VA Tech Escher Wyss Flovel Pvt. Ltd., Haryana V. ACIT, Faridabad

ITA 6226/DEL/2012

• Counselvise Citation: 622620114 RSA 2012
• Duration Of Justice: 9 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 26-09-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 14-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; YOGESH KUMAR VERMA
• Assessee Lawyers: MANONEET DALAL; G C SRIVASTAVA
• Keywords: Transfer pricing; Business expenditure; Search and seizure; International transaction; Earning of tax free income
• Section: 143(3); 92B; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI B.C. MEENA ITA NO. 6226/DEL/2012 ASSTT. YR: 2008-09 VA TECH ESCHER WYSS FLOVEL, VS. ACIT CIRCLE-I, PVT. LTD. (KNOWN AS ANDRITZ), FARIDABAD. HYDRO PVT. LTD. 49/5, MATHURA ROAD, VILL. PRITHLA, DISTT. PALWAL, HARYANA. PAN: AABCV 2466 R ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI G.C. SRIVASTAVA ADV. & SHRI MANONEET DALAL ADV. RESPONDENT BY : SHRI PEEYUSH JAIN CIT (DR) & SHRI YOGESH KUMAR VERMA CIT(DR) O R D E R PER R.P. TOLANI, J.M : THIS IS ASSESSEES APPEAL AGAINST ASSESSMENT ORDERS DATED 17-10-2012 FOR A.Y. 2008-09, PASSED BY THE ASSESSING OFFICER U /S 143(3) READ WITH SECTION 144C(13) OF THE INCOME-TAX ACT, 1961 (THE ACT). 2. VARIOUS ISSUES ARE RAISED WHICH IN EFFECT INVOL VE FOLLOWING TWO GROUNDS: 1. THE ASSESSING OFFICER/ DRP ERRED IN LAW AND ON F ACTS IN MAKING ADJUSTMENT OF RS. 1,61,71,804/- TO THE INCOME OF TH E ASSESSEE U/S 92CA(4) ON ACCOUNT OF FOLLOWING TRANSACTIONS: (I) REIMBURSEMENTS OF EXPENSE PAID TO AES AMOUNTING TO RS. 1,932,166 2 (II) PAYMENT OF INTEREST ON CORPORATE GUARANTEE PAY MENT AMOUNTING TO RS. 8,254,706 (III) PAYMENT RELATING TO TRAINING COSTS AMOUNTING TO RS. 734,896 (IV) PAYMENT FOR SPECIFIC SERVICES FOR JALDHAKA PRO JECT, AMOUNTING TO RS. 2,379,000 (V) PAYMENT TOWARDS TECHNICAL SERVICES RECEIVED, AM OUNTING TO RS. 2,870,036 2. THE LEARNED AO ERRED IN MAKING AN ADDITION OF R S. 7,000,000 ON ACCOUNT OF DISALLOWANCE OF INTEREST UNDER SECTIO N 14A OF THE ACT. THE DEDUCTION HAS BEEN MADE BY THE AO TO ACCOUNT F OR THE COST OF FUNDS UTILIZED IN MAKING AN INVESTMENT IN SHARES BY THE ASSESSEE AND IGNORING THE FOLLOWING CONTENTIONS OF THE ASSESSEE: (I) NO INTEREST BEARING FUNDS WERE USED FOR MAKING THE INVESTMENT; AND (II) INVESTMENT DID NOT EARN ANY DIVIDEND INCOME OR ANY OTHER TAX FREE INCOME. 3. BRIEF FACTS ARE: THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF ENGINEERING GOODS LIKE HY DRO TURBINE, GOVERNORS ETC. FOR UNDERTAKING EXECUTION OF TURNKEY ENGINEERI NG PROCUREMENT CONSTRUCTIONS CONTRACTS INVOLVING INSTALLATIONS, CO MMISSIONING SERVICES, REHABILITATION AND CIVIL WORKS OF HYDRO POWER PLANT S. 3.1. DURING THE YEAR UNDER CONSIDERATION IT ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ASSOCIATE ENTERPRISE (AE) WITHIN THE MEANING OF SEC. 92B OF THE ACT. REQUISITE FORM NO. 3CEB WAS FILED A ND THE CASE WAS REFERRED 3 TO TPO FOR DETERMINATION OF ARMS LENGTH PRICE (AL P). VARIOUS TP ADJUSTMENTS WERE MADE, PART OF WHICH WERE DELETED B Y DRP QUA THE SAME BY FOLLOWING OBSERVATIONS: THE ISSUE BEFORE THIS OFFICE IS WHETHER THE PAYMEN T THAT YOU HAVE MADE OF RS. 97,956,317 ON ACCOUNT OF SUPPOSED RECEIPT OF TECHNICAL SERVICES ANSWERS TO THE ARMS LENGTH PRIN CIPLE OR NOT. IT MAY BE MENTIONED HERE THAT FOR THE PURPOSE OF BE NCHMARKING YOU HAVE CLUBBED THIS TRANSACTION WITH ANOTHER INTE RNATIONAL TRANSACTION RELATED TO IMPORT OF RAW MATERIALS AND COMPONENTS. YOU HAVE PROCEEDED TO DRAW UP SEGMENTAL ACCOUNTS OF TRANSACTIONS WITH AES AND NON-AES AND ATTEMPTED T O SHOW THAT YOUR TRANSACTIONS WITH AE ARE AT ARMS LENGTH. I AM AFRAID THAT THIS APPROACH IS INACCURATE. IT HAS NOT BEEN E STABLISHED ANYWHERE IN YOUR TP REPORT THAT THESE TRANSACTIONS ARE SO INTERLINKED THAT THE MORE APPROPRIATE APPROACH OF A TRANSACTION BY TRANSACTION ANALYSIS SHOULD BE ABANDONED IN FAVO UR OF THE APPROACH THAT YOU HAVE FOLLOWED. IT GOES WITHOUT SA YING THAT A TRANSACTION BY TRANSACTION APPROACH OF BENCHMARKING IS ALWAYS PREFERABLE. THIS IS IN CONFORMITY WITH THE OECD GUI DELINES ALSO. THE CORRECT APPROACH WOULD BE TO APPLY A CUP, IN THE SENSE, TO WEIGH WHETHER ON INDEPENDENT ENTITY WOULD HAVE MADE SUCH A PAYMENT UNDER SIMILAR CIRCUMSTANCES. IT IS P ROPOSED TO EXAMINE THE ISSUE FROM THAT ANGLE. DRP AGREES WITH THE ABOVE LOGIC AND FINDS NO REASON TO INTERFERE WITH THE ORD ER OF THE TPO. DRP FAILS TO UNDERSTAND HOW CAN IMPORT OF RAW MATER IALS AND COMPONENTS BE CLUBBED WITH RECEIPT OF TECHNICAL CON SULTANCY SERVICES. 4. LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT ASSES SING OFFICER HAD MADE HUGE ADDITIONS. DRP WHILE EXCLUDING THE PURCHASE OF EQUIPMENTS AND RECEIPT OF SERVICES TOWARDS MODEL TEST FROM THE AMBIT OF TE CHNICAL SERVICES, FAILED TO EXCLUDE VARIOUS OTHER ITEMS FOR WHICH NO FINDING H AS BEEN GIVEN. THESE ITEMS ARE: 4 (A) REIMBURSEMENT OF TRAVELING EXPENSES; (B) PAYMENT TOWARDS INTEREST ON LOAN (C) TDS AMOUNT GROSSED ON SAP LICENSING FEES (D) PAYMENT RELATING TO TRAINING COSTS. 4.1. LD. COUNSEL CONTENDS THAT SINCE DRP DID NOT GI VE ANY REASONS OR FINDINGS IN NOT EXCLUDING THE ABOVE AMOUNTS, ADDITI ONAL EVIDENCE IS FILED BEFORE US VIDE APPLICATION DATED 7-5-2013 TO SUBSTA NTIATE THE NATURE OF ABOVE TRANSACTIONS TO BE EXCLUDED FROM THE AMBIT OF TECHN ICAL SERVICES, SINCE THIS EVIDENCE WAS NEVER ASKED AND ADITIONS HAVE BEEN MAD E IN SUMMARY MANNER, THE ADMISSION OF DOCUMENTS BECOME IMPORTANT FOR ADJ UDICATION OF TAX LIABILITY. BESIDES, ASSESSEE WAS PREVENTED BY A SUF FICIENT CAUSE IN FILING THE SAME. 4.2. IT IS PLEADED THAT: (A) NO ACTUAL SERVICES HAVE BEEN RECEIVED. (B) ASSESSEE DID NOT NEED THE SERVICES AND HAS NOT RECE IVED ANY TANGIBLE BENEFITS FROM THE SERVICES. (C) THE SERVICES RECEIVED ARE IN THE NATURE OF SHAREHOL DERS SERVICES. 4.3. IT IS FURTHER PLEADED BY LD. COUNSEL THAT: (I) TO SUBSTANTIATE THE RECEIPT OF SERVICES, COPIES OF AE INVOICES, TECHNICAL REPORTS, CALCULATION ETC. RECEIVED IN REL ATION TO SPECIFIC PROJECTS ARE AVAILABLE. (II) THE SERVICES RECEIVED CAN BE DIRECTLY CORRELATED TO THE VARIOUS PROJECTS EXECUTED BY THE ASSESSEE, THEREBY JUSTIFYI NG THE NEED AND BENEFIT FROM SUCH SERVICES. 5 (III) NO EVIDENCE HAS BEEN SUBMITTED BY THE TPO TO SUBSTA NTIATE HOW THESE CAN BE CONSIDERED AS SHAREHOLDER SERVICES. 4.4. ASSESSING OFFICER/ TPO HELD THAT USE OF COMBIN ED TRANSACTION APPROACH IS NOT CORRECT AND EACH TRANSACTION NEEDS TO BE ANALYSED SEPARATELY. THEREFORE, THE ALP OF PAYMENT FOR TECHNICAL SERVICE S NEEDS TO BE DETERMINED SEPARATELY. THE ASSESSEE OBJECTED TO THESE OBSERVAT IONS. DRP, HOWEVER, CONFIRMED THE SAME. 4.5. THE ASSESSEE CONTENDS AS UNDER: (I) AVAILING OF TECHNICAL SERVICES IS CLOSELY LINKED TO THE MAIN BUSINESS ACTIVITY OF THE ASSESSEE (I.E. MANUFACTURI NG AND SUPPLY OF HYDRO TURBINES AND RELATED EQUIPMENTS AND COMPONENT S) (II) SAME IS THE CASE WITH OTHER INTERNATIONAL TRANSACTI ON (IMPORT OF RAW MATERIAL AND COMPONENTS), WHICH IS ALSO CLOSELY LIN KED TO THE MAIN BUSINESS ACTIVITY OF THE ASSESSEE AND HAS BEEN ACCE PTED AS SUCH BY THE TPO. (III) THE ASSESSEE HAS ALREADY DONE A TRANSACTIONAL LEVEL ANALYSIS, WHEREBY ONLY THE PROFITABILITY OF PROJECTS WITH SUC H INTER-COMPANY TRANSACTIONS (SEGMENT A) WAS CONSIDERED AND COMPARE D WITH THE PROFITABILITY OF PROJECTS WITH NO INTER-COMPANY TRA NSACTIONS (SEGMENT B) (IV) THE USE OF COMBINED TRANSACTION APPROACH FOR CLOSE LY LINKED TRANSACTIONS HAS ALSO BEEN UPHELD IN THE VARIOUS CA SE LAWS RELIED UPON BY THE TPO. 6 4.6. IT IS PLEADED THAT THE TPO ERRED IN APPLYING C UP METHOD. DRP WHILE APPROVING THE SAME, HAS GIVEN NO FINDING WHATSOEVER ON THE OBJECTIONS RAISED BY ASSESSEE IN THIS BEHALF FOR NON APPLICAB ILITY OF CUP METHOD. THE CONTENTIONS OF THE ASSESSEE ARE: (I) ALP HAS TO BE DETERMINED USING ONE OF THE PRESCRIBE D METHOD. (II) THE TPO DID NOT PROVIDE ANY REASONS TO REJECT TNMM AS THE MOST APPROPRIATE METHOD. (III) EVEN UNDER A TRANSACTION BY TRANSACTION ANALYSIS, T HE TRANSACTION SHOULD BE CONSIDERED AT ALP (SINCE THE NET MARGIN O F EWF FROM PROJECTS WITH SUCH TECHNICAL SERVICES IS HIGHER THA N NET MARGIN FROM PROJECTS WHICH HAVE NO RELATED PARTY TRANSACTI ONS) (IV) WHEN NO CHANGE/ ALTERNATION HAS BEEN PROPOSED IN TH E TNMM, THERE IS NO NEED TO USE CUP METHOD NO NEED TO APP LY 2 METHODS AS MOST APPROPRIATE METHOD. (V) NO COMPARABLE UNCONTROLLED TRANSACTION HAS BEEN PRO VIDED BY THE TPO FOR APPLICATION OF CUP METHOD. 4.7. ASSESSEE IN SUPPORT OF HIS CONTENTIONS RELIES ON ITAT MUMBAI ORDER IN THE CASE OF CA COMPUTER ASSOCIATES; AND ITAT DEL HI ORDER IN THE CASE OF AWB INDIA LTD. 4.8. IT IS FURTHER PLEADED THAT THE TPO ERRED IN QUESTIONING THE COMMERCIAL RATIONALE OF THE BUSINESS EXPENDITURE IN CURRED BY THE ASSESSEE WHICH IS NOT TENABLE AS TPO CANNOT QUESTION THE WIS DOM OF A COMMERCIAL 7 DECISION OR A TRANSACTION. THE POWER OF THE TPO IS RESTRICTED TO DETERMINE THE APPROPRIATE ALP ONLY. RELIANCE IS PLACED ON: - ABHISHEK AUTO (ITAT DELHI) - LG POLYMERS (ITAT VISHAKHAPATNAM) - EKL APPLIANCES (DELHI HIGH COURT) - DRESSER RAN (ITAT MUMBAI) - MCCANN ERICKSON (DELHI ITAT) - ERICSSON INDIA PVT. LTD. (ITAT DELHI) - AWB INDIA PVT. LTD. (ITAT DELHI). 4.9. THE OTHER MAJOR GROUND OF THE ASSESSEE PERTAI NS TO DISALLOWANCE OF AMOUNT OF RS. 60 LACS U/S 14A RED WITH RULE 8D. 4.10. DRP CONFIRMED THE DISALLOWANCE BY RELYING ON THE SIMILAR DISALLOWANCES MADE IN AY 2005/06 AND 2007-08. 4.11. LD. COUNSEL FOR THE ASSESSEE IN BRIEF CONTEND S THAT: (I) NO INTEREST BEARING FUNDS WERE USED FOR MAKING THE INVESTMENT (II) ASSESSEE DID NOT EARN ANY DIVIDEND INCOME OR ANY OT HER TAX FREE INCOME FROM SUCH INVESTMENT. (III) DISALLOWANCE U/S 14A IS NOT AUTOMATIC. 