DCIT, New Delhi V. M/s EDAG Engineering & Design (India) Pvt. Ltd., New Delhi

ITA 549/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81757 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 03-09-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 01-02-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; YOGESH KUMAR VERMA
• Assessee Lawyers: ARUN B
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 10B

Judgement Text

I.T.A. NO.: 549/DEL/2011 ASSESSMENT YEAR: 2005-06 PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI I BENCH, NEW DELHI [CORAM: PRAMOD KUMAR AM AND C. M. GARG JM] I.T.A. NO.: 549/DEL/2011 ASSESSMENT YEAR: 2005-06 DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 11(1), NEW DELHI .APPELLANT VS. EDAG ENGINEERS & DESIGN INDIA PVT LTD .RESPONDENT SANKALP, C 227 GROUND FLOOR, WESTEND MARG, PARYAVARAN COMPLEX, NEW DELHI 110 030 [ PAN: AAACE6666K] APPEARANCES BY: PEEYUSH JAIN AND YOGESH KUMAR VERMA , FOR THE APPELLANT G C SRIVASTAVA, SAURABH SRIVASTAVA AND ARUN BANSAL, FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : SEPTEMBER 03, 20 14 DATE OF PRONOUNCING THE ORDER : OCTOBER 13 TH , 2014 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE APPELLANT ASSESSING O FFICER HAS CHALLENGED CORRECTNESS OF LEARNED COMMISSIONER (APPEALS)S ORD ER DATED 29 TH NOVEMBER, 2010, IN THE MATTER OF ASSESSMENT UNDER SECTION 143 (3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), FOR TH E ASSESSMENT YEAR 2005-06, ON THE FOLLOWING GROUND: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS 1,6 5,87,730 ON ACCOUNT OF ARMS LENGTH PRICE (ALP) ADJUSTMENT MADE AS PER TPO ORDER UNDER SECTION 92CA (3) OF THE ACT. I.T.A. NO.: 549/DEL/2011 ASSESSMENT YEAR: 2005-06 PAGE 2 OF 5 2. BRIEFLY STATED, MATERIAL FACTS OF THE CASE, AS C ULLED OUT FROM MATERIAL ON RECORD, ARE LIKE THIS. THE ASSESSEE BEFORE US IS A SUBSIDIARY OF A GERMAN COMPANY BY THE NAME OF EDAG ENGINEERING & DESIGNS AG, ENGAG ED IN THE BUSINESS AS AN ENGINEERING EXPERT IN THE AUTOMOTIVE INDUSTRY AND I S SAID TO BE ONE OF THE GLOBAL LEADERS IN OFFERING CLOSED PROCESS CHAIN SERVICES I.E. COMPLETE SERVICES FOR INTEGRATED DEVELOPMENT- INCLUDING DESIGN AND PRODUC T DEVELOPMENT, TEMPLATE AND PROTOTYPE CONSTRUCTION AND FROM TESTING DIVISIO N TO TURNKEY MANUFACTURING FACILITIES. THE ASSESSEE IS A CAPTIVE UNIT FOR ITS GERMAN PARENT COMPANY AND IS ENGAGED IN THE BUSINESS OF PROVIDING COMPUTER AIDED SERVICES, FOR ENGINEERING AND DESIGN OF AUTOMOBILE COMPONENTS, ON PROJECT BAS IS. DURING THE RELEVANT FINANCIAL YEAR, THE ASSESSEE REPORTED INTERNATIONAL TRANSACTIONS IN RESPECT OF (1) DESIGN AND DEVELOPMENT OF AUTOMOBILE PART AND PRODU CTION EQUIPMENT, WITH THE AID OF COMPUTER SOFTWARE (2) TECHNICAL CONSULTANCY RECEIVED; (3) SALES COMMISSION; (4) LANGUAGE TRANSLATION CHARGES; AND ( 5) PURCHASE OF CAPITAL GOODS. WHILE ARMS LENGTH PRICE IN RESPECT OF LAST ITEM, I.E. PURCHASE OF CAPITAL GOODS, WAS ASCERTAINED ON THE BASIS, IN RESPECT OF ALL OTHER ITEMS, THE ASSESSEE HAD USED TNMM, WITH OPERATING PROFIT MARGIN ON SALE S AS PLI, FOR BENCHMARKING THE ARMS LENGTH PRICE. WHILE THE TPO DID NOT DISP UTE THE METHOD EMPLOYED BY THE ASSESSEE, THE TPO DID REJECT THE ADJUSTMENTS CA RRIED OUT BY THE ASSESSEE ON ACCOUNT OF UNDERUTILIZATIONS OF (I) EMPLOYEE COST, (II) LICENCED COST, AND (III) DEPRECIATION. WHILE REJECTING THESES FINANCIAL ADJU STMENTS, THE TPO OBSERVED THAT THE ASSESSEE HAD MECHANICALLY CARRIED OUT THES E ADJUSTMENTS WITHOUT JUSTIFYING THE CAUSE OF ADJUSTMENT, THAT THE ASSESS EE HAS DELIVERED SERVICES ONLY ITS AE, AND, AS SUCH, THE ASSESSEE DID NOT ASSUME A NY KIND OF THIRD PARTY RISK, AND THAT SINCE THE ASSESSEE WAS A CAPTIVE UNIT, ANY UND ERUTILIZATION OF CAPACITY WAS TO BE COMPENSATED BY THE AE. THE TPO DID NOT DIS PUTE THE COMPARABLES SELECTED BY THE ASSESSEE AND COMPUTED THE OPERATING PROFIT MARGIN ( I.E. OP/TC) OF THESE COMPARABLES AT 5.59% AND COMPUTED THE ARM S LENGTH REVENUE AT 105.59% OF THE COST INCURRED BY THE ASSESSEE, WHICH CAME TO RS 6,91,13,540 AS AGAINST BOOK VALUE OF THESE REVENUES AT RS 4,22,37, 633. THE DIFFERENCE THUS CAME TO RS 2,68,75,906. HOWEVER, AS THE ASSESSE HA D SUBSEQUENTLY RECEIVED A I.T.A. NO.: 549/DEL/2011 ASSESSMENT YEAR: 2005-06 PAGE 3 OF 5 FINANCIAL SUPPORT, BY WAY OF WAIVER OF DUES BY THE AE, AMOUNTING TO RS 1,02,88,176, THE ALP ADJUSTMENT WAS REDUCED BY THIS AMOUNT. THE ALP ADJUSTMENT WAS THUS COMPUTED AT RS 1,65,87,730. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER MADE THIS ALP ADJUSTMENT TO THE VALUE OF TRANSACTION ENTERED INTO WITH THE AE. AGGR IEVED, INTER ALIA , BY THE ALP ADJUSTMENT SO MADE BY THE AO, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). LEARNED CIT(A) NOTED THAT AS AGAINST 28,020 MAN HOURS AVAILABLE WITH THE ASSESSEE, ONLY 13,288 MAN HOURS WERE ACTUALLY P UT TO USE. THE UNUTILIZED MANPOWER SO COMPUTED, ACCORDING TO THE CIT(A), WAS 52.58%. LEARNED CIT(A) FURTHER NOTED THAT THE ASSESSEE IS A 100% CAPTIVE UNIT AND HAS TO KEEP MINIMUM STAFF OF TECHNICAL ENGINEERS FOR SMOOTH FUN CTIONING OF ITS OPERATION AND THAT THE FIXED COSTS LIKE ADMINISTRATION COST, SALARY, DEPRECIATION HAS TO BE INCURRED EVEN THOUGH THERE I S NO REVENUE OR LESS REVENUE . SHE FURTHER OBSERVED THAT, THE ASSESSEE HAS SUBMITTED DETAILS TO THE TPO FOR CAPACITY UNDERUTILIZATION .. WHICH WAS TOTALLY IGNORED BY THE TPO . ON THE BASIS OF PRIMARILY THIS LINE OF REASONIN G, HE UPHELD THE GRIEVANCE OF THE ASSESSEE AND CONCLUDED AS FOLLOWS: 25. CONSIDERING THE SUBMISSIONS FILED BY THE APPELL ANT FROM TIME TO TIME REGARDING THE CAPACITY UNDERUTILIZATION AND EDAG GERMANYS ANNUAL ACCOUNTS WHICH SHOW HUGE LOSSES, AND VARIOUS CASE LAWS CITED BY THE APPELLANT, I HOLD THAT AN APPROPRIATE ADJUST MENT SHOULD BE ALLOWED TO THE ASSESSEE ON CAPACITY UNDERUTILIZATIO N. THE MARGIN OF THE APPELLANT COMPANY, AFTER SUCH ADJUSTMENT, IS 9. 69% WHICH IS MUCH HIGHER AS COMPARED TO THE INDUSTRY MARGIN DETE RMINED BY THE TPO AT 5.59% CONSIDERING THE SEVEN COMPARABLES TAKE N BY THE TPO IN HIS ORDER. 26. THEREFORE, GROUND NOS. 1 AND 2 OF THE APPELLAN T ARE ALLOWED. 27. IN VIEW OF THE ABOVE, THE APPEAL IS ALLOWED. 3. THE ASSESSING OFFICER IS AGGRIEVED OF THE RELIEF SO GRANTED BY THE CIT(A) AND IS IN APPEAL BEFORE US. I.T.A. NO.: 549/DEL/2011 ASSESSMENT YEAR: 2005-06 PAGE 4 OF 5 4. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE IN THE L IGHT OF THE APPLICABLE LEGAL POSITION. 5. WE FIND THAT LEARNED CIT(A) HAS GRANTED THE IMPU GNED RELIEF BY MAKING ADJUSTMENTS, ON ACCOUNT OF CAPACITY UNDERUTILIZATIO N, IN THE RESULTS SHOWN BY THE TESTED PARTY AND THUS COMPUTING HYPOTHETICAL FI NANCIAL RESULTS WHICH THE TESTED PARTY WOULD HAVE ACHIEVED IN PERFECT CONDITI ONS. SUCH AN EXERCISE, IN OUR HUMBLE UNDERSTANDING OF LAW, IS IMPERMISSIBLE. AS AS IS THE UNDISPUTED LEGAL POSITION, SUCH COMPARABILITY ADJUSTMENTS CAN ONLY B E MADE IN THE COMPARABLES AND NOT THE TESTED PARTY ITSELF. IT IS SPECIFICALL Y PROVIDED IN RULE 10B (1)(E)(III) THAT ADJUSTMENTS FOR VARIATIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET IN COMPARABLE UNCO NTROLLED TRANSACTIONS, ARE TO BE MADE IN RESPECT OF NET PROFITS REALIZED BY TH E COMPARABLE TRANSACTIONS OR ENTERPRISES. LEARNED CIT(A) WAS THUS CLEARLY IN ERR OR IN PROCEEDING TO MAKE CAPACITY UNDERUTILIZATION ADJUSTMENTS IN THE PROFIT S EARNED BY THE ASSESSEE. THAT APART, IN THE CASE OF A ONE HUNDRED PERCENT CA PTIVE SERVICE UNIT, AS IS THE ASSESSEE BEFORE US, THE VERY CONCEPT OF CAPACITY UN DERUTILIZATION MAY NOT REALLY MAKE ANY SENSE UNLESS THE ASSESSEE HAS NOT BEEN ABL E TO OFFER, FOR REASONS BEYOND ITS CONTROL, THE UNDERUTILIZED CAPACITY TO I TS AE. THERE IS NO FINDING ON THIS ASPECT OF THE MATTER. AS THE ASSESSEE DOES NOT HAVE THE LIBERTY TO WORK FOR ANY OTHER CUSTOMER, AND IS WHOLLY DEPENDENT ON ITS AE FOR PRODUCTIVE USE OF ITS CAPACITY TO WORK, THE AE SHOULD NORMALLY MAKE GOOD ANY LOSSES TO THE CAPTIVE UNIT CAUSED BY ITS NOT BEING ABLE TO MAKE USE OF TH E AVAILABLE CAPACITY. IN THE CASE BEFORE THIS, THE AE HAS INDEED GIVEN SOME FINA NCIAL SUPPORT TO THE ASSESSEE WHICH HAS BEEN REDUCED FROM THE ALP ADJUSTMENT FIGU RE, AND THE BUSINESS RATIONALE OF AES EXTENDING FINANCIAL SUPPORT TO TH E ASSESSE IS THUS NOT IN DOUBT. HOWEVER, THERE IS NOTHING ON RECORD TO SHOW HOW THI S FINANCIAL SUPPORT HAS BEEN COMPUTED AND IS ON WHAT GROUND, AND ON WHAT BA SIS, THIS FINANCIAL SUPPORT IS GIVEN. THE REASON FOR UNDERUTILIZED CAPACITY AND THE FACTS REGARDING FINANCIAL SUPPORT EXTENDED TO THE ASSESSEE ARE NOT CLEAR FROM THE MATERIAL ON RECORD. LEARNED CIT(A) HAS GRANTED THE IMPUGNED RELIEF MERE LY BY MAKING CAPACITY I.T.A. NO.: 549/DEL/2011 ASSESSMENT YEAR: 2005-06 PAGE 5 OF 5 UNDERUTILIZATION ADJUSTMENTS TO THE PROFITS ACHIEVE D BY THE TESTED PARTY, BUT THEN SUCH AN APPROACH, AS WE HAVE NOTED EARLIER, IS WHOLLY UNSUSTAINABLE IN LAW. 6. IN VIEW OF THE ABOVE DISCUSSIONS, AS ALSO BEARIN G IN MIND ENTIRETY OF THE CASE, WE DEEM IT FIT AND PROPER TO VACATE THE IMPUG NED ORDER AND DIRECT THE CIT(A) TO DECIDE THE MATTER AFRESH AFTER GIVING AN OPPORTUNITY OF HEARING TO THE ASSESSEE, IN ACCORDANCE WITH THE LAW AND BY WAY OF A SPEAKING ORDER. WE ORDER SO. 7. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 13 TH DAY OF OCTOBER, 2014. SD/- SD/- C M GARG PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NEW DELHI 13 TH DAY OF OCTOBER 2014 COPIES TO : (1) THE ASSESSEE (2) THE ASSESSING OFF ICER (3) CIT (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI