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Income Tax Appellate Tribunal, DELHI BENCH ‘I’ : NEW DELHI
Before: SHRI S.V. MEHROTRA & SHRI KULDIP SINGH
Order : 22.09.2016 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, M/s. Magotteaux Industries Pvt. Ltd. (hereinafter referred to as ‘the assessee’), by filing the present appeal sought to set aside the order passed by the AO/TPO/DRP under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2009-10 on the grounds inter alia that :-
“1. On the (acts and in law the learned Assessing Officer (ld. AO), learned Transfer Pricing Officer (ld. TPO) erred and hon'ble DRP erred in confirming the addition of Income by Rs.4,42,08,235 as adjustment at arm's length price of international transactions. 2.1 On the facts and in law, the ld. AO, ld. TPO and hon'ble DRP erred in determining the arm's length price of royalty payments to its A.E. at NIL 2.2 On the facts and in law, the Id. AO, ld. TPO and hon'ble DRP erred in holding that the Assessee could not justify the payment of royalty to its AE. 2.3 On the facts and in law, the ld. AO, ld. TPO and hon'ble DRP erred in treating Rs.1,20,70,435 as adjustments u/s 92A on account of payment of royalty to its AE when the actual royalty charged to Profit and Loss Account was Rs.1,12,70,219 and claimed in return of income for the year, after offering Rs.8,00,216 as prior period expense. 3.1 On the facts and in law, the ld. AO, ld. TPO and hon'ble DRP erred in law and on facts in determining the arm's length price of intra group services received at NIL. 3.2 On the facts and in law, the Id. AO, ld. TPO and hon'ble DRP erred in holding that there were no intra group services actually received by the assessee from its AE's. 3.3 On the facts and in law, the ld. AO, ld. TPO and hon'ble DRP erred in treating Rs.3,14,87,895 as adjustments u/s 92A on account of intra group services when the assessee has actually charged to Profit and Loss Account Rs.2,57,91,160 for intra group services received and claimed in returned income for the year, after offering Rs.48,20,700 as prior period expense.
4. The Hon'ble DRP erred on facts and in law in not considering the supporting documents in respect of royalty and intra-group services filed during the course of the proceedings.
5. On the facts and in law, the ld. AO, ld. TPO and hon'ble DRP erred in enhancing the arm's length price of market support service charged by Rs.6,49,905 to Rs.54,28,236 instead of actual receipts of Rs.47,78,331.
6. On the facts and in law, the ld. AO, ld. TPO and hon'ble DRP erred in not allowing benefit of variation of 5% while determining the additions of Rs.4,42,08,235 on the basis of arm's length price of international transaction, which is allowable as per Proviso to section 92C (2) of the Income Tax Act, 1961. 7. On the facts and in law, the ld. AO erred in not allowing MAT credit of Rs.56,28,145 u/s 115JAA of the Income Tax Act, 1961.
On the facts and in law, the ld. AO erred in excess interest charged u/s 234B of the Income Tax Act.
9. On the facts and in law, the ld. AO, ld. AO erred in excess interest of Rs.3,96,342 charged u/s 234C of the Income Tax Act, 1961 which is chargeable on the returned income.” 2. Briefly stated the facts of this case are : assessee group comprises Magotteaux Group SA founded in 1920 in Liege by Lucien Magotteaux and is market leader in both grinding media and castings. Assessee group provides worldwide adapted solutions i.e. products and expertise to increase the wear resistance to abrasion, corrosion or impact of specialized casting products used in grinding, crushing and other processes. Assessee filed return of income declaring taxable income at Rs.4,14,45,462/- which it has revised on the same date declaring same income by explaining that it had not adjusted credit of tax available to the assessee company u/s 115JAA of the Act in the original return due to inadvertent error. During scrutiny proceedings, Shri Afsar Jamil, CA/AR for the assessee put in appearance, furnished requisite details, books of account and bills/vouchers.
Pursuant to the reference made to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act TPO has passed order dated 30.01.2013 u/s 92CA(3) of the Act proposing an adjustment of Rs.4,42,08,235/- being difference in Arm’s Length Price (ALP).
Dispute Resolution Panel (DRP), after considering objections raised by the assessee company to the draft assessment order passed by the AO, upheld the upward TP adjustment of Rs.4,42,08,235/- made by the TPO. Pursuant to the order passed by TPO/ld. DRP, the AO assessed the income of the assessee company at Rs.8,56,53,697/- (Rs.4,14,45,462/- income declared by the assessee company + Rs.4,42,08,235/- addition on account of transfer pricing adjustment).
Feeling aggrieved, the assessee has come up before the Tribunal by challenging the impugned order passed by AO/TPO/DRP by way of present appeal.
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.
At the very outset, ld. AR for the assessee company fairly conceded that he does not want to press grounds no.5 & 7 and consequently, grounds no.5 & 7 are dismissed having not been pressed by the assessee company.
GROUND NO.1 7. Ground no.1 is general in nature which would be covered and discussed under grounds no.2.1, 2.2, 2.3, 3.1, 3.2, 3.3 and 4.
GROUNDS NO.2.1, 2.2 & 2.3 8. Undisputedly, assessee company has entered into international transaction with its Associate Enterprises (AEs) during FY 2008-09 as under :-
S.No. Nature of transaction Amount (in INR) 1. Purchase of raw materials 6,68,11,684 2. Sale of finished goods 23,16,64,685 3. Payment of Royalty 1,20,70,435 4. Receipt of services 3,14,87,895 5. Provision of support services 47,78,331 (amount received) 6. Cost Reimbursement (paid) 2,50,51,980 7. Other receipts 16,99,028 8. Interest on loans 42,26,328
It is also not in dispute that assessee company had debited the payment to the tune of Rs.1,20,70,435/- on account of payment of royalty during the year under consideration and justified the payments of these amounts by aggregating transactions along with other international transactions based on CUP. Assessee claimed that the comparables operating margin is 5.25% and that of assessee is 6% (on the net sales of XWIN products), 4.5% (on net sales of classic products) and however, effective rate or royalty is 1.91%.
TPO as well as DRP came to the conclusion that since the assessee company could not justify the payment of royalty to its AEs adjustment on this account has to be made. Ld. AR for the assessee has also raised a ground that TPO/DRP have erred in treating the amount of Rs.1,20,70,435/- as adjustments u/s 92A on account of payment of royalty to its AEs when the actual royalty charged to the profit and loss account was Rs.1,12,70,219/- and claimed in return of income for the year under assessment after offering Rs.8,00,216/- as prior period expenses. Ld. AR further contended that in the light of the judgment cited as CIT vs. EKL Appliances – (2012) 345 ITR 241 (Delhi) and CIT vs. Cushman & Wakefield India (P) Ltd. – 367 ITR 730 (Delhi), the matter is required to be remanded back to the TPO for verifying the facts.
Hon’ble jurisdictional High Court in judgment cited as CIT 11. vs. EKL Appliances (supra) while dealing with the identical issues returned the following findings :- “Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price - Assessment years 2002-03 and 2003-04 - Whether it is not necessary for assessee to show that any legitimate expenditure incurred by him was incurred out of necessity; and that any expenditure incurred by him for purpose of business carried on by him has actually resulted in profit - Held, yes - Whether quantum of expenditure can, no doubt, be examined by TPO, but in judging allowability thereof as business expenditure, he has no authority to disallow entire expenditure or a part thereof on ground that assessee has suffered continuous losses - Held, yes - Assessee-company entered into know-how/brand fee agreement with its associated enterprise under which it paid brand fee/royalty for using its brand name - In" computation of ALP, TPO held that assessee had been continuously incurring huge losses and, therefore, payment of brand fee/royalty was unjustified as agreement with associated enterprise had not benefited assessee in achieving profits from its operations - Accordingly, he disallowed same - Whether when full justification supported by facts and figures had been given by assessee to demonstrate that increase in employees cost, finance charges, administrative expenses, depreciation cost and capacity increase had contributed to continuous losses, TPO was not justified in disallowing brand fee in computation of ALP - Held, yes [In favour of assessee]”
Keeping in view the law laid down by the Hon’ble jurisdictional High Court and the fact that the contention of the assessee company that the payment on account of royalty by aggregating transaction along with all other international transactions based on CUP has been accepted by the revenue in assessee’s own case qua AY 2010-11 and 2012-13 (TPO vide order dated 30.01.2014 qua AY 2010-11 held that on the basis of functional and economic analysis of assessee company and that of comparables, no adverse inference is drawn in respect of the international transaction undertaken by the assessee during FY 2009-10), we are of the considered view that the matter is required to be remanded to the TPO to decide afresh on furnishing the facts by the assessee after providing an opportunity of being heard to the assessee. Consequently, grounds no.2.1, 2.2 & 2.3 are determined in favour of the assessee for statistical purposes.
GROUNDS NO.3.1, 3.2, 3.3 & 4 13. Ld. TPO/DRP have made adjustment in respect of inter- corporate services to the tune of Rs.3,14,87,895/- on the ground that the assessee could not furnish any details of expenses in the shape of service charges and corporate services received from its AEs. DRP also came to the conclusion that so far as advise on financial accounting and auditing matter is concerned, this work is part and parcel of audit process in India which is carried out by independent auditors in India. TPO/DRP came to the conclusion that there were no intra-group services received by the assessee from its AEs.
Ld. AR for the assessee company again relied upon CIT vs. EKL Appliances (supra) and further contended that during the AY 2010-11 and AY 2012-13 in assessee’s own case, the revenue has accepted the contention of the assessee that intra-group services have actually been received by the assessee from its AEs. Even otherwise, there is a mistake apparent on record that the TPO/DRP have treated Rs.3,14,87,895/- as adjustment u/s 92A on account of intra-group services when the assessee has actually charged to profit & loss account of Rs.2,57,91,160/- for intra-group services received and claimed in returned income for the year under assessment after offering Rs.48,20,700/- as prior period charges. So, the TPO required to verify all these facts and to decide the issue afresh after providing an opportunity of being heard to the assessee. So, this issue is also restored to the TPO. Consequently, grounds no.3.1, 3.2, 3.3 & 4 are determined in favour of the assessee for statistical purposes.
GROUND NO.6 15. Ground No.6 raised by the assessee company is consequential in nature. TPO/DRP is directed to allow the benefit to the assessee as per proviso to section 92C(2) of the Act in case there is variation of 5% in determining the addition of Rs.4,42,08,235/- on the basis of ALP. So, consequently, this issue is also determined in favour of the assessee for statistical purposes.
GROUNDS NO.8 & 9 16. The issue raised in grounds no.8 & 9 are consequential in nature and at the same time, are premature also. Hence, do not require any adjudication at this stage.
In view of what has been discussed above, the impugned order passed by the AO on the basis of the directions issued by TPO/DRP is set aside and the file is ordered to be restored to the file of TPO to decide afresh. Needless to say that assessee is provided with an opportunity of being heard. Consequently, present appeal is allowed for statistical purposes.
Order pronounced in open court on this day 22nd of September, 2016.