Frigoglass India Pvt. Ltd., Gurgaon V. ACIT, Circle- 9(2), New Delhi

ITA 7116/DEL/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3472 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2013-2014
• Appeal Filed On: 27-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Transfer pricing; Business expenditure; International transaction
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.7116/DEL./2017 (ASSESSMENT YEAR : 2013-14) M/S. FRIGOGLASS INDIA PVT. LTD., VS. ACIT, CIRCLE 9 (2), PLOT 26 A, SECTOR 3, NEW DELHI. IMT MANESAR, GURGAON 122 050 (HARYANA). (PAN : AAACF6804G) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO, ADVOCATE REVENUE BY : SHRI SANJAY I. BARA, CIT DR DATE OF HEARING : 10.01.2018 DATE OF ORDER : 09.02.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. FRIGOGLASS INDIA PVT. LTD. (HE REINAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESEN T APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 25.10.2017, PASS ED BY THE AO IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP /TPO UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOM E-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2013- 14 ON THE GROUNDS INTER ALIA THAT :- ITA NO.7116/DEL/2017 2 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APPELLANT RESPECTFULLY SUBMITS THAT: 1. THIS GROUND IS GENERAL IN NATURE 1.1. THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-9(2), NEW DELHI ('THE ASSESSING OFFICER' OR THE LD. AO') PURSUANT TO DIRECTIONS OF HON'BLE DISPUTE RESOLUTIO N PANEL ('HON'BLE DRP'), HAS ERRED ON FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW IN COMPLETING THE PRESENT ASSESSMEN T AT AN INCOME OF 'NIL' POST ADJUSTMENT OF THE BROUGHT FORW ARD LOSSES AGAINST THE RETURNED INCOME OF NIL. THE ASSESSED IN COME IS NIL AND IS BAD IN LAW. 1.2. THAT, THE LEARNED DEPUTY COMMISSIONER OF INCO ME TAX, TRANSFER PRICING OFFICER -1 (2) (1) AND 1 (2)(2) (H EREINAFTER REFERRED AS 'LD. TPO')/ HON'BLE DRP HAS GROSSLY ERR ED IN MAKING/UPHOLDING AN ADJUSTMENT OF RS. 7,65,31,778 I N RESPECT OF DISALLOWANCE OF PAYMENT OF ROYALTY TO AE. 2. DRAFT ORDER PASSED BY LD. AO NOT IN ACCORDANCE W ITH PROCEDURES LAID DOWN IN LAW 2.1. THE DRAFT ORDER PASSED BY THE LD. AO IS VOID AB-INITIO AS REFERENCE MADE TO THE LD. TPO WAS NOT IN ACCORDANCE WITH THE CBDT INSTRUCTION NO 3/2016 AND SINCE THE SAID ORDER IS PASSED BEYOND THE TIMELINE PROVIDED, THE SAME SHOULD BE TR EATED AS TIME BARRED. 3. REJECTION OF THE ECONOMIC ANALYSIS OF THE APPEL LANT 3.1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, LD. TPO/ HON'BLE DRP HAVE ERRED IN NOT ACCEPTI NG THE ECONOMIC ANALYSIS OF THE APPELLANT, FOR DETERMINATI ON OF THE ARM'S LENGTH PRICE ('ALP') IN CONNECTION WITH THE I MPUGNED INTERNATIONAL TRANSACTIONS AND IN NOT APPRECIATING THAT NONE OF THE CONDITIONS SET OUT IN SECTION 92C(3) OF THE ACT ARE SATISFIED IN THE PRESENT CASE 4. NO DUE CONSIDERATION TO DECISION OF HON'BLE HIGH COURT AND HON'BLE ITAT IN APPELLANT'S OWN CASE 4.1. THE LEARNED TPO ERRED, IN LAW AND IN FACTS BY PROPOSING WRONG ADJUSTMENT WHICH DISREGARDS THE ORDER OF THE HIGHER APPELLATE AUTHORITIES IN ASSESSEE'S OWN CASE FOR A Y 2010-11 AND AY 2011-12. 4.2. THE LD. AO HAS ERRED IN DISALLOWING THE SAID TRANSACTION MERELY ON THE BASIS THAT THE APPEAL WAS RECOMMENDED TO BE FILED BEFORE THE HON'BLE SUPREME COURT, ALTHOUGH AS IS CL EAR THAT TILL ITA NO.7116/DEL/2017 3 DATE/ TILL THE DATE OF PRONOUNCEMENT OF THE ORDER P ASSED BY AO NO APPEAL HAS BEEN FILED BY THE DEPARTMENT BEFORE THE HON'BLE SUPREME COURT AND THE TIME LIMIT FOR FILING THE SAI D APPEAL HAS LAPSED. THE SAID ACTION OF THE HON'BLE DRP/LD. AO H AS CAUSED UNDUE HARDSHIP TO THE APPELLANT. 4.3. HON'BLE DRP ERRED IN NOT CONSIDERING THE DECI SION OF HON'BLE HIGH COURT AND HON'BLE INCOME TAX APPELLATE TRIBUNAL IN THE APPELLANT'S OWN CASE FOR EARLIER YE ARS I.E. AY 2010-11 AND AY 2011-12 BY REJECTING THE TNMM AND SE LECTING CUP METHOD AS THE MOST APPROPRIATE METHOD ('MAM') T O BENCHMARK THE INTERNATIONAL TRANSACTION FOR 'PAYMEN T OF ROYALTY'. 5. REJECTION OF COMBINED TRANSACTION APPROACH ADOP TED BY APPELLANT 5.1. THE LD. TPOI HON'BLE DRP ERRED IN REJECTING T HE COMBINED TRANSACTION APPROACH ADOPTED BY THE APPELL ANT FOR BENCHMARKING THE IMPUGNED TRANSACTIONS BY REJECTING TNMM AS THE MOST APPROPRIATE METHOD ('MAM'). 6. ADOPTION OF COMPARABLE UNCONTROLLED PRICE METHO D AS THE MAM 6.1. THAT THE LD. TPOI HON'BLE DRP ERRED IN NOT CO NDUCTING THE ANALYSIS OF SELECTING THE MOST APPROPRIATE METH OD AS PRESCRIBED UNDER RULE 10C OF THE RULES. 6.2. THE LD. TPOI HON'BLE DRP HAVE ERRED IN UPHOLD ING THE ADOPTION OF CUP METHOD AS THE MOST APPROPRIATE METH OD FOR DETERMINING THE ARM'S LENGTH PRICE IN RESPECT OF TH E IMPUGNED INTERNATIONAL TRANSACTION WITHOUT IDENTIFYING ANY C OMPARABLE UNCONTROLLED TRANSACTION(S) FOR THE COMPUTATION OF THE ALP AS PRESCRIBED IN SECTION 92F(II) OF THE ACT. 7. QUESTIONED COMMERCIAL RATIONALE OF THE LEGITIMAT E BUSINESS EXPENSES INCURRED BY THE APPELLANT 7.1 THE LD. TPO/HON'BLE DRP ERRED IN QUESTIONING T HE COMMERCIAL RATIONALE OF THE LEGITIMATE BUSINESS EXP ENSES INCURRED BY THE TAXPAYER AND NOT RESTRICTING THE SC OPE OF ASSESSMENT UNDER SECTION 92CA TO DETERMINING THE AR M'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION BY ADOPTING ONE OF THE PRESCRIBED METHODS ONLY. 8. TRANSFER PRICING ADJUSTMENT BASED ON INCORRECT ASSUMPTIONS ITA NO.7116/DEL/2017 4 8.1. THE LD. TPOI HON'BLE DRP ERRED IN PASSING AN ORDER THAT IS PERVERSE IN LAW IGNORING THE RELEVANT SUBMI SSIONS, INFORMATION AND DOCUMENTS PROVIDED BY THE APPELLANT TO SUBSTANTIATE THE SERVICES AND BENEFITS RECEIVED BY THE APPELLANT IN LIEU OF PAYMENT OF ROYALTY, AND BASED ON A PREOCCUP IED MIND REACHED AT AN INAPPROPRIATE CONCLUSION THAT THE ARM 'S LENGTH VALUE OF THE TRANSACTION PERTAINING TO PAYMENT OF R OYALTY SHOULD BE NIL. 8.2. THE LD. TPOI HON'BLE DRP ERRED IN MISINTERPRE TING / MISCONSTRUED THE FACTS WITH RESPECT TO THE INTERNAT IONAL TRANSACTION RELATING TO PAYMENT OF ROYALTY ON THE B ASIS OF INCORRECT PRESUMPTIONS AND ACCORDINGLY MADE AN ADJU STMENT OF INR 7,65,31,778 TO THE TOTAL INCOME OF THE ASSESSEE . 9. FULL CREDIT OF TAXES CLAIMED IN RETURN OF INCOM E NOT PROVIDED 9.1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN NOT GIVING FULL CREDIT OF TAXES PAI D AS CLAIMED IN RETURN OF INCOME. 10. PENALTY PROCEEDINGS INITIATED U/S 271(1)(C) OF THE ACT 10.1. ON FACTS AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 (1)( C) READ WITH SECTION 274 OF THE ACT AGAINST THE APPELLANT FOR CONCEALING THE INCOME THROUGH SUBMISSION OF INACCURATE PARTICULARS IN THE TAX RETURN. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. FRIGOGLASS INDIA PVT . LTD., THE TAXPAYER IS INTO THE BUSINESS OF GLASS DOOR MERCHAN DISING WITH A MANUFACTURING PLANT IN GURGAON, INDIA CATERING TO I NDIAN MARKET AND ACTS AS AN EXPORT PLATFORM FOR THE ASIAN MARKET . GLASS DOOR MERCHANDISING CONCEPT IS RELEVANT IN ALCOHOLIC AND NON-ALCOHOLIC WATER, DAIRY PRODUCTS, BAKERY & CONFECTIONARY, PHAR MACEUTICALS ETC. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYE R ENTERED INTO ITA NO.7116/DEL/2017 5 INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES (AE) AS UNDER :- SL.NO. NATURE OF TRANSACTION METHOD AMOUNT(IN INR) 1. PURCHASE OF RAW MATERIALS TNMM 93,88,796 2. SALE OF FINISHED GOODS 3,18,48,493 3. SALE OF COMPONENTS AND SPARES 90,23,944 4. PURCHASE OF TRADING GOODS 11,11,771 5 . PAYMENT OF ROYALTY 7, 65,31,778 6 . PAYMENT OF MANAGEMENT CONSULTANCY FEES 3,47,23,166 7 . SALE OF CONSUMABLES 4,17,420 8. PURCHASE OF FIXED ASSETS 1,44,376 9. PROVISION OF SUPPORT SERVICES 16,55,17,715 10. REIMBURSEMENT OF EXPENSES TO AES NO BENCHMARKING REQUIRED 32,48,663 11. RECOVERY OF EXPENSES FROM AES 25,23,260 3. THE TAXPAYER IN ITS TRANSFER PRICING STUDY IN OR DER TO BENCHMARK ITS INTERNATIONAL TRANSACTION USED TRANSA CTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) AND FOUND ITS INTERNATIONAL TRANSACTIONS AT ARMS L ENGTH. THE TPO HAS DISPUTED ONLY ONE INTERNATIONAL TRANSACTION OF RS.7,65,31,778/- ENTERED INTO BY THE TAXPAYER WITH ITS AE QUA PAYMEN T OF ROYALTY. THE LD. TPO REJECTED THE TNMM USED BY THE TAXPAYER FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS RATHER APPLIED CUP METHOD AND PROCEEDED TO CONCLUDE THAT, IN THE SIMILAR FACTS AND CIRCUMSTANCES OF THE SITUATION, NO THIRD PARTY WOUL D BE WILLING TO PART WITH ANY AMOUNT TO A THIRD PARTY OR WOULD HAVE SPENT ANY AMOUNT IN ARRANGEMENT OF THE ABOVE STATED PURPORTED SERVICES, ARMS LENGTH PRICE OF THESE SERVICES, AGAINST WHICH ROYALTY/LICENCE ITA NO.7116/DEL/2017 6 FEE HAS BEEN PAID, IS ARRIVED AT NIL. AND CONSEQUENTLY, MADE ADJUSTMENT OF RS.7,65,31,778/- ON ACCOUNT OF ROYALT Y PAYMENT AS CUMULATIVE ADJUSTMENT U/S 92C OF THE ACT. 4. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY FILING OBJECTIONS WHO HAS DISPOSED OF THE OBJECTIONS BY DI RECTING THE AO TO COMPLETE THE ASSESSMENT AS PER DIRECTIONS. FEEL ING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 5. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 6. LD. AR FOR THE TAXPAYER, AT THE VERY OUTSET, CON TENDED THAT THE ISSUE INVOLVED IN THE PRESENT APPEAL HAS ALREAD Y BEEN SETTLED IN FAVOUR OF THE TAXPAYER IN ITS OWN CASE FOR AY 2010- 11 AND AY 2011-12, FURTHER AFFIRMED BY THE HONBLE HIGH COURT . THE CONTENTION RAISED BY THE LD. AR FOR THE TAXPAYER IS CONFIRMED FROM THE DIRECTIONS ISSUED BY THE DRP, WHICH ARE EXTRACT ED FOR READY PERUSAL AS UNDER :- THE ISSUE INVOLVED IN THIS CASE IS SAME AS IN AY 2 010-11 AND 2011-12. THE HON'BLE HIGH COURT HAS DECIDED THE ISS UE IN THE CASE OF THE ASSESSEE FOR AY 2010-11 AND 2011-12 AGA INST THE DEPARTMENT. AS INFORMED BY THE ASSESSEE, NO ADJUSTM ENT ON THIS GROUND HAS BEEN MADE IN AY 2012-13 AND 2014-15. SIN CE THE JUDGMENT OF THE HON'BLE HIGH COURT HAS BEEN PASSED FEW MONTHS ITA NO.7116/DEL/2017 7 BACK (MARCH/APRIL 2017), THERE MAY BE TIME FOR THE DEPARTMENT TO FILE THE SLP IN THIS MATTER. IN VIEW OF THESE FA CTS AND CIRCUMSTANCES OF THE CASE, THE DIRECTIONS OF DRP AR E AS UNDER: (A) IF THE DEPARTMENT HAS FILED THE SLP OR INTENDS TO FILE THE SLP IN THIS CASE ON THIS ISSUE, THE ORDER OF THE TP O/AO IS HERE BY CONFIRMED AS THE MATTER WILL BE SUB-JUDICE. (B) IF DEPARTMENT HAS NOT FILED THE SLP OR DO NOT INTEND TO FILE THE SLP IN THIS CASE ON THIS ISSUE, THE TPO/AO MAY FOLLOW THE DECISION OF JURISDICTIONAL HIGH COURT IN THE AS SESSEE'S OWN CASE FOR AY 2010-11 AND 2011-12. 7. UNDISPUTEDLY, THE COORDINATE BENCH OF THE TRIBUN AL IN ASSESSEES OWN CASE IN ITA NO.784/DEL/2016 FOR AY 2 011-12 ORDER DATED 25.07.2016 DELETED THE ADJUSTMENT MADE BY THE AO ON ACCOUNT OF ROYALTY PAYMENT AND MANAGEMENT FEE BY MA KING FOLLOWING OBSERVATIONS :- 6. AS FOR THE SECOND ISSUE, THAT WAS A MATTER TAK EN UP AT THE DRP ONLY INASMUCH AS AN ENHANCEMENT WAS MADE BY THE DRP IN THIS REGARD. DURING THE COURSE OF THE PROCEEDINGS B EFORE DRP, IT WAS NOTICED THAT IN THE IMMEDIATELY PRECEDING ASSES SMENT YEAR, I.E. 2010-11, THE TPO HAD MADE AN ALP ADJUSTMENT OF RS 29,65,700 IN RESPECT OF MANAGEMENT FEES AND OF RS 8 ,47,65,448 IN RESPECT OF ROYALTY AND LICENCE FEES, AND THESE A LPS WERE CONFIRMED BY THE DRP. THE DRP REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY SIMILAR ALP ADJUSTMENT NOT BE MADE FOR THIS ASSESSMENT YEAR AS WELL, AS THE RELEVANT FACTS AND CIRCUMSTANCES ARE SIMILAR. IT WAS IN THIS BACKDROP, AND AFTER REJ ECTING THE SUBMISSIONS AGAINST THE ENHANCEMENT, THAT THE DRP D IRECTED THE ASSESSING OFFICER TO MAKE SIMILAR (ARMS LENGTH PR ICE) ADJUSTMENT TOWARDS ROYALTY AND MANAGEMENT FEES AS H AS BEEN UPHELD BY THE DRP IN 2010-11. WHEN THE MATTER THU S TRAVELLED BACK TO THE ASSESSING OFFICER, HE MADE AN ALP ADJUS TMENT OF RS 5,41,00,671 AS AGAINST ALP ADJUSTMENT OF RS 2,39,5 8,750 AS ORIGINALLY PROPOSED BY THE TPO. THE ASSESSEE IS AGG RIEVED AND IS IN APPEAL BEFORE US. 7. HAVING HEARD THE RIVAL SUBMISSIONS AND HAVING P ERUSED THE MATERIAL ON RECORD, WE FIND THAT THE ISSUE IS C OVERED, IN FAVOUR OF THE ASSESSEE,THE ORDER DATED 8TH APRIL 2 016 PASSED BY A COORDINATE BENCH, IN ASSESSEES OWN CASE FOR THE AS SESSMENT YEAR 2010-11. THERE IS NO OCCASION TO TAKE A DIFFERENT V IEW OF THE ITA NO.7116/DEL/2017 8 MATTER FOR THIS YEAR. IN ANY EVENT, ONE CAN DISCARD THE TNMM AND PROCEED TO ADOPT CUP ONLY WHEN A COMPARABLE PRO DUCT OR SERVICE IS AVAILABLE. WHEN NO SUCH COMPARABLE IS AV AILABLE, AS IN THIS CASE, THERE CANNOT BE ANY OCCASION TO RESORT T O CUP, AND, AS SUCH, IN SUCH A SITUATION, CUP CANNOT BE ACCEPTED A S MAM OVER THE TNMM. THE VERY APPROACH UNDERLYING THESE ALP ADJUSTMENTS IS NOT FALLACIOUS AND LEGALLY UNSUSTAIN ABLE. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO DELETE A LP IN RESPECT OF ROYALTY AND MANAGEMENT FEES. 8. FURTHERMORE, ORDER PASSED BY THE COORDINATE BENC H OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2011-12 HAS BEEN CONFIRMED BY THE HONBLE HIGH COURT OF DELHI IN ITA 123/2017 ORDER DATED 03.03.2017. 9. SINCE THE ISSUE AS TO PAYMENT OF ROYALTY BY THE TAXPAYER TO ITS AE IS ONE OF THE ACTUAL BUSINESS ARRANGEMENT, T HERE IS NO MATERIAL ON FILE TO TAKE A DIFFERENT VIEW ON THE IS SUE AS THE SAME HAS ALREADY BEEN SETTLED IN FAVOUR OF THE TAXPAYER IN A Y 2010-11 AND AY 2011-12, SO ALP ADJUSTMENT ON ACCOUNT OF ROYALTY PAYMENT MADE BY THE TPO/AO IS NOT SUSTAINABLE IN THE EYES O F LAW, HENCE ORDERED TO BE DELETED BY THE AO. CONSEQUENTLY, THE APPEAL FILED BY THE TAXPAYER IS HEREBY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 9 TH DAY OF FEBRUARY, 2018. SD/- SD/- (R.S. SYAL) (KULDIP S INGH) VICE PRESIDENT JUDICIAL MEMBER DATED THE 9 TH DAY OF FEBRUARY, 2018 TS ITA NO.7116/DEL/2017 9 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.