M/s FOSROC Chemicals I P Ltd, Bangalore V. Deputy Commissioner of Income tax, circle-11(2), Bangalore

MA 47/BANG/2015

• Counselvise Citation: [2015] 124 COUNSELVISE.COM (IT) 3366 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 12 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 14-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 02-06-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PREETI GARG
• Assessee Lawyers: S RAMASUBRAMANIAN
• Keywords: Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER M.P. NO.47/BANG/2015 [IN IT(TP)A NO.148/BANG/2014] ASSESSMENT YEAR : 2009-10 M/S. FOSROC CHEMICALS INDIA PVT. LTD., NO.38, 12 TH CROSS, 3 RD FLOOR PSRID CBI ROAD, GANGANAGAR NORTH, BANGALORE 560 032. PAN: AAACF 2300D VS. THE DEPUTY COMMISSIONER OF INCOME TAX, LTU, BANGALORE. APPLICANT RESPONDENT APPLICANT BY : SHRI S. RAMASUBRAMANIAN, C.A. RESPONDENT BY : SMT. PREETI GARG, CIT(DR) DATE OF HEARING : 07.08.2015 DATE OF PRONOUNCEMENT : 14.08.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS A MISCELLANEOUS PETITION FILED BY THE ASS ESSEE PRAYING FOR RECTIFICATION OF CERTAIN APPARENT ERRORS IN THE ORD ER DATED 10.04.2015 PASSED BY THIS TRIBUNAL IN THE AFORESAID APPEAL. MP NO.47/BANG2015 PAGE 2 OF 8 2. THE ISSUES THAT AROSE FOR CONSIDERATION IN THE AFORESAID APPEAL BY THE ASSESSEE WAS AS TO, WHETHER THE AO WAS JUSTIFIE D IN COMING TO THE CONCLUSION THAT :- (I) THE ASSESSEE DOES NOT REQUIRE SERVICES RENDERE D BY THE ASSOCIATED ENTERPRISE (AE) AND THE ASSESSEE HAS NOT RECEIVED ANY SERVICES FROM ITS AE; (II) THE TRANSACTION OF PROVIDING TECHNICAL AND MAN AGEMENT SERVICES BY THE AE WERE ENTERED INTO BY THE ASSESS EE WITH THE AE ONLY WITH A VIEW TO SIPHON OFF THE PRO FITS AND WAS A COLOURABLE DEVICE; AND (III) CONSEQUENTLY MAKING AN ADDITION OF RS.7,27,57 ,135 TO THE TOTAL INCOME OF THE ASSESSEE BY WAY OF ADJUSTMENT CONSEQUENT TO DETERMINATION OF ARMS LENGTH PRICE (ALP). 3. THE ASSESSEE IS A COMPANY. THE ASSESSEE IS A ME MBER OF JMH, FZ, DUBAI GROUP AND IS A SUBSIDIARY OF M/S. FOSROC INTERNATIONAL LTD., U.K. THE ASSESSEE IS A MANUFACTURER OF SPECIALTY CONSTRU CTION CHEMICALS AND MARKETS A WIDE VARIETY OF CONSTRUCTION CHEMICALS IN THE NATURE OF CONCRETING PRODUCTS, GROUTING PRODUCTS, FLOORING PRODUCTS, WAT ER PROOFING PRODUCTS. THE PRINCIPAL CUSTOMERS ARE CONSTRUCTION COMPANIES/CONT RACTORS AND RETAIL STOCKISTS/APPLICATORS PRIMARILY IN THE DOMESTIC MAR KET. THE TECHNICAL KNOW- HOW IS SUPPLIED BY M/S FOSROC INTERNATIONAL LTD. U. K., AS PER THE TECHNICAL COLLABORATION AGREEMENT WITH IT. 4. THE ASSESSEE COMPANY HAS ENTERED INTO AN INTERNA TIONAL TRANSACTION OF RENDERING TECHNICAL AND MANAGEMENT CONSULTING BY ITS AE TO THE ASSESSEE FOR WHICH IT PAID A SUM OF RS.7,27,57,135/ -. THE SAID PAYMENT MP NO.47/BANG2015 PAGE 3 OF 8 BEING AN INTERNATIONAL TRANSACTION WITH AN ASSOCIAT ED ENTERPRISES (AES) HAD TO PASS THE ARMS LENGTH PRICE (ALP) AS LAID DOWN I N SEC.92 OF THE ACT. 5. IN FORM 3CEB FILED BY THE ASSESSEE, THE ASSESSEE ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) AT THE ENTERPR ISE LEVEL AND CLAIMED THAT THE TRANSACTIONS WITH THE AE AND CONSI DERATION PAID FOR THE INTERNATIONAL TRANSACTIONS BY THE ASSESSEE TO AE WE RE AT ARMS LENGTH. THE ASSESSEE FURTHER SUBMITTED IT WAS IN THE BUSINESS O F MANUFACTURE OF CONSTRUCTION CHEMICALS AND WAS OPERATING ONLY IN ON E SEGMENT VIZ., MANUFACTURE AND SALE OF CONSTRUCTION CHEMICALS. THE TRANSACTION FOR PAYMENT OF TECHNICAL AND MANAGEMENT COST AND ROYALT Y PAYMENT TO THE AE WERE ALL IN CONNECTION WITH MANUFACTURE OF CONSTRUC TION CHEMICALS. THE ASSESSEE ALSO POINTED OUT THAT PURCHASE OF TRADING GOODS FROM AE WERE OF SUCH NATURE THAT THE GOODS PURCHASED HAD A SUPPLEME NTARY ROLE TO PLAY IN THE USE OF CONSTRUCTION CHEMICALS WHICH WERE MANUFA CTURED AND SOLD BY THE ASSESSEE. TO QUOTE AN EXAMPLE, WHEN CONSTRUCT ION CHEMICAL IN THE FORM OF PAINT IS MANUFACTURED BY THE ASSESSEE, THIN NER OF THE PAINT IS PURCHASED FROM THE AE AS A TRADING GOODS ITEM. THI S IS HOW THE TRADING GOODS ITEM PERFORM A SUPPLEMENTARY ROLE IN THE MATT ER OF USE OF THE CONSTRUCTION CHEMICALS MANUFACTURED BY THE ASSESSEE . IT WAS THE PLEA OF ASSESSEE THAT ALL THE INTERNATIONAL TRANSACTIONS AR E INTEGRALLY CONNECTED WITH THE MANUFACTURING BUSINESS OF THE ASSESSEE. T HE ASSESSEE THEREFORE SUBMITTED THAT IT ADOPTED TNMM AT THE ENTITY LEVEL TO JUSTIFY ALP OF THE INTERNATIONAL TRANSACTION WITH AE. MP NO.47/BANG2015 PAGE 4 OF 8 6. THE TPO, TO WHOM THE QUESTION OF DETERMINATION O F ALP WAS REFERRED TO BY THE AO, WAS OF THE VIEW THAT THE PAY MENT MADE BY THE ASSESSEE FOR TECHNICAL AND MANAGEMENT COST OF RS.7, 27,57,135 TO THE AE AND SUCH PAYMENT BEING AT ARMS LENGTH HAD TO BE JU DGED INDEPENDENTLY . THE TPO HELD THAT THE ASSESSEE FAILED TO PROVE THE NATURE OF SERVICES RECEIVED BY IT FROM THE AE FOR WHICH THE PAYMENT WA S MADE AND FURTHER HELD THAT THE ASSESSEE DID NOT SHOW WHAT IS THE TAN GIBLE AND SUBSTANTIAL COMMERCIAL BENEFIT DERIVED BY THE TAXPAYER FROM THE ALLEGED SERVICES AND THE CONSEQUENT PAYMENT OF TECHNICAL AND MANAGEMENT COSTS. THE ALP OF THE TRANSACTION WAS HELD TO BE NIL AND THE ENTIRE P AYMENT MADE TO THE AE WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE AS AD JUSTMENT TO ALP. THE TPO ALSO HELD THAT MANAGEMENT AND TECHNICAL COSTS A RE NOT LINKED WITH ACTUAL SERVICES BUT A WAY TO SIPHON OF THE PROFITS WITH MINIMUM INCIDENCE OF TAX. 7. ON THE ABOVE ISSUES, THE TRIBUNAL FOUND THAT IN ASSESSEES OWN CASE IN A.Y. 2007-08, IDENTICAL REASONS WERE GIVEN BY THE TPO FOR MAKING AN ADDITION BY WAY OF ADJUSTMENT TO THE ALP, WAS S UBJECT MATTER OF CHALLENGE BEFORE THE ITAT IN ITA NO.1256/BANG/2011 AND THE TRIBUNAL ON THE ABOVE ISSUE FOUND THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS E.K.L APPLIANCES LTD (IN ITA NOS. 1068/2011 & 10 70/2011 HAD HELD THAT WHETHER OR NOT TO ENTER INTO A TRANSACTION IS FOR T HE ASSESSEE TO DECIDE AND THE TPO CAN ONLY EXAMINE AND COMPUTE THE QUANTUM OF ALP, BUT HE HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A PART THEREOF ON THE MP NO.47/BANG2015 PAGE 5 OF 8 GROUND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LO SSES AND THEREFORE, NOT GAINED ANY COMMENSURATE BENEFIT THERE FROM. FOLLOWI NG THE SAME, THE TRIBUNAL HELD THAT THE TPO HAS NO AUTHORITY TO HOLD THAT SINCE THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE COMMENSURATE BENEF IT FOR THE EXPENDITURE INCURRED BY IT, THE ALP TO BE DETERMINE D IS NIL. AS REGARDS THE QUANTIFICATION OF THE EXPENSES AND THE COMMENSURATE BENEFIT, THE TRIBUNAL HELD THAT THE TPO CANNOT GO INTO THE FACT WHETHER T HE ASSESSEE IS ACTUALLY BENEFITED FROM SUCH EXPENDITURE. THE TPO IS ONLY R EQUIRED TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION, BUT CANNO T EXAMINE WHETHER THERE WAS ANY INTERNATIONAL TRANSACTION BETWEEN THE ASSES SEE AND ITS AE. THIS POWER IS VESTED WITH THE AO ONLY. THE BENEFIT DERI VED WAS THUS DIRECTED TO BE DETERMINED BY THE AO. THE TRIBUNAL ULTIMATELY I N AY 07-08 REMANDED THE ISSUE OF DETERMINATION OF ALP TO THE AO/TPO WIT H CERTAIN DIRECTIONS. 8. THE AFORESAID ORDER WAS FOLLOWED BY THE TRIBUNAL IN THE PRESENT AY 2009-10 ALSO. HOWEVER IN PARA 37, THE TRIBUNAL OBS ERVED AS FOLLOWS: 37. WE ARE OF THE VIEW THAT THE JUSTIFICATION FUR NISHED BY THE ASSESSEE FOR AGGREGATION OF TRANSACTIONS OF MANUFAC TURING AND TRADING TRANSACTIONS WITH AE IS ACCEPTABLE. CAN BE EXTENDED TO THE INTRA GROUP SERVICES RECEIVED BY THE ASSESSEE, IS THE QUESTION NOW FOR OUR CONSIDERATION. AS WE HAVE ALREADY SEEN THE TRANSACTION IN QUESTION IS AN EXPENSE TRANSACTION A ND THEREFORE PROFIT METHODS MAY NOT BE THE MAM. THIS WILL DEPE ND ON THE ULTIMATE EXPLANATION TO BE FURNISHED BY THE ASSESSE E WITH REGARD TO THE NATURE OF SERVICES RECEIVED BY THE ASSESSEE AND AS TO HOW THE DIFFERENT SEGMENTS OF THE ASSESSEE BENEFITTED F ROM THE SERVICES RECEIVED. THE TEST WHETHER TO ADOPT A COM BINED TRANSACTION APPROACH OR TO EVALUATE INTERNATIONAL T RANSACTION ON A TRANSACTION-BY-TRANSACTION BASIS IS TO SEE WHETHER THE TRANSACTION MP NO.47/BANG2015 PAGE 6 OF 8 CAN BE EVALUATED ADEQUATELY ON A SEPARATE BASIS. W E THEREFORE LEAVE THIS QUESTION ALSO OPEN TO ENABLE THE TPO TO COME TO A CONCLUSION ON THIS ASPECT AFTER EVALUATING THE EVID ENCE AND EXPLANATION TO BE FURNISHED/ALREADY FURNISHED BY TH E ASSESSEE. 9. IT IS THE PLEA OF THE ASSESSEE IN THIS M.P. THAT SINCE THE TRIBUNAL HAD FOLLOWED THE ORDER IN ASSESSEES OWN CASE FOR AY 07 -08, THE DIRECTION TO EXAMINE THE BENEFIT BY THE TPO WAS AN ERROR APPAREN T ON THE FACE OF THE RECORD, SINCE IN AY 07-08, THE TRIBUNAL SPECIFICALL Y HELD THAT THE DOMAIN OF EXAMINING THE BENEFIT DERIVED BY THE ASSESSEE IS TH AT OF THE AO AND NOT THE TPO. THE PRAYER IN THE M.P. IS TO MAKE SUITABLE RE CTIFICATION IN THE ORDER SO THAT ONLY THE AO SHOULD BE DIRECTED TO EXAMINE THIS ASPECT OF THE ISSUE. 10. THE ABOVE ERROR POINTED OUT IN THE M.P. IS AN A PPARENT ERROR IN THE ORDER OF THE TRIBUNAL. THE SAME IS RECTIFIED BY CL ARIFYING THAT THE BENEFIT DERIVED BY THE ASSESSEE INCURRING THE EXPENSES IN Q UESTION WILL BE EXAMINED ONLY BY THE AO. ESPECIALLY IN THE CONTEXT OF HOW THE BENEFITS ARE CONNECTED WITH THE BUSINESS OF THE ASSESSEE. IT IS ALSO CLARIFIED THAT SINCE THE ASSESSEE HAS ONLY ONE BUSINESS SEGMENT VIZ., MA NUFACTURE OF CONSTRUCTION CHEMICALS, REFERENCE IN PARA-37 OF THE ORDER OF THE TRIBUNAL TO DIFFERENT SEGMENTS OF THE ASSESSEE SHOULD BE CONSTR UED AS REFERRING ONLY TO THE MANUFACTURE OF CONSTRUCTION CHEMICALS . THE ORDER OF THE TRIBUNAL STANDS RECTIFIED AS STATED ABOVE. MP NO.47/BANG2015 PAGE 7 OF 8 11. IT IS FURTHER STATED IN THE M.P. THAT IN PARA-3 5 OF THE ORDER, THE ASSESSEE HAS BEEN DIRECTED TO ANSWER THE QUERIES RA ISED BY THE TPO IN THE SHOW CAUSE NOTICE ISSUED. IT WAS SUBMITTED THA T THE ASSESSEE HAS GIVEN ALL ANSWERS IN ITS REPLY AND THEREFORE THE SA ID DIRECTION NEEDS TO BE DELETED. WE ARE OF THE VIEW THAT THE DIRECTION TO GIVE REPLY IS ONLY IN ADDITION TO WHAT HAS ALREADY BEEN GIVEN BY THE ASSE SSEE. THE ASSESSEE, IF IT IS OF THE VIEW THAT THE SAID REPLY GIVEN IS S UFFICIENT, MAY SAY SO IN THE SET ASIDE PROCEEDINGS. THE LIBERTY GIVEN TO THE ASSESS EE TO FILE ADDITIONAL REPLY, IN OUR VIEW, WILL NOT AMOUNT TO A MISTAKE AP PARENT ON THE FACE OF THE RECORD, AND THEREFORE, TO THIS EXTENT THE M.P. IS N OT ACCEPTED. 12. IN THE RESULT, THE MISCELLANEOUS PETITION IS PA RTLY ALLOWED, TO THE EXTENT INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON THIS 14 TH DAY OF AUGUST, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 14 TH AUGUST, 2015. /D S/ MP NO.47/BANG2015 PAGE 8 OF 8 COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.