Appeal details
Counselvise Citation
[NaN] 107 COUNSELVISE.COM (IT) 1936 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
7 year(s) 6 month(s) 21 day(s)
Appellant
Respondent
Appeal Type
Income Tax (Transfer Pricing) Appeal
Pronouncement Date
03-12-2021
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
B
Assessment Year
2009-2010
Appeal Filed On
12-05-2014
Judgement Text
IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “B’’ BENCH: BANGALORE BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No.330/Bang/2014 Assessment Year: 2009-10 M/s. SKF Engineering and Lubrication India Pvt. Ltd. (Previously known as SKF Engineering and Lubrication India Ltd. – as successor to SKF Technologies (India) Pvt. Ltd. pursuant to the scheme of amalgamation between SKF Technologies (India) Pvt. Ltd. and Lincoin Helios (India) Ltd.) 249/250, Bommasandra Industrial Area Phase 3, Hosur Road Bangalore 560 099 PAN NO :AAACL2061P Vs. Deputy Commissioner of Income-tax Circle-12(3) Bangalore APPELLANT RESPONDENT Appellant by : Shri K.R. Vasudevan, A.R. Respondent by : Shri Muzaffar Hussain, D.R. Date of Hearing : 07.10.2021 Date of Pronouncement : 03.12.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: The assessee has filed this appeal challenging the assessment order dated 29.1.2014 passed by the A.O. for assessment year 2009-10 in pursuance of directions given by Ld. Dispute Resolution Panel (DRP). IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 2 of 14 2. The assessee is engaged in the business of manufacture and sale of oil seals. It is a subsidiary of SKF Forvaltning AB Sweden. The assessee had entered into international transactions with its associated enterprises (AEs) during the year under consideration. The assessee furnished segmental details for manufacturing activity and trading activity. The TPO accepted international transactions relating to trading activity to be at arms length. In respect of manufacturing activity, he made transfer pricing adjustment of Rs.7,28,39,511/-. 3. The assessee had also made payment of Rs.5.63 crores to its AEs for intra-group services. It was noticed that the expenses in respect of intra-group services were allocated proportionately to various companies with a markup of 5% on cost. The associated enterprise named SKF Data services AB has acted as centralized facilitator. During the year under consideration, the assessee has paid a sum of Rs.3,63,56,935/- to its AEs for group IT charges and group service fee. The TPO determined the ALP of above said intra- group services as NIL. Accordingly, he made transfer pricing adjustment of Rs.3.63 crores in respect of intra-group services. 4. The AO issued draft assessment order making addition of T.P adjustments referred above. Besides, the AO also made additions on account of disallowance of product development expenditure, disallowance of provision for customer claims, disallowance of bad debts. The Ld. DRP directed the TPO to examine the working of profit while computing adjustment in respect of manufacturing segment. With regard to TP adjustment made in respect of intra- group services, the Ld. DRP upheld the TP adjustment made. The Ld DRP confirmed the additions in respect of disallowance of product development expenditure, disallowance of provision for IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 3 of 14 customer claims, disallowance of bad debts. The A.O. passed the final assessment order determining total income of the assessee at Rs.17.40 crores. Aggrieved, the assessee has filed this appeal before us. 5. The assessee has filed revised grounds of appeal. At the time of hearing, the Ld. A.R. advanced his arguments on the following grounds urged in respect of “Transfer pricing adjustment” in the revised grounds of appeal:- “v) The Ld. AO/ Hon’ble Panel has erred in disregarding the adjustment made towards underutilization of capacity; vi) The Ld. AO/Hon’ble Panel has erred in disregarding the net margin on cost of comparable companies to be 8.16% as against 9.10% as computed by the TPO; vii) The Ld. AO/ Hon’ble Panel has erred in not providing the adjustment towards the difference in working capital position of the appellant and the comparable companies; viii) The Ld. AO/ Hon’ble Panel has erred in not restricting the transfer pricing adjustment to the sales made to Associated Enterprises (AEs); ix) The Ld. AO/Hon’ble Panel has erred in treating the forex gain as forex loss and including the same as part of the cost base to arrive at arm’s length price and thereby erred in computing the net margin on cost of the appellant at -5.04% for the financial year ended March 31, 2009; x) The Ld AO/Hon'ble Panel has erred in failing to appreciate that the group IT/group Services are interlinked with the primary activities of the appellant. Therefore, the aggregation of transactions with the primary activities for the purpose of application of TNMM is justified. xi) The Ld AO/Hon’ble Panel has erred in accepting the arm’s length price of the payment of Group IT service fee as ‘Nil’; xii) The Ld AO/Hon’ble Panel has erred in not acknowledging the evidences produced by the appellant with respect to the receipt of services and benefits derived by the appellant.” 6. The assessee has raised certain additional grounds in ground numbers I(xv) to I(xvii) contending that IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 4 of 14 (a) the ALP of intra-group services, having been taken as NIL, it should have been excluded from the operating expenditure while computing margin of manufacturing segment. (b) the amount disallowed by the AO should be eliminated while computing margin of the assessee, as the same would result in double disallowance. (c) adjustment on account of difference in additional cost of import should have been granted. 7. The corporate grounds urged by the assessee relates to the following 3 issues: - a) Disallowance of product development expenditure b) Disallowance of provision for customer claims c) Disallowance of bad debts. 8. The assessee has filed additional grounds questioning the validity of assessment order on the reasoning that the AO has passed the order not following the directions of Ld DRP and the it vitiates the assessment order. However, the Ld A.R did not press the same at the time of hearing. Accordingly, the said additional grounds are dismissed as not pressed. 9. We shall first take up the addition made towards transfer pricing adjustment. In ground No.1(v), the assessee seeks adjustment for “under utilization capacity” for manufacturing segment. The Ld. A.R. submitted that the assessee has utilised only 41% of its installed capacity during the year under consideration. Hence the assessee claimed adjustment for “under utilisation of capacity” before TPO, the same was not allowed by both TPO & DRP. The Ld. A.R. submitted that the issue of capacity utilisation adjustment has since been adjudicated by the Tribunal in the assessee’s own case in assessment year 2004-05, wherein IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 5 of 14 the Tribunal has held that there is merit in the prayer of the assessee and accordingly remitted the issue to the file of TPO for examining the same. 10. We heard Ld. D.R. on this issue and perused the record. We notice that the issue relating to adjustment towards Under utilisation of the capacity has been considered by the coordinate bench in the assessee’s own case relating to assessment year 2004- 05 in IT(TP)A No.341/Bang/2014 dated 15.2.2019. The Tribunal, following the decision rendered by Delhi bench of Tribunal in the case of Class India Pvt. Ltd. (2015) 62 Taxmann.com 173, has held that there is merit in the prayer of the assessee seeking adjustment towards difference in the level of capacity utilisation. We notice that the capacity utilisation achieved by the assessee in the year relevant to the assessment year 2004-05 was 42%, while the capacity achieved by the comparables was around 70%. During the year under consideration, the Ld. A.R. submitted that the assessee has achieved capacity utilisation of 41% only. Though the Ld. A.R. did not mention about the capacity utilisation achieved by the comparable companies, yet following the decision rendered by the coordinate bench in assessment year 2004-05, we are of the view that the assessee should be allowed capacity utilisation adjustment. Accordingly, we restore this issue to the file of AO/TPO for examining the claim of the assessee. 11. The next issue urged in ground no. I(vi) in respect of transfer pricing adjustment in manufacturing segment relates to the error in computing net margin on cost of comparable companies. The Ld. A.R. submitted that the TPO has computed net margin on cost of comparables as 8.16% while the actual margin works out to 9.10%. IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 6 of 14 The ld. A.R. submitted that the assessee has raised this issue before Ld. DRP but the DRP did not adjudicate the same. 12. We heard Ld. D.R. on this issue. Since this claim of the assessee requires verification, we restore this issue to the file of AO/TPO to examine this claim of the assessee. 13. The next issue urged in ground No. I(vii) in respect of transfer pricing adjustment made in manufacturing segment relates to claim for working capital adjustment. The Ld. A.R. submitted that the TPO did not allow working capital adjustment and the Ld. DRP did not render its decision on this claim. Accordingly, he prayed that the AO/TPO may be directed to allow working capital adjustment on actual basis. 14. We heard Ld.D.R. on this issue. There should not be any dispute that the working capital adjustment should be allowed if the working capital levels of comparable companies differ from that of the assessee. The claim of the assessee gets support from the decision rendered by the co-ordinate bench in the case of Huawei Technologies India P Ltd (2019)(101 taxmann.com 313)(Bang.). Accordingly, we restore this issue to the file of the AO/TPO with the direction to allow working capital adjustment on actual basis. 15. The next issue urged in ground No.1(viii) in respect of transfer pricing adjustment made in manufacturing segment relates to the action of TPO in not restricting the transfer pricing adjustment to the sales made to Associated Enterprises. The Ld A.R. submitted that the assessee has raised this issue before Ld. DRP, but the Ld. DRP has rejected the contentions of the assessee by observing that the basic structure of the law is to benchmark all IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 7 of 14 international transactions at entity level as per sec. 92(1). The Ld. A.R. submitted that it is a settled principle that the TP adjustment should be restricted only to international transaction. 16. We heard Ld. D.R. on this issue and perused the record. There should not be any doubt that the object of Transfer pricing study is to determine Arms Length price of international transactions. Under TNMM method the Profit level indicator may be determined at entity level, but the Transfer pricing adjustment is required to be restricted to only international transactions only. We find support for this proposition from the decision rendered by the co-ordinate bench in the case of IKA India (P) Ltd vs. ACIT (2019)(101 taxmann.com 276)(Banglore Trib.) Accordingly, we restore this issue to the file of AO/TPO with the direction to restrict the TP adjustment to international transactions entered with AEs only. 17. The next issue urged in ground No.1(ix) in respect of transfer pricing adjustment made in manufacturing segment relates to error in treating Forex gain as Forex loss and including the same as part of cost. The ld A.R. submitted that this mistake was pointed out before Ld. DRP and Ld. DRP also directed the TPO to verify the claim of the assessee and correct the figures. However, the TPO has not complied with directions so given by Ld DRP. 18. We heard Ld. D.R. on this issue and perused the record. The mistake pointed out by Ld. A.R. is a computational mistake, which requires to be corrected in order to arrive at correct margin. We notice that the Ld. DRP has already directed the TPO to verify the claim of the assessee and correct the mistakes. It is unfortunate that the TPO has not followed the directions so given IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 8 of 14 by Ld. DRP. In any case, the claim of the assessee requires verification at the end of the TPO, so that the mistake could be corrected. Accordingly, we restore this issue to his file for examining the claim of the assessee and to take appropriate corrective measures. 19. The next issue urged in ground No.1(x) to 1(xiii) relates to transfer pricing adjustment made in respect of intra-group services. The Ld. A.R. submitted that an identical adjustment made by the TPO in assessment year 2006-07 & 2007-08 in the assessee’s own case (IT TPA No.1481/Bang/2010 & IT (TP)A No.1339/Bang/2011 - Order dated 31.3.2016) has been considered by the Tribunal and the issue was restored to the file of AO/TPO with a direction to examine this issue afresh by considering the evidences that may be produced by the assessee to prove the receipt of benefit from AEs in respect of payment made. It was also held that the assessee is duty bound to bench mark such services by comparing it with uncontrolled transaction by independent enterprises where similar services are received. The observations made by the Tribunal in assessment years 2006-07 & 2007-08 are extracted below:- “19. In our opinion, there is no doubt that assessee has to establish receipt of benefits on account of services rendered by its AEs and these were compensated on a level comparable to payments that would have been made if similar services were received from unrelated parties or in an uncontrolled transaction. At the same time, it is not open for the TPO to consider that there was no benefit whatever received by the assessee without verifying the documentation submitted by the assessee. As per the assessee, it had evidence to show that there was considerable correspondence between the AE and itself which could amply prove rendering of services by the AEs to the assessee. The facts and circumstances of the case as described above show that the question of bench-marking the value of such services requires a fresh look by the AO/TPO. We therefore set aside the orders of the AO/TPO and remit the issues relating to alleged payments for technical fees and alleged reimbursement of group IT expenditure to the AEs back to the file of the AO/TPO for consideration afresh IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 9 of 14 in accordance with law. Assessee is free to produce any evidence to show that services were indeed received by it from the AE. Assessee is also duty bound to bench-mark such services by comparing it with uncontrolled transactions by independent enterprises where similar services are received. Accordingly, ground 1 of the assessee for both years is treated as allowed.” 20. In ground I(x), the assessee contends that the fee paid for IT/group services are interlinked with the primary activities of the assessee and hence it should have been aggregated with other transactions, instead of bench marking the same separately. In additional ground I(xv), the assessee submits that if the ALP of Group IT /group services are determined as NIL, then the same should be excluded from the cost while computing margin of manufacturing segment under TNM method. 21. We notice that the above said claims relating to payment made for group IT/group services are interlinked with each other. We noticed that the Tribunal, in assessment year 2006-07 & 2007- 08, has restored the issue of determining ALP of group IT/group services to the file of AO/TPO. In our view, the above said alterntive contentions of the assessee also deserves to be examined. Accordingly, we restore all the issues relating to payment madd towards IT/group services to the file of AO/TPO for examining them afresh. 22. The assessee has raised certain other additional grounds relating to Transfer pricing adjustment in ground numbers I(xvi) and I(xvii). The contention urged in I(xvi) is that the amount disallowed by the AO, viz., Product development expenses, provision for customer claims should be excluded from the cost while computing margin of the assessee. We heard the parties on this issue. First of all, the entire exercise of determination of ALP and IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 10 of 14 consequent transfer pricing adjustment are the result of legal fiction enacted in Income tax Act. There should not be any doubt that it is altogether a different exercise unconnected with the provisions relating to allowance or disallowance of expenses. Net margins of the assessee as well as comparable companies are computed under TNM method on the basis of book results without making any adjustment as prescribed in sec.28 to 44 of the Act (both in the hands of the assessee as well as in the hands of comparable companies.) Hence these contentions of the assessee are untenable and hence liable to be rejected. 23. The next claim urged in I(xvii) is ‘adjustment for customs duty’ due to difference in the quantum of imported goods purchased by assessee vis-à-vis comparable companies. In our view, the assessee, apart from rising this ground, has not demonstrated as to how the customs duty paid by it has materially affected its comparability with comparable companies. In the absence of relevant details, this claim of the assessee is also liable to be deleted. 24. We shall not deal with corporate issues urged by the assessee. The first issue relates to disallowance of Product Development Expenses of Rs.41,57,479/-. (net amount of product development expenses less depreciation allowed by AO). The AO noticed that the assessee has claimed a sum of Rs.55,43,305/- as product development expenses. From the details furnished, the AO noticed that it was incurred for new parts development, improvement in existing parts and prototype development expenses as per customer’s requirements. The nature of expenses consisted of purchase of mold inserts, mold accessories, adaptors & fixtures holding plates, chemicals, compound, product and compound testing charges and fixtures, metal stamping development charges IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 11 of 14 etc. The AO, accordingly, took the view that the above expenses have resulted in evolution of distinct technology, which could be registered as new patent or know how, i.e., an intangible asset. Hence the AO took these expenses as capital in nature and accordingly disallowed the claim. However, he allowed depreciation @ 25% and accordingly disallowed net amount of Rs.41,57,479/-. The ld DRP also confirmed the same. 25. The Ld A.R submitted that the product development expenses are routine expenses incurred in the normal course of business to meet the requirements of customers and it did not create any intangible assets as presumed by the AO. The assessee has also not registered any patent or know how, as assumed by the AO. Further, the expenses were incurred on purchase of moulds etc., which are incurred in the normal course of business. Accordingly, he submitted that there is no reason to treat this expenditure as capital in nature. 26. We heard Ld D.R and perused the record. We find merit in the contentions of the Ld A.R. We notice that the AO has only assumed that these expenses would give rise to creation of any patent or know-how and accordingly took the view that these expenses are capital in nature, i.e., there is no material with the AO to show that these expenses have resulted in creation of any patent or know how as assumed by him. Hence, we are of the view that the AO has disallowed this claim of the assessee on surmises and conjectures only. Accordingly, we direct the AO to delete this disallowance. 27. The next issue relates to disallowance of provision for customer claims. The assessee had claimed a sum of Rs.12,87,871/- as deduction towards “Provision for customer IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 12 of 14 claims”. The AO took the view that this expense has not crystallized and hence not allowable. The Ld DRP directed the AO as under:- “.... In the present case, the AO has made the disallowance simply on the ground of the provision being a contingent liability. This is not adequate. We direct him to examine the expenditure with particular reference to the conditions laid down in the Rotork India case and if it is found that the provision is made on a consistent and scientific basis, the assessee manufactures multiple products and non utilized portions of earlier years are either written back or reduced from the new provisions etc, the expenditure should be allowed u/s 37(1). We dispose of this objection with the above direction.” 28. The Ld A.R submitted that the AO has not followed the directions given by Ld DRP and accordingly retained the addition without making any further examination as per the decision of Hon'ble Supreme Court in the case of Rotork Controls India. 29. We heard Ld D.R and perused the record. It is unfortunate that the AO did not follow the directions given by Ld DRP. Accordingly, we restore this issue to the file of the AO with the direction to examine the claim of the assessee in accordance with the principles laid down by Hon'ble Supreme Court in the case of Rotork Controls India case. 30. The last issue relates to the disallowance of bad debts claim. The assessee had claimed a sum of Rs.21,45,150/- as deduction towards “Provision for bad doubtful debts”. The AO noticed that the assessee had disallowed a sum of Rs.19,57,793/- only in the IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 13 of 14 computation of income. Hence the AO disallowed the difference amount of Rs.1,87,357/-. Before Ld DRP, the assessee submitted that the above said difference represents amount of bad debt actually written off by the assessee. Accordingly, the Ld DRP directed the AO to re-examine this issue with reference to the books of account. Ld DRP also directed to allow the deduction, if the bad debts have actually been written off. 31. The Ld A.R submitted that the AO did not comply with the directions given by Ld DRP. We heard Ld DR and perused the record. We deprecate the careless approach of the AO in not complying with the directions of Ld DRP, since the AO is required to mandatorily pass assessment order in conformity with the directions given by Ld DRP. Accordingly, we restore this issue to the file of AO with the direction to strictly follow the directions given by Ld DRP. 32. In the result, the appeal of the assessee is treated as partly allowed for statistical purposes. Order pronounced in the open court on 3 rd Dec, 2021 Sd/- (Beena Pillai) Judicial Member Sd/- (B.R. Baskaran) Accountant Member Bangalore, Dated 3 rd Dec, 2021. VG/SPS IT(TP)A No.330/Bang/2014 M/s. SKF Engineering & Lubrication India Pvt. Ltd., Bangalore Page 14 of 14 Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.
