ACIT, Hosur V. Interpump Hydraulics India Pvt Ltd., Hosur

ITA 839/CHNY/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9330 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-05-2016
• Appeal Filed By: Department
• Bench Allotted: D
• Assessment Year: 2010-2011
• Appeal Filed On: 15-04-2015
• Court: TRIBUNAL
• Assessee Lawyers: R E BALASUBRAMANYAM
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction
• Section: 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , . !' , # $ % [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ] ./ I.T.A.NO.839/MDS/2015 / ASSESSMENT YEAR : 2010-11 THE ASSTT. COMMISSIONER OF INCOME-TAX CIRCLE I HOSUR VS. M/S INTERPUMP HYDRAULICS INDIA PVT. LTD PLOT NO.129, SIPCOT INDUSTRIAL COMPLEX ZUZUVADI, HOSUR 635 126 [PAN AABCI 5465 R ] ( &' / APPELLANT) ( ()&' /RESPONDENT) / APPELLANT BY : SHRI JASDEEP SINGH, CIT /RESPONDENT BY : SHRI R.E.BALASUBRAMA NYAM, CA / DATE OF HEARING : 15 - 03 - 2016 ! / DATE OF PRONOUNCEMENT : 19 - 05 - 2016 / O R D E R PER N.R.S.GANESAN, JUDICIAL MEMBER THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST TH E ASSESSMENT ORDER CONSEQUENT TO THE DIRECTION OF THE DISPUTE RESOLUTION PANEL, DATED 16.12.2014, AND PERTAINS TO ASSESSMENT YEAR 2010-11. 2. SHRI JASDEEP SIGH, LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE IS A WHOLLY OWNED SUB SIDIARY COMPANY OF ITA NO. 839/15 :- 2 -: M/S HYDRAULICS SPA, ITALY. DURING THE YEAR UNDER C ONSIDERATION, THE ASSESSEE-COMPANY MADE TRANSACTION WITH ITS HOLDING COMPANY BY PURCHASING MACHINERY. THE TRANSFER PRICING OFFICER AND THE ASSESSEE ADOPTED CUP METHOD AS THE MOST APPROPRIATE METHOD. THE VALUE OF THE MACHINERY PURCHASED BY THE ASSESSEE WAS COMPAR ED WITH THE WRITTEN DOWN VALUE OF THE PARENT COMPANY. THE ASS ESSEE CONTENDED BEFORE THE TPO THAT THE ASSESSEE PURCHASED MACHINE RY WHICH WAS IN PERFECT WORKING CONDITION AND CONTINUED TO PERFORM THE SAME FUNCTION AS IT WAS PERFORMING IN ITALY. THE ASSESSEE ALSO C LAIMED BEFORE THE TPO THAT WHAT WAS PURCHASED BY THE ASSESSEE IS NOT A STANDALONE MACHINE BUT AN ENTIRE SET OF PLANT AND MACHINERY WI TH A PROVEN AND TIME TESTED PRODUCTION CAPACITY FOR A WELL ESTABLIS HED PRODUCT. THE TPO AFTER CONSIDERING THE OBJECTION OF THE ASSESSE E, FOUND THAT THE ADVANTAGE IN PURCHASING THE MACHINERY WAS NOT IN Q UESTION. THE WHOLE ISSUE ARISES FOR CONSIDERATION WAS WHETHER TH E PURCHASE OF MACHINERY WAS AT ARMS LENGTH PRICE OR NOT. THE TP O FOUND THAT WRITTEN DOWN VALUE OF THE MACHINERY WOULD BE AT ALP , THEREFORE, THE SAME HAS TO BE ADOPTED FOR MAKING ADJUSTMENT. HOWE VER, ON THE OBJECTION OF THE ASSESSEE, THE MATTER WAS REFERRED TO THE DRP. THE DRP FOUND THAT ADOPTING WRITTEN DOWN VALUE AS ALP U NDER THE CUP METHOD IS NOT JUSTIFIED AND ACCEPTED THE ASSESSEE S OBJECTION. ACCORDING TO THE LD. DR, WRITTEN DOWN VALUE OF THE MACHINERY IS THE ITA NO. 839/15 :- 3 -: MOST APPROPRIATE VALUE FOR ESTIMATING THE COST OF M ACHINERY PURCHASED BY THE ASSESSEE. ACCORDING TO THE LD. DR, WHEN TH E MACHINERY WAS PUT TO USE, IT WOULD AUTOMATICALLY DEPRECIATE AT A PARTICULAR RATE WHICH WAS RECOGNIZED UNDER BOTH THE COMPANIES ACT AND THE INCOME-TAX ACT. ACCORDING TO THE LD. DR, WHEN AN INDEPENDENT BUYER PURCHASES A SECOND HAND MACHINERY, HE WOULD NATURALLY ANALYZE T HE COST OF THE ORIGINAL MACHINERY, ITS DEPRECIATED VALUE, REPAIRS AND MAINTENANCE ETC. TO ESTIMATE THE ACTUAL COST OF THE SECOND HAND MACH INERY. SINCE THE DEPRECIATION RATES ARE APPROVED BY THE RELEVANT AUT HORITIES, ACCORDING TO THE LD. DR, THE WRITTEN DOWN VALUE WOULD BE THE MOST APPROPRIATE VALUE FOR ESTIMATING THE ALP. THEREFORE, THE DRP O UGHT TO HAVE ACCEPTED THE ADJUSTMENT MADE BY THE TPO. 3. ON THE CONTRARY, SHRI R.E. BALASUBRAMANYAM, LD. REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT UNDE R THE CUP METHOD, THE PRICE PAID FOR THE PROPERTY TRANSFERRED SHALL B E COMPARED WITH UNCONTROLLED TRANSACTIONS WHICH ARE IDENTIFIED. SU CH COMPARED PRICE WITH UNCONTROLLED TRANSACTION SHALL BE ADJUSTED TO ACCOUNT FOR THE DIFFERENCE BETWEEN THE INTERNATIONAL TRANSACTION OF THE ASSESSEE AND THE COMPARABLE UNCONTROLLED TRANSACTION IDENTIFIED. THE PRICE SO ARRIVED AT HAS TO BE TAKEN AS ALP IN RESPECT OF THE PROPERTY TRANSFERRED. IN FACT, THE ASSESSING OFFICER HAS T AKEN THE WRITTEN DOWN VALUE WITHOUT IDENTIFYING ANY COMPARABLE CASE IN TH E UNCONTROLLED ITA NO. 839/15 :- 4 -: TRANSACTION. THE LD. REPRESENTATIVE FURTHER SUBMIT TED THAT THE WRITTEN DOWN VALUE MAY NOT ALWAYS REFLECT THE MARKET VALUE OF THE PROPERTY. THE ASSESSING OFFICER WITHOUT IDENTIFYING ANY TRANS ACTION, HAS SIMPLY TAKEN THE WRITTEN DOWN VALUE OF THE MACHINERY. NO DOUBT, EVERY MACHINERY USED FOR MANUFACTURING ACTIVITY WOULD NAT URALLY DEPRECIATE ITS VALUE ON PASSAGE OF TIME. EVEN THOUGH A STATUT ORY DEDUCTION WAS PROVIDED UNDER THE INCOME-TAX ACT AND THE COMPANIES ACT, THE PRICE OF THE MACHINERY HAS TO BE COMPARED WITH COMPARABLE MACHINERY IN THE UNCONTROLLED MARKET. SUCH AN EXERCISE WAS NOT DONE BY THE TPO AND THE ASSESSING OFFICER. THEREFORE, THE DRP FOUN D THAT ADOPTING WRITTEN DOWN VALUE AS ALP UNDER THE CUP METHOD IS N OT JUSTIFIED. THEREFORE, THE DOWNWARD ADJUSTMENT MADE BY THE TPO TO THE EXTENT OF `2,53,43,940/- WAS RIGHTLY FOUND TO BE NOT WARRANTED BY THE DRP. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE CAREFULLY GONE THROUGH THE PROVISIONS OF RULE 10B OF THE INCOME-TA X RULES, 1962. RULE 10B(1) PROVIDES METHOD FOR DETERMINATION OF AR MS LENGTH PRICE IN COMPARABLE UNCONTROLLED PRICE METHOD. FOR THE P URPOSE OF CONVENIENCE, WE REPRODUCE BELOW RULE 10B(1): ITA NO. 839/15 :- 5 -: 10B(1) FOR THE PURPOSE OF SUB-SECTION (2) OF SECTIO N 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHO D, IN THE FOLLOWING MANNER NAMELY:- (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRE D OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRA NSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED. (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENC ES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTIC TRANSACTION] AND THE COMPARABLE UNCONTROLL ED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING IN TO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRI CE 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 INTERNATION AL TRANSACTION[ OR THE SPECIFIED DOMESTIC TRANSACTION] AS RIGHTLY SUBMITTED THE BY THE LD. REPRESENTATIVE FOR THE ASSESSEE, WHEN THE TRANSACTION WAS COMPARED BY TAKING CUP MET HOD AS THE MOST APPROPRIATE METHOD, THE PRICE CHARGED OR PAID BY THE ASSESSEE FOR THE PROPERTY TRANSFERRED NEEDS TO BE COMPARED I N A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSA CTIONS, AS IDENTIFIED. THEREFORE, IT IS OBLIGATORY ON THE PAR T OF THE TPO TO IDENTIFY THE COMPARABLE TRANSACTION IN THE UNCONTROLLED TRAN SACTION FOR THE PURPOSE OF DETERMINING THE ALP. IN THIS CASE, THE TPO HAS NOT TAKEN ANY PAIN TO IDENTIFY THE COMPARABLE TRANSACTION SO AS TO COMPARE THE PRICE PAID BY THE ASSESSEE FOR PURCHASING THE MACH INERY FROM ITS HOLDING COMPANY. WHEN THE PRICE WAS DETERMINED BY COMPARING THE ITA NO. 839/15 :- 6 -: UNCONTROLLED TRANSACTION, THE DIFFERENCE BETWEEN TH E PRICE PAID BY THE ASSESSEE AND THE PRICE SO DETERMINED IN A COMPARABL E UNCONTROLLED TRANSACTION HAS TO BE WORKED OUT AND THE DIFFERENCE BETWEEN THE TWO SHALL BE TAKEN AS THE ALP. UNFORTUNATELY, THE TPO HAS NOT TAKEN ANY PAIN EITHER TO IDENTIFY THE COMPARABLE TRANSACTION OR TO IDENTIFY THE PRICE PAID BY THE THIRD PARTY COMPANY IN THE UNCONT ROLLED TRANSACTION. THE TPO HAS SIMPLY COMPARED THE WRITTEN DOWN VALUE OF THE MACHINERY. 5. AS RIGHTLY SUBMITTED BY THE LD. REPRESENTATIVE FOR THE ASSESSEE, DEPRECIATION IS PROVIDED FOR ALL MACHINER IES USED FOR PRODUCTION OF AN ARTICLE OR THING AND OTHER CAPITAL ASSET UNDER THE INCOME-TAX ACT. A MACHINERY WOULD AUTOMATICALLY DE PRECIATE WHEN IT WAS PUT TO USE IN THE MANUFACTURING ACTIVITY. WHEN THE MACHINERY WAS SOLD, THE BUYER OF THE MACHINERY WOULD NATURALL Y LOOK FOR THE EFFICIENCY AND LIFE OF THE MACHINERY AFTER THE PURC HASE. THEREFORE, THE WRITTEN DOWN VALUE MAY BE ONE OF THE FACTOR TO BE T AKEN INTO CONSIDERATION FOR DETERMINING THE VALUE OF THE MACH INERY. HOWEVER, IN VIEW OF THE SPECIFIC PROVISION IN RULE 10B(1)(A) OF THE INCOME-TAX RULES, WRITTEN DOWN VALUE CANNOT BE A DETERMINING F ACTOR TO DECIDE THE ALP. THE VALUE OF THE MACHINERY HAS TO BE COMPARE D WITH IDENTIFIED TRANSACTION IN THE UNCONTROLLED MARKET. SINCE SUCH AN EXERCISE WAS NOT ITA NO. 839/15 :- 7 -: DONE BY THE TPO, THIS TRIBUNAL IS OF THE CONSIDERE D OPINION THAT THE DRP HAS RIGHTLY FOUND THAT THE SALE PRICE BETWEEN T HE TWO PARTIES CANNOT BE MERELY ON THE BASIS OF THE WRITTEN DOWN V ALUE. THEREFORE, THE DRP HAS RIGHTLY FOUND THAT ADOPTING WRITTEN DOW N VALUE AS ALP UNDER THE CUP METHOD IS NOT JUSTIFIED. HENCE, THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY. ACCORDINGLY, THE SAME IS CONFIRMED. 6. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH MAY, 2016, AT CHENNAI. SD/- SD/- ( . !' ) (A. MOHAN ALANKAMONY) # / ACCOUNTANT MEMBER ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER #$ / CHENNAI %& / DATED: 19 TH MAY, 2016 RD &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF