Income Tax Appellate Tribunal - Chennai
Bonfiglioli Transmission Private ... vs Dcit Corporate Circle 1(2), Chennai on 14 May, 2018
आयकर अपील य अ धकरण, 'डी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
' D' BENCH : CHENNAI
ी जॉज माथन, या यक सद य के सम
एवं एस जयरामन, लेखा सद य
BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER & SHRI
S.JAYARAMAN, ACCOUNTANT MEMBER
आयकर अपील सं./I.T.A.No.2977/CHNY/2017
नधा रण वष /Assessment year : 2013-14
M/s.Bonfigioli transmissions Vs. Deputy Commissioner of
Private Limited., Income Tax,
Plot No.AC7-AC11, Corporate Circle 1(2),
SIDCO Industrial Estate, Room No.613,6th floor,
Thirumudivakkam, Chennai 600 034.
Chennai 600 044.
[PAN AABCB 1675 N ]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से/ Appellant by : Mr.Sriram Seshadri &
Mr.Ashik Shah
!"यथ क ओर से /Respondent by : Mr.Vijayakumar Purna,JCIT, D.R
सन
ु वाई क तार&ख/Date of Hearing : 14-05-2018
घोषणा क तार&ख /Date of Pronouncement : 14-05-2018
आदे श / O R D E R
PER GEORGE MATHAN, JUDICIAL MEMBER
This appeal of the assessee is directed against an assessment order dated 26.12.2016 of Deputy Commissioner of :- 2 -: ITA No.2977/CHNY/2017 Income Tax, Chennai u/s.143(3) r.w.s.144C(1) r.w.s.92CA of the Income Tax Act,1961 (in short 'the Act' ), pursuant to the directions of the Dispute Resolution Panel (DRP) -2, Bangalore, dated 27.09.2017 in F.No.323/DRP-2-BNG/2016-17 for the assessment year 2013-14.
2. In this appeal, assessee has raised the following grounds:-
General Grounds
1. The lower authorities have erred in finalizing an order of assessment which suffers from legal defects such as being passed in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such is liable to be quashed.
2. The lower authorities have finalized their order with improper adjustments to the reported taxable profits of the Appellant, as a result of misapplying the provisions of the Act and by adopting faulty assessment procedure to finalize the adjustment, such as but not limited to, application of filters, analysis of the functions carried out by the Appellant and those of the comparable companies, analysis of the economic circumstances experienced by the Appellant, selection of comparable companies, computation of profit margins of the Appellant and comparable companies, usage of appropriate adjustments, and consideration of the information, arguments and evidence provided by the Appellant.
II. Application of TNMM
3. The lower authorities have, in the facts and circumstances of the case and in law, erred in incorrectly computing the operating margin of the Appellant and those of the comparable companies selected for benchmarking purposes.
4. The lower authorities have, in the facts and circumstances of the case and in law, erred in choosing certain comparable companies despite such companies failing the legally required parameters such as, but not limited to, functional dissimilarity, quantitative filters and non-availability of data.
5. The lower authorities have, in the facts and circumstances of the case and in law, erred in rejecting certain companies selected by the Appellant, on incorrect parameters.
:- 3 -: ITA No.2977/CHNY/2017
6. The lower authorities have, in the facts and circumstances of the case and in law, erred in not admitting the comparability adjustments considered by the Appellant, including but not limited to, adjustment for idle capacity.
7. The lower authorities have, in the facts and circumstances of the case, erred in not considering the supporting information and supplemental analysis regarding to the economic circumstances and market conditions experienced by the Appellant; such as to the corroboration of capacity utilization based on manufacturing sector wide information (Reserve Bank of India's Report), the analysis of profits in connection with subsequent years, among others.
8. The lower authorities have, in the facts and circumstances of the case and in law, erred in disregarding the arm's length analysis prepared by the Appellant on the basis of cash profit margins, based on incorrect parameters.
9. The lower authorities have, in the facts and circumstances of the case and in law, erred in disregarding the financial information and analysis provided by the Appellant, including but not limited to the segmented financial information, and the internal TNMM analysis submitted by the Appellant.
10. The lower authorities have, in the fact and circumstances, erred in disregarding the relevance of the use of multiple-year data to iron out the differential impact of business cycle between the Appellant and the comparable companies.
III. Considering corporate services availed from AEs as 'NIL'
11. The lower authorities have, in the facts and circumstances of the case and in law, erred in not accepting that the corporate services availed by the Appellant are closely linked to the Appellant's business and inherent to the centralization of functions that normally occurs within Multinational Groups (such as the case of the Bonfiglioli Group) and have erred in not considering the aggregation approach adopted by the Appellant in its TP documentation..
12. The lower authorities have, in the facts and circumstances of the case and in law, erred in considering the value of corporate services availed as 'Nil' purportedly under the CUP method, without bringing on record any benchmarking exercise using comparable companies and has as such exceeded their jurisdiction.
13. The lower authorities have, in the facts and circumstances of the case and in law, erred in disregarding the evidence provided by the Appellant for availing corporate services and has erred in concluding that no tangible / direct benefits accrued to the Appellant from such services.
:- 4 -: ITA No.2977/CHNY/2017 IV. Disallowance of sales commission expense
14. The lower authorities have, in the facts and circumstances of the case and in law, erred in disallowing sales commission expense under section 37 of the Act, by disregarding the evidence and information submitted and have erred in holding that Appellant had not actually received such services.
V. Disallowance of employees provident fund
15. The lower authorities have, in the facts and circumstances of the case and in law, erred in disallowing employees provident fund remitted after due dates as per respective acts but within the grace period allowed by the Hon'ble Employee Provident Fund Organization.
16. The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto.
3. Mr.Sriram Seshadri and Mr.Ashik Shah represented on behalf of the Assessee and Mr.Vijayakumar Purna represented on behalf the of the Revenue.
4. Ground Nos.1 & 2 are general in nature and no specific argument has been raised for these grounds by the ld.A.R. Hence, Grounds 1 & 2 of the assessee does not call for any adjudication.
5. In respect of Grounds Nos.3 to 10, it was submitted by the ld.A.R that the issue was in regard to transfer Pricing matter. It was a submission that the assessee is a company, which is doing the business of manufacture and trade of in-line helical gear boxes, electric motors, shaft mounted gear boxes and related sub assembly and spare parts :- 5 -: ITA No.2977/CHNY/2017 that from parts of the Machine Tools and Component industry in India. The assessee's products are used in various equipments. It was a submission that during the relevant to assessment year , the main core thrust of the assessee was in the renewable energy sector, more specifically wind mill sector. It was submitted that assessee has been doing business in the country for the last 20 years and never earlier assessment years, or after the present assessment year the assessee has been held to be liable under transfer pricing adjustments. It was a submission that peculiar situation for the relevant to assessment year was that nearly 90% of the assessee's business is in respect of manufacturing segment, being concentrated in the wind mill and renewable energy equipment. The market conditions that hit the wind mill sector had affected the assessee-company and the assessee- company had incurred substantial losses. It was a submission that as on 31.03.2012 two amendments took place. The first one was that the depreciation was restricted to 15% on wind mills installed after 31.03.2012. The second one relating to generation based incentive under the wind power sector was removed. Because of these two factors, setting up of wind mills dropped during the assessment year 2013-14. Consequently, the assessee's manufacturing capacity utilization also fell to 47% as against the national average of 75%. Ld.A.R drew our attention to pages 195 to 198 of Paper book, which was the copy of the Amendments to the Income Tax Rule. In respect of depreciation, the Press information bureau clarification in respect of renewable energy generation and the copy of the Economic Times of 13th May 2013 wherein it has been mentioned that wind energy has dropped by :- 6 -: ITA No.2977/CHNY/2017 1,500 megawatts due to withdrawal of incentive. It was submitted that show-cause notice was issued to the assessee on 10.10.2016 wherein the assessee's transfer pricing study was rejected. The assessee had prayed for Idle Capacity Adjustments as also adjustment on account of the variable in respect of depreciation computation in respect of comparables. It was a submission that both were rejected on the ground that in respect of idle capacity adjustments, there was non-availability of variable data for verification. It was submitted that after 2011, on account of change in the method of reporting, the capacity utilization data was admittedly not available. It was further submitted that the assessee had no objection if the TPO's exercises his power u/s.133(6) of the Act and obtained the details from the comparables. In respect of issue of depreciation, it was a prayer that as the method of depreciation adopted by various comparables were variable for the purpose of standardized method, the assessee had no objection, if the pre-depreciation figures were adopted in line of the decision of Co-ordinate Benchof this Tribunal in the case of M/s.ICON Clinical Research India Pvt. Ltd. Vs. The DCIT in ITA No.1034/Mds./2014 dated 21.09.2016 wherein held as under:-
"18. One of the primary requisite of the comparative study is that margin arrived at for the comparables as well as that of the assessee, shall always be adjusted for dissimilarities in treatment of various expenditure including notional expenditure like depreciation, when such dissimilarities can be measured and quantified. Otherwise, it could erode the comparability. The Panaji Bench of :- 7 -: ITA No.2977/CHNY/2017 the Tribunal in the case of M/s Pentair Water India Pvt. Ltd (supra) had held as under:
"The common contention in respect of computation of TNMM i.e. operating profit taken by the ld. AR in respect of the comparables is that while computing the profit ratio, profit prior to depreciation should be computed as it will give true and fair profit ratio without being affected by the depreciation charged by each of the companies. We noted that different companies have adopted different method of depreciation. In fact, for charging depreciation to the Profit& Loss account there are different prevalent recognized methods of depreciation. Some Assessee opt for Straight Line method, some opt for Written Down method and some opt for Sum of Digit method or even Replacement Cost method. Selection of each method will affect the rate and quantum of depreciation even if the nature of the asset is the same and ultimately, the net profit derived by the company will vary. For determining the fair and true profit, in our opinion, it is appropriate that the effect of the depreciation must be excluded out of the operating profit for determining the operating profit ratio. Therefore, the best way of computing the operating profit, in our opinion, will be to compute the profit before depreciation in respect of each of the company. This will take out the inconformity or the variation in the profit level of the comparables arising due to adoption of different method of charging depreciation. We have gone through the order of the Bombay Bench of this Tribunal in the case of DCIT vs. Reuters India 24 ITR (Trib) 231 (Mum) as has been relied on by the ld. AR. We noted that the Tribunal in this case has adopted the cash profit/operating cost as the correct profit level indicator under the TNMM method."
19. We are, therefore, of the opinion that the profit level indicator considering the margins prior to depreciation would give better results in the comparable analysis and benchmarking of the transactions of the assessee in the given facts and circumstances. We direct the Assessing Officer/TPO to rework the PLI of the comparables after excluding the depreciation cost and benchmark the PLI of the assessee also excluding the depreciation cost.
:- 8 -: ITA No.2977/CHNY/2017
Ordered accordingly. Ground Nos. 6 and 7 of the assessee are
allowed for statistical purposes."
6. In reply, ld.D.R vehemently supported the order of DRP. It was a submission that idle capacity adjustments could not be laid at the door of the TPO and it was the duty of the assessee to substantiate its claim, if it wanted to make a claim of the idle capacity adjustments. In respect of pre-depreciation adoption of profit level indicator for considering the margins prior to depreciation, it was a submission that he had no objection if the pre-depreciation figures were adopted.
7. We have considered the rival submissions. Admittedly, two issues, which have been argued, are in Grounds Nos.6, 7 & 8 of the assessee's appeal. Perusal of the facts in the present case clearly shows that assessee's business has taken a hit mainly on account of change in the business conditions in respect of wind mills during the assessment year 2012-13 on account of withdrawal of the accelerated depreciation benefit and the withdrawal of the generation based incentive under the wind power sector. Perusal of the comparative taken in the present case, shows that some comparables, though not compprable to the assessee, have been compared with in the earlier years and the subsequent years. However, the change in the factors :- 9 -: ITA No.2977/CHNY/2017 came about on account of drop in the capacity utilization of the assessee to 47% during the relevant assessment year. Further, a perusal of the report of the Reserve Bank of India (RBI) clearly shows that during the assessment year 2013-14, the capacity utilization as per RBI's report is 75%. This being so, admittedly assessee is entitled to have the benefit of capacity utilization adjustments. However, as it has been pointed out that the data in respect of capacity utilization is not available on account of non-availability of variable data, liberty is granted to the assessee to obtain the variable data and prove the claim before the TPO, who has to consider the same and grant the assessee the benefit of the adjustments towards capacity utilization. Consequently, grounds No.6 & 7 of the assessee's appeal stands allowed.
7.1 In respect of ground No.8, representing the adjustments on account of depreciation so as to determine the aggregate cash profit margins, the same is to be determined by adopting pre-depreciation figures in respect of comparables in line with the decision of Co-ordinate Bench of this Tribunal in the case of M/s.ICON Clinical Research India Pvt. Ltd. Vs. The DCIT referred to supra. Consequently, ground No.8 of the assessee stands allowed.
:- 10 -: ITA No.2977/CHNY/2017 7.2 The Ld.AR has not raised any arguments in regard to
grounds of the appeal which are marked as Grounds Nos.3, 4, 5, 9 & 10 in the assessee's appeal. Consequently, Grounds Nos. 3, 4, 5, 9 & 10 of the assessee's appeal stand dismissed as not argued.
8. In respect of Ground Nos.11 to 13, it was submitted by the ld.A.R that the assessee had made payments for Corporate Services availed by the assessee from its A.Es. Ld.A.R drew our attention to the agreement entered into by the assessee with it's A.Es at page No.393 of the paper book. It was submitted that the agreement was between the parent company, Bonfiglioli Riduttori Spa (BRI), Italy and 20 subsidiaries. The assessee was shown at party No.16 in the said agreement. It was submitted that there were four types of services provided i.e. Information & Technology services, Accounting & Finance, Quality control system & Marketing services. It was submitted that ld. Assessing Officer allowed the claim of information technology fees, but held that there was no necessity for the assessee to make any payments towards the marketing fees, Financial controlling fees as also quality controlling fees. It was a submission that these were aggregated amounts payable by the assessee in respect of expenditure incurred by the parent company. The ld.A.R drew our attention to the decision of :- 11 -: ITA No.2977/CHNY/2017 Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd., (345 ITR 241) wherein the Hon'ble Delhi High Court had held as follows:-
"22. Even rule 10B(1)(a) does not authorise 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 the view of the Revenue 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 Transfer Pricing Officer 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 the assessee can never be a criterion to judge allowability of an expense ; there is certainly no authority for that. What the Transfer Pricing Officer 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 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 Transfer Pricing Officer 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 Transfer Pricing Officer is not contemplated or authorised.
23. Apart from the legal position stated above, even on the merits the disallowance of the entire brand fee/royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by :- 12 -: ITA No.2977/CHNY/2017 us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees' cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of five years from 1998 to 2003 with relevant figures have been given before the Commissioner of Income-tax (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the Commissioner of Income-tax (Appeals) in support of the reasons for the continuous losses. There is no material brought by the Revenue either before the Commissioner of Income-tax (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on the merits the reasons for the losses are not genuine."
It was a submission that similar expenses have not been claimed separately in the accounts of the assessee. It was submitted that assessee was entitled to its claim of expenditure.
9. In reply, ld.D.R submitted that corporate services expenditure cannot be aggregated. It was a submission that the order of TPO/A.O and direction of the DRP is liable to be sustained on this issue.
10. We have considered the rival submissions and perused the materials available on record. Admittedly the business of the assessee is a consolidated one. The services referred under 'Corporate Services" are intrinsically linked to its manufacturing :- 13 -: ITA No.2977/CHNY/2017 and sales activity. These two services cannot be separately demarcated. Corporate services are the services rendered, which has helped the assessee in generating the business in respect of marketing and trading. This being so, in view of the decision of Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd., referred to supra, the ld. Assessing Officer is directed to allow the assessee's claim of the Corporate Services expenditure incurred by assessee. Consequently, Grounds Nos.11 to 13 of the assessee stand allowed.
11. In respect of Ground No.14, it was submitted by ld.A.R that the issue was against the action of the DRP in confirming the disallowance of the Sales Commission paid by the assessee to its sister concern in Bonfiglioli Deutschland GmbH (BD), Germany to an extent of `99/- lakhs. The ld.A.R drew our attention to page- 677 of Paper Book, which was the copy of agreement between Bonfiglioli Deutschland GmbH (BD) and the assessee, Bonfiglioli Transmissions Pvt Ltd.,(BTPL). As per the ld.A.R, the agreement has been entered on 15.12.2009 and as per the agreement, the assessee is to get the services from Germany counter-part in respect of specific areas as provided in Article 2.1. Consequently, the assessee has paid 1% commission. It was submitted by ld.A.R that the said commission had been paid in the earlier years, i.e. :- 14 -: ITA No.2977/CHNY/2017 assessment year 2012-13 and was allowed for which he drew our attention to the pages 669 to 671 of paper book. Similarly, for the assessment year 2011-12 at pages 672 to 674 of the paper book, It was a submission that in all the transfer pricing study for earlier assessment years, the said expenditure had been allowed and no adjustment has been made. It was the prayer by ld.A.R that expenditure claimed by the assessee may be allowed.
12. We have considered the rival submissions. Perusal of the agreement between the assessee and the Germany counter- part clearly shows that the agreement has been entered into in 2009. Consequent to the said agreement, the sales commission has been paid and the same has also been allowed during immediately preceding assessment years 2010-11, 2011-12 & 2012-13. The Revenue has not been able to bring any new fact, which has led to change the present stand for the purpose of disallowing sales commission. This has been so, we find no reason to change the existing position and the ld. Assessing Officer is directed to allow the assessee's claim in respect of the sales commission paid to BD. In these circumstances, ground No.14 of the assessee's appeal stands allowed.
:- 15 -: ITA No.2977/CHNY/2017
13. In respect to Ground No.15, it was submitted by ld.A.R that the issue was against the action of the DRP in not allowing assessee's claim in respect of employees' contribution to Provident Fund (PF) in time. It was a submission that employees' contribution to PF had been paid within the grace period and before the due date of filing of the return. Ld.A.R drew our attention to page 38 of the paper book, which was the copy of return filed wherein clause-16(b) shows the details of the sum received from employees towards contribution to PF, due date for payment and the actual date of payment to the concerned authorities. It was submitted by the ld.A.R that in view of the decision of the jurisdictional High Court in the case of C.I.T v. Salem Co- Operative Spinning Mills Ltd., reported in [2002] 258 ITR 360 (Mad) wherein held that the amounts had been paid within the grace period provided under the relevant statutes, Ground No.15 may be allowed in favour of the assessee.
14. In reply, ld.D.R vehemently supported the orders of DRP and ld. Assessing Officer.
15. We have considered the rival submissions. As it is noticed that the issue is squarely covered by the decision of Hon'ble Madras High Court in the case of C.I.T v. Salem Co- Operative Spinning Mills Ltd. referred to supra, ld. Assessing Officer is directed to allow the assessee's claim of payment of PF :- 16 -: ITA No.2977/CHNY/2017 and ESI, which has been made within the grace period provided under the relevant statutes. Consequently, Ground No.15 of the assessee stands allowed.
16. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court after conclusion of hearing on 14th May, 2018, at Chennai.
Sd/- Sd/-
(एस जयरामन) ( जॉज माथन)
(S. JAYARAMAN) (GEORGE MATHAN)
लेखा सद$य/Accountant Member या%यक सद$य/JUDICIAL MEMBER
चे नई/Chennai
*दनांक/Dated: 14th May, 2018.
K S Sundaram
आदे श क ! त,ल-प अ.े-षत/Copy to:
1. अपीलाथ /Appellant 3. आयकर आयु/त (अपील)/CIT(A) 5. -वभागीय ! त न4ध/DR
2. !"यथ /Respondent 4. आयकर आयु/त/CIT 6. गाड फाईल/GF