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Income Tax Appellate Tribunal, KOLKATA BENCH ‘C’, KOLKATA
Before: Dr. Manish Borad & Shri Sonjoy Sarma]
ORDER
PER MANISH BORAD, AM:
The captioned appeals are directed at the instance of the assessee against the impugned orders dated 24/10/2018 and 24/06/2019 for AY 2014-15 and AY 2015-16 respectively, passed by the Learned Income Tax Officer, Circle- 11(1), Kolkata (“Ld. AO”) in the case of M/s. TDK India Private Limited (“the assessee”), under section 143(3) r.w.s. 92CA(3) r.w.s. 144C of the Income Tax Act, 1961 (herein after referred as “the Act”), consequent to the directions of Learned Dispute Resolution Panel, New Delhi (“DRP”).
The Assessee has raised following grounds of Appeal before Tribunal for AY 2014-15:
1. On the facts of the case and in law, the order of the learned Transfer Pricing Officer (hereinafter referred to as ‘ Ld. TPO’) passed u/s 92CA(3) of the Income-tax Act, 1961, (hereinafter referred to as (‘the Act’), subsequently confirmed by the Hon. Dispute Resolution Panel (hereinafter referred to as ‘Hon. Panel’) and consequently incorporated by the learned Deputy Commissioner of Income-tax (hereinafter referred to as ‘Ld. AO’) in the assessment order passed u/s 143(3) read with section 144C(13) of the Act, is erroneous on facts and bad in law.
2. On the facts of the case and in law, the Hon. Panel erred in confirming the adjustment of Rs. 30,26,00,000/- to the international transactions of the Assessee with its Associated Enterprises (hereinafter referred to as ‘AEs’).
3. On the facts of the case and in law, the Ld. TPO/AO erred in concluding that the Assessee is acting as a contract manufacturer when actually the Assessee is a manufacturer bearing all normal risks w.r.t to ‘export of goods for resale’ and ‘payment of sales margin’ having failed to understand the business model of the Assessee with regard to ‘export of goods for resale’ and ‘payment of sales margin’ and erroneously concluded that the Assessee is acting as a contract manufacturer.
4. On the facts of the case and in law, the Ld. TPO/AO have erred in not appreciating that the transactions pertaining to ‘export of goods for resale’ and ‘payment of sales margin’ are closely inter-linked and cannot be reviewed separately and hence needs to be aggregated for determining the arm’s length price.
5. On the facts of the case and in law, the Ld. TPO/ AO have erred in making transfer pricing adjustment to the transaction of ‘export of goods for resale’ and ‘payment of sales margin’ to AEs failing to appreciate that the pricing is commensurate with the functions performed, assets employed and risks assumed by the respective AEs and therefore transactions pertaining to ‘export of goods for resale’ and ‘payment of sales margin’ have been undertaken at arm’s length.
6. On the facts of the case and in law, the Ld. TPO/AO have erred in making transfer pricing adjustment to the transaction of ‘payment of sales margin’ to AEs failing to determining the arm’s length price of transaction by applying Comparable Uncontrolled Price method in an inappropriate manner.
On the facts of the case and in law, the transaction pertaining to ‘export of goods for consumption by AEs’ is comparable with the third party prices and therefore has been undertaken at arm’s length price.
8. On the facts of the case and in law, the Ld. TPO/AO have erred in disregarding the economic and commercial reasons for loss in Ferrite segments, including the adjusted profit level indicator after considering the impact of significant capacity underutilization during the year.
9. On the facts of the case and in law, the Ld. TPO/AO have erred in disregarding the Service Agreement entered into by the Assessee with the AEs, in questioning the commercial expediency for availing such services and failed to appreciate the jurisprudence that the Ld. AO/ TPO cannot go beyond his powers in questioning commercial decision of the Assessee.
10. On the facts of the case and in law, the Ld. TPO/AO have erred in categorizing the transaction of ‘IT support services’ received from its AE to be in the nature of stewardship services and determining the arm’s length price of such services to be Rs. Nil even after the Assessee established the nature of ‘IT support services’, the ensuing benefits and its arm’s length pricing.
On the facts of the case and in law, the Ld. TPO/AO have erred in categorizing the transaction of Export support services’ received from its AE to be in the nature of stewardship services and determining the arm’s length price of such services to be Rs. Nil even after the Assessee established the nature of ‘Export support services’, the ensuing benefits and its arm’s length pricing.
On the facts of the case and in law, the Ld. TPO/AO have erred in categorizing the transaction of ‘Management services’ received from its AE to be in the nature of stewardship services and determining the arm’s length price of such services to be Rs. Nil even after the Assessee established the nature of ‘Management services’, the ensuing benefits and its arm’s length pricing.
On the facts of the case and in law, the Ld. TPO/AO have erred in not appreciating the economic analysis undertaken by the Assessee for using the AEs as tested party with respect to the international transactions pertaining to ‘payment of sales margin’, ‘receipt of IT support services’, ‘receipt of export support services’ and ‘receipt of management services’.
On the facts of the case and in law, the Ld. TPO/AO have erred in alleging that no tangible or direct benefit was derived by the Assessee from receipt of the intra-group services and in holding that the Assessee failed to furnish adequate evidences to demonstrate that the services were actually rendered by the AEs.
Without prejudice to the above grounds and on the facts of the case and in law, the Ld. TPO/AO have erred in rejecting the economic analysis undertaken by the Assessee, with respect to international transaction pertaining to ‘export of goods for resale’, ‘payment of sales margin’, ‘receipt of IT support services’, ‘receipt of export support services’ and ‘receipt of management services’ in accordance with the provisions of the Act for the determination of the arm’s length price summarized in the transfer pricing study.
16. That on the facts and in the circumstances of the case, the Ld. AO has erred in disallowing the sum debited towards provision for slow-moving and non-moving inventory treating it as contingent in nature without taking cognizance of the submission of the Company that the provision reflected the erosion in value of such slow-moving and non-moving inventory during the year and hence was an allowable expenditure. 17. That on the facts and in the circumstances of the case, the Ld. AO erred in disallowing the claim for deduction towards capital work-in-progress written off during the previous year relevant to the assessment year 2014-15 for an amount of Rs. 2,02,01,473 ignoring the principle laid down by the Jurisdictional High Court in the case of Binani Cement Limited Vs. CIT reported in 380 ITR 116 that such expenses are allowable as deduction 18. That on the facts and in the circumstances of the case the Ld. AO should be directed to grant consequent relief towards interest levied u/s 234B of the Act. 19. That on the facts and in the circumstances of the case, the Ld. AO has grossly erred and unjustified in initiating penalty proceedings u/s 271(1)(c) of the Act. 20. That on the facts and in the circumstances of the case, the Ld. TPO/ AO has not considered the benefit of variation / deduction of 3 per cent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act, while determining the arm’s length price for the adjustment made to the international transactions of the Assessee. 21. The Assessee craves leave to add to and/ or amend, alter, modify or rescind the grounds hereinabove before or at the time of hearing of the appeal.” 3. The Assessee has raised following grounds of Appeal before Tribunal for AY 2015-16:
“1. On the facts of the case and in law, the order of the learned Transfer Pricing Officer (hereinafter referred to as 'Ld. TPO’) passed u/s 92CA(3) of the Income-tax Act, 1961, (hereinafter referred to as (‘the Act'). subsequently confirmed by the Hon. Dispute Resolution Panel (hereinafter referred to as ‘Hon. Panel') and consequently incorporated by the learned Deputy Commissioner of Income-tax (hereinafter referred to as ‘Ld. AO’) in the assessment order passed u/s 143(3) read with section 144C(l3) of the Act, is erroneous on facts and bad in law.
2. On the facts of the case and in law, the Hon. Panel erred in confirming the adjustment of Rs. 30,74,59,780/- to the international transactions of the Assessee with its Associated Enterprises (hereinafter referred to as ' AEs’).
On the facts of the case and in law, the Ld. TPO/AO erred in concluding that the Assessee is acting as a contract manufacturer when actually the Assessee is a manufacturer bearing all normal risks w.r.t to ‘export of good for resale’ and ‘payment of sales margin’ having failed to understand the business model of the Assessee with regard to ‘export of goods for resale’ and ‘payment of sales margin’ and erroneously concluded that the Assessee is acting as a contract manufacturer.
On the facts of the case and in law, the Ld. TPO/AO have erred in not appreciating that the transactions pertaining to ‘export of goods for resale’ and ‘payment of sales margin’ are closely inter- linked and cannot be reviewed separately and hence needs to be aggregated for determining the arm’s length price.
On the facts of the case and in law, the Ld. TPO/AO have erred in making transfer pricing adjustment to the transaction of ‘export of goods for resale’ and ‘payment of sales margin’ to AEs failing to appreciate that the pricing is commensurate with the functions performed, assets employed and risks assumed by the respective AEs and therefore transactions pertaining to ‘export of goods for resale’ and ‘payment of sales margin’ have been undertaken at arm's length.
On the facts of the case and in law, the Ld. TPO/AO have erred in making transfer pricing adjustment to the transaction of ‘payment of sales margin’ to AEs by determining the arm’s length price by applying Comparable Uncontrolled Price method in an inappropriate manner.
7. On the facts of the case and in law, the Ld. TPO/AO have erred in disregarding the Service Agreement with respect to IT support services. Export support services and management services entered into by the Assessee with the AEs, in questioning the commercial expediency for availing such services and failed to appreciate the jurisprudence that the Ld. AO/TPO cannot go beyond his powers in questioning commercial decision of the Assessee.
On the facts of the case and in law, the Ld. TPO/AO have erred in categorizing the transaction of ‘IT support services’ received from its AE to be in the nature of stewardship services and determining the arm’s length price of such services to be Nil even after the Assessee established the nature of ‘IT support services’, the ensuing benefits and its arm’s length pricing.
On the facts of the case and in law, the Ld. TPO/AO have erred in categorizing the transaction of Export support services’ received from its AE to be in the nature of stewardship services and determining the arm’s length price of such services to be NiI even after the Assessee established the nature of ‘Export support services’, the ensuing benefits and its arm’s length pricing.
On the facts of the case and in law, the Ld. TPO/AO have erred in categorizing the transaction of ‘Management services’ received from its AE to be in the nature of stewardship services and determining the arm's length price of such services to be Nil even after the Assessee established the nature of ‘Management services’, the ensuing benefits and its arm’s length pricing.
11. On the facts of the case and in law, the Ld. TPO/AO have erred in not appreciating the economic analysis undertaken by the Assessee for selecting the AEs as tested party with respect to the international transactions pertaining to ‘payment of sales margin’, ‘receipt of IT support services’, ‘receipt of export support services’ and ‘receipt of management services’. 12. On the facts of the case and in law, the Ld. TPO/AO have erred in alleging that no tangible or direct benefit was derived by the Assessee from receipt of the IT support services, receipt of export support services and receipt of management services and in holding that the Assessee failed to furnish adequate evidences to demonstrate that the services were actually rendered by the AEs. 13. Without prejudice to the above grounds and on the facts of the case and in law, the Ld. TPO/AO have erred in rejecting the economic analysis undertaken by the Assessee, with respect to international transaction pertaining to ‘export of goods for resale’, ‘payment of sales margin’, ‘receipt of IT support services’, ‘receipt of export support services’ and ‘receipt of management services’ in accordance with the provisions of the Act for the determination of the arm’s length price summarized in the transfer pricing study. 14. That on the facts and in the circumstances of the case, the Ld. AO has grossly erred and unjustified in initiating penalty proceedings u/s 271(1)(c) of the Act. 15. The Assessee craves leave to add to and/ or amend, alter, modify or rescind the grounds hereinabove before or at the time of hearing of the appeal.” 4. From perusal of the above grounds, we find that ground nos. 1 & 2 are general in nature which need no adjudication. Further, during the course of hearing, Learned Counsel for the Assessee requested for not pressing ground nos. 3 to 6 for both the AYs i.e. AY 2014-15 and AY 2015-16. We, therefore, dismiss ground nos. 3 to 6 as not pressed for both the AYs. 5. Except general Ground Nos. 1 & 2 raised for both the years in the remaining grounds, effectively one issue is raised commonly for Assessment Year 2014-15 and 2015-16 and three issues are raised for Assessment Year 2014-15 and the same are discernible from the following chart:- S.No. International Transactions Adjustment as per Final AO order AY 2014-15 AY 2015-16 1 Payment for intra-group services: 1a - 84,688,150 91,626,428 IT services 1b - 161,905,984 175,633,946 Export support services 1c - 30,295,333 40,199,406 Management support services (paid to TDK Electronic Components S.A. (‘TDK Malaga’) 2 Export of ferrites for consumption 25,710,000 NIL 3 Disallowance of provision for slow moving and 13,200,000 NIL non-moving inventory 4. Disallowance of capital work in progress 20,201,473 NIL written off relating to abandoned project
6. We first take up the common issue relating to adjustment made towards disallowance of payment for intra group services, namely, IT services, export support services, management support services, which have been paid to its AE, TDK Electronic Components S.A. (‘TDK Malaga’). For the purpose of adjudication, we will take up the facts for Assessment Year 2014-15 and since the issue remains same for Assessment Year 2015-16, our adjudication shall apply mutatis mutandis.
7. During the year under consideration, when the case was being scrutinised by the Assessing Officer during the scrutiny proceedings, he observed that the assessee has claimed expenses for the payments made for intra group services to TDK Malaga towards IT Services, export services and management support services. The transactions falling under the category of international transaction, the ld. Assessing Officer referred the same to the ld. TPO for the purposes of calculating ALP of the said transactions. The ld. TPO while examining the said transactions rejected the benchmarking analogy adopted by the assessee and held it to be a stewardship activity which the AE was bound to provide the assessee. Therefore, the arm’s length price (ALP) of the said transactions of intragroup services was calculated at Rs. Nil. However, the ld. TPO did not apply any method and merely for providing the services a stewardship services calculated the Nil value of the said transactions. When the matter travelled before the ld. DRP where the assessee filed objection against the draft assessment order of the ld. Assessing Officer, but ld. DRP, rejected the grounds observing that similar submissions and grounds have been raised by the assessee for Assessment Year 2011-12 and 2012-13 wherein, the ld. DRP has upheld the action of the ld. Assessing Officer /TPO with regard to the intra group services and accordingly the ld. Assessing Officer disallowed the claim of expenses of Rs.27.69 Crores approx., claimed towards intragroup services as mentioned in the chart (supra).
8. Aggrieved the assessee is now in appeal before this Tribunal challenging the finding of the Assessing Officer.
9. The ld. Counsel for the assessee took us through the details of the various services provided to TDK Malaga by the assessee and complete information of services provided to the assessee i.e., IT services, export services, management support services. Ld. Counsel for the assessee referring to the written submissions and paper books, submitted that that TDK Group is a manufacturing giant and the business size of the group necessitates centralization of IT, management and other services for smooth functioning of the business operations with years of operating in the business of passive electronic components in varied market conditions and different economies, TDK Electronic Components AG (‘TDK AG’) and TDK Electronic Components S.A. (‘TDK Malaga’) have gained rich experiences in the field of Marketing, Corporate functions, R&D, Information Technology, Export Market, etc.
9.1. Further, Ld. Counsel for the Assessee submitted that while TDK AG provides services to TDK group companies which are in the nature of ITSS and ESS, TDK Malaga provides services to TDK group companies (relevant for the Capacitor Business Group) which are in the nature of MSS (e.g. Quality management, internal audit R&D support etc.). Thus, TDK AG and TDK Malaga operate as cost centres within the TDK group for above- mentioned services’ whereby TDK AG and TDK Malaga procures services from third party service provider as well as deploys its in-house dedicated resources. 9.2. With the objective of leveraging on the rich business experience of TDK AG and TDK Malaga of dealing in passive electronic components, the Assessee along with other group entities has entered globally into Framework Services Agreement (‘FSA’) with TDK AG for receipt of certain specialized services. 9.3. The Ld. Counsel invited our attention to the fact that in today’s technology driven business environment, it is very important for the Assessee to have a systematic IT infrastructure in place, which helps Assessee in conducting its business in an effective manner. Further, considering the small team of IT personnel (i.e. 3 employees) employed by the Assessee, it becomes necessary to avail IT support from TDK AG as well to manage the wide network operations and the IT infrastructure. Further, considering the Assessee has significant export revenue, there exists a need for dedicated product marketing team comprising of skillful resources who are constantly involved in analyzing market conditions for the Assessee in terms of technology changes, product variation etc. Keeping the above in mind, the assessee has availed varied category of services, also submitted, and evidenced, (being IT, management, corporate sales, product marketing, finance, quality audit, etc.), as and when requested vide different agreements entered into between the parties. 9.4. The Ld. AR submitted that the relevant details of the above stated services along with benefits received from the same had been duly submitted by the Assessee before the Ld. TPO / DRP. Pursuant to the agreements entered, the details of the cost charged on the assessee by the AE for each of the services received, had been made available to the Ld. TPO/Ld. DRP. Further, a certified copy of cost allocation statement certified by independent professional had also been submitted; along with sample invoices evidencing the charge against the said services. 9.5. The Ld. Counsel also contended that the AE has entered into similar agreements with other group companies, where similar services provided are charged on the same principle as that for the assessee. Thus, it can be concluded that IGS arrangement between the Assessee and the AE is not exclusive in nature, and that the AE acts as a centralized service provider to other group entities, recovering costs from them on a similar basis. Therefore, the Assessee humbly submits that there are various decisions which hold that how an Assessee conducts its business is entirely its prerogative and it is not for the revenue authorities to decide what is needed by the Assessee and what is not. Further there are various tribunal decisions that held that TPO does not have a right to question whether a particular expense on services received actually benefits an Assessee in monetary term or not or to test the commercial expediency and question on the reasonableness of the expenditure which has to be judged by the businessman and not revenue. The Ld. AR further invited our attention to the fact that the Ld. TPO had rejected the benchmarking analysis adopted by the Assessee. However, it failed to provide its own benchmarking analysis to determine the transaction price to be Rs. NIL. 9.6. The Ld. Counsel further contented that the TPO determined the arm’s length price of the aforesaid international transaction at Nil solely based on the allegation that the intra-group activities performed under the aforesaid agreement were in the nature of stewardship services. The TPO did not apply any of the six methods prescribed under sub-section (1) read with sub- section (2) of Section 92C of the I.T. Act for the purpose of determining the arm’s length price of the international transaction at Nil. He did not bring on record any comparable uncontrolled transaction for the purpose of determining the arm’s length price of the international transaction at Nil.
10. The ld. Counsel for the assessee placed reliance on the decision of this Tribunal in the case of AT&S India Private Limited (I.T.A. No. 1311/Kol/2018), wherein also similar issue was for consideration before the Tribunal and the judgement of the Hon’ble Supreme Court in the case of DIT (International Tax) vs. Morgan Stanley and Co. Inc. (and vice versa) reported in [2007] 292 ITR 416 (SC), has been discussed and also reference has been made to the decision of this Tribunal in the case of Akzo Nobel India Ltd vs. DCIT reported in [2017] 81 taxmann.com 366 (Kolkata - Trib.).
11. Referring to these decisions, it is submitted that all the intragroup services, are very much beneficial for carrying out the business activity of the assessee company and secondly TDK Malaga is not providing all these services but it helps in locating companies which can provided these services in India to the assessee company and other group concerns located in other parts of the world and only a minor amount is charged by TDK Malaga for its services. It was also submitted that the facts of the assessee are distinguishable to the facts of the case dealt by the Hon’ble Supreme Court in the case of Morgan Stanley and Co. Inc. (supra), and also in view of the judgment of the Hon’ble Supreme Court in the case of Commissioner of Income-tax-1, Mumbai v. Lever India Exports Ltd. [2017] 78 taxmann.com 88 (Bombay), jurisdiction of the TPO is specific and limited i.e., to determine the ALP of an international transaction by applying any of the methods prescribed u/s (1) and (2) of Section 92CA of the Act, which the ld. TPO failed to do in the instant case. Thus, prayer was made that impugned disallowance be deleted and the payments for intra-group services may be allowed. Per contra, learned D/R vehemently argued supporting the orders of 12. both the lower authorities as well as the learned DRP relying on the Hon’ble Supreme Court’s decision in the case of Morgan Stanley (supra) determined the ALP of IGS as NIL by concluding that these services were in the nature of stewardship activities.
13. The Ld. DR placed reliance on the order of the TPO for the relevant assessment year. The Ld. DR alleged that the services provided by the associated enterprise clearly indicated that the services were meant for exercising overall control and supervision over the assessee and hence, the same were in the nature of stewardship activities.
14. We have heard rival contentions and carefully gone through the decisions of the ld. Counsel for the assessee. The issue for our consideration is that whether the ld. Assessing Officer was justified in disallowing the intra-group services claimed by the assessee towards IT Services, export services and management services paid to TDK Malaga. The ld. TPO treated the said services as part of the stewardship services and valued the ALP of the transactions at NIL. The ld. DRP has held that the assessee failed on the benefit test in respect of the intra-group services paid to its AE. For Assessment Year 2014-15, the total amount disallowed and its payment for intra-group services amounts to Rs. 27,68,89,467/-.
15. Now, first we need to examine that what type of services have been provided by the AE to the assessee. Learned Counsel for the assessee has claimed that the assessee company in order to avail an effective network development and high productivity service standards the assessee is in continuous need of said services in the nature of product marketing as well as information technology, management support etc. The Assessee has also filed the written submission before us wherein it has explained in detail the need and consequent receipt as well as benefit derived from availing such services and the same is reproduced below: 1) IT Support Services (‘ITSS’) a) NEED FOR ITSS In today’s technology driven business environment, it is very important for TDK India to have a systematic IT infrastructure in place, which helps TDK India in conducting its business in an effective manner. Further, considering the small team of IT personnel (i.e. 3 employees) employed by TDK India, it becomes necessary for TDK India to avail IT support from TDK AG as well to manage the wide network operations and the IT infrastructure. b) RECEIPT & BENEFIT OF ITSS Within TDK-EPCOS group, TDK AG employs a central IT department that renders IT services to all TDK-EPCOS group subsidiaries including TDK India. The IT systems and resources are used by all TDK-EPCOS group subsidiaries and thus, also facilitate the core business functions and processes of TDK India. With years of operating in the industry, TDK AG has been able to create an in-house pool of specialized and skilled resources who can provide / coordinate the IT support services to other group entities. This includes the development and implementation of the IT strategy and architectures, administration, maintenance and controlling of the IT systems and provision of ongoing support with regard to the IT systems.
Moreover, TDK AG also procures IT services (i.e. software, licenses and IT platforms) from the third-party vendors and provides its access to the TDK Group companies. For managing services from third party vendors, TDK AG performs the following functions: - TDK AG also acts a central purchaser of IT resources. The central purchasing function of TDK AG allows TDK-EPCOS group to realize synergies from economies of scale (e.g. better prices) and to provide all subsidiaries with up-to date IT resources. The IT systems and resources centrally purchased by TDK AG comprise of SAP systems (ERP system) and Non-SAP systems (such as, ASSIST (shipping system), EBIS (system for sales controlling & reporting), EDI (system for data transfer between SAP & Non-SAP systems), Microsoft Office applications, etc. - Understanding the IT resource requirement; - Vendor evaluation for sourcing necessary licenses; - Negotiation and finalization of contract with vendors; - Acting as a single point of contact for service related to third party vendors i.e. coordinating with vendor on issue of delivery of software licenses, solving of bugs, license support, renewal of contracts and warranties, following up for updates, ensuring Group’s data security and integrity, etc.; and Supervise and ensure that right quality services are being provided by the third-parties to all its group companies across the globe. In view of the above, with respect to third party IT service costs, TDK AG undertakes larger functions and provide value in terms of coordination with the third-party IT service vendors on behalf of all the TDK group entities, ensuring right quality of services, maintain group’s data security etc. Therefore, one cannot conclude that TDK AG is only acting as a pass-through entity for allocating third party costs to other TDK group companies. Hence, TDK AG is required to be remunerated appropriately for such third- party costs. Moreover, the IT department in TDK India comprises of only three people at local level. This only demonstrates the level of coordination and management handled by TDK AG the group level so as to ensure smooth flow of continuous IT support. Such dedicated IT support service in place ensures access to highly specialized talent and resources as and when a company requires. It also helps in maximizing a company’s efficiency, saving business costs in the long run and provides access to latest technology. The fact that the company is in receipt of various application licenses to undertake its business operations could be verified from the fact that it has been using those licenses in its day to day business operation and without any separate cost being incurred by it. Further, the IT cost allocated to TDK India include 81.66% of the third-party cost and very minimal cost incurred by TDK AG itself i.e. 18.34%. This clearly suffices that there has been actual receipt of IT support as majority of the support services has been received from third parties.
2) Export Support Services (‘ESS’) a) NEED FOR ESS During FY 2013-14, approx. 55.54% (i.e. INR 3,840 / 6,914 million) and during FY 2014-15, approx. 55.18% (i.e. INR 3,546 / 6,426 million) of the total revenue of TDK India is from export activities. Therefore, it is necessary for TDK India to avail export support in the context of furthering its export market and increasing the market reach of its products Thus, there exists a need for dedicated product marketing team comprising of skillful resources who are constantly involved in analyzing market conditions for TDK India in terms of technology changes, product variation etc. b) RECEIPT & BENEFIT OF ESS To cater to the need of export support, TDK India has received services from TDK AG through well qualified team of resources rendering the desired services in an efficient manner. The dedicated product marketing team comprising of skilful resources constantly helps TDK India in analyzing market conditions in terms of technology changes, product variation etc. which has benefitted TDK India in increasing export turnover, expanding its business operations in the overseas market, increase the market reach of its products, etc. Following are list of functions performed by TDK AG personnel at local as well as global level for TDK India to render export support for products manufactured by TDK India: - Analyzing the market conditions in terms of growth rates, technology changes, price developments etc; - Developing product strategies for different market and assisting in implementing the same; - Preparing technical documents for product utility, making visual presentations; - Communicating the details of training and further education of the global product sales staff to TDK India; - Preparing guidelines (advisory nature) for conducting business transactions in different foreign locations; - Maintaining customer relationship, addressing concerns etc; - Negotiating with logistic vendors; and - Preparing guidelines with respect to export controls. Therefore, there could be no denial from the fact that services have been received and benefits have been derived by TDK India from receipt of services in relation to Export support. 3) Management Support Services (‘MSS’) a) NEED FOR MSS Differing high value services like consulting, financial advisory, supply chain & logistics, human resource management helps an organization in focusing on core business. MSS helps in strengthening the competitive position by logical approach to analyze the complex and the strategic management issues. It brings value and measurable performance improvement by saving entity’s valuable time and cost significantly. MSS are specialized for crafting solution to complex financial and strategic challenges of a multilateral enterprise. b) RECEIPT & BENEFIT OF MSS The regional HQ of each business division (i.e. TDK Malaga for TDK India’s business division) collates details at micro level from each entity and then forwards it to TDK AG at group level, for planning the further plan of action. In order to establish oneself as an efficient enterprise, overseeing overall growth of the group becomes pivotal. Accordingly,. The services availed by TDK India from TDK Malaga under MSS are in the nature of R&D Services, Quality management services, Internal audit services and other support services. TDK India is able to access best practices and develop efficiency through various types of reporting to regional HQ. Such incidental benefits cannot be directly linked with any tangible outcome It derives various benefits in the nature of daily check on operational performance of TDK India; alignment of TDK India’s sales strategy with the Group strategy and adoption of global best practices, minimise production costs, etc. Based on the above, it can be concluded that there was a need for availing intra group services and TDK India has derived benefit from such services. The Assessee has adduced documentary evidence supporting the need, rendition of services and benefits derived therefrom. The TPO has, without any basis, held the services to be in the nature of stewardship activity and has, without applying any of the 6 methods specified in section 92C(3) read with section 92CA of the Act, determined the ALP of such services at NIL. The same is not in consonance with law and is bereft of facts of the case. Therefore, it is submitted that the adjustment in this regard needs to be quashed.
We observe that the above described type of IT support services which the assessee is availing is majorly from third party service providers and very miniscule form AE. Also the other nature of services rendered by AE to the assessee are not specific but provided on day to day basis whenever needed. The AE has relevant expertise and there are various types of issues and problems attached in such services and the AE being an expertise in the international business – the assessee company is taking regular service through the personnel of AE to get guidelines on various fronts including the product marketing, management support, corporate sales, finance, other connected issues on various courses. In other words, for day to day smooth and effective working of business and for trying to keep an error free working environment, such intra group services have been taken.
The learned counsel for the Assessee reiterated submissions made before the DRP/TPO and drew our attention to the evidence in support of the services received by the Assessee from its AE, the rationale/need for services so received vis-à-vis the business of the Assessee, benefit received by the Assessee, the benchmarking approach adopted by the Assessee from recipient’s perspective and also from the service provider’s perspective, manner of allocation of costs by the service provider vis-à-vis the Assessee. He also explained the meaning of nature of stewardship services and as to how the payment made by the Assessee to its AE, are not in the nature of stewardship services. He drew our attention to certain cases of Hon’ble High Courts in India and various Benches of Income Tax Appellate Tribunal on the approach that should be adopted in determining ALP in cases of intra group services received from group companies (AE). We will make a reference to these decisions later.
The observation of the Revenue authorities is not specific but general in nature that the assessee has failed on the benefit test but nowhere any specific instances have been given to show that the so-called services taken by the assessee company from its AE under various agreements are not related to the nature of business carried on by the assessee. It is not the case that the assessee which is carrying on manufacturing of electronic business has paid the intra group service charges for some other unrelated business activity.
We have noted that the term ‘stewardship activity’ has not been defined by the I.T. Act. The Hon’ble Supreme Court has defined the term ‘stewardship activity’ in the matter of DIT (International Tax) vs. Morgan Stanley and Co. Inc. (and vice versa) reported in [2007] 292 ITR 416 (SC). In this connection, we wish to clarify that the ruling in the aforesaid decision, in our view, has no application to the facts of the present case. In the case of DIT (International Tax) vs. Morgan Stanley (supra), firstly, the observations were rendered in the context of an admitted factual position by the applicant before the Authority for Advance Ruling (AAR) that certain services were in the nature of stewardship services. Secondly, the observations were made by the Hon'ble Supreme Court as to whether stewardship activity rendered by the holding company for the Indian subsidiary in India would constitute a Permanent Establishment (PE) within the meaning of Article 5(2)(1) of the DTAA between India and USA. However, in the present case, the factual dispute is as to whether the IT services received by the assessee under the aforesaid agreement was in the nature of stewardship services or not. To this extent, we conclude that the aforesaid decision of the Hon'ble Supreme Court (supra) is not relevant to the present case. In this matter, we place reliance on the decision of this Tribunal in the matter of Akzo Nobel India Ltd vs. DCIT reported in [2017] 81 taxmann.com 366 (Kolkata - Trib.), a copy of which has been submitted to us by the assessee.
We further observe that in the instant case, the AO, did not make any adverse comment under section 37 of the I.T. Act but he only adopted the ALP adjustment of Rs. 276,889,467/- directed by the TPO because the order of the TPO was binding on him. As per the decision of the Hon’ble High Court of Bombay, in the case of CIT vs. Lever India Exports Ltd reported in [2017] 78 taxmann.com 88 (Bombay), the jurisdiction of the TPO is specific and limited, i.e., to determine the arm’s length price of an international transaction by applying any of the methods prescribed under sub-sections (1) and (2) of section 92C of the I.T. Act, being the most appropriate method. However, the TPO, in the instant case, determined the arm’s length price of the international transaction at Nil without applying any of the methods prescribed under sub- sections (1) and (2) of section 92C of the I.T. Act. We find that the principle enunciated by the Hon’ble High Court of Bombay in the aforesaid case is squarely applicable on the facts of the present case. Hence, we find that the aforesaid action of the TPO (that is, the determination of the ALP of the international transaction under consideration at nil) is without jurisdiction and it goes against the basic tenet of the Indian Transfer Pricing Regulation.
In our opinion the facts brought to our notice by the Ld Counsel for the Assessee clearly show that the Assessee has a prima facie case. In respect of the payments made for various intra group services, the evidence regarding benefit received by the Assessee have not been considered by the Ld. TPO / DRP. 22. We therefore conclude that the Assessee has established the nature of services including quantum of services received from AE, that services were provided in order to meet specific need of the assessee for such services, the economic and commercial benefits derived by the Assessee from intra group services. The Ld. TPO has not disputed any of the documentary evidences including the cost allocation.
In this regard, the Ld. Counsel also referred to the recent decision of Kolkata ITAT wherein on similar facts, the determination of IGS at ALP Nil was deleted by the Hon’ble bench in the case of AT&S India Private Limited (I.T.A. No. 1311/Kol/2018), wherein this Tribunal dealing with similar issue held as follows:- “It was alleged by the Revenue that the Ld. CIT(A) erred in concluding that the payment for intra-group services was at arm’s length without examining the cost of such service provider and without examining mark-up element incorporated in the quantum of service fee charged by the AE. In this connection, it is noted that as per the ‘I T Cost Pooling Agreement’, total cost was allocated to the AT&S group companies using appropriate allocation keys. It is further noted the TPO did not make any adverse comment in his order regarding the cost allocation certificate issued by the independent auditor namely PwC Wirtschaftsprüfung GmbH vide letter dated 17th April, 2014 and the allocation keys used for the purpose of allocation of cost to the individual group companies including the assessee. It is noted that the TPO did not raise any issue regarding the cost incurred by the service provider and mark-up element in the sum paid/payable by the assessee to AT&S AG. The sole allegation of the TPO was that the intra-group activities under the ‘IT Cost Pooling Agreement’ were in the nature of stewardship services and hence, he determined the arm’s length price of the international transaction under consideration at Nil value. Therefore, we note that the Revenue is raising an issue before this Tribunal in relation to which the TPO has not raised any objection. ………….In view of the above, we are of the considered view that the aforesaid allegation raised by the Revenue has no valid basis. As per the aforesaid decision of the Hon’ble High Court of Bombay, the jurisdiction of the TPO is specific and limited, i.e., to determine the arm’s length price of an international transaction by applying any of the methods prescribed under sub- sections (1) and (2) of section 92C of the I.T. Act, being the most appropriate method. However, the TPO, in the instant case, determined the arm’s length price of the international transaction at Nil value without applying any of the methods prescribed under subsections (1) and (2) of section 92C of the I.T. Act. The AO, in the instant case, had not disallowed the expenditure under section 37 of the I.T. Act but only adopted the ALP determined by the TPO in his order. We find that the principle enunciated by the Hon’ble High Court of Bombay in the aforesaid case is squarely applicable on the facts of the present case. Hence, we find that the aforesaid action of the TPO (that is, the determination of the ALP of the international transaction under consideration at nil value) is without jurisdiction and it goes against the basic tenet of the Indian Transfer Pricing Regulation.
24. We have noted that the term ‘stewardship activity’ has not been defined by the I.T. Act. The Hon’ble Supreme Court has defined the term ‘stewardship activity’ in the matter of DIT (International Tax) vs. Morgan Stanley and Co. Inc. (and vice versa) reported in [2007] 292 ITR 416 (SC). In this connection, we wish to clarify that the ruling in the aforesaid decision, in our view, has no application to the facts of the present case. In the case of DIT (International Tax) vs. Morgan Stanley (supra), firstly, the observations were rendered in the context of an admitted factual position by the applicant before the Authority for Advance Ruling (AAR) that certain services were in the nature of stewardship services. Secondly, the observations were made by the Hon'ble Supreme Court as to whether stewardship activity rendered by the holding company for the Indian subsidiary in India would constitute a Permanent Establishment (PE) within the meaning of Article 5(2)(1) of the DTAA between India and USA. However, in the present case, the factual dispute is as to whether the IT services received by the assessee under the aforesaid agreement was in the nature of stewardship services or not. To this extent, we conclude that the aforesaid decision of the Hon'ble Supreme Court (supra) is not relevant to the present case. In this matter, we place reliance on the decision of this Tribunal in the matter of Akzo Nobel India Ltd vs. DCIT reported in [2017] 81 taxmann.com 366 (Kolkata - Trib.), a copy of which has been submitted to us by the assessee.
25. We see no reason to take any view of the matter other than the view taken by the Division Bench of this Tribunal in assessee’s own case for the assessment years 2009-10, 2010-11, 2011-12 and 2013-14. As the issue is squarely covered in favour of the assessee by the decisions of the Division Bench in the assessee’s own case (supra) and there is no change in facts and law, we, respectfully following the above binding precedent, uphold the order of the CIT(A) for the assessment year 2014-15 and the contention of the assessee and we delete the ALP adjustment of INR 4,10,08,010/- made by the AO/TPO. Hence, the ground nos. (1), (2), (3), (4) and (5) are dismissed.”
In this regard, we would like to place reliance on the decision of Hon’ble Kolkata Tribunal itself in the case of N L C Nalco India Private Limited which states as under: “20. …..The essence is that a businessman himself is the best judge in determining the reasonableness / usefulness / benefit of an expenditure which is wholly and exclusively laid out for the purpose of business. The Revenue has no role to play in determining the reasonableness / usefulness / benefit of a business expenditure.
In the instant case, TPO computed the arm's length price of intra-group services received by assessee from Nalco Pacific under the aforesaid agreements at 'nil' value without applying any of the transfer pricing methodologies prescribed under section 92C of the Act read with rule 10B and 10C of the Rules. Accordingly, the action of the TPO in arriving at the arm's length price of the relevant international transactions at 'nil' value without application of any transfer pricing methodology, was without any basis and hence, was not sustainable. In the instant case, TPO was authorised to determine, by order in writing, the arm's length price of an international transaction in accordance with section 92C (3) of the Act. We find that the TPO did not make any adverse comments in his order upon the arm's length analysis carried out by assessee under the TNMM as per section 92C of the Act read with rule 10B of the Rules. Accordingly, we feel that TPO made proper enquiry and applied his mind to the details brought on record by assessee. He had agreed with the assessee that the international transactions covered by the TNMM analysis (including the intra-group service charge paid /payable to Nalco Pacific) adhered to the arm's length principle Transfer Pricing Regulation Accordingly, We are of the view that the first ground for confirming disallowance by CIT (A) that no independent documentary evidence had been furnished by assessee to show that the fact of actual services having been rendered to assessee and Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence, has no leg to stand.”
Similar view was also taken by this Tribunal in the case of Akzo Nobel India Limited [TS-379-ITAT-2017(Kol)-TP], Almatis Alumina (P.) Ltd. [TS-302- ITAT-2019(Kol)-TP], etc. wherein the documentary evidences has been considered and the adjustment has been deleted.
In view of our conclusion that the Ld. TPO and Hon’ble DRP were in error in holding that the nature of services rendered by AE were in the nature of stewardship activity or shareholder activity, we hold that the TPO’s conclusion that no charges ought to have been paid by the Assessee is without any basis. After considering all the evidences submitted by the Assessee and various judicial precedents relied on the Ld. Counsel, we conclude that the charges paid by the Assessee to AE are held to be at Arm’s Length. Consequently, the addition made by the revenue authorities in this regard are directed to be deleted and relevant grounds raised
on this issue are allowed.
27. The decision on this issue for Assessment Year 2014-15 shall apply mutatis mutandis to the grounds raised for Assessment Year 2015-16.
28. Accordingly, Ground Nos. 9, 10, 11, 12 & 14 for Assessment Year 2014-15 and Ground Nos. 7, 8, 9, 10 & 12 for Assessment Year 2015-16 are allowed.
29. Now, we take up the remaining grounds left for our adjudication for Assessment Year 2014-15.
30. Ground Nos. 7 & 8 for Assessment Year 2014-15, relate to TP adjustment made with respect to international transactions for export of ferrites for consumption by AEs.
31. The Ld. Counsel submitted that the assessee is primarily engaged in the business of manufacturing & sale of electronic components such as metalised plastic film capacitors (capacitors) & soft ferrite components (ferrites) of different shapes, sizes, weights and properties. In relation with the ferrites, assessee has sold ferrites to AEs for resale and for consumption and also to domestic third party customers. It was submitted that the sale of ferrites for consumption is miniscule to the total sales to AEs. Assessee applied Comparable Uncontrolled Price Method considering the third party price or price quotations received by the AEs from their existing vendors / suppliers. Since the sale price of the goods by Assessee is either equal to or more than the third party price, the transaction is concluded to be at arm’s length.
32. Aggrieved the assessee is now in appeal before this Tribunal.
The ld. Counsel for the assessee submitted that the sale price of the goods by the assessee is either equal to or more than the third party price, therefore, the transactions were concluded at arm’s length price only. It is also submitted that operating margin earned by assessee from sale of ferrites to AEs (i.e. -25.27%) is more than that of sales to Non AEs (i.e. - 25.47%) on the domestic sale to 3rd parties. The assessee has rightly applied Comparable Uncontrolled Price method, for the purpose of evaluating the ALP of the said transactions. The TP adjustment proposed by the ld. TPO on this issue at Rs. 2,57,10,000/- has been confirmed by the ld. DRP and thus addition was made in the final assessment order. It is also submitted that the Hon’ble DRP for subsequent Assessment Years i.e., Assessment Year 2015-16 to 2017-18, has accepted the CUP method adopted by the assessee for calculating the ALP of the similar transaction of sale to its AEs. 33.1. On the other hand, ld. D/R submitted that ld. TPO and ld. DRP has rightly applied the transaction net margin method (TNMM) and has rightly proposed adjustment and, therefore, the same should be confirmed.
We have heard rival contentions and perused the material available on record. The assessee sells ferrites for consumption to its AEs. Ferrites are required in the process of manufacturing as an input material. Assessee has sold ferrites to AEs for resale and for consumption and also to domestic third party customers, however, sale of ferrites for consumption is miniscule to the total sales of TDK India. The assessee has applied the CUP method for computing the ALP of the transactions of export of ferrites whereas the ld. TPO after conducting search public database selected to comparable companies and proposed adjustment to the entire ferrites scheme.
Before us, the Ld. Counsel submitted that the Ld. TPO has disregarded the benchmarking approach adopted by the Assessee, thereby applying external TNMM. Thus, the adjustment was made on the entire ferrite segment, including resale transaction amounting to Rs. 20,72,30,000/-. The Ld. Counsel submitted that Assessee challenged the Order of the TPO before the Hon’ble DRP. The Hon’ble DRP in its directions directed to delete the adjustment made in relation to the international transaction of ‘export of ferrites for resale’ and consider only the amount of towards the segment export/sale of ferrites products to the AEs for consumption. The Ld. Counsel contended that Hon’ble DRP ignored the internal TNMM workings for ferrites segment provided by the Assessee. Being aggrieved with the order of Hon’ble DRP, the Ld. Counsel preferred an appeal before us for this transaction. 35.1. It was brought to a notice by the ld. Counsel for the assessee that the ld. DRP in the assessee’s own case for subsequent assessment years 2015-16 to 2017-18 accepted the TNMM approach adopted by the assessee.
We have gone through the findings of the ld. DRP for the subsequent assessment years and the common fact arising in all these years is that the profit margin from sales to Associate Enterprises is better than the one from the sale to the third parties. Though it is an admitted fact that for the year under consideration the operating profit margin is (-) 25.27% whereas in the subsequent years it has scaled down to -6.94% for Assessment Year 2016-17 and a positive rate of 2.73% for Assessment Year 2017-18. We, however, failed to find any merit in the submissions made by the ld. Counsel for the assessee, because the only argument from its side is that its profit margin from the export sales to AEs, is better than export sales to domestic as well as to third parties but this ground in itself is not sufficient to brush aside the finding of the ld. Assessing Officer based on the proposed adjustment by the ld. TPO. Before us it has been accepted by the assessee that TDK Malaga, manufactures the ferrite goods for its AEs only on the basis of confirmed orders and specifications. The quantity of goods sold through export sale and domestic sales has not been placed before us. Only mentioning the profit margin will in itself not solve the purpose unless and until the quantity of goods exported in the domestic market are almost at par to the export sales to the AEs, and then only this contention of profit margin formula can be accepted. No such quantitative details have been filed at any stage.
Under these given facts and circumstances we restore this issue to the file of the Assessing Officer/TPO who shall call for the details from the assessee to examine the quantitative details of the export sales vis-à- vis domestic sales and only if both are reasonably at par (i.e., ± 10%), then only the internal TNMM method can be resorted to. For this, reasonable opportunity to file the all necessary documents shall be provided to the assessee. And, if it is found that the profit margin on export sales is better than the domestic sales then under such circumstances no adjustments will be called for.
Accordingly, Ground Nos. 7 & 8 for Assessment Year 2014-15 are allowed for statistical purposes.
Ground No. 16 for Assessment Year 2014-15, relates to disallowance of provision for slow-moving and non-moving inventory.
At the outset, the ld. Counsel for the assessee submitted that the said adjustment of not allowing the provision for slow-moving and non- moving inventory is not justified because the assessee has made the adjustment based on Accounting Standard 2 issued by ICAI. 41. On the other hand, the ld. D/R supported the orders of the lower authorities. 42. We have heard rival contentions and perused the material placed before us. We notice that the assessee created the provision of Rs.1,32,00,000/- for slow-moving items and claimed it as an expenditure based on a scientific basis. The ld. Assessing Officer, however, disallowed the same treating the provision to be contingent in nature and not allowable. When the matter travelled before the ld. DRP, following directions were given to the Assessing Officer:- “2.6.2 We have considered the submissions of the assessee and the AO's order. Obsolescence of machinery and/or spare parts/inventory is a normal occurrence in business. It has to be examined as to whether the inventory written off is part of capitalized fixed assets or day-to-day consumables/inventory of stock, and specific findings have to be giver to such claim of obsolete inventory. In case the obsolete inventory written off relates to capitalized fixed assets, the write off is to be accounted for in the fixed assets as per law and accounting principles. However, if obsolete inventory written off relates to day-to-day consumables/inventory of stock, the write off is to be treated as revenue expenses on actual basis. Such write off cannot be allowed to be as revenue expense on estimate basis. The assessee has not submitted the details of the inventory written off as obsolete except for debiting in the P&L account. The AO is directed to examine such inventory details submitted to him/her and give specific finding as per directions contained herein above and to take the correct figure of Rs 1,32,00,000/-.”
However, in the final assessment order under section 143(3) of the Act, the ld. Assessing Officer disallowed the provision for slow-moving and non-moving inventory.
Aggrieved the assessee is now in appeal before this Tribunal. 45. Firstly, the ld. Counsel for the assessee submitted that Ld. AO proposed to disallow Rs. 13,20,00,000 in the draft order u/s 143(3) r.w.s. 144C(1) of the Act on an adhoc basis treating the provision to be contingent in nature and not allowable as per the Act. Before the Hon’ble DRP, the assessee duly highlighted that the Ld. AO has erroneously disallowed Rs. 13,20,00,000 as against Rs. 1,32,00,000, who corrected the figure. As regards the provisions made for slow-moving item it is submitted that the assessee has already provided the manner of creation of aforesaid provision and justification for claiming deduction for the said sum on provision basis before the Hon’ble DRP and also submitted the details of such inventory on which provision was created in last 4 years. The Hon’ble DRP, however, directed the Ld. AO to examine such inventory details and consider the correct figure of Rs. 1,32,00,000 thereby upholding the approach of Ld. AO. 46. Being aggrieved with the order of Ld. AO pursuant to direction of Hon’ble DRP, the Assessee preferred an appeal before us for this transaction. 47. In this regard, the Ld. Counsel invited our attention to written submission filed by assessee before us wherein it has explained the approach adopted for maintaining books of accounts and creation of the provision. The assessee follows mercantile system of accounting and records stock (including creation of provision) as per Accounting Standard 2 issued by the ICAI.
The Ld. DR has argued that the Assessee has no basis for making these provision and the provisions are only based on certain arbitrary assessment. Merely putting the value under provision of slow moving and non moving item does not lead to deduction of provision from total income of the Assessee. In support of his contention Ld. DR relied upon ruling in case of CIT vs Heredilla Chemicals Ltd. [1997] 225 ITR 532 / 94 Taxman 420. Moreover, Ld. DR has argued that the Assessee has itself realized this and added back provision for slow moving and non moving inventory to arrive at the Book Profit.
We have heard rival contentions and perused the material placed before us. The issue pertains to disallowance of provision made for slow- moving and non-moving inventory at Rs.1.32 Crores. 50. We note that the Assessee has created provision for the slow moving and non-moving inventory based on the guidance given under the Accounting standard 2 issued by the ICAI by adopting scientific approach to derive the value of the provision. In result, we have considered the provision of slow moving and non moving as business loss and consider appropriate to direct the Ld. AO to delete the adjustment the additions made by the ld. AO are hereby directed to be deleted. Hence, the Ground No. 16 is allowed. 51. The last issue for our consideration is Ground No. 17, for Assessment Year 2014-15 relating to claim of loss towards capital work in progress written off at Rs. 2,02,01,473/- 52. Facts in brief are that in view of the fast-growing demand of new series of transformers in the year 2010, assessee company planned to establish a plant for manufacturing of the series of transformers. Certain expenses were incurred for the said plant but in the year 2013, due to low demand of the aforesaid series of transformers, and shifting of the market to automotive and high current transformer applications, assessee decided to close the transformer plant at Kalyani and the same was shut down. Expenses incurred on the said plant appearing in the capital work in progress at Rs. 2,02,01,473/-, was claimed as deduction. The ld. Assessing Officer treated the same as capital expenditure in the draft assessment order and the same was upheld by the ld. DRP stating that the assessee had not submitted any detail of capital work in progress. The ld. Assessing Officer passed the final assessment order in conformity to the directions of the ld. DRP.
Aggrieved the assessee is now in appeal before this Tribunal.
The Ld. Counsel for the assessee submitted that the Assessee had been incurring expenses for construction of an asset which was being debited under the head CWIP. The Ld. Counsel highlighted that on account of technological advancement, the division for which such expenditure had been incurred got obsolete and CWIP pertaining to the same was written-off and the same was inextricably linked to the business of the assessee, hence the same should be allowed as a business loss.
The Ld. Counsel drew our attention to the fact that the Ld. AO, in the draft assessment order, proposed to disallow the aforesaid claim lodged by the assessee holding it as capital loss not entitled for deduction as revenue expense which was also upheld by Hon’ble DRP by erroneously stating that the Assessee had not submitted the details of CWIP and that the Assessee had only made legal arguments in its submissions. However, the Ld. AO himself recognized the fact that the aforesaid expense was incurred prior to bringing the asset into usable condition. Being aggrieved with the order of Ld. AO pursuant to direction of Hon’ble DRP, the Assessee preferred an appeal before us for this transaction.
The Ld. Counsel placed reliance on below mentioned judicial precedents to support its above contention for allowance of deduction of CWIP as a business loss: a. Binani Cement Limited vs CIT (Jurisdictional HC - 380 ITR 116) b. Royal Calcutta Turf Club vs DCIT (I.T.A No. 231/Kol/2013) c. CIT vs Idea Cellular Ltd. [2016] 76 taxmann.com 77 (Bombay) d. Daimler Chrysler India (P.) Ltd. vs DCIT [2018] 98 taxmann.com 53 (Pune - Tribunal) e. CIT Vs. Seshasayee Paper and Boards Ltd, 243 ITR 421 f. CIT Vs. Tata Robins Fraser Ltd reported in 211 Taxman 257 g. Indo Rama Synthetics (I) Ltd. vs CIT reported in [2009] 185 Taxman 277 (Delhi) 57. On the other hand, the ld. D/R vehemently argued supporting the order of the lower authorities.
We have heard rival contentions and perused the material placed before us. We find that the assessee has not placed any documents before the lower authorities. The finding of the ld. DRP clearly states that assessee only made legal arguments but did not furnish any detail in respect of the capital work in progress. It is an admitted fact at the end of the assessee also that the Kalyani plant was just a venture by the assessee company and the plant never came into existence. It is also not proved that whether the regular business activity of the assessee company is similar to the one which was planned to be carried out at Kalyani plant i.e., manufacturing of new series of transformers. No evidence has been placed before us to prove that it is a part of business loss. If the said loss has been incurred in the regular course of business, then the same should have been written off from the fixed assets block. Before us the claim of the assessee is that it is a revenue loss but to prove that the same as revenue loss no details has been filed before the lower authorities and even before us the assessee has been unable to justify the said claim. Prima facie, the said claim seems to be a capital loss but since the details of such loss is not placed before the lower authorities we, in the interest of justice restore this issue to ld. TPO who shall provide the assessee sufficient opportunity to place all relevant details on record and thereafter examine the nature of the loss and decide in accordance with law.
Accordingly, Ground No. 17 for Assessment Year 2014-15, is allowed for statistical purposes.
In the result appeal of the assessee for Assessment Year 2014-15 is partly allowed for statistical purposes and appeal of the assessee for Assessment Year 2015-16, is allowed. Order pronounced in the open court on 22.08.2023. Sd/- Sd/- (Sonjoy Sarma) (Manish Borad) Judicial Member Accountant Member Dated: 22.08.2023 SC Sr. P.S.
Copy of the order forwarded to:
1. 1. Assessee- M/s. TDK India Private Limited (formerly known as EPCOS India Private Limited), WBIDC Growth Centre, Kulia Kanchrapara Road, P.O. NS Sanatorium, Kalyani, Nadia, Kolkata-741251.
2. Respondent – DCIT, Circle-11(1), Kolkata.
3. Ld. CIT 4. Ld. CIT(A) 5. Ld. DR