M/s. Magneti Marelli Powertrain India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 6728/DEL/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5493 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-03-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 06-03-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 24-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: YOGESH KUMAR VERMA
• Assessee Lawyers: MANOJ KUMAR PARDASANI
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Initiation of penalty proceedings
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SHRI RAJPAL YADAV, JUDICIAL MEMBER ITA NO. 6728/DEL/2013 (ASSESSMENT YEAR-2009-10) MAGNETI MARELLI POWERTRAIN INDIA PVT. LTD., PLOT NO. 1, SUB PLOT NO. 25 & 32, MARUTI SUZUKI SUPPLIER PARK, SECTOR 3A, INDUSTRIAL AREA, IMP MANESAR, GURGAON VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 6(1), CENTRAL REVENUE BUILDING, NEW DELHI-110002 (APPELLANT) (RESPONDENT) PAN NO. AAFCM3204N ASSESSEE BY: SHRI MANOJ KUMAR PARDASANI REVENUE BY: SHRI YOGESH KUMAR VERMA DATE OF HEARING 6.3.2014 DATE OF PRONOUNCEMENT 10.3.2014 ORDER PER R. S. SYAL, AM: THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) READ WITH SECTION 144C ON 05.12.2013 IN RELATION TO THE ASSESSMENT YEAR 2009- 10. 2. THE MAJOR ISSUE INVOLVED IN THIS APPEAL IS AGAIN ST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A JOINT VENTURE C OMPANY BETWEEN MAGNETI MARELLI POWERTRAIN SPA, ITLAY, MARUTI SUZUK I INDIA LTD. AND SUZUKI MOTOR CORPORATION, JAPAN. THIS COMPANY WAS S ET UP IN INDIA ITA NO. 6728/DEL/2013 MAGNETI MARELL I POWERTRAIN INDIA PVT. LTD. 2 TO MANUFACTURE AND SELL ENGINE CONTROL UNITS (ECUS) . THE ASSESSEE REPORTED SIX INTERNATIONAL TRANSACTIONS INCLUDING ` PAYMENT OF TECHNICAL ASSISTANCE FEE TO THE TUNE OF RS. 38,58 ,80,000/-. ONLY THIS TRANSACTION IS IN DISPUTE INASMUCH AS THE OTHER FIV E INTERNATIONAL TRANSACTIONS HAVE NOT BEEN QUESTIONED BY THE TRANSF ER PRICING OFFICER (TPO). 3. THE FACTS CONCERNING THIS INTERNATIONAL TRANS ACTION ARE THAT ASSESSEE ENTERED INTO AGREEMENT WITH ITS FOREIGN A. E FOR ACQUIRING TECHNOLOGY REQUIRED FOR THE PURPOSE OF MANUFACTURIN G ECUS IN RESPECT OF THE FOLLOWING : - EURO IV/75 HP 1.3 SDE/SUZUKI SWIFT CAR APPLICATION BHARAT III/75 HP 1.3 SDE/MS SWIFT APPLICATION BHARAT III/75 HP 1.3 SDE/TATA INDICA CAR APPLICATIO N BHARAT III/75 HP 1.3 SDE/FIAT INDIA PALIO-LINEA CAR APPLICATION 4. THE ASSESSEE USED TRANSACTIONAL NET MARGIN METHO D (TNMM) TO BENCHMARK ALL ITS INTERNATIONAL TRANSACTION OF I MPORT OF RAW MATERIAL, SUB-ASSEMBLES AND COMPONENTS, PAYMENT OF TECHNICAL ASSISTANCE FEES, PAYMENT OF ROYALTY, PAYMENT OF SOF TWARE AND PURCHASE OF FIXED ASSETS, ALL CATEGORIZED UNDER ONE BROADER HEAD OF `MANUFACTURING OF AUTOMOTIVE COMPONENTS. THE RATIO OF THE ASSESSEES ` PROJECTED OPERATING PROFIT MARGIN TO THE OPERATING REVENUE AT 18.78% WAS COMPARED WITH THE MEAN OPERAT ING PROFIT MARGIN AT 6.65% OF COMPARABLES TAKEN ON THE BASIS O F PAST THREE ITA NO. 6728/DEL/2013 MAGNETI MARELL I POWERTRAIN INDIA PVT. LTD. 3 YEARS DATA. IN THE LIGHT OF THE ABOVE ANALYSIS, TH E ASSESSEE CLAIMED THAT ITS INTERNATIONAL TRANSACTIONS UNDER THIS BROA DER HEAD WHICH ALSO INCLUDES `PAYMENT OF TECHNICAL ASSISTANCE FEE WER E ALP. THE TPO REJECTED THE ASSESSEES WORKING BY HOLDING THAT TNM M WAS TO BE APPLIED SEPARATELY FOR EACH INTERNATIONAL TRANSACTI ON AND NOT COLLECTIVELY AS WAS DONE BY THE ASSESSEE. HE CAME T O HOLD THAT SIMPLY BECAUSE THE OVERALL OPERATING PROFIT WAS MOR E THAN THE COMPARABLES, IT COULD NOT BE INFERRED THAT ALL THE INTERNATIONAL TRANSACTIONS WERE AT ALP. HE, THEREFORE, REJECTED T HE `ENTITY LEVEL APPROACH ADOPTED BY THE ASSESSEE TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS INCLUDING THAT OF `TECHNICAL ASSISTANC E FEES AMOUNTING TO RS. 38.58 CRORES. IN THE OPINION OF THE TPO, IT WAS COMPARABLE UNCONTROLLED PRICE (CUP) METHOD WHICH WAS REQUIRED TO BE APPLIED. HE, THEREFORE, REJECTED THE ASSESSEES TNMM AND SOU GHT TO APPLY CUP METHOD. ACCORDINGLY, ALP OF THIS TRANSACTION WA S DETERMINED AT RS. NIL AS AGAINST THE AMOUNT PAID BY THE ASSESS EE AT RS. 38.58 CRORE. THE ASSESSEE WAS UNSUCCESSFUL BEFORE THE DR P. IN THE FINAL ORDER PASSED U/S 144C(13), THE A.O MADE THIS ADDITI ON. THE ASSESSEE IS AGGRIEVED AGAINST SUCH ADDITION. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THE RECORDING BY THE TPO THAT THE ASSESSEE MADE PAYMENT OF RS. 38.58 CRO RE IN THE YEAR IN QUESTION FOR WHICH DEDUCTION WAS CLAIMED, IS NOT CORRECT. IT HAS ITA NO. 6728/DEL/2013 MAGNETI MARELL I POWERTRAIN INDIA PVT. LTD. 4 BEEN DEMONSTRATED BY THE LD. AR THAT THE AMOUNT SO PAID WAS CAPITALIZED AND THE ASSESSEE CLAIMED ALLOWANCE FOR DEPRECIATION ON SUCH CAPITALIZED AMOUNT TO THE TUNE OF RS. 6 CRORE AND ODD. BE THAT AS IT MAY, THE SIMPLE FACT THAT THE ASSESSEE CAPIT ALIZED THE AMOUNT IN THE YEAR AND CLAIMED DEPRECIATION ON IT, WILL NOT T AKE THE TRANSACTION OUTSIDE THE AMBIT OF `INTERNATIONAL TRANSACTION . IT IS AN UNDISPUTED FACT THAT THE ASSESSEE INCURRED LIABILITY FOR THE S AID AMOUNT AND DID ACQUIRE TECHNICAL ASSISTANCE IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION IN RESPECT OF E CUS TO BE MANUFACTURED DISTINCTLY FOR SUZUKI SWIFT CAR APPLIC ATION; MS SWIFT APPLICATION ; TATA INDICA CAR APPLICATION; AND FIA T INDIA PALIO-LINEA CAR APPLICATION. HENCE, THE CHARACTER OF INTERNATIO NAL TRANSACTION IS INTACT. EVEN, THIS ASPECT HAS NOT BEEN DISPUTED ON BEHALF OF THE ASSESSEE EITHER BEFORE US OR THE AUTHORITIES BELOW. 6. IT IS SEEN THAT THE ASSESSEE CLUBBED TRANS ACTIONS OF IMPORT OF RAW MATERIAL, SUB-ASSEMBLES AND COMPONENTS, PAYMENT OF TECHNICAL ASSISTANCE FEES, PAYMENT OF ROYALTY, PAYMENT OF SOF TWARE AND PURCHASE OF FIXED ASSETS UNDER ONE SEGMENT OF MANU FACTURING OF THE AUTOMOTIVE COMPONENTS AND ANALYZED ALL SUCH TR ANSACTIONS ON A COMBINED BASIS. THIS TYPE OF COMBINED BENCHMARKING OF ALL THE INTERNATIONAL TRANSACTIONS IS NOT IN ACCORDANCE WI TH LAW. THE MERE FACT THAT THE OVERALL PROFIT EARNED BY THE ASSESSEE IS MORE, WOULD NOT IPSO FACTO LEAD TO THE INTERFERENCE THEN ALL THE INTERNATIONA L ITA NO. 6728/DEL/2013 MAGNETI MARELL I POWERTRAIN INDIA PVT. LTD. 5 TRANSACTIONS ARE AT ALP. THE SPECIAL BENCH OF THE T RIBUNAL IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. VS ACIT 2013 140 ITD 41 (DELHI) (SB) HAS HELD TO THIS EXTENT. THUS, THE APPROACH SO ADO PTED BY THE ASSESSEE IN COMBINING SO MANY INTERNATIONAL TRANSACTION FOR DETERMINING ALP ON A CONSOLIDATED BASIS, IS INCORRE CT. 7. THE NEXT MAJOR FLAW IN THE ASSESSEES CALCU LATION IS THAT IT TOOK INTO CONSIDERATION THE PROJECTED OPERATING PROFIT MARGIN TO SHOW THAT ITS INTERNATIONAL TRANSACTION FOR THE CURRENT YEAR WAS AT ALP. THE REQUIREMENT UNDER THE RELEVANT PROVISIONS OF TH E ACT ALONG WITH THE RULES IS TO CONSIDER THE `ACTUAL FIGURES AND NOT ANY ` PROJECTED FIGURES. IT IS BEYOND OUR COMPREHENSION AS TO HOW T HE PROJECTED FIGURES CAN BE SUBSTITUTED FOR THE ACTUALS WHEN THE REQUIREMENT IS TO BENCHMARK ACTUAL INTERNATIONAL TRANSACTIONS AT ALP. WE, THEREFORE, DO NOT APPROVE THE METHODOLOGY ADOPTED BY THE ASSES SEE IN THIS REGARD. 8. IT IS FURTHER SEEN THAT THE ASSESSEE SHOWED MEAN OPERATING MARGIN OF CERTAIN COMPARABLES AT 6.65% ON THE BASIS OF PAST THREE YEARS DATA. WE DO NOT APPROVE THIS KIND OF APPROACH ADOPTED BY THE ASSESSEE FOR THE OBVIOUS REASON THAT RULE 10B(4) PR OVIDES THAT THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF A N UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNA TIONAL TRANSACTION ITA NO. 6728/DEL/2013 MAGNETI MARELL I POWERTRAIN INDIA PVT. LTD. 6 HAS BEEN ENTERED INTO. PROVISO OF THIS RULE FOR USE OF MULTIPLE YEAR DATA IS ONLY AN EXCEPTION AND NOT A RULE, WHICH CAN BE INVOKED IF THE DATA FOR THE CURRENT YEAR DOES NOT RESULT INTO THE DETERMINATION OF CORRECT PRICES. NOTHING OF THE SORT HAS BEEN SHOWN AS TO WHY THE DATA OF THE COMPARABLES FOR THE CURRENT YEAR WAS NO T APPROPRIATE. WE, THEREFORE, REJECT THIS POINT OF VIEW CANVASSED BY THE ASSESSEE IN MAKING COMPARABILITY. 9. WE FURTHER OBSERVE THAT THE APPROACH ADOPTED BY THE TPO IS ALSO NOT CORRECT. HE REJECTED TNMM AS APPLIED BY TH E ASSESSEE BY HOLDING THAT CUP METHOD WAS APPLICABLE. HOWEVER, HE COMPUTED THE ALP OF SUCH TRANSACTION UNDER CUP AS NIL. THERE IS NO DISPUTE ON THE FACT THAT THE ASSESSEE DID RECEIVE TECHNICAL INFORMATION IN RESPECT OF ECUS TO BE MANUFACTURED BY IT FOR FOUR D IFFERENT MODELS OF CARS PERTAINING TO MARUTI, FIAT AND TATA. WHEN T ECHNICAL INFORMATION WAS ADMITTEDLY OBTAINED, IT COULD NOT B E SAID THAT THE ASSESSEE OUGHT NOT TO HAVE PAID ANY CONSIDERATION F OR THAT TO ITS A.E. THE TPO SEEMS TO HAVE GONE WRONG BY CONSIDERING THA T THE FOREIGN A.E CONTRIBUTED CAPITAL TO THE TUNE OF RS. 20 CRORE