Howden Solyvent (India) Private Limited, CHENNAI V. DCIT Corporate Circle 2(2), CHENNAI

ITTPA 50/CHNY/2018

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9485 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 30-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 16-10-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 16-09-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Date of conversion; Unabsorbed depreciation
• Section: 143(3); 92D; 234B; 113

Judgement Text

आयकर अपीलीय अिधकरण, ‘डी’ ᭠यायपीठ,चे᳖ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI Įी महावीर ͧसंह, उपाÚय¢ एवं Įी मनोज क ु मार अĒवाल, लेखा सदèय के सम¢ BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER आयकर अपीलसं./IT(TP)A No.: 50/CHNY/2018 िनधाᭅरण वषᭅ/Assessment Year: 2014 - 15 Howden Solyvent (India) Pvt. Ltd., [Earlier known as Solyvent Flakt (India) Pvt. Ltd. and Flakt India Pvt. Ltd.] 147, Poonamalle High Road, Numbai Village, Chennai – 600 077. PAN: AAACF 6153G vs. The DCIT, Corporate Circle 6(2), Chennai. (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮ कᳱ ओर से/Appellant by : Shri Darpan Kirpalani, Advocate & Shri H. Yeshwanthkumar, CA ᮧ᭜यथᱮ कᳱ ओर से/Respondent by : Dr.S. Palanikumar, CIT स ु नवाई कȧ तारȣख/Date of Hearing : 17.10.2022 घोषणा कȧ तारȣख/Date of Pronouncement : 31.10.2022 आदेश /O R D E R PER MAHAVIR SINGH, VICE PRESIDENT: Aforesaid appeal by assessee for Assessment Year (AY) 2014- 15 arises out of final assessment order dated 13.08.2018 passed by Ld. Assessing Officer, Chennai (AO) u/s 143(3) r.w.s. 144C(13) r.w.s. 92CA(3) pursuant to the directions of Learned Dispute - 2 - IT(TP) No.50/Chny/2018 Resolution Panel, Chennai (DRP) u/s. 144C(5) of the Act dated 31.07.2018. The assessee carried out certain international transactions with its Associated Enterprises (AE) which were subjected to determination of Arm’s Length Price (ALP) before Ld. Transfer Pricing Officer-2(2), Chennai (TPO) vide order dated 31.10.2017. Incorporating the proposed adjustment, draft assessment order was passed by Ld. AO on 22.11.2017 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. The Learned Assessing Officer (Ld. AO) erred in assessing income of the Appellant asRs 7,23.26,422/- in final assessment order issued in pursuance to the direction of Hon'ble DisputeResolution Panel (DRP) as against the returned income amounting to Nil. 2. The Ld. TPO/ Hon'ble DRP/ Ld. AO erred in determining the Arm's Length Price (‘ALP') of theinternational transaction of payment of management fees amounting Rs. 4,81,86,200/- by theAppellant to the AEs as 'Nil', and in doing so grossly erred in law and in facts for the followingreasons: a) applying the Comparable Uncontrolled Price method and rejecting the application ofTransactional Net Margin Method as the most appropriate method for determination ofarm's length price of the international transaction of payment of management fee; b) drawing conclusion as regards to no economic value was derived and that no tangible andsubstantial commercial benefit was derived out of services by the Appellant for which the management fee was paid; c) disregarding the collective evidences provided in justification of the arm's length nature ofinternational transaction pertaining to the payment of management fee; d)by considering the management support services to be in the nature of shareholder functionas it results into benefit to the AEs and such co- - 3 - IT(TP) No.50/Chny/2018 ordination activity is required to be carriedout by the parent companies to improve its global presence and global profit; and e) did not provide any cogent reason while rejecting Appellant's contentions for payment ofmanagement fees. 3. The Ld. TPO/ Hon'ble DRP/ Ld. AO have erred in determining the arm's length price of theinternational transaction pertaining to 'Payment of interest on Fully & Compulsorily ConvertibleDebentures (FCCDs)' amounting Rs. 1,42,61,918/- at Nil' and in doing so, have grossly erred in: a) rejecting the economic analysis undertaken by the Appellant in determining the ALP, in theTransfer Pricing (TP) documentation maintained by it in terms of section 92D of the Actread with Rule 1oD of the Income-tax Rules, 1962 (‘Rules'); b) comparing the interest paid by the Appellant with interest on other convertible debentureswithout undertaking a comparability analysis of the returns and the terms & conditionsattached to FCCDs and other convertible debentures; c) collecting information on corporate bond yields that was not available to the Appellant in thepublic domain; d) disregarding the analysis carried out by the Appellant to benchmark the internationaltransaction of interest received on loan on various incorrect/ baseless statements withseveral infirmities in the TP Order so as to mislead the cause of justice, thereby clearlydemonstrating a prejudiced mindset driven with the single-minded intention to recommenda TP adjustment; e) That on facts and circumstances of the case the Ld.TPO/Hon’ble DRP/Ld.AO have erred in not appreciating the fact that no benefit has been provided to the investor by providing the contertibility clause as the value of conversion was to be determined as per the fair market value as on date of conversion. 4. Thus, the Ld.AO has erred in not allowing setting-off brought forward business loss and unabsorbed depreciation of earlier years. 5. The Ld.AO has erred in levying interest under section 234A & 234B of the Act. 2. This appeal was heard along with assessee’s appeal for Assessment Year (AY) 2010-11 in ITA No.732/CHNY/2015, which has already been disposed-off by us vide separate order. It was - 4 - IT(TP) No.50/Chny/2018 admitted position that facts as well as issues in both the years are substantially the same and our adjudication in assessment year 2010-11 would apply to this year also. In the above background, we proceed to adjudicate the grounds raised by assessee. Ground No.1 is general in nature. Ground No.2 is related with Transfer Pricing (TP) Adjustment on management service charges. Ground No.3 is related with Transfer Pricing (TP) Adjustment against interest paid by assessee on Fully & Compulsorily Convertible Debentures (FCCD). In Ground No. 4, the assessee seeks set off of brought forward business losses and unabsorbed depreciation. It would be sufficient on our part to direct the ld.AO to allow set-off of brought forward business losses and unabsorbed depreciation of earlier years in accordance with law. Ground No.5 is related with levy of interest u/s 234A& 234B of the Act. The same is consequential in nature, which does not require any specific adjudication. 3. Ground No.2: TP Adjustment on Management Charges: The assessee paid management fees of Rs.481.86 lakhs. The TPO determined the Arm’s Length Price of the same as nil by observing that the payments were not commensurate with the volume of the services rendered. The DRP confirmed the stand of - 5 - IT(TP) No.50/Chny/2018 TPO against which, the assessee is in further appeal before us. We find that this issue has been adjudicated by us in AY 2010-11 in ITA No.732/CHNY/2015, as under:- “6. Proceeding further, in AY 2009-10, Ld. TPO disputed the TNMM methodology adopted by the assessee and upheld application of CUP method. The Ld. TPO proposed an adhoc adjustment of 25% against the same which was rejected by Ld. DRP on the ground that the same was not permissible. In this year, Ld. DRP has taken a contrary stand and upheld application of CUP method and confirmed ALP at nil primarily by applying need and benefit test. The revenue assailed the adjudication of Ld. DRP for AY 2009-10 before this Tribunal vide ITA No.1032/Mds/2014 order dated 09.06.2016 wherein this issue was decided in assessee’s favor as under: - 9. The Transfer Pricing Officer has not taken any pain to identify uncontrolled transaction between two independent entities. In the absence of any comparison of the transaction with transaction carried out in a uncontrolled market, this Tribunal is of the considered opinion that the Transfer Pricing Officer cannot independently come to a conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The matter may be totally different if the Transfer Pricing Officer was able to identify the uncontrolled transaction between the enterprises entering into such transaction which would materially affect the price in the open market. In this case, such an exercise was not made by the Transfer Pricing Officer. The Dispute Resolution Panel has, therefore, rightly found that the method adopted by the Transfer Pricing Officer for disallowing the claim of the assessee was not justified. As rightly observed by the Dispute Resolution Panel, the Transfer Pricing Officer has not brought on record the base on which he estimated the Arm's Length Price at 25%, when Rule 10B(c) provides for method of determining the Arm's Length Price. This Tribunal is of the considered opinion that estimation of the services rendered and costs for such services may be outside the scope of transfer pricing adjustment. Without identifying the - 6 - IT(TP) No.50/Chny/2018 comparable cases, this Tribunal is of the considered opinion that estimation of the disallowance without any base is not called for. Therefore, the Dispute Resolution Panel has rightly upheld the transfer pricing study made by the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. The bench thus held that in the absence of any comparison of the transaction with transaction carried out in uncontrolled market, Ld. TPO could not independently come to conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The estimation of the services rendered and costs of such service was outside the scope of transfer pricing adjustment. Thus, this issue stand concluded in assessee’s favor in AY 2009-10. 7. The Ld. CIT-DR has emphasized the fact that Ld. TPO has applied hypothetical CUP and determined that ALP at nil on the ground that no evidences were furnished by the assessee with respect to rendering of services and no benefit accrued to the assessee. However, the same would not hold much substance since the services has been availed by the assessee pursuant to an agreement which has been entered into as early as financial year 2002-03 and the assessee is continuously receiving these services from its AE. This is further supported by the fact that the assessee placed on record email correspondences and other documentary evidences to substantiate rendering of services which have also been placed before us in the voluminous paper-book. These evidences have not been held to be non-genuine but alleged to be routine activities in nature and part of stewardship activities which would not require any payment on the part of the assessee. However, considering the facts of the case and considering the adjudication of Tribunal for AY 2009-10, the need and benefit test as applied by lower authorities, in our opinion, would not help the case of the revenue. - 7 - IT(TP) No.50/Chny/2018 8. Going by the factual matrix, it could be seen that the assessee has availed bundle of services from its AE and made payment pursuant to the terms of the agreement. These payments are recurring in nature and are determined by applying specific allocation keys. The Ld. TPO held that the assessee may not be requiring these services in the normal course of business. The same, in our opinion, is not correct approach since the role of Ld. TPO was limited to determine the ALP of the transactions and not to adjudge the same at the threshold of business needs / requirements of the assessee. Also, though Ld. TPO observed that the transaction was to be benchmarked applying CUP method, however, no effort has been made to determine the ALP of the transaction using CUP method. Simply determining the ALP to be nil on the basis that the services were not required to be availed and not determining ALP without applying any of the prescribed method is not in accordance with statutory mandate. The TP provisions mandate application of any of the prescribed method to arrive at Arm’s Length Price of the international transactions. 9. The Ld. CIT-DR has referred to the decisions of Bangalore Tribunal in Herbalife International India (P.) Ltd. vs. ACIT (81 Taxmann.com 178); Taegu Tec India (P.) Ltd. vs. DCIT (83 Taxmann.com 81); Safran Engineering Services India (P.) Ltd. vs. ACIT (89 Taxmann.com 77); Volvo India (P.) Ltd. vs. DCIT (89 Taxmann.com 79): the decision of Delhi Tribunal in Akzo Noble India Ltd. vs Addl. CIT (137 Taxmann.com 369). 10. After going through all these decisions, we find that in all these decisions, it was the finding of the benches that the assessee could not establish rendering of services and accordingly, the TP adjustment were confirmed by Tribunal. However, the same is not the case before us. The present assessee has submitted evidences - 8 - IT(TP) No.50/Chny/2018 in support of rendering of services which have been held to be routine activities in nature. Therefore, these case laws have no application to the fact of case before us. 11. Finally, considering the facts of the case, the impugned adjustment confirmed by ld. DRP could not be sustained. We order so. The Ld. AO is directed to re-compute the income of the assessee.” Facts being pari-materia the same, taking the same view, the impugned adjustments stand deleted. The ld.AO is directed to re-compute the income of the assessee. 4. Ground No.3: TP Adjustment on FCCD: The assessee issued debentures to its AE M/s Flakt Woods Cyprus Ltd. and paid interest @12%. The ld.TPO held the benchmarking rate at nil which was confirmed by the ld.DRP. We find that this issue has been adjudicated by us in earlier assessment year 2010-11 in ITA No.732/CHNY/2015, as under:- 13. We find that the assessee has issued fully & compulsorily convertible debentures (FCCD) to its AE. As per the terms of the debentures, the assessee is required to pay interest of 12% to its AE. The debentures, in due course, would be converted into equity shares. The Hon’ble Supreme Court in the case of R.D. Goyal v. Reliance Industries Ltd. (2003; 113 Comp. Cas. 1) has held that a debenture is an instrument of debt executed by the company managing its receipt to repay the same at a specific rate and also - 9 - IT(TP) No.50/Chny/2018 carrying interest. It is in sum and substance a certificate of loan or a bond evidencing the fact that the company is liable to pay a specific amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure, yet it does not become share capital. The term debentures, in its ordinary sense, denote one of the modes for borrowing money by any company in exercise of its borrowing powers. The instrument imports an obligation or a covenant to pay. It is a repayment of the loans of the money borrowed by issue of debentures. Thus, the debentures are essential borrowing of money against interest with a certain other rights. Therefore, the benchmarking interest rate as applicable to lending of money may be applied to determine ALP of these transactions. Considering the same, the adjudication of Ld. DRP determining the ALP as Nil could not be upheld. The convertible debentures may give ownership rights to the holders but the rights accrue only at a future date and till such time, the holder is entitled to receive interest on such holding. Since the debentures are denominated in Indian Rupees, the same, in our considered opinion, could be benchmarked at SBI Prime Lending Rate with mark-up of 2% considering the fact that the assessee has credit rating of BB+ (S & P). The Ld. AO / Ld. TPO is directed to re-compute TP adjustment accordingly. The grounds thus raised stand partly allowed. Facts being pari-materia the same, we direct the TPO to benchmark the same at SBI Prime Lending Rate with mark-up of 2%. The Ld. AO / Ld. TPO is directed to re-compute TP adjustment accordingly. The grounds thus raised stand partly allowed. - 10 - IT(TP) No.50/Chny/2018 5. In the result, the appeal filed by the assessee is partly allowed. Order pronounced on 31 st October, 2022 at Chennai. Sd/- Sd/- (मनोज कुमार अᮕवाल) (MANOJ KUMAR AGGARWAL) लेखा सद᭭य/ACCOUNTANT MEMBER (महावीर ᳲसह ) (MAHAVIR SINGH) उपा᭟यᭃ /VICE PRESIDENT चे᳖ई/Chennai, ᳰदनांक/Dated, the 31 st October, 2022 RSR आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy to: 1. अपीलाथᱮ/Appellant 2. ᮧ᭜यथᱮ/Respondent 3. आयकरआयुᲦ (अपील)/CIT(A) 4. आयकरआयुᲦ /CIT 5. िवभागीय ᮧितिनिध/DR 6. गाडᭅफा ईल/GF.