT THER EOF TO COME INTO PLAY. THE SAME SATISFIES THE TEST OF CUP AND, IN ANY CASE, WO ULD QUALIFY WITH REFERENCE TO R. 10AB, EFFECTIVE FROM THE CURRENT YEAR. THE MATTER, ACCORDINGLY, IS RESTORED BACK TO THE F ILE OF THE AO FOR FRESH DETERMINATION ALONG THESE LINES. THE BURDEN TO PROV E ITS RETURN, AND THE CLAIMS PREFERRED THEREBY, IS ONLY ON THE ASSESSEE ( CIT V. CALCUTTA AGENCY LTD . [1951] 6 ITA NO.459/MDS/2017 (AY 2012-13) I NTERPUMP HYDRAULICS PVT. LTD. V. ASST. CIT 19 ITR 191 (SC); CIT V. R. VENKATASWAMY NAIDU [1956] 29 ITR 529 (SC)), SO THAT THE ONUS TO STATE AND PRESENT ITS CASE IN THE SET ASIDE PROCEEDINGS SHALL BE ON THE ASSESSEE. THE REVENUE (TPO) SHALL, AT THE SAME TIME, THOUGH AT LIBERTY TO VERIFY THE MATERIALS FURNISHED AND RELIED UPON BY T HE ASSESSEE IN THESE PROCEEDINGS, AS WELL AS TO RAISE QUESTIONS IN THEIR RESPECT, SO AS TO SATISFY HIMSELF, ACT IN CONSISTENCY WITH THE BROAD PARAMETE RS SET FORTH HEREIN, WHICH IS OF VALUATION OF PLANT AND MACHINERY (PRODUCTIVE CAP ACITY) ON A COMPARABLE, UNCONTROLLED BASIS, WHICH WE UNDERSTAND THE ISSUE U NDER REFERENCE AS. WE MAY THOUGH CLARIFY TWO THINGS. ONE, THAT THE EN TIRE CAPACITY IS TO BE, IRRESPECTIVE OF THE TIME OF ITS SUBSEQUENT TRANSFER (RELOCATION) TO INDIA, AT ONE VALUE, SO THAT THE VALUATION OF THE PLANT AND MACHI NERY COMPRISING THE FIRST TRANCHE IS TO BE CONSISTENT WITH THE SECOND, AND TH E TWO CANNOT BE VALUED EITHER DIFFERENTLY OR INDEPENDENT OF EACH OTHER. THAT IS, EVEN IF THE SAME STANDS VALUED SEPARATELY, BEING THE SUBJECT MATTER OF THE PROCEED INGS FOR A DIFFERENT YEAR, QUA WHICH WE EXERCISE NO JURISDICTION, FOR THE PURPOSE OF THE VALUATION FOR THE CURRENT YEAR, THE ENTIRE PLANT AND MACHINERY OF H.S . PENTA IS TO BE TAKEN INTO ACCOUNT. IN FACT, IF THE DRP, FOR AY 2010-11, REQUI RED AN INDEPENDENT VALUATION (BY THE REVENUE), AS APPEARS TO BE THE CASE, WHOSE ACTION HAS BEEN UPHELD BY THE TRIBUNAL, OUR ORDER IS BROADLY IN SYNC WITH THA T FOR THAT YEAR. YES, THERE COULD BE SOME VARIATIONS FROM MACHINE TO MACHINE DEPENDIN G UPON ITS PRODUCTION QUALITY, CAPACITY AND AGE, I.E., THE REMAINING USEF UL LIFE, ALL OF WHICH MAY IMPACT ITS UTILITY AND, THUS, HAS A BEARING ON ITS PRICE F OR THE ASSESSEE. THESE VARIATIONS, WHICH MAY TRANSLATE IN SOME DIFFERENCE IN THE PRICE S OF INDIVIDUAL MACHINES, SHALL BE NEVERTHELESS WITHIN THE BROAD FRAMEWORK OF THE PRICE DETERMINED ON THE BASIS OF THE ACQUISITION COST OF SHARES (OF H.S. PE NTA). TWO, THE SOFTWARE; THE MACHINES BEING PROGRAMMED /PROGRAMMABLE, IS NOT TO BE VALUED INDEPENDENTLY AS IT IS AN INTEGRAL PAR T OF THE MACHINE/S IN-AS-MUCH AS THE SAME, PROGRAM DRIVEN, IS A SINGLE, IDENTIFIA BLE UNIT REPRESENTING A PART OF THE PRODUCTION CAPACITY (WHICH COULD BE QUA DIFFERENT PRODUCTION PROCESSES). 7 ITA NO.459/MDS/2017 (AY 2012-13) I NTERPUMP HYDRAULICS PVT. LTD. V. ASST. CIT WHY, THE ENTIRE INTELLECTUAL PROPERTY IN THE FORM O F DESIGNS, PROCESS DRAWINGS, MACHINING PARAMETERS, CODES, DATA EMBEDDED IN THE M ACHINES, ETC. IS TO BE TRANSFERRED ALONG WITH, WHICH IS IN FACT IMPLIED IN THE CONTEXT OF THE TRANSFER OR RELOCATION OF PRODUCTION CAPACITY. FURTHER, THE SAM E, I.E., THE TRANSFER PRICE OF THE MACHINERY PURCHASED FROM H.S. PENTA CAN ALSO PROVID E A VALID BASIS FOR THE PURCHASE OF MACHINERY FROM IPH ITALY IN-AS-MUCH AS, AS EXPLAINED, IT IS ALSO FOR THE SAME PLANT, COMPARABLE AND COMPATIBLE IN ALL RE SPECTS, FORMING PART OF THE SAME PRODUCTION CAPACITY, AS OTHERWISE THERE IS NO BASIS FOR ITS TRANSFER, WHICH, AS EXPLAINED, REPRESENTS THE TRANSFER OF THE PRODUC TION CAPACITY WITHIN THE GROUP. FINALLY, WE MAY CLARIFY THAT THE TRANSFER PRICE, I N AGGREGATE, CANNOT, IN ANY CASE, EXCEED THAT ADOPTED BY THE ASSESSEE ITSELF, S O THAT IN CASE OF A HIGHER ALP ON THE BASIS OF ACQUISITION COST OF SHARES, THE SAM E SHALL HAVE TO BE RESTRICTED TO THE VALUE TRANSACTED, REQUIRING NO ADJUSTMENT. WE DECIDE ACCORDINGLY. 5. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON JUNE 30, 2017 AT CHENNAI . SD/- SD/- ( ! 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