4.12. RELIANCE IS PLACED ON THE RATIO OF DECISIONS IN: - HERO CYCLES LTD. (P&H HIGH COURT) - PAHARPUR COOLING TOWERS LTD. (ITAT KOLKATA ) - GILLETTE GROUP INDIA PVT. LTD. (ITAT DELHI) - SIVA INDUSTRIES AND HOLDINGS LTD. (ITAT CHENNAI) - TORRENT POWER LTD. (ITAT AHMEDABAD) 4.13. LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT AS SESSEE HAD RECEIVED AN ORDER AMOUNTING TO RS. 93 CRORE FROM M/S ORISSA POW ER CONSORTIUM LTD. 8 (OPCL). FOR THIS PURPOSE THE POWER FINANCE CORPOR ATION (PFC) WAS TO APPROVE THE LIMITATION WITH A CONDITION OF EQUITY P ARTICIPATION OF RS. 5 CRORES FROM THE ASSESSEE ON WHICH NO DIVIDEND WAS PAYABLE. IT IS PLEADED THAT THE FUNDS WERE FINANCED CONSEQUENT TO A BUSINESS OBLIGA TION PURPOSES NECESSITATED BY THE FINANCING CONDITIONS OF PFC FOR FUNDING SUCH MEGA PROJECT. THUS THE EQUITY PARTICIPATION WAS NOT A FR EE/ INDEPENDENT DECISION TAKEN BY THE ASSESSEE FOR EARNING EXEMPT INCOME BUT IT WAS NECESSITATED BY THE BUSINESS EXPEDIENCY. THEREFORE, SUCH INVESTMENT CANNOT BE HELD TO BE THE AMOUNT UTILIZED FOR EARNING TAX FREE INCOME, MORE SO WHEN THE DIVIDEND WAS NOT PAYABLE AND IN THIS YEAR NO EXEMPT INCOME IS RE CEIVED. 5. LD. DR ON THE OTHER HAND CONTENDS THAT THE ASSES SEE DID NOT PROVIDE PROPER DOCUMENTATION BEFORE THE LOWER AUTHORITIES. LD. DR REFERRED TO PARA 4 OF TPOS ORDER TO THE EFFECT THAT EVEN JV AGREEMENT WAS NOT PRODUCED BEFORE HIM, AS UNDER: THE NEXT ISSUE IS THE COMPARATIVE BENEFITS THAT HA VE BEEN RECEIVED BY THE RESPECTIVE JV PARTNERS. A FINDING H AD BEEN GIVEN IN THE SHOW CAUSE NOTICE THAT HE INDIAN PARTN ER IS NOT RECEIVING ANY BENEFIT. THE FOREIGN PARTNER IS RECEI VING ITS BENEFIT EVEN IF THE ASSESSEE THE JV ENTITY IS MAKIN G LOSSES. THE ASSESSEE HAS TO PAY ROYALTY AS A PERCENTAGE OF SALE S. THE PROFITS OF LOSS MADE BY THE ASSESSEE IS OF NO CONSEQUENCE. BESIDES THAT THE ASSESSEE IS ALSO CALLED UPON TO MAKE A PAYMENT FOR SUPPOSED TECHNICAL ASSISTANCE. THERE IS OBVIOUSLY NO BENEFIT BEING RECEIVED IF THE ASSESSEE IS LEFT IN LOSSES. I T HAD BEEN BROUGHT OUT IN THE SHOW CAUSE NOTICE THAT THE PROFI TS IN THE YEAR UNDER CONSIDERATION COULD NOT WIFE OUT THE CARRIED FORWARD 9 LOSSES. UNDER THESE CIRCUMSTANCES, THERE IS VERY LI TTLE JUSTIFICATION FOR PAYMENT OF ROYALTY ALSO. HOWEVER, NO INTERFERENCE IS MADE IN THAT TRANSACTION SINCE IT I S A COMPOSITE PAYMENT. THERE IS DEFINITELY NO JUSTIFICATION FOR A SEPARATE PAYMENT ON ACCOUNT OF SUPPOSED RECEIPT OF TECHNICAL SERVICES. THE ASSESSEE WAS ASKED TO SUBMIT A COPY OF THE JV A GREEMENT. IT HAS FAILED TO DO SO. ALL THINGS CONSIDERED, IT CAN BE SAID THAT NEITHER THE JV AGREEMENT NOR THE ARRANGEMENT OF THE JV ENTITY I.E. THE ASSESSEE WITH ITS AES IS AT ARMS LENGTH. 6. LD. COUNSEL FOR THE ASSESSEE IMMEDIATELY REVERTE D AND CONTENDS THAT OBSERVATION IS NOT CORRECT AS JV AGREEMENT WAS PROD UCED BEFORE THE TPO AS WELL AS DRP. THEREFORE, THE ENTIRE ORDER STARTS ON A WRONG PREMISE AND IT SHOWS THE NON APPRECIATION OF THE RECORD PLACED BEF ORE THE LOWER AUTHORITIES. 6.1. LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT APR OPOS DISALLOWANCE U/S 14A A PLEA ABOUT THE EQUITY PARTICIPATION WITH AN A DDED CONDITION OF NO PAYMENT OF DIVIDEND THEREON WAS A DECISION TAKEN IN THE INTEREST OF BUSINESS EXPEDIENCY. WITHOUT AGREEING TO THIS CONDITION PFC WOULD NOT HAVE FINANCED SUCH A MASSIVE PROJECT. THEREFORE, THIS IS SUE WAS TO BE APPRECIATED AND A PROPER FINDING OUGHT TO HAVE BEEN GIVEN. HOWE VER, BOTH THE LOWER AUTHORITIES HAVE GLOSSED OVER THIS REQUIREMENT AND UPHELD THE DISALLOWANCE. 6.2. LD. COUNSEL IN THE ALTERNATIVE PLEADS THAT WHE N THE TPO HAS PROCEEDED TO DECIDE THE ALP ALLEGING THAT NO JV AGR EEMENT WAS FILED, WHICH IS NOT A CORRECT STATEMENT, THE MATTER MAY BE SET A SIDE AND RESTORED BACK TO THE FILE OF ASSESSING OFFICER. 7. LD. DR IS HEARD. 10 8. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE ENTIRE MATERIAL AVAILABLE ON RECORD. FROM THE RECORD IT EMERGES THA T TPO HAS PROCEEDED TO DRAW AN ADVERSE INFERENCE AGAINST THE ASSESSEE ON T HE PREMISE THAT JV AGREEMENT WAS NOT FILED, WHEREAS THE LD. COUNSEL FO R THE ASSESSEE HAS DEMONSTRATED FROM THE PAPER BOOK THAT JV AGREEMENT WAS FILED. THE DRP HAS CONFIRMED THE ACTION OF ASSESSING OFFICER/ TPO IN THIS BEHALF WITHOUT GIVING ANY FINDING. SIMILARLY, APROPOS DISALLOWANCE U/S 14A THE ASSESSEES MAIN CLAIM HAS NOT BEEN EXAMINED I.E. ABOUT THE EQU ITY PARTICIPATION BEING A BUSINESS DECISION AND IT WAS NOT INVESTMENT TO EARN ANY EXEMPT INCOME. IN OUR CONSIDERED VIEW IT WILL BE DESIRABLE AND IN THE INTEREST OF JUSTICE TO SET ASIDE BOTH THE ISSUES TO THE FILE OF ASSESSING OFFI CER TO CONSIDER THE SAME AFRESH AFTER GIVING THE ASSESSEE ADEQUATE OPPORTUNI TY OF BEING HEARD. 9. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 26-09-2013. ( B.C. MEENA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 26 TH SEPT. 2013. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR