Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’, NEW DELHI
Before: SH. N. K. BILLAIYA & MS. SUCHITRA KAMBLE
PER N. K. BILLAIYA, AM:
This appeal by the assessee is preferred against the order of the CIT(A)-1, Gurgaon dated 25.01.2016 pertaining to A. Y.2011- 12.
The grievance of the assessee read as under :-
That on the facts and circumstances of the case and in law, the
order passed by the Learned Commissioner of Income Tax (Appeals) [“Ld. CIT(A)”] under section 250 of the Indian Income Tax Act (“the Act”) is bad in law.
That on the facts and circumstances of the case, the Ld. CIT(A) grossly erred in interpreting the provisions of Section 246 of the Act thereby holding the appeal as not maintainable.
That on the facts and circumstances of the case, the Ld. CIT(A) grossly erred in not considering the legal and factual submissions made by the Appellant in regard to the fact that the adjustment made by Ld. AO / Ld. TPO would have a futuristic impact on the income of the Appellant. 4. That the Learned Deputy Commissioner of Income Tax, Circle-2(1), Gurgaon [“Ld. AO”] / the Learned Additional Commissioner of Income Tax, Transfer Pricing Officer-l(3), New Delhi [“Ld. TPO”] erred on facts and in law by holding that its international transaction pertaining to payment of development cost does not satisfy the arm’s length principle envisaged under the Act. 5. That the Ld. AO / Ld. TPO erred on facts and in law by disallowing the payment of development cost and holding that the corresponding depreciation on this cost in subsequent years be disallowed, and in doing so the Ld. AO / Ld. TPO grossly erred in:
5.1 disregarding the arm’s length price, as determined by the Appellant in the transfer pricing documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules and holding that Transactional Net Margin Method is not the most appropriate 5.2 disregarding the fact that the international transactions undertaken by the Appellant did not have any impact on the taxable income of the Appellant in the relevant assessment year, and accordingly provisions under section 92 of the Act are not applicable on such transactions;
5.3 failing to appreciate the business arrangement between the Appellant and its AE for the payment of development cost;
5.4 challenging the genuineness of transaction by ignoring the various substantive evidences produced by the Appellant to demonstrate the actual receipt and benefit of technical assistance received during the relevant assessment year;
5.5 misinterpreting the fact of the case and misquoting that the payment for development cost are linked with the purchase of raw material from AE while the actual purchases from AE were insignificant and immaterial; and
5.6 disallowing the development cost on the ground that the basis of charge and mark-up was not provided by the Appellant, even though the same was never requested by the Ld. TPO during the course of proceedings u/s 92CA of the Act.
That the above grounds of appeal are independent and without prejudice to each other.
That the Appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.
The appellant company is a Joint Venture which was set up in India between Inergy Automotive Systems SA, Inergy Automotive Systems SAS(France), Suzuki Motor Corporation (Japan) and Maruti Suzuki India Limited. The company is engaged in the business of manufacturing of plastic fuel tanks for motor vehicles.
The international transaction entered into, by the assessee are
tabulated below. The table also provides the transfer pricing approach of the assessee followed by the assessee in benchmarking its international transactions. The table provides the values of the international transactions, the most appropriate method (MAM) adopted by the assessee, the profit level indicators (PLI) used by the assessee. SI. No. Nature of Transaction Method Amount (in INR )
1 Payment of Development Cost 19,800,000 2 Purchase of raw materials 569,242 TNMM 3 Purchase of machinery 10,608,771 4 Purchase of components 89,701 5 Issue of Share Capital 125,440,000 CUP 6 Issue of Share Capital ] 5,360,000 7 Issue of Share Capital 48,640,000
During the TP assessment proceedings the assessee was questioned about the international transaction related to the payment of development cost. The relevant queries raised read as under :- 1. In the course of the aforementioned proceedings, there are certain issues to which attention is sought to be drawn. These issues concern the international transactions related to the payment of development cost. This is the description that is found in your transfer pricing report (TP report]. Your form 3CEB describes this as purchase of technical know-how. By whatever name called, you have paid Rs.19,800,000.
Transfer pricing approach of the assessee
2 . Your TP report has aggregated this transaction with other
international transactions like the purchase of capital goods. You have used the Transactional Net Margin Method (TNMM) as the most appropriate method and operating profit/sales (OP/Sales) as the profit level indicator.
Admittedly during the year you have not commenced commercial production and hence you have not earned any revenues. Hence, to give some meaning to the MAM that you have chosen you have projected your income for the next three years (FYs ending 2011, 2012 and 2013) and arrived at OP/Sales of 14.59%.
The average OP/sales of the comparables has been worked out to be 3.63%. Here you have used multiple year data, but the three years that you have considered in the case of the comparables is FYs ending 2009, 2010 and 2011. | 5. Herein lies the obvious fallacy of your approach. Rule 10D(4) requires that the comparability data that is used be 'contemporaneous'. The rule does not envisage the data that is used for the assessee will be for a period different from what is used for comparables. The manner in which you have gone about the application of TNMM is in opposition to the way it is laid out in the Income Tax Rules.
Hence,your economic analysis stands rejected.
Benchmarking of payment of development cost
In your TP report, you have mentioned at section 5.4.5, Inergy India has paid development cost to Inergy Japan as per the "Development and Technical Assistance Master Agreement" between the two entities. As per this agreement, Inergy japan has
provided certain development and technical assistance services to Inergy India for which it has charged on the basis of cost plus 5% mark up'. 8. In the course of these proceedings, you were asked to provide a copy of this agreement. Vide your submission dated 4 November 2014, you have 'stated at page 4, ‘The Assessee would like to humbly submit that it did not enter into an inter-company agreement with its AE in relation to the above mentioned transaction. Accordingly, copy of that agreement is not available with the Assessee'.
Since, it not appears that the reference to the agreement in your TP report is unsupported by facts, the entire analysis that you have made in the TP report with reference to this transaction stands rejected.
It is a settled matter that the primary onus to establish the arm's length nature of any international transaction lies upon the assessee. In your case, that onus has not been discharged. Effectively there is no analysis in existence that supports that arm's length nature of this transaction. It can be said without any doubt that no independent party would have made such a substantial payment under such circumstances.
In your submission dated 4 November 2014, you have stated that none of the international transactions that you have undertaken have any impact on your income. Hence, TP provisions do not apply here. You have relied upon the decision of the Hon'ble Bombay High Court in the case of Vodafone India Services Pvt Ltd (WP No. 871/2014).
The reliance on this decision is misplaced. The point of
examination there was whether an international transaction arises in certain cases or not. That is not an issue in your situation. There is no doubt that an international transaction has been undertaken. Once that is settled, this office has to determine the arm's length price (ALP) of that international transaction. The same applies to all the other decisions that you have cited.
It is the not the task of the TPO to determine your profit or be concerned whether you have actually made one. The TPO has to determine the ALP of an international transaction. That is what is being done here.
This office therefore concludes that in a fact pattern like your case, no independent party would have made a payment of this kind. Therefore, it is proposed to reduce the ALP of the international transaction to NIL The proposed adjustment u/s 92CA is Rs.19,800,000
Please submit your reply within seven days of receipt of this letter and in no case later than 10 December 2014. In case you fail to do so, the matter will be decided based on material based on record.
Assessee filed a point wise reply to the queries raised by the TPO. The assessee strongly objected to treating the payment of development cost as an international. The assessee strongly contended that the payment of development cost is not an international transaction. This objection of the assessee was dismissed by the TPO who was of the firm belief that explanation
to section 92B2 clearly holds the impugned transaction as an international transaction. The TPO questioned the benchmarking of payment of development cost the TPO was of the opinion that the assessee failed to explain the basis of the transfer price of Rs.1.98 crores and further failed to explain the basis of 5% mark up that the AE has charged it.
The TPO finally concluded by holding that the assessee has not carried any benchmarking process in the international transaction related to the payment of development cost of Rs.1.98 crores and further the assessee has not been able to provide any basis of the setting of the transfer price of Rs.1.98 corres for the payment of development cost and the 5% mark up charged by the AE. 8. Having observed as above, the ALP of the international transaction related to the payment of development cost was taken at nil and accordingly income of the assessee as enhanced by Rs.1.98 crores. 9. Assessee strongly objected the adjustment before the CIT(A). However, the appeal of the assessee was dismissed by the CIT(A) as he was of the opinion that the appeal is not maintainable. Relevant findings read as under :-
3.3 I have given careful consideration to the matter and find that both the TPO and A.O have held that the international transaction of payment of development cost should be NIL which means the said payment should not have been made
by the appellant to its oversea Associated Enterprises. However, for the year under consideration, the above mentioned amount has neither been claimed as revenue expenditure nor the same has been capitalized so that claiming depreciation over it. The observations made by the A.O in the year consideration are futuristic in nature and does not pertain to the year under consideration. Section 246A of Income Tax Act provides the orders which are appealable in Income Tax Appeals and the relevant clause is 246A(i)(a) which lays down that the order where the appellant is agreevied with the income assessed or amount of tax determined or amount of loss computed or the status under which he is assessed is appealable . The order which is intended to be appealed against should have anyone or more of the above mentioned consequence only then such order becomes appealable. This provisions is in-corporated because in any assessment order, there may be number of observations made by the A.O which may not be of any consequences but appellant might not agree with those observations. If such order are made appealable then a number of infructous litigation would arise which is avoidable. The provisions of Act are very clear with the income assessed, tax demanded, loss computed or status of assessment and if none of these exists, the order is not appealable. In the present case the A.O has observed that depreciation would be disallowed in future as and when the appellant claims the same. The appeal is not maintainable against any such observations made by the A. O. The ground of appeal is dismissed.
Before us the counsel for the assessee vehemently stated that the CIT(A) has grossly erred in dismissing the appeal as not maintainable. It is the say of the counsel that the assessee has determined the ALP with proper documentation maintained by it in terms of section 92D of the Act r.w Rule 10D of the Rules. The counsel emphatically stated that TNMM is the most appropriate method for determining the ALP of the payment of developing cost. The counsel continued by stating that the appeal was very much maintainable before the CIT(A) and he has wrongly interpreted the provisions of section 246 of the Act.
Per contra the DR strongly supported the findings of the CIT(A). 12. We have given a thoughtful consideration to the orders of the authorities below. It is not in dispute that the assessee has claimed the payment of development cost of Rs.1.98 crores as not an international transaction. It is equally true that the TPO proceeded by treating the same as an international transaction and determined the ALP as nil and enhanced the income of the taxpayer by Rs.1.98 crores.
In our considered view once the assessee has challenged the enhancement of its income by ALP adjustment, it was incumbent upon the CIT(A) to decide the appeal on merits of the case. We are of the considered view that CIT(A) ought not have dismissed the appeal. In the interest of justice and fair play we restore the entire issue to the files of the CIT(A). The CIT(A) is directed to
decide the appeal afresh considering the merits of the quarrel after giving a reasonable and sufficient opportunity of being heard to the assessee. 14. In the result, the appeal is treated as allowed for statistical purpose. The order is pronounced in the open court on 14.10.2019.
Sd/- Sd/- [SUCHITRA KAMBLE] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 14 October , 2019 *Neha* Copy forwarded to: 1. Appellant 2. Respondent 3. CITi 4. CIT(A) 5. DR
Asst. Registrar ITAT, New Delhi Date of dictation 10.10.2019 Date on which the typed draft is placed before the 14.10.2019 dictating Member 14.10.2019 Date on which the typed draft is placed before the Other member 14.10.2019 Date on which the approved draft comes to the Sr.PS/PS 14.10.2019 Date on which the fair order is placed before the Dictating Member for Pronouncement 14.10.2019 Date on which the fair order comes back to the Sr. PS/ PS 14.10.2019 Date on which the final order is uploaded on the website of ITAT 14.10.2019 Date on which the file goes to the Bench Clerk Date on which file goes to the Head Clerk. The date on which file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order