Income Tax Appellate Tribunal - Delhi
Rockwell Automation India Pvt. Ltd. , ... vs Acit, Delhi on 10 May, 2024
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I": NEW DELHI
BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER
AND
SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER
ITA No. 232/Del/2022
(Assessment Year: 2016-17)
Rockwell Automation India Pvt. Ltd, Vs. ACIT,
131, Functional Industrial Area, Delhi
Patparganj, Delhi-110092
(Appellant) (Respondent)
PAN: AACCR3791A
Assessee by : Shri Anubhav Rastogi, Adv
Revenue by: Shri Rajesh Kumar, CIT (DR)
Date of Hearing 20/02/2024
Date of pronouncement 10/05/2024
ORDER
PER M. BALAGANESH, A. M.:
1. The appeal in ITA No.232/Del/2022 for AY 2016-17, arises out of the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as 'ld. AO', in short] in Appeal No. ITBA/AST/S/143(3)/2020-21/1032058955(1) dated 31.03.2021 against the order of assessment passed u/s 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act').
2. Ground No. 1 raised by the assessee is general in nature and does not require any specific adjudication.
3. Ground Nos. 5 to 7 raised by the assessee were stated to be not pressed by the ld AR at the time of hearing. The same is reckoned as a statement made from the bar and accordingly ground Nos. 5 to 7 raised by the assessee are dismissed as not pressed.
4. Ground No. 2 to 2.5 raised by assessee are challenging the transfer pricing adjustment made by the ld TPO in the assembly/ manufacturing segment.
Page | 1 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd
5. We have heard the rival submissions and perused the material available on record. The assessee is engaged in the business of design, manufacturing, install, repair and deal in industrial, electrical and electronic products. The company also designs, develops and installs software for operating integrated control automation monitoring systems and also provides engineering design and customer support services and related parties. During the relevant AY, the assessee undertook the following international transactions with its Associated Enterprises (AEs) which were duly reported in the Accountant's Report (form No. 3CEB), filed along with the assessee's return of income:-
Sl Description of the transactions Amount (Rs.) No.
1. Import of components 584,913,563
2. Export of finished goods 6,394,426
3. Import of finished goods 2,333,908,550
4. Import of capital goods 15,216,789
5. Provision of services - Engineering Design Services 805,776,591
6. Provision of services - Customer support Services 156,350,417
7. Provision of services - Business support Services 46,604,828
8. Intercompany Pricing Adjustment 227,873,097
6. The assessee segregated its business operations in 5 distinct segments namely:
1. Assembly/ Manufacturing Segment ; 2. Customer Care Services ; 3. Business Support Services ; 4. Distribution Segment ; and 5. Engineering Design Support. The relevant segment (subject matter) in the present appeal is assembly/ manufacturing segment. The assessee benchmarked the assembly segment using Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) by using the profit level indicator as under:-
Particulars Details
No of comparables 4
Profit level indicator (PLI) chosen OP/ Sales
by the assessee
Assessee's margin 3.04%
Comparable mean margin 0.61%
7. Considering the above, the assessee concluded that its margin is at arm's length with regard to transactions carried out with the AE in the assembly/ manufacturing segment.
Page | 2 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd
8. Thereafter, the ld TPO applied his own filters and rejected/ modified the quantitative and qualitative filters applied by the assessee and arrived at his own set of comparables. The ld TPO disregarded the benchmarking approach of the assessee and recomputed the margins after arriving at a set of 8 companies with median of 8.38% as against the assessee's margin of 3.04%. The comparables chosen by the ld TPO are as under:-
S no. Company Name OP/ OR
1. BCH Electric Ltd. 3.44%
2. JSL Industries Ltd. 3.52%
3. Stelmec Ltd 4.38%
4. Circuit Systems (India) Ltd 6.74%
5. Havells India Ltd 10.92%
6. Centum Electronics Ltd 10.92%
7. Mahashakti Energy Ltd 13.69%
8 Eddy Current Controls (India Ltd 14.70%
9. 35th Percentile 2.8 4.38%
10. 65th Percentile 5.2 10.92%
Median 8.83%
9. Accordingly, the ld TPO proposed an adjustment of Rs. 3,49,20,106/- to the total income of the assessee. The assessee filed objections before the ld DRP. The ld DRP gave certain directions regarding re-computation of margin and related party transactions (RPT) filter etc after adjudicating the functional characteristic of certain comparables. Pursuant to the directions issued by the ld DRP, the final set of comparables chosen by the ld TPO for benchmarking international transactions in the assembly/ manufacturing segment together with the corresponding margins considered by the assessee qua the said comparables are tabulated here under:-
Sr. Name of Comparable OP/Sales% per TPO Appella No. AO Order nt 1 BCH Electric Ltd. 3.44% 3.44% 2.93 2 JSL Industries Ltd. 3.52% 3.52% 3 Stelmec Ltd. 4.38% 4.38% 4 Circuit Systems (India) Ltd. 6.74% 6.74% 5 Havells India Ltd. 10.92% 10.92% Page | 3 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd 6 Centum Electronics Ltd. 10.92% 10.92% 11.69% 7 Mahashakti Energy Ltd. 13.69% 13.69% 8 Eddy Current Controls (India) Ltd. 14.70% 14.70% 9 Easun Reyrolle Ltd. -11.30% 10 Kaycee Industries Ltd. -0.86% 35th Percentile 4.38% 4.38% Median/ Mean 8.83% 8.83% 0.62% 65th Percentile 10.92% 10.92%
10. Consequent to the aforesaid comparables, transfer pricing adjustment of Rs. 3,37,75,523/- was made in the manufacturing/ assembly segment.
11. The assessee before us seeks exclusion and inclusion of certain comparables. Before getting into the venture of exclusion and inclusion of certain comparables with the assessee company, it would be relevant to first address the functional profile of the assessee in the manufacturing/ assembly segment which is as under:-
Automation Control and Information (ACI) Most of ACI products are integrated/configured products which are manufactured/assembled using various components. They are integrated with a larger system by means of coded software, whereby the coding may be done by the Company's channel partners to whom the sale is made, or by OEMs' end-users who purchase from the company directly.
The typical functions of ACI involve understanding the application needs of the customers, selecting components that meet the customer's requirements, ensuring compatibility between the different components which would be configured together, ensuring compatibility of the configured product with the customer's existing system and finally assembling the various components to produce the configured/integrated products.
Page | 4 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd A brief description of various kinds of products sold under ACI is given below.
Sensing Products These are sensing devices for industrial applications, which help sense position, vibrations, temperature, speed, etc. Some of these sensors include Photoelectric Sensors, Limit Switches, Inductive, Capacitive, Ultrasonic Proximity Sensors, Connection Systems, Safety System Components, and Encoders.
Logix These products are used in variety of industries for process control, motion control, sequencing, discrete control and are used for high end applications.
Control Platform These mainly comprise Small Logic Controller (SLC) and Program Logic Controller (PLC). These products contain modular cards which provide the same functions as Logix but have architectural differences. Also, Logix is a new version of control platforms.
Distributed Input/output and Small Controllers These are essentially used for low end applications and in a variety of industries. These devices help in control through input-output cards.
Industrial Motion Control These devices are typically used for motion control in big industries where very precise control is required. These products include servo drivers, amplifiers, etc. Electronic Operator Interface Page | 5 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd These devices enable visual control, and consist of push button modules, graphical terminals, message display and portable HMIs (Human Machine Interface). They have embedded operating systems, and for them to function they have to be connected with a larger system at the customers site.
Industrial Computers These are computers suitable for an industrial environment. Industrial computers offer technology management, ruggedness (to endure shocks, vibrations, etc.), cost effectiveness and easy product configuration.
Condition monitoring products/systems These products/systems sold by Rockwell India enable customers to diagnose the condition/health of their machines. These products/systems help predict breakdown so that corrective or preventive actions may be taken by the customer.
12. Apart from this, the assessee also performs customer support and maintenance services, plant services, technical support services, field support services, training services in addition to providing system and solutions business, standard drives to medium voltage systems and industrial components under the special category of control and power automation group (CPAG). These details are picked up from the transfer pricing study report furnished by the assessee. In the transfer pricing study report, based on the FAR analysis of the assessee, the assessee is characterized as a routine manufacturer/ assembler of automation and industrial control product exposed to normal risks associated with carrying out such business. There is no dispute with regard to TNMM being adopted as MAM. The only difference is with regard to the comparables chosen by the assessee and the comparables chosen by the ld TPO.
Page | 6 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd
13. Exclusion of Havells India Ltd.
13.1 This comparable is electrical and power distribution equipment manufacturer with products ranging from industrial and domestic circuit protection, switchgears, cables, motor, pumps, fans, power capacitors, CFL Lamps and luminaries for domestic, commercial and industrial appliances, modular switches, water heaters and domestic appliances covering the entire range of household, commercial and industrial electrical needs. The ld AR before us argued that the assessee's products in the assembly/ manufacturing segment are meant only for industrial use whereas Havells India Ltd products are meant for domestic consumption, and not for industrial use. Accordingly, he argued that the same cannot be treated as a comparable with the assessee company. But from the perusal of the functions performed by Havells India Ltd as reported in its annual report which are reproduced (supra), we find that the said company was catering to the requirement of the domestic, commercial and industrial electrical needs and assessee is also engaged in the whole range of electrical products and electrical works. Hence, in our considered opinion, Havells India ltd is functionally comparable with that of the assessee company and the product range is almost similar.
15.2 The next argument advanced by the ld AR was challenging the turnover filter applied by the ld TPO by taking up comparable companies having turnover Rs. 1 crore to infinity. In this regard, he argued that the turnover of Havells India Ltd for the relevant year under consideration was Rs. 5436.88 crores and whereas the turnover of the assessee in this segment was only Rs. 150 crores as conceded by both the parties before us. In the instant case, we find that the ld TPO had set the turnover filter from Rs. 1 crore to infinity, which in our considered opinion, should be ignored in view of the fact that the ld TPO having set the minimum range of the turnover by starting from Rs 1 crore should also set the upper range of Page | 7 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd turnover of the comparable companies upto which he would like to compare the transaction of the assessee. In our considered opinion, the turnover upto range of 5 times of the persons getting compared (the assessee herein) should be reasonable way for selecting the comparable companies which would make the comparision 'apple to apple'. Admittedly in the instant case, the assessee's turnover is 38 times lesser than the comparable company's turnover. Hence, the ld TPO having applied the turnover filter and having not set the upper range of the turnover ought not to have considered Havells India Ltd having turnover of Rs. 5436 crores. Hence, we hold that the Havells India as functionally comparable with that of the assessee herein, still would go out of the list of comparables because of the erroneous turnover filter adopted by the ld TPO. This view of ours is also fortified by the coordinate bench of this Tribunal in the case Aggressive Digital System Pvt. Ltd Vs ITO 136 Taxmann.com 11 (Del). Infact the Delhi Tribunal while rendering the decision also placed reliance on the decision of the Karnataka High Court in the case of Acusis Software India Pvt. Ltd Vs. ITO reported in 98 taxmann.com 183 which approved the decision of the Bangalore Tribunal holding that if the turnover of the comparable company is less or more than 10 times turnover of the assessee, then it cannot be considered as a comparable company. In our considered opinion, Havells India Ltd is a giant size company when compared with assessee herein even though functional profile matches. Hence, we direct the ld TPO to exclude Havells from the final list of comparables.
14. Exclusion of Eddy Current Controls (India) Ltd 14.1 This comparable company is engaged in the business of manufacturing of battery operated vehicles, control apparatus, fans, batteries etc as is evident from product description reflected in the company's general profile in the annual report. We find that the turnover of the comparable company is Rs. 1.67 crores whereas the turnover of the Page | 8 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd assessee is Rs. 150 crores. In view of the observation made herein for Havells India Ltd, based on the turnover aspect, we hold that the said comparable company is too small a company to be compared with that of the assessee company. Hence, we direct the ld TPO to exclude Eddy Current Control (India) Ltd from the final list of comparables.
15. Exclusion of Mahasakthi Energy Ltd 15.1 This comparable company is engaged in the business of manufacturing auto dippers and transformers. Accordingly, the ld AR submitted that the said comparable company is completely functionally different from that of the assessee.
15.2 Per contra, the ld DR vehemently argued that auto dippers is yet another form of transformers. We are unable to comprehend ourselves to accept to the contention of the ld CIT DR in this regard in view of the fact that the said comparable company is engaged in the manufacturing Auto Dipper and transformers whereas the assessee company is engaged in the business of design, manufacturing, installation, repair and dealing in industrial electrical and electronic products. Merely because the assessee is dealing in electric products that cannot be equated with manufacture of Auto dipper and transformers. Hence, we have no hesitation to hold said comparable company is functionally not comparable with that of the assessee company and accordingly, we direct the ld AO, the TPO exclude the same from the final list of comparables.
16. Inclusion of Kaycee Industries Ltd.
Page | 9 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd 16.1 No information is available in the annual report of the said comparable company with regard to functions performed by the said comparable company. The ld AR before us also did not provide any information with regard functions performed by this comparable company. However, we find that in the order of the ld TPO, this comparable company has been rejected by him not on account of functionally dissimilarity but on account of persistent loss. Hence, it could be presumed that the said comparable company is functionally comparable with that of the assessee company. We find that the ld. TPO had rejected this comparable company on the ground that it is a persistent loss making company and had also incurred loss in AY 2014-15. On perusal of the records, we find that this observation of the ld TPO is factually incorrect as is evident from pages 367 of the Paper Book containing profit and loss account for the year ended 31.03.2017 wherein, it is noticed that the said comparable company had made profit of Rs. 61,76,429/- as on 31.03.2014 and Rs. 91,59,799/- as on 31.03.2013. Hence, the basic premise based on which the ld TPO had rejected the comparable company is found to be factually incorrect. Accordingly, we hold that this company is not persistent loss making company and hence, we direct the ld TPO to include the same in the final list of comparables.
17. Ground No. 2 to 2.5 raised by the assessee are disposed of in the abovementioned terms and they are partly allowed.
18. Ground No. 3 to 3.3 raised by the assessee are challenging the transfer pricing adjustment of Rs. 4,62,940/- by imputing interest on outstanding inter-company receivables from AEs.
19. We have heard the rival submissions and perused the materials available on record. The ld TPO found from the financials of the assessee company that assessee had substantial amount of outstanding receivables Page | 10 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd from AEs which have remained outstanding for a prolonged period and no interest has been charged for the same. This was picked up by the ld TPO as a separate international transaction requiring benchmarking. The fact that whether this could be treated as a separate international transaction within the meaning of section 92B of the Act is not in dispute before us. The ld TPO observed that the assessee had not provided invoice-wise details in the proforma given to it and proceeded to impute interest @4.485% (LIBOR plus 400 basis points) on the outstanding receivables for 182 days and proposed an adjustment of Rs. 13,66,836/-. Before the ld DRP, the assessee submitted that there are lot of amounts that are payable by the assessee to its AEs on which also no interest is being paid by the assessee. Hence, it was pleaded before the ld DRP that the amounts payable should be netted off with amount receivables from AEs and on the net amount, interest is to be imputed. This was accepted by the ld. DRP and direction was given to ld TPO accordingly to recompute interest chargeable on outstanding net receivables. The ld TPO accordingly arrived at Rs. 4,62,940/- as interest on outstanding receivables and proposed adjustment thereon.
20. It is fact that the delay in receivables from AE was estimated by the ld TPO to be at 182 days. It is a fact that invoice wise details were not furnished by the assessee either before the ld. TPO or before ld. DRP or even before us. The ld AR stated before us that credit period allowed to the assessee was 30 days and he had admitted that there is delay in receipt of outstanding receivable from AEs. He also submitted that there are huge amounts payable to the AE on which the interest is not paid by the assessee and that amounts payable to AE are much more than amounts receivable from AEs and accordingly he argued that no interest is required to be imputed in the instant case. He also drew our attention to the order passed by this tribunal in assessee's own case for AY 2015-16 and 2017-18 where this issue is decided in favour of the assessee. Per contra, the ld DR Page | 11 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd also placed an order for AY 2013-14 in the assessee's own case wherein, this issue was restored to the file of the ld TPO.
21. To resolve this dispute we find that assessee is supposed to provide the invoice wise details in respect of outstanding receivables from AEs before the ld TPO. If any monies are payable to AEs and if any amount are due from such AEs, then the assessee is justified in seeking netting off the balance and then arrive at the chargeability of interest at LIBOR plus 400 basis points i.e. 4.485% (which is not in dispute before us). In our considered opinion, the assessee will not be justified to seek netting off of amounts payable to AEs with outstanding amounts receivable from AEs on consolidated basis or on entity level basis. It has to be done qua the relevant AEs. With these directions, we deem it fit to restore this entire issue to the file of the ld AO/ TPO for de novo adjudication in accordance with law. Needless to mention that reasonable opportunity be given to the assessee of being heard with liberty given to the assessee to file additional evidences, if any, in support of its contentions. Accordingly, ground Nos. 3 to 3.3 raised by the assessee are allowed for statistical purposes.
22. Ground No. 4 raised by the assessee is challenging the disallowance of Rs. 1,08,78,832/- with regard to loans and advances written off.
23. We have heard the rival submissions and perused the material available on record. The ld AO noticed that the assessee company had claimed deduction for loans and advances written off amounting to Rs. 1,08,78,832/- by debiting the same in the profit and loss account. The assessee was asked to provide the details along with supporting documents in order to substantiate its claim. The ld AO observed that no submissions were made by the assessee and accordingly proceeded to disallow the same while completing the assessment in the draft assessment proceedings. The assessee furnished the details of the same before the ld DRP as under:-
Page | 12 ITA No. 232/Del/2022 Rockwell Automation India Pvt. Ltd a. Retention money not recoverable written off - 98,40,773/-
b. purchase of goods inadvertently classified as loans and advances written off- 10,44,322/-
c. Inter company payment written back - (-) 62,62/-
Total 1,08,78,832/-
24. The ld DRP observed that in respect of retention money irrecoverable written off amount to Rs. 98,40,773/-, the assessee had stated that it had offered to tax in earlier years and since the said sum was not received from the party, it was duly written off in the books of account and claimed as deduction. Accordingly, the ld DRP directed the ld AO to verify the claim of the assessee and decide in accordance with law. With regard to another item of purchase of goods wrongly treated as loans and advances in the sum of Rs. 10,44,322/-, the ld DRP directed the ld AO to verify the claim of the assessee and decide in accordance with law. The assessee in the giving effect proceedings did not provide the requisite details before the ld. AO.
Hence the ld AO could not have any occasion to verify the same and accordingly reiterated the disallowance made in the draft assessment order. Even before us, no details whatsoever in connection with this dispute were filed by the assessee. Hence, the claim made by the assessee is merely a bald claim without any supporting documentary evidences. Accordingly, we have no hesitation to confirm the disallowance made by the ld AO and hence ground No. 4 raised by the assessee is dismissed.
25. Ground No. 8 raised by the assessee is challenging initiation of penalty proceedings u/s 271(1)© of the Act. This would be premature for adjudication at this stage and hence dismissed.
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26. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 10/05/2024.
-Sd/- -Sd/-
(YOGESH KUMAR U.S.) (M. BALAGANESH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 10/05/2024
A K Keot
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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