ACIT LTU, MUMBAI V. KSB PUMPS LTD, MUMBAI

ITA 814/MUM/2013

• Counselvise Citation: 81419914 RSA 2013
• Duration Of Justice: 1 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 03-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 30-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AJEET KUMAR JAIN
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Revenue expenditure
• Section: 92C; 143(3); 92

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K MUMBAI . . , / !' , # $ % BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER . / ITA NO. 770/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 KSB PUMPS LTD. 126, MAKER CHAMBER III, NARIMAN POINT, MUMBAI - 400021 / VS. THE ASST. CIT, (LTU), 28 TH FLOOR, CENTER NO.1, WORLD TRADE CENTER, CUFFE PARADE, MUMBAI 400 005 ( # ./ )* ./ PAN/GIR NO. : AAACK 5918J ( (+ / APPELLANT ) .. ( ,-(+ / RESPONDENT ) . / ITA NO. 814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 THE ASST. CIT, (LTU), 28 TH FLOOR, CENTER NO.1, WORLD TRADE CENTER, CUFFE PARADE, MUMBAI 400 005 / VS. KSB PUMPS LTD. 126, MAKER CHAMBER III, NARIMAN POINT, MUMBAI - 400021 ( # ./ )* ./ PAN/GIR NO. : AAACK5918J ( (+ / APPELLANT ) .. ( ,-(+ / RESPONDENT ) ASSESSEE BY SHRI JITENDRA SANGHVI RESPONDENT BY : SHRI AJEET KUMAR JAIN . /# / DATE OF HEARING : 03/02/2014 01' . /# / DATE OF PRONOUNCEMENT : 03/02/2014 . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 2 2 / O R D E R PER I.P.BANSAL, JM: THESE ARE CROSS APPEALS AND THEY ARE DIRECTED AGAI NST ORDER PASSED BY LD. CIT(A) DATED 22/11/2012 FOR ASSESSMENT YEAR 2 008-09. THE GROUNDS APPEAL READ AS UNDER: ASSESSEES GROUNDS OF APPEAL: THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 15, [CIT(A)] ERRED IN UPHOLDING THE ORDER OF TRANSFER PRICING OFFICER AND ASSESSING OFFICER IN MAKING ADJUSTMENT OF RS.1,15,63,145/- OUT OF COMMISSION PA ID TO KSB AMRI (ASIA PACIFIC ) PTE. LTD. (KSB SINGAPORE) IN WORKING OUT THE ARM S LENGTH PRICE AND THEREBY ERRED IN MAKING THE ADDITION IN RESPECT THEREOF. REVENUES GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING THE DISALLOWANCE MADE BY THE A.O OF PROFESSIONAL FEES OF RS.2,93,36,941/- PAID BY THE ASSESSEE TO KSB AG FOR IMPLEMENTATION OF SAP PROGRAMME WITHOUT APPRECIATING THE FACT THAT IT IS CAPITAL IN NATURE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING THE DISALLOWANCE MADE BY T HE AO ON EXCHANGE LOSS OF RS.25,97,167/- INCURRED ON ACQUISITION OF S AP PROGRAMME WITHOUT APPRECIATING THE FACT THAT IT IS CAPITAL IN NATURE. 2. AT THE OUTSET IT MAY BE MENTIONED HERE THAT IT W AS THE COMMON CONTENTIONS OF THE PARTIES THAT ALL THE ISSUES RAIS ED IN THESE APPEALS ARE COVERED BY THE EARLIER ORDER OF THE TRIBUNAL. LD. AR HAS FURNISHED A COPY OF EARLIER ORDER OF THE TRIBUNAL IN RESPECT OF A.Y. 2004-05 AN D 2007-08, WHICH IS DATED 8/8/2013 IN ITA NO.8482/MUM/2010 AND ITA NO.3806/MU M/2012, DEPARTMENTAL APPEALS FOR A.Y 2004-05 AND 2007-08 RE SPECTIVELY AND ITA NO.8496/MUM/2010 AND ITA NO.3294/MUM/2012, ASSESSEE S APPEAL FOR A.Y 2004-05 AND 2007-08 RESPECTIVELY. A COPY OF THIS O RDER IS FILED AT PAGE 1 TO 24 OF THE PAPER BOOK. IT WAS SUBMITTED THAT THE ISSUE RAISED BY ASSESSEE IN ITS APPEAL IS COVERED BY THE AFOREMENTIONED ORDER OF TH E TRIBUNAL VIDE PARA 3 TO 12.1. IT WAS SUBMITTED THAT SIMILAR ADJUSTMENT WAS MADE BY TPO FOR THIS YEAR ALSO AND TRIBUNAL VIDE ITS AFOREMENTIONED ORDER HAD RESTORED THE ISSUE TO THE FILE OF TPO WITH THE FOLLOWING OBSERVATIONS: . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 3 3. COMMON ISSUE INVOLVED IN ALL THESE APPEALS IS RE GARDING ADJUSTMENT MADE WITH REGARD TO TRANSFER PRICING IN RESPECT OF COMMI SSION PAID BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES (AES). FOR ARGUING THIS ISSUE BOTH THE PARTIES HAVE REFERRED TO THE FACTS RELATING TO A.Y 2004-05. IT WAS THE COMMON CONTENTION OF BOTH THE PARTIES THAT FACTS AND CIRCUMSTANCES LEADI NG TO SUCH ADJUSTMENT ARE SIMILAR FOR OTHER YEARS ALSO. THEREFORE, FACTS RELA TING TO TRANSFER PRICING ISSUE ARE MENTIONED FROM A.Y 2004-05 AND DECISION TAKEN ON TH E BASIS OF FACTS AVAILABLE FOR A.Y 2004-05 WILL BE APPLICABLE TO THE TRANSFER PRICING ISSUE IN OTHER APPEALS CONSIDERED BY THIS ORDER. 4. FOR THE SAKE OF CONVENIENCE WE WILL FIRST TAKE T RANSFER PRICING ISSUE AND IT WILL COVER GROUND NO.2 OF DEPARTMENTAL APPEAL FOR A .Y 2004-05. GROUND NO.1 OF ASSESSEES APPEAL FOR ASSESSMENT YEARS 2006-07 AN D 2007-08. 5. THE ASSESSEE HAS FILED A CONSOLIDATED PAPER BOOK FOR ALL THESE APPEALS IN WHICH TRANSFER PRICING STUDY REPORT HAS BEEN FURNI SHED ONLY IN RESPECT OF ASSESSMENT YEAR 2004-05. ACCORDING TO TRANSFER PR ICING REPORT, COPY OF WHICH HAS BEEN PLACED ON PAGES 77 TO 100 THE ASSESSEE HAS SEVERAL INTERNATIONAL TRANSACTION WITH ITS AES WHICH HAVE BEEN LISTED BY THE ASSESSEE IN TRANSFER PRICING (TP) REPORT AT PAGE 100 OF THE PAPER BOOK. THESE TRANSACTIONS IN THE ORDER OF TPO ARE 14 IN NUMBER. THE TPO VIDE HIS ORDER DA TED 5/12/2006 HAS ACCEPTED THE PRICE SHOWN BY THE ASSESSEE EXCEPT WITH REGARD TO COMMISSION PAID BY THE ASSESSEE TO ITS AE IN SINGAPORE, NAMELY M/S. KSB SI NGAPORE (ASIA PACIFIC) PTE LTD. IT WAS CLAIMED BY THE ASSESSE IN TP REPORT TH AT TRANSACTION OF THE ASSESSEE WITH ITS AES ARE UNIQUE TO EACH AE AND ARE NOT SI MILAR TO TRANSACTIONS WITH UNRELATED PARTIES WHETHER AS TO EXPORT OR IMPORT S ERVICES. IN ABSENCE OF COMPARABLE UNRELATED TRANSACTIONS WITHIN KSB INDIA S OVERALL TRANSACTIONS, THE IMPUGNED TRANSACTIONS WITH AES ARE REQUIRED TO BE BENCH MARKED WITH THE TRANSACTIONS OF THE COMPETITORS IN THE BUSINESS. IN THE TP STUDY THE ASSESSEE HAS MENTIONED NAME OF VARIOUS PARTIES WHO ARE DEAL ING IN THE PUMPS OR VALVES AND ULTIMATELY IN PARA 9.7 AFTER MENTIONING VARIOUS COMPARABLES IT HAS BEEN MENTIONED THAT THERE IS ABSENCE OF (I) SAME OR SIM ILAR COMPARABLE OF UNCONTROLLED TRANSACTIONS WITHIN KSB INDIA; (II) SAME OR SIMILAR COMPARABLE UNCONTROLLED TRANSACTIONS AND TRANSACTIONS OUTSIDE KSB INDIA; (III) SAME OR SIMILAR COMPARABLE CONCERNS HAVING SAME OR SIMILAR TRANSACT IONS. IN PARA 9.8 THE PROFIT RESULTS OF THREE CONCERNS HAVE BEEN MENTIONED AND AFTER COMPILING THE SAME IT HAS BEEN MENTIONED THAT THE RATIO RETURNS ON ASSETS EMPLOYED ON KSB INDIA IS BETTER THAN THE RESULT OF EACH OF THE ABOVE COMPANI ES AS WELL AS AVERAGE OF PUMP INDUSTRIES AND ENGINEERING INDUSTRIES AND KEEPING I N VIEW THESE FACTS IT HAS BEEN MENTIONED IN THE REPORT THAT PROFIT MARGIN SH OWN BY THE ASSESSEE IS JUSTIFIED BY FOLLOWING TRANSACTIONS OF NET MARGIN M ETHOD. IT MAY BE MENTIONED HERE THAT ASSESSEE HAS NOT BENCH MARKED EACH OF THE TRANSACTION INDEPENDENTLY IN THE TP STUDY. 5.1 THE ISSUE REGARDING DETERMINATION OF ARMS LENGT H PRICE (ALP) WAS REFERRED TO TPO, WHO WITH REGARD TO COMMISSION PAID HAS OBSE RVED THAT SUCH COMMISSION . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 4 HAS BEEN PAID BY THE ASSESSEE FOR AVAILING SERVICES OF SOLE SELLING AGENT @ 12.50% OF THE SALES OBTAINED. IT WAS ALSO OBSERVED THAT THE AE OF THE ASSESSEE TO WHOM SUCH COMMISSION HAS BEEN PAID WAS RECEIVING CO MMISSION @10% FROM THE OTHER GROUP CONCERNS. THE TPO REQUIRED THE ASSESSE E TO EXPLAIN THE SAME AND WAS ALSO REQUIRED TO EXPLAIN AS TO WHY EXTRA PAYMEN T OF 2.50% SHOULD NOT BE DISALLOWED. VIDE LETTER DATED 18/10/2006 IT WAS SU BMITTED THAT MORE COMMISSION HAS BEEN PAID BY THE ASSESSEE TO ITS AE ON ACCOUNT OF SPECIAL FACTORS ATTACHED TO THE PRODUCTS MARKETED BY THE AE. THE A E OF THE ASSESSEE HAS ALSO CLARIFIED VIDE ITS LETTER THAT PRODUCTS OF ASSESSEE ARE MORE COMPLEX THAN THE PRODUCTS OF OTHER GROUP CONCERNS MARKETED BY THEM. FOR THIS PURPOSE AE OF THE ASSESSEE HAD TO CARRY OUT DETAILED DISCUSSIONS WIT H THE CUSTOMERS OF THE ASSESSEE AND NUMBER OF COUNTRIES INVOLVED ARE ALSO LARGE FOR WHICH THE AE HAS TO MAKE ADDITIONAL SALE EFFORTS. IT WAS FURTHER SU BMITTED THAT AE IS THE SOLE SELLING AGENT OF THE ASSESSEE SINCE 1979 AND APPOI NTMENT OF SOLE-SELLING AGENT IS APPROVED BY THE CENTRAL GOVERNMENT. THE COMMISSION IS BEING PAID @12.50% SINCE 1987 AND THE SAME HAS ALWAYS BEEN ACCEPTED. DUE TO EFFORTS OF AE THERE IS A PHENOMENAL INCREASE IN THE TURNOVER WHICH HAS RISEN FROM RS. 5.59 LACS IN 1986 TO 31.78 CRORES IN 2004. IN THE ALTERNATIVE IT WAS SUBMITTED THAT DUE WEIGHTAGE SHOULD BE GIVEN TO THE EXTRA EFFORTS WHI CH ARE PUT IN BY KSB SINGAPORE AND THE SAME SHOULD BE BENCH MARKED WITH REFERENCE TO THE PAYMENTS RECEIVED BY THEM FROM OTHER GROUP CONCERNS AS INCREASED BY ADDITIONAL EFFORTS. ADDITIONAL SUBMISSIONS WERE ALSO MADE WHICH HAVE BEEN REPRODUC ED IN THE ORDER OF TPO. THE TPO AFTER CONSIDERING ALL THESE SUBMISSIONS HAS COME TO A CONCLUSION THAT ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH AS TO HOW THE PRODUCTS OF THE ASSESSEE WERE MORE COMPLEX THAN THE OTHER GOODS SOLD BY THE AE OF THE ASSESSEE ON WHICH IT HAS HAS RECEIVED COMMISSION @10%. THE TPO OBSERVED THAT THERE IS NO DOUBT THAT SALES OF THE ASSESSEE RELATING TO KBS SI NGAPORE HAVE GONE UP BUT THE SAME IS THE FACT WITH THE OTHER SALES MADE BY THE ASSESSEE WHICH HAVE SIMILARLY GONE UP. THE AE OF THE ASSESSEE HAS ALSO VESTED IN TEREST IN INCREASING THE SALE TO INCREASE ITS INCOME. THEREFORE, THERE IS NO EXTRA ORDINARY REASON WHICH INSIST FOR THE PAYMENT OF ADDITIONAL 2.50% OF THE COMMISSION. THE TPO ALSO NOTICED THAT THE ASSESSEE FOR RENDERING SIMILAR SERVICES TO IT S AE IS RECEIVING COMMISSION @6%. THE SINGAPORE AE OF THE ASSESSEE IS GETTING C OMMISSION AT THE HIGH RATE. THEREFORE, THE TPO HAS RESTRICTED THE COMMISSION PA ID BY THE ASSESSEE TO ITS SINGAPORE AE @10% AND AN ADDITION OF RS.63,60,732/- IS MADE. 6. AN APPEAL WAS FILED BEFORE LD. CIT(A). THE SUB MISSIONS MADE BEFORE TPO WERE REITERATED. IN ADDITION, IT WAS SUBMITTED THA T FOR MAKING ADDITION OF 2.5% COMMISSION TPO HAS NOT BROUGHT ON RECORD ANY COMP ARABLE TRANSACTION WITH UNRELATED PARTY EITHER BY THE ASSESSEE OR BY ITS A E WITH UNRELATED PARTY OR ANY TRANSACTION OUTSIDE THE KSB GROUP. IT WAS SUBMITTE D THAT IN ABSENCE OF COMPARABLE UNCONTROLLED TRANSACTION, CUP METHOD NEI THER WAS AVAILABLE NOR COULD BE APPLIED. IT WAS SUBMITTED THAT ONLY METHO D WHICH COULD BE APPLIED WAS TNMM AT ENTITY LEVEL AND UNDER TNMM EVEN AFTER CONS IDERING THE ENTIRE COMMISSION, THE PROFIT LEVEL INDICATOR WAS MORE TH AN THE COMPARABLES UTILIZED BY THE TPO. 7. AFTER CONSIDERING THE AFOREMENTIONED SUBMISSIONS LD. CIT(A) HAS OBSERVED THAT TPO HAS SOUGHT TO INVOKE INTERNAL COMPARABLE UNCONTROLLED PRICE BUT THE SAME IS INHERENTLY FLOUTED. ACCORDING TO LD. CIT( A) THE RATE OF 10% CHARGED BY . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 5 THE AE AT SINGAPORE IS ALSO A CONTROLLED TRANSACTIO N AND SO BY ITS VERY NATURE NOT AUTOMATICALLY ELIGIBLE FOR COMPARABILITY AS IT IS N OT INDEPENDENT. AS A MATTER OF RULE CONTROLLED TRANSACTION SHOULD BY NO MEANS BE U SED AS BASIS FOR TP ADJUSTMENT AS THE SAME WOULD BE CONTRARY TO ARMS LE NGTH PRINCIPLE WHICH REQUIRED THAT TAX PAYERS COMMERCIAL OR FINANCIAL RE LATIONS WITH ITS RELATED PARTIES TO BE COMPARED WITH COMMERCIAL OR FINANCIAL RELATIO NSHIP WITH INDEPENDENT PARTIES. ACCORDING TO OECD GUIDELINES THE EVIDENCE FROM ENTERPRISES ENGAGED IN THE CONTROLLED TRANSACTIONS WITH AE MAY BE USEFUL I N UNDERSTANDING THE TRANSACTIONS UNDER REVIEW OR AS POINTER TO FURTHER INVESTIGATION. ACCORDING TO LD. CIT(A) IN THE FACTS OF THE CASE TPO DID QUESTION TH E ASSESSEE ABOUT THE HIGHER RATE OF COMMISSION PAID BY IT TO ITS AE AS COMPARE D WITH THE COMMISSION PAID BY OTHER RELATED AES. LD. CIT(A) AFTER REFERRING TO T HE LETTERS SUBMITTED BY THE ASSESSEE HAS COME TO A CONCLUSION THAT ACCORDING TO THOSE LETTERS THE AE OF THE ASSESSEE WAS REQUIRED TO PUT EXTRA EFFORTS. IT IS FURTHER MENTIONED BY LD. CIT(A) THAT THE ASSESSEE HAS BENCH MARKED ITS COMMISSION P AYMENT UNDER TNMM BY SELECTING SAFE COMPARABLES AND FROM THAT IT IS OBS ERVED THAT RATIO OF RETURN OF THE ASSETS EMPLOYED BY THE ASSESSEE IS @14.09%, WHICH I S BETTER THAN RESULT OF EACH OF THE COMPARABLE COMPANIES AND EVEN AFTER MAKING P AYMENT ON KNOW-HOW FEES AND SALE COMMISSION AND TREATING IT AS ITEM EXPENSE , THE RESULT OF THE ASSESSEE ARE BETTER THAN ALL THE COMPANIES, THE AVERAGE OF W HICH HOVERS AROUND 10% AS AGAINST ASSESSEES AVERAGE OF 14.08%. THE TPO DID NOT DOUBT IN RESPECT OF ALP OF 14 INTERNATIONAL TRANSACTIONS BUT HAS ONLY PICKE D UP COMMISSION PAYMENT ON THE GROUND THAT CUP IS AVAILABLE. LD. CIT(A) FURTH ER OBSERVED THAT NO VALID CUP EXISTS AS CONTROLLED TRANSACTION HAS BEEN USED AS R EFERENCE POINT AND IT IS NOT ESTABLISHED THAT THE EXTENT OF SERVICES PROVIDED TO OTHER GROUP CONCERN BY THE AE AT SINGAPORE IS THE SAME AS THAT PROVIDED TO THE AS SESSEE. THE CIT(A) HAS FURTHER OBSERVED THAT THERE IS CONSTANT INCREASE IN EXPORT TO SINGAPORE WHICH RE-ENFORCE ASSESSEES CASE. IN THIS MANNER LD. CIT(A) HAS DEL ETED THE TP ADJUSTMENT OF RS.63,60,732/-. 8. FOR ASSESSMENT YEAR 2006-07 ON SIMILAR FACTS AD JUSTMENT WAS MADE BY TPO, WHO APPLIED CUP METHOD AND THE ACTION OF TPO H AS BEEN CONFIRMED BY LD. DRP. ACCORDINGLY, THE ADJUSTMENT OF RS.1,08,95,284 /- HAS BEEN MADE AND UPHELD. 9. FOR ASSESSMENT YEAR 2007-08 ADJUSTMENT OF RS.84, 29,667/- HAS BEEN MADE ON SIMILAR ACCOUNT AS ASSESSEE DID NOT OBJECT THE DRAFT ORDER, THE AO HAS PASSED ORDER UNDER SECTION 143(3) R.W.S. 144C OF TH E ACT. THE APPEAL WAS FILED BEFORE LD. CIT(A), WHO HAS UPHELD THE ADJUSTMENT. 10. ARGUING THE APPEALS FOR A.Y 2004-05, LD. DR SUB MITTED THAT IN THE TP STUDY THE ASSESSEE HAS APPLIED TNMM METHOD WHICH W AS NOT FOUND TO BE APPLICABLE BY TPO AND ON ACCOUNT OF UNAVAILABILITY OF COMPARABLE, THE TPO APPLIED INTERNAL COMPARISON. FROM OTHER AES THE S INGAPORE AE WAS GETTING 10% COMMISSION THAT ASSESSEE COULD NOT JUSTIFY THE COMM ISSION @12.5%. LD. DR SUBMITTED THAT LD. CIT(A) WAS WRONG IN DELETING THE ADDITION BY TAKING THE OVER ALL PROFIT OF THE ASSESSEE. LD. DR SUBMITTED THAT FOR EACH INTERNATIONAL TRANSACTION THE ASSESSEE HAS TO SATISFY THAT THE SA ME IS AT ARMS LENGTH PRICE (ALP). IN THE CASE OF COMMISSION CUP METHOD WAS APPLICABLE AND ASSESSEE HAS REMAINED UNABLE TO SHOW THAT COMMISSION PAID BY IT WAS AT ALP. THUS IT WAS . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 6 PLEADED BY LD. DR THAT ADDITION HAS WRONGLY BEEN D ELETED BY LD. CIT(A) AND THE SAME SHOULD BE RESTORED. FOR OTHER YEARS LD. DR R ELIED UPON THE ORDERS OF DRP/CIT(A). 11. IT WAS VEHEMENTLY SUBMITTED BY LD. AR THAT EVE N AFTER GRANT OF COMMISSION THE PROFIT OF THE ASSESEE WAS ON HIGHER SIDE WITH THE COMPARABLES AND, THEREFORE, LD. CIT(A) HAS RIGHTLY DECIDED THAT NO TP ADJUSTMENT WAS CALLED FOR. 11.1 IN RESPECT OF OTHER YEARS IT WAS SUBMITTED BY LD. AR THAT LD. CIT(A) AND LD. DRP FAILED TO APPRECIATE THAT NO ADDITION WAS C ALLED FOR IN RESPECT OF TP VALUATION OF COMMISSION PAYMENT MADE BY THE ASSESS EE. HE SUBMITTED THAT TNMM IS APPROPRIATE METHOD ADOPTED BY THE ASSESSEE AND ACCORDING TO TNMM METHOD ALL TRANSACTIONS OF THE ASSESSEE ARE ON ALP . THEREFORE, LD. AR SUBMITTED THAT ORDER OF LD. CIT(A) IN RESPECT OF A.Y 2004-05 SHOULD BE UPHELD AND FOR OTHER YEARS THE ADDITION MADE IN THIS REGARD SHOULD BE DE LETED. 12. WE HAVE HEARD BOTH PARTIES AND THEIR CONTENTION S HAVE CAREFULLY BEEN CONSIDERED. WE HAVE CAREFULLY GONE THROUGH TP REPO RT FIELD BY THE ASSESSEE WHICH HAS BEEN MADE THE BASIS FOR CLAIMING THAT ALL THE 14 INTERNATIONAL TRANSACTIONS OF THE ASSESSEE ARE AT ALP. THESE TRA NSACTIONS HAVE BEEN LISTED IN THE ORDER OF TPO AND FOR THE SAKE OF CONVENIENCE A RE REPRODUCED BELOW: S.NO. NATURE OF TRANSACTION AMOUNT (RS.) 1. PURCHASES A) PURCHASE OF FINISHED GOODS FOR TRADING- B) PURCHASE OF COMPONENTS 2,81,48,911/- 2. EXPORT SALES TO AE 20,10,53,203/- 3. INCOME FROM SERVICES RECEIVED 1,19,52,815/- 4. COMMISSION INCOME (RECEIVED) 1,91,38,200/- 5. ORDER CANCELLATION CHARGES (RECEIVED) 1, 02,125/- 6. TOTAL CHARGES RECEIVED 84,600/- 7. REIMBURSEMENT OF EXPENSES (ACTUAL) 26,66,7 90/- 8. COMMISSION PAID 3,18,03,660/- 9. ROYALTY PAID 2,00,74,971/- 10. TECHNICAL KNOW-HOW ACQUIRED 7,59,248/- 11. PAYMENTS FOR TECHNICAL AND OTHER SERVICES 12,18,578/- . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 7 12. TESTING CHARGES PAID 11,26,574/- 13. EXPENSES REPAID 4,614/- 14. WARRANTY CHARGES PAID 55,10,500/- TOTAL 32,36,44,644/- EACH OF THE ABOVE MENTIONED INTERNATIONAL TRANSACT IONS HAS NOT BEEN SEPARATELY CONSIDERED IN THE TP REPORT AND BASIS HAS BEEN ADO PTED AS TNMM. AS PER SECTION 92 OF THE ACT ANY INCOME ARISING FROM AN I NTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO ALP. AS PER SECTION 92C THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTIONS OR CLASS OF TRANSACTION, OR CLASS OF ASSOCIATE BUSINES S OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS DESCRI BED BY THE BOARD; (A) COMPARABLE UNCONTROLLED PRICE METHOD(CUP); (B ) RESALE PRICE METHOD; (D) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTI ON NET MARGIN METHOD(TNMM); SUCH OTHER METHOD AS MAY BE DESCRIBED BY THE BOARD. AS IT CAN BE SEEN FROM THE ABOVE LIST OF INTE RNATIONAL TRANSACTIONS THAT NONE OF THE INTERNATIONAL TRANSACTIONS MATCH TO EA CH OTHER. THEREFORE, IT CANNOT BE SAID THAT A COMMON METHOD WILL BE SUFFICIENT TO COMPUTE THE ALP AS FIRSTLY IT HAS TO BE DETERMINED THAT WHICH METHOD WILL BE APP ROPRIATE METHOD TO COMPUTE THE ALP OF AN INTERNATIONAL TRANSACTION. THERE IS NO DISPUTE WITH REGARD TO OTHER INTERNATIONAL TRANSACTIONS WHICH HAVE BEEN ACCEPTED BY THE TPO. THE DISPUTE IS ONLY IN RESPECT OF COMMISSION PAYMENT. IT IS THE CASE OF THE ASSESSEE THAT TNMM SHOULD BE APPLIED AND IT IS THE CASE OF T HE REVENUE THAT CUP METHOD IS APPROPRIATE METHOD. RULE 10B(1) DESCRIBES THAT FOR THE PURPOSE OF SUB-SECTION(2) OF SECTION 92C, THE ALP IN RELATION TO AN INTERNATI ONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHODS WHICH HAVE ALREA DY BEEN DESCRIBED IN THE ABOVE PART OF THIS ORDER BEING MOST APPROPRIATE MET HOD IN THE FOLLOWING MANNER. SUB-CLAUSE (A) DESCRIBED CUP METHOD WHICH READ AS U NDER: (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH,- (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (II) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; CLAUSE (E) DESCRIBE TNMM METHOD WHICH IS AS UNDER: . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 8 (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH,- (I) THE NET PROFIT MARGIN REAL IZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASS ETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALIZED BY THE ENTERPR ISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND T HE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRIS ES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMO UNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE AN D REFERRED TO IN SUB- CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKE N INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNA TIONAL TRANSACTION; 12.1. IF WE SEE THE MODE OF COMPUTATION PROVIDED U NDER BOTH THESE METHODS FOR COMPUTING ALP IN RESPECT OF COMMISSION THE MOST AP PROPRIATE METHOD WILL BE COMPARABLE UNCONTROLLED PRICE METHOD AS THE COMMISS ION IS PAID BY THE ASSESSEE IN RESPECT OF SERVICES PROVIDED BY ITS AE. TNMM ME THOD IS MOST APPROPRIATE METHOD IN THE CASES WHERE SALE AND PURCHASE IS INV OLVED. THEREFORE, IN OUR OPINION THE MOST APPROPRIATE METHOD TO COMPUTE ALP IN RESPECT OF COMMISSION PAID BY THE ASSESSEE IS CUP METHOD. HOWEVER, THE W AY IN WHICH TPO HAS APPLIED CUP METHOD IS NOT APPROPRIATE. THE AO HAS RELIED UPON THE INTERNAL TRANSACTIONS FOR ARRIVING AT A CONCLUSION THAT THE COMMISSION PAID BY THE ASSESSEE IS ON HIGHER SIDE. SUCH OPINION HAS BEEN FORMED BY TPO WITHOUT GIVING ANY FINDING THAT WHETHER OR NOT ANY OUTSIDE COMPARI SON IS AVAILABLE IN SIMILAR TYPE OF TRANSACTIONS. SUCH COURSE CAN BE ADOPTED ONLY IN THE CIRCUMSTANCES WHERE IT IS FOUND THAT OUTSIDE COMPARISON IS NOT AV AILABLE. IN THIS VIEW OF THE SITUATION, WE ARE OF THE OPINION THAT THE MATTER SH OULD BE RESTORED BACK TO THE FILE OF AO WITH A DIRECTION TO PROVIDE THE ASSESSEE A REASONABLE OPPORTUNITY TO SUPPORT ITS CASE IN RESPECT OF ALP OF COMMISSION PA YMENT. THE ASSESSEE MAY FILE FRESH TP STUDY FOR THIS TRANSACTION AND IF THE ASS ESSEE DOES NOT DESIRE TO DO SO THEN THE AO AT HIS DISCRETION GIVEN IN THE PROVISI ONS OF LAW MAY REFER THE SAME TO TPO AND THIS ISSUE HAS TO BE RE-ADJUDICATED IN T HIS MANNER AFRESH. WE DIRECT ACCORDINGLY. IN THE RESULT, THE AFOREMENTIONED GRO UNDS ARE ALLOWED FOR STATISTICAL PURPOSES. 2.1 AS NO DIFFERENCE WAS POINTED OUT IN THE FACTS A ND CIRCUMSTANCES OF THE CASE FOR THE YEAR UNDER CONSIDERATION ALSO AND BOTH OF US ARE PARTY OF THE AFOREMENTIONED ORDER, FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL WE PASS . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 9 SIMILAR ORDER AND RESTORE THIS ISSUE TO THE FILE OF TPO WITH SIMILAR DIRECTIONS AS ARE GIVEN IN A.Y.2004-05 AND 2007-08. IN VIEW OF A BOVE ADJUDICATION THE SOLE GROUND TAKEN BY THE ASSESSEE IS CONSIDERED AS ALLOW ED FOR STATISTICAL PURPOSES, THEREFORE, THE APPEAL FILED BY THE ASSESSEE IS CONS IDERED TO BE ALLOWED FOR STATISTICAL PURPOSES IN THE MANNER AFORESAID. 3. APROPOS GROUND NO.1 OF REVENUES APPEAL, WHICH IS REGARDING DISALLOWANCE OF PROFESSIONAL FEES PAID TO KSB AG, T HE ISSUE WAS STATED TO BE COVERED WITH THE FOLLOWING OBSERVATIONS OF THE TRIB UNAL IN THE AFOREMENTIONED ORDER PASSED FOR A.Y 2004-05 AND 2007-08. 28. APROPOS GROUND NO.4, THE ASSESSEE IS A JOINT VENTURE COMPANY IN WHICH KSB AG GROUP OF GERMANY IS THE JOINT VENTURE PARTNE R. M/S. KSB GERMANY GROUP HAS VARIOUS SUBSIDIARIES AND ASSOCIATES IN DI FFERENT COUNTRIES AND THE ASSESSEE IS ONE OF THE ASSOCIATES OF THE SAID GROU P. ACCORDING TO THE FACTS SUBMITTED BY THE ASSESSEE BEFORE LD. DRP, KSB GERMA NY GROUP HAD DECIDED TO IMPLEMENT SAP PROGRAMME FOR ALL ITS SUBSIDIARIES AN D ASSOCIATES IN ORDER TO SYNCHRONIZE AND INTEGRATE THEIR BUSINESS FUNCTIONS , MANAGEMENT CONTROL, MANAGEMENT REPORTING ETC. M/S. KSB GERMANY HAD ACQ UIRED SAP PROGRAMME AND THEREFORE, THEY WERE OWNER OF THE SAID SOFTWARE . IN ORDER TO FACILITATE THE USE OF SAP PROGRAMME IN INDIA BY THE ASSESSEE, KSB GERM ANY WAS REQUESTED TO PROVIDE SERVICES RELATING TO DATA PREPARATION, DATA MIGRATION, CONSULTATION, ESTABLISHMENT OF CONNECTION LINKS, DATA CENTER OPE RATION AND VARIOUS OTHER SERVICES. THE ASSESSEE DID NOT PURCHASE SAP PROG RAMME BUT ITS SYSTEMS WERE MODIFIED TO ADOPT THE SAP PROGRAMME ON KSB GERMANY FOR WHICH AN AGREEMENT WAS ENTERED INTO BY THE ASSESSEE WITH KSB GERMANY ON 21/12/2005, ACCORDING TO WHICH FOLLOWING SERVICES WERE TO BE PR OVIDED. A) SAP INTERFACE TO LEGACY SYSTEMS, INFRASTRUCTURE COONSULTANCY AND ALL OTHER FUNCTIONAL CONSULTANCY; B) PREPARATION FOR INSTALLATION OF SAP PROGRAMME C) PROVIDING SERVICES OF EXPERT EXTERNAL CONSULTANT S FOR PROVIDING DATA MIGRATION AND TECHNICAL ARCHITECTURE D) INSTALLATION OF NETWORKING BETWEEN INDIA AND GER MANY E) WAN CONNECTION F) APPLICATION AND SOFTWARE SUPPORT INCLUDING SAP A ND ORACLE LICENSES, ITS ANNUAL MAINTENANCE CHARGES, CHARGES FOR HOSTING OUR DATA SERVICES, BACKUP AND ARCHIVING SERVICES, SUPPORT FOR OPERATIO N OF THE SERVERS. G) ACCEPTABLE QUALITY F SERVICE AND RESPONSE TO USE RS IN TERMS OF APPLICATION RESPONSE, COMMUNICATION SPEED, SYSTEM A VAILABILITY, HELPDESK, RESOLUTION OF QUERIES / PROBLEMS. . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 10 FOR THIS PURPOSE THE ASSESSEE HAD MADE THE FOLLOWIN G PAYMENTS DURING THE YEAR UNDER CONSIDERATION. EURO (A) TRAVELLLING COST OF KSB AG CONSULTANTS 33880 (B) DAILY ALLOWANCE OF KSB AG CONSULTANTS 1316 (C) EXTERNAL CONSULTANTS FOR MIGRATION AND TECHNICAL ARCHITECTURE 94400 (D) INTERFACE TO SUB-SYSTEMS 85000 (E) CONSULTATION CHARGES OF KSB AG CONSULTANTS 527950 HOWEVER, LD. DRP HAS HELD THAT THESE EXPENDITURE AR E OF CAPITAL IN NATURE. ACCORDING TO LD. DRP THE ASSESSEE HAD DERIVED BENEF IT WHICH IS ENDURING IN NATURE, THEREFORE, AO HAS RIGHTLY TREATED IT AS CAP ITAL EXPENDITURE. THE ASSESSEE IS AGGRIEVED, HENCE, HAS FILED AFOREMENTIONED GROU ND. 29. THE AO ALSO DISALLOWED THE BENEFIT OF DEPRECIAT ION ON THE GROUND THAT SUCH SAP PROGRAMME WAS IMPLEMENTED ONLY W.E.F. 1/10/2007 AND AS CAPITAL ASSET CREATED BY THE ASSESSEE WAS NOT PUT TO USE IN THE Y EAR UNDER CONSIDERATION, THEREFORE, DEPRECIATION IS ALSO NOT ALLOWABLE. AS AGAINST SUCH CASE OF AO, IT IS THE CASE OF LD. AR THAT THESE EXPENDITURE ARE OF REVENU E IN NATURE AND ARE ALLOWABLE. FOR THIS PROPOSITION LD. AR HAS RELIED UPON THE D ECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RAYCHEM RPG LTD. 346 ITR 138 (BOM), WHEREIN IT HAS BEEN HELD THAT TRIBUNAL WAS RIGHT IN ALLOWIN G THE CLAIM OF THE ASSESSEE IN RESPECT OF PURCHASE OF SOFTWARE WHICH DID NOT FORM PART OF ASSESSEES PROFIT MAKING APPARATUS. 30. ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY LD. DRP AND A.O. 31. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TIONS HAVE CAREFULLY BEEN CONSIDERED. IN THE SUBMISSIONS MADE BEFORE LD. DRP IT HAS BEEN MADE CLEAR BY THE ASSESSEE THAT ASSESSEE DID NOT PURCHASE SAP PRO GRAMME. ITS EXISTING STRUCTURE OF SOFTWARE WAS MADE COMPATIBLE BY THE KSB GERMANY FOR WHICH AN AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND KSB GERMANY, COPY OF WHICH WAS ALSO FILED BEFORE LD. DRP. THE NATURE OF EXPENDITURE WERE ALSO GIVEN WHICH INCLUDE TRAVELLLING COST OF KSB AG CONSULTA NTS AND EXTERNAL CONSULTANTS FOR MIGRATION AND TECHNICAL ARCHITECTURE, INTERFA CE TO SUB-SYSTEMS AND CONSULTATION CHARGES OF KSB AG CONSULTANTS. NONE OF THESE EXPENDITURE HAS BEEN INCURRED FOR ACQUIRING ANY ASSET. THE DECISIO N OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RAYCHEM RPG, 346 ITR 138 (SUPRA) WILL BE SQUARELY APPLICABLE TO THE FACTS OF THE CASE AS BY INCURRING THESE EXPENDITURE THE ASSESSEE HAS FACILITATED ITS OPERATIONS AND INCURRING SUCH EXPENDITURE WHICH WILL ENABLE THE MANAGEMENT TO CONDUCT ITS BUSINESS MORE EFFICIE NTLY AND THESE EXPENDITURE ALSO ARE NOT IN THE NATURE OF PROFIT MAKING APPARA TUS. THEREFORE, WE HOLD THAT THESE EXPENDITURE ARE ALLOWABLE AS REVENUE EXPENDIT URE. THIS GROUND IS ALLOWED . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 11 3.1 AS NO DIFFERENCE IN THE FACTS AND CIRCUMST ANCES OF THE CASE WAS POINTED OUT, FOLLOWING THE AFOREMENTIONED ORDER, W E HOLD THAT THESE EXPENSES ARE ALLOWABLE AS REVENUE EXPENDITURE AND THIS GROUN D OF THE REVENUE IS DISMISSED. 4. APROPOS GROUND NO.2, THE AMOUNT OF RS.25,97,167/ - RELATES TO FOREIGN EXCHANGE FLUCTUATION LOSS RELATING TO PAYMENT OF SA P IMPLEMENTATION. THIS ADDITION HAS BEEN DELETED BY LD. CIT(A) ON THE GROU ND THAT WHILE EXAMINING THE ALLOWABILITY OF EXPENSES RELATING TO PROFESSIONAL F EES OF RS.2,93,36,941/- (ISSUE RELATES TO GROUND NO.1 OF THE REVENUE) ITSELF HAS BEEN HELD THAT THE SAID EXPENDITURE IS IN THE NATURE OF REVENUE AND WHEN THE EXPENDITURE IT HAS BEEN HELD TO BE REVENUE IN NATURE, THE LOSS ON ACCOUNT O F FOREIGN EXCHANGE FLUCTUATIONS WILL BE A REVENUE LOSS. 5. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. W HILE DISMISSING GROUND NO.1 OF THE REVENUES APPEAL IT HAS BEEN HELD THAT EXPENSES RELATING TO SAP ARE OF REVENUE IN NATURE. IF IT IS SO, FOREIGN EX CHANGE FLUCTUATION LOSS INCURRED IN RESPECT OF SAP EXPENSES ARE ALSO TO BE CONSIDE RED AS REVENUE EXPENDITURE. WE, THEREFORE, DO NOT FIND ANY INFIRMITY IN THE ORD ER OF LD. CIT(A) VIDE WHICH IMPUGNED ADDITION OF RS.25,97,167/- IS DELETED. WE DECLINE TO INTERFERE AND THIS GROUND OF THE REVENUE IS DISMISSED. 6. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS CONSIDERED AS ALLOWED FOR STATISTICAL PURPOSES AND APPEAL FILED BY THE REVEN UE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 03/02/2014 2 . 01' # 3 45 03/02/2014 1 . 6 % ( !' / N.K.BILLAIYA ) ( . . / I.P. BANSAL ) # / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 4 DATED 03/02/2014 . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 12 2 2 2 2 . .. . ,/78 ,/78 ,/78 ,/78 98'/ 98'/ 98'/ 98'/ / COPY OF THE ORDER FORWARDED TO : 1. (+ / THE APPELLANT 2. ,-(+ / THE RESPONDENT. 3. : ( ) / THE CIT(A)- 4. : / CIT 5. 8;6 ,/ , , / DR, ITAT, MUMBAI 6. 6< = / GUARD FILE. 2 2 2 2 / BY ORDER, -8/ ,/ //TRUE COPY// > >> > / ? ? ? ? ) ) ) ) (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . . ./ VM , SR. PS . / ITA NO. 770&814/MUM/2013 ' ' ' ' / ASSESSMENT YEAR 2008-09 13 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 03/02/2014 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 03/02/2014 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER