M/s.Kaypee Electronics & Associates Pvt. Ltd., Bangalore V. Asst. Commissioner of Income Tax, Bangalore

ITA 86/BANG/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5514 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 16-01-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: G KAMALADHAR
• Assessee Lawyers: CHYTHANYA K K
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER 1. IT (TP) A NO. 159/BANG/2015 ASSESSMENT YEAR: 2010-11 2. IT (TP) A NO. 132/BANG/2016 ASSESSMENT YEAR: 2011-12 3. IT (TP) A NO. 86/BANG/2017 ASSESSMENT YEAR: 2012-13 M/S. KAYPEE ELECTRONICS & ASSOCIATES PVT. LTD., # 18/2, SRINIVASA INDUSTRIAL ESTATE, 7 TH MILE, KANAKAPURA MAIN ROAD, KONANAKUNTE CROSS, NEXT TO METRO, BANGALORE 560 062. PAN: AACCK 1203C ..APPELLANT VS. 1. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(1), BANGALORE. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4(1)1), BANGALORE. 3. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(1), BANGALORE. .. RESPONDENTS APPELLANT BY : SHRI CHYTHANYA K.K., ADVOCATE RESPONDENT BY : SHRI G. KAMALADHAR, STANDING COUNSEL DATE OF HEARING : 2 3 .0 3 .2017 DATE OF PRONOUNCEMENT : 21 .04.2017 IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 2 OF 12 O R D E R PER SHRI INTURI RAMA RAO, AM: THESE ARE APPEALS FILED BY THE ASSESSEE-COMPANY DI RECTED AGAINST THE ASSESSMENT ORDERS DATED 24.12.2014, 17.12.2015 AND 30.11.2016 FOR THE ASSESSMENT YEARS 2010-11, 2011-12 AND 2012-13 RESPE CTIVELY U/S. 143(3) R.W.S. 144C OF THE ACT BY THE DEPUTY COMMISSIONER O F INCOME-TAX / ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-4(1)(1 ), BANGALORE. 2. SINCE THE COMMON ISSUE IS INVOLVED IN ALL THE THREE APPEALS, WE PROCEED TO DISPOSE OF SAME VIDE THIS COMMON ORDER. THE FAC TS RELEVANT TO THE ASSESSMENT YEAR 2010-11 ARE STATED HEREIN FOR THE S AKE OF CLARITY AND CONVENIENCE. 3. THE ASSESSEE-COMPANY RAISED THE FOLLOWING GROUNDS F OR THE YEAR 2010-11. IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 3 OF 12 IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 4 OF 12 IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 5 OF 12 IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 6 OF 12 4. BRIEFLY THE FACTS OF THE CASE ARE THAT THE APPELLAN T IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF MAGNETI C BASED ELECTRONIC COILS, TRANSFORMERS AND INDUCTORS. IT IS A SUBSIDI ARY OF M/S. FALCO LIMITED, HONGKONG. THE RETURN OF INCOME FOR THE AS SESSMENT YEAR 2010- 11 WAS FILED ON 29.08.2010 DECLARING A TOTAL INCOME OF RS. 6,21,81,210/-. THE 80% OF EQUITY CAPITAL OF THE APPELLANT IS HELD BY THE SAID M/S. FALCO LIMITED. THE APPELLANT ALSO ENTERED INTO TECHNOLOG Y COLLABORATION AGREEMENT WITH M/S. FALCO LIMITED ON 29.03.2006 FOR MANUFACTURING ELECTRONIC COMPONENTS BY USING TECHNOLOGY, EXPERTIS E AND KNOWHOW OF FALCO AND MARKETING AND SELLING COMPONENTS UNDER TH E BRAND NAME OF IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 7 OF 12 FALCO IN INDIA AS WELL AS ABROAD. IN TERMS OF THE SAID TECHNOLOGY COLLABORATION AGREEMENT, THE APPELLANT WAS TO PAY R OYALTY AT THE RATE OF 8% ON THE SALES TO SAID M/S. FALCO LIMITED IN CONSI DERATION OF TECHNOLOGY AND KNOWHOW INCLUDING TECHNICAL ASSISTANCE MADE AVA ILABLE TO THE APPELLANT COMPANY. 5. THE APPELLANT COMPANY ALSO REPORTED THE FOLLOWING I NTERNATIONAL TRANSACTIONS IN ITS FORM 3CEB. DESCRIPTION OF THE INTERNATIONAL TRANSACTION AMOUNT (RS.) PURCHASE OF RAW MATERIALS 20,25,51,853/ - SALES 9,19,13,597/ - PURCHASE OF FIXED ASSETS 16,18,591/ - PAYMENT OF ROYALTY 4,39,93,839/ - 6. THE APPELLANT COMPANY SOUGHT TO JUSTIFY THAT THE AB OVE INTERNATIONAL TRANSACTION ARMS LENGTH PRICE AND FOR THIS PURPOSE THE ASSESSEES COMPANY SUBMITTED A TP STUDY REPORT. FOR THE PURPO SE OF THIS TP STUDY REPORT THE ASSESSEE COMPANY ADOPTED TNMM METHOD. 7. THE AO HAD REFERRED THE MATTER TO THE TPO FOR THE P URPOSE OF BENCH MARKING THE ABOVE INTERNATIONAL TRANSACTIONS. THE TPO VIDE ORDER DATED 30.01.2014 PASSED U/S. 92CA OF THE IT ACT, DETERMIN ED THE ALP IN RESPECT OF THE ROYALTY AT RS. 2,75,25,270/-. ACCOR DING TO THE LD. TPO, THE APPELLANT WAS NOT JUSTIFIED IN PAYING ROYALTY A T THE RATE OF 8% ON SALES AS THERE WAS NO VALUE ADDITION MADE FROM THE AE; IT IS THE CONTENTION OF THE LD. TPO THAT IF THE ROYALTY IS PA ID ON GROSS SALES IT AMOUNTS TO PAYING THE ROYALTY ON THE PURCHASES MADE BY THE AE ALSO. IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 8 OF 12 THUS THE TPO DETERMINED THE ALP ADJUSTMENT IN PAYME NT OF ROYALTY AS FOLLOWS. 8. THE AO PASSED THE DRAFT ASSESSMENT ORDER U/S. 143(3 ) R.W.S. 144C OF THE IT ACT VIDE ORDER DATED 28.02.2014 AFTER INCORP ORATING THE ABOVE TP ADJUSTMENT. AFTER RECEIPT OF DRAFT ASSESSMENT ORDE R THE APPELLANT COMPANY FILED AN OBJECTION BEFORE THE HONBLE DRP C ONTENDING THAT THE TPO WAS NOT JUSTIFIED IN REJECTING THE TP STUDY AND FURTHER CONTENDED THAT WHEN THE APPELLANT COMPANY ADOPTED THE TNMM AT ENTITY LEVEL INCLUDING PAYMENT OF ROYALTY, THERE WAS NO NEED OF SEPARATE BENCH MARKING IN RESPECT OF ROYALTY PAYMENT. IT WAS FURT HER CONTENTED THAT THE ROYALTY IS PAID TO M/S. FALCO LIMITED FOR THE U SE OF BRAND NAME ALSO. THE HONBLE DRP AFTER CONSIDERING THE SUBMISSIONS O F THE ASSESSEE- COMPANY HAD CONFIRMED THE FINDINGS OF THE TPO VIDE DIRECTIONS DATED 13.11.2014. THE AO PASSED THE FINAL ASSESSMENT ORD ER U/S. 143(3) R.W.S. 144C OF THE ACT VIDE ORDER DATED 24.12.2014. BEING AGGRIEVED, THE APPELLANT IS BEFORE US IN THE PRESENT APPEALS R AISING THE FOLLOWING GROUNDS OF APPEAL. IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 9 OF 12 9. DURING THE COURSE OF HEARING OF THE APPEAL THE LD. COUNSEL SHRI CHYTHANYA K.K. FOR THE APPELLANT SUBMITTED THAT WHE N THE TPO ACCEPTED THE TNMM METHOD AT ENTITY LEVEL THERE WAS NO NEED O F MAKING A SEPARATE BENCH MARKING IN RESPECT OF ROYALTY PAYMEN T. IN THIS CONNECTION, HE PLACED RELIANCE ON THE DECISION OF H ONBLE DELHI HIGH COURT IN CASE OF SONY ERICSSON MOBILE COMMUNICATION S INDIA PVT. LTD. VS. CIT 231 TAXMAN 113(DELHI) COORDINATE BENCH DECI SION OF THE TRIBUNAL IN THE CASE OF M/S. SIEMENS VDO AUTOMOTIVE LTD. VS DCIT IN IT(TP)A NO. 923/BANG/2012. THUS HE SUBMITTED THAT WHEN TPO HAS ACCEPTED THE TNMM METHOD AT ENTITY LEVEL, THERE WAS NO NEED OF S EPARATE BENCH MARKING IN RESPECT OF ROYALTY PAYMENT. 10.ON THE OTHER HAND, THE LD. STANDING COUNSEL PLAC ED RELIANCE ON THE ORDERS OF THE AUTHORITIES. 11.WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE M ATERIAL ON RECORD. IN THE PRESENT CASE, THE ONLY ISSUE THAT ARISES FOR CO NSIDERATION BEFORE US IS WHETHER THE TPO WAS JUSTIFIED IN MAKING THE ALP ADJ USTMENT IN RESPECT OF ROYALTY PAYMENT MADE TO M/S. FALCO LIMITED IN TH E GIVEN FACTS OF THE PRESENT CASE. THE ROYALTY PAYMENT IS MADE TO M/S. FALCO LIMITED FOR MANUFACTURING ELECTRONIC COMPONENTS BY USING TECHNO LOGY, EXPERTISE AND KNOWHOW OF FALCO AND MARKETING AND SELLING COMPONEN TS UNDER THE BRAND NAME OF FALCO IN INDIA AS WELL AS ABROAD BY T HE ASSESSEE- COMPANY. IN CONSIDERATION OF SAME, ROYALTY AT THE RATE OF 8% OF SALES WAS MADE BY THE APPELLANT TO M/S. FALCO LIMITED. N O DOUBT THE LAW IS SETTLED TO THE EXTENT THAT AN INTERNATIONAL TRANSAC TION CAN BE CLUBBED / AGGREGATED WITH OTHER INTERNATIONAL TRANSACTIONS PR OVIDED SUCH IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 10 OF 12 TRANSACTIONS ARE CLOSELY CONNECTED WITH EACH OTHER. IN THE CASES CITED BY THE LD. COUNSEL FOR THE APPELLANT, THIS PROPOSIT ION OF LAW WAS REITERATED. BUT IN THE PRESENT CASE, THE TPO HAD N OT APPLIED TNMM AT ENTITY LEVEL. THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE COMPANY HAD BEEN REJECTED BY THE TPO. THIS ACTION OF THE T PO IS CONFIRMED BY THE HONBLE DRP. BUT THE TPO PROCEEDED TO BENCH MA RK THE TRANSACTION OF THE ROYALTY PAYMENT ON STAND ALONE BASIS. IN TH E PROCESS, THE COST OF PRODUCTION OR OTHER TRANSACTIONS ARE NOT SUBJECTED TO BENCH MARKING BY THE TPO. THEREFORE THE CONTENTION OF THE LD. COUNS EL THAT WHEN THE TNMM WAS APPLIED AT THE ENTITY LEVEL, THERE WAS NO NECESSITY OF SEPARATE BENCH MARKING IN RESPECT OF ROYALTY TRANSACTIONS CA NNOT BE ACCEPTED. THIS SUBMISSION MADE BY THE ASSESSEE-COMPANY IS FAC TUALLY INCORRECT. ON MERE PERUSAL OF ORDER OF THE LD. TPO IT IS MANIF EST THAT THE TPO HAD PICKED UP THE TRANSACTION ROYALTY ALONE FOR THE PUR POSE OF BENCH MARKING. THE STATEMENT MADE BY THE LD. COUNSEL FOR THE APPELLANT IS NOTHING BUT ATTEMPT TO MISLEAD THE COURT. THIS CON DUCT ON THE PART OF THE COUNSEL IS HIGHLY DEPLORABLE. IT IS A FUNDAMEN TAL DUTY OF AN ADVOCATE / COUNSEL TO ASSIST THE COURT IN ADJUDICATING THE M ATTER BEFORE THE COURT IN ACCORDANCE WITH THE LAW. IT IS HIGHLY UNBECOMIN G OF COUNSEL TO MISLEAD THE COURT. WE LEAVE THE ISSUE HERE WITH TH ESE OBSERVATIONS. 12.NOW ON THE ISSUE OF BENCH MARKING THE TRANSACTIO N OF ROYALTY THE LD. COUNSEL CHOSEN NOT TO POINT OUT ANY FALLACIES IN TH E REASONING OF THE TPO OR OF THE ALP ANALYSIS IN THE WORKING OF THE ALP AD JUSTMENT. THE LD. COUNSEL ALSO FAILED TO ESTABLISH THAT THE TRANSACTI ON ROYALTY PAYMENT IS CLOSELY LINKED WITH THE OTHER TRANSACTIONS CARRIED OUT WITH AE. IT IS TRITE IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 11 OF 12 LAW THAT A JUSTIFICATION SHOULD BE SHOWN FOR CLUBBI NG THE TRANSACTIONS. IN THE ABSENCE OF SUCH JUSTIFICATION CLUBBING OTHER TR ANSACTIONS IS NOT POSSIBLE. THE ONUS ALWAYS LIES ON THE ASSESSEE-COM PANY TO ESTABLISH THE JUSTIFICATION FOR CLUBBING AND AGGREGATION OF T HE TRANSACTION OF PAYMENT OF ROYALTY WITH OTHER TRANSACTIONS. AS MEN TIONED (SUPRA) THE ASSESSEE-COMPANY HAD FAILED TO DISCHARGE SUCH ONUS, IN THE CIRCUMSTANCES WE CONFIRM THE ORDERS OF THE LOWER AU THORITIES IN THIS RESPECT OF ALP ADJUSTMENT ON PAYMENT OF ROYALTY. 13.IN THE RESULT, THE GROUNDS OF APPEAL FILED BY TH E ASSESSEE-COMPANY CHALLENGING ADDITION OF ALP ADJUSTMENT ON ACCOUNT O F ROYALTY PAYMENT ARE DISMISSED FOR ALL THE THREE YEARS. 14.IN ASSESSMENT YEARS 2010-11 AND 2011-12 IN IT(TP ) NOS. 159/BANG/2015 AND 132/BANG/2016 THE OTHER GROUNDS O F APPEAL RELATES TO THE REDUCTION OF THE EXPENDITURE INCURRED UNDER TELECOMMUNICATION FREIGHT AND TRAVELLING INCURRED IN FOREIGN CURRENCY FROM EXPORT TURNOVER. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE-COM PANY BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN CASE OF TATA EL XSI LTD 349 ITR 98. RESPECTFULLY FOLLOWING THE DECISION OF THE ORDER WE DIRECT THE AO / TPO TO EXCLUDE THE EXPENDITURE FROM BOTH EXPORT TURNOVER A ND TOTAL TURNOVER. THESE GROUNDS OF THE APPEAL ARE ALLOWED. 15.IN THE RESULT, THE APPEAL FOR ASSESSMENT YEARS 2 010-11 AND 2011-12 ARE PARTLY ALLOWED AND FOR THE ASSESSMENT YEAR 2012-13 THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. IT(TP)A NOS. 159/BANG/2015, 132/BANG/2016 & 86/BANG /2017 PAGE 12 OF 12 PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF APRIL, 2017 SD/- SD/- (SUNIL KUMAR YADAV) (INTURI R AMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 21 ST APRIL, 2017. / MS/ COPY TO: 1. APP ELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.