Michelin India Technology Center LLP, Gurgaon V. ACIT Circle-1, Faridabad

ITA 9247/DEL/2019

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 3759 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Assessment Year: 2015-2016
• Appeal Filed On: 29-11-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MEERA SRIVASTAVA
• Keywords: Depreciation; Transfer pricing; International transaction; Application of stay; Capital receipt; Capital expenditure
• Section: 37; 28; 271(1)(c); 10; 92C; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2, NEW DELHI BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER (THROUGH VIDEO CONFERENCING) ITA NO. 9247/DEL/2019 : ASSTT. YEAR : 2015-16 & SA NO. 100/DEL/2020: ASSTT. YEAR : 2015-16 MICHELIN INDIA TECHNOLOGY CENTER PVT. LTD. (CONVERTED FROM MICHELIN INDIA TECHNOLOGY CENTER LLP) 3 RD FLOOR, ORCHID BUSINESS PARK, SOHNA ROAD, GURGOAN-122002 VS ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-1, FARIDABAD-121001 (APPELLANT) (RESPONDENT) PAN NO. A AXFM5559P ASSESSEE BY : SH. NAGESHWAR RAO, ADV. REVENUE BY : MS. MEERA SRIVASTAVA, CIT DR & SH. M. BARNWAL, SR. DR DATE OF HEAR ING: 26 . 0 7 .20 2 1 DATE OF PRONOUNCEMENT: 07 .10 .20 2 1 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 15.10.2019 PASSED BY THE AO U/S 143 (3) R.W.S. 144C(3) OF THE INCOME TAX ACT, 1961. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSESS EE: GROUND NO. 1 GENERAL THAT THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1, FARIDABAD (LD AO) AND LEARNED DISP UTE RESOLUTION PANEL (LD DRP) HAVE ERRED BOTH IN LAW AND ON FACTS OF THE CASE WHILE ASSESSING THE INCOME OF THE ITA NO. 9247/DEL/2019 SA NO. 100/DEL/2020 MICHELIN INDIA TECHNOLOGY CENTER PVT. LTD. 2 APPELLANT FOR THE RELEVANT ASSESSMENT YEAR AT INR 18,19,60,840 AS AGAINST THE RETURNED INCOME OF INR 4,05,81,450, THEREBY MAKING AN ADDITION OF INR 14,13,79,393. GROUND NO. 2 - INCORRECT DISALLOWANCE OF LEGAL AND PROFESSIONAL EXPENSE THAT, THE LD AO AND LD DRP ERRED BOTH IN LAW AND ON THE FACTS OF THE CASE IN MAKING A DISALLOWANCE OF VARIOUS LEGAL AND PROFESSIONAL EXPENSES AGGREGATING TO INR 13,53,59,645 UNDER SECTION 37 OF THE INCOME-TAX ACT, 1961 (ACT), TREATING THE SAME AS CAPITAL IN NATURE. 2.1 THAT THE LD AO AND LD DRP ERRED ON FACTS OF TH E CASE IN HOLDING THAT THE ABOVE EXPENDITURE INCURRED FOR THE PURPOSE OF THE PROJECTS OF THE APPELLANT, THUS, ARE TO BE CONSIDERED AS CAPITAL EXPENDITURE AND DEPRECIATION IS ALLOWABLE AS PER LAW. 2.2 THAT THE LD AO AND LD DRP FAILED TO APPRECIATE THAT THE ABOVE EXPENDITURE INCLUDES INR 3,67,04,772 TOWARDS THE COST OF ABANDONED PROJECT AND THE SAME SHOULD BE ALLOWED UNDER SECTION 37 OF THE ACT. 2.3 THAT THE LD AO AND LD DRP ERRED IN PRESUMING THAT LEGAL AND PROFESSIONAL FEES AMOUNTING TO INR 14,31,97,068 PAID TO ACCENTURE SERVICES PRIVATE LTD . AS BEING TOWARDS PROJECT AND DISALLOWING THE SAME FAILING TO APPRECIATE THAT SUCH ROUTINE EXPENDITURE HAD IN FACT RESULTED IN INCOME OFFERED TO TAX. 2.4 WITHOUT PREJUDICE TO ABOVE, LD. AO AND LD. DRP ERRED IN ADOPTING INCONSISTENT AND CONTRADICTORY POSITIONS AS CORRESPONDING INCOME EARNED AT COST PL US AGREED WAS BROUGHT TO TAX WHILE DISALLOWED THE COST . 2.5 WITHOUT PREJUDICE TO GROUND 2 AND 2.1 WHEREIN THE EXPENDITURE IS TREATED AS CAPITAL IN NATURE, TH E LD AO AND LD DRP ERRED BOTH IN LAW AND ON THE FACTS OF THE CASE IN TREATING THE CORRESPONDING RECEIPTS (INCLUDING MARKUP) RECOVERED FROM THE AE AS INCOME UNDER SECTION 28 OF THE ACT INSTEAD OF REDUCING THE ITA NO. 9247/DEL/2019 SA NO. 100/DEL/2020 MICHELIN INDIA TECHNOLOGY CENTER PVT. LTD. 3 SAME FROM COST OF CAPITAL EXPENDITURE AS PER EXPLANATION 10 OF THE SECTION 43(1) OF THE ACT. THU S, THE CORRESPONDING RECEIPTS (INCLUDING MARK-UP) SHOU LD NOT BE TREATED AS INCOME OF THE APPELLANT INSTEAD SHOULD BE REDUCED FROM ACTUAL COST OF ASSETS. GROUND NO. 3 - INCORRECT TRANSFER PRICING ADJUSTMENT THAT ON THE FACTS AND IN LAW, THE LEARNED TRANSFER PRICING OFFICER (LD. TPO) HAS ERRED IN MAKING TRA NSFER PRICING ADJUSTMENT AMOUNTING TO INR 60,19,748. 3.1 THE LD. TPO WHILE PASSING THE ORDER INCORPORAT ING THE DIRECTIONS ISSUED BY THE HONBLE DRP, HAS ERRED IN LAW AND FAILED TO APPRECIATE THAT THE MARGIN EARNED BY THE APPELLANT IS WITHIN THE ARMS LENGTH RANGE COMPUTED IN THE ORDER AND HENCE, NO ADJUSTMENT IN RESPECT OF TRANSFER PRICING MATTERS IS WARRANTED. 3.2. THE HONBLE DRP / LD. TPO ERRED IN LAW IN RE- DETERMINING THE PRICE OF THE IMPUGNED INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT AND MAKING THE IMPUGNED TRANSFER PRICING ADJUSTMENT, AS THE CIRCUMSTANCES NECESSITATING THE RE-DETERMINATION OF PRICE BY THE LD. TPO AS MENTIONED IN SUB-SECTION (3 ) OF SECTION 92C DID NOT EXIST IN CASE OF THE APPELLA NT. 3.3. THE HONBLE DRP / LD. TPO HAS GROSSLY ERRED IN APPLYING QUANTITATIVE FILTER OF TURNOVER LESS THAN RS. 1 CRORE AND REJECTING HI-TECH LABORATORIES AS A COMPARABLE, WITHOUT GIVING DUE COGNIZANCE TO THE FUNCTIONS, ASSET AND RISK PROFILE OF HI-TECH LABORATORIES WHICH IS COMPARABLE TO THE APPELLANT. 3.4. THE HONBLE DRP FAILED TO APPRECIATE THAT LD. TPO HAD NOT CHOSEN A SCIENTIFIC PROCESS OF SELECTIO N OF NEW COMPARABLE COMPANIES AND MERELY CHERRY-PICKED COMPANIES ARBITRARILY WITHOUT PROVIDING ANY COGENT REASONS FOR SELECTING THE FOLLOWING COMPANIES: - VIMTA LABS LTD. - MAJESTIC RESEARCH SERVICES & SOLUTIONS LTD. - KILLICK AGENCIES & MKTG. LTD. ITA NO. 9247/DEL/2019 SA NO. 100/DEL/2020 MICHELIN INDIA TECHNOLOGY CENTER PVT. LTD. 4 3.5. HONBLE DRP HAS ERRED IN ACCEPTING CERTAIN COMPANIES PROPOSED BY THE LD. TPO AND REJECTING THE COMPARABLES INCLUDING ADDITIONALLY PROPOSED BY THE APPELLANT, WITHOUT GIVING COGNIZANCE TO THE FUNCTIO NS, ASSET AND RISK ANALYSIS AND MERELY RELYING UPON THE FINANCIAL RESULTS, AND EVEN DISREGARDING THE FUNDAMENTALS OF THE COMPARABILITY PRINCIPLES WHICH ARE PRESCRIBED UNDER RULE 10B(2), SUCH AS COMPARABILITY OF THE PRODUCTS SUPPLIED BY INDEPENDENT COMPANIES OR SERVICES PROVIDED BY THE INDEPENDENT COMPANIES. 3.6. THE HONBLE DRP / LD. TPO FAILED TO INCLUDE UNIMED DIAGNOSTICS PRIVATE LIMITED AFTER PERFORMING REASONABLE ACCURATE ADJUSTMENTS AS PRESCRIBED UNDER RULE 10B(4). 3.7 THE HONBLE DRP / LD. TPO HAS GROSSLY ERRED IN SUBJECTIVELY REJECTING NUTEK INDIA LIMITED AS A COMPARABLE BY CITING EXCEPTIONAL ECONOMIC CIRCUMSTANCES, WITHOUT GIVING DUE COGNIZANCE TO THE COMPLETE FACTS AND NATURE OF ACTIVITIES BEING PERFORMED BY NUTEK INDIA LIMITED DURING THE SUBJECT YEAR. GROUND NO. 4 - INCORRECT LEVY OF INTEREST UNDER SECTION 234A/ 234B OF THE ACT THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED BOTH IN LAW AND ON THE FACTS O F THE CASE IN LEVYING INTEREST UNDER SECTION 234A/ 23 4B OF THE ACT. GROUND NO. 5 - PENALTY PROCEEDINGS THAT ON THE FACT AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER 271(1)(C) OF THE ACT. ITA NO. 9247/DEL/2019 SA NO. 100/DEL/2020 MICHELIN INDIA TECHNOLOGY CENTER PVT. LTD. 5 THE TRANSFER PRICING GROUNDS HAVE NOT BEEN PRESSED . LEGAL AND PROFESSIONAL EXPENSES: 3. THE ASSESSING OFFICER FOLLOWING THE DIRECTIONS O F THE LD. DRP HAS DISALLOWED THE EXPENDITURE OF RS.13,53,59,6 48/- BEING THE AMOUNT PAID TO ABRD ARCHITECTS OF RS.69,37,450/ -, ACCENTURE SERVICES PVT. LTD. OF RS.14,31,97,068/-, HOK INTERNATIONAL LTD. OF RS.68,18,099/-, OPEN BUILDING RESEARCH SRL OF RS.71,37,026/-, PTK ARCHITECTS OF RS.20,23,2 00/-, ROMI KHOSLA DESIGN STUDIOS OF RS.43,07,847/-, WOODS BAGO T ARCHITECTS PC OF RS.94,81,10/- AND DIRECTOR GENERAL OF HARYANA UNDER THE HEAD LEGAL AND PROFESSIONAL EXPENSES OF RS.5,77,690/- BEING RELATED TO THE PROJECTS OF THE ASSESSEE, CONSIDERING THE SAME AS CAPITAL EXPENDITURE. THE AO HAS ALLOWED 25% DEPRECIATION ON THE INTANGIBLE ASSETS. THE CORE ISSUE: 4. THE ASSESSEE WAS SET-UP IN OCTOBER 2013 AND HAD PLANNED TO ESTABLISH A REGIONAL R&D CENTRE IN INDIA. FOR TH IS PURPOSE, IT PURCHASED 14 ACRE LAND AND SOUGHT CONVERSION OF SAM E FOR COMMERCIAL PURPOSES. ITS CUSTOMER ASKED THEM TO SET -UP A WORLD CLASS R&D FACILITY FOR WHICH IT INCURRED VARI OUS COST FOR THE PROJECT NAMED AS PROJECT CORBET. HOWEVER, DUE TO COMMERCIAL REASONS, THE HEAD QUARTER DECIDED TO ABANDON THE PR OJECT. AS THE CUSTOMER DID NOT WANT TO PROCEED FURTHER, THE ENTIRE COST WITH MARK-UP WAS CHARGED TO THEM BY THE ASSESSEE . THE HEAD QUARTERS ENTERED INTO CONTRACT WITH ACCENTURE GLOBA LLY FOR VARIOUS SERVICES LIKE STUDY OF CUSTOMER BEHAVIOR, P RODUCT COST STRUCTURE, COST MANAGEMENT, PROJECT MANAGEMENT AND TRACKING, ITA NO. 9247/DEL/2019 SA NO. 100/DEL/2020 MICHELIN INDIA TECHNOLOGY CENTER PVT. LTD. 6 SUPPLY CHAIN MODELING ETC. FOR INDIA PURPOSE, IT AS KED ASSESSEE TO ENTER SIMILAR AGREEMENT FOR ACCENTURE INDIA TO U NDERTAKE STUDY IN INDIA MARKET AND SHARE THE OUTCOME THEREO F WITH THEM. ACCORDINGLY, THE ASSESSEE ENTERED INTO SUB-CO NTRACT WITH ACCENTURE SERVICES PVT. LTD. FOR PROVISION OF MANAG EMENT CONSULTANCY SERVICES AND PAID AN AMOUNT OF RS.14.31 CRORES. 5. IT IS TO BE OBSERVED THAT THE ENTIRE COST HAS BEEN REIMBURSED BY THE PARENT COMPANY ALONG WITH MARK-UP . THUS, THE RECEIPTS HAVE BEEN DULY AND CORRECTLY SHOWN AS REVENUE RECEIPT BY THE ASSESSEE IN THE P&L ACCOUNT WHEREAS THE DEPARTMENT TREATED THE AMOUNT PAID TO ACCENTURE SER VICES PVT. LTD. AS CAPITAL EXPENDITURE. WHILE THE INCOME FOR THE SAME SERVICES ARE TREATED AS REVENUE RECEIPT, THE EXPEND ITURE ON THE SAME IS TREATED AS CAPITAL RECEIPT BY THE LD. DRP. IT IS ALSO NOT IN DISPUTE, THE ASSESSEE HAS ALSO RECEIVED MARK-UP CHARGES OF 10% WHICH HAS BEEN DULY OFFERED TO TAX. THUS, WE FI ND THAT THE REVENUE DEPARTMENT HAS MISDIRECTED ITSELF TO TREAT THIS EXPENDITURE AS CAPITAL EXPENDITURE. WHEN THE ENTIRE COSTS HAVE BEEN REIMBURSED TO THE ASSESSEE BY THE HEAD QUARTER S AND WHEN THE TP STUDY DID NOT FIND ANY REASON TO ADJUST THE RECEIPTS, THE CONTRARY TREATMENT GIVEN TO THE EXPEN DITURE INCURRED AS CAPITAL EXPENDITURE CANNOT BE HELD TO B E LEGALLY VALID. 6. HAVING INDISPUTABLY FOUND THAT ALL THE COSTS HAV E BEEN REIMBURSED WITH MARK-UP BY THE HEAD QUARTER AND DUL Y CONSIDERED AS REVENUE RECEIPT OF THE ASSESSEE IN TH E P&L ACCOUNT, WE HOLD THAT TREATING THE OTHER EXPENDITUR E INCURRED/PAID TO HOK INTERNATIONAL, OBR, PTK ARCHIT ECTS, RKD ITA NO. 9247/DEL/2019 SA NO. 100/DEL/2020 MICHELIN INDIA TECHNOLOGY CENTER PVT. LTD. 7 STUDIOS, WB ARCHITECTS AND FEES PAID TO CONVERSION OF LAND USE (CLU) AS CAPITAL EXPENDITURE CANNOT BE HELD TO BE LEGALLY TENABLE. 7. WHILE THE RECEIPTS ARE TREATED AS REVENUE IN NAT URE, THE ABOVE SAID EXPENDITURE IS TREATED AS CAPITAL IN NAT URE BY THE ASSESSING OFFICER WHICH IS AN ANTI-THESIS TO THE PR UDENT TAXATION PRINCIPLES. 8. OWING TO THE DISPOSAL OF THE APPEAL OF THE ASSES SEE, THE STAY APPLICATION NO. 100/DEL/2020 IS DISMISSED AS I NFRUCTUOUS. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED AND THE STAY APPLICATION OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 07/10/2021. SD/- SD/- (AMIT SHUKLA) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACC OUNTANT MEMBER DATED: 07/10/2021 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR