ACIT CORPORATE CIRCLE 5(1), CHENNAI V. REYNOLDS PENS INDIA P LTD., KANCHEEPURAM

ITTPA 41/CHNY/2019

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 8970 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 03-11-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 04-09-2022
• Assessment Year: 2007-2008
• Appeal Filed On: 19-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; TDS
• Section: 195; 250; 92CA

Judgement Text

आयकर अपीलीय अिधकरण, ‘डी’ ᭠यायपीठ, चे᳖ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI Įी वी द ु गा[ राव,ÛयाǓयक सदèय एवं ᮰ी जी. मंजुनाथ, लेखा सद᭭य के समᭃ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.: 41/Chny/2019 िनधाᭅरण वषᭅ / Assessment Year: 2007-08 Assistant Commissioner of Income Tax, Corporate Circle -5(1), Chennai – 34. v. M/s. Reynolds Pens India P Ltd., C-21, SIPCOT Indsutrial Park, Irungattukottai, Pennalur Post, Kanchipuram Dist. TN- 602 117. [PAN: AABCR-4412-R] (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮ कᳱ ओर से/Appellant by : Shri. D. Hema Bhupal, JCIT ᮧ᭜यथᱮ कᳱ ओर से/Respondent by : Ms. Sneha Garg, CA स ु नवाई कȧ तारȣख/Date of Hearing : 05.09.2022 घोषणा कȧ तारȣख/Date of Pronouncement : 04.11.2022 आदेश /O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: This appeal filed by the Revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-3, Chennai, dated 21.02.2019 and pertains to assessment year 2007-08. :-2-: IT(TP)A No: 41/Chny/2019 2. The Revenue has raised the following grounds of appeal: “1. The order of the Id CIT(A) is contrary to law and to the facts and circumstances of the case. 2.1 Whether the Ld. CIT (A) is correct in saying that the TPO has rejected the CPM without valid reasons when the assessee submitted CPM working only for invoices covering Rs 2,99,31,316 whereas the assessee's non AE export was Rs. 5,03,80,733. 2.2 Whether the Ld. CIT (A) is correct in holding that the CPM calculation is correct when the material, labour and overhead costs considered for each consignment/invoice was not supported by any documentary evidence. 2.3 Whether the Ld. CIT (A) is correct in saying that the assessee had submitted a detailed cost working during the assessment proceeding and shown 10% mark up for both related and unrelated parties without appreciating the fact the assessee had submitted two different working for the same party SIAB Tunisie in the submissions made on 03.08.2010 showing Rs. 0.06664as margin and 07.10.2010 showing Rs.0.03359 as margin per unit sold 2.4 Whether the Ld. CIT (A) is correct in not appreciating the fact that the assessee allotted different labour cost for the same party SIAB Tunisie in the submissions made on 03.08.2010 showing Rs 0.00770 as labour cost and on 07.10.2010 showing Rs 0.04074 as labour cost per unit sold. 2.5 The Ld. CIT (A) failed to appreciate that the per unit cost of different items of finished goods considered for valuation of closing stock (submitted by the assessee on 26.06.2014 before TPO in remand report proceedings) and per unit cost of goods sold (submitted on 07.10.2010 during assessment proceedings) for the CPM working did not match and therefore the assesee's assertion before CIT(A) that the same per unit cost, as was adopted for valuation of closing stock, was also adopted for the CPM working was factually incorrect. 2.6 Whether the Ld. CIT (A) is correct in holding that the TPO had accepted CPM in the AY 2008-09 and 2009-10 without verifying the facts from the records of those years which shows that the TPO applied TNMM though no adjustment was made as the assessee's :-3-: IT(TP)A No: 41/Chny/2019 margin in those years was higher than the margins of comparable companies 2.7 Whether the Ld. CIT (A) is correct in holding that CPM method is appropriate method in the case of the assessee in violation of Lummus Technology Heat Transfers B.V. Vs. Asst. DIT [2014] 42 taxmann.comll3/146 ITD 775 (Delhi- Trib.) when the data in respect of AE and non AE segments is neither workable nor reliable 3.1 Whether the Ld. CIT (A) is correct in holding that the TNMM at entity level is notappropriate method for the reason that the non-AE segment is predominant when the TPO made adjustment only to the extent of AE transaction when applying TNMM as there was no basis for preparation of AE and non AE segment 3.2 Whether the Ld. CIT (A) is correct in holding that the TNMM working based on two segment is correct whereas the assessee has three segments namely domestic non AE sales, Export AE sales and export non AE sales 3.3 Whether the Ld. CIT (A) is correct in relying on the revised TNMM submitted as rejoinder by the assessee to the remand report submitted by the TPO without giving opportunity to TPO to verify the correctness of the rejoinder in violation of R.46A of IT Rule 1962 3 .4 Whether the Ld. CIT (A) is correct in holding the revised TNMM working of profits correct, which was worked on single allocation key of number of units sold,to allocate all cost under the head "Other Expenses" amounting to Rs. 17,84,16,560, between AE and non AE segment while the expenditures are of different nature, like communication, travel and conveyance, insurance, rates and taxes etc. and without establishing any correlation between these costs and number of units sold 4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.” 3. The brief facts of the case are that the assessee, Reynolds Pens Pvt Ltd., is engaged in the business of :-4-: IT(TP)A No: 41/Chny/2019 manufacturing and sale of parts of writing instruments, stationery articles and their components including metallic tips for ball point pens. The assessee has filed its return of income for assessment year 2007-08 on 31.10.2007 admitting Nil income, after setting off brought forward unabsorbed depreciation. During the financial year relevant to assessment year 2007-08, the assessee had reported various international transactions with its Associate Enterprise (AE) including sale of manufactured goods, purchase of fixed asset, purchase of raw materials and payment of technical and management fees. The assessee had adopted cost plus method as most appropriate method and claimed that the transactions with its AE are at Arm’s length price (ALP). During the course of assessment proceedings, reference was made to Transfer Pricing Officer (TPO)u/s. 92CA of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) to determine ALP of international transactions of the assessee with its AE. The TPO vide their order passed u/s. 92CA(3) of the Act dated 28.10.2010 has made two adjustments i.e., one in respect to sale of manufactured goods to AE amounting to Rs. 8,25,66,962/- and second one is with respect to payment of technical and management fees of Rs. 1,07,09,068/-. The :-5-: IT(TP)A No: 41/Chny/2019 assessee carried the matter in appeal before the first appellant authority and the Ld. CIT(A) for the reasons stated in their appellant order dated 21.02.2019 deleted additions made by the AO towards TP adjustments on sale of manufactured goods and also payment of managerial services fee to its AE. Aggrieved by the CIT(A) order, the Revenue is in appeal before us. 4. The first issue that came up for our consideration from ground no. 2.1 to 2.7 is deletion to TP adjustment towards sale of manufactured goods to AE. The assessee has adopted cost plus method to bench mark sale of manufactured goods to its AE. The assessee had charged a markup of 10% over direct and indirect cost of production of goods in respect of transactions with AE as well as export transactions with unrelated parties. The TPO has rejected the cost plus method adopted by the assessee on the ground that the assessee could not produce necessary details of third party AE export sales. Therefore, adopted Transactional Net Margin Method (TNMM) as most appropriate method and made TP adjustments of Rs. 8,25,66,962/-. :-6-: IT(TP)A No: 41/Chny/2019 5. The Ld. DR submitted that the Ld. CIT(A) has erred in deleting additions made by the AO towards sale of manufactured goods to AE without appreciating fact that the assessee is unable to furnish necessary details of third party export sales to compare markup charged to AE as well as non- AE. The Ld. DR further submitted that no doubt the assessee has adopted uniform 10% markup on direct and indirect cost of goods manufactured to AE as well as non-AE sales. However, the TPO has rejected the CPM method only when assessee could not able to furnish necessary evidence with regard to sales made to non-AE segment. The CIT(A) without appreciating above facts simply deleted additions made by the AO on the ground that the assessee has not justified adoption of cost plus method and also with necessary evidence. 6. The Ld. Counsel for the assessee supporting the order of the CIT(A) submitted that first of all there is no reason for the TPO to adopt TNMM in place of CPM method selected by the assessee. Further, the assessee has justified CPM with internal comparables where it has charged 10% markup on cost to AE as well as non-AE. The assessee is consistently following CPM as most appropriate method and further, in :-7-: IT(TP)A No: 41/Chny/2019 subsequent years, the TPO although adopted TNMM for bench marking AE transactions, but did not make any additions because the margin of the assessee was much higher than the comparable margin. Therefore, once the assessee has consistently following CPM method, to benchmark AE transactions, there is no reason for the TPO to adopt different method. In this regard, she relied upon the decision of Hon’ble Supreme Court in the case of Radhasoami Satsang, Saomi vs CIT, [1992] 60 Taxmann248 (SC). 7. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The assessee is in the business of manufacturing of writing instruments and stationery articles, has entered into various international transactions with its AE including sale of manufactured goods. The assessee has bench marked AE transactions with CPM method as most appropriate method. The assessee has adopted cost plus 10% mark up on AE sales as well as, non AE export sales and claimed to be tested party. The TPO rejected CPM method and has adopted TNMM as most appropriate method to determine ALP of international transactions with AE, only on the ground that the assessee :-8-: IT(TP)A No: 41/Chny/2019 could not justify cost plus method with necessary evidence with regard to non-AE export sales. We find that the assessee has consistently following CPM method as most appropriate method and has charged 10% markup on direct and indirect cost of goods manufactured to AE sales as well as non-AE export sales. The assessee had also furnished necessary workings to arrive at margin earned from AE sales and non-AE sales. Although, the TPO observed that no supporting evidence was filed in support of non-AE export sales, but during the appellant proceedings, the assessee has filed complete workings and evidence and the same has been referred to TPO in remand proceedings. The CIT(A), after considering evidences filed by the assessee and also taken note of remand report of the AO observed that the assessee has rightly adopted CPM method to benchmark AE transactions and has also furnished necessary evidences. Therefore, we are of the considered view that the TPO has completely erred in changing method followed by the assessee to benchmark AE transactions with CPM method as most appropriate method to TNMM, only on the ground of lower margins earned in the impugned assessment year. Further, we noted that in subsequent assessment years, the assessee has followed once :-9-: IT(TP)A No: 41/Chny/2019 again, CPM method and TPO has disputed method followed by the assessee and adopted TNMM as most appropriate method, but no adjustments has been suggested, because margin of the assessee was higher, when compared to the comparables margin. From the above, it is very clear that when assessee is consistently following CPM method to benchmark AE transactions, then there is no reason for the TPO to change method to TNMM method, only for the reason that there is less profit before tax for the impugned assessment years. In our considered view, what is to be seen to change a particular method is a nature of business of the assessee and clause of transactions with its AE, but not margin earned from AE sales. In this case, although, the assessee is following CPM method to bench mark transactions, the TPO changed to TNMM without assigning appropriate reasons. Further, this view is supported by the decision of the Hon’ble Supreme Court in the case of Radhasoami Satsang, Saomi vs CIT, (supra), where the Hon’ble Apex Court clearly held that although res-judicata is strictly not applicable to income-tax proceedings, but rule of consistency needs to be adhered unless circumstance leads to change in method to determine taxability of particular receipt or income. This view is further fortified by the decision of :-10-: IT(TP)A No: 41/Chny/2019 ITAT, Chennai Benches in the case of Bonfigioli Transmissions (P) Ltd vs DCIT [2019] 101 Taxmann.com 42 (Chennai), and also in the case of Honeywell Electrical Devices & Systems India Ltd vs ACIT [2014] 42 Taxmann.com 223 (Chennai). Therefore, we are of the considered view that ld. CIT(A) rightly deleted additions made towards TP adjustments on sale of manufactured goods to AE and thus, we are inclined to upheld the findings of the CIT(A) and reject the ground taken by the Revenue. 8. The next issue that came up for our consideration from ground no. 3.1 to 3.4 of Revenue appeal is deletion of addition made towards payment of technical and management fees to AE. The assessee had paid technical and management fees to AE amounting to Rs. 1,07,09,068/- on the basis of agreement entered into with Reynolds, France on 01.10.1999. The assessee has paid technical fees of Rs. 16,39,834/- and management fees of Rs. 90,69,234/-. The assessee has deducted applicable TDS as per provisions of section 195 of the Act, before remitting sum to non-resident. The TPO disregarded agreement between the parties, and observed that agreement and payment after deducting TDS is not :-11-: IT(TP)A No: 41/Chny/2019 sufficient to substantiate the need for payment of technical and management fees. According to the TPO, the assessee could not demonstrate need for payment of technical and management fees to its AE. Therefore, rejected arguments of the assessee and made additions towards technical and management fees amounting to Rs. 1,07,09,068/-. 9. The Ld. DR submitted that the Ld. CIT(A) has erred in deleting additions made towards technical and management fees without appreciating fact that the assessee could not explain need for making payment to AE for availing technical and managerial services. The Ld. DR further submitted that the agreement between the parties and payment made through proper channel is not sufficient and what is required to be proved is whether any services which commensurate with payment is provided by the AE or not. Since, the assessee could not furnish any evidence to demonstrate services rendered by the AE, the AO has rightly disallowed technical and management fees, but CIT(A) without appreciating said facts deleted additions made by the AO. 10. The Ld. Counsel for the assessee supporting the order of the CIT(A) submitted that the assessee has filed various :-12-: IT(TP)A No: 41/Chny/2019 evidence including agreement with Reynolds France for rendering technical and managerial services. The assessee has also filed copies of invoices raised by AE for rendering services. The assessee has remitted amount after deducting TDS applicable as per law. Therefore, there is no reason for the TPO to doubt genuineness of payments. Further, the TPO/AO cannot question need for payment of technical and management fees and it is for the businessman to decide whether any services are required to be procured from AE or not. In this case, the assesseee has availed services which are technical in nature and also availed managerial services for which it has paid remuneration to its AE. The CIT(A), after considering relevant facts rightly deleted addition made by the AO and therefore, their order should be upheld. 11. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. There is no dispute with regard to the fact that the assessee had entered into a technical and managerial services agreement with Reynolds France w.e.f. 01.10.1999, a copy of which is filed before the TPO as well as CIT(A). As per agreement between the parties, Reynolds France has provided :-13-: IT(TP)A No: 41/Chny/2019 bunch of services which includes technical and managerial services to the assessee. If you go through the scope of agreement between the parties, it specifies type of services to be provided by the AE, and to support this assessee has furnished copies of invoices raised by Reynolds France, which specifies the kind of services availed by the assessee. The assessee had also filed necessary proof of payment after deducting applicable TDS as per provisions of section 195 of the Act. Therefore, we are of the considered view that the assessee has filed sufficient evidence to justify payment of technical and management fees and thus, we are of the considered view that the TPO has completely erred in making adjustment towards technical and management fees, only on the ground that the assessee could not explain need for making said payments. In our considered view, whether there is a need for availing particular service or not is exclusive domain of the assessee, and the TPO/AO does not have any role in questioning need for payments of technical and management fees. This view is fortified by the decision of the Hon’ble Delhi High Court in the case of Cushman and Wakefield (India) Pvt Ltd., vs CIT (2015) 233 Taxmann 250 (Delhi), it has been clearly held that TPO cannot question the :-14-: IT(TP)A No: 41/Chny/2019 wisdom of the businessman in availing services and further it is an exclusive domain of the assessee to avail particular service from its AE. In this case, the TPO never disputed fact that the assessee has furnished certain evidences which proves service rendered by AE. Therefore, in our considered view, the TPO has completely erred in making adjustments towards technical and management fees. The CIT(A) after considering relevant facts has rightly deleted additions made by the AO and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue. 12. In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the court on 04 th November, 2022 at Chennai. Sd/- (वी दुगाᭅ राव) (V. DURGA RAO) ÛयाǓयकसदèय/Judicial Member Sd/- (जी. मंजुनाथ) (G. MANJUNATHA) लेखासदèय/Accountant Member चे᳖ई/Chennai, ᳰदनांक/Dated: 04 th November, 2022 JPV आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy to: 1. अपीलाथᱮ/Appellant 2. ᮧ᭜यथᱮ/Respondent 3. आयकर आयुᲦ (अपील)/CIT(A) 4. आयकर आयुᲦ/CIT 5. िवभागीय ᮧितिनिध/DR 6. गाडᭅ फाईल/GF