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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI SHAMIM YAHYA & SHRI PAWAN SINGH
13 ITA 2483/Mum/2015 TRUMPF India (P) Ltd Vs ACIT [2015] 53 taxmann.com 515( Mumbai Trib) Tecumash Product India (P) Ltd Vs ACIT [2014]41 taxmann.com 385, ACIT Vs Caparo Engineering India Ltd (P) Ltd [2018] 91 taxmann.com 330 ( Delhi- Trib), ACIT Vs Sarens Heavy Lifts (I) (P) Ltd [2018] 93 taxmann.com 431(Delhi Trib).
12. On the other hand the ld. DR for the revenue supported the order of the lower authorities. The ld. DR for the revenue has not made any comment on the various decisions relied by ld. AR for the assessee.
We have considered the rival contention of both the parties and have gone through the orders of authorities below. We have also deliberated on various case laws relied by learned AR of the assessee. First, we are taking up the claim/ issue/ adjustment related with the transaction of sale of colour printing machine. The TPO suggested adjustment of Rs. 97,52,114/- by taking view that WDV of colour printing machine was ₹ 1.68 crore , however, the assessee charged from its AE of ₹ 71 lakhs only. Thus, the transaction in not at arm’s length price (ALP) being falls outside (+) / (-) 5% of the tolerance range. The TPO accordingly suggested the difference between the WDV and the cost recovered by the assessee for adjustment. The TPO has not made reference of valuation report in his order. The ld CIT(A) affirmed the action of the 14 ITA 2483/Mum/2015 TPO by taking the similar view. The ld. CIT (A) not accepted the report of valuer by taking view that it is a self serving document. The ld. CIT (A) also held that in the valuation is nothing but more than estimation and that there is no item wise valuation. The copy of the quotations furnished by the assessee to substantiate the cost was not considered the ld CIT(A) by taking view that these documents were not filed before and treated as additional evidence. It was held that no application for admitting additional evidence under Rule 46A for admitting such additional evidence was filed by assessee. Before us, the ld. AR for the assessee vehemently argues that the valuation report should not ordinarily be rejected and made reliance on various case law including in assessee’s own case for AY 2010-11 in (supra) and other cases, which we have mentioned above.
The coordinate bench of Tribunal in assessee’s own case for AY 2010- 11(supra) in para-6 of the order held that if the TPO was not agreeing with the view of the independent valuer, he should have referred it to the expert instead of undertaking the value himself, he is neither technically qualified nor competent to undertake the valuation.
Further, the coordinate bench of Tribunal in First Advantage Quest Research Ltd Vs DCIT (sura) while considering the valuation report of 15 ITA 2483/Mum/2015 unquoted shares with regard to sale of shares by assessee to its AE held that that for fair valuation of unquoted shares of a corporate entity only one factors should not be considered. In other words share price depends upon many factors. It is said that the mere capitalization of actual past earnings would not produce a reasonable result in such cases and that the emphasis has to be on prospective earning capacity rather than actual past earnings-although naturally the latter has to be used as a starting point to calculate the former(para 3.5). It was further held that the purpose behind introducing the TP provisions in the Act was to ensure that goods/ services purchased/sold or rendered/availed by the group entities should be at market rate. It was found that to avoid taxes the AE.s were not showing the market price of IT.s (international transactions). So, to curb the misuse of proximity of group concerns located in India and outside India provisions of chapter X were included in the statute. What the legislature wanted was that the price of IT.s with AE should be at arm's length i.e., that an independent person in the market would pay/receive the same price as paid/received by the group entity for the good/services. If the surrounding circumstances lead to the conclusion that price charged by the AE.s is not the normal fair market value, the departmental authorities can make adjustment to the price shown by the assessee.
16 ITA 2483/Mum/2015 But, the adjustments cannot be made without any basis. In short, the basis of TP adjustment is determining fair market value of IT.s entered in to by the assessee. (para 3.5.1).
Coordinate bench of Pune Tribunal in GKN Sinter Metals (P) Ltd Vs ACIT (supra) while considering the grounds of appeal, where the TPO made suggested adjustment by disregarding the report of independent valuer held as under; “6. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decision on which the ld. AR of the assessee has placed reliance. The only issue raised in the appeal before the Tribunal is with regard to the valuation of capital asset purchased by the assessee from its AEs. The assessee in support of his submissions has placed reliance on the valuation certificate issued by an Independent Chartered Engineer at UK whereas the Revenue has placed reliance on the valuation made by TPO by extrapolating the arithmetic mean of operating margin of the companies manufacturing similar machine in India and applying CUP method to markup the import price at ALP.
The contention of the ld. AR is that the authorities below have disbelieved the valuation certificate issued by an independent Chartered Engineer, whereas the same has been accepted by the customs authorities and even in the subsequent assessment year i.e. assessment year 2009-10 the valuation certificate issued by the same Chartered Engineer has been accepted by the TPO.
We are of the considered view that if the TPO was not satisfied with the valuation certificate given by an independent Chartered Engineer at UK, the TPO should have referred the matter to DVO who is an 17 ITA 2483/Mum/2015 expert to determine the value of such capital assets. The TPO has erred in extrapolating the average arithmetic mean of operating profit of companies manufacturing similar machines in India.
The Chennai Bench of the Tribunal in the case of Coastal Energy (P.) Ltd. v. Asstt. CIT [2011] 12 taxmann.com 355/46 SOT 286 (URO) (Chennai) for the assessment year 2006-07 decided on 13-07-2011 has occasion to deal with the issue, where the TPO refused to accept the value adopted by the Customs Authority. The Tribunal has held that the value adopted by the customs authorities should be accepted as the customs authorities assign value to the imported goods on scientific formulated method and their valuation is not an arbitrary exercise. The relevant extract of the observations of the Chennai Bench of the Tribunal are as under:
"6. The next question to be considered is whether this price variation noticed by the TPO should be taken as the basis for making adjustment in the transfer pricing. The grievance of the assessee is that the comparable price has been obtained by the TPO from the customs authorities and the valuation of the customs authorities need not necessarily be realistic as that department is more interested in collecting import duties. We should state without fear of contradiction that the customs authorities are assigning values to the imported goods on the basis of scientifically formulated methods and they are responsible for making a fair assessment value of the imported goods. The valuation made by the customs authorities is not an arbitrary exercise. But on the other hand, it depends upon large volume of international data classified according to internationally accepted protocol. Therefore, it is not possible to say that the credibility of the price rate furnished by customs authorities needs to be discounted."
18 ITA 2483/Mum/2015 The view taken by the Chennai Bench of the Tribunal has been followed by the Delhi Bench of the Tribunal in the case of C-Dot Alcatel-Lucent Research Centre (P.) Ltd. (supra).
The Hyderabad Bench of the Tribunal in the case of Tecumseh Products India (P.) Ltd. (supra) in a similar case where the value of imported machine was not accepted by the TPO, the Tribunal held that to determine the value of machinery the best way is to refer the machinery to valuation officer. Without doing so, the TPO or DRP cannot determine value at Nil and consequently deny depreciation claim to the assessee. The relevant extract of the findings of the Tribunal are as under :
"(F) (i) As briefly stated above, Assessee has imported certain machinery (old as well as new machinery) from TPC USA. The purchase price of these machineries was based on fair market value and supported by an independent valuer's report M/s SGS Global Trade Solutions Inc., who certified second hand machinery procured by Assessee. As Assessee submitted before the authorities, the comparative analysis of the machinery prepared indicates that purchase price paid to M/s TPC USA is lower than the value determined by M/s SGS Global Trade Solutions. Assessee paid customs duty and also countervailing duty and the valuation was accepted by the authorities at the time of import. Though TPO as well as DRP were of the opinion that the machinery does not have any value, we do not understand on what basis they have come to this opinion. There is no dispute with the fact that the machinery was imported and used in Assessee's business for manufacturing of its compressors/parts, so, there is no dispute with reference to usage of second hand machinery. It is also not the case of the revenue that machinery imported was kept idle and Assessee unnecessarily paid the amount to the AE. This being so, the value paid by Assessee duly supported by valuation report
19 ITA 2483/Mum/2015 cannot be ignored. In case of any doubt on the matter, the best way is to refer the machinery to the valuation officer under the IT Act. Without doing so, the TPO or the DRP has no base to determine the value at Nil and consequently denying the depreciation claim of the assessee while at the same time, the payment of custom duty and countervailing duty are considered as value of cost. Not only that, as submitted by Assessee and as seen from the Table furnished, new machinery worth US$ 500,965 was also treated as old machinery and valuation was determined at Nil. This shows non-application of mind by TPO as well as by DRP."
The Mumbai Bench of the Tribunal in the case of Koch Chemical Technology Group (India) Ltd. (supra) the Tribunal has held that before rejecting the valuation report, the TPO is duty bound to refer the valuation of machinery to DVO. The TPO not being an expert to determine the value of machine cannot ascertain the fair market value of machine. The relevant extract of the findings of the Tribunal are reproduced here-in-under :
"7. . . . . . . . . . . . . . . . . . . . It is to be noted that the invoices submitted by the assessee indicate that the assessee has paid the price for purchase of machineries to the A.E. as claimed by the assessee. It is also to be noted that the purchase price paid by the assessee is supported by report of approved valuer from the U.S.A. Therefore, it is very much evident that to substantiate the price paid for purchase of certain second hand machineries from the A.E., the assessee has produced documentary evidences including the valuation report. Whereas, the Transfer Pricing Officer, apart from making some general observations to the effect that the details of date of purchase by the A.E., depreciated value in its books are not available, has quantified the value of the two machineries at 50% of the value claimed by the assessee. On what basis he adopted 50% of the value as ALP
20 ITA 2483/Mum/2015 has not been provided by the Transfer Pricing Officer. In our view, when the assessee has submitted a report from the approved valuer indicating the fair market value of machineries purchased, before rejecting such valuation report, the Transfer Pricing Officer was duty bound to refer the valuation of the machineries to the DVO as per the procedure laid down under the statute. The Transfer Pricing Officer not being an expert to determine the value of machineries and there being no other material brought on record by him to demonstrate that he made enquiry of any kind to ascertain the fair market value of machineries, he could not have quantified the value of the machineries at 50% of the value shown by the assessee. The DRP, in our view, has also sustained the disallowance without proper application of mind and in a mechanical manner. . . . . . . . . . . . "
The Tribunal further remarked that since the TPO failed to make reference to the DVO for valuation of asset and made 50% disallowance of purchase value of machinery in an arbitrary manner, there is no point in remitting the issue back to the TPO and give him second innings. The observations of the Tribunal in this regard are as under:
"7.2 We may observe, the learned Departmental Representative had submitted before us that at this stage also, the matter can be remitted back to the file of the Transfer Pricing Officer for making a reference to the DVO for valuation of assets. However, we are unable to accept such contention of the learned Departmental Representative for the simple reason that when the Transfer Pricing Officer has failed to refer the valuation to the DVO and on the contrary has proceeded to quantify the value of the machineries at 50% by adopting a method which is not in conformity with the statutory provisions, in our view, the matter cannot be restored back to him again for giving him a second
21 ITA 2483/Mum/2015 innings. Considering the fact that 50% disallowance made out of the purchase value of machineries is without any basis and in violation of statutory provision, we are inclined to delete the addition made on account of adjustment made by the Transfer Pricing Officer by disallowing 50% of purchase value of second hand machineries. Accordingly, ground raised by the assessee is allowed."
In the present case, we observe that the TPO has made upward adjustment of the international transactions in respect of valuation of capital asset purchased by the assessee from its AEs. The said adjustment has been made by the TPO without making reference to the DVO and rejecting the valuation report from an independent Chartered Engineer furnished by the assessee. Undisputedly the valuation report was accepted by the Customs Authorities for the purpose of levy of import duty. We do not concur with the action of TPO for making such adjustment. The Act provides for reference to Valuation Officer for valuation of capital assets in case of any doubt. The TPO has erred in extrapolating avg. operating margin of Indian manufactures and applying CUP method to markup import price and determine ALP.
In so far as objection of TPO with respect to variation in the book value of capital asset and the price at which assessee has purchased the capital asset is concerned, it is not necessary that book value and market value of the capital asset are at par. Our view is further fortified by the decision rendered by the Bangalore Bench of the Tribunal in the case of Intel Asia Electronics Inc. India v. Asstt. DIT [2011] 9 taxmann.com 197/46 SOT 48 (URO) (Bang.).
We observed that the DRP while dealing with the objections of the assessee in respect of valuation of capital asst has not properly appreciated the facts and circumstances. The DRP has merely examined one aspect of the transaction relating to pricing of capital 22 ITA 2483/Mum/2015 asset i.e. the price paid by assessee to acquire old machine viz-a-viz price of new model of same machine. The DRP has failed to take holistic view of the transaction.
Thus, in view of the facts of the case and various decisions discussed above, we set aside the findings of the authorities below on this issue and direct the Assessing Officer to delete the addition made on account of adjustment in the value of capital asset. Accordingly, ground no. 3 raised in the appeal by the assessee is allowed.”
In view of the aforesaid factual and legal discussion and respectfully following the same, we are of the view that if the TPO was not satisfied with the valuation report by an independent Chartered Engineer, the TPO should have referred the matter to DVO who is an expert to determine the value of such capital asset. Considering the ration of decisions of coordinate bench as referred above, we direct the AO/TPO to delete the addition/ adjustment made on account of sale of Colour Printing Machine.
So far as adjustment on account of transaction of Punching Machine to AE in Dubai is concerned, the ld. AR for the assessee has not specifically submitted that any expert report of valuer was obtained nor any supporting evidence is brought to our notice, to take contrary view.
No case law is brought our notice. Therefore, we affirm the findings of the lower authorities with regard to the adjustment on international
23 ITA 2483/Mum/2015 transaction of Punching Machine. In the result these grounds of appeal are partly allowed. 18. Ground No. 7 relates to disallowance of interest under section 201(1A) on delayed payment of tax deducted at source (TDS). During the submissions the ld. AR submits that he is not pressing this ground of appeal
. Considering the submissions of the ld. AR for the assessee this ground of appeal is dismissed as not pressed.
19. Ground No. 8 relates to not adjudicating the issue regarding the depriciation on Goodwill {Ground No. 7 before ld CIT(A)}. The ld AR for the assessee submits that the assessee raised specific ground of appeal before ld CIT(A). The ld CIT(A) dismissed the ground by taking view that the same is not emanating from the order of assessment. The ld. AR submits that this ground may be admitted for adjudication as additional ground of appeal, the facts relating to this ground of appeal is available on record as the amount of goodwill is entered in the block of asset and no new facts are required to be brought on record. The ld AR further submits that similar depriciation was allowed by ld CIT(A) in appeal for AY 2008-09 and no further appeal was filed by the revenue. In support of his submission the ld AR relied on the order of the ld CIT(A)for AY 2008-09 dated 24.03.2011.
The ld counsel also relied on the decisions of Bombay High Court in 24 ITA 2483/Mum/2015 CIT Vs Pruthvi Brokers & Shareholders [2012] 349 ITR 336 (Bom) and CIT Vs B.G. Shirke Construction Technology (P) Ltd [2017] 395 ITR 371(Bom).
On the other hand the ld DR for the revenue relied on the order of ld CIT(A). The ld DR for the revenue further submits that in case the additional ground is admitted, the issue may be restored to the file of AO/CIT(A) for adjudication afresh in accordance with law.
We have considered the rival contention of both the parties and have gone through the orders of authorities below. We have also deliberated on various case laws relied by learned AR of the assessee. We have noted that the ld CIT(A) rejected the corresponding ground of appeal by taking view that there is no reference of issue in the assessment order. The ld. AR for the assessee vehemently submitted that the facts relating to this ground of appeal is available on record as the amount of goodwill is entered in the block of asset and no new facts are required to be brought on record. This fact is not controverted by ld. DR for the revenue. Thus, considering the facts that no new facts are required to be brought on record and the decision of Bombay High Court in CIT Vs Pruthvi Brokers & Shareholders (supra), we admit this ground of appeal.
25 ITA 2483/Mum/2015 22. We have further seen that similar depriciation was allowed by ld CIT(A) in appeal for AY 2008-09. Considering the facts that we have admitted the additional ground of appeal
, therefore, we restore this issue to the file of assessing officer to decide the claim/ issue afresh in accordance with law. Needless to order that before deciding the claim/ issue the assessing officer shall grant opportunity of hearing to the assessee and would pass the order in accordance with law. In the result this ground of appeal is allowed for statistical purpose.
23. In the result the appeal of the assessee is partly allowed.
Order pronounced in the open court on 22-04-2020.