BONFIGLIOLI TRANSMISSION PRIVATE LIMITED,CHENNAI vs. DCIT CORPORATE CIRCLE 1(2), CHENNAI

आदेश / O R D E R

PER GEORGE MATHAN, JUDICIAL MEMBER

This appeal of the assessee is directed against an

assessment order dated 26.12.2016 of Deputy Commissioner of

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Income Tax, Chennai u/s.143(3) r.w.s.144C(1) r.w.s.92CA of the

Income Tax Act,1961 (in short ‘the Act’ ), pursuant to the directions of

the Dispute Resolution Panel (DRP) -2, Bangalore, dated 27.09.2017

in F.No.323/DRP-2-BNG/2016-17 for the assessment year 2013-14.

General Grounds

II. Application of TNMM

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III. Considering corporate services availed from AEs as ‘NIL’

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IV. Disallowance of sales commission expense

V. Disallowance of employees provident fund

the Assessee and Mr.Vijayakumar Purna represented on behalf the of

the Revenue.

argument has been raised for these grounds by the ld.A.R. Hence,

Grounds 1 & 2 of the assessee does not call for any adjudication.

the ld.A.R that the issue was in regard to transfer Pricing matter.

It was a submission that the assessee is a company, which is doing

the business of manufacture and trade of in-line helical gear boxes, electric

motors, shaft mounted gear boxes and related sub assembly and spare parts

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that from parts of the Machine Tools and Component industry in India. The

assessee’s products are used in various equipments. It was a submission

that during the relevant to assessment year , the main core thrust of the

assessee was in the renewable energy sector, more specifically wind mill

sector. It was submitted that assessee has been doing business in the

country for the last 20 years and never earlier assessment years, or after the

present assessment year the assessee has been held to be liable under

transfer pricing adjustments. It was a submission that peculiar situation for

the relevant to assessment year was that nearly 90% of the assessee’s

business is in respect of manufacturing segment, being concentrated in the

wind mill and renewable energy equipment. The market conditions that hit

the wind mill sector had affected the assessee-company and the assessee-

company had incurred substantial losses. It was a submission that as on

31.03.2012 two amendments took place. The first one was that the

depreciation was restricted to 15% on wind mills installed after 31.03.2012.

The second one relating to generation based incentive under the wind power

sector was removed. Because of these two factors, setting up of wind mills

dropped during the assessment year 2013-14. Consequently, the assessee’s

manufacturing capacity utilization also fell to 47% as against the national

average of 75%. Ld.A.R drew our attention to pages 195 to 198 of Paper

book, which was the copy of the Amendments to the Income Tax Rule. In

respect of depreciation, the Press information bureau clarification in respect of renewable energy generation and the copy of the Economic Times of 13th

May 2013 wherein it has been mentioned that wind energy has dropped by

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1,500 megawatts due to withdrawal of incentive. It was submitted that

show-cause notice was issued to the assessee on 10.10.2016 wherein the

assessee’s transfer pricing study was rejected. The assessee had prayed for

Idle Capacity Adjustments as also adjustment on account of the variable in

respect of depreciation computation in respect of comparables. It was a

submission that both were rejected on the ground that in respect of idle

capacity adjustments, there was non-availability of variable data for

verification. It was submitted that after 2011, on account of change in the

method of reporting, the capacity utilization data was admittedly not

available. It was further submitted that the assessee had no objection if the

TPO’s exercises his power u/s.133(6) of the Act and obtained the details

from the comparables. In respect of issue of depreciation, it was a prayer

that as the method of depreciation adopted by various comparables were

variable for the purpose of standardized method, the assessee had no

objection, if the pre-depreciation figures were adopted in line of the decision

of Co-ordinate Benchof this Tribunal in the case of M/s.ICON Clinical

Research India Pvt. Ltd. Vs. The DCIT in ITA No.1034/Mds./2014 dated

21.09.2016 wherein held as under:-

“18. One of the primary requisite of the comparative study is that margin arrived at for the comparables as well as that of the assessee, shall always be adjusted for dissimilarities in treatment of various expenditure including notional expenditure like depreciation, when such dissimilarities can be measured and quantified. Otherwise, it could erode the comparability. The Panaji Bench of

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the Tribunal in the case of M/s Pentair Water India Pvt. Ltd (supra) had held as under:

”The common contention in respect of computation of TNMM i.e. operating profit taken by the ld. AR in respect of the comparables is that while computing the profit ratio, profit prior to depreciation should be computed as it will give true and fair profit ratio without being affected by the depreciation charged by each of the companies. We noted that different companies have adopted different method of depreciation. In fact, for charging depreciation to the Profit& Loss account there are different prevalent recognized methods of depreciation. Some Assessee opt for Straight Line method, some opt for Written Down method and some opt for Sum of Digit method or even Replacement Cost method. Selection of each method will affect the rate and quantum of depreciation even if the nature of the asset is the same and ultimately, the net profit derived by the company will vary. For determining the fair and true profit, in our opinion, it is appropriate that the effect of the depreciation must be excluded out of the operating profit for determining the operating profit ratio. Therefore, the best way of computing the operating profit, in our opinion, will be to compute the profit before depreciation in respect of each of the company. This will take out the inconformity or the variation in the profit level of the comparables arising due to adoption of different method of charging depreciation. We have gone through the order of the Bombay Bench of this Tribunal in the case of DCIT vs. Reuters India 24 ITR (Trib) 231 (Mum) as has been relied on by the ld. AR. We noted that the Tribunal in this case has adopted the cash profit/operating cost as the correct profit level indicator under the TNMM method.” 19. We are, therefore, of the opinion that the profit level indicator considering the margins prior to depreciation would give better results in the comparable analysis and benchmarking of the transactions of the assessee in the given facts and circumstances. We direct the Assessing Officer/TPO to rework the PLI of the comparables after excluding the depreciation cost and benchmark the PLI of the assessee also excluding the depreciation cost.

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Ordered accordingly. Ground Nos. 6 and 7 of the assessee are allowed for statistical purposes.”

was a submission that idle capacity adjustments could not be laid at

the door of the TPO and it was the duty of the assessee to

substantiate its claim, if it wanted to make a claim of the idle capacity

adjustments. In respect of pre-depreciation adoption of profit level

indicator for considering the margins prior to depreciation, it was a

submission that he had no objection if the pre-depreciation figures

were adopted.

We have considered the rival submissions. Admittedly, two 7.

issues, which have been argued, are in Grounds Nos.6, 7 & 8 of the

assessee’s appeal. Perusal of the facts in the present case clearly

shows that assessee’s business has taken a hit mainly on account of

change in the business conditions in respect of wind mills during the

assessment year 2012-13 on account of withdrawal of the accelerated

depreciation benefit and the withdrawal of the generation based

incentive under the wind power sector. Perusal of the comparative

taken in the present case, shows that some comparables, though not

compprable to the assessee, have been compared with in the earlier

years and the subsequent years. However, the change in the factors

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came about on account of drop in the capacity utilization of the

assessee to 47% during the relevant assessment year. Further, a

perusal of the report of the Reserve Bank of India (RBI) clearly shows

that during the assessment year 2013-14, the capacity utilization as

per RBI’s report is 75%. This being so, admittedly assessee is entitled

to have the benefit of capacity utilization adjustments. However, as it

has been pointed out that the data in respect of capacity utilization is

not available on account of non-availability of variable data, liberty is

granted to the assessee to obtain the variable data and prove the

claim before the TPO, who has to consider the same and grant the

assessee the benefit of the adjustments towards capacity utilization.

Consequently, grounds No.6 & 7 of the assessee’s appeal stands

allowed.

7.1 In respect of ground No.8, representing the adjustments on

account of depreciation so as to determine the aggregate cash profit

margins, the same is to be determined by adopting pre-depreciation

figures in respect of comparables in line with the decision of

Co-ordinate Bench of this Tribunal in the case of M/s.ICON Clinical

Research India Pvt. Ltd. Vs. The DCIT referred to supra. Consequently,

ground No.8 of the assessee stands allowed.

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7.2 The Ld.AR has not raised any arguments in regard to

grounds of the appeal which are marked as Grounds Nos.3, 4, 5, 9

& 10 in the assessee’s appeal. Consequently, Grounds Nos. 3, 4,

5, 9 & 10 of the assessee’s appeal stand dismissed as not argued.

the ld.A.R that the assessee had made payments for Corporate

Services availed by the assessee from its A.Es. Ld.A.R drew our

attention to the agreement entered into by the assessee with it’s

A.Es at page No.393 of the paper book. It was submitted that the

agreement was between the parent company, Bonfiglioli Riduttori

Spa (BRI), Italy and 20 subsidiaries. The assessee was shown at

party No.16 in the said agreement. It was submitted that there

were four types of services provided i.e. Information & Technology

services, Accounting & Finance, Quality control system & Marketing

services. It was submitted that ld. Assessing Officer allowed the

claim of information technology fees, but held that there was no

necessity for the assessee to make any payments towards the

marketing fees, Financial controlling fees as also quality controlling

fees. It was a submission that these were aggregated amounts

payable by the assessee in respect of expenditure incurred by the

parent company. The ld.A.R drew our attention to the decision of

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Hon’ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd.,

(345 ITR 241) wherein the Hon’ble Delhi High Court had held as

follows:-

“22. Even rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the Transfer Pricing Officer as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of the assessee can never be a criterion to judge allowability of an expense ; there is certainly no authority for that. What the Transfer Pricing Officer has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the Transfer Pricing Officer to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the Transfer Pricing Officer is not contemplated or authorised.

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us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees' cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of five years from 1998 to 2003 with relevant figures have been given before the Commissioner of Income-tax (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the Commissioner of Income-tax (Appeals) in support of the reasons for the continuous losses. There is no material brought by the Revenue either before the Commissioner of Income-tax (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on the merits the reasons for the losses are not genuine.”

It was a submission that similar expenses have not been claimed

separately in the accounts of the assessee. It was submitted that

assessee was entitled to its claim of expenditure.

expenditure cannot be aggregated. It was a submission that the

order of TPO/A.O and direction of the DRP is liable to be sustained

on this issue.

the materials available on record. Admittedly the business of the

assessee is a consolidated one. The services referred under

‘Corporate Services” are intrinsically linked to its manufacturing

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and sales activity. These two services cannot be separately

demarcated. Corporate services are the services rendered, which

has helped the assessee in generating the business in respect of

marketing and trading. This being so, in view of the decision of

Hon’ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd.,

referred to supra, the ld. Assessing Officer is directed to allow the

assessee’s claim of the Corporate Services expenditure incurred by

assessee. Consequently, Grounds Nos.11 to 13 of the assessee

stand allowed.

that the issue was against the action of the DRP in confirming the

disallowance of the Sales Commission paid by the assessee to its

sister concern in Bonfiglioli Deutschland GmbH (BD), Germany to

an extent of `99/- lakhs. The ld.A.R drew our attention to page-

677 of Paper Book, which was the copy of agreement between

Bonfiglioli Deutschland GmbH (BD) and the assessee, Bonfiglioli

Transmissions Pvt Ltd.,(BTPL). As per the ld.A.R, the agreement

has been entered on 15.12.2009 and as per the agreement, the

assessee is to get the services from Germany counter-part in

respect of specific areas as provided in Article 2.1. Consequently,

the assessee has paid 1% commission. It was submitted by ld.A.R

that the said commission had been paid in the earlier years, i.e.

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assessment year 2012-13 and was allowed for which he drew our

attention to the pages 669 to 671 of paper book. Similarly, for the

assessment year 2011-12 at pages 672 to 674 of the paper book,

It was a submission that in all the transfer pricing study for earlier

assessment years, the said expenditure had been allowed and no

adjustment has been made. It was the prayer by ld.A.R that

expenditure claimed by the assessee may be allowed.

the agreement between the assessee and the Germany counter-

part clearly shows that the agreement has been entered into in

2009. Consequent to the said agreement, the sales commission

has been paid and the same has also been allowed during

immediately preceding assessment years 2010-11, 2011-12 &

2012-13. The Revenue has not been able to bring any new fact,

which has led to change the present stand for the purpose of

disallowing sales commission. This has been so, we find no reason

to change the existing position and the ld. Assessing Officer is

directed to allow the assessee’s claim in respect of the sales

commission paid to BD. In these circumstances, ground No.14 of

the assessee’s appeal stands allowed.

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that the issue was against the action of the DRP in not allowing

assessee’s claim in respect of employees’ contribution to Provident

Fund (PF) in time. It was a submission that employees’

contribution to PF had been paid within the grace period and before

the due date of filing of the return. Ld.A.R drew our attention to

page 38 of the paper book, which was the copy of return filed

wherein clause-16(b) shows the details of the sum received from

employees towards contribution to PF, due date for payment and

the actual date of payment to the concerned authorities. It was

submitted by the ld.A.R that in view of the decision of the

jurisdictional High Court in the case of C.I.T v. Salem Co-

Operative Spinning Mills Ltd., reported in [2002] 258 ITR 360

(Mad) wherein held that the amounts had been paid within the

grace period provided under the relevant statutes, Ground No.15

may be allowed in favour of the assessee.

and ld. Assessing Officer.

noticed that the issue is squarely covered by the decision of

Hon’ble Madras High Court in the case of C.I.T v. Salem Co-

Operative Spinning Mills Ltd. referred to supra, ld. Assessing

Officer is directed to allow the assessee’s claim of payment of PF

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and ESI, which has been made within the grace period provided under the relevant statutes. Consequently, Ground No.15 of the assessee stands allowed.

statistical purposes.

Order pronounced in the open court after conclusion of hearing on 14th May, 2018, at Chennai. Sd/- Sd/- (एस जयरामन) ( जॉज� माथन) (S. JAYARAMAN) (GEORGE MATHAN) लेखा सद�य/Accountant Member �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai �दनांक/Dated: 14th May, 2018. K S Sundaram

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF