आयकर अपील
य अधकरण, अहमदाबाद यायपीठ ‘सी’,अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
“ C ” BENCH, AHMEDABAD
सम ी जी.डी.अवाल, उपाय एवं ी कुल भारत, यायक सदय ।
BEFORE SHRI BEFORE SHRI G.D. AGARWAL,VICE PRESIDENT (AZ) And
SHRI KUL BHARAT, JUDICIAL MEMBER
1. आयकर अपील सं./I.T.A.No.2210/Ahd/2012–A.Y.2004-05
2. आयकर अपील सं./I.T.A.No.2154/Ahd/2012–A.Y.2004-05
1. GE India Industrial Private
Limited
( F o r m e r l y G E L i gh t i n g I n d i a ( P )
Ltd.)
Building No.7A, 4 t h Floor,
DLF C yber Cit y D LF
Phase-III,
Sector 25A
Gurgaon – 122 002
Haryana
2. D y.CIT
Kheda Circle,Nadiad
थायी ले खा सं ./जी आ इआ र सं . / PAN/GIR
(अपीलाथ% /Appellants)
Assessee by :
Revenue by
सन
ु वाई क* तार+ख
:
बनाम/
Vs.
1. D y.CIT
Kheda Circle
Nadiad
2.
No. :
..
GE India Industrial
Pvt.Ltd.,NH No.8,
Dharamsinh Park
Nadiad – 387 002
AAACG 4901 D
(&'यथ% / Respondents)
Shri S.N. Soparkar with Sachit Jolly,
Adv.
Madhavi Rathi, Nishant Periwal &
Bandish Soparkar ARs
Shri T.P.Krishnakumar, CIT-DR with
Shri B.Y. Chauhan, TPO
/ Date of Hearing
घोषणा क* तार+ख /D a t e
o f P ro n o u n c e m e n t
11/06/2015
26/06/2015
आदे श / O R D E R
PER BENCH :
These two appeals by the Assessee and the Revenue are
directed against the order of the Ld.Commissioner of Income
Tax(Appeals)-IV, Baroda (‘CIT(A)’ in short)
dated 17/07/2012
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
-2pertaining to Assessment Year (AY) 2004-05. These appeals were heard
together and are being disposed of by this consolidated order for the sake
of convenience.
2.
First, we take up the assessee’s appeal in ITA No.2210/Ahd/2012
for AY 2004-05.
The assessee has raised the following grounds of
appeal:1.
That the order passed by the Commissioner of Incometax(Appeals)-IV, Baroda [hereinafter referred to as ‘CIT(A)’]
under section 250 of the Income-tax Act, 1961 (‘the Act’) to the
extent prejudicial to the Appellant, is perverse, erroneous on
facts and bad in law.
2.1.
That on the facts and circumstance of the case and in law, the
CIT(A) exceeded its jurisdiction contemplated in Section 251 of
the Act, by enhancing the income of the Appellant on account of
denial of claim for bad debts written off through provision for
bad debt account of Rs.7,53,08,028.
2.2.
Without prejudice to the above, in view of the facts and
circumstances of the case and in law, the learned CIT(A) erred
in disallowing the claim of bad debts of Rs.7,53,08,028 written
off through provision for bad debt account.
3.1.
That the learned CIT(A) has erred in computing the Transfer
pricing adjustment of Rs.7,62,29,166 for the manufacturing
segment of Power Control Domestic Tariff Area (‘PCDTA’)
division of the Appellant Company.
3.2.
That the learned CIT(A) has erred while computing the raw
material adjustments of the Appellant Company and the
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
-3comparable companies in the manufacturing segment of the
PCDTA division and consequently arriving at the revised
operating margin of comparable companies.
3.3.
Without prejudice to the above, the learned CIT(A) has erred in
not appreciating the error made by the learned Transfer Pricing
officer in computing the raw material adjustment and the
consequent operating margin of the Appellant Company.
3.4.
That the learned CIT(A) has erred mathematically by adding the
adjustment made by the Transfer Pricing Officer in the Transfer
Pricing order of an amount of Rs.21,155,611 to the revised
adjustment as computed based on the learned CIT(A)’s
approach, instead of subtracting it from the revised adjustment.
That the Appellant craves leave to add to and/or to alter, amend
rescind, modify, the grounds hereinabove or produce further
documents before or at the time of hearing of this Appeal.
3.
Brief facts of the case recorded by the ld.CIT(A) in his order read as
under:
“10.1 The brief facts in the case of appellant are that after
amalgamation / merger of above entities in to it as per orders of above
Hon'ble Courts, a revised return of income along with audit report, tax
audit report, statement of computation of income etc. were filed on 3103-2006. The AO on perusal of computation of income noticed that the
appellant company had consolidated the figures of business income of
itself as well as of the above entities by virtue of scheme of arrangement
/ agreement, merged or amalgamated. As per the AO the computation
included income from business operations, disallowables, allowables,
income from other sources etc. Accordingly after consolidating the
income as per the revised audit report, the appellant had filed the return
of income at Nil. In this regard it may be mentioned that in the revised
return as filed by the appellant the income from business and profession
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
-4was shown at
₹2,59,69,283/- and income from other sources was
shown at ₹4,64,712/- totalling to ₹2,64,33,995/-. However, after setting
of the carried forward losses and depreciation, the total income was
shown at Nil in the revised return of income. As per Para-5 of the Audit
report, vide Para l(b) it was observed by the AO that the financial
statements were prepared and presented under the historical cost
convention on the basis of accounting ............ Provisions of the
Companies Act, 1956 to the extent applicable. It was also stated that,
these financial statements have been prepared based on the accounting
practices and policies, historically followed by the concerned
companies in the Scheme. It was also stated that, the accounting
practices and policies have not been and are not required to be aligned
under the scheme of arrangement. Even the order of the Hon'ble High
Court has also made it mandatory not to make any alignment in the
accounting practices and policies subsequent to the scheme being made
operational.
10.2 From the plain reading of the order of the Hon'ble High Court as
well as the accounting practices and policies adopted by the Board of
Directors subsequent to the merger/amalgamation, as per the A.O.
there was no scope of any alignment in the accounting practices and
policies including taxation matters in the books of accounts of the new
entity i.e. the appellant. As per the AO the scheme of merger was
approved with the appointed date which was 01-04-2003 and
accordingly the arrangement/ amalgamation/ merger became effective
from the first day of the previous year relevant to assessment year under
consideration. Since the order of Hon'ble Gujarat High Court
regarding the scheme of arrangement was passed on 02-05-2005
whereas all the companies including the appellant company were liable
to file their return of income as per provisions of section 139 of the Act /
Sec. 44AB-of the Act for A.Y. 2004-05 on or before 31-10-2004 and
accordingly separate returns of income along with statutory audit
report as well as tax audit report u/s 44AB of the Act were filed by all
the companies before the respective AOs and details of which are
mentioned by the AO on Page No.4 of assessment order. As per the AO
had the scheme of arrangement/ amalgamation/merger not taken place,
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
-5for the sake of argument, then all the above referred companies as
separated and distinct entities would have been assessed to tax before
their respective assessing officer. As per the AO in such eventuality, the
return income as certified by the statutory auditors as well as tax
auditors, the income return would have been subject matter of the
regular assessment proceedings. As per the AO since, however, the
Hon'ble Gujarat High Court approved the scheme of
arrangement/amalgamation/merger vide its order dated 02-05-2005
made operative with retrospective effect from the appointing date as per
the petition of the appellant from 01-04-2003, the revised return filed by
the appellant company are to have been submitted on simple
consolidation basis because the previous year relevant to A.Y. 2004-05
was over on 31-03-2004 i.e. much prior to the order of Gujarat High
Court. Thus as per the AO under the circumstances, the net result of
disallowable, allowables, income from other sources shall be on
consolidation basis and there was no scope whatsoever to make any
amendment/ alteration, modification in the crystallized and closed and
adjusted books of accounts of all the companies involved in the scheme
of arrangement/amalgamation/merger. As per the AO simple
consolidation process ought to have been carried out. In other words,
whatever income/lossess, allowables and disallowables were declared
by each company in its original returns of income based upon its
respective audit report and after considering the legal and factual
positions as well as the provisions of income tax Act, the same should
have been adopted in the revised return filed by the appellant company
i.e. GEII. As per the AO however, in fact, the picture was totally
different and the same was showing gross violation /deviation from the
so called principles claimed and adopted in the revised audit report. As
per the AO such violation / deviation are as under:
10.2.1 As per the AO all the companies as listed above which were
part of the scheme of arrangement in their respective original returns of
income filed on the basis of their respective audit reports claimed /
added disallowables as per Annexure-A to this order. As per the AO on
perusal of annexure-A, the total disallowable considered by the
respective companies in their returns of income were totaling to
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
-6₹62,63,45,413/-. Thus as per the AO accordingly while computing the
income as per the revised return prepared to give effect to scheme of
arrangement without any alignment in the accounting practices and
policies of respective companies ought to have considered with
disallowable being added to the income as per profit and loss account
should have been naturally ₹62,63,45,413/-. As per the AO however on
perusal of revised return of income such disallowables were considered
at ₹51,25,39,846/-. Thus as per the AO the act of the appellant
company of reduction in the amount of disallowables to the tune of
₹11,60,49,285/- was neither justified nor maintainable within the
provisions of law. The AO was of the view that the figures shown as
disallowables in the respective returns of the above companies / entities
should have been appeared as a consolidated total in the revised return
of the appellant company and there was no scope for any re-alignment,
omission left because the figures were worked out by the respective
companies in their respective original returns of income after
considering the factual positions as well as the provisions of the Act. As
per the AO for the sake of argument, if the scheme of arrangement
would not have come into operation, the then respective companies'
returns of income would have been assessed considering the
disallowables offered by them without any alignment what so ever. In
view of this the AO held that the appellant company re-casted the
quantum of disallowables in the revised return of income with a view to
reduce taxable income. Accordingly AO added an amount of
₹11,60,49,285/- to the total income of the appellant.
10.2.2 Likewise, the AO on perusal of this Annexure-B, further noticed
that the total allowables considered by respective companies in the
returns of income were totaling to ₹56,34,62,586/- and this amount
ought to have been considered as allowable for reducing the same from
the income as per P&L account of the revised return of income of the
appellant. As per the AO however, an amount of ₹54,09,84,981/- have
been considered as allowables. In view of this the AO held that there
was short allowables to the tune of ₹2,24,77,605/- and which in his
opinion was required to be deducted from the total income of the
appellant in all fairness as there was no deviation or alignment in the
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
-7accounting policies of the respective companies. Accordingly, the AO
deducted this amount of ₹2,24,77,605/- from the total income of revised
return of the appellant.
10.2.3 The AO on perusal of this Annexure-C noticed that the total
income from other sources considered by respective companies in their
returns of income were totaling to ₹28,84,598/-. As per the AO
accordingly while computing the income as per the revised return of the
appellant prepared to give effect to the scheme of arrangement without
any alignment in the accounting practices and policies of respective
companies ought to have been considered the income from Other
Sources at ₹28,84,598/-. However, as per the AO in the revised return
of income of the appellant such income from other sources have been
considered only at ₹4,64,712/-. In view of this the AO held that the
income from other sources reduced to the tune of ₹24,19,886/- (i.e.
₹28,84,598/- - ₹4,64,712/-) and the same was added by him to the total
income of the appellant.
10.3 In view of the above discrepancies with regard to
disallowables and allowable of business income and income from other
sources, the AO held that the revised return of income of the appellant
was not showing the true state of affairs and accordingly he rejected the
books of accounts of the appellant u/s 145(3) of the IT Act.”
3.1.
The AO further made adjustment as proposed by TPO and made
addition of Rs.2,11,55,611/-.
3.2
Against this, the assessee filed an appeal before the ld.CIT(A)
who, after considering the submissions partly allowed the appeal. The
ld.CIT(A) made disallowance of bad debt of Rs.7,53,08,029/-; thereby
enhanced the income of the assessee.
The ld.CIT(A) also made
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
-8enhancement into Transfer Pricing adjustment.
The assessee feeling
aggrieved by the order of the ld.CIT(A), has filed the present appeal
before us.
4.
First ground of assessee’s appeal is general in nature which require
no independent adjudication.
5.
Ground Nos.2.1 & 2.2 are inter-connected and, therefore, the same
are decided together. The ld.counsel for the assessee submitted that the
ld.CIT(A) travelled beyond the record and made enhancement on the
matter that was neither considered by the AO nor was a subject matter of
appeal. In support of this contention, the ld.counsel for the assessee
placed reliance on the judgment of Hon’ble Apex Court rendered in the
case of CIT(Central), Calcutta vs. Rai Bahadur Hardutroy Motilal
Chamaria reported at 1967-(066)-ITR-0443-SC and of CIT, Bombay vs.
Shapoorji Pallonji Mistry reported at 1962-(044)-ITR-0891-SC. He also
placed reliance on the judgement of Hon’ble Gujarat High Court
rendered in the case of Prabhudas Ramji vs. CIT reported at 1966-(062)ITR-0621-Guj and of CIT,Gujarat vs. Jagdish Mills Ltd. reported at
1964-(051)-ITR-0266-Guj. Further, he placed reliance on the judgement
of Hon’ble Karnataka High Court rendered in the case of Sterling
Construction And Trading Company vs. Income-tax Officer, Central
Circle-1, Bangalore, And Others reported at 1975-(099)-ITR-0236-Kar.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
-9He also placed reliance on the judgement of Delhi High Court rendered
in the case of CIT vs. Union Tyres reported at 1999-(240)-ITR-0556-Del.
and of CIT vs. Sardari Lal & Co. reported at 2001-(251)-ITR-0864-Del.
[FB]. Further, he placed reliance on the judgement of Hon’ble Gujart
High Court rendered in the case of Saheli Synthetics (P.)Ltd. vs. CIT
reported at 2008(215)-CTR-0343-Guj. The ld.counsel for the assessee
further placed reliance on the written note that reads as under:“The Ld. CIT(A) exceeded his jurisdiction by travelling beyond record to
make enhancement
The Ld. CIT(A) does not have the jurisdiction to travel beyond the record and
seek extraneous information with a view to find and enhance income. This
contention has been upheld by the Supreme Court in the case of CIT v Rai
Bahadur Hardutroy Motilal Chamaria (66 ITR 443) and CIT v Shapoorji
Pallonji Mistry (44 ITR 891). The relevant extracts of the judgments are
attached as Annexure 1.
In the facts of the instant case, CIT(A) vide the notice dated June 22, 2012
issued under Section 251(2) of the Act sought details and evidences to
demonstrate that the subject bad debts pertained to the business of the
Appellant and was considered as income in prior years.
Further, the Ld. CIT(A) also sought details and evidences of write off of the
subject debts.
It is submitted that the taxability of subject bad debts was neither a subject
matter of appeal nor was it considered by the Ld. AO during the course of
assessment proceedings.
The enhancement is bad in law as the Ld. CIT(A) has sought to tax a new
source of income.
There are numerous judgments in the context of Section 31 of the Income-tax
Act, 1922 which state that items of income which have not been considered
during the course of assessment cannot be encompassed in the enhancement
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 10 power of the AAC. Reliance in placed on the judgments of the Gujarat High
Court in the case of Prabhudas Ramji v CIT (1966) (62ITRITR 621) and CIT
v Jagdish Mills Ltd (1964) (51 ITR 266); Karnataka High court in the case of
Sterling Construction And Trading Company v ITO (1975)(99 ITR 236).
It is further contended that the power of enhancement by CIT(A) contemplated
in Section 251 of the Act does not include the power to discover new source of
income. This contention was also upheld by the Delhi High Court in the case
of CIT vs Union Tyres (240 ITR 556) and approved by the full bench of Delhi
High Court in the case of CIT v Sardari Lal and Co (251 ITR 864) after
placing reliance on the judgments of CIT v Rai Bahadur Hardutroy Motilal
Chamaria (supra) and CIT v Shapoorji Pallonji Mistry (supra).
The facts of the instant case are similar to the case of CIT v Sardari Lal
(supra). In both the cases the CIT(A) had sought extraneous information,
unconnected with the appeal or proceedings before the lower authorities, with
a view to enhance income of the Appellant.
The Ld. CIT(A), to emphasise that the powers conferred in his office are not
restricted has relied on the judgments of the Supreme Court in the cases of
CIT v Nirvheram Daluram (1997) (224 ITR 610), Jute Corporation of India
(1991) (187 ITR 688) and CIT v Kanpur Coal Syndicate (1964) (53 ITR 225).
However, the reliance placed by the Ld. CIT(A) is misplaced viz a viz the
contention raised by the assessee. These judgement have held that the power
of the CIT(A) is wide and plenary, however whether such wide and plenary
powers include the power to discover new source of income has not been
commented upon. This distinguishment, after considering the judgments of the
Supreme Court in the aforesaid three cases has also been made by the Full
Bench of Delhi High Court in the case of CIT v Sardari Lal (supra), the
relevant extract of which is attached as Annexure 2.
Ld. CIT(A) has relied on the judgment of Gujarat High Court in the case of
Saheli Synthetics Pvt Ltd v CIT (302 ITR 126) to contend that an appellate
authority can even process a new source of income which forms part of either
the return of income or the order of assessment.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 11 However, this reliance is also misplaced as the said judgment deals with the
right of the AO to tax new source of income while framing a de novo
assessment on the direction of the CIT(A). Moreover, the judgment itself
recognizes that "powers available to an appellate authority are coextensive
and coterminous with that of the
assessing authority and though such powers are plenary powers, yet the
appellate authority has no power to enhance the assessment by discovering a
new source of income not mentioned in the return of income filed by the
assessee or considered by the AO in the assessment order."
To draw support from the aforesaid judgment of Gujarat High Court, it is
submitted that the claim for bad debts had been reduced from the return of
income thereby meaning that this source of income has been removed from
the tax computation. Further, as stated earlier, the issue of bad debts had not
been considered by the Ld. AO during the course of assessment.
To buttress the contention of jurisdiction, the Ld. CIT(A) relied on the
judgment of the Delhi HC in the case of Gurinder Mohan Singh Nindrajog v
CIT (348 ITR 170). However the said reliance is also misplaced and
distinguishable on facts. In the said case, the subject matter of enhancement
was considered by the AO and after receiving a reply from the assessee, the
AO chose not to make an addition. Accordingly, it was held that the AO had
considered the matter.
Drawing a parallel to the case under consideration, the Ld. AO, at the time of
assessment, had not enquired anything about the subject claim of bad debt.
Though, the subject bad debts did form part of the financial statements of the
assessee for the subject AY, it was not enquired upon on any aspect by the Ld.
AO.
Accordingly, it is submitted that the subject bad debts were not considered by
the Ld. AO and enhancement by the Ld. CIT(A) on that account after roving
enquires would tantamount to discovery of new source of income which is
beyond the jurisdiction of his office.
Indirect way of making additions beyond the limitations period
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 12 Without prejudice to the above, it is contended that enhancement based on
intimation by the Ld. AO after the expiry of time limits of reopening
assessment would tantamount to indirectly reopening the assessment. Such
indirect re-opening beyond the time limits specified under Section 148 is not
contemplated in the Income-tax Act, 1961 and goes entirely against the
scheme of the Act and the limitations prescribed therein.
This action of doing an act (ie. indirectly reopening the assessment beyond
the limitations period) which is prohibited legally, in an indirect manner
through a circuitous contrivance is against the settled legal principle of
"quando aliquid prohibetur, prohibetur at omne per quod devenitur ad'illud"
meaning that whatever is prohibited by law to be done, cannot legally be
effected indirectly.
Reliance placed on the judgment of Supreme Court in the case of U.P.
Cooperative Federation vs. Singh Consultants, 1988 (1) SCC 174 and
Sangramsinh Vs. Shantadevi, 2005 (11) SCC 314.
Further reliance to substantiate this principles applicability in the context of
Income-tax is placed on the following judgments:
• Anupam Susil Garg v. CIT (265 ITR 474)
• CIT v. Kalvinator of India Ltd. [2002] 256 ITR 1 123 Taxman 433
(Delhi)(FB)
• J.N. Sahni v. ITAT (Delhi HC) (257 ITR 16)
• CIT v. Paharpur Cooling Towers (219 ITR 618)
Specifically, in the context of enhancement by the first appellate authority
beyond the period of limitations for reopening the assessment, we wish to rely
of the judgment of the Lahore High Court in the case of CIT, Punjab v Nawab
Shah Nawaz Khan (1937)(6 ITR 370) which was in the context of Section 34
of the Income-tax Act, 1922. The relevant extract has been attached as
Annexure 3.
The Ld. CIT(A) to fortify its contention that enhancement may be made on the
intimation of the AO has relied on the judgment of the P&H High Court in the
case of Goel Die Cast Ltd v CIT (297 ITR 72). However, the Company
submits that the said judgment is distinguishable as in the facts of that case,
the enhancement, albeit on an intimation by the AO, was within the time limit
of re-opening of assessment.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 13 Claim of bad debts - in compliance with the provisions of section 36(1) (vii)
r.w,s 36(2) of the Act
The debt has become bad in the current year and has been written off as
irrecoverable in the books of accounts of the Company. Accordingly, the same
has been claimed as deduction in compliance with the provisions of section
36(l)(vii) r.w.s 36(2) of the Act.
During the year under consideration, the subject bad debts have been credited
to the debtor's account with a corresponding debit to the "Provision for bad
debt account". This in itself would demonstrate that the subject debts have
been written off from the ledger of the debtor.
The judgment of CIT v Hotel_Ambassador (253 ITR 430) sought to be relied
by the Ld. AO is distinguishable on facts. In the said case, the assessee wrote
off the amount as bad debts in the debtors ledger, after the accounts were
finalised and audited. In that context, it was held that deduction under Section
36(l)(vii) cannot be allowed if the assessee writes off the debt in some of the
books maintained by it, which do not form part of the audited accounts.
However, in the case of the Appellant, bad debts have been written off from
the books of accounts which have been finalized and audited by the statutory
auditors.
Further, the Ld. CIT(A) has relied on the judgment of Sampanna Kuries by
the Kerala High Court to substantial that even after the deletion of the words
"established to have become bad in the previous year" from Section 36(l)(iii),
the bad debts written off should be 'irrecoverable'. It was held that since no
material has been brought on record to show that the subject debts have
infact become irrecoverable, the deduction would not be allowed. However, it
is submitted that the aforesaid judgment now stands overruled by the
judgment of the Supreme Court in the case of TRF Ltd (Civil Appeal no.5293
of 2003 and 5294 of 2004). Reliance is also placed on the judgments of the
Gujarat High Court judgement in the case of CIT vs. Girish Bhagwatprasad
(256 ITR 772), CIT vs Shakti Cargo Movers Pvt Ltd. (ITA No.1515 of 2010)
and CIT vs. Frontline Corporation Ltd. (Tax Appeal No.1943 of 2010).
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 14 Thus, going by the aforesaid judgement of TRF Ltd(supra) it is not necessary
for the assessee to establish that the debt has become bad. It should suffice if
the debts are written off in the books as bad and hence, not recoverable.
Reliance is placed on Circular no.551 dated January 23, 1990 issued by the
CBDT. By way of the said circular, it has been clarified that a mere write off
in the books of the Company is adequate for claim of bad debts u/s.36(1)(vii)
of the Act.
Submissions dated July 9, 2012 was filed where it was indicated that
Provision for bad debt (through which the subject bad debt were written off)
have been offered to tax in prior years.
The bad debts are genuine and vouched by the auditors of the Company. The
auditors have formed an opinion that the accounts reflect a true and fair view
of the year's results. The Company has also got its accounts audited u/s.44AB
of the Act.
Reliance placed on the decision of the Delhi High Court in the case of
Addl.CIT vs. Jay Engineering Works Limited (113 ITR 389).
Deduction to be allowed as loss incurred in the normal course of business u/s
29 of the Act
Even otherwise, the amount written off represents due from customers not
recoverable in the normal course of business. Hence, the same should be
allowed as business loss u/s 29 of the Act.
Deduction should be allowed in the year in which the provision was created
and offered to tax
Provision for bad debts was offered to tax in the preceding years in which the
said provision was created and charged to profit and loss account.
Disallowance of bad debts written off in the current year would tantamount
to double disallowance.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 15 Hence, in the event, bad debt is disallowed in the current year, deduction
should be allowed with regard to provision created in the preceding years.”
5.1.
On the contrary, ld.CIT-DR also submitted a note and reiterated as
were made in the submission, which reads as under:“Note on Enhancement of income by the Commissioner (Appeals)
It is commonly understood that the First Appellate Authority viz. the
Commissioner (Appeals) has the power of enhancement in relation to
any matter connected with an appeal before him. This proposition
arises from the wording in section 251(1) which reads as under:
In disposing of an appeal, the Commissioner (Appeals) shall have the
following powers - (a) in an appeal against an order of assessment, he
may confirm, reduce, enhance or annul the assessment (emphasis
added).
However, some decisions have been rendered wherein the power of
enhancement was sought to be restricted by holding that such
enhancement would not apply to sources of income which had not been
considered by the Assessing Officer -CIT, Bombay v. Shapoorji Pallonji
Mistry (1962) 44 ITR 891 (SC). However, this line of thinking was
overturned by a series of the decisions of the Apex Court in CIT v.
Kanpur Coal Syndicate (1964) 53 ITR 225 (SC), Jute Corporation of
India Ltd. v. CIT (1991) 187 ITR 688 (SC) and the last in the series CIT
v. Nirbheram Deluram (1997) 091 Taxman 181 (SC).
In the Nirbheram Deluram case, the Apex Court took specific note of
the issue as to whether new source of income which were not the subject
matter of assessment could be considered for the purpose of
enhancement of income. The Court took cognizance of the fact that the
Appellate Authority had plenary powers in disposing of an appeal and
the scope of his power is coterminous with that of the income tax
officer. He can do what the income tax officer can do and also direct
him to do what he has failed to do. The Court referred to the fact that
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 16 the Appellate Authority was only subject to the restrictions or
limitations, if any, prescribed by the statutory provisions. In the absence
of any statutory provisions, the appellate authority is vested with all the
plenary powers which the subordinate authority may have in the matter.
In these circumstances, the Apex Court unequivocally held that new
sources of income could also be the basis for enhancement of income
assessed. This is clear from the following wording from the decision:
........Madhya Pradesh High Court to refer the following questions of
law for opinion.
(1)Whether on the facts and in the circumstances of the case, the
Tribunal was justified in deleting a sum of Rs. 2,30,000/- freshly added
by the Appellate Assistant Commissioner?
(2) Whether the sum of Rs. 2,30,000/- was added by the Appellate
Assistant Commissioner on new sources of income of items not
considered by the Income Tax Officers from the point of view of
assessability?
(3) Whether the Appellate Assistant Commissioner had no jurisdiction
or power to add the sum of Rs. 2,30,000/- in the facts and circumstances
in which he has added the same? (emphasis added).
The Court further goes on to consider these issues. In para 1 middle it
considered the aspects of new source of income as is clear from the
wording again:
According to the High Court, the items containing that amount
constituted new sources of income which were not the subject matter of
assessment before the ITO, therefore it was not open in appeal to
consider these sources and to assess them.
After referring to the plenary powers of the Assessing Officer, earlier
stated the Court concluded as under:
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 17 This means that even if question No. 2 is answered in the affirmative,
question nos. 1 and3 must be answered in the negative. The appeal is
therefore allowed............
The Apex Courts decision is in tune with the well accepted legal maxim
that no word can be read into a statute if it is not clearly so provided.
No word which is provided in a statute can also be excluded as
meaningless. In other words, there has to be a strict interpretation of
the statute as is clear from the wordings: Cape Brandy Syndicate v. IRC
(1921) 1 KB 64, AV Fernandez V. State of Kerala AIR 1957 SC 657,
CWT v. Kripashankar Dayashankar Worah 81ITR 763 (SC).
However, subsequent to the Supreme Court's decision which appeared
to have set at rest finally the issue as to whether the first appellate
authority had limitless powers of enhancement of income, Court
decisions have been coming seeking to distinguish the decision of the
Supreme Court cited earlier. Thus, in CIT v. Union Tyres [1999] 240
ITR 556 (Delhi) and in CIT v. Sardari Lal and Co. [2002] 251 ITR 864
(Delhi) the High Courts has sought to distinguish the Apex Court
decision on the ground that the Apex Court did not deal with a situation
where a new source of income was considered by the Appellate
Authority for enhancement. In Union Tyres case the Delhi High Court
distinguisheded Deluram case by commenting that the Apex Court did
not comment on the issue whether the wide powers of the First
Appellate Authority also included the power to discover a new source
of income.
A question regarding powers of the first appellate authority came
up for consideration before the Supreme Court recently in CIT
v. Nirbheram Deluram (1997) 224 ITR 610 (SC). Following their
earlier decisions in Kanpur Coal Syndicate and Jute
Corporation of India's cases (supra) though their lordships
reiterated that the appellate powers conferred on the AAC under
section 251 could not be confined to the matter which had been
considered by the ITO, as the AAC is vested with all the plenary
powers which the ITO may have while making the assessment,
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 18 but did not comment on the issue whether these wide powers also
include the power to discover a new source of income. Therefore,
the principle of law laid down in Shapoorji and Chamaria's
cases (supra) still hold the field (para 10 of order).
Accordingly, the Delhi High Court held that there was a solitary but
significant limitation to the power of revision in that it is not open to the
AAC to introduce in the assessment a new source of income and the
assessment has to be confined to those items of income which were the
subject matter of original assessment:
However, there is a solitarily but significant limitation to the power of
revision, viz. that it is not opened to the AAC to introduce in the
assessment a new source of income and the enhancement has to be
confined to those items of income which were the subject matter of
original assessment (para 11 end).
Similarly, in Sardari Lal and Co. case also the Delhi High Court noted
that the Apex Court had not specifically approved enhancement where a
totally new source of income was the basis for enhancement. It held
that:
whenever the question of taxability of income from a new source
of income is concerned, which had not been considered by the
A.O., the jurisdiction to deal with the same in appropriate cases
may be dealt with u/s. 147 / 148 of the Act and section 263 of the
Act, if requisite conditions are fulfilled. It is inconceivable that in
the presence of such specific provisions, a similar power is
available to the first appellate authority.
We can see that a new issue of availability of alternate methods of
enhancement like 147, 263 etc. are being discussed now. Here, one can
see that the Court itself has accepted the existence of alternate methods
of enhancement - 147 / 148 or 263 but put its foot down on another
alternate enhancement method - 251(1). The fact that the distinction
made regarding new source of income just not being there is clear from
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 19 the fact that enhancement based on new source of income had been
considered and approved by the Apex Court in Deluram's case et al,
and quite clear from the reproduction from that case noted earlier.
It is also worth noting that if the wording in section 251(1)(a) read as
under:
In respect of issues in appeal, he may confirm, reduce, enhance or
annul the assessment,
then, the interpretation given by the various High Courts may perhaps
have been relevant. We have also noted that a strict interpretation of the
statute is the norm. It is also interesting to note that under 251(2), the
Commissioner (Appeals) is bound to give reasonable opportunity of
being heard to the assessee before an enhancement is made. The
explanation to sub clause (2) therein further categorically states that
issues not in appeal before the Commissioner (Appeals) may also be
dealt with by him in respect of any matter arising out of the proceedings
in which the order appealed against was passed. All these facts would
also show that there is no restriction intended on the enhancement
power of the Commissioner (Appeals).
In this view of the matter, it is submitted that the decision of the Apex
Court has not really been distinguished by the Delhi High Court
decisions cited.
The enhancement done by the CIT(A), in any case is also relating to the
same source of income, that is business income.
Hence, on any basis, the enhancement is within the parameters
provided by the statute and the laid down principles of Judicial
Precedence and hence may be approved.”
6.
We have heard the rival submissions, perused the material
available on record and gone through the orders of the authorities below.
The contention of the assessee in these grounds (ground Nos.2.1 & 2.2)
are in three folds. Firstly, the contention of the assessee is that under the
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 20 fact of the present case, the ld.CIT(A) travelled beyond its jurisdiction for
making disallowance of bad debts as claimed by the assessee and thereby
he acted contrary to the settled law. Secondly, the contention of the
assessee is that during the year under consideration, the subject bad debts
have been credited to the debtor’s account with a corresponding debit to
the “Provision for bad debt account”. This in itself would demonstrate
that the subject debts have been written off from the ledger of the debtor.
It is also contended that in the current year the debt has become bad and
has been written off as irrecoverable in the books of accounts of the
Company. Accordingly, the same has been claimed as deduction in
compliance with the provisions of section 36(1)(vii) r.w.s.36(2) of the
Act.
Thirdly, the contention of the assessee is that the enhancement is
an indirect way of making additions beyond the limitations period. It is
the contention of the assessee that action of doing an act (i.e. indirectly
reopening the assessment beyond the limitations period) which is
prohibited legally, in an indirect manner through a circuitous contrivance
is against the settled legal principle of “quando aliquid prohibetur,
prohibetur at omne per quod devenitur ad illud”.
6.1.
the ld.CIT(A) proceeded on the basis that the assessee has not
complied with the statutory requirement of section 36(1)(vii), therefore
first we would examine whether the ld.CIT(A) was justified in holding
that there is a non-compliance of the provisions of section 36(1)(vii)
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 21 r.w.s.36(2) of the Act; thereby the claim of bad debt could not have been
allowed.
Undisputedly, the contention of the assessee is that it has
complied with the provisions of section 36(1)(vii) r.w.s.36(2) of the Act.
It is submitted that the subject bad debts have been credited to the
debtor’s account with a corresponding debit to the “Provision for bad
debt account”. In this context our attention was drawn to page Nos.77
and 78 of the paper-book. It is also contended that the provision for bad
debt was offered to tax in the preceding years in which the said provision
was created and charged to profit and loss account. The disallowance of
bad debts written off in the current year would tantamount to double
disallowance. The Reliance is placed on judgement of the Hon’ble Apex
Court rendered in the case of TRF Ltd. vs. CIT reported at (2010) 323
ITR 397 (SC). We find force into the contention of ld.counsel for the
assessee.
The Hon’ble Supreme Court in the case of TRF Ltd. vs.
CIT(supra) has held as under:“4. This position in law is well-settled. After 1st April, 1989, it is not
necessary for the assessee to establish that the debt, in fact, has become
irrecoverable. It is enough if the bad debt is written off as irrecoverable
in the accounts of the assessee. However, in the present case, the AO
has not examined whether the debt has, in fact, been written off in
accounts of the assessee. When bad debt occurs, the bad debt account is
debited and the customer's account is credited, thus, closing the account
of the customer. In the case of companies, the provision is deducted
from sundry debtors. As stated above, the AO has not examined
whether, in fact, the bad debt or part thereof is written off in the
accounts of the assessee. This exercise has not been undertaken by the
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 22 AO. Hence, the matter is remitted to the AO for de novo consideration
of the above-mentioned aspect only and that too only to the extent of the
write off.”
6.2. Therefore, in the light of the recent judgement of the Hon’ble Apex
Court rendered in the case of TRF Limited v. CIT(supra) the AO is
hereby directed to verify whether the provision has been deducted from
sundry debtors and in case if he finds so, he would delete the addition.
Since we have restored the issue back to the file of AO for verification,
we are not adverting to other issues raised by the assessee, in case the
assessee succeeds on this issue other issues would become academic.
Thus, ground Nos.2.1 & 2.2 of assessee’s appeal are allowed for
statistical purposes.
7.
Ground Nos.3.1 to 3.3 are inter-connection and, therefore, the
same are decided together. The respective representatives of the parties
reiterated their arguments as were made in the written submissions filed
by them.
8.
We have heard the rival submissions, perused the material
available on record and gone through the orders of the authorities below.
We find that the ld.CIT(A) has decided this issue in paras-13.3 to 13.15
of his order by observing as under:“13.13
In view of above submission of the appellant, now the
question arises whether while computing the raw-material adjustment,
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 23 RM/Operating expenses ratio of the tested party and comparable
companies can be considered and can be proceeded to compute the
raw-material adjustments or not. In this regard reference is made to
para-6.7 of the order u/s.92CA(3) of the TPO, Ahmedabad for A.Y.
2005-06. The TPO in such order on perusal of P&L account realized
that the cost of raw-material was major cost affecting the profit of the
appellant and hence it was decided to mark up the cost of raw-material
of the comparables to arrive at adjusted value of the total purchases of
the appellant so that costlier local purchases do not colour the
appellant’s transaction with AE’s. Hence, the entire raw-material cost
was reduced to bring Industry at level. The TPO observed that the local
raw-material purchases of the appellant was very high (65.99%) and
due to these higher local cost of purchase, its results were not
comparable with local comparables. It was also observed by the TPO
that the cost of purchase of raw-material of local comparable may be
not due to existence of unrecognized raw-material market. Thus as per
provision of rule 10B(e)(iii) of the income Tax Rules, adjustment was
made to the results of the comparable companies and purchase
inefficiency of the appellant was adjusted, which results into mean
adjusted margin to sales at 1.22%. In my opinion the TPO in his order
for A.Y. 2005-06 has adopted correct method by considering
RM/Operating expenses ratio of the tested party and comparable
companies and by proceeding to compute the raw-material adjustments.
Thus in my opinion the same method/approach should be followed in
the case of appellant for A.Y. 2004-05 also which is the year under
consideration. It is pertinent to mention that if the adjusted cost of rawmaterial is calculated on the basis of sales turnover, then the cost of
raw-material will also include the profit margin of sales, which
increases the adjusted cost of raw-material which in turn will reduce
the actual profit margin which is not correct and not comparable. The
correct method/appropriate base to calculate the adjusted cost of rawmaterial is in proportion to the total operating cost. The element of
profit is to be eliminated or not to be considered while calculating the
adjusted cost of raw-material.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 24 13.14. It is further mentioned that the Transactional Net Margin
method operates in a similar way to the Cost Plus Method and the
Resale Price Method. However, the Transactional Net Margin Method
benchmarks net profitability, i.e. it tests net profits earned in controlled
transactions and compares them to the net profits earning in
uncontrolled transactions. That means that instead of gross profit the
transactional net margin method analysises the net profits in relation to
an appropriate base such as costs, sales, or, as the case may be assets.
This is done via net margins or so called profit level indicators. In
contrast to the cost plus method, which generally computes the mark up
after direct and indirect costs of production, the transactional net
margin method uses margins computed after operating expenses.
13.15 In view of the above discussion it is held that the TPO,
Ahmedabad has followed the correct method in his order u/s.92CA(3) of
AY 2005-06 by computing the raw-material adjustment by comparing
the raw-material adjustment to operating cost ratio of the tested party
vis-à-vis the raw-material to operating cost ratio of each of the
comparable company and accordingly by making adjustment to the
raw-material expenses of the comparable companies. I, therefore, hold
that this method/approach is required to be followed in the case of
appellant for AY 2004-05 also and in doing so there will be Transfer
Pricing Adjustment of ₹7,62,29,166/-. In view of this, the AO is directed
to follow the above method/approach for AY 2004-05 and to make
transfer pricing adjustment on account of Arm’s Length Price at
₹7,62,29,166/- in the case of appellant. In result, there will be
enhancement of Transfer Pricing Adjustment of ₹5,50,73,555/- on
account of Arm’s Length Price in the case of appellant for the year
under consideration. The assessment is enhanced by an amount of
₹5,50,73,555/- accordingly. Thus the grounds of appeal no.3,4,5,6 & 7
of the appellant are dismissed. Since the appellant has filed inaccurate
particulars of income by adopting wrong and incorrect method in
respect of Transfer Pricing adjustment with regard to International
Transactions entered into with AE in view of the reasons as discussed
above and therefore the penalty proceedings u/s.271(1)(c) of the IT Act
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 25 are also initiated on enhanced income of ₹.5,50,73,555/- for filing of
inaccurate particulars of income.”
8.1.
The submissions of the ld.counsel for the assessee are reproduced
hereunder:“B. ARGUMENTS BEFORE THE HON'BLE TRIBUNAL (Ground No. 3.1 and 3.4):
Ground No. 3.1:
That the learned CIT(A) has erred in computing the Transfer pricing adjustment of
INR 76,229,166 for the manufacturing segment of the Power Control Domestic Tariff
Area (‘PCDTA’) division of the Appellant Company.
Ground No. 3.4:
That the learned CIT(A) has erred mathematically by adding the adjustment made by
the Transfer Pricing Officer in the Transfer Pricing order of an amount of INR
21,155,611 to the revised adjustment as computed based on the learned CIT(A)'s
approach, instead of subtracting it from the revised adjustment order.
14. These Grounds are not sought to be pressed as the same have already been dealt
with and resolved in terms of the CIT(A) rectification order dated October 25, 2012.
[Refer Page 1 to 8 of the Paperbook (CIT(A) rectification order)].
Ground 3.3: Without prejudice to the above the learned CIT(A) has erred in not
appreciating the error made by the learned Transfer Pricing officer in computing the
raw material adjustment and the consequent operating margin of the Appellant
Company.
15. The Appellant would like to highlight that the TPO has accepted the fact that
PCDTA division's raw material cost is higher by 18.50% of sales of the comparable
companies [Refer Page 253 of the Appeal Memo]. Accordingly, the learned TPO
proceeded to make a downward adjustment to the raw material cost of PCDTA
division and consequently the adjusted operating margin of the division. However,
while computing the adjustment though the difference in the raw material to sales
ratio was 18.50% of sales, the learned TPO computed the raw material adjustment as
18.50% of costs as against sales. The TPO followed an incorrect approach by
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 26 comparing the raw material adjustment to operating cost ratio of tested party vis-avis the raw material to cost ratio of each comparable company and accordingly
making an adjustment to the raw material expense of the comparable company.
Without prejudice to the approach adopted by the TPO for the raw material
adjustment, the computation of the raw material adjustment performed by the TPO
was also incorrect.
16. Further, the CIT(A) also erred in not appreciating the error made by the learned
Transfer Pricing officer computing the raw material adjustment and the consequent
operating margin of the Company.
17.
Assuming without admitting, that even if the learned TPO's approach was
considered and had the learned TPO carried out the calculations correctly, the
adjusted operating margin would be as provided in the table below.
Computation of the proportion of international transaction to total costs
Particulars
Amount (In Amount (In
INR)
INR)
Income
Income from Operations
1,045,039,761
Expenditure
Total expenses (excluding raw material cost)
417,262,348
Total Material Cost
709,346,049
Less: Downward Adjustment of materials cost as
per material cost of comparables
(1,045,039,761*18.50%)
193,332,356 516,013,693
Total Expenditure (after adjustment for raw
material cost)
933,276,041
Revised Profit
111,763,720
Adjusted OP/ Sales
10.69%
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 27 18. As is evident from the table above, if the calculation would have been correctly
followed by the learned TPO, the adjusted operating margin of the Appellant would
be at 10.69% which is higher than the arithmetic mean of 6.78% of the comparable
companies. Accordingly, this lends support to the fact that the international
transactions of PCDTA manufacturing segment continue to be demonstrated to be at
arm's length even as per the learned TPO's own accepted analysis.
Ground 3.2: That the learned CIT(A) has erred while computing the raw material
adjustments of the Appellant Company and the comparable companies in the
manufacturing segment of the PCDTA division and consequently arriving at the
revised operating margin of comparable companies.
Use of appropriate base' / Selection ofPLI
19. The Appellant submits that the raw material adjustment is computed by the Ld.
TPO by comparing the raw material ('RM') to operating cost ('OC') ratio of the tested
party vis-a-vis the raw material to cost ratio of each of the comparable company.
20. In this regard it is pertinent to mention that the Transactional Net Margin
Method ('TNMM') was selected as the most appropriate method and the Profit level
indicator (‘PLI’) selected by the Appellant is OP / Sales. The TNMM and the PLI is
also duly accepted by the Ld. TPO without any debate in AY 2004-05 and in AY
2005-06 and all subsequent years.
21. The PLI compares and measures results of the tested party and the uncontrolled
transaction to determine the arm's length outcome of the price in the controlled
transaction.
22. Thus it is undisputed that Sales is the appropriate base for the purposes of the
PLI in the instant case.
Use of 'appropriate base' for computation of raw material adjustment
23. The Appellant submits that, the Ld. TPO has technically erred in carrying out the
mathematical computation of the raw material adjustments in the manufacturing
segment of the Power Controls division of GEIIPL for AY 2004-05, by comparing the
ratio of raw material costs to operating expenses of the tested party, with the raw
material costs to operating expenses of the comparable companies.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 28 24. The Appellant submits that the mathematical computation of the raw material
adjustment by the Ld. TPO using RM / OC ratio is particularly incorrect given the
fact that the PLI selected in this case is OP / Sales with 'Sales' as the relevant base
since the import transaction of the tested party is subject matter of test. Accordingly,
the raw material adjustment should also be computed having regard to the same
relevant base and comparing the RM / Sales ratio of the tested party with the RM /
Sales ratio of the comparable companies.
25. In this regard the relevant extracts of the Rule 10B(e) of the Income-tax Rules,
1962 are reproduced below for immediate reference:
"transactional net margin method, by which,—
(i) the net profit margin realised by the enterprise from an international transaction
entered into with an associated enterprise is computed in relation to costs incurred or
sales effected or assets employed or to be employed by the enterprise or having
regard to any other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from
a comparable uncontrolled transaction or a number of such transactions is computed
having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable
uncontrolled transactions is adjusted to take into account the differences, if any,
between the international transaction and the comparable uncontrolled transactions,
or between the enterprises entering into such transactions, which could materially
affect the amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is
established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an
arm's length price in relation to the international transaction."
26. Farther, the Appellant also wishes to draw reference to the following principle
provided in the OECD guidelines:
"The process of calculating working capital adjustments:
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 29 a) Identify differences in the levels of working capital Generally trade receivables,
inventory and trade payables are the three accounts considered. The transactional
net margin method is applied relative to an appropriate base, for example costs,
sales or assets (see paragraph 2.58 of the Guidelines). If the appropriate base is
sales, for example, then any differences in working capital levels should be measured
relative to sales."
Para 2.58:
"The transactional net margin method examines the net profit relative to an
appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled
transaction (or transactions that are appropriate to aggregate under the principles of
paragraphs 3.9-3.12). Thus, a transactional net margin method operates in a manner
similar to the cost plus and resale price methods.
………This means in particular that the net profit indicator of the taxpayer from the
controlled transaction (or transactions that are appropriate to aggregate under the
principles of paragraphs 3.9-3.12) should ideally be established by reference to the
net profit indicator that the same taxpayer earns in comparable uncontrolled
transactions, i.e. by reference to "internal comparables" (see paragraphs 3.27-3.28).
Where this is not possible, the net margin that would have been earned in
comparable transactions by an independent enterprise ("external comparables") may
serve as a guide (see paragraphs 3.29-3.35).
27. ln this regard the Appellant submits that under TNMM the net profit margin
realised by the enterprise from an international transaction entered into with an
Associated Enterprise ('AE') is computed in relation to costs incurred or sales
effected or assets employed or to be employed by the enterprise or leaving regard to
any other relevant base.
28. In the instant case, the subject matter of test is the transaction of import of raw
materials in the manufacturing segment of Power Controls division of GEIIPL. Thus
OP/ Sales (Sales being the uncontrolled base) has been used as the appropriate PLI.
Accordingly, any adjustments thereafter, under TXMM, have to be made with
reference to the same relevant base (i.e. Sales). Adopting a different, controlled base,
would vitiate the analysis by considering the very transaction which is the subject
matter of test for the purpose of the adjustment.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 30 29. Thus in the present case, the raw material adjustments in the manufacturing
segment of the Power Controls division of GEIIPL have to be computed by
comparing the ratio of raw material costs to sales of the tested party with the ratio of
raw material costs to sales of the comparable companies, thereby adjusting the
operating margins of the comparable companies for the differences in this ratio.
Base considered by the Ld. TPO in AY 2005-06 and AY 2004-05
30. In this regard the Appellant submits would also like to highlight certain factual
references made by the Ld. TPO in the TP order for AY 2005-06 which also support
the above principle. For the purposes of computing the raw material adjustment, the
Ld. TPO has compared the RM / Sales ratio of the tested party vis-a-vis the
comparable companies. Attention is drawn to the reference made in the Ld. TPO's
order for AY 2005-06 (para 6.7 Page 7 line no 5) attached herewith as Annexure 1,
wherein the Ld. TPO has made a reference to the raw material ratio of the tested
party of '65.99%' which is actually the RM / Sales ratio of the tested party.
31. Further the Ld. TPO has also made a reference to RM / Sales ratio of the
comparable companies as well (para 6.8 on page 7 of the TP order for AY 2005-06).
32.
However, while computing the raw material adjustments for AY 2004-05, the
Ld. TPO has erroneously considered RM / operating expenses ratio of the tested
party and comparable companies and proceeded to compute the raw material
adjustments.
33. Therefore, the inference is that the TPO sought to make the adjustment having
regard to RM / Sales but eventually resorted to RM / Cost as it would result in an
adjustment.
Computation of raw material adjustment
34. Based on the above principle the Appellant submits that the raw material
adjustment has to be computed with sales as the relevant base and accordingly has
computed the raw material adjustments. The Appellant provides the computation of
the raw material adjustment and consequently the adjusted operating profit margin of
the companies as considered by the Ld. TPO in the Order dated December 22, 2006
for AY 2004-05 as Annexure 2.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 31 35. The arithmetical mean of the adjusted operating profit margin of the comparable
companies^ after adjusting for differences in raw material costs is (11.73)%.
36. For ease of reference, the computation of adjustment with sales as the relevant
base is provided below.
Particulars
Amount (INR)
Income from operations (A)
1,045,039,761
Profit/ (Loss) (B)
-81,617,605
OP/Sales (C) =(B) / (A)
-7.81%
Arm' length Margin (%) before raw
6.78%
material adjustment (D)
Arm' length Margin (%) post raw material -11.73%
adjustment - Considering sales as the base
(E)
Arm's Length Operating Profit (F)=
(122,583,164)
(A)*(E)
Adjustment (G) =(F) - (B)
Nil
37. Evidently, the operating profit margin earned by Appellant at (7.81)%, is higher
than the arithmetical of the adjusted operating profit margin of the comparable
companies (post adjustment for raw material costs) of (11.73)%. Accordingly, this
lends support to the fact that the international transactions of the Appellant in the
manufacturing segment of Power Controls division continue to be demonstrated to be
at arm's length even as per the Ld. TPO's own accepted analysis.
Without prejudice to the fallacy of the adjustments in terms of our contentions made
above, the Appellant further contends as follows:
Adjustment to be made on proportionate basis
38. The transaction related to purchases from associated enterprises and expenses
on account of transacting with related enterprises amounts Rs. 121,269,639 which is
only 10.76% of the total expenses of the PCDTA manufacturing segment which are
Rs. 1,126,608,397 excluding unusual expenses incurred by the division during the
year [and only 17% of the total material costs]. The workings have been provided in
the Table below.
Computation of the proportion of international transaction to total costs
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 32 Calculation of % of AE Transactions to Total Cost
AE transactions
121,269,639
Total Costs
1,126,608,397
% of AE Transactions to Total Cost
10.76%
Computation of the proportion of international transaction to total raw material costs
Calculation of % of AE Transactions to Total Raw Material Cost
Purchase from AE's
121,269,639
Purchase from non AE's
588,076,410
Total Raw Material Costs
709,346,049
% of AE Transactions to Total
Material Cost
17.10%
39. Thus it is clear that the raw material sourced from AEs, i.e., raw material and
other expenses incurred by the manufacturing segment of PCDTA are extremely low
compared to the total expenses of the segment itself.
40.
Accordingly, considering the very low quantum of the raw material costs
representing the international transaction with associated enterprises of the
manufacturing segment for FY 2003-04 vis-a-vis the total expenses, without prejudice
and assuming without admitting, it is contended that any such adjustment, if at all,
could have been made only on a proportionate basis i.e. ratio of the material cost
from related parties to total material costs or ratio of the material cost from related
parties to total costs. Thus the adjustment ought not, in any case, to have exceeded
the proportionate amount of adjustment so computed. Accordingly, the Appellant
contends that the entire amount resulting from the difference between the arithmetic
mean of the adjusted net operating margin of the comparable companies and
manufacturing segment of PCDTA should not be adjusted only to the material costs
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 33 or expenses representing the international transaction with associated enterprises
which constitutes a meagre 17% of the total material costs.
41. In this regard we provide below the computation of the proportionate adjustment
that could have been considered even if one were to make any adjustment to the
transfer prices, based on the learned TPO's own faulty approach.
42. The TP adjustment as computed by the learned TPO is given in the table below:
Adjustment as computed by the TPO
Particulars
Arm's length at
adjusted RM as per the
TPO (Rs.)
Total Income from operations
1,045,039,761
AE transactions- Imports from GE entities and Royalty 100,114,028
(Balancing Figure)
Material consumed (purchased from Non GE Entities)
456,851,491
Other expenses
417,262,348
Total Expenses
974,227,867
Operating profit
70,811,894
Operating profit after excluding unusual expenses /
Sales (%)
Actual AE transaction
6.78
Difference TP Adjustment
21,155,611
121,269,639
43. The table below provides computation of a proportionate adjustment:
Computation of Proportionate Adjustments
As per Tables TP Adjustment Proportionate
9 and 10
as per TPO
adjustment (Rs.)
above
(Rs.)
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 34 Actual AE costs to actual total 10.76%
costs ratio
21,155,611
2,276,343
Actual AE costs to actual total 17.10%
material costs ratio
21,155,611
3,617,609
44. Based on the above, in summary, the Appellant contends that for the reason that
the international transaction value is miniscule to the total costs of the segment, it
would be highly unreasonable to attribute the entire difference, between the
arithmetical mean of the OPM of the comparable companies vis-a-vis the OPM of the
manufacturing segment of PCDTA, to the transfer prices in the international
transactions. Accordingly, based on the calculations provided in the above table, the
Appellant contends that even as per the approach followed by the TPO the
adjustment could have been only Rs. 2,276,343 and not Rs. 21,155,611 as computed
by the learned TPO.
45. Based on the above submissions, the Appellant contends that the learned TPO
and consequently the learned DCIT have erred in determining an adjustment of Rs.
21,155,611 in respect of the manufacturing segment of PCDTA under section 92C(4)
read with subsections (3) and (4) of section 92C(3), the domestic industrial business
division of the Appellant.”
8.2.
On behalf of the Revenue, the submissions are as under:“That the learned CIT(A) has erred in computing the Transfer Pricing
adjustment of Rs.7,62,29,166 for the manufacturing segment of Power
Control Domestic Tariff Area ('PCDTA') division of the Appellant Company.
TPO's Comments:
This is a general ground of appeal. However, the facts of the case are as
under:
(i) In this case the TPO had made adjustment of Rs. 2,11,55,611/- in the
power control division(Manufacturing Segment) of the Appellant vide order
dated 22.12.2006 for AY 2004-05 . This issue has been discussed in detail in
the TP order. During the course of TP proceedings it was observed by the
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 35 TPO that th international transactions relating to manufacturing activity were
not at arms length price because the TNMM method was selected as most
appropriate method and PL1 margin of tested party was worked out to
(-) 7.81%(OP/Sales) whereas the PL1 margin of the comparables selected by
the assessee was 6.78%(OP/Sales). Since the difference between PLI margin
of the tested party and the comparables was beyond 5% variation, the
adjustment was worked out to Rs. 15,23,80,530/-. However, the value of
international transaction shown by the assessee was Rs.12,12,69,639/-,
therefore TPO did not adopt this amount of Rs.15.23 crores for adjustment.
The TPO observed that the cost of raw material was a major cost affecting the
profit of the assessee and the TPO removed the raw material cost from the
assessee as well as the comparables to arrive at the adjusted value of total
purchases. However, the TPO did not exclude the value of raw material
purchased from AE as the same was at ALP as per 3CEB report and the
entire exercise was being carried out to find out whether the value as per
3CEB is at ALP or not. The TPO worked out the margin of raw material to
sales in the case of comparables which was worked out to 49.38%, whereas
the margin of raw material with sales in the case of assessee was worked out
to 67.88%. Thus it was found that cost of raw material of the assessee was
more by 18.50% as compared to comparables. Accordingly the adjustment
was made to the cost of raw material of the assessee and the OP/Sales margin
of the assessee was worked out to 4.75%, whereas the ALP margin was
6.78%. After applying the ALP profit margin, the ALP cost of material was
worked out to Rs. 10,01,14,028/- and after allowing the +7-5% variation, this
figure was arrived at Rs. 10,51,19,729/-, whereas the value of international
transaction was Rs.12,12,69,639/-. Since the value of international
transaction was beyond the benefit +/-5%, the downward adjustment of
Rs.2,11,55,611/-( 12,12,69,639/- (-) 10,01,14,028/-) was made by the TPO.
(ii) The CIT(A) upheld the approach of the TPO for making adjustment.
However, it was found action of TPO making adjustment to eliminate the
difference as per Rule 10B(e)(iii) in the case of assessee was found incorrect
by the CIT(A) because as per Rule 10B(e)(iii) adjustment was required to be
made in the case of comparables. Accordingly, the CIT(A) enhanced the
adjustment to Rs.7,62,29,166/-. The relevant portion of the CIT(A)'s order
(page No. 204 & 205, para 13.13 to 13.15 of CIT(A)' order) is reproduced as
under:"13.13 In view of above submission of the appellant, now the question arises
whether while computing the raw-material adjustment, RM/Operating
expenses ratio of the tested party and comparable companies can be
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 36 considered and can be proceeded to compute the raw-material adjustments
or not. In this regard reference is made to para 6.7 of the order u/s 92CA(3)
of the TPO, Ahmedabad for AY 200506. The TPO in such order, on perusal
of P&L account realized that the cost of raw-material was major cost
affecting the profit of the appellant and hence it was decided to mark up the
cost of raw-material of the comparables to arrive at adjusted value of the
total purchases of the appellant so that costlier local purchases do not
colour the appellant's transactions with AE 's. Hence, the entire rawmaterial cost was reduced to bring at industry level. The TPO observed that
the local raw material purchases of the appellant was very high (65.99%)
and due to these higher local cost of purchases, its results were not
comparable with local comparables. It was also observed by the TPO that
the cost of purchase of raw-material of local comparable may be not due to
existence of unrecognized raw-material market. Thus as per provision of rule
1 OB(e) (Hi) of the Income tax Rules, adjustment was made to the results of
the comparable companies and purchase inefficiency of the appellant was
adjusted, which results into mean adjusted margin to sales at 1.22%. In my
opinion the TPO in his order for AY 2005-06 has adopted correct method by
considering RM/operating expenses ratio of the tested party and comparable
companies and by proceeding to compute the raw-material adjustment. Thus
in my opinion the same method/approach should be followed in the case of
appellant for AY 2004-05 also which is the year under consideration. It is
pertinent to mention that if the adjusted cost of raw-material is calculated on
the basis of sales turnover, then the cost of raw-material will also include the
profit margin of sales, which increases the adjusted cost of raw-material
which in turn will reduce the actual profit margin which is not correct and
not comparable. The correct method/appropriate base to calculate the
adjusted cost of raw-material proportionate to the total operating cost. The
element of profit is to be eliminated or not to be considered while calculating
the adjusted cost of raw-material.
13.14 It is further mentioned that the Transactional Net Margin Method
operates in a similar way to the Cost Plus Method and the Resale Price
Method. However, the Transactional Net Margin Method benchmarks the net
profitability, i.e. it tests the net profits earned in controlled transactions and
compares them to the net profits earning in uncontrolled transactions. That
means that instead of gross profit the transactional net margin method
analyses the net profits in relation to an appropriate base such as costs,
sales or as the case may, assets. This is done via net margins or so called
profit level indicators. In contrast to the cost plus method, which generally
computes the mark up after direct and indirect costs of production, the
transactional net margin method uses margins computed after operating
expenses.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 37 13.15 In view of the above discussion it is held that the TPO, Ahmedabad has
followed the correct method in his order u/s 92CA(3) of AY 2005-06 by
computing the raw-material adjustment by comparing the raw-material
adjustment to operating cost ratio of the tested party vis-a-vis the rawmaterial to operating cost ration of each of the comparable company and
accordingly by making adjustment to the raw-material expenses of the
comparable companies.!, therefore, hold that this method/approach is
required to be followed in the case of appellant for AY 2004-05 also and in
doing so there will be Transfer Pricing Adjustment on account of Arm's
Length Price at Rs.7,62,29,166/- in the case of appellant."
(iii)
In view of the above facts, the general ground raised by the assessee
requires to be rejected.
Ground No. 3.2:
That the learned CIT(A) has erred while computing the raw material
adjustments of the Appellant Company and the comparable companies in the
manufacturing segment of the PCDTA division and consequently arriving at
the revised operating margin of comparable companies.
TPO's Comments:As discussed in the comments on ground No.3.1 in para (ii), the detailed
discussion has been made by the Ld. C1T(A) for computation of raw material
adjustment and accordingly revised operating margins of the comparables
was worked out. The assessee has claimed that C1T(A) has computed raw
material adjustment using operating cost as the base and has arrived the
revised TP adjustment of Rs. 5,50,73,595/- being the difference between the
arithmetic mean of adjusted OPM of (-) 2.54% of the comparable companies
and OPM of (-) 7.81% of the assessee (tested party).
The claim of assessee that CIT(A) has used operating cost as base is
incorrect. The C1T(A) has discussed this issue in detail in the appeal order at
para 13.13 which is already reproduced in the comments of TPO on Ground
No.3.1 above. It is clearly mentioned that the cost of raw material in the case
of assessee was 65.99% (RM/Sales) for AY 2005-06 whereas in the case of
comparables this ratio was 54.18% (RM/Sales) only. Therefore, to eliminate
the differences in the cost of raw material in the case of assessee vis-a-vis
comparables, suitable adjustment was made by the TPO and accordingly the
adjusted average margin of profit to sales of the comparables was revised at
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 38 1.22% as against 9.93%. Accordingly, the downward adjustment of
Rs.2,28,56,144/- was made to the international transaction of purchases of
raw material from AE.
In view of the above facts, it can be seen that during AY 2005-06, the TPO
had taken the base of PLI as OP/Sales while computing the adjustment to be
made to the value of international transaction shown by the assessee. The
CIT(A) has made the upward adjustment of Rs.7.62 crores for AY 2004-05 on
the basis of approach adopted by the TPO for AY 2005-06 as discussed above.
However, for computing the adjusted cost of raw material the CIT(A) has
taken the base of RM/total expenses to avoid the effect of profit if the
RM/Sales basis of computation is considered to eliminate the differences. For
adopting this approach the CIT(A) has mentioned in para 13.13 of appeal
order that "It is pertinent to mention that if the adjusted cost of raw-material
is calculated on the basis of sales turnover, then the cost of raw-material will
also include the profit margin of sales, which increases the adjusted cost of
raw-material which in turn will reduce the actual profit margin which is not
correct and not comparable. The correct method/appropriate base to
calculale the adjusted cost of raw-material proportionate to the total
operating cost. The element of profit is to be eliminated or not to be
considered while calculating the adjusted cost of raw-material. "
The assessee has claimed that the adjusted margin (OP/Sales) of the
comparables after allowing the adjustment for difference in cost of material,
the arithmetic mean of adjusted OP/Sales comes to (-) 11.73% as per the
methodology adopted by TPO in AY 2005-06 whereas the PLI margin of the
assessee is (-) 7.81% and therefore the margin of the assessee is better than
the comparables and hence the international transaction is at ALP. However,
the CIT(A) has changed the methodology for working out the adjustment to be
made to eliminate the differences on account of cost of raw material by taking
the ratio of cost of raw material to total expenses to avoid the effect of profit
involved in the sales. This methodology is discussed in the earlier
para(underlined portion). The calculation of raw material adjustment of
(-)2.54% is mentioned by the CIT(A) in the order u/s 154 dated 25.10.2012.
A copy of relevant page of order u/s 154 is attached as per annexure-A. In
view of the above, the ground raised by the assessee may be rejected.
Ground No. 3.3
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 39 Without prejudice to the above, the learned CIT(A) has erred in not
appreciating the error made by the learned Transfer Pricing Officer in
computing the raw material adjustment and the consequent operating margin
of the Appellant Company.
TPO's comments:
The assessee has claimed that the adjusted operating margin of the appellant
would be at 10.69%(OP/Sales) instead of 4.75% worked out by the TPO. The
computation of 10.69% margin worked out by the assessee is reproduced as
under:
Particulars
Amount(lNR)
Amount(INR)
Income
Income from operations
104,50,39,761
Expenditure
Total Expenses(Excluding
material cost)
raw
Total material cost
41,72,62,348
70,93,46,049
Less: Downward adjustment of 19,33,32,356
material cost of comparables
(104,50,39,761*18.50%)
51,60,13,693
Total expenditure(after adjustment
for raw material cost)
93,32,76,041
Revised profit
11,17,63,720
Adjusted OP/Sales
10.69%
It can be seen from the above table that the assessee has worked out the
downward adjustment of material cost by calculating 18.50% of total sales. It
may be noted that TPO had observed that the cost of raw material was higher
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 40 by 18.50% in the case of the assessee as compared to the cost of raw material
in the case of comparables. Therefore, with a view to eliminate the difference
on account of variation between cost of raw material in the case of assessee
vis-a-vis comparables TPO made adjustment to bring down the cost of raw
material at industry level. Therefore, TPO had reduced the cost of raw
material by 18.50% of the assessee. However, the assessee has worked out the
downward adjustment by taking the sales figure which is totally incorrect
method. As already pointed out by the CIT(A), adjustment was required to be
made in the case of comparable as per Rule 10B(e) (iii) to eliminate the
differences in the cost of material, the action of TPO in making adjustment in
the hands of tested party to eliminate differences was incorrect methodology.
Thus, the claim of assessee is totally incorrect and against the provisions of
law. Therefore, this ground may be rejected.
Ground No. 3.4
That the learned CIT(A) has erred mathematically by adding the adjustment
made by the Transfer Pricing Officer in the Transfer Pricing order of an
amount of Rs.21,155,611 to the revised adjustment as computed based on the
learned CIT(A)'s approach, instead of subtracting it from the revised
adjustment.
TPO's comments:
The claim of assessee is correct. However, the C1T(A) has already passed
rectification order on 25.10.2012 through which the above mathematical
error has been rectified and the revised adjustment is worked out to
Rs.5,50,73,555/- (TP adjustment made by TPO of Rs. 2,11,55,611/- +
enhancement made by CIT(A) of Rs. 3,39,17,984/-). Therefore, this ground of
appeal is redundant”.
9.
We have given our thoughtful consideration to the rival
submissions made by the respective parties. The undisputed facts remain
in this case are that the assessee had transactions with related party and
therefore, transfer pricing provisions were applicable in the case of the
assessee. The assessee had operating loss of 7.81% as under:-
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 41 -
“i.b. Assessee had taken OP/Sales as it PLI. The OP/Sales
computed by the assessee is -7.81%. The calculation of margin of
the assessee is as under:Operating Income/Sales
1,045,039,761
Total Expenses
1,126,608,397
Operating Loss
(81,568,636)
Operating Loss/Sales
-7.81%”
10.
The TPO noticed that as per list of comparables provided by the
assessee, the operating margin of the comparables was 6.78%, as under:-
“i.b.1 The assessee had provided a list of comparables the same
is provided as under:S.No.
1
2
3
4
5
6
7
8
9
10
11.
Name of Comparables
Bhartia Industries
Controls & Switchgear Contractors Ltd
Crompton Greaves Ltd
Lakshmi Electrical Control Systems Ltd
Havells India Ltd.
Incap Ltd
Indo Asian Fusegear Ltd
JSL Industries Ltd
Modison Metals Ltd
Vijai Electricals Ltd
Average
Operating
Profit Margin
1.72%
5.77%
4.41%
10.35%
7.47%
5.72%
3.46%
1.62%
15.17%
12.07%
6.78%
The TPO also noticed that the cost of raw material of the assessee
was higher than the cost of raw material of the comparables. Therefore,
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 42 he was of the opinion that the assessee is entitled to the adjustment of
excess cost of raw material incurred by the assessee as compared to
comparable cases. He noticed that the cost of raw material to sales of the
comparables was 49.38%, but in the case of the assessee, it was 67.88%.
Thus, there was difference of 18.50%. The TPO allowed the adjustment
therefor while making the revised calculation of margin. After
adjustment of cost of raw material, the operating profit of the assessee on
sales was worked out to 4.75%, as under:-
“i.c. 2 The margin of raw material to sales of the assessee was also
computed which was then compared to find out the incremental
cost of raw material incurred by the assessee. The calculation of
the same is provided as under:Assessee
Rm/Sales
67.88%
Comparables
49.38%
Difference
18.50%
i.c.3 From the above table it can be seen that the cost of Raw
material of the assessee is more than 18.50% of the cost of
comparables. Thus by using the data as computed above the
margin of the assessee was recomputed as under:Calculation of revised margin
Income
Income from operations
Expenditure
Total Expenses excl material cost
Total Material Cost
1,045,039,761
417,262,348
709,346,049
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 43 Less : Downward adjustment of
material cost as material cost of
competitors are less
(709,346,049 * 18.50%)
Revised Total expenditure
Revised Profit/Loss
OP/Sales
12.
131,224,919
578,121,130
995,383,478
49,656,283
4.75%”
At the time of hearing before us, it was pointed out by the ld.
Counsel that while working out the consumption of raw material by the
assessee as well as comparables, the Assessing Officer worked out the
ratio by dividing raw material to the sales, which would be evident from
the following working by the TPO.
i.c.1 The margin of raw material to sales of comparables was
calculated as under:S. No. Name of Comparables
Rm/Sales
1
Bhartia Industries
31.66%
2
Controls & Switchgear Contractors Ltd
37.73%
3
Crompton Greaves Ltd
64.97%
4
Lakshmi Electrical Control Systems Ltd
42.38%
5
Havells India Ltd.
51.94%
6
Incap Ltd
63.20%
7
Indo Asian Fusegear Ltd
45.91%
49.12%
8
JSL Industries Ltd
9
Modison Metals Ltd
44.63%
10
Vijai Electricals Ltd
62.24%
Average
49.38%
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 44 13.
Thus, admittedly, the TPO compared the raw material of the
assessee as well as comparables by dividing the cost of raw material to
the sales. But, while giving the adjustment, the TPO allowed the
adjustment of 18.50% of the total material cost and not of the sales.
Therefore, the only request before us from the assessee’s side was to
allow the adjustment of the 18.50% on sales. We find that the CIT(A),
while adjudicating this issue, has considered the order of the TPO for
Assessment Year 2004-05 as well as Assessment Year 2005-06 and
arrived at the conclusion that the TPO has adopted the correct method in
Assessment Year 2005-06; this would be evident from the following
observations of the CIT(A).
“13.13 …………. In my opinion the TPO in his order for AY 200506 has adopted correct method by considering RM/Operating
expenses ratio of the tested party and comparable companies and
by proceeding to compute the raw-material adjustments. Thus in
my opinion the same method/approach should be followed in the
case of appellant for A.Y. 2004-05 also which is the year under
consideration….”
14.
After considering the arguments of both the sides, we are of the
opinion that the CIT(A) was not justified in giving any opinion about the
correctness or otherwise of the TPO’s order for Assessment Year 200506, because that was not under appeal before him. However, be that as it
may be, we have heard both the parties with regard to the method to be
followed while comparing the raw-material component of the assessee as
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 45 well as comparables. After considering the arguments of both the sides
and facts of the case, we find force in the contention of the ld. Counsel of
the assessee that the ratio of raw-material/sales would be a proper ratio to
compare the consumption of raw-material by the assessee and
comparable parties, because sales in the case of the assessee is,
admittedly, uncontrolled transaction. We also find that OECD guidelines
in this regard read as under:“2.88 The denominator should be reasonably independent from
controlled transactions, otherwise there would be no objective starting
point. For instance, when analyzing a transaction consisting in the
purchase of goods by a distributor from an associated enterprise for
resale to independent customers, one could not weight the net profit
indicator against the cost of goods sold because these costs are the
controlled costs for which consistency with the arm’s length principle is
being tested. Similarly, for a controlled transaction consisting in the
provision of services to an associated enterprise, one could not weight
the net profit indicator against the revenue from the sale of services
because these are the controlled sales for which consistency with the
arm’s length principle is being tested. Where the denominator is
materially affected by controlled transaction costs that are not the
object of the testing (such as head office charges, rental fees or
royalties paid to an associated enterprise), caution should be exercised
to ensure that said controlled transaction costs do not materially distort
the analysis and in particular that they are in accordance with the
arm’s length principle.
2.89 The denominator should be one that is capable of being
measured in a reliable and consistent manner at the level of the
taxpayer’s controlled transactions. In addition, the appropriate base
should be one that is capable of being measured in a reliable and
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 46 consistent manner at the level of the comparable uncontrolled
transactions. This in practice limits the ability to use certain indicators,
as discussed at paragraph 2.99 below. Further, the taxpayer’s
allocation of indirect expenses to the transaction under review should
be appropriate and consistent over time.
B.3.4.1. Cases where the net profit is weighted to sales
2.90 A net profit indicator of net profit divided by sales, or net profit
margin, is frequently used to determine the arm’s length price of
purchases from an associated enterprise for resale to independent
customers. In such cases, the sales figure at the denominator should be
the re-sales of items purchased in the controlled transaction under
review. Sales revenue that is derived from uncontrolled activities
(purchase from independent parties for re-sale to independent parties)
should not be include in the determination or testing of the
remuneration for controlled transactions, unless the uncontrolled
transactions are such that they do not materially affect the comparison;
and/or the controlled and uncontrolled transactions are so closely
linked that they cannot be evaluated adequately on a separate basis.
One example of the latter situation can sometimes occur in relation to
uncontrolled after-sales services or sales of spare parts provided by a
distributor to independent end-user customers where they are closely
linked to controlled purchase transactions by the distributor for resale
to the same independent end-user customers, for instance because the
service activity is performed using rights or other assets that are
granted under the distribution arrangement. See also discussion of
portfolio approaches in paragraph 3.10.”
15.
In the instant case, what is being tested is whether purchase from
associated enterprises is at arms-length or not. Admittedly, sales by the
assessee is not to the associated parties and therefore, is un-controlled
transaction. In view of above, in the light of OECD guidelines, while
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 47 working out ratio of raw-material should be worked out by comparing the
raw-material vis-à-vis sales. In this view of the matter, we uphold the
finding of the TPO for the year under appeal wherein he arrived at the
conclusion that the assessee should be allowed the adjustment of 18.50%
because of excess consumption of raw-material. However, in our
opinion, while giving the adjustment, the assessee should be allowed the
adjustment of 18.50% of the sales and not of the 18.50% of the rawmaterial cost. We, therefore, direct the Assessing Officer to allow the
adjustment of 18.50% of the sales while working out the operating profit
and if, after the above adjustment, the operating profit of the assessee
works out to more than 6.78% i.e. the average of operating profit of
comparables, then no adjustment should be made. With this direction,
we set aside the orders of the lower authorities and restore the matter
back to the file of the Assessing Officer.
16.
Before parting with the matter, we hereby clarify that our
observation is strictly on the facts of the Assessment Year 2004-05 and
we have not expressed any opinion in respect of the order of TPO for
Assessment Year 2005-06.
17.
Apropos to Ground No.3.4 of assessee’s appeal, since the assessee
has no grievance left as the ld.CIT(A) has rectified the mistake, therefore,
this ground is dismissed as infructuous.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 48 18. In the result, assessee’s appeal is partly allowed for statistical
purposes.
19.
Now, we take up the Revenue’s appeal in ITA No.2154/Ahd/2012
for AY 2004-05, wherein following grounds have been taken:1. On the facts and in the circumstances of the case and in law, the
learned CIT(A) has erred in allowing set off of the business loss of
Rs.2,64,32,995/- pertaining to AY 1997-98 against profit of AY
2004-05 without considering the fact that as on 31.03.1997, GE
Padific Ltd., Singapore alone was able to control GE Lighting
Division i.e. assessee company, but after merger, it had lost the
controlling power as its number of share holding was less than 51%.
2. On the facts and in the circumstances of the case, the learned
CIT(A) ought to have upheld the order of the Assessing Officer.
3. The appellant craves leave to add to, amend or alter the above
grounds as may be deemed necessary.
Relief claimed in appeal.
It is, therefore, prayed that the order of the CIT(A) on the issues raised
in the aforesaid grounds be set aside and that of the Assessing Officer
be restored.
19.1.
The only issue is to be examined whether the ld.CIT(A) was
justified in allowing set off of the business loss.
The ld.CIT-DR
submitted that the ld.CIT(A) was not justified in allowing the set off of
the business loss of Rs.2,64,32,995/- pertaining to AY 1997-98 against
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 49 profit of AY 2004-05 without considering the fact. He submitted that the
ld.CIT(A) ought o have upheld the order of the AO. He placed reliance
on the order of the AO.
19.2. On the contrary, ld.counsel for the assessee submitted as under:“At the outset it is submitted that the Assessee Company has purported
to set off losses of only
Rs. 2,59,69,283 and balance Rs. 464,712
pertains to unabsorbed depreciation purported to be set off in the
revised return of income filed for the year under consideration.
The brought forward business losses of Rs 2,59,69,283 set off during the
year under consideration pertains to the losses incurred by the Lighting
Division (i.e. the Appellant Company) in AY 1997-98 and were set off in
compliance with the conditions stipulated in Section 79 of the Act.
Section 79 requires an inquiry to be made as to who the shareholders
were at two points in time i.e on the last day of the previous year in
which the losses are set off and on the last day of the previous year in
which the losses were incurred.
On identification of persons/ shareholders at two points in time, it must
be ascertained what their share holding in the company is at two points
in time.
Section 79 refers to "persons" in plurality. The reference is to
"shareholders" and not a shareholder. The comparison has to be of the
collective holdings of these persons or the group.
Reliance placed on the ruling of the Supreme Court in the case of CIT
vs. Italindia Cotton Co. P. Ltd (1988) 174 ITR 160 and Mumbai
Tribunal decision in the case of Sunanda Capital Services Ltd. vs. JCIT
(28 SOT 484).
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 50 The view that the reference in section 79 is to a group of shareholders is
supported by judicial precedents and commentary by Kanga and
Palkhivala in 'The law and practice of Income-tax, Eighth Edition,
Volume 1, commentary by Chaturvedi and Pithisaria in Income Tax
Law, 2nd Edition, vol 2, Page 1150.
In the instant case, as evident from the shareholding pattern, and
admitted by the Ld. AO as well as Ld. CIT(A) that GE Pacific Pte Ltd,
Singapore and GE Pacific (Mauritius) Ltd collectively continued to hold
more than 51% of the shares of the Company in the year ended March
31,1997, (the years in which losses were incurred) and March 31, 2004
(the year of set off of losses).
Hence, business losses have been set off and carried forward to the
subsequent years in compliance with the conditions prescribed in
section 79 of the Act.
Without prejudice, the ultimate holding company is General Electric
Company, US which continues to exercise control over the assessee
through its subsidiaries. Any change in the shareholding amongst the
members of the GE group would not prejudice the right to carry
forward the losses in case of assessee company as long as General
Electric continues to have control over it through its subsidiaries. The
ultimate beneficiary interest remains within the GE group. Reliance on
Bangalore Tribunal Ruling in the case of Amco Power Systems Limited
and Delhi Tribunal Ruling in the case of Select Holiday Resorts Pvt.
Ltd.”
20.
We have heard the rival submissions, perused the material
available on record and gone through the orders of the authorities below.
We find that the ld.CIT(A) has given a finding on fact in paras-12.19 &
12.20 of his order, which are reproduced hereunder:-
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 51 “12.19.
From the above it can be seen that the appellant
company has claimed set off of part of losses of ₹102,83,83,355/against the income of AY 2005-06 also. From the above one can
see that the AO has not denied set off of losses of the appellant
against the profit of AY 2005-06 merely on the basis that the entire
losses of ₹102,83,83,355/- has been disallowed to be carried
forward and set off in AY 2004-05. Rather the AO has stated that
the appellant was once again called upon to furnish details of
company-wise losses which merged into the appellant company
and the share holding pattern of such companies in the year of
incurrence of losses. The AO has further stated that the contention
of the appellant is not correct as it itself has claimed the benefit of
carried forward and setting off of the losses and therefore, it is
obligatory upon it to substantiate the claim specifically in light of
the provisions of Sec.79 of the Act”. Thus it is clear that AO had
called for details from the appellant during the course of
assessment proceedings for AY 2005-06 also for substantiating the
claim of the appellant specially in the light of provisions of section
79 of the Act. Once, the entire loss has been disallowed by the AO
in the case of appellant in AY 2004-05 itself, then it is not clear as
to how carried forward and set off of part of such losses of
₹.102,83,83,355/- can further be considered for the purpose of
allowing or disallowing the same u/s.79 of the IT Act against the
profit of 2005-06. These facts show that the AO has contradicted
himself by stating that the appellant was called upon to furnish
details of company-wise losses and share holding pattern of such
company in the year of incurrence of losses during the course of
assessment proceedings of AY 2005-06. The very fact is that the
appellant has claimed carry forward and set off of part of the
losses against the profit of subsequent year also i.e. AY 2005-06
and the AO has called for details with regard to such claim of the
appellant in view of section 79 of the IT Act. Thus the Act of the
AO itself is contradictory to his own stand so far as AY 2005-06 in
the case of appellant is concerned as in AY 2004-05 he has
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 52 disallowed entire losses of ₹102,83,83,355/- and in another year
i.e. in AY 2005-06 he is again calling for details for the purpose of
examining the claim of such losses or part of such losses.
However, as stated in earlier paragraphs, the claim of set off of
any losses pertaining to PCDTA & GEIIPL against the profit of
AY 2005-06 is required to be considered by the AO as per law and
on merits of the case while completing the assessment of such
assessment year.
12.20.
In view of the above discussion, it is held that the
appellant (i.e. GEIIL) is entitled to set off of the business loss
pertaining to AY 1997-98 in its case against its profit of AY 200405 in view of provisions of section 79 of the IT Act. As regards
remaining losses in the case of appellant, the same cannot be
denied to be carried forward by the AO u/s.79 of the Act while
completing the assessment for AY 2004-05. As stated above in
case if remaining losses or part of such remaining losses which
are pertaining to different years of GEPCDTA and GEIIPL are
claimed by the appellant against the profit of subsequent
assessment years (i.e. after AY 2004-05), allowability or
disallowability of such claim of losses has to be considered by the
AO on merits and subject to fulfillment of conditions as laid down
in section 79 and also subject to fulfillment of conditions as laid
down in other relevant provisions of the IT Act while completing
the assessments in the case of appellant for such subsequent
assessment years.”
20.1. The above finding of the ld.CIT(A) is not controverted by the
Revenue by placing any contrary material on record. Therefore, we do
not see any reason to interfere with the order of the ld.CIT(A), same is
hereby upheld. Thus, this ground of Revenue’s appeal is rejected.
ITA No.2210/Ahd/2012 (By Assessee)
and ITA No.2154/Ahd/2012 (By Revenue)
GE India Industrial Pvt.Ltd. vs. DCIT
Asst.Year – 2004-05
- 53 21.
Ground Nos.2 & 3 are general in nature which require no
independent adjudication.
22.
In the combined result, appeal of the Assessee is partly allowed for
statistical purposes, whereas appeal of the Revenue is dismissed.
Order pronounced in the Court on Friday, the 26th day of June, 2015
at Ahmedabad.
Sd/-
Sd/-
(जी.डी.अवाल)
(कुल भारत)
उपाय
यायक सदय
( G.D. AGARWAL )
VICE PRESIDENT (AZ)
Ahmedabad;
Dated
( KUL BHARAT )
JUDICIAL MEMBER
26/ 06 /2015
ट+.सी.नायर, व.न.स./T.C. NAIR, Sr. PS
आदे श क
!त#ल$प अ%े$षत/Copy of the Order forwarded to :
अपीलाथ% / The Appellant
1.
2.
3.
4.
5.
6.
&'यथ% / The Respondent.
संबं5धत आयकर आयु7त / Concerned CIT
आयकर आयु7त(अपील) / The CIT(A)-IV, Baroda
8वभागीय &तन5ध, आयकर अपील+य अ5धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
गाड; फाईल / Guard file.
आदे शानुसार/ BY ORDER,
स'या8पत &त //True Copy//
उप/सहायक पंजीकार (Dy./Asstt.Registrar)
आयकर अपील
य अधकरण, अहमदाबाद / ITAT, Ahmedabad
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Date of dictation started..11/19.5.15 and 18.6.15 (dictation-pad 19+pages attached at the end of this File)
Date on which the typed draft is placed before the Dictating Member .. 12/18/19.5.15 & 18.6.15
Other Member...
Date on which the approved draft comes to the Sr.P.S./P.S……………..
Date on which the fair order is placed before the Dictating Member for
pronouncement……
Date on which the fair order comes back to the Sr.P.S./P.S…….26.6.15
Date on which the file goes to the Bench Clerk………………… 26.6.15
Date on which the file goes to the Head Clerk…………………………………...
The date on which the file goes to the Assistant Registrar for signature
on the order……………………..
Date of Despatch of the Order………………