PCIT-1 Vs Cummins India Limited (Bombay High Court)
The Bombay High Court admitted a Revenue appeal under Section 260A of the Income Tax Act, 1961 against the ITAT order dated 3 March 2017 concerning Assessment Year 2006-07. The assessee, engaged in manufacturing and sale of IC Engines, spares, components and generating sets, also operated a 100% export-oriented unit manufacturing and exporting IC Engines, accessories and generating sets.
For the relevant assessment year, the assessee filed its return declaring total income of Rs.2,10,40,80,385. Following scrutiny, a reference was made to the Transfer Pricing Officer (TPO) under Section 92CA(1). The TPO proposed an adjustment of Rs.40,64,87,070 in respect of international transactions. A draft assessment order under Sections 143(3) and 144C(1) was consequently passed. The Dispute Resolution Panel rejected the assessee’s objections, after which the Assessing Officer passed the final order dated 29 November 2010 determining total income at Rs.260,98,88,908, including the transfer pricing adjustment and a corporate tax disallowance of Rs.9,93,21,355.
The assessee approached the ITAT, which partly allowed its appeal. The Revenue challenged that decision before the High Court. Its proposed questions included whether the Tribunal was justified in accepting benchmarking by aggregating exports to associated enterprises (AEs) of Rs.461.15 crore with domestic sales to third parties of Rs.609.63 crore at entity level, despite Section 92 requiring benchmarking of international transactions. The Revenue also questioned the Tribunal’s reliance on Demag Cranes & Components (India) Pvt. Ltd. Vs. Dy. CIT, its treatment of separate transaction benchmarking, the reallocation of costs between domestic and export segments, the direction to use OP/OR as the Profit Level Indicator, and treatment of interest income as operating income.
The Revenue argued that the Tribunal had wrongly aggregated export transactions with AEs and domestic third-party sales at entity level and had relied upon Demag Cranes & Components (India) Pvt. Ltd. Vs. Dy. CIT, although, according to the Revenue, that decision was distinguishable. It also relied upon Denso India Limited Vs Commissioner of Income Tax (133 DTR 33).
The assessee submitted that TNMM was the most appropriate method for benchmarking the international transactions and relied upon Demag Cranes & Components (India) Pvt. Ltd., Cumins India Limited and Sony Ericson Mobile Communication India Pvt Ltd Vs. Commissioner of Income Tax (2015) 374 ITR 188 (Del).
The High Court initially considered that the questions proposed by the Revenue might merely constitute legal objections against the ITAT order. However, after examining the record and the impugned judgment, it concluded that substantial questions of law arose for consideration. The Court accordingly admitted the appeal and framed three questions: whether, in view of Section 92 read with Rule 10A(d), TNMM could be applied by aggregating closely linked transactions involving both domestic and international transactions at entity level; whether entity-level TNMM was permissible where domestic manufacturing was a direct downstream consequence of import of material/technology from an AE; and whether the ITAT judgment was vitiated by perversity.
The High Court issued notice returnable after eight weeks and permitted the Revenue to urge any additional substantial question of law at the time of hearing with the Court’s leave. The supplied judgment is therefore an order admitting the Revenue’s appeal and framing substantial questions of law, rather than a final determination of those questions.
Cases Discussed
- Sony Ericson Mobile Communication India Pvt Ltd Vs. Commissioner of Income Tax (Delhi High Court), (2015) 374 ITR 188 (Del)
- Demag Cranes & Components (India) Pvt. Ltd. Vs. Dy. CIT, ITA no.1683/PN/2011: A.Y2007-08
- Denso India Limited Vs Commissioner of Income Tax, (133 DTR 33)
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
This Appeal, filed by the Revenue, under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as “the Act of 1961”) is directed against the Judgment and Order dated 3rd March 2017 passed by the learned Income Tax Appellate Tribunal (“ITAT”) in Income Tax Appeal No. 115/PUN/2011 (A.Y.2006-07).
2. We have heard Mr Arjun Gupta, learned counsel for the Appellant and Mr Percy Pardiwala, learned Senior Advocate appearing for the Respondent. The facts of the case, in a nutshell, are that the Assessee/Respondent in this case is a company registered under the provisions of the Companies Act, 1956. It is inter alia engaged in the business of manufacturing and sale of Internal Combustion (IC) Engines, Spares, Components (Including Bought-Outs) and Generating Sets, Service of Engines & Genesets, Trading in Power Generating Sets and Allied Equipment etc. The Assessee also has a 100% export oriented unit through which, it conducts manufacture and export of IC Engines and its accessories as well as generating sets and its accessories. The Respondent-Assessee had submitted its return for income for the Assessment Year 2006-07, on 23rd November 2006, declaring the total income of Rs.2,10,40,80,385/-, which was processed under Section 143(1) of the Act of 1961. The return of the company was selected for scrutiny and a reference was thereafter, made under Section 92CA(1) of the Act of 1961, to the Transfer Pricing Officer (“TPO”). In the proceeding before the TPO, addition to the value of international transaction amounting to Rs.40,64,87,070/- was proposed. Accordingly, the Assessing Officer (“AO”) passed a Draft Assessment Order dated 24th December 2009 under Section 143(3), read with Section 144C (1), making the addition of Rs.40,64,87,070/- to the income of the Assessee, as proposed by the TPO. In the result, the AO has assessed that the total income of the Assessee was Rs.261,48,72,472/-. Aggrieved by the Draft Assessment Order dated 24th December 2009 passed by the Assessing Officer, the Assessee/Respondent had filed objection before the Dispute Resolution Panel (“DRP”), Pune in Form No. 35A. However, the DRP had rejected the objections raised by the Assessee thus, confirming the Draft Assessment Order. Consequently, the Assessing Officer had passed order dated 29th November 2010 whereby, the total income of the Assessee was determined as Rs.260,98,88,908/-, which included transfer price adjustment for a sum of Rs.40,64,87,070/- and Corporate Tax Disallowance leading to addition of a further amount of Rs.9,93,21,355/-. Aggrieved thereby, the Assessee had approached the Income Tax Appellate Tribunal by filing Appeal No. 115/PUN/2011 which was disposed of by the impugned order dated 3rd March 2011, partly allowing Appeal filed by the Assessee. Hence, the present Appeal under Section 260-A of the Income Tax Act, 1961.
3. In the memorandum of the Appeal, the Appellant-Revenue has projected the following substantial questions of law.
“A. Whether on the facts and circumstances of the case and law, Hon’ble Tribunal was justified in accepting the benchmarking of the assessee done by aggregating the transactions of export to AE (Rs.461.15 cr.) and domestic sales to third parties (Rs.609.63 cr.) at entity level while section 92 of the I, T. Act, 1961 requires benchmarking of international transaction alone?
B. Whether on the facts and circumstances of the case and law, the finding of Hon’ble Tribunal is perverse and contrary to the fact as it accepted the aggregation approach of the assessee in respect of ‘manufacturing activity’ by relying on the coordinate Bench decision in the case of Demag Cranes wherein the two segments were both in respect of AE transactions which is different from the case of assessee wherein it has aggregated both AE and Non-AE transactions and has benchmarked at entity level?
C. Whether on the facts and circumstances of the case and law, the finding of Hon’ble Tribunal is perverse in ignoring the benchmarking analysis done by the TPO using internal TNMM which was found to be feasible and reliable by the DRP and instead preferring external comparability at entity level?’
D. Whether on the facts and circumstances of the case and law, the finding of Hon’ble Tribunal was justified in reversing the separate transaction approach adopted by the TPO and confirmed by the DRP by ignoring the decision of the Hon’ble Delhi High Court in the case of Denso India (133 DTR 33) wherein it has been held that benchmarking the international transaction, separately, is a l correct application of law?
E. Whether on the facts and circumstances of the case and law, the finding of Hon’ble Tribunal is without any cogent reasoning and hence perverse as the Hon’ble Tribunal dismissed the detailed working of re-allocation of various costs made by the TPO between Domestic Segment and Export Segment of ‘manufacturing activity.?
F. Whether on the facts and circumstances of the case and law, Hon’ble Tribunal was justified in giving the direction to the TPΟ to adopt OP/OR as the Profit Level Indicator (PLI) for benchmarking the transaction of Export to AE, disregarding the fact that what was being benchmarked was revenue transaction and hence the cost base was the most appropriate base for selection of Profit Level Indicator (PLI) as the denominator being non-variable factor?
G. Whether on the facts and circumstances of the case and law, Hon’ble Tribunal was justified in directing the TPO to adopt OP/OR as the Profit Level Indicator (PLI) for benchmarking the transaction of Export to AE, without giving any cogent reasoning as evident from para 22 of the Hon’ble Tribunal and thereby making the finding perverse?
H. Whether on the facts and circumstances of the case and law, Hon’ble Tribunal was justified in directing the TPO to consider the receipt of interest as operating income in manufacturing segment ignoring the definition of operating income provided in Rule 10 TA wherein the interest income is expressly excluded from the definition of operating income?
I. Whether on the facts and circumstances of the case and law, Hon’ble Tribunal was justified in directing the TPO to consider the receipt of interest as operating income in manufacturing segment disregarding the fact that the TPO has calculated the operating profit as profit before interest and tax (PBIT), which excludes the interest expenses from the cost and thus by analogy the interest income could not have been considered as operating income?”
4. During the course of admission hearing of the Appeal, Mr Gupta, learned counsel for the Appellant has addressed elaborate arguments to contend that the aforesaid substantial questions of law would arise in the Appeal, which, if answered in favour of the Revenue, would lead to reversal of the Judgment and Order of the ITAT, to the extent the same has partly allowed the Appeal of the Assessee. It would be pertinent to mention herein that the Assessee has not preferred any Appeal against the Judgment and Order dated 3rd March 2017, to the extent the grounds taken by the Assessee were rejected by the learned Tribunal.
5. According to Mr Gupta, the Tribunal has erred in accepting the benchmarking analysis by aggregating export transactions with associate enterprises and domestic sales to the third parties at entity level. The learned counsel for the Appellant has further argued that the learned Tribunal has committed an error in relying upon the case of Demag Cranes & Components (India) Pvt. Ltd. Vs. Dy. CIT,1 although the ratio laid down in that case was not applicable in the facts of the present case. It is also the submission of Mr Gupta that the decision in case of Denso India Limited Vs Commissioner of Income Tax (133 DTR 33) was not considered by the learned Tribunal and, therefore, the impugned Judgment and Order is liable to be set aside on the ground that the same being perverse.
6. Countering the said arguments, Mr Pardiwala, learned Senior Counsel appearing for the Respondent, has argued that the Transitional Net Margin Method (“TNMM”) for benchmarking international transaction was the most appropriate method for the transfer pricing analysis in a case of this nature and, therefore, the learned Tribunal was wholly justified in setting aside the order of the Assessing Officer. Mr Pardiwala has further argued that in view of the decision rendered in the Demag Cranes & Components (India) Pvt. Ltd. (Supra) as well as Cumins India Limited and in the case of Sony Ericson Mobile Communication India Pvt Ltd Vs. Commissioner of Income Tax (2015) 374 ITR 188 (Del), the substantial questions of law projected by the learned counsel for the Appellant would not arise for consideration of this Court in the present matter.
7. We have considered the submissions made by the learned counsel for both sides and have meticulously gone through the material on record as well as the decision relied upon by the learned counsel appearing for the Respondent. Although, at the first blush, it did occur to us that the substantial questions of law projected by the Appellant in the memo of Appeal are nothing but mere legal objections raised against the impugned Judgment and Order dated 3rd March 2017 passed by the Tribunal and, therefore, cannot be treated as substantial questions of law, yet, after a careful examination of the record and after going through the impugned Judgment, we are convinced that there are substantial questions of law that would arise for consideration of this Court in the present Appeal. Therefore, the Appeal is admitted to be heard on the following substantial questions of law:-
“1. In view of the language employed in Section 92 of Income Tax Act r/w Rule 10A(d) of Income Tax Rules, whether bench marking analysis, applying the TNMM method, can be employed for aggregating closely linked transactions for the purpose of determining arms length price by combining activities that include both, domestic and international transactions, at entity level?
2. When domestic manufacturing is a direct down stream consequence of import of material/technology to AE, whether, entity level TNMM would be permissible mode for determination of arms length price under Section 92C of the Act of 1961?
3. Whether the Judgment and Order dated 3rd March 2017 is vitiated by perversity? ”
8. Issue notice returnable after eight weeks.
9. Since, Mr Jitendra Singh waives service of notice on behalf of the Respondent, no formal notice is required to be sent in this case.
10. Let the matter be listed for hearing in due course
11. The Appellant would be at liberty to urge any other additional substantial question of law, at the time of hearing, with the leave of the Court.
Notes:
1 ITA no.1683/PN/2011: A.Y2007-08.
