HOWDEN SOLYVENT (INDIA) PRIVATE LIMITED, CHENNAI V. ITO,CORP WARD 2(3), CHENNAI

ITTPA 46/CHNY/2022

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9614 (ITAT-CHENNAI)
• Duration Of Justice: 1 month(s) 18 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 27-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 17-10-2022
• Assessment Year: 2018-2019
• Appeal Filed On: 08-09-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained cash credit; Transfer pricing; International transaction
• Section: 68; 144C

Judgement Text

आयकर अपीलीय अिधकरण ‘डी’ ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI माननीय ,ी महावीर िसंह, उपा23 एवं माननीय ,ी मनोज कु मार अ8वाल ,लेखा सद; के सम3। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./ IT(TP) A No.46/Chny/2022 (िनधाCरण वषC / Asse ssment Year: 2018-19) & े यािचका सं. / S.A No.63/Chny/2022 (arising out of IT(TP)A No.46/Chny/2022) (Assessment Year: 2018-19) Howden Solyvent (India) Pvt. Ltd. 147, Poonamalee High Road, Numbal Village, Kancheepuram D.T., Chennai – 600 077. बनाम / Vs . ITO Corporate Ward-2(3), Chennai. थायी लेखा सं. /जीआइ आर सं. /P AN / G I R No . AA AC F - 6153 -G (अपीलाथ /Appellant) : ( थ / Respondent) अपीलाथ की ओरसे/ Appellant by : Shri Sriram Seshadhri (CA)-Ld. AR थ की ओरसे/Respondent by : Dr. S. Palanikumar (CIT) –Ld. DR सुनवाई की तारीख/ Da te of He a rin g : 18-10-2022 घोषणा की तारीख /Date of Pronouncement : 28-10-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2018-19 arises out of final assessment order dated 28-07-2022 passed by Ld. Assessing Officer, Assessment Unit (AO) pursuant to the directions of Learned Dispute Resolution Panel-2, Bengaluru [DRP] u/s. 144C(5) of the Act dated 10-06-2022. The assessee carried out certain IT(TP)A No.46/Chny/2022 - 2 - international transactions with its Associated Enterprises (AE) which were subjected to determination of Arm’s Length Price (ALP) before Ld. Transfer Pricing Officer-2(1), Chennai (TPO) vide order dated 30- 07-2021. Incorporating the proposed adjustment, draft assessment order was passed by Ld. AO on 27-09-2021 which was subjected to further objections before Ld. DRP. Subsequently, final assessment order was passed by Ld. AO pursuant to the directions of Ld. DRP which is in further appeal before us. The grounds raised by the assessee read as under: - 1.That on the facts and in the circumstances of the case, the order passed by the ITO., National e- Assessment Centre, Kolkata (hereinafter referred to as Learned A.O) u/s.143(3) r.w.s 144C of the I.T Act, 1961 is erroneous on facts and bad in law. 2.1 That on the facts and in the circumstances of the case, the Learned A.O erred in making addition of undisclosed income being duty draw back received amounting to Rs.14,57,052/- in the assessment order passed u/s.143(3) r.w.s. 144C of the Act when no such addition was made in the draft assessment order. 2.2 That on the facts and in the circumstances of the case, the Learned A.O erred in making addition of duty draw back received by the appellant when the same was already credited to the profit & loss account and was offered to tax by the appellant, thereby leading to double addition of income. 3.1 That on the facts and in the circumstances of the case, the Learned DRP and learned A.O erred in adding back amount of Rs.35,00,00,000/- being share capital money received from Howden International Holdings B.V., parent company of the appellant as unexplained cash credit u/s.68 of the Act. 3.2 That on the facts and circumstances of the case, the Ld. DRP and the Ld. AO erred in not considering the documentary evidences furnished by the appellant in relation to the issue of share capital to establish the identity and genuineness of the transaction. 3.3 That on the facts and circumstances of the case, the Ld. DRP and the Ld. AO failed to appreciate that the provisions of section 68 of the Act is not applicable in case where the sum credited consist of share capital received by a company from a non-resident. 4. That on the facts and in the circumstances of the case, the Ld. AO erred in charging interest u/s 234B amounting to Rs.13,88,50,400/-. 5 That on the facts and circumstances of the case and in law, the Ld. AO and the Learned Transfer Pricing Officer (hereinafter referred to as 'Ld. TPO') have erred in making upward transfer pricing adjustment in relation to the international transaction of sale of goods to AEs and thereby enhancing the income of the Assessee by Rs. 2,12,98,510. 6.That on the facts and circumstances of the case and in law, the Ld. AO and the Ld. TPO have grossly erred in: 6.1. disregarding the analysis performed by the Assessee in Transfer Pricing Study Report (TPSR) in relation to the said international transaction and thereby conducting a fresh comparability analysis IT(TP)A No.46/Chny/2022 - 3 - 6.2. not considering cost plus method (CPM) as the most appropriate method (MAM) as per the TPSR and thereby selecting transactional net margin method (TNMM) as the MAM without providing any cogent reasons for the same; 6.3. disregarding the segmental profitability computed by the Assessee for the transaction of sales of goods and instead considering an entity level margin, thereby not appreciating that law provides for use of transactional level data to benchmark an international transaction. 6.4. not appreciating the fact that transaction of sale of goods only constitute 6.57 percentage of overall revenue of the Assessee and hence an entity level analysis will mostly include third party sales and expenses which are not subject to transfer pricing laws; 7 Without prejudice to the above grounds, the Ld. TPO has not provided for any risk adjustment considering that the Assessee is not exposed to market risk and credit risk in relation to the said international transaction of export of goods to AE, compared to the comparable companies. 8 That the appellant craves leave to add, amend, modify, rescind, supplement, or alter any of the grounds stated here-in-above, either before or at the time of hearing of this appeal. It was admitted position before us that facts and issues in this year are substantially the same as in AY 2017-18 and adjudication for that year would apply to this year also. The assessee’s appeal for AY 2017-18 has separately been disposed-off by us vide IT(TP)A No.12/Chny/2022 on 26-10-2022. The Ld. AR placed on record issue-wise chart. Having considered the same, the appeal is disposed-off as under. 2. The assessee company being resident corporate assessee is stated to be engaged in manufacturing of industrial fans. The product range of the company includes adjustable pitch axial fans, reciprocating compressors, mining fans, centrifugal fans, sinter plant fans and various ventilation systems. Ground No.1 and 8 is general in nature 3. Ground Nos. 2.1 to 2.2: Addition of Duty Drawback This addition has been made in final assessment order. The assessee received duty drawback of Rs.14.57 Lacs which was accounted as export benefits under the head ‘other operating income’ under note no. IT(TP)A No.46/Chny/2022 - 4 - 15 (revenue from operations) in the Profit & Loss Account. However, Ld. AO added the same on the ground that no such income was shown in the Profit & Loss Account. The Ld. AR has submitted that this amount has duly been offered to tax which may be verified by Ld. AO. Considering the same, we direct Ld. AO to verify that this amount has been credited in Profit & Loss Account and offered to tax. If so, the impugned addition would stand deleted. The grounds thus raised stand allowed for statistical purposes. 4. Ground Nos.3.1 to 3.3 – Addition u/s 68 for Share Capital The assessee received share capital of Rs.35 Crores from its holding company. In support the assessee filed various documentary evidences which were not appreciated by lower authorities and the amount of share capital was added as unexplained cash credit u/s 68. Aggrieved, the assessee is in further appeal before us. We find that this issue has been restored back by us to Ld. AO for AY 2017-18 for fresh adjudication with a direction to the assessee to substantiate its stand. Similar directions are issued in this year also. The grounds thus raised stand allowed for statistical purposes. 5. Ground No.4 – Computation of interest u/s 234B The is a consequential ground. The Ld. AO is directed to compute interest in accordance with law. 6. Ground Nos. 5 to 7: Transfer Pricing Adjustment 6.1 Since the assessee carried out international transactions with its Associated Enterprises (AE), the same were referred to Ld. TPO for determination of Arm’s Length Price (ALP). One of the transactions was sale of goods by assessee to its AEs which was benchmarked using Cost Plus Method (CPM). The assessee compared the Gross IT(TP)A No.46/Chny/2022 - 5 - Profit to Direct and Indirect Cost of production (GP/DICOP) ratio derived from this transaction with ratio of similarly placed comparable uncontrolled companies for the purpose of testing arm's length principle. However, Ld. TPO rejected the CPM and applied Transactional Net Margin Method (TNMM) to propose an adjustment of Rs.212.98 Lacs. The same was confirmed and added in final assessment order. 6.2 The Ld. AR argued that the total value of the export of goods to AEs comprise only 6.57% of the total sales to the customers. Therefore, export of goods to AEs forms a miniscule part of the total sales made to third party customers. This would support the fact that the assessee does not have significant value of the transaction with its AEs for export of goods and primarily deals with the third-party customers. In view of the same, benchmarking the margins of the company as a whole would not give accurate results as to whether the transaction of export of goods to AEs is at Arm’s Length Price (ALP) or not. The entity level profitability would include lot of other items of revenue and expenses which are not relevant to the transaction of export of goods to AE. 6.3 The issue of most appropriate method has been adjudicated by us in AY 2017-18 in assessee’s favor as under: - 10. From the fact, it emerges that the assessee has considered the segmental profitability and compared it with the profitability of comparable entities. Thus, the assessee has benchmarked the transactions using segmental TNMM. The Ld. TPO has adopted entity level TNMM to benchmark the transactions. From the assessee’s submissions, it transpires that the AE export constitutes merely 10.61% of total sale during the year and therefore, to compare the margins of the entity as a whole with comparable entities would not be a correct approach to benchmark the transactions. The assessee has benchmarked the transactions under CPM also wherein the assessee’s gross margins (GP/DICOP) are reflected as 68.92% which are much higher than the margins shown by comparable IT(TP)A No.46/Chny/2022 - 6 - entities. At segmental level TNMM also, the assessee has computed its margins which have been rejected only because the same were not certified. No other cogent reason has been mentioned to reject the segmental results of the assessee. Therefore, on the facts and circumstances of the case, the approach of Ld. TPO in applying entity level TNMM could not be upheld. The benchmarking done by the assessee was to be accepted. The grounds thus raised stand allowed accordingly. Taking the same view, we would hold that CPM as adopted by assessee would be suitable method of benchmarking. Since no fault has been found by lower authorities in the working of the assessee under this method, the impugned adjustment stands deleted. The grounds raised stand allowed accordingly. No other ground has been urged in the appeal. 7. Since the quantum appeal has been adjudicated, the stay petition has been rendered infructuous. Conclusion 8. The assessee’s appeal stands partly allowed in terms of our above order. The stay petition is dismissed as infructuous. Order pronounced on 28 th October, 2022. Sd/- (MAHAVIR SINGH) उपा23 /VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद; / ACCOUNTANT MEMBER चे-ई / Chennai; िदनांक / Dated :28-10-2022 EDN/- आदेश की Wितिलिप अ 8ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकर आय ु त (अपील)/CIT(A) 4. आयकर आय ु त/CIT 5. वभागीय त न ध/DR 6. गाड फाईल/GF