Income Tax Appellate Tribunal - Delhi
Ericsson India Pvt. Ltd., New Delhi vs Dcit, New Delhi on 28 July, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-2', NEW DELHI
Before Sh. N. K. Saini, AM and Ms. Suchitra Kamble, JM
ITA No. 2554/Del/2014 : Asstt. Year : 2009-10
Ericsson India Pvt. Ltd., Vs Dy. Commissioner of Income
4th Floor, Dhaka House, 18/17 Tax, Circle-11(1),
W.E.A, Pusa Road, Karol Bagh, New Delhi
New Delhi-110005
(APPELLANT) (RESPONDENT)
PAN No. AAACE0138N
Assessee by : Sh. Ravi Sharma, Adv. &
Sh. Anubhav Rastogi, Adv.
Revenue by : Sh. T. M. Shiva Kumar, CIT DR
Date of Hearing : 04.05.2017 Date of Pronouncement : 28.07.2017
ORDER
Per N. K. Saini, AM:
This is an appeal by the assessee against the order dated 31.01.2014 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act).
2. Following grounds have been raised in this appeal:
"That on the facts and circumstances of the case, and in law;
1. That the assessment order passed by the Learned Assessing Officer ("Ld. AO") under section 143(3) read with section 144C of the Income-tax Act, 1961 ("the Act"), in pursuance to the directions issued by the Learned Dispute Resolution Panel ("Ld. DRP") is a vitiated order as the Ld. DRP has erred both on 2 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
facts and in law in confirming the addition to the extent of INR 22,94,17,103 in part made by the Ld. Transfer Pricing Officer ("Ld. TPO") to the Appellant's income, is without appropriate application of mind and in undue haste.
1.1. The reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the Arm's Length Price ("ALP"), as is required under section 92CA(1) of the Act.
1.2. The Ld. AO pursuant to the directions of the Ld. DRP erred on facts and in law in enhancing the income of the Appellant by INR 22,94,17,103 by holding that the international transactions pertaining to the receipt of second line support ("SLS") services do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred by:
1.3.1 not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case;
1.3.2 disregarding the ALP, as determined by the Appellant in the Transfer Pricing (TP) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Indian Income tax Rules, 1962 ('the Rules') without providing the Appellant with any cogent reason for rejection of the TP documentation maintained by the Appellant;3 ITA No. 2554/Del/2014
Ericsson India Pvt. Ltd.
1.3.3 misinterpreting the concept of shareholder services and other concepts relating to intra-group services contained in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations released by the Organisation for Economic Cooperation and Development (OECD Guidelines);
1.3.4 disregarding the computation of cost submitted by the Appellant in support of the fee paid to Associated Enterprises for receipt of second line support services and instead, proposing a completely arbitrary methodology of cost allocation based on its own conjectures and surmises.
1.3.5 by proposing a flawed allocation methodology that allocates only 40% of the cost and does not take into account the business and commercial realities that would not allow any third party to absorb 60% of the cost which it incurs for rendering service.
1.3.6 not giving an opportunity of being heard before applying an arbitrary approach for allocation of cost, thus violating the principle of natural justice.
Corporate tax grounds
2. That on the facts and circumstances of the case and in law, the order passed by the Ld. AO is bad in law and liable to be quashed as the same has been passed after making the addition to book profit without appreciating the fact that the Hon'ble Dispute Resolution Panel has not issued any 4 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
direction on the said issues within the period prescribed under section 144C(12) of the Act.
3. Without prejudice, that on the facts and circumstances of the case and in law, the Ld. AO has erred in making an addition of Rs.7,38,08,545 to the book profits under section 115JB of the Act, by holding that the provision for leave encashment was an unascertained liability, without appreciating the fact that the Hon'ble Delhi Tribunal has decided the issue in favour of the appellant in its own case for AY 2003-04 and 2004-05.
4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in making an addition of Rs.6,87,00,165 to the book profits under section 115JB of the Act, by holding that the provision for gratuity was an unascertained liability, without appreciating the fact that the Hon'ble Delhi Tribunal has decided the issue in favour of the appellant in its own case for AY 2003- 04 and 2004-05.
5. That on the facts and circumstances of the case and in law, the Ld. AO has erred in allowing the credit of taxes deducted at source amounting to Rs.211,99,83,813 as against Rs.219,96,61,978 claimed in the tax return, resulting in the short credit of Rs.7,96,78,165.]
6. The Ld. AO erred in computing interest under section 234B, 234C and 234D of the Act.
The above grounds are without prejudice to each other.
5 ITA No. 2554/Del/2014Ericsson India Pvt. Ltd.
The Appellant craves leave to alter, amend or withdraw all or any grounds herein or add any further grounds as may be considered necessary either before or during the hearing."
3. Vide Ground Nos. 1 to 1.3.6, the grievance of the assessee relates to the addition of Rs.22,94,17,103/- made by the AO on account of Arm's Length Price (ALP).
4. Facts of the case in brief are that the assessee is a wholly owned subsidiary of Telefonaktiebolaget LM Ericsson, Sweden and was engaged in the business of trading, manufacturing of telecommunication carrier equipment for sale to independent customers, marketing of telecommunication equipment manufactured by Group companies, construction, assembly & installation, and support/technical services related to telecommunication systems and development of telecommunication software. The assessee filed e-return declaring a total income at Rs.791,68,45,488/- on 30.09.2009 which was subsequently revised on 30.09.2009, declaring the same income. Later on, the case was selected for scrutiny. During the year under consideration, the assessee company had entered into international transaction with the associated enterprises. Therefore, the AO made a reference to the TPO for determining the Arm's Length Price. The TPO-1(2), New Delhi vide his order dated 22.01.2013 recommended an adjustment of 6 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
Rs.43,90,67,319/- being difference in Arm's Length Price by observing as under:
"Based on the discussion in the preceding paras it can be concluded that the assessee has not been able to demonstrate that it has acted as an independent entity would have. Accordingly, by the application of CUP, the arm's length price of the transaction of payment for services availed for the "second line support including software related errors" is determined at 'nil' as against Rs.43,90,67,319/- determined by the assessee.
Accordingly, the assessing officer shall enhance the income of the assessee by Rs.43,90,67,319/-. No adverse inference is drawn in respect of other transactions. The assessee has been given adequate opportunity including personal hearing as per details at Col. 7 of Page 1 of this order."
5. Accordingly, the AO passed the draft assessment order. Against the said order, the assessee filed the objection before the ld. DRP-1, New Delhi who vide order dated 20.12.2013 u/s 144C(5) of the Act, directed the TPO to recompute the transfer pricing adjustment. Thereafter, the TPO vide his order dated 07.02.2014 determine the Arm's Length Price at Rs.22,94,17,103/- instead of Rs.43,90,67,319/-. The AO made the aforesaid addition.
6. Now the assessee is in appeal. During the course of hearing, the ld. Counsel for the assessee at the very outset 7 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
sated that this issue is covered by the earlier order dated 11.05.2012 of the ITAT Delhi Bench 'B', New Delhi in assessee's own case for the assessment year 2007-08 reported at (2012) 17 ITR (T) 79 (Del.)/(2012) 146 TTJ 708 (Del.) (copy of the said order was furnished which is placed on record).
7. The ld. DR in his rival submissions although supported the orders of the authorities below but could not controvert the aforesaid contention of the ld. Counsel for the assessee.
8. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that an identical issue having similar facts was a subject matter of the assessee's appeal for the assessment year 2007-08 in ITA No. 5141/Del/2011 wherein the identical issue has been decided vide order dated 11.05.2012 and the relevant findings are given in paras 29 & 30 which read as under:
"29. We have carefully considered the rival submissions in the light of material placed before us. The facts have already been discussed in detail in the above part of this order. Mainly it is the case of the Revenue that assessee does not require to make any payment with regard to Second Line Support (SLS) obtained by it from its AE. As against that it is the case of the assessee that SLS services 8 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
have been availed to minimum level where the assessee on its own is not able to resolve the problem as most of the problems have been resolved at the level of the assessee. It has been submitted that during the relevant assessment year the assessee has received customer service request to the tune of 11,108 out of which 1,245 have been addressed for SLS. No doubt that equipment has been supplied by the parent company of the assessee and the parent company of the assessee, who has supplied the instruments, can only resolve the complicated problems. During the warranty period, it is the liability of the parent company to resolve the problem without any charge. Therefore, reference to the warranty period is not relevant in the present case more particularly as AMC itself stands on different footings for which separate revenue has been received by the assessee. Supply of equipments is one thing and service of the equipments after the warranty period is another thing. In commercial words it is well known that after the expiry of warranty period the AMC is obtained for the faultless working of the equipment. The assessee is receiving separate consideration on account of AMC after the expiry of the warranty period and the figures relating to that have already been mentioned. The gross revenue has been earned at Rs.118,94,04,863/-. To ensure the faultless working of the equipment the assessee, as a matter of business expediency, has to resolve all the problems relating to that instrument. The assessee has its own set up for resolving the minor problems which it has resolved at its own. The assessee is aware of the fact that it has to incur expenditure with respect to each of the SLS invoked by him, 9 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
therefore, from the data it is clear that minimum number of problems have been referred to the AE. Therefore, for availing the services of the AE for resolving the complicated problems the prerogative is of the assessee and the Department cannot say that the assessee does not require to make any payment for resolving the complicated problems of the instruments. Anybody obtaining AMC must have intention that the instrument which he is operating for his use should run continuously and effectively and it is for that purpose only one would avail AMC. Anticipating that some problems may not be resolved at the level of the assessee's own staff available with as the said staff may not be having the skill upto the level which requires to resolve complicated problem and in turn assessee adopted a mode according to which it is ensured that all the problems arising in the functioning of the instrument are efficiently resolved. That decision of the assessee is business expediency of the assessee so that the customers to whom the instruments have been supplied remain satisfied about the functioning of the equipment. Therefore, we find no force in the claim of the Revenue that for availing these services the assessee was not required to make any payment. The assessee has the right to enter into an arrangement according to which its business interests are protected and for protection of such interests of the business of the assessee, it has entered into an agreement with its AE. To hold that is the prerogative of the assessee to see and decide the business expediency, the reference can be made to the decision of Hon'ble Delhi High Court referred to by learned AR in the case of EKL Appliances Ltd. (supra) wherein their Lordships have observed 10 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
that even Rule 10B(1)(a) does not authorize 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 view of 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. Whether or not to enter into the transaction is for the assessee to decide. It will be relevant to reproduce these observations of their Lordships which is contained in para 22 of the order as under:
"22. Even Rule 10B(1)(a) does not authorize 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 view of 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 TPO 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 assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that What the TPO 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 11 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
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 TPO 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 TPO is not contemplated or authorized."
30. Keeping in view the aforementioned decision of Hon'ble Delhi High Court, we are of the opinion that it will be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee. At the same time it has also to be seen that whether the price paid by the assessee is at arm's length. The term 'arm's length price' has been defined in section 92F which means a price which is applied or proposed to be applied in the transactions between the persons other then Associate Enterprises in uncontrolled conditions. It is only because of that their Lordships in the aforementioned decision have observed that "the quantum of expenditure can no doubt be examined by the TPO 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." Earlier to this they have observed that Revenue cannot disallow any expenditure on the ground that it was not necessary 12 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative. Looking into observations of their Lordships, it has to be held that reasonableness of an expenditure has not been excluded from determination. Here it can be mentioned that the formula, which was placed before the Assessing Officer, TPO, and DRP, was different from the formula according to which the impugned amounts have been calculated. For the first time it is brought to our notice that an amended formula has been adopted to calculate the impugned amount. Though it is the case of the learned AR that this formula is more logical and reasonable but at the same time this formula has not been examined by the authorities below. Though on the face of it the arguments of learned AR appear to have force but unless the new formula is also confronted to the Assessing Officer, it will be wholly unjustified to uphold the correctness & reasonableness of this formula which has been placed before us for the first time. Therefore, we consider it just and proper to restore the issue regarding determination of arm's length price with regard to the impugned transaction to the file of the Assessing Officer re-determine the same in the light of the aforementioned observations. Needless to observe that assessee should be given reasonable and sufficient opportunity of hearing for presenting its case."
9. Since, the facts for the year under consideration are similar to the facts involved for the assessment year 2007-08 in assessee's own case in ITA No.5141/Del/2011. So, 13 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
respectfully following aforesaid referred to order dated 11.05.2012, this issue is restored back to the file of the AO/TPO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.
10. Next issue vide Ground Nos. 2 to 4 relates to the additions amounting to Rs.7,38,08,545/- on account of provision for leave encashment and Rs.6,87,00,165/- pertaining to the provision for gratuity for the purpose of computing book profit u/s 115JB of the Act.
11. As regards to this issue the ld. Counsel for the assessee at the very outset sated that this issue is covered vide earlier order of the ITAT dated 12.09.2016 for the assessment year 2005-06 in ITA No. 1927/Del/2011 in assessee's own case and the order dated 23.03.2009 in Cross Appeals by the assessee and the department for the assessment years 2003-04 & 2004- 05 in ITA Nos. 642 & 643/Del/2008 and ITA Nos. 452 & 453/Del/2008 respectively (copies of the said orders were furnished which are placed on record).
12. In his rival submissions the ld. DR although supported the order of the AO but could not controvert the aforesaid contention of the ld. Counsel for the assessee.
14 ITA No. 2554/Del/2014Ericsson India Pvt. Ltd.
13. After considering the submissions of both the parties and the material available on the record. It is noticed that an identical issue having similar facts has already been adjudicated by the ITAT Delhi Bench "B", New Delhi in assessee's own case for the assessment years 2003-04 & 2004- 05 wherein the relevant findings have been given in paras 35 to 43 of the order dated 23.05.2009 which read as under:
"35 We shall now take up the ground no 4 of the instant appeals of the Revenue pertains to assessment year 2003-04 and 2004-05 relating to deletion of additions of Rs. 365789188/- (in assessment year 2003-04) and Rs. 284160056/- (in assessment year 2004-05) out of book profit u/s 115JB of the Act.
36. Briefly, the facts relating to the issue involved in ground no. 4 of the appeals of the Revenue are that in assessment year 2003-04 arid 2004-05, the AO made additions of Rs. 365789188/- and Rs.284160056/- for the purpose of computing the book profits u/s 115JB of the Act on account of the following provision being treated as unascertained liabilities:
2003-04 (Rs.) 2004-05 (Rs.)
Provision for warranty 8,88,98,823/- 9,04,12,454/-
Provision for liquidated damages 25,26,79,327/- 15,60,73,161/-
Provision for wealth tax 55,950/- -
Provision for leave encashment 92,80,471/- 36,81,331/-
Provision for gratuity 1,05,97,496/- 70,89,932/-
Provision for doubtful debts/advances 42,77,121/- 42,77,121/-
Total 36,57,89,188/- 28,41,60,056/-
15 ITA No. 2554/Del/2014
Ericsson India Pvt. Ltd.
37. On appeal the CIT(A) deleted the impugned additions made by the AO while observing as under:-
"Submissions made by the Id. A.R. were considered. I have also gone through the appellate order dated 9-12-2005 for A-Y. 2002-03 (appeal no.120/05- 06/CIT(A) -XIV/Del) in appellant's own case. My Id. predecessor lias discussed the submissions made by the Counsel of the appellant elaborately on page 14/15 of the appellate order. In para 8.3.1 of the appellate order for A.Y. 2002-03, my predecessor held that the provision made in respect of warranty is an ascertained liability and therefore, the adju.3tm.eni made by the AO in respect of the same is directed to be deleted. Regarding liquidated damages, my predecessor, in para 8.3.2 of the order for the A.Y. 2002-03 held the liquidated damages as unascertained liability and upheld he AO's action of adding amount relating to liquidated damages while working out the book profit of the appellant company. However, as discussed above in para 5.1, the Hon'ble ITAT Delhi Bench "F" New Delhi in an order dated 12-10-2007 in ITA No. 491/Del of 2005 for A.Y. 2001-02 in appellant's own case held that the liquidated damages are not unascertained liability and in view of the same, I hold that the liquidated damages are not to be added back to the total income of the appellant while working out the book profits u/s 115JA/JB of the Act. In consonance with the judicial pronouncements relied upon by the appellant as well as the decision rendered by my Id. predecessor in an appellate order for A.Y. 2002-03, I direct the AO to delete the addition made to book profits on 16 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
account of provision for warranty, provision for liquidated damages, wealth tax, leave encashment, gratuity and provision for bad and doubtful debts while working out the book profit u/s 115JB of the Act".
38. Before us Id. AR for the assessee submitted that the provision for warranty, provisions for liquidated damages stand covered in favour of the assessee and against the Revenue in view of the decisions (supra) of the Tribunal, mentioned while discussing ground no. 1 and 2 of the appeals of the Revenue.
39. Further, that the issues relating to provisions for wealth tax, provision for leave encashment and provision for gratuity now stands covered in favour of the assessee in view of the decision of the Bombay High Court in the case of C1T v/s Echjay Forging (P) Ltd., 116 Taxman 322 (Born.) (placed at page 77 to 82 of the compilation of the assessee.)
40. That provision for bad and doubtful debts now also stand covered in favour of the assessee in view of the decision of Bombay High Court in the case of CIT v/s. HCL Commet System & Services, 292 ITR 299 (Del.) and by ITAT order of A.Y. 2001-02 in ITA No. 516/D/2005 (reference made to Para 10.1 at page 54 of the compilation of the assessee)
41. Thus, according to id. AH for the assessee the orders of CIT(A) in this regard passed for assessment years 2003-04 and 2004-05 need to be upheld because the orders of CIT(A) were in - consonance with the 17 ITA No. 2554/Del/2014 Ericsson India Pvt. Ltd.
above decisions (supra) of the Tribunal and High Court.
42. Ld. DR for the Revenue was fair enough to concede to the above submissions of Id. AR for the assessee.
43. In thus view of the matter, we find that there is no illegality or infirmity in the well reasoned orders of CIT(A) deleting the impugned additions made by the AO in respect of the provisions referred to hereinabove for the purpose of computing book profits u/s 115JB because the orders of CIT(A) were in consonance with the view taken by ITAT in the case of this very assessee and with the view taken by the Hon'ble Delhi High Court in the cases (supra) Accordingly, the orders of CIT(A) in this regard are upheld and ground no. 4 of the instant appeals of the Revenue are rejected."
14. The aforesaid order has been followed by the ITAT Delhi Bench "I", New Delhi in ITA No. 1927/Del/2011 filed by the department in the succeeding year i.e. assessment year 2005- 06 vide order dated 12.09.2016 and the relevant findings have been given in paras 5 & 5.1 which read as under:
"5. Ground No.3 stands covered by order for Assessment Years 2003-04 and 2004-05. The relevant paragraphs are paras 41 to 43. This Tribunal has upheld the findings of Ld. CIT(A) therein. It is further observed that Ld. CIT(A), in the appeal before us has followed the order for Assessment Year 2003-04 passed by Ld. CIT(A).18 ITA No. 2554/Del/2014
Ericsson India Pvt. Ltd.
5.1 We find that there is no illegality or infirmity in the well reasoned orders of Ld. CIT(A) deleting the impugned additions made by the Ld. A.O. in respect of the provisions referred to hereinabove for the purpose of computing book profits u/s 115JB because the orders of Ld. CIT(A) are in consonance with the view taken by this Tribunal in assessee's own case and with the view taken by the Hon'ble Delhi High Court in the cases CIT Vs HCL Commet System & Services, 292 ITR 299 (Del.) for the previous Assessment Year 2003-04 and 2004-05, the orders of Ld. CIT(A) in this regard are upheld and ground No.3 of the instant appeal of the Revenue is rejected."
15. So respectfully following the aforesaid referred to earlier orders of the ITAT Delhi Benches, this issue is decided against the department and in favour of the assessee.
16. Vide Ground No. 5, the grievance of the assessee relates to the short credit of taxes deducted at source amounting to Rs.7,96,78,165/-.
17. As regards to the issue raised in this ground, it was the common contention of both the parties that this issue may be verified by the AO from the Income Tax Return filed by the assessee. Accordingly, this issue is set aside to the file of the AO to be decided after proper verification and by providing due and reasonable opportunity of being heard to the assessee.
19 ITA No. 2554/Del/2014Ericsson India Pvt. Ltd.
18. As regards to Ground No. 6 relating to computation of interest u/s 234B, 234C & 234D of the Act. It was the common contention of both the parties that it is consequential in nature. We order accordingly.
19. In the result, appeal of the assessee is partly allowed for statistical purposes.
(Order Pronounced in the Court on 28/07/2017) Sd/- Sd/-
(Suchitra Kamble) (N. K. Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 28/07/2017
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR