Lear Automotive India Private Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 515/PUN/2014

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 7724 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 24-04-2018
• Assessment Year: 2009-2010
• Appeal Filed On: 14-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NIRUPAMA KOTRU
• Assessee Lawyers: DANESH BAFNA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Initiation of penalty proceedings

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E . , , ! ' , # $ BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AW ASTHY, JM . / ITA NO.515/PUN/2014 #& ' (' / ASSESSMENT YEAR : 2009-10 LEAR AUTOMOTIVE INDIA PRIVATE LIMITED. E-25, 26, 27, BHOSARI, MIDC, PUNE-411 026. PAN : AAACL1978K ....... / APPELLANT & / V/S. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-9, PUNE. / RESPONDENT ASSESSEE BY : SHRI DANESH BAFNA REVENUE BY : SMT. NIRUPAMA KOTRU / DATE OF HEARING : 24.04.2018 / DATE OF PRONOUNCEMENT : 26.04.2018 ) / ORDER PER D. KARUNAKARA RAO, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORD ERS OF DRP/TPO/AO FOR THE ASSESSMENT YEAR 2009-10. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN APPEAL: 2 ITA NO.515 /PUN/2014 A.Y.2009-10. TRANSFER PRICING ADJUSTMENT MADE TO THE INTERNATIO NAL TRANSACTION PERTAINING TO IMPORT OF RAW MATERIAL/CO MPONENTS 1. THE LD. DRP / LD. AO ERRED ON FACTS AND IN LAW IN E NHANCING THE INCOME OF THE ASSESSEE BY RS.1,92,64,620 BY HOLDING THAT THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW MATERIAL S/COMPONENTS (UNDER THE FACTORIES BUSINESS SEGMENT) FROM THE ASS OCIATED ENTERPRISES ('AES') DOES NOT SATISFY THE ARM'S LENG TH PRINCIPLE ENVISAGED UNDER THE INCOME TAX ACT, 1961 ('THE ACT' ). 2. THE LD. DRP / LD. AO ERRED ON FACTS AND IN LAW BY R EJECTING THE COST PLUS METHOD ('CPM') APPLIED BY THE APPELLANT AS THE MOST APPROPRIATE METHOD TO DEMONSTRATE THE ARM'S LENGTH NATURE OF TH E PRICING OF THE TRANSACTION PERTAINING TO IMPORT OF RAW MATERIAL/ C OMPONENTS FROM AES. 3. THE LD. DRP / LD. AO ERRED ON FACTS AND IN LAW BY A DOPTING THE TRANSACTIONAL NET MARGIN METHOD ('TNMM') FOR DETERM INING THE ARM'S LENGTH PRICE OF THE TRANSACTIONS PERTAINING TO IMPO RT OF RAW MATERIALS/ COMPONENTS. 4. THE LD. DRP / LD. AO ERRED ON FACTS AND IN LAW WHIL E APPLYING THE TNMM BY NOT CONSIDERING THE DIFFERENCES BETWEEN APP ELLANT AND THAT OF COM PARABLES AS REQUIRED BY RULE 10B(1)(E)(III) OF THE INCOME-TAX RULES, 1962 ('THE RULES'). 5. THE LD. DRP ERRED ON FACTS AND IN LAW BY NOT COMPUT ING THE ECONOMIC ADJUSTMENT PERTAINING TO DIFFERENCES IN THE LEVEL O F WORKING CAPITAL OF THE APPELLANT AN T AT OF COMPARABLES, A REQUIRED BY RULE 10B(1)(E)(III) OF THE INCOME-TAX RULES, 1962 ('THE RULES'). 6. THE LD. TPO/LD. AO ERRED ON FACTS AND IN LAW BY ERR ONEOUSLY COMPUTING THE ARM'S LENGTH PRICE OF THE TRANSACTION PERTAINING TO IMPORT OF RAW MATERIAL I COMPONENTS FROM AES WHILE APPLYING TNMM. TRANSFER PRICING ADJUSTMENT MADE TO THE INTERNATION AL TRANSACTION PERTAINING TO COST ALLOCATIONS FROM ASS OCIATED ENTERPRISES 7. THE LD. DRP / LD. AO ERRED ON FACTS AND IN LAW IN E NHANCING THE INCOME OF THE APPELLANT BY RS.1,84,97,787 BY HOLDIN G THAT THE INTERNATIONAL TRANSACTION OF COST ALLOCATION FROM T HE ASSOCIATED ENTERPRISE TO THE APPELLANT DOES NOT SATISFY THE AR M'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. 8. THE LD. DRP /LD. AO ERRED ON FACTS AND IN LAW IN DI SALLOWING THE ENTIRE VALUE OF TRANSACTION PERTAINING TO THE COST ALLOCATIONS FROM AES WITHOUT TAKING COGNIZANCE OF THE FACT THAT THE AMOU NT ALLOCATED TO IEC BUSINESS SEGMENT HAS BEEN HELD TO BE AT ARM'S LENGT H BY LD. TPO, THEREBY RESULTING IN THE DOUBLE ADJUSTMENT. 9. THE LD. DRP /LD. AO ERRED ON FACTS AND IN LAW BY RE JECTING THE COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD APPLIE D BY APPELLANT TO DEMONSTRATE THE ARM'S LENGTH NATURE OF THE PRICING OF THE TRANSACTION OF COST ALLOCATION FROM AE. 10. THE LD. DRP /LD. AO ERRED ON FACTS AND IN LAW BY ER RONEOUSLY INTERPRETING THE COST ALLOCATION ARRANGEMENT BETWEE N THE APPELLANT AND ITS AE AS A SERVICE TRANSACTION WITHOUT TAKING COGNIZANCE OF THE PRICING MECHANISM FOR THE TRANSACTION. 3 ITA NO.515 /PUN/2014 A.Y.2009-10. 11. THE LD. DRP ERRED ON FACTS AND IN LAW BY ALLOWING T HE PARTIAL RELIEF ON THE BASIS OF SAMPLE DOCUMENTS AND ONLY TO THE EXTEN T OF REFERENCE OF INDIA IN SUCH SAMPLE DOCUMENTS. 12. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE LD. AO / LD. TPO WHILE GIVING EFFECT TO DIRECTIONS OF LD. DRP, HAS ERRED B Y CONSIDERING THE INCORRECT AMOUNT OF THE INTERNATIONAL TRANSACTION P ERTAINING TO COST ALLOCATIONS FROM ASSOCIATED ENTERPRISES THEREBY RES ULTING IN EXCESSIVE TRANSFER PRICING ADJUSTMENT OF RS.25,37,909. TRANSFER PRICING ADJUSTMENT MADE TO THE INTERNATION AL TRANSACTION PERTAINING TO COST RECHARGES FROM ASSOC IATED ENTERPRISES. 13. THE LD. DRP /LD. AO ERRED ON FACTS AND IN LAW IN E NHANCING THE INCOME OF THE APPELLANT BY RS.2,70,74,788 HOLDING T HAT THE INTERNATIONAL TRANSACTION PERTAINING TO ITS COST RE CHARGES FROM THE AES DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. 14. THE LD. DRP /LD. AO ERRED ON FACTS AND IN LAW BY R EJECTING THE COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD APPLIE D BY APPELLANT TO DEMONSTRATE THE ARM'S LENGTH NATURE OF THE PRICING OF THE TRANSACTION OF COST ALLOCATION FROM AE. 15. THE LD. DRP ERRED ON FACTS AND IN LAW BY ALLOWING THE PARTIAL RELIEF ON THE BASIS OF SAMPLE DOCUMENTS. 16. THE LD. DRP /LD. AO ERRED ON FACTS AND IN LAW IN DI SALLOWING THE ENTIRE VALUE OF TRANSACTION PERTAINING TO THE COST RECHARGES FROM AES WITHOUT TAKING COGNIZANCE OF THE FACT THAT THE AMOU NT ALLOCATED TO IEC BUSINESS SEGMENT HAS BEEN HELD TO BE AT ARM'S LENGT H BY LD. TPO, THEREBY RESULTING IN THE DOUBLE ADJUSTMENT. INITIATION OF PENALTY PROCEEDINGS BY THE AO 17. THE LD. AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT FOR FURNISHING INACCURATE PART ICULARS OF INCOME. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. YOUR APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, M ODIFY AND /OR SUBSTITUTE, AND TO WITHDRAW THE ABOVE GROUNDS OF AP PEAL. THUS, THE TP ADJUSTMENTS MADE TO THE (I) TRANSACTION OF IMPORT OF RAW MATERIAL/COMPONENTS; (II) COST ALLOCATIONS FROM ASSOCIATED ENTE RPRISES AND (III) COST RECHARGES FROM ASSOCIATED ENTERPRISES ARE THE ISSUES RAISED IN THE APPEAL. 3. BRIEFLY STATED RELEVANT FACTS INCLUDES THAT THE ASSESS EE-COMPANY IS ENGAGED IN THE BUSINESS OF INTERIOR DESIGN AND DEVELOPMENT , MANUFACTURING ASSEMBLY OF AUTOMOTIVE SEATING SYSTEM AND ENGINEERING S ERVICES TO AUTOMOTIVE 4 ITA NO.515 /PUN/2014 A.Y.2009-10. INDUSTRY. THE ASSESSEE FILED ITS RETURN OF INCOME ON 29.09.20 09 DECLARING LOSS OF RS.18,97,75,614/-. THE ASSESSEE ENTERED INTO INTERNATIONAL T RANSACTIONS WITH THE ASSOCIATED ENTERPRISES (AES). THEREFORE, THE MATTER WAS RE FERRED TO THE TRANSFER PRICING OFFICER (TPO) FOR BENCHMARKING INTERNATIONAL TRANSACT IONS. THE TPO RECOMMENDED FOLLOWING ADJUSTMENTS AND THE SUMMARY OF ADJ USTMENT NARRATED IN PARA-7 OF THE ORDER IS GIVEN AS FOLLOWS: 7. SUMMARY OF ADJUSTMENTS THE SUMMARY OF ADJUSTMENT U/S. 92CA IS AS UNDE R: PARTICULAR ADJUSTMENT ON ACCOUNT OF IMPORT OF RAW MATERIALS/COMPONENTS ( FACTORY SEGMENT) 1,92,64,620 COST ALLOCATION RS.2,60,08,841 COST RECHARGES RS.9,71,01,546 TOTAL RS.14,23,75,007 THUS, THE ABOVE AMOUNT OF RS.14,23,75,007/- IS TREA TED AS TRANSFER PRICING ADJUSTMENT FOR THE FY 2008-09. 4. THE ASSESSING OFFICER MADE DRAFT ASSESSMENT ORDER U/S .144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE AC T) INCORPORATING THE SAID ADJUSTMENT IN FEBRUARY, 2013 DETERMINING TOTAL LOSS OF RS. 4,74,00,607/- BEFORE SUPPLYING THE COPY OF IT TO THE ASSESSEE. AGAINST THE S AME, ASSESSEE WENT TO THE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE ADDITIONS PROPOSE D BY THE ASSESSING OFFICER/TRANSFER PRICING OFFICER. THE TRANSFER PRICING OFFICER ISS UED DIRECTIONS VIDE DIRECTION DATED 24.01.2013. EVENTUALLY, THE ASSESSING O FFICER FINALIZED THE ASSESSMENT ON 28.01.2014 DECLARING TOTAL LOSS OF RS.12,49,38,4 19/-. AGGRIEVED BY THE SAME, THE ASSESSEE IN APPEAL BEFORE TRIBUNAL WITH T HE GROUNDS MENTIONED ABOVE. 5. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THERE ARE FOUR MAIN ISSUES RELATING TO (I) TRANSFER PRICING ADJUSTMENT MADE TO THE INTERNATIONAL 5 ITA NO.515 /PUN/2014 A.Y.2009-10. TRANSACTION PERTAINING TO IMPORT OF RAW MATERIAL/COMPONEN TS. (II) TRANSFER PRICING ADJUSTMENT MADE TO THE INTERNATIONAL TRANSACTION PERTAINING TO COST ALLOCATIONS FROM ASSOCIATED ENTERPRISES (III) TRANSFER PRICING AD JUSTMENT MADE TO THE INTERNATIONAL TRANSACTION PERTAINING TO COST RECHARGE S FROM ASSOCIATED ENTERPRISES AND (IV) INITIATION OF PENALTY PROCEEDINGS BY THE LD. AO. 6. REFERRING TO THE FIRST ISSUE, THE LD. COUNSEL OF THE ASS ESSEE SUBMITTED THAT THERE ARE SIX GROUNDS UNDER THE SAME. DEVIATING FROM TH E SAME, LD. COUNSEL SUBMITTED THAT EXCEPT GROUND NO.5, GROUND NOS. 1 TO 4 AND 6 ARE NOT P RESSED. 7. AFTER HEARING BOTH THE PARTIES, THE GROUND NOS.1 TO 4 AND 6 ARE DISMISSED AS NOT PRESSED . 8. REFERRING TO GROUND NO.5, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT HE MERELY WANTS GRANTING OF WORKING CAPITAL ADJUSTMENT BEFOR E QUANTIFYING THE ADJUSTMENT AS REQUIRED BY RULE 10B(1)(E) (III) OF THE INCOME- TAX RULES, 1963. FURTHER, RELYING ON THE ORDER OF TRIBUNAL IN THE CASE OF D EMAG CRANES & COMPONENTS (INDIA) PVT. LIMITED VS. DCIT, IN ITA NO.120/PN/2 011 DECIDED ON 04.01.2012, LD. COUNSEL SUBMITTED THAT THE SAID WORKING C APITAL ADJUSTMENTS ARE ALLOWABLE, IN PRINCIPLE AND IT IS IN FAVOUR OF ASSESSEE. IN T HIS REGARD, BRINGING OUR ATTENTION TO PARA-20 (PAGE-8) OF THE TRIBUNALS ORDER (SUPRA.), TH E LD. COUNSEL SUBMITTED THAT THE MATTER MAY BE REMANDED BACK TO TH E FILE OF ASSESSING OFFICER FOR GRANTING THE SAME IN ACCORDANCE WITH THE PRINCIPLES AP PROVED IN THE CASE OF DEMAG CRANES & COMPONENTS (INDIA) PVT. LIMITED VS. DCIT (SUPRA) BY TRIB UNAL. 9. AFTER HEARING BOTH THE PARTIES ON THIS ISSUE, WE FIND, IN P RINCIPLE, IT IS DECIDED ISSUE AND THE ASSESSEE IS ENTITLED TO FAIR ADJUSTM ENTS ON ACCOUNT OF WORKING CAPITAL FOR ELIMINATING OF THE MATERIAL EFFECTS. FOR TH IS PROPOSITION, PARA-33 OF THE TRIBUNALS ORDER (SUPRA) IS RELEVANT AND T HE SAME IS EXTRACTED AS UNDER: 6 ITA NO.515 /PUN/2014 A.Y.2009-10. 33. WE HAVE ALREADY DISCUSSED IN THE PRECEDING PARA GRAPHS, THIS ISSUE OF ADJUSTMENT ON ACCOUNT OF WC WAS RAISED FOR THE FIRS T TIME BEFORE THE LD. DRP AND THE DRP HAS PASSIVELY RELIED ON THE ORDER O F TPO WITHOUT REALIZING THAT THE SAID ISSUE WAS NEVER DEALT WITH BY THE TPO . THEREFORE, THE ISSUE OF GRANTING OF ADJUSTMENT ON ACCOUNT OF WORKING CAPIT AL FOR ELIMINATING OF THE MATERIAL EFFECTS AND THE ISSUE OF, IF SUCH ADJUSTMENT @ 3.41% CONSTITUTES THAT DIFFERENCE, IF ANY, WHICH IS LIKELY TO MATERIALLY AFFECT THE PRICE/PROFIT MARGIN, HAVE NOT BEEN EXAMINED. WE FIN D THAT THERE ARE WRITTEN REQUEST OF THE ASSESSEE TO DRP TO THIS EXTENT AND A SSESSEE FURNISHED THE RELEVANT FIGURES, WHICH ARE ENOUGH TO ADJUDICATE TH E SAID REQUEST BY THE AO/DRP. IT IS NOT THE CASE OF THE DRP THAT THE ABOV E CLAIMS OF THE ASSESSEE ARE INCORRECT. ALTERNATIVELY, IT IS NOT THE REQUEST OF THE REVENUES DR THAT THESE SAIS ISSUES SHOULD BE REMITTED FOR ANOTHER RO UND OF THE PROCEEDINGS BEFORE THE REVENUE AUTHORITIES. IN OUR OPINION, THE EXISTENCE OF DIFFERENCE @ 3.41%, WHICH IS WORTH RS.31,72,099/-, ATTRIBUTABLE TO THE WORKING CAPITAL OUGHT TO AMOUNT TO THE MATERIAL DIFFERENCE CONSID ERING THE EXISTING UNADJUSTED OPERATING MARGIN OF THE COMPARABLES AT 7 .18%. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE SAID WORKING CAPITAL DIFFERENCES CONSTITUTES QUANTITATIVELY LIKELY TO MA TERIALLY AFFECT THE ALP/AL OPERATING MARGIN OF THE COMPARABLE. THEREFORE, THE CLAIMS OF THE ASSESSEE ARE ALLOWED . ACCORDINGLY, THE GROUNDS 4(A) IS COVERED BY THE CITED DECISIONS AND IS ALLOWED PRO-TANTO. CONSIDERING THE ABOVE, WE ARE OF OPINION THAT REQUEST OF ASSESSEE FOR REMITTING THE ISSUE BACK TO THE FILE OF ASSESSING OFFICER/TPO WITH IDENTICAL DIRECTIONS IS ALLOWED. THE ASSESSING OFFICER SHALL GRANT REASO NABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, GROUND NO. 5 RAISED BY ASSESSEE IS ALLOWED IN PRO-TANTO . 10. REFERRING TO THE SECOND AND THIRD ISSUES, THE LD. COUN SEL OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS RAISED TEN GROUNDS IN THIS RESPECT AND OUT OF WHICH SERIAL. NO. 7 TO 12 RELATE TO COST ALLOCATIONS FROM ASSOCIATED ENTERPRISES AND GROUND NOS.13 TO 16 PERTAINS TO COST RECHARGES FROM ASSOCIATED ENTERPRISES. BRINGING OUR ATTENTION TO THE PAPER BOOK DA TED 28.07.2016, LD. COUNSEL SUBMITTED THAT ASSESSEE MADE AN APPLICATION UNDE R RULE 29 OF INCOME TAX (APPELLATE TRIBUNAL) RULES, 1963 SEEKING PERMISSION TO FILE ADDITIONAL EVIDENCES IN SUPPORT OF THE SAID GROUNDS. REFERRING TO SAID ADDITIONA L EVIDENCES AT PAGE 405 TO 592, THE LD. COUNSEL SUBMITTED THAT THE SE ADDITIONAL EVIDENCES IN THE FORM OF PAPER BOOK WILL GO ROOT OF THE ISSUES IN SO FAR AS ALLOCATION OF COST FROM ASSOCIATED ENTERPRISES AS WELL AS COST CHARGES FROM THE ASSOCIATED 7 ITA NO.515 /PUN/2014 A.Y.2009-10. ENTERPRISES FOR DECIDING TP ADJUSTMENT IN CORRECT MANNE R. IT IS THE REQUEST OF LD. COUNSEL OF ASSESSEE FOR ADMITTING THE ADDITIONAL EVIDENCES A ND REFERRING THE MATTER TO THE FILE OF ASSESSING OFFICER/TPO FOR FRESH ADJUDIC ATION OF THE ISSUE RAISED IN ALL THESE GROUNDS I.E. SERIAL NO. 7 TO 16. 11. ON GOING THROUGH THE SAID ADDITIONAL EVIDENCES, ON HEA RING BOTH THE PARTIES, WE ARE OF THE OPINION THAT REQUEST OF THE LD. COU NSEL SHOULD BE ADMITTED AND REMITTED THE ISSUES BACK TO THE FILE OF ASSESSING OFFIC ER/TPO FOR FRESH ADJUDICATION AFTER CONSIDERING THE SAID ADDITIONAL EVIDENCES. NEEDLESS TO SAY, ASSESSING OFFICER SHALL GRANT REASONABLE OPPORTUNITY OF BEIN G HEARD TO THE ASSESSEE IN ACCORDANCE WITH SET PRINCIPLES OF NATURAL JUS TICE. ACCORDINGLY, ISSUE RAISED IN GROUNDS I.E SERIAL NO. 7 TO 16 BY ASSESSE E ARE ALLOWED FOR STATISTICAL PURPOSES . 12. WITH REGARD TO FOURTH ISSUE I.E. INITIATION OF PENALTY PROCE EDINGS U/S. 271(1)(C) OF THE ACT FOR FURNISHING INACCURATE PARTICULARS OF INC OME, WE FIND THAT THIS ISSUE IS PREMATURE FOR OUR ADJUDICATION AT THIS POINT OF TIME AND AC CORDINGLY, WE DISMISS THE SAME AS PREMATURE. 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THURSDAY, THE 26 TH DAY OF APRIL, 2018. SD/- SD/- ( ! ' /VIKAS AWASTHY) ( . / D. KARUNAKARA RAO ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; !' / DATED : 26 TH APRIL, 2018. SB 8 ITA NO.515 /PUN/2014 A.Y.2009-10. ) * +#,-! .!(, / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT (APPEALS)-13, PUNE. 4. THE CIT-IT/TP, PUNE. 5. %&' () , * () , + +,- , / DR, ITAT, B BENCH, PUNE. 6. './ 01 / GUARD FILE. // TRUE COPY // * 2 / BY ORDER, 3 (- /PRIVATE SECRETARY * () , / ITAT, PUNE.