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Income Tax Appellate Tribunal, PUNE BENCH “C”, PUNE
Before: SHRI R.S. SYAL & SHRI S.S. VISWANETHRA RAVI
आदेश / ORDER
PER R.S.SYAL, VP :
This appeal by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) in relation to the assessment year 2015-16.
Tersely stated, the facts of the case are that the assessee is a subsidiary of Rieter group based in Switzerland. The assessee is engaged in the manufacture of textile machineries, related parts and components. It also provides sales and after-sales services for textile machinery and equipments manufactured and sold by Rieter group companies in India. The assessee filed its return of income accompanied by the Form 3CEB detailing certain international transactions. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transactions. The TPO has disputed only two transactions, namely, `Import of raw materials and components’ and ‘Sale of products’. The first transaction has been split into two parts, namely, for Rs.57.20 crore and Rs.297.78 crore. The Internal Comparable Uncontrolled Price (CUP) method was applied by the assessee for the first part and External Transactional Net Margin Method (TNMM) for the second part of this international transaction. The other transaction of `Sale of products’ amounting to Rs.416.64 crore was also processed under the External TNMM for showing the same to be at ALP. The TPO did not accept the application of the Internal CUP and External TNMM for two parts of the first international transaction of Import of raw materials and components. He aggregated both the parts of the first transaction of import of raw materials and the second transaction of sale of products and administered the External TNMM for determining the ALP. Five comparables were finally chosen, out of which three were selected by the assessee and remaining two by the TPO. By considering the average Profit Level Indicator (PLI) of adjusted Operating Profit/Operating Revenue of the comparables at 5.05%, the AO worked out the transfer pricing adjustment at Rs.68,97,95,410/-. No relief was allowed by the Dispute Resolution Panel (DRP), which led to the making of the transfer pricing addition of Rs.68.97 crore by the AO in the final assessment order. The assessee is in appeal against the addition.
We have heard both the sides and gone through the relevant material on record. The first issue raised by the assessee is against certain inclusions and exclusions made by the TPO in the list of comparables. We will take up such comparables, one by one, for ascertaining the correctness of their inclusion or otherwise in the final list of comparables.
Egi Electric Industries Ltd.(Textile Division Segment) :
4.1 The TPO included this company in the list of comparables.
The assessee’s objections that it was functionally dissimilar did not persuade the AO.
4.2 It is seen that this company was included by the TPO in the list of comparables in the immediately preceding assessment year, namely, A.Y. 2014-15, which came up for consideration before the Tribunal. Vide order dated 28-04-2022 (ITA No.1947/PUN/2018), the Tribunal held it to be not comparable. In fact, the relevant data of Elgi Electric Industries Ltd. for the preceding year was not available before the Tribunal and it relied on the Director’s report of this company for the year under consideration to hold that the said company was functionally different. Relevant discussion has been made in para 13.2 of the order to the effect that no precise reference to the nature of work done by the company was made in the entire Annual report. What could be gathered was only that this company was manufacturing a) Bobbin Transport System; b)
Yarn Conditioning System; and c) Overhead Travelling Cleaner, which indicated that this company was in the business of textile and not of manufacturing textile machines. As the assessee is engaged in manufacturing textile machines and not in manufacturing textiles, we hold that this company was not justifiably included in the list of comparables. Its exclusion is directed.
Luwa India Private Limited :
5.1 The next comparable challenged by the assessee is non inclusion of Luwa India Private limited. The assessee requested for the inclusion of this company, which was not allowed by the TPO.
5.2 We find from the Annual report of this company, a copy of which has been placed in the paper book, that “it is manufacturing, assembling, installing, fabricating, purchasing, selling, importing, exporting, dealing, repairing, servicing, renovating, hiring out or letting out on hire industrial air engineering machinery for textiles, textile humidification plants, machinery cleaning systems for textile machines, filtration and waste removal systems, humidification and filtration plants for controlling humidity and air pollution, industrial process and comfort air treatment systems”.
On going through the description of products or services, it is clear that this company is engaged both in manufacturing textiles and air pollution machineries. In addition, this company is also into hiring out or letting out of air engineering machinery and the entire revenue is in a common pool. As the assessee is engaged only in manufacturing textile machinery and not air treatment systems and further is also not into hiring of machines, we hold that this company has been rightly excluded by the TPO from the list of comparables. Similar decision has been taken by the Tribunal in the assessee’s own case for the immediately preceding assessment year.
Veejay Lakshmi :
6.1 This company was not included by the assessee in its list of comparables. The TPO initially proposed to include it and called for the comments of the assessee. Thereafter, he realised that some extraordinary financial event had occurred in this company. After entertaining the objections from the assessee, the TPO did not consider it for inclusion in the final list of comparables. No relief was allowed by the DRP. Aggrieved thereby, the assessee has approached the Tribunal.
6.2 We find from the Annual report of this company, whose copy has been placed at 278 onwards of the paper book, that Veejay Lakshmi Textiles Ltd., the erstwhile wholly owned subsidiary of the company, merged with it by means of amalgamation from 01-04-2014. The audited accounts of the company for the financial year 2014-15 cover both the operations of the Engineering activities of the company (being run by it earlier also, which the assessee is seeking as comparable) and Textile business handled by the erstwhile subsidiary earlier. From this narration of facts, it can be seen that the amalgamation took place in the year under consideration by which the textile business of the erstwhile subsidiary was amalgamated with this company and the financial accounts were drawn on a consolidated basis. The ld. AR emphasized that the fact of amalgamation should not result into exclusion because the merger took place of the textile business of the subsidiary which was separate from the regular business owned by it under the Engineering Division. We find from the Director’s report of this company that under the head “R&D/Technology and Awards”, it has been mentioned that “the focus of the company is on product development to improve productivity and energy conservation. The company’s R&D efforts resulted in the development of a new model of Two for one Twister with energy efficient spindles. This has been recognized by the Textile Machinery Manufacturers’ Association (India) in the selection of the company for R&D award for the year 2014-15’. This discussion has been made with reference to the Engineering Division of this company, which is engaged in the manufacturing of textile machinery. It can be seen from the above quoted portions from the Director’s report that this company has been engaged in substantial R&D activities in the Engineering Division and also developed new products which were recognized by the Textile Machinery Manufacturers’ Association (India) and also selected it for R&D award for the year 2014-15. As against this, the assessee is not engaged in any R&D activity. That being the position, the Engineering Division of this company cannot obviously be considered as comparable to the assessee company.
We uphold the exclusion of this company from the list of comparables.
Apart from the inclusion or non-inclusion of the above companies, the assessee has also challenged its own PLI computation by the TPO. The assail is limited only to three items, namely, (1) Duty drawback, (2) Balances written off and (3)
Incremental Export Incentives, all of which were taken by the TPO as non-operating.
7.1 For duty drawback, the TPO held that the assessee did not submit any details of duty drawback income and further it was not clear whether it pertained to the imports made during this year or earlier years.
7.2 It can be seen from the assessee’s “Notes to accounts”, forming part of the Annual accounts, that it has been reported under “Other income” that “Income from duty drawback and premium on sale of import licenses is recognized on accrual basis”.
This shows that the income from duty drawback is recognized only when the exports are made. In that view of the matter, the point canvassed by the TPO that the duty drawback may be pertaining to some earlier years, stands nowhere. Be that as it may, duty drawback is a concession given by the Government of India to encourage exports so as to make the exporters more competitive in the world market. Sale prices are fixed by the exporters for the global market by taking into consideration the export incentives including duty drawback. Higher the incentives lower the prices in the international market. It is axiomatic that duty drawback is directly concerned with the sales revenue generated by a company.
There is no point in treating the amount of duty drawback as non- operating income. We, therefore, overturn the impugned order on this score.
7.3 The next item is Sundry balances written off amounting to Rs.38,09,046/-. It has been brought to our notice that similar issue cropped up in the appeal of the assessee for the immediately preceding assessment year, in which the Tribunal remitted the matter to the AO/TPO for re-deciding it in the light of certain directions given. Facts being similar, following the same, we set- aside the impugned order on this score and send the matter back to the file of the AO/TPO for deciding it afresh accordingly.
7.4 The last item is Incremental Export Incentives of Rs.1,10,71,003/-. The TPO considered this item as non-operating.
The ld. AR invited our attention towards certain material indicating that the Government of India allowed export incentives with reference to the increased exports in this year vis-à-vis the preceding year. This again is nothing but an item of operating revenue because of its direct relation with sales. We, therefore, direct to include this amount in the operating revenue of the assessee in the PLI determination.
The last aspect of the transfer pricing adjustment is against not making proportionate transfer pricing adjustment. The TPO adopted the figure of operating revenue at Rs.902.88 crore. The assesssee’s contention before the DRP that non-AE transactions should be excluded for the purposes of the ALP determination did not find favour. It is seen that the TPO recommended the transfer pricing adjustment by considering the entity level figures of the assessee under the TNMM without restricting it to the international transactions.
The issue of restricting the transfer pricing adjustment to the transaction level rather than the entity level is no more res integra in view of several judgments rendered by various higher forums including the Hon’ble jurisdictional High Court holding that the transfer pricing adjustment should be restricted only to the international transactions and not the entity level transactions. The Hon’ble jurisdictional High Court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd. (2019) 414 ITR 704 (Bom.) has held that the transfer pricing adjustment made at entity level should be restricted to the international transactions only. Here, it is pertinent to mention that the Department’s SLP against the judgment in the case of Phoenix Mecano (India) Pvt. Ltd. has since been dismissed by the Hon’ble Supreme Court in CIT Vs. Phoenix Mecano (India)
Pvt. Ltd. (2018) 402 ITR 32 (St.). Similar view has been taken by the Hon’ble Bombay High Court in CIT Vs. Thyssen Krupp Industries Pvt. Ltd. (2016) 381 ITR 413 (Bom.) and CIT Vs. Tara Jewels Exports (P). Ltd. (2010) 381 ITR 404 (Bom.). We, therefore, set aside the impugned order on this score and direct that the transfer pricing adjustment should be restricted only to the value of international transactions.
To sum up, the impugned order on the issue of transfer pricing adjustment of the international transactions of `Import of raw material and components’ and `Sale of products’ is set aside and the matter is remitted to the file of the AO/TPO for a fresh determination in the terms indicated above. Needless to say, the assessee will be allowed reasonable opportunity of hearing in such fresh proceedings.
The only other ground which survives in the instant appeal is against the addition of Rs.1,64,61,000/- made by the AO on account of Government grant.
11.1 The facts apropos this issue are that the assessee received Government grant of Rs.16.46 crore under Package Scheme of Incentives, 2007. The AO held this amount to be revenue nature and thus made the addition. However, while computing the total income, the addition was made for a sum of Rs.1.64 crore instead of Rs.16.46 crore. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.
11.2 Having heard the rival submissions and gone through the relevant material on record, we find that the assessee received subsidy under Package Scheme of Incentives, 2007 from the Maharashtra Government. Preamble of the Scheme states that:
`State has declared the new Industrial, Investment, Infrastructure Policy 2006 to ensure sustained Industrial growth through innovative initiatives for development of key potential sectors and further improving the conducive industrial climate in the State’. It further provides that “new projects, which are set up in these categories in different parts of the State, will be eligible for Industrial Promotion Subsidy”. The quantum of subsidy has been linked to the Fixed Capital Investment and the payment of incentive equal to 25% of the relevant taxes paid by the eligible unit to the State. On going through the Scheme, it becomes evident that the purpose and object of this Scheme is to incentivize industrialists to set up new industries in the backward areas. It is only the manner of disbursement of the subsidy which is linked with the payment of taxes. What is essential for ascertaining the taxability or otherwise of subsidy is to see the purpose for which it was granted. In that view of the matter, the amount in question cannot be treated as a revenue receipt.
11.3 At this stage, it is vital to mention that we are concerned with the A.Y. 2015-16 and the Finance Act, 2015 has inserted clause (xviii) to section 2(24) w.e.f. 01-04-2016 providing that assistance in the form of subsidy or grant of cash incentives etc., other than the subsidy which has been taken into consideration in determining the actual cost of the asset in terms of Explanation 10 to section 43(1), shall be considered as an item of income chargeable to tax. Since the amended provision of section 2(24)(xviii) is not applicable to the year under consideration, the fortiori is that the subsidy received by the assessee cannot be included in its total income. We, therefore, overturn the impugned order and direct to treat the subsidy as an item of capital receipt not chargeable to tax. Similar view has been taken by the Tribunal in the case of the assessee for the immediately preceding year. Thus the addition of Rs.1,64,61,000 is directed to be deleted.
In the result, the appeal is partly allowed. Order pronounced in the Open Court on 27th July, 2022.