M/s Lumax Industries Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 4824/DEL/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87195 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 23-03-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 03-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JUDY JAMES SPL
• Assessee Lawyers: R K KAPOOR
• Keywords: Related party transaction; Transfer pricing; International transaction; Earning of tax free income
• Section: 92C; 143(3); 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I , NEW DELHI BEFORE SHRI H.S.SIDHU, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER ITA NO. 4824 /DEL/201 0 AY: 2 00 6 - 07 LUMAX INDUSTRIES LTD. VS. ACIT B 85 - 86, MAYAPURI INDL. AREA RANGE 4 PHASE I, NEW DELHI NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY : SH. R.K.KAPOOR, C.A. RESPONDENT BY : JUDY JAMES, SPL.COUNSEL, D.R. ORDER PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER THIS IS AN APPEAL AT THE INSTANCE OF THE ASSESSEE AND IS DIRECTED AGAINST THE ORDER OF THE ASSESSING OFFICER PASSED U/S 143 R.W.S. 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) DT. 24.8.2010 PERTAINING TO THE ASSESSMENT YEAR 2006 - 07 ON THE FOLLOWING GROUNDS. 1. THAT THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) R.W.S. 144C ON THE DIRECTIONS GIVEN BY THE DRP IS BAD IN LAW. 2.1. THAT THE DRP HAS GROSSLY ERRED IN DISMISSING THE VARIOUS OBJECTIONS FILE BY T HE APPELLANT IN A SUMMARY MANNER AND WITHOUT PROPER APPLICATION OF ITS MIND ON THE VARIOUS ISSUES RAISED BEFORE IT. 2.2. THAT THE DRP HAS MOSTLY ERRED IN UPHOLDING THE FINDINGS AND RECOMMENDATIONS MADE BY THE TPO AND THE AO IN THEIR ORDERS IN A SUMMARY MA NNER, WHICH IS AGAINST THE JUDICIAL PRINCIPLE REQUIRING JUDICIAL ORDERS TO BE SPEAKING ORDERS. 3. THAT THE DISPUTE RESOLUTION PANEL (DRP)/ASSESSING OFFICER(AO)/ TRANSFER PRICING OFFICER (TPO) HAS GROSSLY ERRED IN LAW AND ON FACTS, IN THE CIRCUMSTANCES OF THE APPELLANT'S CASE IN MAKING AN ADDITION OF RS.77,44,161/ - ON ACCOUNT OF THE ORDER OF THE AO/ TPO, ADDITION U/S 14A READ WITH RULE 8D OF RS.8,80,095/ - AND DISALLOWANCE OF WARRANTY PROVISION OF RS.42,07,000/ - . 2 THE ADDITIONS MADE ARE WHOLLY ILLEGAL, UNTENA BLE AND ON ERRONEOUS GROUNDS. THE ENTIRE ADDITION OF RS. 1,28,31 ,256/ - IS PRAYED TO BE DELETED. 4. THAT THE ORDER OF ASSESSMENT INCLUDING THAT OF TPO IS BAD IN LAW. 5.1. THAT THE ADDITION OF RS.77,44,161/ - MADE BY THE AO/TPO UNDER THE PROVISIONS OF SEC TION 92CA OF THE INCOME TAX ACT IS BAD IN LAW. 5.2. THAT THE AO/TPO HAVE GROSSLY ERRED IN MAKING ADDITION AMOUNTING TO RS.77,44,161/ - BASED ON HIS CALCULATIONS TO ARRIVE AT THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. 5.3. THAT THE AO/TPO H AS GROSSLY ERRED IN LAW FOR NOT GIVING THE BENEFIT ON ACCOUNT OF SAFE HARBOUR RULE U/S 92C OF THE INCOME TAX ACT, 1961, WHICH ALLOWS AN ADJUSTMENT OF +1 - 5% TO THE ARM'S LENGTH PRICE DETERMINED BY THE TPO AND THAT PRICE AT WHICH THE TRANSACTIONS HAVE ACTUA LLY BEEN UNDERTAKEN. 5.4. THAT THE LEARNED AO/TPO HAS GROSSLY ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANT'S CASE IN MAKING ADJUSTMENT IN THE ARM S LENGTH PRICE OF THE ASSESSEE BY HOLDING THAT THE INTERNATIONAL TRANSACTION CARRIED OUT BY THE APPELLANT AND IT S A.E. ARE NOT ON ARM S LENGTH BY APPLYING THE WRONG PRINCIPLES AND BY ADOPTING WRONG CALCULATIONS. 5.5.THAT THE TPO HAS GROSSLY ERRED IN LAW AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANT'S CASE IN NOT MAKING ADJUS TMENT WITH REGARD TO THE INCIDENCE OF EXCISE DUTY FOR CALCULATING THE OPERATING PROFIT MARGIN OF THE COMPARABLE COMPANIES, WHICH WAS CLAIMED BEFORE HIM DURING THE COURSE OF ASSESSMENT PROCEEDINGS IN ORDER TO ESTABLISH A LEVEL PLAYING FIELD AS BETWEEN THE T ESTED PARTY AND THE COMPARABLE COMPANIES. 5.6. THE TPO HAS GROSSLY ERRED IN REJECTING THE ASSESSEE'S SEGMENTAL FINANCIAL STATEMENTS BASED ON FALSE ALLEGATIONS THAT THEY MAY BE MANIPULATED. THE AO/TPO DID NOT HAVE ANY VALID REASON OR INFORMATION TO SUPPORT HIS ALLEGATION. THE TPO FAILED TO APPRECIATE THAT SUCH SEGMENTAL WERE DRAWN AT THE INSTANCE OF TPO HIMSELF AND THAT ALL THE INTERNATIONAL TRANSACTIONS WERE FOUND TO BE AT ARM'S LENGTH BASED ON INTERNAL TNMM ALSO. 5.7. THE TPO HAS GROSSLY ERRED IN LAW IN DECIDING THE ACCEPTABLE LIMITS OF RELATED PARTY TRANSACTION FOR ACCEPTANCE OF COMPARABLE COMPANIES. THE TPO HAS HELD IN PARA 14, PAGE NO.I8 OF HIS ORDER THAT THE PROPER THRESHOLD LIMIT FOR ACCEPTING A COMPANY AS COMPARABLE IS RELATED PARTY TRANSACTIONS OF 26% WHICH IS TOTALLY ERRONEOUS. 5.8. THAT THE TPO HAS GROSSLY ERRED IN LAW AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANT'S CASE IN NOT MAKING ADJUSTMENT WITH REGARD TO THE INCIDENCE OF EXCISE DUTY FOR CALCULATING THE OPERATING PROFIT MARGIN O F THE COMPARABLE COMPANIES, WHICH WAS CLAIMED BEFORE HIM DURING THE COURSE OF ASSESSMENT PROCEEDINGS IN ORDER TO ESTABLISH A LEVEL PLAYING FIELD AS BETWEEN THE TESTED PARTY AND THE COMPARABLE COMPANIES. 6. THAT THE ADJUSTMENT MADE BY THE AO ON THE GROUND OF DISALLOWANCE OF EXPENSES INCURRED FOR EXEMPT INCOME U/S 14A READ WITH RULE 8D OF THE LT. 3 ACT IS ERRONEOUS, FACTUALLY INCORRECT, ILLEGAL NOT MAINTAINABLE IN LAW AND IS PRAYED TO BE SET ASIDE. 7.THAT THE ADJUSTMENT MADE BY THE AO ON THE GROUND OF DISALLO WANCE OF PROVISION FOR WARRANTY EXPENSES (AMOUNTING TO RS 42,07,000) IS ERRONEOUS, FACTUALLY INCORRECT, ILLEGAL NOT MAINTAINABLE IN LAW AND IS PRAYED TO BE SET ASIDE. 8. THAT EACH GROUNDS OF APPEAL IS INDEPENDENT OF AND WITHOUT PREJUDICE TO THE OTHER GRO UNDS. PRAYER THE APPELLANT - ASSESSEE PRAYS THAT THE RELIEF AS PER GROUNDS OF APPEAL ABOVE MAY KINDLY BE ALLOWED TO IT AND THE APPELLANT MAY ALSO BE ALLOWED TO ADD, DELETE, AMEND OR SUBSTITUTE ANY GROUND(S) OF APPEAL EITHER AT OR BEFORE THE DATE OF HEARING . 2. THE ASSESSEE IS ENGAGED MAINLY IN THE BUSINESS OF MANUFACTURING EQUIPMENTS FOR DIFFERENT TYPES OF VEHICLES MANUFACTURED IN INDIA. THE MAJOR PART OF THE SALES WAS EFFECTED TO THE ORIGINAL EQUIPMENT MANUFACTURERS. 3. WE HAVE HEARS SHRI RK KAPOOR, THE LD.COUNSEL FOR THE ASSESSEE AND MR.JUDY JAMES, THE SPECIAL COUNSEL, D.R. ON BEHALF OF THE REVENUE. 4. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, ON PERUSAL OF MATERIAL ON RECORD, ORDERS OF THE AUTHORITIES BELOW, CASE LAWS CITED, WE HOLD AS FOLLOWS. 5. GROUND NOS. 1 TO 3 ARE GENERAL IN NATURE. GROUND NOS. 4 TO 5.8 ARE AGAINST THE TRANSFER PRICING ADJUSTMENT AS CONFIRMED BY THE (DISPUTE RESOLUTION PANEL (D.R.P). ONE OF THE CONTENTIONS THAT WAS ARGUED BEFORE US, IS THE QUE STION WHETHER THE TRANSFER PRICING OFFICER ( T.P.O. ) WAS RIGHT IN REJECTING JAGAN LAMPS LTD., AS A COMPARABLE. AFTER HEARING RIVAL CONTENTIONS WE FIND THAT M/S JAGAN LAMPS LTD. W AS ACCEPTED AS A COMPARABLE FOR THE ASSESSMENT YEAR ( A.Y. ) 2004 - 05 BY THE L D.CIT(A), WHICH ORDER WAS UPHELD BY THE ITAT. FURTHER FOR THE A.Y. 2005 - 06, THE TPO HIMSELF HAS RETAINED JAGAN LAMPS LTD. AS A COMPARABLE. WE ALSO FIND THAT THE TPO HAS NOT GIVEN ANY REASON WHATSOEVER IN HIS ORDER AS TO WHY HE HAS NOT ACCEPTED M/S JAGAN LAMPS LTD. A S A COMPARABLE. SIMILARLY THE DRP 4 HAS NOT GIVEN ANY REASON AS TO WHY IT UPHELD THE DECISION OF THE TPO. UNDER THE CIRCUMSTANCES WE ARE OF THE CONSIDERED OPINION THAT JAGAN LAMPS LTD. I S TO BE ACCEPTED AS A COMPARABLE. THE LD.COUNSEL FOR THE ASSESSEE SUBMITS THAT IF JAGAN LAMPS LTD. IF ACCEPTED AS A COMPARABLE, HE WOULD NOT PRESS THE ACCEPTANCE OR DELETION OF THE OTHER COMPARABLES AS IT WOULD RESULT IN THE TRANSFER PRICE BEING AT ARM S LENGTH . IN VIEW OF THIS AND IN VIEW OF THE FACT THAT W E HAVE DIRECTED ACCEPT ANCE OF JAGAN LAMPS LTD. AS A COMPARABLE WE DISPOSE OF THIS GROUND ACCORDINGLY. 6. GROUND NO.6 IS ON DISALLOWANCE U/S 14A. RULE 8D WAS APPLIED BY THE REVENUE AUTHORITIES. THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF MAXO PP INVESTMENTS LTD. REPORTED IN 247 CTR 162 (DEL) HAS HELD THAT THE RULE IS NOT RETROSPECTIVE IN NATURE. THUS WE UPHOLD TH IS CONTENTION OF THE ASSESSEE. IT WAS SUBMITTED BY BOTH THE PARTIES THAT THE DISALLOWANCE IN QUESTION U/S 14A BE RESTRICTED TO 10% OF THE EXEMPT INCOME EARNED BY THE ASSESSEE . AS THE SAME IN OUR VIEW IS REASONABLE UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE , WE DIRECT THAT THE DISALLOWANCE BE RESTRICTED TO 10% OF EXEMPT INCOME EARNED . IN THE RESULT GROUND NO.6 IS PARTLY ALLOWED. 7. GROUND NO.7 IS AGAINST THE DISALLOWANCE OF PROVISION FOR WARRANTY. THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THIS BENCH OF THE TRIBUNAL IN THE ASSESSEE S OWN CASE FOR THE A.Y. 2008 - 09 WHEREIN AT PARA 40 IT IS HELD AS FOLLOWS. 40. IN THIS REGARD, IT IS SEEN THAT THE A.O. MADE THE DISALLOWANCE ON THE BASIS THAT THE PROVISION FOR WARRANTY WAS A CONTINGENT LIABILITY, HAVING NO SCIENTIFIC BASIS. INDEED, UNDISPUTEDLY, THE ASSESSEE WAS MAKING THE PROVISIONS ON A CTUAL WARRANTY BASIS FOR THE UNEXPIRED WARRANTY PERIOD, PROVIDING WARRANTY OF ONE YEAR ON THE PRODUCTS WHICH IT WAS SELLING. IT CREATED PROVISION FOR WARRANTY FOR THE UNEXPIRED PERIOD OF WARRANTY AS AT THE END OF THE YEAR, ON A PERCENTAGE OF THE ACTUAL WA RRANTY EXPENSES DURING THE IMMEDIATELY PRIOR PERIOD, ON THE SALES MADE. IT HAS NOT BEEN SHOWN AS TO HOW THIS BASIS OF MAKING THE PROVISION WARRANTY IS NOT SCIENTIFIC. MOREOVER, SIMILAR PROVISION FOR WARRANTY WAS NOT DISALLOWED IN THE EARLIER YEARS, UPTO A.Y. 2005 - 06. THIS POSITION IS ALSO SUPPORTED BY THE HON BLE SUPREME COURT S 5 DECISION IN ROTORK CONTROLS INDIA P.LTD. AND THE HON BLE DELHI HIGH COURT DECISION IN BECTON DICKINSON. ACCORDINGLY THIS ADDITION IS DELETED AND GROUND NO.5 IS ALLOWED. 7.1 . CONSISTENT WITH THE VIEW TAKEN THEREIN WE DISPOSE OF THIS GROUND OF THE ASSESSEE. 8. IN THE RESULT THE APPEAL BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 1 S T MARCH, 2015 . S D / - S D / - ( H.S.SIDHU ) ( J. SUDHAKAR REDDY ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 3 1 S T MARCH, 2015 MANGA COPY FORWARDED TO: - 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR