Case Law Details
Brief of the Case
ITAT Pune held In the case of M/s. Vishay Components India Pvt. Ltd. vs. ACIT that where the revenue from year to year has accepted the method adopted by the assessee for benchmarking its international transactions with its associate enterprises, in the absence of any reasons brought on record, there is no merit in deviating or taking stand contrary to the stand accepted in both the preceding and succeeding years.
It was held that for benchmarking international transactions with its associate enterprises on aggregate basis, TNMM method should be applied and since the margins declared by the assessee are higher than the margins declared by the comparables picked up by the assessee in its TP study report and consequently, the international transactions entered into by the assessee with its associate enterprises being at arm’s length price, no addition is warranted in the hands of the assessee.
On the issue of deduction under section 10B, it was decided that this deduction is to be computed in the hands of the assessee before adjusting brought forward unabsorbed losses / depreciation.
Facts of the Case
The assessee was involved in the manufacture of resistors and capacitors used in various electronic applications / products. The manufacturing facilities of the assessee were divided into Domestic Tariff Area unit (‘DTA unit’) for manufacturing capacitors and low end resistors, and an Export Oriented Unit (‘EOU’) for manufacturing certain high end resistors, which were exported to overseas group entities. During the year under consideration, the assessee had also started the activity of providing certain Information Technology. Enabled Services (‘ITES’) to certain Vishay Group entities. The Vishay Group was a leading international manufacturer and supplier of electronic components.
During the year under consideration, the assessee had undertaken various international transactions, which in turn, were reported in the audit report in Form No.3CEB. The Assessing Officer made a reference under section 92CA(1) to the Transfer Pricing Officer (TPO) for computing the arm’s length price in respect of international transactions entered into by the assessee with its associate enterprises. The TPO after perusing the details / documents filed and the information furnished was of the view that in respect of certain international transactions, the benchmarking done by the assessee company was not acceptable. Accordingly, a show cause notice was issued to the assessee. Finally the TPO thus, proposed an adjustment to the extent of Rs.4,70,39,832/- in respect of international transaction relating to export of finished goods. The Assessing Officer passed the assessment order under section 143(3) making TP adjustment of Rs.4.84 crores.
The second issued related to whether while computing deduction under section 10B in cases where the assessee has unabsorbed losses or depreciation, brought forward from earlier years, then whether the said unabsorbed business losses / depreciation are to be adjusted from the gross total income before allowing the deduction under section 10B or the said losses or the deduction under section 10B is to be allowed in the hands of the assessee without considering the brought forward unabsorbed losses / depreciation, which can be set off against the other income of assessee.
Contention of the Assessee
The ld counsel of the assessee submitted that the assessee was applying TNM Method in its TP study in order to benchmark its international transaction, whereas in respect of international transaction of export of finished goods, the TPO proposed and the CIT(A) accepted the application of CPM method being most appropriate method. In respect of import of finished goods though the assessee had benchmarked its international transaction on TNM Method, but the TPO had applied RPM method for the same. The learned Authorized Representative for the assessee pointed out that common transactions were entered into by the assessee with its associate enterprises for all the subsequent years and the assessee was consistently following the method of TNM Method to benchmark its international transaction from year to year, which has been accepted by the Department. The assessee had aggregated the transactions and had also applied TNM Method. Where the products remained to be the same and in the absence of any evidence found to the contrary, the plea of the assessee before us was that the TNM Method should be applied in order to benchmark its international transaction.
In relation to computation of sec.10B deduction, it was submitted that the CIT(A) had relied on the decision of Hon’ble Supreme Court in Himasingka Seide Ltd. Vs. CIT Civil Appeal No.1501 of 2008, dated 19.09.2013, which was relatable to assessment years 1988-89 to 1990-91, wherein the Hon’ble Karnataka High Court was dealing with the old provisions of the Act. However, section 10B of the Act has been amended w.e.f. 01.04.2001 and it has now become a deduction and not exemption under the Act. In respect of reliance of the CIT(A) on the Circulars issued by the CBDT, the learned Authorized Representative for the assessee pointed out that the said Circulars were not binding upon the assessee and could not debar the assessee from claiming its deduction. The learned Authorized Representative for the assessee in this regard placed reliance on series of case laws.
In relation to claim of bad debts, it was submitted that the issue in the present appeal is covered by the ratio laid down by the Hon’ble Supreme Court in TRF Ltd. Vs. CIT (2010) 323 ITR 397 (SC).
Contention of the Revenue
The ld counsel of the revenue submitted that admittedly, in subsequent years, the method adopted by the assessee i.e. TNM Method was accepted by the TPO. Our attention was drawn to the TP Study report placed at pages 33 and 34 of Paper Book and it was pointed out that where the assessee has entered into various transactions which are functionally dissimilar, then the aggregation of transactions cannot be allowed. Further he relied on the order of CIT (A).
In the matter of computation of section 10B deduction, the ld counsel of the revenue placed reliance on the ratio laid down by the Hon’ble Supreme Court in Synco Industries Ltd. Vs. AO, (2008) 299 ITR 444 (SC), in which it was held that gross total income under section 80B(5) of the Act, which is also referred to in section 80I(1) of the Act, was required to be computed in manner provided under the Act, which pre-supposes that gross total income shall be arrived at after adjusting losses of other division against profits derived from an industrial undertaking.
Held by CIT (A)
The CIT (A) held that the assessee has aggregated the international transactions of import of raw materials and finished goods, export of finished goods and receipt of commission for the application of TNM Method. As far as the import of raw materials and export of finished goods is concerned, these transactions pertain to the manufacturing function carried out by the assessee. However, import of finished goods for re-sale was held to be a trading activity and the international transaction of receipt of commission was a commission activity and the assessee’s contention was that the transaction of manufacturing, trading and commission activities required to be aggregated. Referring to the OECD Transfer Pricing Guidelines, 2010, the CIT(A) observed that the transaction may be aggregated, when it was not possible to evaluate them separately and when the transactions were clearly linked and continuing. However, as per the CIT (A), the TP study report of the assessee was not in accordance with paras of OECD Guidelines. The CIT (A) accepted the view of the TPO that manufacturing and trading functions should be segregated and separately benchmarked.
With regard to most appropriate method, CIT (A) held that in respect of manufacturing functions, CPM method was the most appropriate method. Then, the plea of the assessee that exports segment could not be compared with the domestic segment as it had sold the resistors technically of different specifications, was also not agreed upon by the CIT(A), in the absence of details that major components of sale to the associate enterprises as well as third parties consisted of different resistors, so as to make the gross margins. The contention of the assessee that exports segment and the domestic segment could not be compared because geographical difference was also not valid. The CIT(A) noted that the assessee was not a contract manufacturer for associate enterprises, but operates as normal manufacturer and this being so if the assessee has lesser margins in exports segments than the domestic segment, same does not reflect Indian commercial realities. Hence, this argument of the assessee was also rejected. Further, the CIT(A) also rejected the plea of the assessee that it had sold only 4% of its products in the domestic products as against 96% products manufactured being exported outside India, in the absence of any details. Accordingly, the adjustment to the international transaction of export of finished goods at Rs.4.70 crores was upheld by the CIT (A). The CIT (A) further upheld the adjustment to international transaction of import of finished goods for re-sale. The CIT(A) upheld the application of RPM method for benchmarking the international transaction of the assessee.
Held by ITAT
Transfer pricing adjustment on account of most appropriate method
The principal objection of the assessee is that it had been consistently following the TNMM Method for benchmarking its international transactions with its associate enterprises both in the preceding and succeeding years and except for the year under consideration, this Method followed by the assessee by aggregating international transactions, has been accepted even in the subsequent years.
The perusal of order of TPO under section 92CA(3) relating to assessment year 2006-07 and 2007-08, it is clear that the application of TNM Method and the aggregation of various international transactions has been approved by the TPO though the adjustment has been made to the international transactions on account of various other factors.
The case of the assessee before us is that in view of the above said facts and circumstances, there was no merit in deviating from the TNMM Method applied by the assessee to benchmark its international transactions with its associate enterprises on aggregate basis. Undoubtedly, the doctrine of res judicata is not applicable to the tax proceedings, but at the same time, where there is no change in the facts in respect of a particular transaction and / or issue or proceedings, then it is the requirement of law that consistency should be maintained and the methodology adopted by the assessee for benchmarking its international transactions should not be disturbed. Where the Revenue from year to year has accepted the method adopted by the assessee for benchmarking its international transactions with its associate enterprises, in the absence of any reasons brought on record, there is no merit in deviating or taking stand contrary to the stand accepted in both the preceding and succeeding years, while benchmarking the international transactions in the hands of the assessee. In the absence of TPO or CIT (A) having been able to demonstrate as to how the facts of the present year are different from the facts of other years, which were before the authorities, there is no justification for taking a different stand.
The explanations of the assessee have been rejected by the TPO/CIT (A) without any basis, wherein similar explanation has been accepted by the TPO itself in all the other years. The conduct of the business and the products manufactured are identical in the year under consideration, when compared to the other years i.e. assessment years 2006-07, 2007-08 and 2008-09. In the entirety of the above said facts and circumstances, we are of the view that the adoption of TNMM method was the most appropriate method for benchmarking international transactions with its associate enterprises and we find no merit in the order of Assessing Officer in adopting RPM / CPM method to benchmark the international transactions with its associate enterprises.
We find support from the order of Tribunal in John Deere India (P.) Ltd. Vs. DCIT in ITA No.1476/PN/2010, relating to assessment year 2006-2007, wherein the Tribunal vide order dated 20.02.2015 had decided the issue on both the aspects i.e. where a method has been consistently followed by the assessee why the same should not be applied to benchmark its international transactions and also the issue of application of TNMM method as compared to CUP method applied by the TPO. In this case, while deciding the second issue of application of TNMM method, the Tribunal in turn relied on the ratio laid down by the Pune Bench of Tribunal in M/s. Drilbits International P. Ltd. vs. DCIT and Alfa Laval (I) Ltd. Vs. DCIT (2014) 149 ITD 285 (Pune – Trib.).
Applying the above said ratio to the facts of the present case, we hold that for benchmarking international transactions with its associate enterprises on aggregate basis, TNMM method should be applied and since the margins declared by the assessee are higher than the margins declared by the comparables picked up by the assessee in its TP study report and consequently, the international transactions entered into by the assessee with its associate enterprises being at arm’s length price, no addition is warranted in the hands of the assessee. Accordingly, we delete the addition of Rs.4.84 crores.
Issue of computation of deduction under section 10B
Both the authorities below had denied the claim to the assessee, in view of the ratio laid down by the Hon’ble Supreme Court in Himasingka Seide Ltd. Vs. CIT Civil Appeal No.1501 of 2008, dated 19.09.2013. The perusal of the judgment of] Hon’ble Karnataka High Court in the said case reflects that the years under appeal related to assessment years 1988-89 to 1990-91 i.e. the years where the benefit under section 10B of the Act was for being exempt from total income. However, the year under appeal before us is assessment year 2005-06, wherein the said section has been amended and the deduction now is allowable to the assessee as against the said income being exempt in the earlier years. The issue is settled by the Hon’ble Bombay High Court in CIT Vs. Black & Veatch Consulting Pvt. Ltd. (2012) 348 ITR 72 (Bom), in which it was held that ITAT was correct in holding that the brought forward unabsorbed depreciation and losses of the unit the Income which is not eligible for deduction u/s10A cannot be set off against the current profit of the eligible unit for computing the deduction under s.10A of the IT Act.
The said proposition of law has further been applied by the Hon’ble Bombay High Court in CIT Vs. M/s. Ganesh Polychem Ltd. in Income Tax Appeal No. 2083 of 2012, order dated 25.02.2013 and in CIT Vs. Schmetz India Pvt. Ltd. (2012) 79 DTR (Bom) 356 and also by the Hon’ble High Court of Gujarat in CIT Vs. Ace Software Exports Ltd. in Tax Appeal No.687 of 2012, order dated 18.02.2013. The Mumbai Bench of Tribunal has also applied the said proposition in various cases.
The issue before the Hon’ble Supreme Court in the case of Synco Industries Ltd. Vs. AO, (2008) 299 ITR 444 (SC) which was relied upon by the revenue is at variance with the issue before us and the said ratio is not applicable to the facts of the present case The issue in the present appeal is squarely covered by the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Black & Veatch Consulting Pvt. Ltd. (2012) 348 ITR 72 (Bom), wherein deduction under section 10A of the Act was to be computed in the hands of assessee and the same was whether the brought forward losses had to be adjusted before computing deduction under section 10A of the Act. It may be pointed out that the provisions of section 10A and 10B of the Act are at parametria. Following the ratio laid down by the Hon’ble Bombay High Court, we hold that the deduction under section 10B of the Act is to be computed in the hands of the assessee before adjusting brought forward unabsorbed losses / depreciation.
Appeal no. 736 of 2014
Issue related to claim of bad debts
We find that the issue of claim of bad debts written off in the books of account is squarely covered by the ratio laid down by the Hon’ble Supreme Court in TRF Ltd. Vs. CIT (2010) 323 ITR 397 (SC) ) and following the said ratio, we uphold the order passed by the CIT(A).
Accordingly, appeal of the assessee allowed and cross appeal of the revenue dismissed.
