Infac India Pvt Limited, Kancheepuram V. DCIT, CHENNAI

ITA 745/CHNY/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95828 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2015
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 30-07-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 09-04-2015
• Court: TRIBUNAL
• Department Lawyers: SUNDARA RAO
• Assessee Lawyers: S RAGHUNATHAN
• Keywords: Transfer pricing

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . , , ! '# $ , % & BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./ I.T.A.NO.745/MDS./20 15 ( / ASSESSMENT YEAR :2010-11) M/S.INFAC INDIA PVT LTD ., NO.113,EILLAIMANNAM KOIL STREET, PADAPPAI, KANCHIPURAM DISTRICT 601 301. VS. DY. COMMISSIONER OF INCOME TAX, CORPORATION CIRCLE 2(2), 512,5 TH FLOOR,WANAPARTHY BLOCK, CHENNAI-34. PAN AADCS 4890 C ( '( / APPELLANT ) ( $)'( / RESPONDENT ) / APPELLANT BY : MR.S.RAGHUNATHAN,ADVOCATE /RESPONDENT BY : MR.SUNDARA RAO, CIT,D.R / DATE OF HEARING : 30.07.2015 ! /DATE OF PRONOUNCEMENT : 12.08.2015 * / O R D E R ITA NO. 745/MDS/2015 2 PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE, AGGRIEVED BY THE ORDER OF THE LD. ASSESSING OFFICER PURSUANT TO THE ORDER OF THE T.P. O AND THE DIRECTIONS ISSUED BY THE D.R.P. 2. THE ASSESSEE HAS RAISED FIVE GROUNDS IN ITS APP EAL; HOWEVER THE CRUX OF THE ISSUE IS THAT THE LD. TPO/LD.DRP HAD ER RED BY DISALLOWING THE MANAGEMENT FEE PAID TO PARENT COMPANY AT KORE A TO THE EXTENT OF ` 1,18,82,436/- WHILE ARRIVING AT THE ARMS LENGTH PR ICE (ALP) ADOPTING CUP METHOD. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS ENGAGED IN THE BUSINESS OF MANUFACTURING CONTROL CABLE, ANTENN A, FEEDER CABLE AND IGNITION CABEL ETC. A REFERENCE U/S.92CA(1) OF THE ACT WAS MADE BY THE LD. ASSESSING OFFICER AND THEREAFTER THE LD . TPO DETERMINED THE ALP BY DISALLOWING THE MANAGEMENT FEE PAID BY T HE ASSESSEE TO ITS PARENT COMPANY AT KOREA FOR ` 1,18,82,436/- BY MAKING DOWNWARD ADJUSTMENTS. ITA NO. 745/MDS/2015 3 4. THE LD. A.R. SUBMITTED BEFORE US THAT THE ASSES SEE HAD INCURRED MANAGEMENT FEE OF ` 1,18,82,436/- TOWARDS:- ( A) NEW CUSTOMER DEVELOPMENT RELATED WORK (B) RAW MATERIAL PROCUREMENT FROM KOREA AND OTHER C OUNTRY- SUPPORT (C) CRITICAL ISSUE SUPPORT (D) TIME COST OF FINANCE AND ACCOUNTS SUPPORT TEAM (E) TIME COST CHARGE IN RESPECT OF TOP LEVEL MANAGE MENT PERSONS VISIT AND REGULAR SUPPORT GIVEN. 5. ON PERUSING THE RECORDS AND THE BALANCE SHEET O F THE ASSESSEE, THE BENCH OBSERVE THAT THE MANAGEMENT SE RVICE FEE OF ` 1,84,85,866/- WAS DISCLOSED IN THE BALANCE SHEET OF THE ASSESSEE UNDER THE HEAD DIRECT MANUFACTURING COST, SUB-H EAD FACTORY EXPENSES. THE RELEVANT PORTION OF THE STATEMENT OF ACCOUNTS IS REPRODUCED HEREIN BELOW FOR REFERENCE:- SCHEDULES FORMING PART OF BALANCE SHEET AND P&L A/C AS ON 31.03.2000 SCHEDULE NO. 16 31.03.2010 31.03.2008 DIRECT MANUFACTURING COST FACTORY EXPENSES CALIBRATION CHARGES; GUAGE 131,075 159,154 CONSUMABLE PRODUCTION 488,690 555,204 DEVELOPMENT CHARGES 23,500 DIESEL GENSET 3,412,092 ELECTRICITY CHARGES 2,480,179 3,788,568 MACHINERY MAINTENANCE 7,430,364 4,475,125 MAINTENANCE FACTORY 3,960,275 2,971,989 PACKING MATERIALS 79,216 1,405,961 PLASTIC CRATES 223,797 332,680 ITA NO. 745/MDS/2015 4 CONTRACT WAGES 6,639,580 6,414,308 TESTING CHARGES 54,106 216,218 TRANSPORTATION CHARGES 1,919,694 2,629,039 EXPORT FREIGHT CHARGES 1,145,173 10,749,641 IMPORT FREIGHT CHARGES 629,251 1,925,550 MANAGEMENT SERVICE AGREEMENT FEE 18,485,866 ROYALTY & CESS 35,266,506 17,948,061 TECHNICAL DISCLOSURE FEE 1,341,967 9,379,782 WAGES 9,982,571 8,909,299 TOTAL 93,670,402 71,884,079 SCHEDULE NO. 16 31.03.2010 31.03.2008 ADMINISTRATIVE OVERHEADS ADVT & BUSINESS PROMOTION 2,562,865 1,322,565 COMMUNICATION EXPENSES 912,806 1,155,030 INTEREST AND FINANCE CHARGES 3,988,697 6,147,380 OTHER.ADMINISTRAIION EXPENSES 2,605,917 3,729,411 AUDIT FEES 150,000 108,000 PRINTING& STATIONERY 1,081,696 967,123 LOSS ON SALE OF FIXED ASSETS 13,332 RENT 1,320,000 1,007,355 REPAIRS & MAINTENANCE 821,031 898,267 SALARIES AND BONUS,, 10,361,517 10,210,062 DIRECTOR REMUNERATION 9,895,580 6,770,157 STAFF WELFARE 4,892,700 4,921,408 TRAVELLING AND CONVEYANCE 2,438,286 3,073,201 VEHICLE MAINTENANCE 1,446,241 1,346,630 SELLING & DISTRIBUTION EXPENSE 4,271,432 2,918,8 81 TOTAL 93,670,402 71,884,079 THEREAFTER, THE BENCH QUERIED HOW THE AFORESAID EXP ENDITURE COULD BE TREATED AS ADMINISTRATIVE OVERHEADS/ MANAGEMENT FEE. ON PERUSING THE ORDER OF THE LD.TPO ALSO, IT WAS OBSER VED THAT THE LD.TPO HAD PROCEEDED WITH THE CASE ON THE PREMISES THAT THE AFORESAID AMOUNT FALLS UNDER THE CATEGORY OF MANAG EMENT FEE PAID TO ITS PARENT COMPANY M/S.INFAC CORPORATION, KOREA FOR RENDERING ITA NO. 745/MDS/2015 5 MANAGERIAL SERVICES. FURTHER, IT IS OBSERVED FROM T HE ORDER OF THE LD. TPO THAT THE ASSESSEE HAD SUBMITTED BEFORE THE REVE NUE THE AFORESAID PAYMENTS RELATED TO:- 1. ECB LOAN RELATED WORK 2. NEW CUSTOMER DEVELOPMENT RELATED WORK 3.RAW MATERIAL PROCUREMENT FROM KOREA AND OTHER CO UNTRY SUPPORT 4.TFT(TASK FORCE TEAM) ORGANIZED FOR MTM CABLE OF HMI TO IMPROVE THE QUALITY. 5. CRITICAL ISSUE SUPPORT 6. QUALITY RELATED WORK 7. PART SUPPORT WORK 8. FINANCE AND ACCOUNTS SUPPORT WORK IT WAS ALSO OBSERVED BY THE LD. TPO IN HIS ORDER TH AT THE ASSESSEE HAD NOT FURNISHED ANY EVIDENCE FOR THE ABOVE SERVIC ES RENDERED BY THE PARENT COMPANY TO THE ASSESSEE COMPANY. THE LD . A.R. ALSO CONCEDED TO THE REPLY OF THE QUERY RAISED BY THE BE NCH THAT THE SERVICES RENDERED BY THE PARENT COMPANY TO THE ASSE SSEE COMPANY ARE TECHNICAL SERVICES AND NOT MANAGEMENT SERVIC ES AND IN THE ENTIRE PROCEEDINGS BEFORE THE REVENUE, THE ASSESSEE AS WELL AS THE REVENUE HAD PRECEDED ON MISCONSTRUED FACTS. THE LD . A.R FURTHER SUBMITTED THAT THE REVENUE HAD DEMANDED THE PROOF F OR THE SERVICES RENDERED BY THE PARENT COMPANY TO THE ASSESSEE COMP ANY WHICH IS ITA NO. 745/MDS/2015 6 NOT HUMANLY POSSIBLE TO COMPLY WITH. THE LD.A.R THE REFORE PLEADED THAT, THE OPERATING COST OF THE COMPARABLE COMPANIE S MAY BE COMPARED WITH THE ASSESSEE COMPANY AND IF IN THE AS SESSEE COMPANIES OPERATING COST IS LESS THAN THE OTHER CO MPARABLE COMPANIES THEN THE TECHNICAL SERVICES PAID BY THE ASSESSEE COMPANY TO ITS PARENT COMPANY MAY BE ACCEPTED. LD. D.R VEHEMENTLY OPPOSED TO THE SUBMISSIONS OF THE LD. A. R. AND ARGUED STATING THAT THE EXPENSES INCURRED BY THE ASSESSEE BY WAY OF PAYMENT MADE TO ITS PARENT COMPANY, THE NATURE OF E XPENSE AS WELL AS THE PROOF OF SERVICES RENDERED HAS TO BE ESTABLI SHED WITH PROPER EVIDENCE. 6. AFTER HEARING BOTH SIDES, WE ARE OF THE CONSIDE RED VIEW THAT THE ENTIRE MATTER HAS TO BE REMITTED BACK TO THE FILE O F LD. TPO FOR DENOVO CONSIDERATION BECAUSE BOTH THE ASSESSEE AS WELL AS THE REVENUE HAS NOT EXAMINED THE ISSUE WITH RESPECT TO THE CORR ECT FACTUAL MATRIX. MANAGEMENT SERVICES AND TECHNICAL SERVICES FALS E UNDER DIFFERENT FIELD AND THE NATURE OF WORK INVOLVED BOTH THESE SE RVICES ARE DIFFERENT. FURTHER, WHEN THE ASSESSEE HAS MADE PAYMENTS TO ITS PARENT COMPANY IT HAS TO ESTABLISH AND JUSTIFY THE NATURE OF PAYMENT AND THE ITA NO. 745/MDS/2015 7 NATURE OF SERVICE RECEIVED FOR THE PURPOSE OF DETER MINING ARMS LENGTH PRICE IN TRANSFER PRICING MATTERS. THE ONUS IS ON T HE ASSESSEE TO SUBSTANTIATE ITS CLAIM. JUST BECAUSE THE OPERATING COST INCURRED BY THE ASSESSEE COMPANY IS LESS THAN THE OPERATING COS T OF THE COMPARABLE COMPANIES, THE CLAIM OF EXPENSES INCURRE D TOWARDS PAYMENT MADE TO ITS PARENT COMPANY ON AN ADHOC BASI S CANNOT BE JUSTIFIED. IN MODERN MANAGEMENT AND TECHNICAL FIELD THERE ARE SUFFICIENT WAYS AND MEASURES TO MEASURE THE SERVICE S RENDERED BY ONE ENTITY TO OTHER ENTITY. THEREFORE, AS REQUIRED BY THE REVENUE, THE ASSESSEE IS BOUND TO PRODUCE SATISFACTORY EVIDENCE BEFORE THE REVENUE TO ESTABLISH ITS STAND. IN FACT IN THIS IN STANCE CASE THE ENTIRE CONFUSION HAS ARISEN BECAUSE THE ASSESSEE COMPANY H AS NOT SUBMITTED THE EVIDENCE FOR THE SERVICE RENDERED BY THE PARENT COMPANY TO THE ASSESSEE COMPANY AGAINST WHICH THE P AYMENTS ARE MADE TO THE PARENT COMPANY BY THE ASSESSEE COMPANY. WITH THESE OBSERVATIONS WE REMIT THE MATTER BACK TO THE FILE O F LD.TPO FOR FRESH CONSIDERATIONS. ITA NO. 745/MDS/2015 8 7. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES ORDER PRONOUNCED ON 12 TH AUGUST ,2015 AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD ) (A.MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 12 TH AUGUST,2015. K S SUNDARAM. '# $%&% /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. '() /CIT(A) 4. ' /CIT 5. %*+ , /DR 6. +-. /GF