आयकर अपीलीय अिधकरण, मुंबई “केे ” खंडपीठ
Income-tax Appellate Tribunal -“K”Bench Mumbai
सवी राजे
,लेखा सदय एवं सी. एन. साद,
याियक सदय
Before S/Sh.Rajendra,Accountant Member and C.N. Prasad,Judicial Member
आयकर अपील सं./I.T.A./ 1035/Mum/2015,िनधारण वष /Assessment Year: 2010-11
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Dy. CIT-15(3)(1)
M/s. Rolls Royce Marine India Pvt. Ltd.
th
Floor, Aayakar
Room No.451, 4
Plot No.D-505, TTC Industrial Area,
Vs.
Bhavan,M.K. Road,
MIDC Turbhe,Navi Mumbai-400 703.
Mumbai-400 020.
PAN:AAACU 4687 L
(अपीलाथ /Appellant)
(यथ / Respondent)
Revenue by:Shri N.K. Chand
Assessee by: Shri Ajit Kumar Jain & Ms. Radhika Thakkar
सुनवाई की तारीख / Date of Hearing:
03.05.2016
घोषणा की तारीख / Date of Pronouncement: 27.05.2016
आयकर अिधिनयम,1961 की धारा 254(1)के अग त आदे श
Order u/s.254(1)of the Income-tax Act,1961(Act)
लेखा सद राजे" के अनुसार PER RAJENDRA, AM-
Challenging the directions,dt. 14.11.2014 of the Dispute Regulation Panel- II,
IT
Mumbai the AO has filed the present appeal ,raising two effective Grounds of
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appeal.The assessee is a part of Rolls-Royce group which operates in 4 global
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markets namely civil-aerospace, defence-aerospace, marine and energy.It is part
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of the marine division of the group.The group offers a product portfolio ranging
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from vessel design and gas turbine engines to water jets and deck handling
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equipment.The assessee is engaged in providing marketing, sales support, coordination and allied services to its group. It also provides assembling and
delivery management support services to its group in India and also provides
after sales services.
2.During the year significant International Transactions(IT.s)entered into by the
assessee are on account of provision of marketing and sales support, provision
of assembly and delivery management support services, provision of repairs and
maintenance of marine equipment and provision of business promotion and
liaison services.The assessee had bifurcated its activities into four segments as
follows:
1035/M/15-Rolls Royce Marine-(10-11)
i) After sales service,ii) Assembly and delivery management support services
iii)Marketing, sales support coordination and other allied activities, iv)
Application engineering services
The assessee had benchmarked its transactions by using TNMM in respect of
Sl.No.(ii),(iii) and (iv).As regards Sales services segment it used CUP method.
The AO made a reference to the Transfer Pricing Officer(TPO)for determining
the Arm’s Length Price(ALP)of the transactions as per provision of Sec.92 of
the Act.During the TP proceedings the TPO found that the Profit Level Indica tor(PLI)was net operating profit to operating cost (OP/OC),that for assembly
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and delivery management services,the assessee had selected following six
PLI as per TP Report (%)
12.60
0.00
16.29
2.45
3.71
1.71
6.13
9.32
D
IT
Name of the Comparable Company
Anup Malleable Ltd.*
Bloom Indistries Ltd.*
De Two Forging Pvt. Ltd.
Metal Coatings (India) Ltd.
Omax Autos Ltd.
Rishi Laser Ltd.
Arithmetic Mean
Assessee Margin
Updated PLI
24.44
(17.21)
11.70
4.18
3.71
1.71
4.76
9.32
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SN.
1.
2.
3.
4.
5.
6.
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comparables:
* Segmental Data
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He further found that PLI of the assessee was at 9.32% as against the arithmetic
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mean of the comparable of 6.13%,that the assessee had claimed that the
transaction in question was at Arm’s Length.The assessee had worked the PLI
Particulars
Sales
Total Income
Manufacturing expenses
Servicing costs (including tools)
Employees Costs
Administration Cost
Total Expenses
Net Profit
Net Profit as % of cost
Ref.
A
B
CCMf(A-B)
C/B*100
Rupees
45,791,463/45,791,463/14,068,232/1,158,052/20,640,971/6,020,385/41,887,640/3,903,823/9.32%
The updated PLI of the comparables was found to be at 4.76%.
SN. Name of the Company
1.
Anup Malleables Ltd.
2.
Bloom Industries Ltd.
NCP(%) based on 3 years data
12.60
0.00
2
NCP(%)FY.09-10
24.44
(17.21)
1035/M/15-Rolls Royce Marine-(10-11)
3.
4.
5.
6.
De Two Forging Pvt. Ltd.
Metal Coatings (India) Ltd.
Omax Autos Ltd.
Rishi Laser Ltd.
Arithmetic Mean
16.29
2.45
3.71
1.71
6.13
11.70
4.18
3.71
1.71
4.76
The TPO rejected four comparables giving the following reasons:
Comparable
Reason for Rejection by TPO
Bloom Industries
Metal Coatings(India) Ltd.
Functionally different- disclosed primary segment as business segment
Functionally different- company is engaged in manufacture and sale of
steel strips cold rolled -CR flat wire strips
Functionally different-company engaged in manufacture and sale of
auto components for 2 wheelers and 4 wheelers
Functionally different- engaged in the field of automotive, construction
equipment, power segments and rail transportation segments.
Omax Autos
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Rishi Laser Ltd.
NCP(%)
22.44
11.70
18.07
45,791,463
9.32%
41887543
18.07
49456622
48081036
43501889
3665159
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TA
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AE Sales
OP/OC of Assessee
Corrected AE cost
ALP Mean
ALP Sales
105% of sales
95%
Adjustment
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He computed the ALP as under :-
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Name of the Company
Anup Malleables Ltd.
De Two Forging Pvt. Ltd.
Arithmetic Mean
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Sr.No.
1.
2.
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After issuing a show cause notice to the assessee,the TPO finalised the set of
comparables and arrived at the Arithmetic mean of 18.07%.-
As a result,he proposed an adjustment of Rs.36.65 lakhs Following the order of
the TPO,the AO made an addition of the said amount in his draft order.
3.Aggrieved by the order of the TPO/AO the assessee filed objections before
the DRP.Before it,the assessee argued that it was a contract service provider,
that the AE would sell its products to third party in India, that the contract
would be entered into between the third party and AE directly, that the assessee
would be sub-contracted the manufacturing and assembling work in respect of
such contract entered into by the AE with the third party,that the manufacturing
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1035/M/15-Rolls Royce Marine-(10-11)
and assembling work was carried out in accordance with the specification
provided by AE,that the goods were delivered by assessee to third party
customer in India,that it was not responsible for any risk or loss or damage of
goods once the same was offered for transport,that it had characterised its
activity in the segment of assembly and delivery management as that of contract
manufacturing(CMf),that it had identified other companies that were engaged in
providing CMf services or products that were broadly similar to the assessee,
that the average margin of those companies worked out to 4.76%, that the
assessee’s margin was 9.32%,that the transaction in the segment in question
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were at Arm’s length,that the comparable selected by the assessee
were
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functionally comparable,that under the TNMM,to benchmark the transaction of
contract manufacturer (CM)it was more important to identify other companies
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engaged in CMf activity even if it was not manufacturing the same product, that
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it was more important to identify a CM rather than an entrepreneur,that all the
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companies identified by it had primary income on account of job work
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charges,that they were performing CMf services for other persons,that if close
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product comparability was to be insisted upon for accepting the comparables the
TPO should have rejected the remaining two comparables also,that the
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remaining two comparable companies were engaged in CMf of steel casting and
cold forging,that both were not comparable to the products manufactured by the
assessee, that if product comparability was to be used as a yardstick to identify
comparables then all comparables identified by the assessee ought to have been
rejected,that the TPO was inconsistent in rejecting four comparables and
accepting remaining two comparables which suffered from same deficiency.
4.DRP was the of the opinion that the argument of either rejecting all or
accepting all the comparables was a valid argument.It directed the assessee to
furnish an alternate set of comparables.In pursuance of the directions of the
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1035/M/15-Rolls Royce Marine-(10-11)
DRP,the assessee filed a fresh set of comparables by conducting a structured
search process of six more comparable cases that were engaged in
manufacturing of product more closely comparable to the assessee. Following
comparable were selected by the assessee:
SN.
1.
2.
3.
4.
5.
6.
Name of Company
Ador Powerton Ltd.
Ador Welding Ltd.
Aplab Ltd.
Keycee Industries Ltd.
Salzer Electronics Ltd.
Switching Technologies Gunther Ld.
Arithmetic Mean
Sales (in crores)
68.76
261.48
97.96
25.52
171.16
6.53
PLI %(OP/OC)
2.81
12.67
-2.14
6.29
12.04
-0.94
5.12%
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As the alternate comparables set were produced before the DRP for the first
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time the same was remanded to the TPO for seeking his comments on comparability of those comparables.In his report,the TPO stated that the assessee could
IT
not submit new set of comparable at the appellate stage, that the remaining two
comparables(Anup Malleables Ltd. & De Two Forging Pvt. Ltd.)were functionally
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similar to the assessee.
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After examining the remand report,the DRP held that the TPO had failed to
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address the core issue on which the report was called for, that he again and
again reiterated the point that two comparables finally accepted by him were the
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valid comparable to determine the ALP, that he failed to address the issue as to
why the four comparables were rejected when they were performing the same
job as that of the remaining two,that the remaining two comparables suffered
the same infirmity of the rejected four comparables,that he had failed to address
the issue of comparability of six new comparables identified by the assessee,that
he had failed to avail the opportunity given to him,that it was not possible to
condone the approach of the TPO in accepting/in rejecting the comparables. The
DRP held that the new comparable identified by the assessee were found to be
engaged in manufacturing of product that are more similar to the assessee,that
the assessee’s margin was better than the average margin of the comparables,
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1035/M/15-Rolls Royce Marine-(10-11)
that there was no justification to make any adjustment in respect of IT of that
segment.
5.Before us,the Departmental Representatives(DR),argued that no positive
finding was given by the DRP,that the DRP had admitted additional evidences .
The Authorised Representative(AR)supported the order of the DRP.
6.We have heard the rival submissions and perused the material before us. We
find that the assessee had selected six comparables,that the comparable comp -
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anies were engaged in manufacturing activities,that the updated average margin
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of the comparable companies worked out to 4.76% as against assessee’s margin
of 9.32%, that the TPO rejected four comparables out of the six on the ground
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that they were functionally different,that he selected two comparables for
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determining the ALP,that he proposed an adjustment of Rs.36,65,159/-, that the
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Tribunal found force in the argument of the assessee that there was no valid
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basis for rejecting or accepting the comparables,that the remaining two
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comparables,finally selected by the TPO,were not manufacturing the products
that were manufactured by the assessee,that the DRP directed the assessee to
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file fresh set of comparables,that it furnished a new set of six comparables, that
the new sets were forwarded to the TPO for his comments,that after considering
the available material the DRP deleted the addition.
We have gone through the remand report of AO.(Pg.246-48 of the PB.)We find
that the TPO had not dealt with the core issue i.e. rejecting/accepting the
comparables selectively.All the comparables submitted by the assessee before
him were engaged in the job work segment.He had simply stated that four of the
comparables were functionally different.But,he has not brought on record as to
how they were functionally not similiar.The chart appearing in his order clearly
reveal that all the six comparables were in the same segment, therefore picking
up only two comparables was highly objectionable.The DRP had specifically
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1035/M/15-Rolls Royce Marine-(10-11)
asked him to justify the selective acceptance/rejection of the comparables.
Instead of carrying out the direction of the DRP,he questioned the authority of
the Panel in accepting the new comparables.In our,opinion the stand taken by
TPO is not supported by provisions of any of the sections of the Act.Principles
of natural justice demand that before using new material the affected party
should be given an opportunity to rebut such material.The DRP had given a
reasonable opportunity to him.But,instead of availing and making a positive
contribution he stuck to the two comparables that were endorsed by him for
computing ALP.
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If we take into consideration the behavior of the TPO, it becomes clear that he
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was not following the mandate of Chapter-X of the Act.It appears that he had
decided to make adjustment at any cost.Therefore,he sidelined the basic issue
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raised by DRP and did not offer any comment of new comparables. Therefore,
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we have no hesitation to hold that DRP had rightly and justifiably held that the
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approach of the TPO was ‘illogical’ and ‘inconsistent’.As far as admission of
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additional evidence/new evidence is concerned we are of the opinion that the
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DRP being an appellate authority has all the powers as that of the CIT(A). The
proceedings before the DRP is an extension of the assessment proceedings and
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admitting additional evidence is part of the powers of the DRP. We find that in
the case of Lahmeyer Holding Gmbh (W.P.)C-7417/2012 and CM No.1879/
2012 )the Hon’ble Delhi High Court has held as under :“……it must be noted that the DRP procedure is part of assessment proceedings
queries raised and answered during DRP proceedings would stand in the same
footing as queries raised and answered in the course of an assessment proceedings
before an AO where the DRP procedure is not applicable”
It would have been better if the TPO had dealt the issue raised by the DRP
rather than challenging the jurisdiction of the DRP.It is a fact that the two
comparable companies were not dealing in the same product as that of the
assessee.Therefore, they were at par with the other four comparables.In the
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1035/M/15-Rolls Royce Marine-(10-11)
TNMM what is to be seen is functional comparability and not the product
comparability.If the TPO wanted to emphasis on product comparability,then he
should not have accepted the remaining two comparables.Considering the
above,we are of the opinion that the order of the DRP does not suffer from any
infirmity.First effective Ground (GOA 1 & 2 ) is decide against the AO.
7. Next Ground of appeal is about allowing the claim of bad debts.During the
TP proceedings,the TPO observed that the assessee had written off/written back
certain amounts in respect of its overseas AE,that it had claimed that same were
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no longer receivable/payable.He held that assessee had not furnished any
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evidence in that regard,that it was also not clear as to what was the nature of bad
debts,that the TP report and the accounts of the assessee did not indicate any
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substantial reason for writing off/writing back the amounts in question, that the
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bad debts could not be accepted as arm’s length.Finally he made an adjustment
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of Rs.13.00 lakhs.
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7.1Aggrieved by the order of the TPO/AO the assessee field objections before
the DRP.Before it the assessee argued that balance written back formed part of
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the total income of the assessee that had arisen in the normal course of
business.The DRP observed that the only reason given by the TPO for making
the adjustment was that assessee had not justified the writing off, that assessee
had written back only a sum of Rs.39,056/-, that it had written back the balance
sum of Rs.12.49 lakhs in the books of account,that the TPO had not given any
comment in respect of the items that were written back, that the assessee had
already offered the amount of Rs.12,49,939/- as part of its income, that the
adjustment made by the TPO resulted in taxing the same amount twice.Finally
the DRP deleted the addition except for Rs.39,056/-.
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1035/M/15-Rolls Royce Marine-(10-11)
7.2.Before us,the DR stated that the matter could to be decided on merits.The
AR supported the order of the DRP.Without prejudice,it was stated that working
capital adjustment should be granted to the assessee of Rs.39.056/-.
7.3.It is found that following amounts were written off/written back by the
assessee for the year under consideration:
Description
Amount
1.
Rolls-Royce Marine AS Dep. Propulsion
Balance written back
19,188
2.
Rolls-Royce Marine Middle East
Balance written back
3,27,177
3.
Rolls-Royce Marine AS Dep. Engines
Balance written back
4,02,952
4.
Rolls-Royce Oy Ab-Finland
Balance written back
5.
Rolls-Royce
AS
Dep
Machinery
6.
Deck Balance written back
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Total of balance written back
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Marine
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SN. Name of the AE
RR Naval Marine
2,30,687
12,40,939
39,056
39,056
N
D
TOTAL
Balance Written off
2,60,935
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We find that the assessee had written off Rs.39,056/- only in the books of
accounts during the year under consideration ,whereas an amount of 12.40 lakhs
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was written back.It appears that the TPO without understanding the difference
between the writing back of balance and writing off the balance had made the
adjustment.The balance written back was offered for taxation by the assessee.
Therefore,we fail to understand that how the TPO proposed the adjustment.In
our opinion,the DRP had rightly deleted the addition but we are surprised to
notice that in such a straight case the department has decided to file an appeal. It
shows lack of judicial discretion on part of the officers who have recommended/
approved the appeal.Such frivolous appeal not only waste the time of the
Tribunal,but also increase the burden of the DRs unnecessarily.In our opinion,
there is no need to interfere with the order of DRP. So confirming its order we
decide second effective ground against the AO.
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1035/M/15-Rolls Royce Marine-(10-11)
As far as the request of the assessee to consider Rs.39,096/- as working capital
adjustment,we would like to state that same could be granted as it has already
suffered taxation.
As a result,appeal filed by the AO stands dismissed.
फलतःिनधा
रती ारा दािखल क गई अपील नामजूर क जाती है
Order pronounced in the open court on 27th May, 2016.
आदे श की घोषणा खु ले ायालय म िदनां
क
27
Sd/-
मई, 2016
को की गई ।
Sd/-
(सी. एन. साद /C.N. Prasad )
ाियक सद / JUDICIAL MEMBER
(राजे
/ Rajendra)
लेखा सद / ACCOUNTANT MEMBER
TA
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मुंबई Mumbai; िदनां कDated : 27 .05.2016.
Jv.Sr.PS.
आदे श की #ितिलिप अ $ेिषत/Copy of the Order forwarded to :
1.Appellant /अपीलाथ$
2. Respondent /%&थ$
3.The concerned CIT(A)/सं ब' अपीलीय आयकर आयु (, 4.The concerned CIT /सं ब' आयकर आयु (
5.DR “K ” Bench, ITAT, Mumbai /िवभागीय %ितिनिध, खंडपीठ,आ.अ.ाया.मुंबई
6.Guard File/गाड- फाईल
स&ािपत %ित //True Copy//
आदे शानुसार/ BY ORDER,
उप/सहायक पंजीकार Dy./Asst. Registrar
आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.
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