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Income Tax Appellate Tribunal, DELHI BENCH ‘I’ : NEW DELHI
Before: SHRI B.P. JAIN & SHRI KULDIP SINGH
being disposed off by way of consolidated order to avoid repetition of discussion.
2. The Appellant, M/s. JCB India Ltd. (formerly known as M/s.
JCB Manufacturing Pvt. Ltd.) (hereinafter referred to as ‘the taxpayer’) by filing the present appeal being sought to set aside the impugned order dated 25.10.2012, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2008-09 on the grounds inter alia that :-
“TRANSFER PRICING MATTERS
Ground 1: Erroneous rejection of the transfer pricing analysis
On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer ('AO'), the Ld. Transfer Pricing Officer (TPO') pursuant to the directions of the 3 CO No.284/Del/2014 Ld. Dispute Resolution Panel (‘DRP') erred in rejecting the benchmarking approach adopted by the appellant in the transfer pricing study and thereby making a transfer pricing adjustment of Rs.9,82,34,197 to the international transaction of export of components from Plant I and Rs.17,098,544 to the transaction of provision of engineering design services from Plant II of the appellant by holding that these international transactions do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 (‘the Act’).
Ground 2: Rejection of economic adjustments conducted by the appellant to compute the operating profit from the international transaction of export of components
On the facts and in the circumstances of the case and in law, the Ld. DRP/AO/TPO has erred in rejecting the economic adjustments conducted by the appellant for computation of operating profit from international transaction of export of components, while doing so, the Ld. DRP/ AO/TPO has erred in rejecting the need to make economic adjustments to the tested party (instead of adjustments to the comparables) and stating that adjustments are permissible only to com parables and not to the appellant, i.e. tested party, as per provisions of Rule 10B (1) (e) (iii) of the Rules.
Ground 3: Denial of working capital adjustment to the com parables
On the facts and in the circumstances of the case and in law, the Ld. DRP/AO/TPO erred in denying a working capital adjustment to the operating profit margins of the com parables as conducted by the appellant despite the fact that such an adjustment was conducted in the Transfer Pricing documentation as maintained by the appellant in terms of section 92D of the Act read with Rule 10D of the Rules and all the details were submitted before the Ld. DRP/ AO/TPO during the course of assessment proceedings.
On the facts and in the circumstances of the case and in law, the Ld. DRP/AO/TPO has erred in rejecting the Comparable Uncontrolled Price data provided by the appellant in respect of its international transaction pertaining to provision of design engineering services to its Associated Enterprises.
Ground 5: Erroneous computation of adjustment on the entire service income of Design Engineering Services Segment
On the facts and in the circumstances of the case and in law, the Ld. DRP/AO/TPO has erred in computing the adjustment on the entire service income of the Design Engineering Services Segment (Plant III) of the Appellant amounting to Rs.67,388,310, whereas the international transaction pertaining to this segment amounts only to Rs.52,611,526. Thus, the Ld. DRP/AO/TPO have erred by not computing the adjustment on a proportionate basis.
Ground 6: Erroneous selection I rejection of comparables for international transaction of provision of engineering design services
On the facts and in the circumstances of the case and in law, the Ld. DRP/AO/TPO has erred in: a) Rejecting Onward Technologies Limited as functionally not comparable company; despite the fact that relevant CUP data for services procured by the Associated Enterprises from Onward Technologies was submitted by the appellant; b) Considering Rolta India Limited as comparable company; though the same is not functionally comparable.
On the facts and in the circumstances of the case, the Ld DRP/AO/TPO has erred in considering the single year data for the com parables i.e. data for Financial Year ('FY') 2007-08 only and disregarding multiple year data which was considered by the appellant in accordance with the provisions of Rule 10B (4) of the Rules. While doing so, the Ld. DRP/AO/TPO erred in appreciating the fact that the appellant has computed arm's length price for the transaction of provision of engineering design services on the basis of contemporaneous and multiple year data of com parables available at the time of conducting the Transfer Pricing Study and based on the same had offered a suo-moto adjustment of Rs.96,09,029 as income in its return of income, thereby clearly complying with the proviso to Rule 108 (4) of the Rules.
Ground 8: Ignoring the fact that the appellant is entitled to tax holiday under Section 10B of the Act
On the facts and in the circumstances of the case and in law, the Ld. DRP/AO/TPO erred in ignoring the fact that the appellant is entitled to tax holiday under section 108 of the Act on its profits of Plant I and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions.”
The Appellant, Deputy Commissioner of Income-tax, Circle 4 (1), New Delhi (hereinafter referred to as ‘the Revenue’) by filing the present appeal being sought to set aside the impugned order dated 29.01.2014, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 grounds inter alia that :-
“1. Whether on the facts and circumstances of the case & in law, the Ld. members of DRP has erred in directing the TPO / AO to allow adjustment on account of working capital, in respect of plant 1.
2. Whether on the facts and circumstances of the case & in law, the Ld. members of DRP has erred in holding the CUP method as most appropriate for the period 01.04.2008 to 31.12.2008 on the basis of invoice of A.E. ignoring the fact that there was no material difference when the assessee is working as "license manufacturing" or "contract manufacture"
3. That the order of the DRP is erroneous and is not tenable on facts and in law.”
4. The Objector, M/s. JCB Manufacturing Pvt. Ltd., by filing the present cross objections challenged the assessment order dated 29.01.2014 passed by the Assessing Officer qua the assessment year 2009-10 on the grounds inter alia that :-
“1. Under the facts and circumstances of the case and in law, the Ld AO has erred in confirming the Ld. TPO's judgment regarding rejection of transfer pricing approach undertaken by the appellant. In particular, the AO /TPO has erred in: Grounds pertaining to international transaction of export of components from Plant I 1.1 Rejection of economic adjustment conducted by the respondent on account of unabsorbed overheads due to underutilisation of capacity to compute the operating profit from the international transaction of export of components;
7 CO No.284/Del/2014 1.2 Rejection of accounting adjustment conducted by the respondent (to account for differences in rates of depreciation adopted by the respondent vis-a-vis comparables) for computation of operating profit from international transaction of export of components without appreciating that the said rationale is' squarely covered under several judicial precedence from Hon'ble Tribunal;
Grounds pertaining to international transaction of export of equipment from Plant II
1.3 Incorrect consideration of B E M L Limited as a comparable company without appreciating the fact that the same is a public sector undertaking whereas, the selection of public sector undertakings is incorrect, the said rationale is squarely covered under several judicial precedence from Hon'ble Tribunal; and 1.4 Rejection of adjustment for marketing function which was absent in case of the assessee vis-a-vis the comparables as conducted by the assessee in its TP documentation.”
(AY 2008-09) ASSESSEE’S APPEAL
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. JCB Manufacturing Pvt. Limited (JCBMPL), the taxpayer has been merged with M/s. JCB India Limited (JCBIL) w.e.f. 01.04.2009 as approved by Hon’ble High Court of Bombay vide order dated 05.02.2010 and Hon’ble High Court of Delhi vide order dated 05.02.2010 and another order passed by Hon’ble Delhi High Court dated 26.05.2010 and consequently JCBML ceases to be a separate legal entity. The Manufacturing Plant (Plant – I) has been set up for manufacturing components and spare parts for construction equipment and during the year under assessment, the taxpayer manufactured welded steel fabrications in the nature of excavator components such as back blades, buckets, dippers, shovels, loader arms, booms etc. for Backhoe Loader 220, 360 Degree Excavator and other machines The taxpayer has set up Equipment Manufacturing Plant (Plant - II) to cater the export as well as domestic market commenced in October 2006 and has set up in-house engineering design centre, to provide services to Overseas Group companies and other Indian counterparts such as Plant I, Plant II and Delhi Unit of JCBIL.
The taxpayer during the year under assessment entered into following international transactions :-
S.No. Nature of Transactions Amount of Method Transactions Adopted 1. Import of raw materials 2,03,11,666 TNMM 2. Export of finished components 1,47,13,85,613 TNMM 3. Export of finished goods 88,09,17,903 TNMM 4. Import of kits 39,72,80,839 CUP 5. Export of raw material / parts 35,02,75,661 TNMM (components) 6. Export of raw material 1,43,87,723 TNMM 7. Purchases of capital assets 25,68,296 CUP 8. Design Engineering Services 5,26,11,526 TNMM 9. Write back of provision for rectification 1,52,34,244 CUP & rework charges 10. Rectification & Rework charges 1,32,22,229 CUP 11. Recovery of expenses 6,91,99,394 CUP 12. Reimbursement of expenses incurred 31,85,15,888 CUP Total 3,60,59,10,982
The taxpayer claimed total sales of Rs.7,31,48,97,463/- and net sales after deduction of excise duty of Rs.6,55,22,77,673/- and on including the other income of Rs.26,91,61,546/-, the turnover of the taxpayer is Rs.6,82,14,39,219/- and loss before taxation of the taxpayer is Rs.43,10,91,149/- for the year ending 31.03.2008. The taxpayer for the purpose of benchmarking the international transaction selected four comparables OP/TC as Profit Level Indicator (PLI), having margin of 16.68% having single year data as against PLI 13.22% qua international transaction with Associated Enterprise (AE) in the form of supply of design engineering services. Out of four comparables, TPO rejected Onward Technologies Limited and proposed to introduce Rolta India Limited having average of 28.52%. After making detailed analysis of the objections raised by the taxpayer, TPO finally selected four comparables having OP/TC at 24.07% which are as under :-
Sr.No. Name of the Company PLI – OP/TC 1. Tata Technologies Ltd. 18.63% 2. Infotech Enterprise – (Engineering, 15.79% Manufacturing, Industries Products Segment) 3. KLG Systel Ltd. (Life Cycle Solutions Segment) 23.48% 4. Rotla India Ltd. 38.38% Mean 24.07% operating Revenues, operating expenses and operating profit, TPO taken PLI of the comparables at 24.07% as against PLI of taxpayer at (-) 5.86% and proceeded to propose the arm’s length as under:-
Operating Cost of EDC Rs.7,15,86,142 Mean of the OPTC of the comparables 29.93% Arm’s Length price of the international (7,15,86,142 X transaction 129.93/100 = Rs.9,30,11,874 Adjustment over operating income Rs.9,30,11,874 – Rs.6,73,88,310 = Rs.2,56,23,564
In view of the facts of the case, submissions of assessee and economic analysis carried out by it, the Arm’s Length Price of transactions as reported by the assessee are being disturbed for the Plant I for Rs.9,82,34,197 and for the Engineering Design Services for Rs.2,56,23,564.”
The taxpayer carried the matter by way of raising objections before the ld. DRP, which have been disposed off. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeals.
CO No.284/Del/2014 (AY 2009-10) ASSESSEE’S CROSS OBJECTION
The taxpayer is engaged in the business of manufacturing, developing, designing, buying, selling and assembly of all kind of equipments and machinery used in construction, agriculture, components, spares and stores, tools etc. The taxpayer initially challenged the TP order passed by the TPO on the basis of which draft assessment order dated 07.02.2013 was passed which was challenged before the ld. DRP. Then ld. DRP passed fresh order dated 26.11.2013 on the basis of which fresh TP order dated 24.01.2014 has been passed vide which working capital adjustment on comparables has been granted qua Plant – I and found the international transaction qua Plant – I at arm’s length being within +/- 5% range. Ld. DRP directed the TPO to use as CUP a Most Appropriate Method (MAM) from April 2008 to December 2008 and to use TNMM from January 2009 to March 2009 as the taxpayer is a contract manufacturer and determined the prices based on cost plus and appropriate mark up and again found the international transaction qua Plant – II at arm’s length being within +/- 5%.
Feeling aggrieved, the Revenue has come up before the Tribunal challenging the impugned order passed by TPO/AO to allow adjustment on account of working capital in respect of Plant – I and directing the TPO to use CUP for the period January 2009 or contract manufacturer.
CO NO.284/DEL/2014 (IN (AY 2009-10) ASSESSEE’S CROSS OBJECTION
The taxpayer also filed cross objections qua international transactions of export component of Plant – I and qua international transactions of equipment of Plant – II for rejection of economic adjustment conducted by the taxpayer on account of unabsorbed overheads and rejection of accounting adjustment conducted by the taxpayer and also challenged incorrect consideration of BEML Limited as a comparable company and also challenged the rejection of adjustment for marketing function which was not there in the case of the taxpayer vis-à-vis the comparables.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
The taxpayer moved an application for admission of additional grounds in for AY 2008-09 and in Cross Objection No.284/Del/2014 for Assessment Year 2009- 10 for the reason that the aforesaid grounds are legal and can be The additional grounds raised by the assessee in both the AYs 2008-09 and 2009-10 are as under :-
ITA NO.6359/DEL/2012 (AY 2008-09)
“1. That the Draft Assessment order dated 21.12.2011 and Final Assessment order dated 25.10.2012, both passed by the learned Assessing Officer are illegal and void-ab-initio, since these have been passed upon an entity which did not exist on the date of passing of these orders.
2. That in any case and in any view of the matter, impugned orders were passed by the lower authorities without assuming jurisdiction as per the law and thus impugned orders passed by the lower authorities including the order by the Hon'ble DRP are nullity in the eyes of law and deserve to be quashed.
3. That in any case and in any view of the matter, the impugned assessment orders have been passed in violation of provisions of Section 170(2) of the Income Tax Act, 1961 and therefore these are not sustainable in the eyes of law.
4. That in any case and in any view of the matter, orders passed in the name of a dead person or a non- existing person is nullity in the eyes of law and may be held so.”
CO NO.284/DEL/2014 (IN (AY 2009-10)
“1. That the Draft Assessment order dated 07.02.2013 and Final Assessment order dated 29.01.2014, both passed by the learned Assessing Officer are illegal and void-ab-initio, since these have
That in any case and in any view of the matter, impugned orders were passed by the lower authorities without assuming jurisdiction as per the law and thus impugned orders passed by the lower authorities including the order by the Hon'ble DRP are nullity in the eyes of law and deserve to be quashed.
3. That in any case and in any view of the matter, the impugned assessment orders have been passed in violation of provisions of Section 170(2) of the Income Tax Act, 1961 and therefore these are not sustainable in the eyes of law.
That in any case and in any view of the matter, orders passed in the name of a dead person or a non- existing person is nullity in the eyes of law and may be held so.”
Since aforesaid grounds sought to be raised by the taxpayer in its appeal as well as cross objections are purely legal and necessary for complete adjudication of the controversy at hand, the same are allowed without expressing any opinion on merits.
At the very outset, it is brought to our notice by the ld. AR for the taxpayer as well as by the ld. DR for the Revenue that on the date of draft assessment order dated 21.12.2011 and assessment order dated 25.10.2012 passed in JCBML merged with JCBIL, the taxpayer in this case, was not in existence and drew our attention to assessment order dated 25.10.2012 for AY 2008-09 in case of scheme of amalgamation as approved by Hon’ble High Court of Bombay vide its order dated 05.02.2010 and vide orders dated 05.02.2010, 26.02.2010 and 26.02.2010 passed by Hon’ble High Court of Delhi. This fact has been duly recorded by ld. DRP in its order dated 21.09.2012, available at page 52 of the paper book. So, on the date of completion of assessment, in case JCBMPL merged with JCBIL w.e.f. 01.04.2009, it was not in existence and was a non-entity. So, we are of the considered view that assessment order itself is a nullity and is not sustainable in the eyes of law.
Similarly, in case of JCBMPL for AY 2009-10 qua the appeal filed by the Revenue as well as cross objection filed by the taxpayer, assessment order was passed on 29.01.2014 whereas JCBMPL ceases to be in existence w.e.f. 01.04.2009 as per order passed by Hon’ble High Court of Bombay dated05.02.2010 and order passed by Hon’ble Delhi High Court dated 05.02.2010, 26.02.2010 and 26.02.2010. This fact has been highlighted by the ld. DRP in its order dated 21.09.2012 passed in JCBIL for AY 2008-09.
In view of what has been discussed above, without entering into the merits of the grounds of appeal raised by the taxpayer as its appeals for AY 2008-09 and cross objection for AY 2009-10 are allowed and the assessment order dated 25.10.2012 for AY 2008- 09 and assessment order dated 29.01.2014 for AY 2009-10 are held to be nullity. Consequently, for AY 2008- 09 filed by the assessee is allowed, AY 2009-10 filed by the Revenue is dismissed and Cross Objection No.284/Del/2014 for AY 2009-10 filed by the assessee is allowed. Order pronounced in open court on this 12th day of December, 2017.