DCIT, New Delhi V. M/s. Swaroski India Pvt. Ltd., New Delhi

ITA 5497/DEL/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6701 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-02-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Next Hearing Date: 09-02-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 10-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.5622/DEL/2014 ASSESSMENT YEAR : 2005-06 SWAROVSKI INDIA PRIVATE LIMITED, 1A-1D, VANDHANA BUILDING, 11, TOLSTOY MARG, NEW DELHI. PAN: AABCS4767J VS. ACIT, CIRCLE-7(1), NEW DELHI. ITA NO.5497/DEL/2014 ASSESSMENT YEAR : 2005-06 DCIT, CIRCLE-7(1), NEW DELHI. VS. SWAROVSKI INDIA PRIVATE LIMITED, 1A-1D, VANDHANA BUILDING, 11, TOLSTOY MARG, NEW DELHI. PAN: AABCS4767J (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI MANOJ PARDASANI, SHRI S.K. AGARWAL, CA DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR SHRI NEERAJ KUMAR, SR. DR DATE OF HEARING : 09.02.2017 DATE OF PRONOUNCEMENT : 10.02.2017 ITA NOS.5622 &5497/DEL/2014 2 ORDER PER R.S. SYAL, AM: THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE ARISE OUT OF THE ORDER PASSED BY THE CIT( A) ON 26.07.2014 IN RELATION TO THE ASSESSMENT YEAR 2005-06. THERE ARE TWO TRANSFER PRICING ADDITIONS WHICH HAVE BEEN CHALLENGED BY THE ASSESSE E IN ITS APPEAL APART FROM THE CONFIRMATION OF CERTAIN NON-TRANSFER PRICI NG ADDITIONS. THE REVENUE IS ALSO AGGRIEVED AGAINST THE DELETION OF T WO NON-TRANSFER PRICING ADDITIONS. I. TRANSFER PRICING ADDITIONS A. TP ADDITION ON IMPORT OF CRYSTAL AND CRYSTAL COM PONENTS 2.1. THE FIRST CHALLENGE IN THE ASSESSEES APPEAL I S TO THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RESPECT O F IMPORT OF CRYSTAL AND CRYSTAL COMPONENTS. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY, WITH ITS ORIGINAL NAME OF SWAROPE ARL, WAS INCORPORATED IN INDIA IN 1996. IT IS A PART OF SWA ROVSKI GROUP, A GLOBALLY FAMOUS BRAND FOR CRYSTAL AND CRYSTAL RELATED PRODUC TS. IT IS A WORLD-WIDE ITA NOS.5622 &5497/DEL/2014 3 MARKET LEADER IN CRYSTAL JEWELLERY AND ACCESSORIES, GRINDING AND DRESSING TOOLS, PRECISION OPTICAL EQUIPMENT AND SYNTHETIC GE MSTONES. THE GROUP HAS PRODUCTION LOCATIONS IN TWELVE COUNTRIES AND HA S SALE COMPANIES IN SEVERAL COUNTRIES IN ASIA, EUROPE, SOUTH AMERICA, U SA AND CANADA. THE ASSESSEE COMPANY WAS INITIALLY REGISTERED AS A 100% EXPORT ORIENTED UNIT FOR UNDERTAKING ACTIVITIES OF COATING OF RAW B EADS, POLISHING AND KNOTTING OF CRYSTALS ETC. LATER ON, THE ASSESSEE AL SO STARTED IMPORTS AND SALE OF CRYSTAL GOODS AND CRYSTAL COMPONENTS. APAR T FROM 100% EOU DIVISION IN PUNE, THE ASSESSEE CARRIES OUT ITS TRAD ING ACTIVITIES FROM A DOMESTIC UNIT IN NEW DELHI WHICH HAS FURTHER TWO SU B-DIVISIONS, NAMELY, CONSUMER GOODS DIVISION (CGD) AND A CRYSTAL COMPONENTS DIVISION (CCD). MAJOR CUSTOMERS OF CGD AND CCD ARE DESIGNERS AND GARMENT MANUFACTURERS ETC. THE ASSESSEE REPORTED C ERTAIN INTERNATIONAL TRANSACTIONS IN FORM NO. 3CEB. THE ASSESSING OFFIC ER (AO) REFERRED THE MATTER OF DETERMINATION OF THEIR ARMS LENGTH P RICE (ALP) TO THE TRANSFER PRICING OFFICER (TPO). REPORTED INTERNATI ONAL TRANSACTIONS INCLUDE A TRANSACTION OF IMPORT OF CRYSTAL AND CRY STAL COMPONENTS WITH TRANSACTED VALUE OF RS.14,91,85,346/-. ONLY THIS IN TERNATIONAL TRANSACTION ITA NOS.5622 &5497/DEL/2014 4 IS UNDER DISPUTE. THE ASSESSEE APPLIED COMPARABLE UNCONTROLLED PRICE (CUP) METHOD TO DEMONSTRATE THAT THE INTERNATIONAL TRANSACTION WAS AT ALP. IN ORDER TO FORTIFY THE ADOPTION OF CUP AS TH E MOST APPROPRIATE METHOD, THE ASSESSEE ARGUED THAT THE IMPORTS WERE M ADE AS PER THE PRICE LIST PROVIDED BY ITS AE WHICH WAS AVAILABLE FOR ALL ITS SALES TO GROUP COMPANIES (INTERNAL COMPARABLE). IT WAS ALSO SUBMIT TED THAT ITS AE ALSO MADE DIRECT SALES OF CRYSTAL COMPONENTS TO INDIAN C USTOMERS AND THE AMOUNT CHARGED FROM SUCH INDEPENDENT CUSTOMERS WAS HIGHER THAN THAT CHARGED FROM THE ASSESSEE (EXTERNAL COMPARABLE). T HE ASSESSEE SUBMITTED THAT IT WAS ALSO TAKING ORDERS ON BEHALF OF ITS AE FROM CUSTOMERS IN INDIA AND FORWARDING THE SAME FOR EXEC UTION TO ITS AE, ON WHICH COMMISSION @15% OF INVOICE VALUE WAS BEING AL LOWED TO IT. THE SUM AND SUBSTANCE OF THE ASSESSEES SUBMISSIONS BEF ORE THE TPO WAS THAT THE PRICE CHARGED BY ITS AE FROM ANY OTHER COU NTRY THROUGH ITS GROUP COMPANY/BRANCH OFFICE WAS THE SAME AS THAT CH ARGED FROM CUSTOMERS IN INDIA. ITA NOS.5622 &5497/DEL/2014 5 2.2. THE TPO, FOLLOWING HIS VIEW TAKEN FOR THE A.Y. 2004-05, REJECTED THE APPLICATION OF CUP METHOD AND APPLIED THE TNMM AS THE MOST APPROPRIATE METHOD. TWENTY FOREIGN COMPARABLE COMP ANIES WERE CHOSEN, WHICH ARE SIMILAR TO THOSE CHOSEN IN THE PR OCEEDINGS FOR THE PRECEDING YEAR. APPLYING THE ARMS LENGTH MARGIN O F 4.34%, THE TPO WORKED OUT TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.2,48,81,287/-. IN THE FIRST APPEAL, THE LD. CIT(A) ACCEPTED THE AP PLICATION OF THE TNMM AS THE MOST APPROPRIATE METHOD AS AGAINST THE MAIN CONTENTION OF THE ASSESSEE FOR THE APPLICATION OF THE CUP METHOD OR T HE RESALE PRICE METHOD (RPM) IN ALTERNATE. AS A COMMON ORDER WAS P ASSED FOR THE A.YS. 2004-05 AND 2005-06, NO SEPARATE DISCUSSION H AS BEEN MADE BY THE LD. CIT(A) FOR THE A.Y. 2005-06. ACCORDINGLY, THE ISSUE OF TRANSFER PRICING ADJUSTMENT WAS RESTORED. AGGRIEVED THEREBY, THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE ADVERSE FINDINGS GIVEN BY THE LD. CIT(A). 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE AO PASSE D THE ORDER FOR THE CURRENT YEAR BY MAINLY RELYING ON THE VIEW TAKEN BY HIM FOR THE A.Y. ITA NOS.5622 &5497/DEL/2014 6 2004-05. THE LD. CIT(A) HAS ALSO PASSED A COMBINED ORDER AND THERE IS NO SEPARATE DISCUSSION FOR THE A.Y. 2005-06. THE APPEAL FOR THE A.Y. 2004-05 WAS ARGUED SIMULTANEOUSLY AND THE SUBMISSIO NS MADE FOR SUCH EARLIER YEAR WERE ADOPTED BY BOTH THE SIDES FOR THE INSTANT YEAR AS WELL. WE HAVE PASSED A SEPARATE ORDER FOR THE A.Y. 2004-0 5 IN WHICH REJECTION OF THE CUP METHOD BY THE AUTHORITIES BELOW HAS BEEN UPHELD AND FURTHER DIRECTION HAS BEEN GIVEN TO THE AO/TPO FOR A FRESH DETERMINATION OF THE ALP OF THIS TRANSACTION, FIRSTLY, BY CONSIDERING TH E APPLICATION OF RPM AND IF, DUE TO ONE REASON OR THE OTHER, THE SAME CA NNOT BE APPLIED, THEN, THE TNMM. DETAILED DISCUSSION MADE IN OUR ORDER FO R THE A.Y. 2004-05 IS APPLICABLE AND SHOULD BE READ AS A PART OF THIS ORDER ALSO, TO BE FOLLOWED BY THE TPO IN SUCH FRESH DETERMINATION. B. TP ADDITION ON AMP EXPENSES 3.1. DURING THE COURSE OF FIRST APPELLATE PROCEEDIN GS, THE LD. CIT(A) OBSERVED THAT NO TRANSFER PRICING ANALYSIS WAS DONE IN RESPECT OF THE INTERNATIONAL TRANSACTION OF ADVERTISEMENT, MARKETI NG AND PROMOTION (AMP) EXPENSES. THE ASSESSEE WAS CALLED UPON TO BE NCHMARK THIS ITA NOS.5622 &5497/DEL/2014 7 TRANSACTION. TAKING NOTE OF BRIGHT LINE TEST AND O THER RELEVANT FACTUAL DETAILS, THE LD. CIT(A) MADE AN ADDITION OF RS.2,51 ,69,338/- TOWARDS TRANSFER PRICING ADJUSTMENT ON AMP EXPENSES. THE A SSESSEE IS AGGRIEVED AGAINST SUCH ADJUSTMENT. 3.2. THE LD. AR REITERATED THE ARGUMENTS AS MADE FO R THE PRECEDING YEAR AND SUBMITTED THAT THE VIEW CONSISTENTLY TAKEN BE A DOPTED HERE ALSO. THE LD. DR ALSO REITERATED HIS SUBMISSION SEEKING RESTO RATION OF THIS MATTER TO THE FILE OF TPO FOR A FRESH ADJUDICATION IN THE LIG HT OF THE JURISPRUDENCE FROM THE HONBLE DELHI HIGH COURT ON THIS ISSUE AND SIMILAR ORDER CAN BE PASSED FOR THIS ASSESSEE AS WELL. 3.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. ON PERUSAL OF THE ORDER OF THE LD. CIT(A), IT EMERGES THAT WHILE HOLDING THE AMP EXPENSES TO BE AN INTERN ATIONAL TRANSACTION, HE DID NOT HAVE THE BENEFIT OF THE JUDICIAL PRECEDE NTS NOW AVAILABLE FOR CONSIDERATION, IN SOME OF WHICH THE TRANSACTION OF AMP HAS BEEN HELD AS AN INTERNATIONAL TRANSACTION, IN OTHERS AS NOT AN I NTERNATIONAL TRANSACTIONS, WHILE STILL IN SOME OTHERS, THE MATTER HAS BEEN RES TORED FOR FRESH ITA NOS.5622 &5497/DEL/2014 8 CONSIDERATION IN THE LIGHT OF THE JUDGMENT IN SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD. VS. CIT (2015) 374 ITR 118 (DEL) , IN WHICH THE AMP EXPENSES AS AN INTERNATIONAL