M/S INCAP CONTRACT MANUFACTURING SERVICES PVT LTD,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME-TAX, BANGALORE

Ground Nos. 1 to 3 raised by the assessee reads as follows:-

The learned Assessing Officer (' learned AO' ), learned Transfer Pricing Officer ('learned TPO' ) and the Honourable Dispute Resolution Panel ('Hon'ble DRP') grossly erred in determining an adjustment of INR 1,45,40,935/- with respect to the international transaction rendered by the taxpayer u/s 92CA of the Income-tax Act, 1961.

The assessee is a company engaged in the business of manufacturing of UPS, Invertors, PCBA Assembly, electronic equipments, sub-systems, etc. The assessee made payment of Rs.14,50,40,935 to an Associated Enterprise (AE) [non-resident]. The payment was claimed to have been made for providing IT and Management Services by AE to the assessee. Since the payment was made to an AE, it was an international transaction and arm’s length price (ALP) of the payment in question had to be determined in view of the provisions of Section 92 of the Act. It was the claim of assessee that the AE provided IT support services like trouble shooting, perceived threats of data storage, assistance in additional software reporting structure, etc. The assessee enclosed email copies of the assistance provided by the AE, Incap Finland in resolving the various IT related issues.

The TPO was of the following view:-

According to the TPO, the assessee failed to prove rendering of actual services and further failed to justify the price charged by the AE and the benefit which the assessee received from services provided by the AE. The TPO accordingly came to the conclusion that the ALP of the transaction has to be regarded as NIL and the entire payment made to the AE was treated as an adjustment u/s. 92CA of the Act and added to the total income of the assessee.

Aggrieved by the action of the AO in making the addition of adjustment suggested by the TPO in the order u/s. 92CA of the Act, the assessee preferred objections before the DRP. In its objections, the assessee submitted that the Assessee received management services from its AE which included guidance on the overall operations of the company, providing training to the employees, meeting local vendors in identifying the suppliers and having discussion with the customers for supply of products. The cost relating to Travel expenses and Visa expenses of AE's employees who visited customer for business development of the Assessee were reimbursed by the Assessee to its AE at cost without any mark-up. It was further submitted that accounting related services provided by the AE to the Assessee was reimbursed by the Assessee to its AE at cost without any markup. It was also submitted that the Assessee was manufacturing electronic and electrical products like

The Assessee submitted that there was no mark-up charged by the AE and the entire IT and management charges were reimbursed at cost to cost. The Assessee highlighted that like any other entrepreneurial entity even it has to incur certain costs like HR, legal, finance etc. cost irrespective of the amount of business it undertakes during the year. The only differentiating factor in the case of the Assessee when compared to a similar third party is that the Assessee had availed the services from its AE. Had the Assessee availed the services from a third party, it would have incurred similar expenses.

The DRP, however, confirmed the order of AO holding that the assessee failed to prove the nature of services rendered by the AE. Aggrieved by the order of DRP which was incorporated in the final order of assessment, the assessee is in appeal before the Tribunal.

We have heard the submissions of the ld. Counsel for the assessee and the ld. DR. The ld. counsel for assessee drew our attention to an application filed by the assessee u/s. Rule 29 of the ITAT Rules, 1963, seeking to file additional evidence before the Tribunal. He brought to our notice that the assessee had filed the following evidence before the TPO and the DRP and he now seeks to file the evidence listed in Sl.No.9 of the chart given below as additional evidence :-

It was his submission that the emails which are enclosed to the application for admission of additional evidence would show that the services were in fact rendered by the AE. According to him, the DRP/TPO did not examine the evidence, but made the addition in question on the basis that no evidence was filed by the assessee to show that services were rendered by the AE for which payment in question was made by the AE.

The ld. DR relied on the directions of the DRP.

After considering the rival submissions, we are of the view that the issue has not been examined in the proper perspective by the TPO and DRP. The evidence already filed as well as the additional evidence filed now need to be considered to see whether the persons visiting India had in fact rendered services to the assessee and whether the payment in question made to the AE can be regarded as at arm’s length. Admittedly there is evidence to show that personnel travelled from outside India. The evidence now filed according to the learned counsel for the Assessee would show what type of services they rendered to the Assessee. The ld. counsel for assessee made submission that the assessee is willing to IT(TP)A No.697/Bang/2017 Page 7 of 12 produce such other evidence as may be insisted upon by the TPO/AO in the set aside proceedings, as the type of evidence that would satisfy the requirements on the issue are not known to the Assessee nor spelt out by the Revenue authorities. In our view, it would be in the interest of justice to set aside the order of AO and remand the issue for fresh consideration by the AO/TPO in the light of evidence already available on record and additional evidence now filed before the Tribunal. The assessee will also file such other evidence as the TPO may require to show that the payment in question was made for services which the assessee received from the AE and that the price paid is at arm’s length. These grounds are treated as partly allowed for statistical purposes.

