CET Power Solutions India Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 546/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8687 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 21-07-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 09-03-2016
• Court: TRIBUNAL
• Department Lawyers: M N MAURYACIT
• Assessee Lawyers: B GIBIN JACOBC A
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Working capital adjustments
• Section: 143(3); 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , ! ' , # $% & [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ] ./ I.T.A.NO.546/MDS./2016 / ASSESSMENT YEAR : 2011-12 M/S.CET POWER SOLUTIONS INDIA PRIVATE LIMITED, 2/295, DPR AVENUE,AUDCO NAGAR, KATTUPAKKAM, CHENNAI 600 056. VS. DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-1(2), CHENNAI 600 034. [PAN AADCC 2912 P ] ( '( / APPELLANT) ( )*'( /RESPONDENT) / APPELLANT BY : MR.B.GIBIN JACOB,C.A /RESPONDENT BY : MR.M N MAURYA,CIT DR / DATE OF HEARING : 21 - 07 - 201 6 / DATE OF PRONOUNCEMENT : 29 - 07 - 2016 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE DY. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE I( 2),CHENNAI DATED 21.01.2016 PASSED U/S.143(3) R.W.S. 92CA(3) OF THE ACT, WHICH IS EMANATED FROM DIRECTION OF THE DISPUTE RESOLUTION P ANEL (DRP), ITA NO.546/MDS./16 :- 2 -: CHENNAI PASSED U/S.143(3) R.W.S. 92CA(3) R.W.S 144C (1) OF THE ACT DATED 28.12.2015 OF THE ACT PERTAINING TO ASSESSME NT YEAR 2011-12. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS. 1) THE ORDER PASSED BY THE LEARNED ASSESSING OFFICE R (AO) UNDER SECTION 143(3) READ WITH SECTION 92CA(3) AND SECTIO N 144C(12) OF THE INCOME-TAX ACT (THE ACT) IS CONTRARY TO LAW, FA CTS AND CIRCUMSTANCES OF THE CASE. 2) THE LEARNED AO/ TRANSFER PRICING OFFICER (TPO) E RRED IN MAKING ADDITIONS TO THE EXTENT OF RS.1,83,00,000 TO THE TO TAL INCOME OF THE ASSESSEE ON ACCOUNT OF ADJUSTMENT IN ARMS LENG TH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS ENTERED BY THE AS SESSEE WITH ITS ASSOCIATED ENTERPRISE (AE). 3) THE HONBLE DRP/ LEARNED TPO HAS ERRED .IN REJEC TING THE ECONOMIC ANALYSIS AND OPERATING PROFIT, MARGIN ON A SSETS SELECTED AS PROFIT LEVEL INDICTOR (PU) AND IN CONDUCTING A F RESH ECONOMIC ANALYSIS DETEMINATION OF ARMS LENGTH PRICE (ALP) F OR THE IMPUGNED INTERNATIONAL TRANSACTION. 4) THE HONBLE DRP/ LEARNED TPO COMPUTED OPERATING PROFIT MARGIN OVER OPERATING COST [OP/OC] 5.49% WHILE COMPUTING T HE ALP. THE OP/CC OF THE AE OF THE APPELLANT I.E., CET SA, BELG IUM, 2.20% FOR THE FISCAL YEAR 2010, WHEREAS THE OP/OC OF THE APPE LLANT WAS (-) 0.77% FOR THE FINANCIAL 2010-11. THE HIGHER ADJUSTM ENT ON ACCOUNT OF ALP RESULTS IN TAXING THE NOTIONAL INCOM E WHICH THE APPELLANT NOR ITS AE HAS EARNED. 5) THE HONBLE DRP/ LEARNED TPO HAS ERRED IN NOT CO NSIDERING WORKING CAPITAL ADJUSTMENTS WHICH NECESSARY FOR ADJ USTING THE ITA NO.546/MDS./16 :- 3 -: DIFFERENCE IN FUNCTIONS OR TERMS GIVING RISE TO DIF FERENCES IN CAPITAL FOR THE COMPARABLE COMPANIES AND THE TESTED PARTY. 6) THE HONBLE DRP/ LEARNED TPO HAS ERRED IN SELECT ING POWER BUILD LIMITED AS COMPARABLE, WHICH IS FUNCTIONALLY DIFFER ENT AND NOT COMPARABLE FOR THE PURPOSE OF BENCHMARKING THE INTE RNATIONAL TRANSACTIONS WHICH ARE UNDERTAKEN BY THE APPELLANT. 7) THE HONBLE DRP/ LEARNED TPO OUGHT TO HAVE ADOPT ED SEGMENTAL RESULTS OF ACCURATE TRANSFORMERS LIMITED, PARTICULA RLY WHEN THE COMPARABLE IS INVOLVED IN VARIOUS LINE OF BUSINESS FOR THE PURPOSE OF BENCHMARKING. 8) THE LEARNED AC ERRED IN NOT FOLLOWING DIRECTIONS OF THE HONBLE DRP FOR NOT SETTING OFF BUSINESS LOSSES OF A NON-EL IGIBLE UNIT AGAINST THE PROFITS OF UNITS ELIGIBLE FOR DEDUCTION S UNDER SECTION 10B OF THE ACT. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE COM PANY IS A SUBSIDIARY OF CET SA BELGIUM AND CET INTERNATIONAL SA BELGIUM, CET INDIA WAS INCORPORATED IN MARCH 2008. CET INDIA HAS ITS MANUFACTURING AND R&D FACILITY IN CHENNAI. THE MANUFACTURING AND R&D UNITS ARE REGISTERED AS 100% EOUS UNDER EHTP AND STPI SCHEMES RESPECTIVELY. CET INDIA IS ENGAGED IN THE MANUFACTURE OF MODULAR INVERTERS AND POWER SYSTEM. IT ALSO PROVIDES R&D SUPPORT TO THE GROUP. 3.1. THE TPO PASSED AN ORDER U/S.92CA(3) ON 31.12. 2014 PROPOSING AN UPWARD ADJUSTMENT OF 1.86 CRORES. THE DRP IN IT S ORDER DATED 28..12.2015 HAD HELD THE CASE IN FAVOUR OF THE REVE NUE AND DIRECTED ITA NO.546/MDS./16 :- 4 -: THE TPO TO EXCLUDE INTEREST EXPENSES. ON GIVING EFF ECT TO THE DIRECTIONS OF THE DRP, THE ADJUSTMENT STANDS AT 1.8 3 CRORES. AGGRIEVED WITH THE DIRECTION OF DRP THE ASSESSEE IS IN APPEAL BEFORE US. 4.1 THE LD.A.R SUBMITTED THAT GROUND NOS.1 & 2 ARE TOO GENERAL, WHICH DOES NOT REQUIRE ADJUDICATION. 4.1.1 REGARDING GROUND NOS.3, 4, 6, 7, LD.A.R SUBM ITTED THAT THE DRP HAS NOT GIVEN ANY SPECIFIC FINDINGS ON THIS ISSUE. 4.1.2 REGARDING GROUND NO.5, LD.A.R SUBMITTED THAT THE DRP HAS NOT CONSIDERED THIS GROUND. 4.1.3 REGARDING GROUND NO.8, LD.A.R SUBMITTED THAT THE DRP HAD GIVEN DIRECTION ON THIS ISSUE, BUT THE LD. ASSESSIN G OFFICER HAS NOT FOLLOWED THE SAME IN HIS FINAL ORDER. 4.2 ON THE OTHER HAND, LD.D.R SUBMITTED THAT THE TP O REJECTED THE ECONOMIC ANALYSIS OF THE ASSESSEE ON SOUND REASONIN G AS GIVEN IN PARA NOS.7.4 TO 7.7 IN THE TP ORDER AND HAD THEREAFTER P ROCEEDED TO CONDUCT A FRESH ECONOMIC ANALYSIS FOR THE DETERMINA TION OF THE ALP. THE DRP UPHELD THE FINDINGS OF THE TPO. FURTHER, LD .D.R SUBMITTED THAT ANY TRANSACTION THAT TAKES PLACE BETWEEN AN AS SESSEE AND ITS A.E IS SUBJECT TO TRANSFER PRICING ANALYSIS UNDER WHICH , APPLYING SUITABLE METHODS, THE TRANSACTIONS (IN THIS CASE THE MARGINS TNMM BEING THE ITA NO.546/MDS./16 :- 5 -: MAM) OF THE ASSESSEE (ASSESSEE BEING THE TESTED PAR TY IN THIS CASE) IS COMPARED WITH THAT OF ITS PEERS. IF THE PRICE CHAR GED FOR THE PARTICULAR TRANSACTION WITH ITS AE IS LESS THAN THE ALP THEN A N ADJUSTMENT IS MADE. MOREOVER, THE TPO IS NOT REQUIRED TO PROVE TH E SHIFTING OF PROFITS FROM INDIA TO OUTSIDE INDIA. FURTHER, LD.D. R RELIED ON THE DECISION OF TRIBUNAL IN THE CASE OF M/S.DELOITT CO NSULTING INDIA P LTD AND 24/7 CUSTOMERS PVT LTD. 4.2.1 FURTHER, LD.D.R SUBMITTED THAT THE ASSESSEE HAS NEITHER RESERVED THE RIGHT FOR WORKING CAPITAL ADJUSTMENTS NOR REQUE STED FOR WORKING CAPITAL ADJUSTMENTS DURING THE COURS OF THE PROCEED INGS. NOTWITHSTANDING THE ABOVE, THE BENEFIT OF WORKING C APITAL ADJUSTMENTS SHOULD NOT BE GIVEN TO THE ASSESSEE AS THE ASSESSEE HAS NOT DEMONSTRATED A NEGATIVE WORKING CAPITAL SCENARIO WH ICH IS NECESSARY TO CLAIM THE WORKING CAPITAL ADJUSTMENTS. THIS WAS UPHELD BY THE CO-ORDINATE BENCH OF CHENNAI TRIBUNAL IN THE CASE O F M/S.MOBIS INDIA LTD. LASTLY, LD.D.R SUBMITTED THAT THE COMPARABLES POWER BUILD LTD., AND ACCURATE TRANSFORMERS LTD. HAVE BEEN IDENTIFIED ONLY ON THE BASIS OF THEIR FUNCTIONAL SIMILARITY WITH THE ASSESSEE. I N ADDITION, THE TRANSACTIONAL NET MARGIN METHOD IS HIGHLY AMENABLE TO PRODUCT DIFFERENCES. HENCE, THE LD.D.R PRAYED THAT THE SAME HAS BEEN RIGHTLY ITA NO.546/MDS./16 :- 6 -: RETAINED AS COMPARABLES BY THE TPO WHICH HAS ALSO B EEN UPHELD BY THE DRP. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, ASSESSEE FILED OBJECTION AGAI NST DRAFT ASSESSMENT ORDER BEFORE THE DRP. THE DRP HAS NOT PROPERLY DEA LT THE ISSUE IN PROPER PERSPECTIVES. THE PRIMARY OBJECTION OF THE L D. AR IS THAT THE ORDER OF THE DRP IS NOT IN CONSONANCE WITH THE PROV ISIONS OF SEC.144C OF THE ACT. WE HAVE GONE THROUGH THE PROVISIONS OF SEC.144C, WHICH READS AS UNDER: (5) THE DRP SHALL, IN CASE WHERE ANY OBJECTION IS RECEIVED UNDER SUB-S.(2), ISSUE SUCH DIRECTIONS, AS IT THINKS FIT, FOR THE GUIDANCE OF THE AO TO ENABLE HI M TO COMPLETE THE ASSESSMENT. (6) THE DRP SHALL ISSUE THE DIRECTIONS REFERRED TO IN SUB- S. (5), AFTER CONSIDERING THE FOLLOWING, NAMELY- (A) DRAFT ORDER; (B) OBJECTIONS FILED BY THE ASSESSEE; (C) EVIDENCE FURNISHED BY THE ASSESSEE; (D) REPORT, IF ANY, OF THE AO, VALUATION OFFICE R OR TPO OR ANY OTHER AUTHORITY; (E) RECORDS RELATING TO THE DRAFT ORDER; (F) EVIDENCE COLLECTED BY, OR CAUSED TO BE COLLECTE D BY, IT; AND (G) RESULT OF ANY ENQUIRY MADE BY, OR CAUSED TO BE MADE BY, IT. (7) THE DRP MAY, BEFORE ISSUING ANY DIRECTIONS REFE RRED TO IN SUB-S. (5),- ITA NO.546/MDS./16 :- 7 -: (A) MAKE SUCH FURTHER ENQUIRY, AS IT THINKS FIT; OR (B) CAUSE ANY FURTHER ENQUIRY TO BE MADE BY ANY IT AUTHORITY AND REPORT THE RESULT OF THE SAME TO IT. (8) THE DRP MAY CONFIRM, REDUCE OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO, HOWEVER, THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIRECTION UNDER SUB-S.(5) FOR FURTHER ENQUIRY AND P ASSING OF THE ASSESSMENT ORDER. (9) IF THE MEMBERS OF THE DRP DIFFER IN OPINION ON ANY POINT, THE POINT SHALL BE DECIDED ACCORDING TO THE OPINION OF THE MAJORITY OF THE MEMBERS. (10) EVERY DIRECTION ISSUED BY THE DRP SHALL BE BIN DING ON THE AO. (11) NO DIRECTION UNDER SUB-S. (5) SHALL BE ISSUED UNLESS AN OPPORTUNITY OF BEING HEARD IS GIVEN TO THE ASSES SEE AND THE AO ON SUCH DIRECTIONS WHICH ARE PREJUDICIAL TO THE INTEREST OF THE ASSESSEE OR THE INTEREST OF THE REVENUE, RESPECTIVELY. (12) NO DIRECTION UNDER SUB-S. (5) SHALL BE ISSUED AFTER NINE MONTHS FROM THE END OF THE RNONTH IN WHICH THE DRAFT ORDER IS FORWARDED TO THE ELIGIBLE ASSESSEE. (13) UPON RECEIPT OF THE DIRECTIONS ISSUED UNDER SU B-S. (5), THE AO SHALL, IN CONFORMITY WITH THE DIRECTION S, COMPLETE, NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN S. 153, THE ASSESSMENT WITHOUT PROVIDI NG ANY FURTHER OPPORTUNITY OF BEING HEARD TO THE ASSES SEE, WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH SUCH DIRECTION IS RECEIVED.' 6. WE FIND THAT THE DRP IN THIS CASE, AGAINST THE ABOVE PROVISIONS OF THE ACT, PASSED A VERY NON-SPEAKING ORDER, THOUG H THE ASSESSEES COUNSEL MADE A VOLUMINOUS SUBMISSION BEFORE THE DRP AGAINST THE DRAFT ASSESSMENT ORDER. IT IS ACCEPTED BY THE DRP THAT IT HAS TO BE ITA NO.546/MDS./16 :- 8 -: CONSIDERED EVERY POINT OF DISPUTE AND PASS A SPEAKI NG ORDER. CONTRARY TO THIS, THE ORDER PASSED BY THE DRP VERY CRITIC AN D THERE IS NO ADDRESSING THE ISSUES RAISED BY THE ASSESSEE MENTIO NED HEREIN ABOVE PARA NOS.4.1 TO 4.1.3 AND IT WAS NOT PROPERLY ADJUD ICATED. BEING OF, WE ARE NOT IN A POSITION TO UPHOLD THE ORDER OF THE DRP AS IT IS NOT CONSISTENT WITH THE PROVISIONS OF SEC.144C OF THE A CT. WE FIND THAT THE SUPREME COURT IN THE CASE OF SAHARA INDIA VS. C IT & ANR. (300 ITR 403) HAS HELD THAT EVEN AN ADMINISTRATIVE ORDER HA S TO BE CONSISTENT WITH THE RULES OF NATURAL JUSTICE. THE SAME VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF GAP INTERNATIONAL SOURCING INDIA (P) LTD. VS. DCIT (8 ITR 0177). FUR THER, IN THE CASE OF M/S. ADOBE SYSTEMS INDIA PRIVATE LTD. V. ADDL. CIT IN ITA NO.5043/DEL/2010 DATED 21.01.2011, THE DELHI BENCH OF THE TRIBUNAL HELD THAT WHEN THE DRP PASSED THE ORDER IN CURSORY AND LACONIC ORDER WITHOUT GOING INTO THE DETAILS OF THE SUBMISSIONS, IT SHOULD BE DECIDED AFRESH. CONSIDERING ALL THESE FACTS AND CIRCUMSTAN CES, WE ARE INCLINED TO THE REMIT THE ISSUES BACK TO THE DRP TO PASS A S PEAKING ORDER ON THE DISPUTED ISSUES. 7. HENCE, WE REMIT THE ISSUE BACK TO THE FILE OF DR P TO CONSIDER THE OBJECTIONS OF THE ASSESSEE IN PROPER PERSPECTIVE AN D PASS A SPEAKING ORDER. ITA NO.546/MDS./16 :- 9 -: 8. IN THE RESULT, THE APPEAL OF THE ASSESSE E IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 29 TH JULY, 2016, AT CHENNAI. SD/ - SD/ - ( . . . ! ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( ! ' ) (CHANDRA POOJARI) # / ACCOUNTANT MEMBER '# / CHENNAI $% / DATED: 29 TH JULY, 2016 K S SUNDARAM %&'' ()'*) / COPY TO: ' 1 . / APPELLANT 3. ' +',! / CIT(A) 5. )-.' / / DR 2. / RESPONDENT 4. ' + / CIT 6. .0'1 / GF