Income Tax Appellate Tribunal - Delhi
Va Tech Escher Wyss Flovel Pvt. Ltd., ... vs Assessee on 17 October, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I" NEW DELHI
BEFORE SHRI R.P. TOLANI AND SHRI B.C. MEENA
ITA No. 6226/Del/2012
Asstt. Yr: 2008-09
VA Tech Escher Wyss Flovel, Vs. ACIT Circle-I,
Pvt. Ltd. (known as ANDRITZ), Faridabad.
Hydro Pvt. Ltd. 49/5, Mathura Road,
Vill. Prithla, Distt. Palwal, Haryana.
PAN: AABCV 2466 R
( Appellant ) ( Respondent )
Appellant by : Shri G.C. Srivastava Adv. &
Shri Manoneet Dalal Adv.
Respondent by : Shri Peeyush Jain CIT (DR) &
Shri Yogesh Kumar Verma CIT(DR)
ORDER
PER R.P. TOLANI, J.M :
This is assessee's appeal against assessment orders dated 17-10-2012 for A.Y. 2008-09, passed by the assessing officer u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 ("the Act").
2. Various issues are raised which in effect involve following two grounds:
1. The Assessing officer/ DRP erred in law and on facts in making adjustment of Rs. 1,61,71,804/- to the income of the assessee u/s 92CA(4) on account of following transactions:
(i) Reimbursements of expense paid to AEs amounting to Rs.
1,932,166 2
(ii) Payment of interest on corporate guarantee payment amounting to Rs. 8,254,706
(iii) Payment relating to training costs amounting to Rs. 734,896
(iv) Payment for specific services for Jaldhaka project, amounting to Rs. 2,379,000
(v) Payment towards technical services received, amounting to Rs.
2,870,036
2. The learned AO erred in making an addition of Rs. 7,000,000 on account of disallowance of interest under section 14A of the Act. The deduction has been made by the AO to account for the cost of funds utilized in making an investment in shares by the assessee and ignoring the following contentions of the assessee:
(i) No interest bearing funds were used for making the investment; and
(ii) Investment did not earn any dividend income or any other tax free income.
3. Brief facts are: The assessee is engaged in the business of manufacturing and sale of engineering goods like hydro turbine, governors etc. for undertaking execution of turnkey engineering procurement constructions contracts involving installations, commissioning services, rehabilitation and civil works of Hydro Power plants. 3.1. During the year under consideration it entered into an international transaction with Associate Enterprise ("AE") within the meaning of Sec. 92B of the Act. Requisite form no. 3CEB was filed and the case was referred 3 to TPO for determination of arm's length price ("ALP"). Various TP adjustments were made, part of which were deleted by DRP qua the same by following observations:
"The issue before this office is whether the payment that you have made of Rs. 97,956,317 on account of supposed receipt of technical services answers to the arm's length principle or not. It may be mentioned here that for the purpose of benchmarking you have clubbed this transaction with another international transaction related to import of raw materials and components. You have proceeded to draw up segmental accounts of transactions with AE's and non-AE's and attempted to show that your transactions with AE are at arm's length. I am afraid that this approach is inaccurate. It has not been established anywhere in your TP report that these transactions are so interlinked that the more appropriate approach of a transaction by transaction analysis should be abandoned in favour of the approach that you have followed. It goes without saying that a transaction by transaction approach of benchmarking is always preferable. This is in conformity with the OECD guidelines also. The correct approach would be to apply a CUP, in the sense, to weigh whether on independent entity would have made such a payment under similar circumstances. It is proposed to examine the issue from that angle. DRP agrees with the above logic and finds no reason to interfere with the order of the TPO. DRP fails to understand how can import of raw materials and components be clubbed with receipt of technical consultancy services."
4. Ld. Counsel for the assessee contends that assessing officer had made huge additions. DRP while excluding the purchase of equipments and receipt of services towards model test from the ambit of technical services, failed to exclude various other items for which no finding has been given. These items are:
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(a) reimbursement of traveling expenses;
(b) payment towards interest on loan
(c) TDS amount grossed on SAP licensing fees
(d) Payment relating to training costs.
4.1. Ld. Counsel contends that since DRP did not give any reasons or findings in not excluding the above amounts, additional evidence is filed before us vide application dated 7-5-2013 to substantiate the nature of above transactions to be excluded from the ambit of technical services, since this evidence was never asked and aditions have been made in summary manner, the admission of documents become important for adjudication of tax liability. Besides, assessee was prevented by a sufficient cause in filing the same.
4.2. It is pleaded that:
(a) no actual services have been received.
(b) Assessee did not need the services and has not received any tangible benefits from the services.
(c) The services received are in the nature of shareholders services.
4.3. It is further pleaded by ld. Counsel that:
(i) To substantiate the receipt of services, copies of AE invoices, technical reports, calculation etc. received in relation to specific projects are available.
(ii) The services received can be directly correlated to the various projects executed by the assessee, thereby justifying the need and benefit from such services.5
(iii) No evidence has been submitted by the TPO to substantiate how these can be considered as shareholder services.
4.4. Assessing officer/ TPO held that use of combined transaction approach is not correct and each transaction needs to be analysed separately. Therefore, the ALP of payment for technical services needs to be determined separately. The assessee objected to these observations. DRP, however, confirmed the same.
4.5. The assessee contends as under:
(i) Availing of technical services is closely linked to the main business activity of the assessee (i.e. manufacturing and supply of hydro turbines and related equipments and components)
(ii) Same is the case with other international transaction (import of raw material and components), which is also closely linked to the main business activity of the assessee and has been accepted as such by the TPO.
(iii) The assessee has already done a transactional level analysis, whereby only the profitability of projects with such inter-company transactions (Segment A) was considered and compared with the profitability of projects with no inter-company transactions (Segment B)
(iv) The use of combined transaction approach for closely linked transactions has also been upheld in the various case laws relied upon by the TPO.6
4.6. It is pleaded that the TPO erred in applying CUP method. DRP while approving the same, has given no finding whatsoever on the objections raised by assessee in this behalf for non applicability of CUP method. The contentions of the assessee are:
(i) ALP has to be determined using one of the prescribed method.
(ii) The TPO did not provide any reasons to reject TNMM as the most appropriate method.
(iii) Even under a transaction by transaction analysis, the transaction should be considered at ALP (since the net margin of EWF from projects with such technical services is higher than net margin from projects which have no related party transactions)
(iv) When no change/ alternation has been proposed in the TNMM, there is no need to use CUP method - No need to apply 2 methods as most appropriate method.
(v) No comparable uncontrolled transaction has been provided by the TPO for application of CUP method.
4.7. Assessee in support of his contentions relies on ITAT Mumbai order in the case of CA Computer Associates; and ITAT Delhi order in the case of AWB India Ltd.
4.8. It is further pleaded that the TPO erred in questioning the commercial rationale of the business expenditure incurred by the assessee which is not tenable as TPO cannot question the wisdom of a commercial 7 decision or a transaction. The power of the TPO is restricted to determine the appropriate ALP only. Reliance is placed on:
- Abhishek Auto (ITAT Delhi) - LG Polymers (ITAT Vishakhapatnam) - EKL Appliances (Delhi High Court) - Dresser Ran (ITAT Mumbai) - McCann Erickson (Delhi ITAT) - Ericsson India Pvt. Ltd. (ITAT Delhi) - AWB India Pvt. Ltd. (ITAT Delhi).
4.9. The other major ground of the assessee pertains to disallowance of amount of Rs. 60 lacs u/s 14A red with Rule 8D.
4.10. DRP confirmed the disallowance by relying on the similar disallowances made in AY 2005/06 and 2007-08.
4.11. Ld. Counsel for the assessee in brief contends that:
(i) No interest bearing funds were used for making the investment
(ii) Assessee did not earn any dividend income or any other tax free income from such investment.
(iii) Disallowance u/s 14A is not automatic.
4.12. Reliance is placed on the ratio of decisions in:
- Hero Cycles Ltd. (P&H High Court) - Paharpur Cooling Towers Ltd. (ITAT Kolkata ) - Gillette Group India Pvt. Ltd. (ITAT Delhi) - Siva Industries and Holdings Ltd. (ITAT Chennai) - Torrent Power Ltd. (ITAT Ahmedabad)
4.13. Ld. Counsel for the assessee contends that assessee had received an order amounting to Rs. 93 crore from M/s Orissa Power Consortium Ltd. 8 ("OPCL"). For this purpose the Power Finance Corporation (PFC) was to approve the limitation with a condition of equity participation of Rs. 5 crores from the assessee on which no dividend was payable. It is pleaded that the funds were financed consequent to a business obligation purposes necessitated by the financing conditions of PFC for funding such mega project. Thus the equity participation was not a free/ independent decision taken by the assessee for earning exempt income but it was necessitated by the business expediency. Therefore, such investment cannot be held to be the amount utilized for earning tax free income, more so when the dividend was not payable and in this year no exempt income is received.
5. Ld. DR on the other hand contends that the assessee did not provide proper documentation before the lower authorities. Ld. DR referred to para 4 of TPO's order to the effect that even JV agreement was not produced before him, as under:
"The next issue is the comparative benefits that have been received by the respective JV partners. A finding had been given in the show cause notice that he Indian partner is not receiving any benefit. The foreign partner is receiving its benefit even if the assessee the JV entity is making losses. The assessee has to pay royalty as a percentage of sales. The profits of loss made by the assessee is of no consequence. Besides that the assessee is also called upon to make a payment for supposed technical assistance. There is obviously no benefit being received if the assessee is left in losses. It had been brought out in the show cause notice that the profits in the year under consideration could not wife out the carried forward 9 losses. Under these circumstances, there is very little justification for payment of royalty also. However, no interference is made in that transaction since it is a composite payment. There is definitely no justification for a separate payment on account of supposed receipt of technical services. The assessee was asked to submit a copy of the JV agreement. It has failed to do so. All things considered, it can be said that neither the JV agreement nor the arrangement of the JV entity i.e. the assessee with its AE's is at arm's length."
6. Ld. Counsel for the assessee immediately reverted and contends that observation is not correct as JV agreement was produced before the TPO as well as DRP. Therefore, the entire order starts on a wrong premise and it shows the non appreciation of the record placed before the lower authorities. 6.1. Ld. Counsel for the assessee contends that apropos disallowance u/s 14A a plea about the equity participation with an added condition of no payment of dividend thereon was a decision taken in the interest of business expediency. Without agreeing to this condition PFC would not have financed such a massive project. Therefore, this issue was to be appreciated and a proper finding ought to have been given. However, both the lower authorities have glossed over this requirement and upheld the disallowance. 6.2. Ld. Counsel in the alternative pleads that when the TPO has proceeded to decide the ALP alleging that no JV agreement was filed, which is not a correct statement, the matter may be set aside and restored back to the file of assessing officer.
7. Ld. DR is heard.
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8. We have heard rival contentions and gone through the entire material available on record. From the record it emerges that TPO has proceeded to draw an adverse inference against the assessee on the premise that JV agreement was not filed, whereas the ld. Counsel for the assessee has demonstrated from the paper book that JV agreement was filed. The DRP has confirmed the action of assessing officer/ TPO in this behalf without giving any finding. Similarly, apropos disallowance u/s 14A the assessee's main claim has not been examined i.e. about the equity participation being a business decision and it was not investment to earn any exempt income. In our considered view it will be desirable and in the interest of justice to set aside both the issues to the file of assessing officer to consider the same afresh after giving the assessee adequate opportunity of being heard.
9. In the result, assessee's appeal is allowed for statistical purposes. Order pronounced in open court on 26-09-2013.
( B.C. MEENA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 26th Sept. 2013. MP Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR