Howden Solyvent (India) Pvt. Ltd., CHENNAI V. DCIT, CHENNAI

ITA 732/CHNY/2015

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9501 (ITAT-CHENNAI)
• Duration Of Justice: 7 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 16-10-2022
• Assessment Year: 2010-2011
• Appeal Filed On: 07-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: DARPAN KRIPALANI
• Keywords: Transfer pricing; International transaction
• Section: 43B; 143(3); 234B; 113

Judgement Text

आयकर अपीलीय अिधकरण ‘डी’ Ɋायपीठ चेɄई मŐ। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI माननीय ŵी महावीर िसंह, उपाȯƗ एवं माननीय ŵी मनोज कु मार अŤवाल ,लेखा सद˟ के समƗ। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपीलसं./ITA No.732/Chny/2015 (िनधाŊरणवषŊ / Assessment Year: 2010-11) Howden Solyvent (India) Pvt. Ltd. 147, Poonamalee High Road, Numbal Village, Kancheepuram D.T. Chennai – 600 077. बनाम / Vs. DCIT Corporate Circle-6(2) Chennai. ̾थायीलेखासं./जीआइआरसं./PAN/GIR No. AAACF-6153-G (अपीलाथŎ/Appellant) : (ŮȑथŎ / Respondent) अपीलाथŎकीओरसे/ Appellant by : Shri Darpan Kripalani (Advocate) & Shri H. Yeswanth Kumar (CA) - Ld. AR ŮȑथŎकीओरसे/Respondent by : Dr. S. Palani Kumar- CIT-DR सुनवाईकीतारीख/Date of Hearing : 17-10-2022 घोषणाकीतारीख /Date of Pronouncement : 31-10-2022 आदेश / O R D E R Mahavir Singh (Vice President) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2010-11 arises out of final assessment order dated 30-01-2015 passed by Ld. Assessing Officer, Chennai (AO) u/s 143(3) r.w.s. 144C(13) r.w.s. 92CA(3) pursuant to the directions of Learned Dispute Resolution Panel, Chennai (DRP) u/s. 144C(5) of the Act dated 19-11-2014. The assessee carried out certain international transactions with its Associated Enterprises (AE) which were subjected to determination of ITA No.732/Chny/2015 - 2 - Arm’s Length Price (ALP) before Ld. Transfer Pricing Officer-IV, Chennai (TPO) vide order dated 27-01-2014. Incorporating the proposed adjustment, draft assessment order was passed by Ld. AO on 25-02-2014 which was subjected to further objections before Ld. DRP. Subsequently, final assessment order was passed by Ld. AO pursuant to the directions of Ld. DRP which is in further appeal before us. The grounds raised by the assessee read as under: - 1. That on the facts and in the circumstances of the case the Ld AO and the Hon’ble Dispute Resolution Panel (Honble DRP) erred in not confirming the arms length nature of the international transaction of payment of management service fee without considering the fact that the information as provided in earlier years has also been shared for the year consideration and it was accepted to be at arms length by the Ld. DRP for AY 2009- I0 and there has been no change in the facts around the transactions, which can lead to an alternate view: 2. That on the facts and in the circumstances of the case the Ld. AO and the Hon’ble DRP erred in rejecting be economic analysis submitted by the appellant and adopted Comparable Uncontrolled Price (CUP) Method as the most appropriate method for the international transaction of parent of management service lee by the appellant and thereby determining the Arms length Price (ALP) to be NIL. 3. That on the facts and in the circumstances of the case the Ld. AO and the Hon’ble DRP erred in misinterpreting and ignoring the information /documents provided by the appellant during the course of proceedings to substantiate the receipt of services and consequent benefits therefrom, thus determining ALP to be NIL. 4.That on the facts and in the circumstances of the case the Ld. AO and the Hon’ble DRP erred in not considering the detailed information/documents provided by the appellant for quantification of the management services charge such as working for cost allocation, break-up of charge etc. 5. That on the acts and in the circumstances of the case the Hon’ble DRP erred in re- characterising the Fully & Compulsorily Convertible debentures (FCCD) issued by the appellant as equity or advance for share capital, akin to share application money and treating the same to be in the form of FDI instead of ECB. 6.That on the facts and in the circumstances of the case the Ld AO and the Hon’ble DRP erred in rejecting the economic analysis (transactional level analysis) undertaken by the assessee in connection with determination of ALP of the international transaction of Payment of interest on FCCD. 7. That on the facts and in the circumstances of the case the Ld AO and the Hon’ble DRP erred in disallowing an amount of Rs.1,64,38,356/- on account of interest on FCCD. 8. That on the facts and in the circumstances of the case, the Ld. DRP erred in confirming the action of the assessing officer in disallowing the unpaid leave encashment of Rs 17,51,000/- under section 43B of the Act. 9. That the charge of interest under Section 234B and 234D of the Act is consequential in nature.” ITA No.732/Chny/2015 - 3 - Ground No.1 is general in nature. Ground No.8 has not pressed before us. Ground No.9 assails levy of interest u/s 234B & 234C. The same is consequential in nature which do not require any specific adjudication. Ground Nos. 2 to 4 are related with Transfer Pricing (TP) Adjustment on management service charges. Ground Nos. 5 to 7 are related with Transfer Pricing Adjustment against interest paid by assessee on Fully & Compulsorily Convertible Debentures (FCCD). 2. The assessee company being resident corporate assessee is stated to be engaged in manufacturing of industrial fans. The assessee was earlier known as Flakt (India) Limited. 3. The Ld. AR advanced arguments supporting the case of the assessee and drew attention to various documents as placed on record including earlier order of Tribunal for AY 2009-10. The Ld. CIT- DR controverted the arguments of Ld. AR and supported the assessment framed by Ld. AO. The ld. CIT-DR distinguished the facts of AY 2009-10 and submitted that in that year, evidences of rendering of services were furnished by the assessee which is not the case in this year. Drawing attention to each of the services, Ld. CIT-DR submitted that the services were not required by the assessee and no evidences were placed on record to support rendering of services. Having heard rival submissions and after due consideration of relevant material on record, our adjudication would be as under. 4. Ground Nos. 2 to 4 : TP Adjustment on Management Charges 4.1 One of the international transactions carried out by the assessee was payment of Rs.898.30 Lacs to its Associated Enterprises (AE) M/s ITA No.732/Chny/2015 - 4 - Flakt Woods Group AG, Switzerland. The same was pursuant to a management service agreement dated 15.12.2002 under which the assessee was to receive services of varied nature viz. international marketing and sale and product support, manufacturing services, purchasing services, administrative services, Tax and legal, Treasury, Human resources etc. The payee charged the same to the assessee at markup of 10%. The assessee, using entity level Transactional Net Margin Method (TNMM), offered no Transfer Pricing (TP) adjustment in its own TP study Report. During the course of hearing, the assessee was directed to submit evidences for services so received and cost allocation formulae etc. 4.2 Upon perusal of assessee’ submissions, the Ld. TPO alleged that no services were received by the assessee. The Ld. TPO also held that TNMM was to be rejected and Comparable Uncontrolled Price (CUP) method was to be adopted as most appropriate method (MAM) since combining all AE transactions and benchmarking the same under TNMM would not be a suitable approach. The Ld. TPO also noted that in terms of agreement, the assessee was to make two advance payments of 90% of estimated annual fees to be paid at the beginning of each semester of the calendar year. The estimated annual fees were to be determined on the basis of a budget for the required amount of service for the year. Thus, it was questionable as to how the assessee was expected to receive the services without knowing the need and necessity which may or may not arise during normal course of business. The assessee did not prove that the AE had the capacity to provide such service. The assessee has its own high level personnel ITA No.732/Chny/2015 - 5 - and the services were nothing but duplication of services. The Ld. TPO also rejected the allocation keys based on sales. 4.3 In support of rendering of services, the assessee submitted email correspondences, few of which have been extracted in the order of Ld. TPO. The Ld. TPO held that the services were very routine in nature which would not require a separate payment. Most of the evidences pertain to submission of report and Profit & Loss Account by the assessee company to its AE. These activities were nothing but shareholder’s activities and as a shareholder, it would be essential to review and guide the assessee company. These stewardship services would not require any separate payment / fees as per OECD guidelines. The assessee has an organized hierarchy for carrying out admin functions. Finally, the Arm’s Length Price (ALP) of these services were held to be Nil and TP adjustment was proposed by Ld. TPO in its order which was incorporated in the draft assessment order. 4.4 The assessee assailed the adjustment before Ld. DRP and made elaborate submissions in support of its case. The Ld. DRP noted the directions given in AY 2009-10 which rejected application of CUP and upheld use of TNMM. The same was so since Ld. TPO had made adhoc disallowance of 25% under CUP method which was not permissible. Differing from the view of earlier year, Ld. DRP held that CUP was most appropriate method. The demand raised by AE on the ground enterprises was not based on actual cost incurred by the AE on provision of services on each group enterprises. The actual receipt of services that are beneficial to the assessee must be established. It was necessary for assessee to prove that the services were actually provided by the AE to the assessee and further, these services were ITA No.732/Chny/2015 - 6 - beneficial to the business of the assessee from economic and commercial standpoint. But the assessee miserably failed in all respect. Finally, the TP adjustments were confirmed. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 5. Upon due consideration of material facts, we find that the assessee has made payment to its AE pursuant to a management service agreement dated 15.12.2002. As per the terms of the agreement, the assessee was to receive services of varied nature viz. international marketing and sale and product support, manufacturing services, purchasing services, administrative services, Tax and legal, Treasury, Human resources etc. Thus under the agreement, the assessee propose to receive variety of services from its AE and accordingly, make the payment as per cost allocation formula as prescribed in the agreement. The AE has raised invoices on the assessee and the same has been paid by the assessee. As per contractual terms, the assessee has to make advance payments based on the budget. In support of rendering of services, the assessee has furnished email correspondences etc. It could be seen that the assessee is receiving these services since financial year 2002-03 onwards and making payment on the same basis to its AE. 6. Proceeding further, in AY 2009-10, Ld. TPO disputed the TNMM methodology adopted by the assessee and upheld application of CUP method. The Ld. TPO proposed an adhoc adjustment of 25% against the same which was rejected by Ld. DRP on the ground that the same was not permissible. In this year, Ld. DRP has taken a contrary stand and upheld application of CUP method and confirmed ALP at nil ITA No.732/Chny/2015 - 7 - primarily by applying need and benefit test. The revenue assailed the adjudication of Ld. DRP for AY 2009-10 before this Tribunal vide ITA No.1032/Mds/2014 order dated 09.06.2016 wherein this issue was decided in assessee’s favor as under: - 9. The Transfer Pricing Officer has not taken any pain to identify uncontrolled transaction between two independent entities. In the absence of any comparison of the transaction with transaction carried out in a uncontrolled market, this Tribunal is of the considered opinion that the Transfer Pricing Officer cannot independently come to a conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The matter may be totally different if the Transfer Pricing Officer was able to identify the uncontrolled transaction between the enterprises entering into such transaction which would materially affect the price in the open market. In this case, such an exercise was not made by the Transfer Pricing Officer. The Dispute Resolution Panel has, therefore, rightly found that the method adopted by the Transfer Pricing Officer for disallowing the claim of the assessee was not justified. As rightly observed by the Dispute Resolution Panel, the Transfer Pricing Officer has not brought on record the base on which he estimated the Arm's Length Price at 25%, when Rule 10B(c) provides for method of determining the Arm's Length Price. This Tribunal is of the considered opinion that estimation of the services rendered and costs for such services may be outside the scope of transfer pricing adjustment. Without identifying the comparable cases, this Tribunal is of the considered opinion that estimation of the disallowance without any base is not called for. Therefore, the Dispute Resolution Panel has rightly upheld the transfer pricing study made by the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. The bench thus held that in the absence of any comparison of the transaction with transaction carried out in uncontrolled market, Ld. TPO could not independently come to conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The estimation of the services rendered and costs of such service was outside the scope of transfer pricing adjustment. Thus, this issue stand concluded in assessee’s favor in AY 2009-10. 7. The Ld. CIT-DR has emphasized the fact that Ld. TPO has applied hypothetical CUP and determined that ALP at nil on the ground that no evidences were furnished by the assessee with respect to ITA No.732/Chny/2015 - 8 - rendering of services and no benefit accrued to the assessee. However, the same would not hold much substance since the services has been availed by the assessee pursuant to an agreement which has been entered into as early as financial year 2002-03 and the assessee is continuously receiving these services from its AE. This is further supported by the fact that the assessee placed on record email correspondences and other documentary evidences to substantiate rendering of services which have also been placed before us in the voluminous paper-book. These evidences have not been held to be non-genuine but alleged to be routine activities in nature and part of stewardship activities which would not require any payment on the part of the assessee. However, considering the facts of the case and considering the adjudication of Tribunal for AY 2009-10, the need and benefit test as applied by lower authorities, in our opinion, would not help the case of the revenue. 8. Going by the factual matrix, it could be seen that the assessee has availed bundle of services from its AE and made payment pursuant to the terms of the agreement. These payments are recurring in nature and are determined by applying specific allocation keys. The Ld. TPO held that the assessee may not be requiring these services in the normal course of business. The same, in our opinion, is not correct approach since the role of Ld. TPO was limited to determine the ALP of the transactions and not to adjudge the same at the threshold of business needs / requirements of the assessee. Also, though Ld. TPO observed that the transaction was to be benchmarked applying CUP method, however, no effort has been made to determine the ALP of the transaction using CUP method. Simply determining the ALP to be nil ITA No.732/Chny/2015 - 9 - on the basis that the services were not required to be availed and not determining ALP without applying any of the prescribed method is not in accordance with statutory mandate. The TP provisions mandate application of any of the prescribed method to arrive at Arm’s Length Price of the international transactions. 9. The Ld. CIT-DR has referred to the decisions of Bangalore Tribunal in Herbalife International India (P.) Ltd. vs. ACIT (81 Taxmann.com 178); Taegu Tec India (P.) Ltd. vs. DCIT (83 Taxmann.com 81); Safran Engineering Services India (P.) Ltd. vs. ACIT (89 Taxmann.com 77); Volvo India (P.) Ltd. vs. DCIT (89 Taxmann.com 79): the decision of Delhi Tribunal in Akzo Noble India Ltd. vs Addl. CIT (137 Taxmann.com 369). 10. After going through all these decisions, we find that in all these decisions, it was the finding of the benches that the assessee could not establish rendering of services and accordingly, the TP adjustment were confirmed by Tribunal. However, the same is not the case before us. The present assessee has submitted evidences in support of rendering of services which have been held to be routine activities in nature. Therefore, these case laws have no application to the fact of case before us. 11. Finally, considering the facts of the case, the impugned adjustment confirmed by ld. DRP could not be sustained. We order so. The Ld. AO is directed to re-compute the income of the assessee. 12. Ground Nos. 5 to 7 : TP Adjustment on FCCD 12.1 The assessee issued debentures to its AE M/s Flakt Woods Cyprus Ltd. and paid interest @12%. The Ld. TPO, taking data as available in public domain for unsecured CCD, computed average ALP ITA No.732/Chny/2015 - 10 - rate of 3.4%. The Ld. TPO observed that FCCD carries an inherent option to convert which is not the case in a typical loan transaction. The said securities carry further ownership benefit and interest paid to FCCD holder would always be less than the interest rate for unsecured loans as the FCCD holder becomes a shareholder besides receipt of interest. The assessee had benchmarked these transactions applying bond rates issued by Bank of Baroda, Woori Bank etc. However, the said benchmarking was rejected. The FCCD rates as available on NSDL site were to be selected as CUP. The mean rate was computed @3% and accordingly, TP adjustment of Rs.89.38 Lacs was proposed. The working of the same has been given on page 38 of the order. 12.2 Before Ld. DRP, the assessee, inter-alia, submitted that interest rate paid to third parties was at much higher rate of 18%. The Ld. DRP upheld rejection of bond rates by Ld. TPO. However the methodology of Ld. TPO was also held to be improper. The Ld. DRP observed that the FCCD was to be considered either as equity or advance for share capital which is akin to share application money. The funds which have been received from AE have been received as FDI and not ECB. The FCCD were subscribed to get the ownership rights in the assessee and not to earn the interest. Therefore, the ALP rate was to be considered as Nil and Ld. TPO was directed to compute the adjustment accordingly. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 13. We find that the assessee has issued fully & compulsorily convertible debentures (FCCD) to its AE. As per the terms of the debentures, the assessee is required to pay interest of 12% to its AE. The debentures, in due course, would be converted into equity shares. ITA No.732/Chny/2015 - 11 - The Hon’ble Supreme Court in the case of R.D. Goyal v. Reliance Industries Ltd. (2003; 113 Comp. Cas. 1) has held that a debenture is an instrument of debt executed by the company managing its receipt to repay the same at a specific rate and also carrying interest. It is in sum and substance a certificate of loan or a bond evidencing the fact that the company is liable to pay a specific amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure, yet it does not become share capital. The term debentures, in its ordinary sense, denote one of the modes for borrowing money by any company in exercise of its borrowing powers. The instrument imports an obligation or a covenant to pay. It is a repayment of the loans of the money borrowed by issue of debentures. Thus, the debentures are essential borrowing of money against interest with a certain other rights. Therefore, the benchmarking interest rate as applicable to lending of money may be applied to determine ALP of these transactions. Considering the same, the adjudication of Ld. DRP determining the ALP as Nil could not be upheld. The convertible debentures may give ownership rights to the holders but the rights accrue only at a future date and till such time, the holder is entitled to receive interest on such holding. Since the debentures are denominated in Indian Rupees, the same, in our considered opinion, could be benchmarked at SBI Prime Lending Rate with mark-up of 2% considering the fact that the assessee has credit rating of BB+ (S & P). The Ld. AO / Ld. TPO is directed to re-compute TP adjustment accordingly. The grounds thus raised stand partly allowed. ITA No.732/Chny/2015 - 12 - Conclusion 14. The assessee’s appeal stands partly allowed in terms of our above order. Order pronounced on 31 st October, 2022 at Chennai. Sd/- Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद˟ /ACCOUNTANT MEMBER (MAHAVIR SINGH) उपाÚय¢ /VICE PRESIDENT चेɄई/ Chennai; िदनांक/ Dated : 31-10-2022 EDN/- आदेशकीŮितिलिपअŤेिषत/Copy of the Order forwarded to : 1. अपीलाथȸ/Appellant 2. Ĥ×यथȸ/Respondent 3. आयकरआय ु Èत (अपील)/CIT(A) 4. आयकरआय ु Èत/CIT 5. ͪवभागीयĤǓतǓनͬध/DR 6. गाड[फाईल/GF