Income Tax Appellate Tribunal - Delhi
Frigoglass India Pvt. Ltd., Gurgaon vs Acit, Circle- 9(2), New Delhi on 9 February, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-1' : NEW DELHI)
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.7116/Del./2017
(ASSESSMENT YEAR : 2013-14)
M/s. Frigoglass India Pvt. Ltd., vs. ACIT, Circle 9 (2),
Plot 26 - A, Sector 3, New Delhi.
IMT Manesar,
Gurgaon - 122 050 (Haryana).
(PAN : AAACF6804G)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Nageshwar Rao, Advocate
REVENUE BY : Shri Sanjay I. Bara, CIT DR
Date of Hearing : 10.01.2018
Date of Order : 09.02.2018
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. Frigoglass India Pvt. Ltd. (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 25.10.2017, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short 'the Act') qua the assessment year 2013-14 on the grounds inter alia that :-
2 ITA No.7116/Del/2017
"Based on the facts and circumstances of the case, the Appellant respectfully submits that:
1. This ground is general in nature 1.1. The Learned Assistant Commissioner of Income Tax, Circle-9(2), New Delhi ("the Assessing Officer" or the Ld. AO") pursuant to directions of Hon'ble Dispute Resolution Panel ("Hon'ble DRP"), has erred on facts and circumstances of the case and in law in completing the present assessment at an income of "Nil" post adjustment of the brought forward losses against the returned income of Nil. The assessed income is Nil and is bad in law.
1.2. That, the Learned Deputy Commissioner of Income Tax, Transfer Pricing Officer -1 (2) (1) and 1 (2)(2) (hereinafter referred as "Ld. TPO")/ Hon'ble DRP has grossly erred in making/upholding an adjustment of Rs. 7,65,31,778 in respect of disallowance of payment of royalty to AE.
2. Draft order passed by Ld. AO not in accordance with procedures laid down in law
2.1. The draft order passed by the Ld. AO is void ab-initio as reference made to the Ld. TPO was not in accordance with the CBDT instruction no 3/2016 and since the said order is passed beyond the timeline provided, the same should be treated as time barred.
3. Rejection of the economic analysis of the Appellant 3.1. That on the facts and circumstances of the case and in law, Ld. TPO/ Hon'ble DRP have erred in not accepting the economic analysis of the Appellant, for determination of the arm's length price ("ALP") in connection with the impugned international transactions and in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case
4. No due consideration to decision of Hon'ble High Court and Hon'ble ITAT in Appellant's own case 4.1. The learned TPO erred, in law and in facts by proposing wrong adjustment which disregards the order of the higher appellate authorities in Assessee's own case for A Y 2010-11 and AY 2011-12.
4.2. The Ld. AO has erred in disallowing the said transaction merely on the basis that the appeal was recommended to be filed before the Hon'ble Supreme Court, although as is clear that till 3 ITA No.7116/Del/2017 date/ till the date of pronouncement of the order passed by AO no appeal has been filed by the department before the Hon'ble Supreme Court and the time limit for filing the said appeal has lapsed. The said action of the Hon'ble DRP/Ld. AO has caused undue hardship to the Appellant.
4.3. Hon'ble DRP erred in not considering the decision of Hon'ble High Court and Hon'ble Income Tax Appellate Tribunal in the Appellant's own case for earlier years i.e. AY 2010-11 and AY 2011-12 by rejecting the TNMM and selecting CUP method as the Most Appropriate Method ("MAM") to benchmark the international transaction for "payment of royalty".
5. Rejection of combined transaction approach adopted by Appellant 5.1. The Ld. TPOI Hon'ble DRP erred in rejecting the combined transaction approach adopted by the Appellant for benchmarking the impugned transactions by rejecting TNMM as the Most Appropriate Method ("MAM").
6. Adoption of Comparable Uncontrolled Price method as the MAM 6.1. That the Ld. TPOI Hon'ble DRP erred in not conducting the analysis of selecting the most appropriate method as prescribed under Rule 10C of the Rules.
6.2. The Ld. TPOI Hon'ble DRP have erred in upholding the adoption of CUP method as the most appropriate method for determining the arm's length price in respect of the impugned international transaction without identifying any comparable uncontrolled transaction(s) for the computation of the ALP as prescribed in Section 92F(ii) of the Act.
7. Questioned commercial rationale of the legitimate business expenses incurred by the Appellant 7.1 The Ld. TPO/Hon'ble DRP erred in questioning the commercial rationale of the legitimate business expenses incurred by the taxpayer and not restricting the scope of assessment under section 92CA to determining the arm's length price of the international transaction by adopting one of the prescribed methods only.
8. Transfer pricing adjustment based on incorrect assumptions 4 ITA No.7116/Del/2017 8.1. The Ld. TPOI Hon'ble DRP erred in passing an order that is perverse in law ignoring the relevant submissions, information and documents provided by the Appellant to substantiate the services and benefits received by the appellant in lieu of payment of royalty, and based on a preoccupied mind reached at an inappropriate conclusion that the arm's length value of the transaction pertaining to payment of royalty should be Nil.
8.2. The Ld. TPOI Hon'ble DRP erred in misinterpreting / misconstrued the facts with respect to the international transaction relating to payment of royalty on the basis of incorrect presumptions and accordingly made an adjustment of INR 7,65,31,778 to the total income of the Assessee.
9. Full credit of taxes claimed in return of income not provided 9.1. On the facts and in the circumstances of the case, the Ld. AO has erred in not giving full credit of taxes paid as claimed in return of income.
10. Penalty proceedings initiated u/s 271(1)(c) of the Act 10.1. On facts and in law, the Ld. AO has erred in initiating penalty proceedings under section 271 (1)( c) read with section 274 of the Act against the Appellant for concealing the income through submission of inaccurate particulars in the tax return."
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Frigoglass India Pvt. Ltd., the taxpayer is into the business of glass door merchandising with a manufacturing plant in Gurgaon, India catering to Indian market and acts as an export platform for the Asian market. Glass door merchandising concept is relevant in alcoholic and non-alcoholic water, dairy products, bakery & confectionary, pharmaceuticals etc. During the year under assessment, the taxpayer entered into 5 ITA No.7116/Del/2017 international transactions with its Associated Enterprises (AE) as under :-
Sl.No. Nature of Transaction Method Amount(in INR)
1. Purchase of raw materials 93,88,796
2. Sale of finished goods 3,18,48,493
3. Sale of components and spares 90,23,944
4. Purchase of trading goods 11,11,771
5. Payment of royalty 7,65,31,778
6. Payment of management 3,47,23,166 consultancy fees
7. Sale of consumables 4,17,420
8. Purchase of fixed assets TNMM 1,44,376
9. Provision of support services 16,55,17,715
10. Reimbursement of expenses to No 32,48,663 AEs Benchmarking
11. Recovery of expenses from AEs required 25,23,260
3. The taxpayer in its transfer pricing study in order to benchmark its international transaction used Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and found its international transactions at arm's length. The TPO has disputed only one international transaction of Rs.7,65,31,778/- entered into by the taxpayer with its AE qua payment of royalty. The ld. TPO rejected the TNMM used by the taxpayer for benchmarking the international transactions rather applied CUP method and proceeded to conclude that, "In the similar facts and circumstances of the situation, no third party would be willing to part with any amount to a third party or would have spent any amount in arrangement of the above stated purported services, arm's length price of these services, against which royalty/licence 6 ITA No.7116/Del/2017 fee has been paid, is arrived at nil." and consequently, made adjustment of Rs.7,65,31,778/- on account of royalty payment as cumulative adjustment u/s 92C of the Act.
4. The taxpayer carried the matter before the ld. DRP by filing objections who has disposed of the objections by directing the AO to complete the assessment as per directions. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
5. 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.
6. Ld. AR for the taxpayer, at the very outset, contended that the issue involved in the present appeal has already been settled in favour of the taxpayer in its own case for AY 2010-11 and AY 2011-12, further affirmed by the Hon'ble High Court. The contention raised by the ld. AR for the taxpayer is confirmed from the directions issued by the DRP, which are extracted for ready perusal as under :-
"The issue involved in this case is same as in AY 2010-11 and 2011-12. The Hon'ble High Court has decided the issue in the case of the assessee for AY 2010-11 and 2011-12 against the Department. As informed by the assessee, no adjustment on this ground has been made in AY 2012-13 and 2014-15. Since the judgment of the Hon'ble High Court has been passed few months 7 ITA No.7116/Del/2017 back (March/April 2017), there may be time for the Department to file the SLP in this matter. In view of these facts and circumstances of the case, the directions of DRP are as under:
(a) If the Department has filed the SLP or intends to file the SLP in this case on this issue, the order of the TPO/AO is here by confirmed as the matter will be sub-judice.
(b) If Department has not filed the SLP or do not intend to file the SLP in this case on this issue, the TPO/AO may follow the decision of jurisdictional High Court in the assessee's own case for AY 2010-11 and 2011-12."
7. Undisputedly, the coordinate Bench of the Tribunal in assessee's own case in ITA No.784/Del/2016 for AY 2011-12 order dated 25.07.2016 deleted the adjustment made by the AO on account of royalty payment and management fee by making following observations :-
"6. As for the second issue, that was a matter taken up at the DRP only inasmuch as an enhancement was made by the DRP in this regard. During the course of the proceedings before DRP, it was noticed that in the immediately preceding assessment year, i.e. 2010-11, the TPO had made an ALP adjustment of Rs 29,65,700 in respect of management fees and of Rs 8,47,65,448 in respect of royalty and licence fees, and these ALPs were confirmed by the DRP. The DRP required the assessee to show cause as to why similar ALP adjustment not be made for this assessment year as well, as the relevant facts and circumstances are similar. It was in this backdrop, and after rejecting the submissions against the enhancement, that the DRP directed the Assessing Officer to make "similar (arm's length price) adjustment towards royalty and management fees as has been upheld by the DRP in 2010-11". When the matter thus travelled back to the Assessing Officer, he made an ALP adjustment of Rs 5,41,00,671 as against ALP adjustment of Rs 2,39,58,750 as originally proposed by the TPO. The assessee is aggrieved and is in appeal before us.
7. Having heard the rival submissions and having perused the material on record, we find that the issue is covered, in favour of the assessee,the order dated 8th April 2016 passed by a coordinate bench, in assessee's own case for the assessment year 2010-11. There is no occasion to take a different view of the 8 ITA No.7116/Del/2017 matter for this year. In any event, one can discard the TNMM and proceed to adopt CUP only when a comparable product or service is available. When no such comparable is available, as in this case, there cannot be any occasion to resort to CUP, and, as such, in such a situation, CUP cannot be accepted as MAM over the TNMM. The very approach underlying these ALP adjustments is not fallacious and legally unsustainable. We, therefore, direct the Assessing Officer to delete ALP in respect of royalty and management fees."
8. Furthermore, order passed by the coordinate Bench of the Tribunal in assessee's own case for AY 2011-12 has been confirmed by the Hon'ble High Court of Delhi in ITA 123/2017 ORDER dated 03.03.2017.
9. Since the issue as to payment of royalty by the taxpayer to its AE is one of the actual business arrangement, there is no material on file to take a different view on the issue as the same has already been settled in favour of the taxpayer in AY 2010-11 and AY 2011-12, so ALP adjustment on account of royalty payment made by the TPO/AO is not sustainable in the eyes of law, hence ordered to be deleted by the AO. Consequently, the appeal filed by the taxpayer is hereby allowed.
Order pronounced in open court on this 9th day of February, 2018.
Sd/- sd/-
(R.S. SYAL) (KULDIP SINGH)
VICE PRESIDENT JUDICIAL MEMBER
Dated the 9th day of February, 2018
TS
9 ITA No.7116/Del/2017
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.