SULZER PUMPS INDIA LTD,MUMBAI vs. ADDL CIT 10(3), MUMBAI

The assessee is engaged in the business of manufacture and sale of power driven pumps.

We shall first take up the appeal filed by the assessee for AY 2009-10. At the time of hearing, the Ld A.R did not press grounds urged in 2a, 3a, 6, 7 and 9. Hence they are dismissed as Not Pressed. The remaining grounds give rise to the following issues:- (a) Disallowance of expenses of Royalty, technical knowhow fees and annual charges of Microsoft licencing fee by determining the ALP at NIL. (b) Disallowance of ASP Management fees (c) Addition on account of difference in income as per Form 26AS.

We heard the parties and perused the record. The first issue relates to the disallowance of Royalty, technical knowhow fees and annual charges of Microsoft licencing fee. We have considered an identical issue in the assessee’s own case in relating to AY 2008-09 and we have restored the issues to the file of the AO for examining them afresh, as the Tribunal held the assessee to be “Licenced Manufacturer”. For the sake of convenience, we extract below the operative portion of the order passed in Ay 2009-10 (supra):- “9. We heard the parties and perused the record. We notice that the tax authorities have considered the assessee as a “Contract Manufacturer” and accordingly disallowed the Royalty and Technical knowhow expenses. In the written submissions, the assessee has demonstrated that the purpose of obtaining approval for sales from its AE is to avoid competition between the AEs. The assessee has also submitted that out of the total export sales of Rs.87.63 crores, the exports made to AEs was only Rs.37.70 crores and the remaining exports have been made to non- AEs. Had the assessee been a contract manufacturer, it could not have sold the goods to non-AEs. Accordingly it was submitted that the restrictions placed by the AE in the agreement entered with the assessee was with the objective of ensuring smooth business operations. We find merit in the said contentions of the assessee. If the assessee was really a contract manufacturer as considered by the tax authorities, it would be getting only a fixed amount of profit and further it would not be able to export goods on its own account. The facts available on record would show that the assessee has been selling goods to Non-AEs also. Accordingly we hold that the assessee should be considered as a Licence Manufacturer in the facts and circumstances of the case.

The next issue contested by the assessee relates to the disallowance of ASP Management fee of Rs.380.03 lakhs. The assessee paid the above said amount to its AE w.e.f. 01.01.2008 as per the Administrative Service agreement entered between the parties. The TPO noticed that the assessee did not make such payment in the earlier years. The assessee submitted that the AE has provided various services in the nature of marketing, business intelligence, support and tracking systems, general management, finance and control support. As per the agreement, 25% of total costs incurred by the AE

We heard the parties on this issue. The assessee contended that the management fee is closely linked to its manufacturing activity and hence the aggregating the same with other activities and benchmarking the same at entity level under TNMM method is justified. The Ld A.R further submitted that the assessee has furnished e-mail correspondences under each category to prove the receipt of services, but the same has not been properly appreciated by the TPO/DRP. He also submitted that the TPO has not followed any of the prescribed method for determining the ALP of the transactions. The Ld A.R submitted that the assessee may be in a position to furnish more evidences, if an opportunity is given to the assessee. The Ld D.R, on the contrary, supported the order passed by the Ld DRP.

We notice that the assessee has entered into an agreement with its AE for receiving various support services, as per which 25% of expenses incurred by its AE for Asia-Pacific region shall be charged to the assessee. Accordingly, the assessee has paid a sum of Rs.380.03 lakhs for the period for the year under consideration. The assessee has provided e-mail correspondences to support its claim of receipt of services. The tax authorities have considered them to be not sufficient to prove the claim of the assessee. The Ld DRP has also taken the view that the assessee should have benchmarked the transactions

Since various services claimed to have received by the assessee are related to its manufacturing activities, in our view, the assessee was justified in aggregating the same with other items of international transactions. With regard to the sufficiency of evidences to prove the receipt of services and the benefits derived therefrom, we are of the view that, in the interest of natural justice, the assessee may be provided with one more opportunity to furnish other evidences. Accordingly we set aside the order passed by the AO/TPO and restore the same to his file for examining it afresh. We also direct the tax authorities to examine this issue in an objective manner by properly considering the explanations and evidences furnished by the assessee.

The last issue relates to the addition made on account of difference in income found in Form 26AS and that reported by the assessee. We notice that the Ld DRP has also restored this issue to the file of the AO with the direction to examine the reconciliation statement filed by the assessee and grant relief in respect of reconciled items of income. The ld A.R submitted that the assessee has furnished additional evidences to reconcile the income and TDS and accordingly prayed that this matter may be restored to the file of the AO. Since the assessee could reconcile the difference further, we are of the view that the same requires examination at the end of the AO. Accordingly we restore this issue to the file of the AO.

We shall now take up the appeal filed by the revenue, wherein following issues are contested:- (a) Addition relating to Warranty Expenses

The first issue contested by the revenue relates to the disallowance of Warranty expenses. The facts relating thereto are that the assessee sells pumps to AEs and non-AEs on principal to principal basis. As per the terms of sales, the assessee provides Warranty on the products sold by it, irrespective of the fact as to whether the buyer is AE or non-AE. Where an AE is available in the Country to which the products were sold, the assessee approaches that AE to provide Warranty related services, which generally consists of repairing and reassembling works. The assessee has established this kind of network link, since it operationally as well as cost wise efficient to do so. Accordingly the assessee has reimbursed the expenses incurred by its AE on providing warranty services.

The TPO, however, took the view that the Post sales risk is the responsibility of the AE, as the assessee has made sales on Principal to Principal basis. The TPO also took the view that the assessee has changed its stand before him and further the assessee has not provided any agreement, if any, entered with its AE to provide warranty services. Accordingly he took the view that the assessee has failed to justify the payment and accordingly determined the ALP of expenses at NIL.

The Ld DRP noticed that identical disallowance made in AY 2008-09 was deleted by Ld CIT(A). The Ld DRP also took the view that the assessee, being the manufacturer of pumps, is bound to incur certain expenses during warranty period. Accordingly the Ld DRP held that the adjustment made by the TPO is not warranted and accordingly directed the AO not to make the same.

We heard the parties on this issue. There is no dispute with regard to the fact that the assessee has exported the pumps manufactured by it to its 7 Sulzer Pumps India Pvt. Ltd.

The next issue contested by the revenue relates to the TP adjustment made on Patterns purchased by the assessee. The assessee has imported “new patterns” from its AE, viz., M/s Sulzer Pumps, Mexico. The assessee treated the same as Capital assets and further stated that these are specific design patterns used to manufacture special pumps. The assessee submitted that the Design Patterns were transferred to the assessee by its AE at its book value and the said value has been accepted by the Customs Authorities also. The TPO took the view that the valuation by Customs authorities is done under different economic and fiscal matrix. He further took the view that the assessee has not furnished any valuation certificate nor did it prove that the Design Patterns were transferred at its book value of AE. The TPO noticed

The Ld DRP noticed that an identical addition was made in AY 2008-09 and the Ld CIT(A) had deleted the same. The department has accepted the same. Accordingly the ld DRP has directed the AO not to make any addition on this issue.

We heard the parties on this issue and perused the record. As in the case of Warranty expenses, we notice that the TPO has determined ALP at nil by doubting the explanations of the assessee. The TPO has taken the view that the Bill of Entry describes the product imported by the assessee as Spare Parts for pumps, while the assessee claimed the same as Design Patterns. Further, the TPO has doubted the valuation also. The claim of the assessee is that it has capitalised the cost of Design Patterns. Further the reasoning given by the TPO to determine the ALP at NIL, in our view, is not justified, as the TPO has only doubted the claim of the assessee on surmises. Accordingly we are of the view that the Ld DRP was justified in directing the AO not to make any addition as opined by TPO.

The next issue contested by the revenue relates to addition of ASP management fee. The revenue has raised the ground under erroneous impression that the Ld DRP has granted relief to the assessee. In fact, the Ld DRP has confirmed the addition and hence this ground of the revenue is erroneous and liable to be rejected.

The last issue contested by the revenue relates to the disallowance of club membership fee of Rs.36,291/- paid to M/s Golden Swan Country Club. The AO disallowed the same by holding it as Capital expenditure. The Ld DRP

We heard the parties on this issue and perused the record. We notice that the Hon’ble Supreme Court in the case of United Glass Manufacturing Co. Ltd (2012 (9) TMI 914) has held that the club membership fees incurred for employees is allowable as deduction u/s 37(1) of the Act. Accordingly we do not find any infirmity in the order passed by Ld DRP on this issue.

We shall now take up the appeal filed by the assessee for AY 2010-11. At the time of hearing, the Ld A.R did not press ground numbers 7 and 9. Accordingly they are dismissed as not pressed. The remaining grounds give rise to the following issues:- (a) Disallowance of expenses of Royalty, technical knowhow fees and annual charges of Microsoft licencing fee by determining the ALP at NIL. (b) Disallowance of ASP Management fees (c) Addition on account of difference in income as per Form 26AS.

We heard the parties and perused the record. The first issue relates to the disallowance of Royalty, technical knowhow fees and annual charges of Microsoft licencing fee. We have considered an identical issue in the assessee’s own case in relating to AY 2008-09 and we have restored the issues to the file of the AO for examining them afresh, as the Tribunal held the assessee to be “Licenced Manufacturer”. We have followed the order passed in AY 2008-09 in AY 2009-10 and accordingly restored these issues to the file of the AO/TPO. Following the orders passed in the above said two years, we restore these issues in this year also to the file of the AO/TPO with identical directions.

The next issue urged by the assessee relates to the disallowance of ASP Management fees. An identical issue was considered by us in AY 2009-10 in 10 Sulzer Pumps India Pvt. Ltd.

The last issue relates to the addition made on account of difference in income found in Form 26AS and that reported by the assessee. We notice that the Ld DRP has also restored this issue to the file of the AO with the direction to examine the reconciliation statement filed by the assessee and grant relief in respect of reconciled items of income. The ld A.R submitted that the assessee has furnished additional evidences to reconcile the income and TDS and accordingly prayed that this matter may be restored to the file of the AO. Since the assessee could reconcile the difference further, we are of the view that the same requires examination at the end of the AO. Accordingly we restore this issue to the file of the AO.

We shall now take up the appeal filed by the Revenue for AY 2010-11. The only issue urged therein relates T.P adjustment made on Warranty Expenses claim of the assessee. The assessee claimed Warranty expenses to the tune of Rs.397.64 lakhs. The TPO determined the same as NIL and the Ld DRP has reversed the decision of the TPO. Hence revenue is aggrieved. An identical issue was considered by us in AY 2009-10 and we have confirmed the view taken by Ld DRP with the following observations:-

We shall now take up the appeal filed by the assessee for AY 2011-12. Following issues are contested by the assessee:- (a) Disallowance of expenses of Royalty, technical knowhow fees and annual charges of Microsoft licencing fee by determining the ALP at NIL. (b) Disallowance of ASP Management fees. (c) Disallowance of payment for SAP software related support expenses. (d) Addition on account of difference in income as per Form 26AS and also non-giving of TDS credit.

We heard the parties and perused the record. The first issue relates to the disallowance of Royalty, technical knowhow fees and annual charges of Microsoft licencing fee. We have considered an identical issue in the assessee’s own case in relating to AY 2008-09 and we have 12 Sulzer Pumps India Pvt. Ltd.

The next issue contested by the assessee relates to the disallowance of ASP Management fee. This issue was considered by us in the earlier paragraphs in AY 2009-10 and 2010-11. We have restored the same to the file of AO/TPO for examining it afresh. Following the same, we restore this issue to the file of AO/TPO in this year also with similar directions.

The next issue relates to disallowance of SAP software related support expenses. The Ld A.R submitted that the Ld DRP has not given any direction on this issue and accordingly prayed that this issue may be restored to Ld DRP. Accordingly we restore this issue to Ld DRP for examining it afresh and for giving appropriate directions in accordance with law.

The last issue relates to the addition made on account of difference in income found in Form 26AS and that reported by the assessee. We notice that the Ld DRP has also restored this issue to the file of the AO with the direction to examine the reconciliation statement filed by the assessee and grant relief in respect of reconciled items of income. The ld A.R submitted that the assessee has furnished additional evidences to reconcile the income and TDS and accordingly prayed that this matter may be restored to the file of the AO. Since the assessee could reconcile the difference further, we are of the view that the same requires examination at the end of the AO. Accordingly we restore this issue to the file of the AO. In this year, one more plea has been put forth by the assessee. It was submitted that the AO has assessed un- reconciled income between the books of the assessee and Form 26AS, but did not give credit for corresponding TDS amount. It was stated that the assessee

In the result, the appeal filed by the assessee for AY 2009-10 and 2010- 11 are treated as Partly Allowed. The appeal of the assessee for AY 2011-12 is treated as allowed. Both the appeals of the revenue are dismissed. Order has been pronounced in the Court on 31.10.2018.