Payne (India) Private Limited, Bangalore V. DCIT, Bangalore

ITA 68/BANG/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95258 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 08-09-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 24-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G R REDDY
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Initiation of penalty proceedings
• Section: 92D

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI VIJAY PAL RAO , JUDICIAL MEMBER A ND SHRI JASON P BOAZ, ACCOUNTANT MEMBER IT (TP) A NO. 68/BANG/2011 (ASSESSMENT YEAR: 2006 - 07 ) M/S.ESSENTRA INDIA PVT. LTD. (FORMERLY KNOWN AS PAY NE (INDIA) PVT.LTD.) NO.3 (OLD PLOT NOS.18 & 23), 3 RD MAIN ROAD, PEENYA INDUSTRIAL AREA, PHASE I, YESHWANTPUR HOBLI, BANGALORE - 560058. PAN:AABCB1955H APPELLANT VS. DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 12(2), BANGALORE. RE SPONDENT APPELLANT BY: SHRI T.SURYANARAYANA, ADVOCATE. RESPONDENT BY: SHRI G.R.REDDY, CIT(DR). DATE OF HEARING : 08/09/2015. DATE OF PRONOUNCEMENT: 24 /09/2015. O R D E R PER VIJAY PAY RAO, JM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAI NST THE ASSESSMENT ORDER DATED 08/10/2010 PASSED IN PURSUANCE TO THE DIRECTIONS OF THE DISPUTES REDRESSAL FORUM (DRP) DATED 21/09/2010. IT(TP)A NO. 68 /BANG/2015 M/S.ESSENTRA INDIA PVT. LTD. PAGE 2 OF 7 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: THE GROUNDS STATED HEREUNDER ARE INDEPENDENT OF, AND WITHOUT PR EJUDICE TO ONE ANOTHER. THE APPELLANT SUBMITS AS UNDER: 1 ASSESSMENT AND REFERENCE TO TRANSFER PRICING OFFICER ARE BAD IN LAW A) THE ORDER ISSUED BY THE DEPUTY COMMISSIONER OF INCOME - TAX - CIRCLE 12(2) ['AO'], IS BAD ON FACTS AND IN LAW, AND IS IN VIOLA TION OF THE PRINCIPLES OF NATURAL JUSTICE. WITHOUT PREJUDICE TO THE ABOVE, THE ORDER ISSUED BY THE AO IS BAD IN LAW INSOFAR AS THE FACT THAT THE AO DID NOT ISSUE TO ESSENTRA (INDIA) PRIVATE LIMITED ('THE APPELLANT OR 'THE COMPANY'), A SHOW CAUSE NOTICE, AS PER PROVISO TO SECTION 92C(3) OF THE INCOME - TAX ACT, 1961 ['THE ACT']. B) THE AO HAS ERRED IN LAW IN MAKING A REFERENCE TO THE JOINT DIRECTOR OF INCOME - TAX (TRANSFER PRICING) - II['TPO'], INTER ALIA, SINCE HE HAS NOT RECORDED AN OPINION THAT ANY OF THE CONDITIONS IN SECTION 92C(3) OF THE ACT, WERE SATISFIED IN THE INSTANT CASE. THE AO ALSO ERRED IN NOT FOLLOWING THE PROVISION CONTAINED IN SECTION 92CA(1) OF THE ACT. 2 DETERMINATION OF ARM'S LENGTH PRICE MANAGEMENT SUPPORT SERVICES FEES A) THE AO/TPO ERRED ON FACTS AND IN LAW IN REJECTING THE VALUE OF INTERNATIONAL TRANSACTIONS AS RECORDED IN THE BOOKS OF ACCOUNTS, AS THE ARM'S LENGTH PRICE. B) THE AO/TPO ERRED ON FACTS IN DETERMINING THE ARM'S LENGTH PRICE OF MANAGEMENT SUPPORT. C) THE AO/TPO ERRE D ON FACTS IN CONCLUDING THAT THE APPELLANT DID NOT DERIVE ANY COMMERCIAL BENEFIT FROM SUCH SERVICES AND PAYMENT OF MANAGEMENT SUPPORT SERVICE FEES IS A SEPARATE SEGMENT. D) THE AO/TPO ERRED ON FACTS IN NOT CONSIDERING THE DOCUMENTS FILED AND CONCLUDING THAT THERE WAS NO PROOF OR EVIDENCE THAT THE APPELLANT HAD RECEIVED ANY ECONOMIC BENEFIT FROM THE MANAGEMENT SUPPORT SERVICES RENDERED BY THE ASSOCIATED ENTERPRISE. I IT(TP)A NO. 68 /BANG/2015 M/S.ESSENTRA INDIA PVT. LTD. PAGE 3 OF 7 3 REJECTION OF THE MOST APPROPRIATE METHOD APPLIED BY THE APPELLANT A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO/TPO ERRED IN DISREGARDING THE BENCHMARKING ANALYSIS AND COMPARABLE TRANSACTIONS SELECTED BY THE APPELLANT IN THE TRANSFER PRICING STUDY REPORT MAINTAINED AS PER SECTION 92D OF THE ACT READ WITH RU LE 10D OF THE INCOME - TAX RULES, 1962 ('THE RULES'). B) THE AO/TPO ERRED ON FACTS AND IN LAW IN REJECTING ONE METHOD ('TNMM') AND SELECTING ANOTHER METHOD ('CUP') AS THE MOST APPROPRIATE METHOD WITHOUT PROVIDING REASONS TO THE APPELLANT FOR REJECTING THE METHOD ADOPTED BY THE APPELLANT. C) THE AO/TPO ERRED ON FACTS AND IN LAW IN REJECTING ONE METHOD ('TNMM') AND SELECTING ANOTHER METHOD ('CUP') AS THE MOST APPROPRIATE METHOD WITHOUT PROVIDING REASONS TO THE APPELLANT FOR REJECTING THE METHOD ADOPTED BY T HE APPELLANT. 4 VARIATION OF 5% FROM THE ARITHMETIC MEAN THE AO/TPO ERRED IN LAW IN NOT GRANTING THE BENEFITS OF PROVISO TO SECTION92C(2) OF THE ACT AVAILABLE TO THE APPELLANT. 5 DIRECTIONS ISSUED BY THE HONORABLE DRP A) THE HONORABLE DRP HAS ERRED I N LAW AND ON FACTS IN NOT TAKING COGNIZANCE OF THE OBJECTIONS FILED BY THE APPELLANT IN RELATION TO THE DRAFT ASSESSMENT ORDER ISSUED BY THE AO/ TP ORDER. B) THE HONORABLE DRP ERRED IN FACTS AND LAW IN CONFIRMING THE DRAFT ORDER OF THE AO. 6 INTEREST U NDER SECTION 234D OF THE ACT THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234D OF THE ACT AMOUNTING TO RS.2,07,617. 7 INITIATION OF PENALTY PROCEEDINGS THE AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C). 8 RELIE F THE APPELLANT CRAVES LEAVE TO ADD TO OR ALTER, IT(TP)A NO. 68 /BANG/2015 M/S.ESSENTRA INDIA PVT. LTD. PAGE 4 OF 7 BY DELETION, SUBSTITUTION, MODIFICATION OR OTHERWISE, THE ABOVE GROUNDS OF APPEAL, EITHER BEFORE OR DURING THE HEARING OF THE APPEAL. 3. THE ONLY ISSUE ARISES FROM THE GROUNDS RAISED BY THE ASSESSEE IS WHETHER THE INTRA GROUP SERVICES RENDERED BY THE AE TO THE ASSESSEE ARE AT ARM S LENGTH. THE ASSESSEE ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WHICH INCLUDE IMPORT OF RAW MATERIALS AND PACKING MATERIAL, EXPORT OF FINISHED GOODS, PURCHASE OF FINIS HED GOODS, IMPORT OF CAPITAL GOODS, PAYMENT OF INTRA GROUP SERVICES AND REIMBURSEMENT OF DIRECTOR S SALARY AND TRAVEL EXPENSES. ALL THE ABOVE INTERNATIONAL TRANSACTIONS WERE CLUBBED BY THE ASSESSEE TO DETERMINE THE ARMS LENGTH PRICE UNDER TRANSACTION NET M ARGIN METHOD (TNMM). THE ASSESSEE HAD PROFIT MARGIN ON COST AT ENTITY LEVEL WAS 33.31% AS COMPARED TO MEAN MARGIN ON COST OF THE COMPARABLES AT 10.11%. THE TPO ACCEPTED TNMM AS MOST APPROPRIATE METHOD FOR DETERMINATION OF ALP IN RESPECT TO ALL OTHER INTERN ATIONAL TRANSACTIONS EXCEPT THE PAYMENT FOR INTRA GROUP SERVICES. THE ASSESSEE IS MAKING THE PAYMENT FOR INTRA GROUP SERVICES WITH A MARKUP OF 5.8% WHEREAS THE TPO HAS DETERMINED THE ALP IN RESPECT OF THE GROUP SERVICES AT NIL BY HOLDING THAT THE INTRA GRO UP SERVICES DID NOT RESULT INCREASE ANY PROFIT MARGIN. 4. AT THE OUTSET, WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY THIS TRIBUNAL IN ASSESSEE S OWN CASE IT(TP)A NO. 68 /BANG/2015 M/S.ESSENTRA INDIA PVT. LTD. PAGE 5 OF 7 FOR ASSESSMENT YEAR 2005 - 06 IN ITANO.446/BANG/2012 VIDE ORDER DATED 24/7/201 5 IN PARA.5 AS UNDER: 5. WE HAVE HEARD THE LEARNED DR AS WELL AS THE LEARNED AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS MADE THE PAYMENT TOWARDS THE COST CONTRIBUTION ON ACCOUNT OF INTRA GROUP SERVICES. THE AO AS WELL AS TH E TPO HAS NOT DISPUTED THE ACTUAL COST OF SERVICES WHICH IS CONTRIBUTED BY THE ASSESSEE, THOUGH THE AE OF THE ASSESSEE HAS ALLOCATED THE COST WITH THE MARK - UP OF 5.8%. THE TPO HAS DETERMINED THE ALP OF GROUP SERVICES AT NIL ON THE GROUND THAT THE SERVICES HAS NOT RESULTED IN ANY INCREASE IN THE PROFIT MARGIN OF THE ASSESSEE. IT IS PERTINENT TO NOTE THAT THE COMPUTATION OF ALP BY THE TPO AT NIL IS CONTRARY TO THE PROVISIONS OF TRANSFER PRICING AS WELL AS RULES PROVIDED UNDER THE ACT. THE ONLY ISSUE BEFORE TH E TPO WAS TO CONSIDER THE ARM S LENGTH PRICE OF THE SERVICES RECEIVED BY THE ASSESSEE. ONCE THE SERVICES RECEIVED BY THE ASSESSEE IS NOT IN DISPUTE THAN, THE DISPUTE IS ONLY THE ALP OF SUCH SERVICES. IN THE CASE IN HAND THE DISPUTE WAS FURTHER NARROWED ONL Y IN RELATION TO THE MARK - UP CHARGED BY THE AE ON THE COST. THE CIT(A) HAS ALREADY DISALLOWED THE MARK - UP AND DETERMINED THE ALP AT COST OF THE GROUP SERVICES WHICH HAS BEEN CONTRIBUTED BY THE ASSESSEE. WE FURTHER NOTE THE CIT(A) HAS NOTED THAT THE FACT FO R ASSESSMENT YEAR 2008 - 09, THE PAYMENT OF INTRA GROUP SERVICES WAS ACCEPTED Y THE TPO AT ARM S LENGTH UNDER THE TNMM WHERE THE PERCENTAGE OF PROFIT ON COST OF ASSESSEE AT ENTITY LEVEL WAS ONLY 16.31% IN COMPARISON TO THE CURRENT YEARS MARGIN AT 33.31%. WE FIND THAT FOR THE ASSESSMENT YEAR 2008 - 09, THE TPO HAS ACCEPTED THE PAYMENT MADE FOR INTRA GROUP SERVICES AS UNDER; HOWEVER, FROM THE SUBMISSIONS MADE BY THE TAXPAYER AND FACTS OF CASE, IT IS SEEN THAT THE PAYMENT IS MADE TOWARDS COST CONTRIBUTION AN D THE TAXPAYER HAS ALSO SUBMITTED THE PAYMENT IS IN NATURE OF REIMBURSEMENT OF ALLOCATED COSTS WHICH AMOUNTS TO 6.99% OF THE LOCAL ALLOCATION MADE THE FILTRONA UK LIMITED TO ALL THE AES AT A MARK - UP OF 5.8%. AS IT IS EVIDENT FROM THE FACTS AND SUBMISSION S, THE PAYMENT IS CLEARLY FOR THE COST CONTRIBUTION AND THEREFORE, THERE SHOULD NOT BE ANY MARK - UP ON SUCH ALLOCATIONS MADE BY THE PARENT COMPANY. HENCE, FOR THE SAME REASON, THE MARK - UP OF 5.8% PAID TOWARDS COST CONTRIBUTION IS NOT AT ARM S LENGTH AND THE ALP FOR THE MARKUP IS TREATED AS NIL WHICH AMOUNTS TO RS.2,15,140/ - . THUS, THE ABOVE EXCESS AMOUNT BEING ADJUSTMENT U/S 92CA OF RS.2,15,140/ - IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA FOR ASSESSMENT YEAR 2007 - 08 . IT(TP)A NO. 68 /BANG/2015 M/S.ESSENTRA INDIA PVT. LTD. PAGE 6 OF 7 5. THE LEARNED DEPAR TMENTAL REPRESENTATIVE HAS SUBMITTED THAT FOR THE YEAR UNDER CONSIDERATION, THE TPO HAS NOTED THAT THE ASSESSEE HAS NOT FURNISHED ANY DETAILS TO ESTABLISH THAT ANY SERVICE HAS BEEN RENDERED BY THE AE FOR WHICH THE ASSESSEE HAS MADE THE PAYMENT. TO COUNTER THIS OBJECTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE, LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT VIDE LETTER DATED 20/8/2009, THE ASSESSEE FURNISHED ALL THE RELEVANT DETAILS, AGREEMENTS, VOUCHERS AND INVOICES AS WELL AS NATURE OF THE SERVICES REND ERED BY THE AE OF THE ASSESSEE ALONG WITH PROOF OF THE SERVICES RENDERED BY THE AE OF THE ASSESSEE. HE HAS FILED COPY OF THE LETTER DATED 20/8/2009. 6. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND THE RELEVANT MATERIAL ON RECORD, WE NOTE THAT THE ASS ESSEE PRODUCED ALL THE RELEVANT DETAILS AS WELL AS THE EVIDENCE IN SUPPORT OF THE CLAIM THAT THE AE OF THE ASSESSEE HAS RENDERED THE SERVICES AS PER THE AGREEMENT BETWEEN PARTIES. WE FIND THAT THE ASSESSEE HAS PRODUCED THE DOCUMENTS BEFORE THE TPO TO SHOW THAT RECEIPT OF THE SERVICES IN RESPECT OF THE LIST OF THE PRODUCTS DEVELOPED BY THE AE , DETAILS OF SALES STRATEGIES, BUDGET PLANNER, ACCOUNTS SUPPORT AND MANAGEMENT REPORTS ETC. THUS, IT IS MANIFEST FROM THE RECORD THAT THE ASSESSEE PRODUCED ALL THE DET AILS IN SUPPORT OF THE CLAIM. HOWEVER, THE TPO WITHOUT CONSIDERING THE RELEVANT RECORD HAS MENTIONED IN THE IMPUGNED ORDER THAT THE ASSESSEE HAS NOT IT(TP)A NO. 68 /BANG/2015 M/S.ESSENTRA INDIA PVT. LTD. PAGE 7 OF 7 FILED THE DETAILS WHICH IS CONTRARY TO THE RECORD. ACCORDINGLY, FOLLOWING THE EARLIER ORDER OF THIS TRIBU NAL DATED 24/07/2015, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE TO THE EXTENT THAT THE COST OF SERVICES PRODUCED BY THE ASSESSEE HAS TO BE ALLOWED. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. PRON OUNCED IN THE OPEN COURT ON 24 TH SEPTEMBER , 201 5 . SD/ - SD/ - (JASON P BOAZ ) ( VIJAY PAL RAO ) ACCOUNTANT MEMBER JUDICIAL MEMBER EKSRINIVASULU COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE T RIBUNAL BANGALORE