S AND ODD AND TOOK AWAY A SUM OF RS. 38 CRORES AND ODD IN THE SHA PE OF FEES FOR TECHNICAL SERVICES. THIS TYPE OF COMPARISON MADE BY THE TPO FOR DETERMINING THAT THE ALP OF THE INTERNATIONAL TRANS ACTION OF PAYMENT OF TECHNICAL FEE AT NIL, HAS NO LEGAL LEGS TO STAND ON. WHEN HE RESORTED TO THE APPLICATION OF CUP METHOD, IT WA S INCUMBENT ITA NO. 6728/DEL/2013 MAGNETI MARELL I POWERTRAIN INDIA PVT. LTD. 7 UPON HIM TO ASK THE ASSESSEE FOR THE SUBMISSION OF DETAILS OF SOME COMPARABLE UNCONTROLLED TRANSACTIONS. THERE IS NO R EFERENCE TO THE ASKING OR SUPPLYING OF ANY SUCH INFORMATION BY THE ASSESSEE IN THE FIRST INSTANCE, OR THE TPO THEREAFTER VENTURING TO FIND OUT SUCH COMPARABLES AT HIS OWN. WHAT IS REQUIRED UNDER THE CUP METHOD IS TO COMPARE THE PRICE PAID WITH CERTAIN UNCONTROLLED COMPARABLE TRANSACTION TO ANALYZE IF THE PRICE PAID IN AN INTE RNATIONAL TRANSACTION IS AT ALP. NOTHING OF THE SORT HAS BEEN DONE BY TH E TPO TO MAKE COMPARISON OF ANY COMPARABLE CASE WITH THAT OF THE ASSESSEE. HE SIMPLY PROCEEDED TO ADOPT NIL VALUE OF AS ALP OF T HE INTERNATIONAL TRANSACTION OF PAYMENT OF TECHNICAL FEE AND PROPOS ED ADDITION FOR THE FULL AMOUNT. IN OUR CONSIDERED OPINION, WHEN TH E ASSESSEE DID RECEIVE TECHNICAL INFORMATION AND EARNED INCOME BY USING THE SAME, IT CANNOT BE SAID THAT IT HAS ALP AT NIL. SOME SO RT OF COMPARISON IS INEVITABLE UNDER THIS METHOD, UNLESS IT IS SHOWN TH AT THE ASSESSEE DID NOT GET ANY ADVANTAGE AT ALL BY MAKING PAYMENT TO I TS AE. 10. THUS IT IS SEEN THAT NEITHER THE ASSESSEE FOLLOWED CORRECT METHODOLOGY FOR DETERMINATION OF ALP OF THIS INTERN ATIONAL TRANSACTION, NOR THE TPO/DRP APPLIED THE CUP METHOD FOR DETERMINATION OF ALP IN CORRECT PERSPECTIVE. IN SUC H A SITUATION, THE ORDER PASSED BY THE A.O MAKING ADDITION PROPOSED BY THE TPO, CANNOT BE UPHELD. IN OUR CONSIDERED OPINION, THE EN DS OF JUSTICE WOULD MEET ADEQUATELY IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ITA NO. 6728/DEL/2013 MAGNETI MARELL I POWERTRAIN INDIA PVT. LTD. 8 ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO/ TPO FOR A FRESH DETERMINATION OF ALP OF THIS INTERNATIONAL TRANSACT ION. WE ORDER ACCORDINGLY. THE LD. AR HAS AGREED TO ASSIST THE TP O IN PROVIDING DATA OF CERTAIN COMPARABLE CASES WHICH COULD ASSIST IN THE DETERMINATION OF ALP. IN SUCH FRESH PROCEEDINGS, T HE TPO WILL ASCERTAIN AS TO WHICH METHOD CAN BE CORRECTLY APPLI ED AND THEN DECIDE THE QUESTION BEFORE HIM. NEEDLESS TO SAY, A REASONABLE OPPORTUNITY OF BEING HEARD WILL BE GIVEN TO THE ASS ESSEE. 11. THE OTHER GROUNDS ABOUT CHARGING OF INTERES T AND INITIATION OF PENALTY PROCEEDINGS ARE EITHER CONSEQUENTIAL OR IRR ELEVANT. 12. IN THE RESULT, THE APPEAL IS ALLOWED FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 10/3/2014. SD/- SD/- (RAJPAL YADAV) (R. S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 10/3/2014 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR