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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee has filed these five appeals challenging orders passed by Ld CIT(A)-4, Bangalore for assessment years 2009-10 to 2013-14. Since common issues are urged in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience.
In all the five years, the assessee is challenging the decision of Ld CIT(A) in confirming the transfer pricing adjustment made in IT(TP)A Nos.118 to 122/Bang/2018 M/s. Mersen India Pvt. Ltd., Bangalore
Page 2 of 8 respect of fee paid for management services determining the ALP as NIL. In AY 2012-13 and 2013-14, the assessee is challenging the decision of Ld CIT(A) in confirming the disallowance of writing of loose tools.
The assessee is engaged in the business of manufacture and sale of Carbon Blocks and brushes, fuses and heat exchangers and also trading in fuses. The assessee was formerly known as Carbon Lorraine India P Ltd and it is subsidiary of Le Carbone Lorraine S.A, France. The assessee has entered into several international transactions with its AE in all these years. We are concerned with the Management fee paid by the assessee to its AE. The assessee had paid to its AE for eight different types of services. The TPO, applying benefit test, determined the ALP of payment of management services as NIL. The conclusions of TPO given in AY 2009-10 are extracted below:-
“8.1 The taxpayer has not shown that the alleged services received from its AE for which payment of management fee amounting to Rs.91,51,375/- has been made, are required for the taxpayer’s business and also that the taxpayer is not capable of getting these services locally or on its own. 8.2 The taxpayer did not prove with evidences that the services have been actually rendered by the AE for which said payment of management/maintenance fees have been made. At arm’s length, the parties dealing in similar circumstances would have such evidences in possession. 8.3 No cost benefit analysis has been furnished by the taxpayer to show that, the taxpayer has benefitted out of the alleged services and the payment is commensurate to the benefit received. 8.4 The taxpayer has also not furnished any details and evidences to show how the alleged services rendered by the AE are quantified at an arm’s length condition. This shows that these management fees are not linked with actual services but a way to siphon of the profits with minimum incidence of tax. 8.5 The taxpayer did not show what is the tangible and substantial commercial benefit derived by the taxpayer from the IT(TP)A Nos.118 to 122/Bang/2018 M/s. Mersen India Pvt. Ltd., Bangalore Page 3 of 8 alleged services and consequent payment of management/maintenance fees of Rs.91,51,375/- and consequently did not prove the arm’s length nature of management fees paid to its AE.”
The Ld CIT(A) accepted Arm’s Length Price in respect of five items and confirmed the decision of TPO in respect of remaining three items. It is pertinent to note that the revenue has not filed appeals challenging the relief granted by Ld CIT(A) in respect of all the five years and hence the said issue has attained finality. The assessee is contesting the transfer pricing adjustment confirmed by the Ld CIT(A) in respect of following three items in all the five years:-
Marketing, Strategy & Commercial & Human Resources Assessment year General International Services ("HR management relationship Services”) (Rs.) services (Rs.) (Rs.) 2009-10 12,21,868/- 13,80,433/- 17,04,348/- 2010-11 15,28,642/- 13,32,855/- 20,30,936/- 2011-12 18,77,187/- 13,55,433/- 18,92,768/- 2012-13 13,39,049/- 8,40,840/- 10,76,714/- 2013-14 12,14,847/- 10,67,857/- 29,56,967/-
The Ld A.R submitted that (i) the TPO is not justified in applying benefit test in determining the ALP of the international transactions.
(ii) the TPO, having accepted the ALP of international transactions at entity level under TNM method and also on noticing that the management fee formed part of operating expenses, could not have made adjustment separately for payment of management expenses.
(iii) the TPO was not justified in not determining ALP by following one of the prescribed methods in accordance with IT(TP)A Nos.118 to 122/Bang/2018 M/s. Mersen India Pvt. Ltd., Bangalore
Page 4 of 8 sec.92C(3) of the Act, since his role is determination of ALP only and nothing else. Hence determination of ALP at NIL by applying benefit test is not in accordance with the provisions of Chapter X of the Act and also beyond his jurisdiction.
(iv) the TPO has erred in failing to appreciate that the AAR, in the assessee's own case reported as Mersen AAR (2012) 208 Taxman 486 (AAR) has upheld, on identical set of facts, the argument of the revenue that the associated enterprises is not only rendering managerial and consultancy services to the assessee, but also is making available to technical knowledge to the assessee. Hence the revenue could not have taken a different stand in the years under consideration.
(v) the Ld CIT(A) was not justified in confirming the action of the TPO in respect of above said three services.
In support of above said contentions, the Ld A.R placed his reliance on host of case laws.
We heard Ld D.R and perused the record. We notice that the TPO has accepted that the international transactions at "entity level" is at arm’s length. We also notice that the management fee paid by the assessee formed part of operative expenses. Hence the Ld A.R has contended that the TPO could not have benchmarked management fee paid by the assessee separately. We also notice that the TPO has determined ALP of management fee payment by applying benefit test. The Ld AR also contended that the ALP of international transactions should be determined by TPO under one of the prescribed methods only. It is also submitted by the ld A.R that the revenue has taken stand before AAR in the assessee's own case that the AEs are not only rendering managerial and consultancy services to the assessee, but also is making available to technical knowledge
IT(TP)A Nos.118 to 122/Bang/2018 M/s. Mersen India Pvt. Ltd., Bangalore
Page 5 of 8 to the assessee. Accordingly he contended that the TPO could not have taken different view in these years.
It is well settled proposition of law that the ALP of international transactions could be determined by TPO under one of the prescribed methods only. However, in the instant case, the TPO has applied benefit test and determined ALP of payment of management services as NIL. Hence the approach of the TPO is not in accordance with the mandate of law. The Ld A.R has also raised two other contentions
(i) with regard to the necessity of segregating this transaction, when the ALP had been determined at entity level aggregating the payment of management fee and (ii) with regard to not following the decision rendered by AAR in the assessee's own case in an earlier year.
We notice that the Ld CIT(A) has held that the principle of res- judicata cannot be applied in income tax proceedings and accordingly refused to follow the decision rendered by AAR. We are unable to agree with the view so expressed by Ld CIT(A). When the assessee is making identical payment every year for identical services provided by AE and the revenue has taken a particular stand with regard to the services so provided by the AE, in our view, there is no scope for applying the principle of res-judicata in other years for this matter for taking different stand in others for the identical payments made by the assessee. However, it is not clear as to whether the decision rendered by AAR against the assessee has attained finality or not.
Accordingly, on a conspectus of the matter, we are of the view that the issue relating to transfer pricing adjustment in respect of three types payments referred in the table issue needs to be examined in the light of contentions of the assessee discussed supra at the end
IT(TP)A Nos.118 to 122/Bang/2018 M/s. Mersen India Pvt. Ltd., Bangalore
Page 6 of 8 of TPO/AO. The tax authorities should first examine the contention of the assessee that there is no requirement of making separate bench marking for these services, when they are aggregated and the ALP of international transactions were accepted to be at arm’s length. The AO/TPO should also take into consideration the decision rendered by AAR in the assessee's own case, if it has attained finality. After carrying out these exercises, if the AO/TPO comes to the conclusion that the bench marking is still required to be made, then the TPO shall determine ALP of these transactions under one of the prescribed methods only. The assessee shall be given adequate opportunity of being heard.
In AY 2012-13 and 2013-14, the assessee is contesting the disallowance of write of loose tools amounting to Rs.5,72,102/- and Rs.13,52,678/- respectively. We notice that the co-ordinate bench of Tribunal has considered an identical issue in the assessee's own case in AY 2008-09 in dated 11.09.2020. We notice that the co-ordinate bench has deleted an identical disallowance made in AY 2008-09 with the following observations:-
"10. Next ground is regarding disallowance of Rs.3,50,544 being 25% of charges of tools which are written off during the year. The assessee has debited a sum of Rs.3,50,544 as being the charges of tools written off. It was submitted before the Assessing Officer that the assessee has practice of writing off of 25% of charges of tools in each assessment year. According to the Assessing Officer, it has to be grouped under the head Block of Assets and depreciation to be claimed at applicable rate. The Assessing Officer disallowed the amount and granted depreciation @ 10%. On appeal, the CIT(Appeals) confirmed the action of the Assessing Officer on this issue. Aggrieved by the assessee, the assessee is in appeal before us.
IT(TP)A Nos.118 to 122/Bang/2018 M/s. Mersen India Pvt. Ltd., Bangalore
Page 7 of 8 11. We have heard the rival contentions, perused and carefully considered the material on record. The learned Authorised Representative submitted that the loose tools is nothing but inventories and have no span of life and the loose tools to be considered as inventories awaiting to use in product process and same to be accounted at cost or net realizable value whichever is lower as prescribed in A.S. II of ICAI. According to ld. AR, the assessee has been following the Inventory Policy on valuation of loose tools which is disclosed in Schedule 18 (vii) to audited financial statements. " Loose Tools are charged of consumption @ 25% per annum on the reducing balance method." The net realizable value of inventory are considered and valued at 75% of the processing value. In our opinion, the method adopted by the assessee to value the loose tools is justified. The loose tools are neither plant nor machinery nor buildings nor furniture nor fixtures and method valued by the assessee consistently accepted by the revenue authorities. Accordingly, we allow this ground of appeal of the assessee."
Accordingly, following the decision rendered by co-ordinate bench in AY 2008-09 in the assessee's own case, we set aside the order passed by Ld CIT(A) on this issue in AY 2012-13 and 2013-14 and direct the AO to delete this disallowance.
In the result all the appeals of the assessee are treated as allowed.
Order pronounced in the open court on 5th May, 2022.