Ground Nos.4 to 7 raised by the assessee is with regard to the action of the revenue authorities in disallowing a sum of Rs.53,83,644 for depreciation on intellectual property rights in the form of customer relationship rights. As far as these grounds are concerned, the facts are that the assessee company which is engaged in the business of providing comprehensive contract manual services to equipment manufacturers and development of renewable energy like solar energy, entered into business transfer agreement with TVS Electronics Ltd. on 31.5.2007 to purchase the business of Contract Manufacturing Services [CMS] division as a going concern. The assessee paid a total consideration of Rs.43.33 crores for acquiring CMS division. The assessee claimed depreciation in AY 2009-10 which was the previous year in which CMS Division was acquired by the assessee as a going concern. Depreciation was claimed on a sum of Rs.67.491 crores which was value allocated to the customer relationship rights acquired by the assessee under the business transfer agreement by which CMS Division was taken over as a going concern.

The claim of assessee was negated by the revenue authorities. But in AY 2009-10, the Tribunal in by its order dated

The claim made in the present assessment year has to be allowed as a consequence of the acceptance of the assessee’s claim in AY 2009- 10. The reason for the AO and the DRP in not accepting the claim of assessee is based on the best judgment assessment in AY 2009-10, which no longer remains valid. In view of the decision of the Tribunal for AY 2009-10, we are of the view that the claim of assessee for depreciation on customer relationship rights has to be allowed. We hold and direct accordingly and allow grounds No.4 to 7.

As far as ground No.8 is concerned, the same is with regard to depreciation on goodwill. The goodwill in question was claimed to have been acquired as a result of business transfer agreement, whereby CMS Division of TVS Electronics was taken over as a going concern by the assessee. This issue also came up before the Tribunal for AY 2009-10 and this Tribunal noticed that the claim for depreciation on goodwill was made by way of an additional ground and accordingly admitted the additional ground for adjudication but remanded the issue for fresh consideration by the AO. In the present assessment year, a similar claim was made by the assessee before the DRP, but the DRP refused to entertain the claim made by the assessee by holding that IT(TP)A No.697/Bang/2017 Page 11 of 12 without filing a revised return, the assessee cannot make any claim and in this regard placed reliance on the decision of the Hon'ble Supreme Court decision in the case of Goetz (India) Ltd. v. Commissioner of Income Tax 12006] 157 Taxman 1(SC). We are of the view that the power of the appellate authorities including the DRP /CIT(A)/Tribunal is in no way circumscribed by the decisions referred to by the Hon'ble DRP and are applicable only to claim made before the AO. This legal position is by now well settled. The following decisions may be referred to in this regard viz., Commissioner of Income-tax, Chennai v. Abhinitha Foundation (P.) Ltd. [2017] 83 taxmann.com 100 (Madras) CIT v. Prabhu Steel Industries (P.) Ltd [1988] 171 ITR 530 (Bombay) and CIT v. Pruthvi Brokers & Shareholders [2012] 23 taxmann.com 23 (Bom.).Accordingly, we direct the AO to examine the claim of assessee for deduction on account of goodwill.

Ground No.9 raised by the assessee is with regard to disallowance of provision for expenses. The ld. counsel for assessee could not point out as to how the expenditure which was claimed by way of provision was actually incurred or accrued to the assessee during the previous year, hence we find no merit in ground No.9 raised by the assessee.

As far as ground No.10 raised by the assessee with regard to stamp duty and ROC charges paid on account of increase in share capital during the relevant previous year is concerned, it was pointed out by the ld. counsel for assessee that convertible debentures were converted into equity shares and therefore the principle laid down by the Hon'ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd. (225 ITR 792) and Brooke Bond India Ltd. (225 ITR 798) will not be applicable. According to him, the decision of Hon'ble Supreme Court in the case of CIT v. General Insurance Corporation (286 ITR 232) wherein it was held that when bonus shares are issued, any expenditure in issue of bonus share should be regarded as revenue expenditure will apply. According to IT(TP)A No.697/Bang/2017 Page 12 of 12 him, there was no change in the capital base of the assessee and therefore the expenditure in question cannot be regarded as capital expenditure. We have considered the submissions of the ld. counsel for assessee and are of the view that the same is not applicable. By conversion of debentures into equity, there is a conversion of loan into capital and in that sense there is an increase in own capital of the assessee. Therefore, we are of the view that there was expansion of capital base(own capital) and therefore expenditure in question was rightly treated by the revenue authorities as in the nature of capital expenditure. We are therefore of the view that there is no merit in ground No.10 raised by the assessee. Accordingly the same is dismissed.

In the result, the appeal by the assessee is partly allowed.