Enercon India Ltd, Mumbai vs Department Of Income Tax

श्री विजयपाऱ राि, न्याययक सदस्य, एवुं श्री बी. आर. बासकरण, ऱेखा सदस्य के समक्ष

BEFORE SHRI VIJAYPAL RAO, JUDICIAL MEMBER AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER

आमकय अऩीर सं. / ITA no.8373/Mum./2010 (ननधधायण वषा / Assessment Year : 2005-06)

Dy. Commissioner of Income Tax ................. अऩीरधथी / Circle-8(1), Aayakar Bhavan 101, M.K. Road, Mumbai 400 020 Appellant

फनधभ v/s

M/s. Enercon India Ltd. Plot A/9, Enercon Tower Veera Industrial Estate ................... प्रत्मथी / Veera Desai Road, Andheri (E) Respondent Mumbai 400 053 PAN - AAACE0319D

ननधधारयती की ओय से / Assessee by : Shri N.K. Chand यधजस्व की ओय से / Revenue by : Shri J.P. Bairagra

सन ु वधई की तधयीख / आदे श घोषणध की तधयीख / Date of Hearing - 25.05.2015 Date of Order - 29.05.2015

आदे श / ORDER

विजयपाऱ राि, न्याययक सदस्य के द्वारा / PER VIJAYPAL RAO, JUDICIAL MEMBER

The present appeal preferred by the Revenue is directed against

the impugned order dated 28th September 2010, passed by the M/s. Enercon India Ltd.

2

Commissioner (Appeals)-15, Mumbai, for the assessment year 2005-

06. Following grounds have been raised by the Revenue:-

"1. The learned CIT(A) erred in restricting the disallowance of ` 15,64,000 made by the A.O. u/s 14A of the Act to an ad-hoc disallowance of ` 5,00,000/ without assigning any reason therefor.

2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of ` 16,07,10,000 made u/s 92CA by the Transfer Pricing Officer / Assessing Officer."

2. During the year under consideration, the assessee had received

interest on investment made in the subsidiary company which was

exempt under section 10(23G) of the Act. The Assessing Officer noted

that the assessee has invested a sum of ` 107.16 crores in its

subsidiary companies. Accordingly, the Assessing Officer proposed to

disallow the expenditure under section 14A by invoking the provisions

of rule 8D of the I.T. Rules, 1962. The assessee objected to the

disallowance proposed by the Assessing Officer and submitted that the

assessee has made the entire investment out of its own funds.

Further, since the investment made in the subsidiary company,

therefore, no disallowance is called for. The Assessing Officer did not

accept the contention of the assessee and worked out the disallowance

as per rule 8D for the purpose of section 14A of the Act. Consequently,

the Assessing Officer made a disallowance of ` 15,64,000 under

section 14A.

M/s. Enercon India Ltd.

3

3. On appeal, the learned CIT(A) held that provisions of rule 8D is

not applicable for the year under consideration in view of the judgment

of the Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd.

v/s DCIT, [2010], 328 ITR 081 (Bom.). However, the learned CIT(A)

has made a reasonable estimate of disallowance at ` 5,00,000, under

section 14A.

4. Before us, the learned Departmental Representative submitted

that though the provisions of rule 8D is not applicable for the year

under consideration, however, it has persuasive value for computing a

reasonable disallowance of expenditure under section 14A of the Act.

He further contended that the learned CIT(A) has not given any basis

for restricting the disallowance to ` 5,00,000.

5. On the other hand, the learned Counsel for the assessee

reiterated its contention as raised before the authorities below and

submitted that the interest income earned by the assessee is from the

investment made in the subsidiary company which was claimed as

exempt under section 10(23G) of the Act. The assessee has not

incurred any expenditure in respect of the investment made in the

subsidiary company and consequently, for earning exempt income in

the shape of interest. Thus, he has supported the order of the learned

CIT(A) that ` 5,00,000, is a reasonable disallowance.

M/s. Enercon India Ltd.

4

6. Having considered the rival submissions as well as the material

on record, we note that the Assessing Officer has not disputed the fact

that the entire investment has been made by the assessee from its

own funds and, therefore, the Assessing Officer has not made any

disallowance under section 14A, on account of interest expenditure.

There is no quarrel on the point that provisions of rule 8D, are not

applicable for the year under consideration, as held by the Hon'ble

Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. (supra). The

Revenue has raised the objection on reasonable estimate made by the

learned CIT(A). We find that in the present case, the entire investment

has been made by the assessee in the subsidiary company, therefore,

it is not a case of reshuffling investment of portfolio by the assessee

which requires the involvement of the management in the regular

decision making process. It appears that this is a strategic investment

and further does not require regular e-valuation and re-consideration

of retaining or reshuffling of the investment. Further, we find that the

estimate of disallowance on account of general administrative

expenses made by the learned CIT(A) at ` 5,00,000, is within the

range of 1% to 2% of the exempt income which is found to be

reasonable keeping in view of the fact of the case that the entire

investment had been made by the assessee in the subsidiary

company. Accordingly, we do not find any error or infirmity in the M/s. Enercon India Ltd.

5

order of the learned CIT(A) qua the present issue. Accordingly, ground

no.1, is dismissed.

7. Ground no.2, relates to transfer pricing adjustment.

8. The assessee is engaged in the manufacturing of wind turbine

generators and installation of wind mills. It is a joint venture between

Anarcom GmbH and the Indian promoter with the shareholding of 56%

to 44% respectively. The assessee has recorded international

transaction during the year under consideration as under:-

Sr. Category Description Amount of no. Transaction (` in lakh) 1. Imports - goods EIL imports raw components and material from its spare parts group entities for ` 31624.14 its manufacturing activity 2. Exports - EIL manufacturers manufactured blades / CBCT for ` 342.27 Blades / CBCT export (e-40 Model) 3. Import - capital EIL imports capital goods goods like machinery, ` 5772.57 accessories, spares, etc., from its group entities 4. Reimbursement Reimbursement of of guarantee guarantee charges ` 243.33 charges 5. Sale of computer Sale of computer ` 0.87 M/s. Enercon India Ltd.

6

9. In its transfer pricing study, the assessee has bench marked its

international transaction in respect of import of raw materials / spares

from the group entity for its manufacturing activities by adopting the

TNMM as most appropriate method and selecting 11 comparable

companies. The assessee has arrived mean margin of the comparable

at 7.16% in comparison of the assessee's operating margin @

11.57%. Accordingly, the assessee claimed that its international

transactions are at arm's length. The Transfer Pricing Officer rejected

the comparables selected by the assessee and asked the assessee to

furnish the TNMM analysis after considering the companies engaged in

the wind generator especially Suzlon Energy Ltd. The assessee

objected against the inclusion of Suzlon Energy Ltd. in the comparable

list on the ground that the said company was not rendering value

added services like installation and such activities were being carried

out by its associated group of companies. The assessee pointed out

that the other group companies which were carrying out the other

services like installation were having lower margin. The Transfer

Pricing Officer did not accept the objection of the assessee on the

ground that the assessee has not furnished the relevant details and

documents in this respect. The Transfer Pricing Officer finally took

three companies as comparable and arrived at mean margin of

13.39% as under:-

M/s. Enercon India Ltd.

7

Sr. Name of the Company Turnover EBIT Profit / no. Sales (%) 1. NEPC India Ltd. 299.68 -80.72 -26.94% 2. Suzion Energy Ltd. 1917.50 430.92 22.47% 3. Vestas R rb India Ltd. 553.36 23.88 4.32%

10. Before the learned CIT(A), the assessee challenged the action of

the Transfer Pricing Officer and contended that the profit margin of

Suzlon Energy Ltd. was wrongly taken by the Transfer Pricing Officer

before depreciation & interest and further Suzlon Energy Ltd., is not

carrying out the various activities for installation and commissioning of

wind mills, therefore, the said company is not functionally comparable

with the assessee. The assessee submitted that Suzlon Energy Ltd.,

under three different legal entities / companies, is carrying out various

activities of supplying of wind mill, installation & commissioning and

land purchase and development of site. Thus, the assessee submitted

that all other activities of installation, commissioning and land

purchase and development of site are performed by the other group

companies and not by the Suzlon Energy Ltd. and, therefore, Suzlon

Energy Ltd. is not a functionally comparable with the assessee. The

assessee has also provided the data of the other two companies

namely Suzlon Infrastructures Ltd. and Sarjan Realities Ltd., which are

performing the activities of installation and commissioning as well as

land purchase and development of site. The learned CIT(A) has M/s. Enercon India Ltd.

8

accepted the combined / consolidated operating margin of all the three

companies as re-calculated by the assessee instead of the margin of

Suzlon Energy Ltd. alone. Thus, the learned CIT(A) has taken into

consideration the combined margin of Suzlon Energy Ltd. along with

the other two companies at 18.10% and, thereafter, worked out the

operating mean margin of the comparables at 11.21% as against the

profit margin of the assessee @ 11.15% and held that the

international transaction of the assessee is at arm's length and

consequently, deleted the addition which was made by the Transfer

Pricing Officer on account of transfer pricing adjustment.

11. Before us, the learned Departmental Representative submitted

that the learned CIT(A) has considered the re-calculation of the

margin of three companies as integrated / combined average margin

of Suzlon Group of companies without giving an opportunity to the

Assessing Officer / Transfer Pricing Officer. Thus, the learned

Departmental Representative submitted that the learned CIT(A) has

violated the provisions of rule 46A of the I.T. Rules, while accepting

the fresh evidence / details produced by the assessee. He further

contended that there is no provision of combining the results of more

than one company as done by the learned CIT(A), therefore, the order

of the learned CIT(A) is not sustainable as per the provisions of the

transfer pricing.

M/s. Enercon India Ltd.

9

12. On the other hand, the learned Counsel for the assessee has

submitted that it is not a fresh evidence or details filed by the

assessee before the learned CIT(A) but the assessee took this

objection before the Transfer Pricing Officer. The Transfer Pricing

Officer did not accept the objection raised by the assessee against the

inclusion of Suzlon Energy Ltd. in the set of comparables. He has

referred to Para-3 of the Transfer Pricing Officer wherein the assessee

has raised specific objection that this company is not functionally

comparable with the assessee as the value added services like

installation and commissioning are not performed by this company but

the same were performed by the other associated companies of Suzlon

Energy Ltd. Thus, the learned counsel supported the order of the

learned CIT(A) and submitted that the consolidated results of all the

three group companies were taken into account by the learned CIT(A)

to make them functionally comparable with the assessee. He has

further submitted that the Transfer Pricing Officer has taken the

operating profit of the Suzlon Energy Ltd. prior to depreciation and

interest whereas in case of the assessee and other comparable, the

operating margin was taken after depreciation, therefore, the action of

the Transfer Pricing Officer is not sustainable.

13. We have considered the rival submissions as well as relevant

material on record. The grievance of the Revenue is clubbing of results M/s. Enercon India Ltd.

10

of three group companies of Suzlon for the purpose of determining the

arm's length price. It is pertinent to note that the Revenue has not

disputed the fact that Suzlon Energy Ltd. is engaged in supply of wind

mills and other related activities of installation and commissioning

were being performed by the other group companies viz. Suzlon

Infrastructure Ltd. Further, the land purchased and development of

site work is dealt with by Sarjan Realities Ltd., a group company of

Suzlon Energy Ltd. Therefore, Suzlon Energy Ltd. was engaged in the

activities of supply alone whereas the assessee is in the business of

supply, installation, commissioning as well as development of sites.

Thus, it is clear that the business activities carried out by the assessee

are not comparable with the Suzlon Energy Ltd., for the purpose of

determination of arm's length price. The Transfer Pricing Officer

included the Suzlon Energy Ltd. in the computation of arm's length

price, however, in view of the fact that the Suzlon Energy Ltd. is not a

functional comparable to the assessee, therefore, the inclusion of

Suzlon Energy Ltd. in the list of comparable is not proper. The learned

CIT(A) accepted the objection of the assessee that Suzlon Energy Ltd.

alone is not a good comparison of the assessee and, therefore,

clubbed the margins of all the three companies. Further, we note that

the Transfer Pricing Officer has determined the arm's length price at

13.39% in the comparison to the operating margin of the assessee @

11.57%. However, the Transfer Pricing Officer has not given the M/s. Enercon India Ltd.

11

benefit of tolerance range of + 5% while making the adjustment.

Without going into the controversy whether the learned CIT(A) is

justified in taking the consolidated results of three group companies of

Suzlon, we note that when the Suzlon Energy Ltd. is not a comparable

and, therefore, cannot be included in the set of comparables for the

purpose of determination of arm's length price and further the arm's

length price determined by the Transfer Pricing Officer is within the

tolerance range of 5%, then the clubbing of results of three group

companies by the learned CIT(A) would be inconsequential . Therefore,

in view of the above facts and circumstances of the case, we do not

find any reason to interfere with the order of the learned CIT(A) qua

this issue when the action of the Transfer Pricing Officer including

Suzlon Energy Ltd. in the list of comparable is not sustainable. As

such, the ground raised by the Revenue is dismissed.

14. ऩरयणधभत् यधजस्व की अऩीर खधरयज की जधती है ।

14. In the result, Revenue's appeal is dismissed.

Order pronounced in the open Court on 29.5.2015

Sd/- Sd/-

बी. आर. बासकरण विजयपाऱ राि, ऱेखा सदस्य न्याययक सदस्य B.R. BASKARAN VIJAYPAL RAO ACCOUNTANT MEMBER JUDICIAL MEMBER

मुंबई MUMBAI, ददनाुंक DATED: 29.5.2015 M/s. Enercon India Ltd.

12

आदे श की प्रनतलरपऩ अग्रेपषत / Copy of the order forwarded to:

(1) ननधधारयती / The Assessee;

(2) यधजस्व / The Revenue;

(3) आमकय आमुक्त(अऩीर) / The CIT(A);

(4) आमकय आमुक्त / The CIT, Mumbai City concerned; (5) पवबधगीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / The DR, ITAT, Mumbai; (6) गधर्ा पधईर / Guard file.

सत्मधपऩत प्रनत / True Copy आदे शधनुसधय / By Order प्रदीऩ जे. चौधयी / Pradeep J. Chowdhury वरयष्ठ ननजी सधचव / Sr. Private Secretary उऩ / सहधमक ऩंजीकधय / (Dy./Asstt. Registrar) आमकय अऩीरीम अधधकयण, भुंफई / ITAT, Mumbai