TRANSACT ION HAS BEEN ACCEPTED. IN ANOTHER JUDGMENT DATED 28.1.2016 OF TH E HONBLE DELHI HIGH COURT IN SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD . (FOR THE AY 2010-11), THE QUESTION AS TO WHETHER AM P EXPENSES IS AN INTERNATIONAL TRANSACTION, HAS BEEN RESTORED FOR A FRESH DETERMINATION. THERE ARE THREE RECENT JUDGMENTS OF THE HONBLE DEL HI HIGH COURT, VIZ., RAYBAN SUN OPTICS INDIA LTD. VS. CIT (DT. 14.9.2016), PR. CIT VS. TOSHIBA INDIA PVT. LTD . (DT. 16.8.2016) AND PR. CIT VS. BOSE CORPORATION (INDIA) PVT. LTD. (DT. 23.8.2016) IN ALL OF WHICH SIMILAR ISSUE HAS BEEN RESTORED FOR FRESH DETERMINATION IN THE LIGHT OF THE EARLIER JUDGMENT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA) . RESPECTFULLY FOLLOWING THE PREDOMINANT VIEW OF T HE HONBLE HIGH COURT, WE ARE OF THE CONSIDERED OPINION THAT I T WOULD BE IN THE FITNESS OF THINGS IF THE IMPUGNED ORDER IS SET ASID E AND THE MATTER IS RESTORED TO THE FILE OF TPO/AO FOR A FRESH DETERMIN ATION OF THE QUESTION AS TO WHETHER THERE EXISTS AN INTERNATIONAL TRANSAC TION OF AMP EXPENSES. ITA NOS.5622 &5497/DEL/2014 9 IF THE EXISTENCE OF SUCH AN INTERNATIONAL TRANSACTI ON IS NOT PROVED, THE MATTER WOULD END THERE AND THEN, CALLING FOR NO TRA NSFER PRICING ADDITION. IF, ON THE OTHER HAND, THE INTERNATIONAL TRANSACTIO N IS FOUND TO BE EXISTING, THEN THE TPO WOULD DETERMINE THE ALP OF SUCH AN INT ERNATIONAL TRANSACTION IN THE LIGHT OF THE RELEVANT JUDGMENTS OF THE HONBLE HIGH COURT, AFTER ALLOWING A REASONABLE OPPORTUNITY OF B EING HEARD TO THE ASSESSEE. 4. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER ON TH E ISSUE OF TRANSFER PRICING ADDITIONS TOWARDS `IMPORT OF CRYS TAL GOODS AND CRYSTAL COMPONENTS AND `AMP EXPENSES AND REMIT THE MATTE R TO THE FILE OF AO/TPO FOR FRESH DETERMINATION OF THE ALP IN CONSON ANCE WITH OUR DIRECTIONS GIVEN IN THE ORDER FOR THE A.Y. 2004-05. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY O F BEING HEARD IN SUCH FRESH PROCEEDINGS. II. NON-TRANSFER PRICING ADDITIONS 5.1. THE ONLY ISSUE RAISED BY THE ASSESSEE IN ITS A PPEAL IS AGAINST THE CONFIRMATION OF ADDITION IN RESPECT OF PROVISION OF DOUBTFUL DEBTS ITA NOS.5622 &5497/DEL/2014 10 AMOUNTING TO RS.3,24,850/-. THE AO DID NOT ALLOW D EDUCTION FOR THIS SUM AS IT WAS A PROVISION AND NOT AN ACTUAL WRITE O FF. THE LD. CIT(A) APPROVED THE ACTION TAKEN BY THE AO IN THIS REGARD. 5.2. HAVING HEARD BOTH THE SIDES PERUSED THE RELEVA NT MATERIAL ON RECORD, WE FIND THAT SIMILAR ISSUE CROPPED UP BEFOR E US IN APPEAL OF THE ASSESSEE FOR THE A.Y. 2004-05. THIS ISSUE HAS BEEN DISCUSSED IN DETAIL IN SUCH ORDER. AS NO FRESH ARGUMENTS HAVE BEEN MADE, SIMILAR FINDINGS WILL APPLY, MUTATIS MUTANDIS , TO THE INSTANT YEAR AS WELL. TO SUM UP, THE AMOUNT OF PROVISION IS NOT DEDUCTIBLE. ACTUAL AMOU NT OF WRITE OFF HAS TO BE ALLOWED AS DEDUCTION U/S 36(1)(VII). REVERSAL O F PROVISION SHOULD NOT LEAD TO TAXABLE INCOME. HOWEVER, DEDUCTION ALLOWED IN RESPECT OF PROVISION FOR DOUBTFUL DEBTS FOR THE A.Y. 2003-04 S HOULD BE TAKEN INTO CONSIDERATION WHILE ALLOWING DEDUCTION ON ACTUAL WR ITE OFF OR REVERSAL OF PROVISIONS TO THE RELEVANT EXTENT SO THAT NO DOUBLE DEDUCTION GETS ALLOWED. ITA NOS.5622 &5497/DEL/2014 11 6.1. THE FIRST GROUND TAKEN BY THE REVENUE IN ITS APPEAL IS AGAINST THE DELETION OF ADDITION OF RS.54,30,335/- ON ACCOUNT O F DISALLOWANCE OF ADVERTISEMENT AND PUBLICITY EXPENSES. 6.2. BOTH THE SIDES ARE IN AGREEMENT THAT THE FACT S AND CIRCUMSTANCES OF THIS GROUND ARE, MUTATIS MUTANDIS , SIMILAR TO THOSE FOR THE A.Y. 2004-05. FOLLOWING THE VIEW TAKEN IN OUR ORDER FOR THE A.Y. 2004-05, WE HOLD THAT THE ENTIRE AMOUNT OF ADVERTISEMENT AND PUBLICI TY EXPENSES SHOULD BE ALLOWED AS DEDUCTION IN THE YEAR OF INCURRING ITSEL F. IT IS HOWEVER, MADE CLEAR NO FURTHER DEDUCTION FOR 2/3 RD OF THE TOTAL EXPENDITURE FOR THE EARLIER YEARS BE GRANTED AS THE SAME WILL LEAD TO D OUBLE DEDUCTION. IF SUCH A DEDUCTION HAS ALREADY BEEN ALLOWED, THEN THE SAME SHOULD BE REVERSED TO THAT EXTENT. THIS GROUND OF THE REVENUE IS NOT ALLOWED. 7.1. THE ONLY OTHER GROUND WHICH SURVIVES IN THE AP PEAL OF THE REVENUE IS AGAINST THE ALLOWING OF DEPRECIATION ON COMPUTER PERIPHERALS AT 60%. ITA NOS.5622 &5497/DEL/2014 12 7.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESS EE CLAIMED DEPRECIATION ON COMPUTER PERIPHERALS @ 60% WHICH WAS RESTRICTED BY THE AO TO 25%. THE LD. CIT(A), FOLLOWING THE JUDGMENT OF THE HONB LE JURISDICTIONAL HIGH COURT IN CIT VS. BSES YAMUNA POWERS LTD. 2010-TIOL-636-HC- DEL-IT , ACCEPTED THE ASSESSEES CLAIM. 7.3. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE LD. CIT(A) HAS TAKEN AN APPROPRIATE DECISION ON THIS ISSUE BY DRAWING STRENGTH FROM THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT WHICH IS BINDING ON ALL T HE AUTHORITIES UNDER ITS JURISDICTION. THE HONBLE DELHI HIGH COURT IN THE CASE OF BSES YAMUNA POWERS LTD .(SUPRA), HAS HELD THAT DEPRECIATION ON COMPUTER PE RIPHERALS SHOULD BE ALLOWED AT 60%. WE, THEREFORE, UPHOLD THE VIEW TAKEN BY THE LD. CIT(A) ON THIS ISSUE. THIS GROUND IS NOT ALLOWE D. ITA NOS.5622 &5497/DEL/2014 13 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED AND THAT OF THE REVENUE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 10.02.201 7. SD/- [KULDIP SINGH] SD/- [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 10 TH FEBRUARY, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.