DCIT, Bangalore V. M/s Centum Rakon India Pvt. Ltd., Bangalore

ITA 472/BANG/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 7592 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 10-07-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 17-03-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: S RAMASUBRAMANIAN
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER I T (TP) A NO. 472/BANG/2016 ASSESSMENT YEAR : 2011 - 12 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), BANGALORE. VS. M/S. CENTUM RAKON INDIA PVT. LTD., NO.44, KHB INDUSTRIAL AREA, YELHANKA NEW TOWNSHIP, BANGALORE 560 064. PAN: AADCC 2533L APPELLANT RESPONDENT APPELLANT BY : SHRI C.H. SUNDAR RAO, CIT(DR - I)(ITAT), BENGALURU. RE SPO NDENT BY : SHRI S. RAMASUBRAMANIAN, CA DATE OF HEARING : 11 .06 .201 8 DATE OF PRONOUNCEMENT : 20.07. 2018 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE REVENUE AGAINST THE FI NAL ORDER OF ASSESSMENT DATED 18.04.2016 PASSED BY THE DCIT, CIR CLE 2(1)(1), BANGALORE U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX ACT, 1961 [THE ACT]. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE READ S AS FOLLOWS:- I) M/S BHARAT ELECTRONICS LTD : A) THE HON'BLE DRP HAS ERRED IN FACT AND LAW IN DIS REGARDING THE POSITION OF LAW THAT THERE COULD BE DIFFERENCES BETWEEN THE ENTERPRISES COMPARED UNDER THE TNMM METHOD THAT ARE NOT LIKELY IT(TP)A NO.472/BANG/2016 PAGE 2 OF 9 TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR T HE PROFITS ACCRUING TO SUCH ENTERPRISES. B) THE HON'BLE DRP HAS ERRED IN FACT IN REJECTING T HE COMPANY AS A COMPARABLE ON THE GROUNDS THAT IT IS F UNCTIONALLY DIFFERENT WHEN THE PRIMARY SOURCE OF INCOME OF THE COMPARABLE IS FROM MANUFACTURING. C) THE HON'BLE DRP HAS ERRED WHILE SEEKING THE EXAC T COMPARABILITY AS MENTIONED ABOVE THE DRP WAS RIGHT IN FACT AND IN LAW IN IMPOSING CONDITION BEYOND LAW WHEREAS THE REQUIREMENT OF LAW IS TO ACKNOWLEDGE ONLY THOSE DIF FERENCES THAT ARE LIKELY TO MATERIALLY AFFECT THE MARGIN. II. MIC ELECTRONICS LTD: THE HON'BLE DRP HAS ERRED IN SEEKING EXACT COMPARAB ILITY WHILE SEARCHING FOR COMPARABLE COMPANIES OF THE ASSESSE U NDER TNMM METHOD WHEREAS REQUIREMENT OF THE LAW AND INTE RNATIONAL JURISPRUDENCE REQUIRE SEEKING SIMILAR COMPARABLE CO MPANIES. III. BHARAT HEAVY ELECTRICALS LTD.: THE HON'BLE DRP HAS ERRED IN SEEKING EXACT COMPARAB ILITY WHILE SEARCHING FOR COMPARABLE COMPANIES OF THE ASSESSE U NDER TNMM METHOD WHEREAS REQUIREMENT OF THE LAW AND INTE RNATIONAL JURISPRUDENCE REQUIRE SEEKING SIMILAR COMPARABLE CO MPANIES. 2. DEPRECIATION: A) THE HON'BLE DRP HAS ERRED IN LAW AND ON FACTS IN COMPARING THE MARGINS OF THE ASSESSE AND THE COMPAR ABLE AFTER EXCLUDING DEPRECIATION TO ARRIVE AT CORRECT COMPARA BILITY. B) THE HON'BLE DRP HAS ERRED IN LAW AND ON FACTS ON RELYING THE DECISION OF THE HON'BLE AP AND TELANGANA HIGH C OURT IN THE CASE OF BA CONTINUM INDIA PVT. LTD (ITTA 440 OF 201 4) (SUPRA) IN THE PRESENT CASE EVEN THOUGH THE FACTS AND CIRCU MSTANCES OF THE ASSESSEE ARE DIFFERENT. IT(TP)A NO.472/BANG/2016 PAGE 3 OF 9 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINE SS OF MANUFACTURE OF FREQUENCY CONTROL PRODUCTS (FCP). T HE PRODUCT MANUFACTURED BY THE ASSESSEE IS A COMPONENT USED FO R EQUIPMENTS THAT ARE USED IN DEFENCE, TELECOM AND OTHER INDUSTRIES. THE ASSESSEE IMPORTS RAW MATERIALS, UTILIZES R&D SERVICES AND ALSO IMPOR TS CAPITAL EQUIPMENTS FROM RAKON (MAURITIUS) LIMITED, WHO HELD 49% OF THE SHARES WITH THE ASSESSEE. THE ASSESSEE AFTER MANUFACTURING EXPORTE D THE FREQUENCY CONTROL PRODUCTS TO RAKON (MAURITIUS) LTD. THE TRA NSACTION OF MANUFACTURE AND EXPORT OF FCP WAS AN INTERNATIONAL TRANSACTION AND THE INCOME FROM SUCH INTERNATIONAL TRANSACTIONS HAD TO BE DETERMINE D HAVING REGARD THE ARMS LENGTH PRICE (ALP) AS ENVISAGED U/S. 92 OF TH E INCOME TAX ACT, 1961 (ACT). 4. IT IS NOT IN DISPUTE BETWEEN THE ASSESSEE AND TH E REVENUE THAT TRANSACTIONAL NET MARGIN METHOD (TNMM) IS THE MOST APPROPRIATE METHOD FOR DETERMINATION OF ALP OF THE TRANSACTIONS. THE PROFIT LEVEL INDICATOR (PLI) CHOSEN FOR THE PURPOSE OF COMPARISON OF THE A SSESSEES PROFIT MARGIN WITH THE PROFIT MARGIN OF COMPARABLE COMPANIES, WAS OPERATING PROFIT TO OPERATING COST (OP/OC). THE OP/OC AS COMPUTED BY T HE ASSESSEE IN THE TRANSFER PRICING (TP) DOCUMENT BEFORE TAKING INTO A CCOUNT DEPRECIATION ON ASSETS WAS 18.82%, WHEREAS OP/OC AS COMPUTED BY THE ASSESSING OFFICER (AO) AFTER CONSIDERING DEPRECIATION WAS 7.9 1%. THE FOLLOWING TABLE EXPLAINS THE ABOVE POSITION:- AS IN TP DOC: INCOME SALE OF MANUFACTURED GOODS 719,240,628 OTHER OPERATING INCOME 10,091,517 OPERATING INCOME 729,332,145 EXPENDITURE MATERIAL COSTS 442,338,958 IT(TP)A NO.472/BANG/2016 PAGE 4 OF 9 PERSONNEL EXPENSES 58,669,582 OPERATING AND OTHER EXPENSES 108,022,397 OTHER FINANCIAL CHARGES 4,806,520 OPERATING COST 613,837,457 CASH PROFIT 115,494,688 CASH PROFIT/ OPERATING COSTS 18.82% ' NOTE: OPERATING COSTS ARE EXCLUDING DEPRECIATION CO STS AS RE-COMPUTED BY TPO TOTAL INCOME 729,469,191 LESS: INTEREST ON MARGIN MONEY(SCH14) 137,046 LESS: FOREIGN EXCHANGE GAIN, NET (SCH14) 8,474,930 LESS: EXCISE DUTY 1,672,911 OPERATING INCOME 719,184,304 MATERIAL COSTS 442,338,958 PERSONNEL COSTS 58,669,582 OTHER EXPENSES 108,022,397 FINANCE EXPENSES (NON OPERATING IN NATURE) - DEPRECIATION 57,454,945 OPERATING EXPENSES 666,485,882 OPERATING PROFIT 52,698,422 OP/OC 7.91% 5. THE TPO SELECTED 7 COMPARABLE COMPANIES, WHOSE OP/OC WAS 18.77% AS FOLLOWS:- SI NO COMPANY NAME OP/OC 1 BHARAT ELECTRONICS LTD. 24.07% 2 BHARAT HEAVY ELECTRICALS LTD. 21.92% 3 HIND RECTIFIERS LTD. 12.69% 4 M I C ELECTRONICS LTD. 33.36% 6 RUTTONSHA INTERNATIONAL RECTIFIER LTD. 12.86% IT(TP)A NO.472/BANG/2016 PAGE 5 OF 9 7 SPECTRUM INFOTECH PVT. LTD. 18.79% 8 GUJRAT POLY AVX ELECTRONICS LTD 7.72% ARITHMETIC MEAN MARGIN 18.77% 6. THE TPO COMPUTED THE ALP AND THE ADDITION TO BE MADE TO THE TOTAL INCOME AS FOLLOWS:- ARITHMETIC MEAN PLI : 18.77% ON COST DESCRIPTION AMOUNT / (RS.) OPERATING COST 666,485,882 ARMS LENGTH MARGIN 18.77% OF OPERATING COST TOTAL ARMS LENGTH PRICE (ALP) @ 118.77% OF OPERATIN G COST 791,585,282 PRICE RECEIVED 719,184,304 SHORTFALL BEING ADJUSTMENT U/S 92CA. 72,400,978 THE ABOVE SHORTFALL OF RS. 72,400,978/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA OF THE INCOME-TAX ACT, 61. 7. BEFORE THE DRP, THE ASSESSEE SOUGHT EXCLUSION OF 3 OUT OF 7 COMPARABLE COMPANIES CHOSEN BY THE TPO AND THE SUBM ISSIONS OF THE ASSESSEE BEFORE THE DRP FOR EXCLUSION OF THESE COMP ARABLES WERE AS FOLLOWS:- BHARAT ELECTRONICS LTD IT IS SUBMITTED THAT THIS COMPANY MANUFACTURES RAD AR COMMUNICATION EQUIPMENT, OPTIC PRODUCTS, FULLY ASSE MBLED ADVANCED SYSTEMS FOR DEFENCE USE AND OTHER ELECTRON IC EQUIPMENTS. IT WAS SUBMITTED THAT THE PRODUCTS MAN UFACTURED BY BHARAT ELECTRONICS ARE IN NO WAY SIMILAR TO FCP PRO DUCTS MANUFACTURED BY THE PETITIONER. IT WAS ALSO SUBMIT TED THAT THE TURNOVER OF BHARAT ELECTRONICS LTD. IS RS.5471.75 C RORE AND THEREFORE THE TURNOVER FILTER ALSO IS NOT SATISFIED . IT(TP)A NO.472/BANG/2016 PAGE 6 OF 9 BHARATH HEAVY ELECTRICALS LTD IT IS SUBMITTED THAT THE PRODUCTS MANUFACTURED BY BHARATH HEAVY ELECTRICAL LTD ARE TOTALLY DIFFERENT. BHARATH HEAVY ELECTRICALS LTD IS ENGAGED IN DIVERSE ACTIVITIES OF MANUFACTURE OF POWER STATION EQUIPMENTS LIKE BOILERS, TURBINES, GE NERATORS, MOTORS ETC. IT IS ALSO INVOLVED IN ERECTION AND CO MMISSION, ENGINEERING AND CONSULTING SERVICES. IT ALSO FAILS THE TURNOVER FILTER TEST AS THE TURNOVER OF BHEL IS RS.41,566 CR ORE. MIC ELECTRONICS LTD IT IS SUBMITTED THAT THE PRODUCTS MANUFACTURED BY MIC ELECTRONICS LTD ARE TOTALLY DIFFERENT. THEY ARE IN THE NATURE OF LED DISPLAY SYSTEMS, LED LIGHTING PRODUCTS, SOLAR G RID, SPORTS PERIMETER, BILL BOARDS TICKER TAPE ETC. THESE PROD UCTS CANNOT BE COMPARED WITH FCP COMPONENTS MANUFACTURED BY THEIR PETITIONER. 8. THE DRP AGREED WITH THE SUBMISSIONS OF THE ASSES SEE FOR THE FOLLOWING REASONS:- HAVING CONSIDERED THE SUBMISSION, WE PERUSED THE ORDER OF THE TPO AND ALSO THE ORDER PASSED BY THE D RP FOR A.Y. 2010-11, IT IS NOTICED BY US THAT CONSIDERING THE F UNCTIONAL DIFFERENCES THE DRP DIRECTED TO EXCLUDE BHARAT ELECTRONICS LTD AND MIC ELECTRONICS LTD FROM THE COMPARABLES, AS THE FUNCTION OF THE ABOVE 2 COMPANIES REMAINS THE SAME, WE DO NO T FIND ANY REASON TO DEVIATE FROM THE FINDINGS OF THE DRP IN P RECEDING YEAR AND ACCORDINGLY, DIRECT THE A.O. TO EXCLUDE THE ABO VE 2 COMPANIES FROM COMPARABLES. IN RESPECT OF BHARAT HEAVY ELECTRICALS LTD, WE ARE IN AGREEMENT WITH THE SUBMISSION OF THE ASSESSEE THAT THE ABOVE COMPANY CANNOT BE CONSIDERED COMPARABLE TO THE ASSE SSEE, ACCORDINGLY WE DIRECT THE A.O. TO EXCLUDE THE ABOVE COMPANY FROM THE COMPARABLES. 9. BEFORE THE DRP, THE ASSESSEE ALSO MADE SUBMISSI ON THAT THE PLI WAS WRONGLY COMPUTED BY THE TPO BY INCLUDING DEPREC IATION AS PART OF THE OPERATING EXPENDITURE. ASSESSEE SUBMITTED THAT DEP RECIATION SHOULD NOT BE IT(TP)A NO.472/BANG/2016 PAGE 7 OF 9 CONSIDERED AS PART OF OPERATING EXPENSES WHILE ARRI VING AT THE PLI OF OP/OC AS IT CANNOT BE REGARDED AS AN OPERATING EXPE NDITURE. THE DRP AGREED WITH THE SUBMISSIONS OF THE ASSESSEE AND HEL D AS FOLLOWS:- HAVING CONSIDERED THE SUBMISSIONS , WE ARE IN AGREEMENT WITH THE SUBMISSION THAT THE MARGIN IN TH E CASE OF THE ASSESSEE AS WELL AS COMPARABLES CAN BE CONSIDERED B EFORE ALLOWING DEPRECIATION TO ARRIVE AT A CORRECT COMPAR ABILITY IN THE CIRCUMSTANCES MENTIONED BY THE ASSESSEE. THIS VIEW IS ALSO FINDS SUPPORT FROM THE DECISION OF THE HON'BLE AP & TELEG ANA HIGH COURT IN THE CASE OF BA CONTINUUM INDIA PVT LIMITED (ITTA 440 OF 2014) (SUPRA) AND ALSO BY OECD GUIDELINES, A CCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO CONSIDER THE MAR GIN IN THE CASE OF THE ASSESSEE AS WELL AS COMPARABLES AFTER EXCLUD ING DEPRECIATION. 10. AGGRIEVED BY THE ORDER OF DRP, THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL RAISING THE GROU NDS OF APPEAL WHICH HAS BEEN EXTRACTED IN THE EARLIER PART OF THIS ORDER. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. D R RELIED ON THE ORDER OF AO/TPO AND THE LD. COUNSEL FOR THE ASSESSEE RELI ED ON THE ORDER OF DRP. AS FAR AS EXCLUSION OF 3 COMPANIES VIZ., BHARATH EL ECTRONICS LTD [BEL]., MIC ELECTRONICS LTD. AND BHARATH HEAVY ELECTRICALS LTD. [BHEL] IS CONCERNED, IT IS CLEAR FROM THE ORDER OF DRP THAT T HE 3 COMPANIES WERE MANUFACTURERS OF EQUIPMENTS, WHEREAS THE ASSESSEE W AS ONLY MANUFACTURE OF COMPONENTS WHICH ARE USED IN MAKING EQUIPMENTS. THIS FUNCTIONAL DIFFERENCE HAS BEEN RIGHTLY NOTICED BY T HE DRP IN EXCLUDING THESE 3 COMPANIES FROM THE LIST OF COMPARABLE COMPA NIES. BESIDES THE ABOVE, IT IS ALSO SEEN THAT BHEL IS ENGAGED IN DIVE RSE ACTIVITIES OF MANUFACTURE OF POWER STATION EQUIPMENTS LIKE BOILER S, TURBINES, ETC. IN TERMS OF SIZE, IT IS TO BE REGARDED AS A VERY BIG C OMPANY NOT COMPARABLE WITH THAT OF ASSESSEE. WE FIND NO GROUNDS TO INTER FERE WITH THE ORDER OF IT(TP)A NO.472/BANG/2016 PAGE 8 OF 9 DRP, CONSEQUENTLY WE DISMISS THE RELEVANT GROUNDS O F APPEAL OF THE REVENUE IN THIS REGARD. 12. THE NEXT GRIEVANCE OF THE REVENUE IS THAT WHILE DETERMINING THE PLI, DEPRECIATION SHOULD BE REGARDED AS PART OF OPERATIN G COST. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES IN THIS REGARD . AT PAGE-355 OF THE PAPER BOOK FILED BY THE ASSESSEE, A CHART SHOWING THE DIF FERENCE IN THE METHOD OF CHARGE OF DEPRECIATION BY THE ASSESSEE AND THE COMP ARABLE COMPANIES CHOSEN BY THE TPO IS GIVEN. PERUSAL OF THE SAME SH OWS THAT THERE IS SUBSTANTIAL VARIATION IN THE MANNER OF CHARGING DEP RECIATION BY THE ASSESSEE AND THE COMPARABLE COMPANIES. THE QUESTIO N THEREFORE IS AS TO WHETHER THE PROFITS TO BE COMPARED SHOULD BE IGNORI NG THE DEPRECIATION CHARGE/EXPENDITURE. AN IDENTICAL ISSUE WAS CONSIDE RED BY THIS TRIBUNAL IN THE CASE OF HONEYWELL TECHNOLOGY SOLUTIONS LAB V. DCIT, 61 SOT 61 (URO) (BANG) WHEREIN THIS TRIBUNAL TOOK THE VIEW FOLLOWING DECI SION IN THE CASE OF 24/7 CUSTOMER.COM (P.) LTD. V. DY. CIT [201 3] 140 ITD 344/[2012] TAXMANN.COM 258 (BANG.), HELD THAT IF THERE ARE DIF FERENCES IN THE METHOD OF CHARGING DEPRECIATION BETWEEN THE TESTED PARTY A ND THE COMPARABLE COMPANIES, THEN THERE WOULD BE IMPACT ON THE OPERAT ING PROFITS AND IN SUCH CIRCUMSTANCES IT IS SAFE TO CONSIDER PLI WITHOUT CO NSIDERING DEPRECIATION AS PART OF THE OPERATING COST. THE TRIBUNAL IN THE CA SE OF BA CONTINUUM INDIA PVT LIMITED V. ACIT [2013] 28 ITR (TRIB.) 445 (HYD) TOOK THE VIEW THAT DEPRECIATION HAD AN IMPACT ON THE PROFIT MARGIN OF THE ASSESSEE. THE ASSESSING OFFICER WAS DIRECTED TO USE THE PROFIT LE VEL INDICATOR AS PROFIT BEFORE DEPRECIATION, INTEREST AND TAXES TO RECOMPUT E THE ARMS LENGTH PRICE. 13. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND AP PROPRIATE TO SET ASIDE THE ORDER OF DRP AND THE FINAL ORDER OF ASSESSMENT AND DIRECT THE AO/TPO TO CONSIDER THE DETERMINATION OF PLI BY CONSIDERING THE RATIO OF THE DECISIONS REFERRED TO ABOVE. IT(TP)A NO.472/BANG/2016 PAGE 9 OF 9 14. IN THE RESULT, THE APPEAL BY THE REVENUE IS TRE ATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF JULY, 2018. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 20 TH JULY, 2018. / D ESAI S MURTHY / COPY TO: 1. APP ELL ANT 2. RESPONDENT 3. CIT 4. CIT( A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.