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Income Tax Appellate Tribunal, DELHI BENCH ‘C’, NEW DELHI
Before: SHRI R. S. SYAL & SHRI KULDIP SINGH
PER KULDIP SINGH, JM: Since, common question has been raised for determination by the appellant, DCIT, Circle 12(1), New Delhi (hereinafter referred to as ‘the revenue’) in the aforesaid appeals, the same are being disposed of by way of consolidated order to avoid repetition of discussion.
1.1 The Revenue by filing the present appeals has sought to set aside the impugned order dated 28.11.2008 in I.T.A.No. 321/Del/2009, order dated 29.07.2009 in I.T.A.No. 3979/Del/2009 and order dated 28.09.2010 in I.T.A.No. 5351/Del/2010 passed by Ld. CIT(A) XX, New Delhi qua the Assessment Years 2004-05, 2005-06 and 2006-07 respectively on the grounds inter alia that:
A. I.T.A.No. 321/Del/2009:
“1. On the facts and circumstances of the case and in law the CIT(A) has erred in deleting the addition of Rs.2,74,86,042/- made by the TPO on account of Arms Length Price of the International Transaction related to payment of royalty. 2. On the facts and circumstances of the case and in law the CIT(A) erred in deciding the issue without waiting for remand report matter being remanded to AO(TPO) and AO (TPO) having sought time, thereby violating the principles of natural justice.”
B. I.T.A.No. 3979/Del/2009:
“1. On the facts and circumstances of the case and in law, the order of the CIT(A) is wrong, perverse, illegal and against the provisions of law which is liable to be set aside.
3 I.T.A.No.321,3979,5351/Del/2009
2. Whether the Ld.CIT(A) was justified on facts of the case and in law in holding that payment of Royalty to the tune of RS.3,39,17,4701- made by the assessee to M/s Group 4 Falck A/S Denmark through M/s G4S Corporate Services Pvt. Ltd., a resident company, does not fall within the definition of deemed International Transaction as defined under section 92892) of the Income Tax Act 1961.”
C. I.T.A.No. 5351/Del/2010:
“1. On the facts and circumstances of the case and in law, the order of the CIT(A) is erroneous, perverse, illegal and against the provisions of law which is liable to be set aside.
Whether the Ld.CIT(A) was justified on facts of the case and in law in holding that payment of Royalty to the tune of Rs. 3,12,18,850/- made by the assessee to M/s Group 4 Falck A/S Denmark through M/s G4S Corporate Services Pvt. Ltd., a resident company, does not fall within the definition of deemed International Transaction as defined under section 928(2) of the Income Tax Act 1961.
3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.4,19,499/- made by the AO on account of depreciation on temporary structure.
On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.3,03,203/- made by the AO on account of excess depreciation claimed.”
2. Briefly stated the facts of this case are as under:
A. 2009 (A.Y. 2004-05):
4 I.T.A.No.321,3979,5351/Del/2009
Briefly stated, the facts of this case are: during the processing of return of income filed by the assessee qua the Assessment Year 2004-05, the case was subjected to scrutiny and in response to the notice issued u/ 143(2) of the Act, Shri S.K. Agarwal, CA along with Shri Venkat Patnaik, AR attended the proceedings form time to time. Keeping in view the fact that the assessee entered into international transaction with its associate enterprises (AE), the case was referred to Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) u/s 92CA of the Income tax Act, 1961 (hereinafter to be referred 'the Act'). TPO passed the order dated 06.12.2006 u/s 92CA(3) making the adjustment of Rs.2,74,86,042/- in the ALP and the assessee was issued show cause notice as to why addition of Rs.2,74,86,042/- be not made. Finding the reply filed by the assessee not tenable that the TPO was not justified in relying upon the financial results for the assessment year 2003-04 to determine the ALP and was also not justified in determining the ALP for Royalty paid in case of assessee, the A.O. passed the assessment order inconsonance with the order passed by TPO and thereby made an addition of Rs.2,74,86,042/-.
ITA No.3979/DeV2009 (A.Y. 2005-06): B.
Briefly stated, the facts of this case are: during the processing of return of income filed by the assessee qua the A.Y. 2005-06, the case was subjected to scrutiny and in response to the notice issued u/ 143(2) of the Act, Shri S.K. Agarwal, CA along with Shri Venkat Patnaik, AR attended the proceedings form time to time. Keeping in view the fact that the assessee has entered into international transaction with its associated enterprises, the matter was referred to TPO u/s 92CA of the Act for determination of ALP, who has passed order dated 27.10.2008 making an 5 I.T.A.No.321,3979,5351/Del/2009 adjustment of Rs.3,39,17,470/- qua payment made by the assessee company on account of royalty paid to M/s. Group 4 Falck Viz. being difference in ALP of the assessee and as determined by the TPO u/s 92CA(3) of the Act. Finding the contention of the assessee that the transaction entered into between both the resident companies are not international transaction, not tenable, an addition of Rs.3,39,17,470/- was made in the income of the assessee being difference between ALP.
C. (A.Y. 2006-07):
Briefly stated, the facts of this case are: during the processing of return of income filed by the assessee qua the A.Y. 2006-07, the case was subjected to scrutiny and in response to the notice issued u/s 143(2) of the Act, Shri S.K. Agarwal, CA along with Shri Venkat Patnaik, AR attended the proceedings from time to time. The assessee accepted the proposed draft order and did not file any objection before DRP. The TPO passed the order making adjustment of Rs.3,12,18,850/- in ALP being difference in ALP adjustment u/s 92CA(3). The assessee's objection that the transaction entered into between both the resident companies viz. Assessee Company and M/s. Group 4 Falck, are not covered under international transaction after analyzing the provisions of deemed international transaction, has been considered and rejected firstly by the TPO and then Assessing Officer, in consonance with the order passed by TPO, made addition of Rs.3,12,18,850/- in the income of the assessee.
6 I.T.A.No.321,3979,5351/Del/2009 2.1 The assessee claimed depreciation of Rs.4,66,100/- @ 100% regarding temporary erections made on lease hold building, expiry of lease deed, these structures would revert back to lesser and their utility for the assessee is temporary and claimed deduction u/s 37(1) of the Act. The Assessing Officer finding and explanation made by the assessee for deduction for the temporary erection u/s 37(1) not tenable, made an addition by allowing depreciation @ 10% and made consequent addition of Rs.4,19,499/- (Rs.466110 - 46611).
2.2 The Assessing Officer also made addition of Rs.3,03,203/- by disallowing the depreciation claimed by the assessee @ 60% on computer peripherals, UPS and Printers on cost / WDV of Rs.l0,11,442/- for less than 180 days i.e. 30% of Rs.l,68,064/- for more than 180 days i.e. 60% amounting to Rs.4,04,271/-.
2.3 The assessee challenged the assessment order dated 29.12.2009 before Ld. CIT(A) who has accepted the appeal. Feeling aggrieved, the Revenue has come up before the Tribunal by filing the present set of appeals.
We have heard Ld. Authorized Representatives, perused the material on record in the light of facts and circumstances of the case, orders of tax authorities below and the case law relied upon by the parties to the appeal.
Grounds No.1 & 2 of I.T.A.No. 321/Del/2009 (A.Y. 2004-05), grounds No.1 & 2 of I.T.A.No. 3979/Del/2009 (A.Y.2005-06) and grounds No.1 & 2 of I.T.A.No. 5351/Del/2010 (A.Y. 2006-07):
7 I.T.A.No.321,3979,5351/Del/2009
4. Ld. D.R. challenging the impugned order, contended inter alia that Ld. CIT(A) has erred in deleting the addition of Rs.2,74,86,042/- Rs.3,39,17,470/- and Rs.3,12,18,850/- qua the Assessment Years 2004-05, 2005-06 and 2006-07 respectively on account of payment of royalty made to M/s. Group 4 Falck A/S Denmark through M/s. G4S Corporate Service Pvt. Ltd., a resident company; that the transaction of making payment of royalty by the assessee to M/s. G4S Corporate Services India (P) Ltd., is a sham transaction to avoid benchmarking of the international transaction, in order to avoid the payment of tax; that the assessee company has actually made the payment on account of royalty to its own created entity and relied upon the case law settled in case cited as Mc Dowel Co.; that factum of making payment of royalty by the assessee company to M/s.G 4S Corporate Service (India) Pvt. Ltd. is to be seen as a whole and not on piecemeal basis; that Ld. CIT(A) has passed the order in haste without providing opportunity of being heard to the Assessing Officer from whom he had called remand report and, thereby derailed the judicial process; that the assessee itself has reported the transaction as international transaction but never challenged its wrong pleadings before TPO by moving an application showing actual nature of transaction; that since the assessee company has made the payment of royalty to the holding companies and holding company has made payment to offshore company, which apparently shows that it is deemed international transaction; that the assessee company itself has filed form 3CEB for treating the royalty payment as international transaction but back out thereafter to avoid the benchmarking and relied upon the order of TPO.
8 I.T.A.No.321,3979,5351/Del/2009
However, on the other hand Ld. A.R. for the assessee to repel the arguments addressed by Ld. D.R. contended inter alia that since the assessee being an Indian company, has paid royalty to another Indian company, the question of falling the transaction under the purview of ‘international transaction' does not arise and relied upon the order passed by Ld. CIT(A); that Ld. CIT(A) has provided ample opportunity to the Revenue and relied upon the order of TPO and he was not to wait endlessly to prolong the decision.
The common issue to be determined in all the aforesaid appeals is, “as to whether the payment of Rs.2,74,86,042/- in Assessment Year 2004- 05 and Rs.3,39,17,470/- in Assessment Year 2005-06, made by the assessee company on account of royalty payment to Group 4 Falck A/S Denmark through G4S Corporate Services Pvt. Ltd., a resident company, falls within the purview of the deemed ‘international transaction’.
At the very outset, Ld. A.Rs. for the parties to the appeals have fairly conceded that transfer pricing issue in all the aforesaid appeals is similar and identical, except for the corporate tax issue, which is involved only in qua Assessment Year 2006-07. So, all the appeals are being taken up together for disposal.
Undisputedly, the assessee company reported international transaction in dispute in Form 3CEB as under:
“International Transactions: The major international transactions reported in Form No.3CEB are summarized as under:
9 I.T.A.No.321,3979,5351/Del/2009
S.No. Description of transaction Method Value (in Rs.) 1 Business support fee (Royalty) CUP 2,74,86,042 2 Services given o the AE CPM 6,44,940 3 Services availed CPM 61,50,243 4 Reimbursements - 1,21,942
The assessee to determine the ALP of international transaction pertaining to the payment of Royalty used comparable uncontrolled price method (CUP). However, the TPO, after considering the submissions made by the Assessee Company as well as recommendations of OECD, rejected the CUP method and applied the TNMM method. TPO also rejected the use of multiple year data and under TNMM, the data of the comparable is taken from the year 2004 only for the purpose of determining the ALP of international transaction.
Consequently, TPO passed the order u/s 92CA(3) of the Act determining adjustment of Rs.2,74,86,042/- holding the ALP on payment of royalty as ‘nil’ by considering the operating profit margin of the comparable company as under:
“Determination of Arm's length operating margin:
The following two broadly comparable companies have been selected by the assessee i) Tops Security Ltd. ii) Bombay Intelligence Security (India) Ltd.
The assessee has computed the average of the weighted profit margin of these two companies at 4.64%. Since, the use of multiple year data has already' been rejected m the preceding paras, the Arm's length margin is computed in the following manner:
10 I.T.A.No.321,3979,5351/Del/2009
S.No. Name Net Operating Margin for the year 2004 (%) 1 Tops Security Ltd. 7.17% 2 Bombay Intelligence Security (India) Ltd. 4.25% Average 5.71%
Computation of Arm's length price of the International Transaction;
The arms length price's of the International transaction related to the payment of royalty is computed in the following manner;
Total income of the assessee for the F.Y 2003-04 262.16 crore Net profit as computed by the assessee 12.12 Crore Net profit margin 4.62% Arm's length net profit margin 5.71% Net profit at Arm's length margin 14.96 Crore Difference 14.96 – 12.12 2.84 crore Adjustment required to be made to the value of international transaction 2.84 crore Value of the international transaction related to payment of royalty 2.74 crore
It can be seen that even after making payment of royalty to the extent of Rs.2.74 crore which has been alleged to have facilitated higher pricing and premier clientele the net operating margin of the assessee are much below Arm s length margin. Even in accordance with the OECD guidelines no payment on account of royalty is justified as there is no income accruing to the assessee that is commensurate with the expenditure.
Accordingly, the Arm's length price of the international transaction related to payment of royalty is determined at NIL value. The corresponding adjustment required to be made to the total income is Rs.2,74,86,042/-. Arm's length price of the other transactions is determined at the value computed by the assessee in Form No.3CEB.”
11 I.T.A.No.321,3979,5351/Del/2009
On the other hand Ld. CIT(A) vide impugned order, overturned the findings returned by TPO and came to the conclusion that :
“ Now applying above provisions of the Section 928 in the appellant case, it is noticed that there is no International Transaction on account of payment of Royalty to the tune of Rs.274,86,402/- because: i) payment of Royalty is made by G4 Security India (P) Ltd. to G4S Corporate Services India (P) Ltd- both of which are Resident Company in India. ii) In order to qualify for "International Transaction" as per Sec 928 at least one of the enterprise or AE must be a non-resident. iii) Since in the instant case as discussed above the Royalty payment of Rs 27486402 is made by one resident company (appellant) to another resident company i.e.( G4S Corporate Services India (P) Ltd), hence it is not an International Transaction within the meaning of Section 92B and therefore provisions of Chapter X of Income Tax Act, 1961 are not applicable. iv) The "International Transaction" is between G4S Corporate Services India (P) Ltd. (Indian Co.) and Gp 4 Falck A/s Denmark, for payment of Royalties and it is only in the case of G4S Corporate Services India (P) Ltd. (Indian entity) against whom the proceedings under Chapter 'X' can be initiated to determine whether the royalty payments made by G4S corporate Services India (P) Ltd to Gp 4 Falck A/s Denmark is at arm's length or not. 8.1 Hence in view of the above discussions, I hold that the payment of Rs.27486402 made by the appellant to G4S Corporate Services India (P) Ltd. (Indian Co) is not covered within the definition of "International Transaction", accordingly, in the result ground No.5 is allowed.”
12 I.T.A.No.321,3979,5351/Del/2009
Ld. CIT(A) followed his own decision impugned by way of the present appeal in the appeal pertaining to the subsequent assessment year.
The assessee by relying upon the copy of royalty agreement entered into between G4S Corporate Service India Pvt. Ltd. and Group 4 Falck A/S, Denmark raised objections that the payment of royalty of Rs.3,39,17,470/- qua Assessment Year 2005-06 (the amount of royalty payment differs in other appeals qua Assessment Years 2004-05 and 2006-07) does not fall within the purview of definition of international transaction and the same was inadvertently included in Form 3CEB and moreover, the said payment has not been made to non-resident company and relied upon the following documents:
“Copy of royalty agreement entered between G4S Corporate Services & Group 4 Falck A/S, Denmark (refer Annexure- I). "Copy of TP Certificate showing that the transaction entered between both the parties is an international transaction (refer Annexure- II). "Copy of Tax return, Auditors report, Balance sheet & Profit & Loss account for the year ended 31s, March, 2005 of G4S Corporate Services (refer Annexure- III). "Copy of approval letter received by G4S Corporate Services from Government of India for payment of royalty to nonresident company i.e. to Group 4 Falck A/S, Denmark (refer Annexure- IV).
"'Copy to documents submitted with the bank for payment of royalty to non-resident by the G4S Corporate Services - (refer Annexure- V). Considering the above, your goodself will appreciate that the transaction between these entities i. e. G4S Corporate Services & Group4 Falck A/S, Denmark is an international transaction & the transaction between both Indian companies i.e. G4S Security
13 I.T.A.No.321,3979,5351/Del/2009
Services & G4S Corporate Services is not an international transaction." Ld. TPO arrived at the conclusion that the said transaction of payment of royalty by the assessee company is “deemed international transaction” u/s 92B(2) of the Act, which is reproduced as under for ready reference:
92B(2): A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of relevant transaction are determined in substance between such other person and the associated enterprise.
In the backdrop of the aforesaid facts and circumstances and findings returned by the Assessing Officer / TPO and Ld. CIT(A), we are of the considered view that Ld. CIT(A) has erred in holding that the payment of Rs.2,74,86,402/- made by the assessee company to Group 4 Falck A/S, Denmark through G4S Corporate Service (India) Pvt. Ltd., an Indian entity, is not an ‘international transaction’ because when the assessee has initially filed form 3CEB claiming the royalty payment transaction as international transaction but then retracted its claim during appellate proceedings without seeking any amendment to the alleged wrong plea taken by the assessee before TPO. The CIT(A) has decided the issue without affording an opportunity of being heard to the TPO.
Even otherwise in the face of undisputed fact that when the assessee company has made comprehensive submissions reproduced by Ld. CIT(A) at pages 10 and 11 of the impugned order during appellate
14 I.T.A.No.321,3979,5351/Del/2009 proceedings, Ld. CIT(A) has not found it expedient to take on record the comments / report of the TPO called for vide letter dated 28.08.2008, neither there is an iota of evidence on the file if such letters were ever delivered to the TPO to file the requisite report nor substantive efforts are shown to have been made to call the remand report, but hastened to decide the matter without waiting for the report by admitting the submissions made by the assessee company as a gospel truth and thereby violated the principles of natural justice.
So without entering to the merits of this case we consider it expedient in the interest of justice to restore the case back to the TPO to decide the matter afresh for transfer pricing adjustment in the light of the comprehensive submissions made by the assessee after providing an opportunity of being heard to the parties. Consequently Grounds No.1 & 2 of I.T.A.No. 321/Del/2009 (A.Y. 2004-05), grounds No.1 & 2 of I.T.A.No. 3979/Del/2009 (A.Y.2005-06) and grounds No.1 & 2 of I.T.A.No. 5351/Del/2010 (A.Y. 2006-07) are determined in favour of the revenue.
Ground No.3 of (A.Y. 2006-07):
The assessee claimed depreciation @ 100% amounting to Rs.4,66,110/- qua the temporary erection. However, Assessing Officer allowed the depreciation @ 10% i.e. Rs.46,611/- and consequently made addition of Rs.4,19,499/-. Ld. CIT(A) on the other hand allowed the entire expenditure of Rs.4,66,110/- by adopting the principle of consistency as in assessee’s own case for the Assessment Year 2002-03, similar expenditure in respect of temporary erection has been allowed.
15 I.T.A.No.321,3979,5351/Del/2009
Ld. A.R. by relying upon the order passed by ITAT in I.T.A.No. 4315/Del/2005 qua the Assessment Year 2002-03 and another order of ITAT New Delhi benches “I” Bench, New Delhi in and 3871/Del/2009 dated 21.12.2012, passed in assessee’s own case, contended that the identical issue has already been decided in favour of assessee.
On the other hand, Ld. D.R. relied upon the order passed by the Assessing Officer.
From the arguments addressed by the parties to the present appeal and perusal of the order passed by ITAT Delhi Bench ‘I’, New Delhi in I.T.A.No. 278 and 3871/Del/2009 order dated 21.12.2012 in assessee’s own case, and in I.T.A.No. 1266/Del/2010 in case of Pearey Lal & Sons Pvt. Ltd. Vs ACIT, order dated 16.12.2011, which have since attained finality, we are of the considered view that the issue in controversy has finally been settled by the tribunal and the appeal filed by the revenue against the order of the tribunal before Hon'ble High Court and Hon'ble Supreme Court have already been dismissed, we hereby confirm the findings returned by Ld. CIT(A). So, the Ground No.3 is determined against the Revenue.
21 Ground No.4 I.T.A.No. 5351/Del/2009 (A.Y.2006-07):
16 I.T.A.No.321,3979,5351/Del/2009
The Assessing Officer allowed the depreciation on computer peripherals, UPS and printers on the ground that UPS and printers are not the integral part to the extent of 50% i.e. Rs.1,01,068/- on the ground that assessee has failed to explain that the computer peripherals and UPS are to be treated in the block of plant and machinery and thereby made addition of Rs.3,03,203 (excess depreciation claimed) to the total income of the assessee. However, Ld. CIT(A) by relying upon the order passed by ITAT Delhi ‘F’ Bench, New Delhi in the case cited Expeditors International (India) P. Ltd. Vs ACIT, 118 TTJ (Del.) 652, allowed the depreciation @ 60% and thereby deleted the addition made by the Assessing Officer, in view the fact that without computer peripherals, UPS and printers, the computer cannot function and as such the same make integral part of the computer.
Moreover, when computer is eligible for depreciation @ 60%, its integral part i.e. computer peripherals, printers and UPS are also entitled for depreciation @ 60%. This issue has been decided by the jurisdictional High Court in the judgement cited as CIT Vs BSES Yamuna Powers Ltd. in in favour of the assessee wherein, it is held by Hon'ble High Court that ‘the computer accessories and peripherals cannot be used without the computer, consequently, they are the part of the computer system, and as such are entitled to depreciation at the higher rate of 60%’. So, we find no ground to interfere in the findings retuned by Ld. CIT(A). Hence, Ground No.4 is determined against the revenue.
17 I.T.A.No.321,3979,5351/Del/2009
In view of what has been discussed above, we hereby partly allow the aforesaid appeals for statistical purposes so far as transfer pricing issue qua the aforesaid appeals are concerned to decide afresh in pursuance to the findings returned in the preceding paras and hereby dismiss the appeal in I.T.A.No. 5351/Del/2010 (A.Y. 2005-06) own grounds no. 3 & 4 filed by the Revenue.
Order pronounced in the open court on 15 Feb., 2016.