ITAT upholds Upward Adjustment of Management Support Services on TVS [Read Order]
The Tribunal upheld the order of the CIT(A) and dismissed all the grounds of appeal raised by the Revenue on the issue of upward adjustment of Rs.17,69,67,000/- on account of management support services.
TVS - Motor _ Taxscan
TVS - Motor _ Taxscan
In a recent order, the Chennai bench of the Income Tax Appellate Tribunal(ITAT) upheld the order of the CIT(A) and dismiss all the grounds of appeal raised by the Revenue on the issue of upward adjustment of Rs.17,69,67,000/- on account of management support services. It was observed that the expenses have been governed by a management services agreement dated 29.03.1997 and consequently the assessee has been paying amounts to its holding company SCL.
The Revenue filed the appeal against the order of the Commissioner of Income Tax (CIT(A)) for the assessment year-2014-15 which was in favour of TVS Motor Company Limited,the assessee.
The first issue raised by the Revenue through its ground of appeal is regarding the action of the CIT(A) in restricting the addition made by the AO of Rs.14.78 Crores to Rs.2.25 Crores. The Counsel for the assessee informed that the appellant company is engaged in the business of manufacturing of two wheeler and other vehicles. The international transactions of the appellant assessee was subjected to TP verification whereby the TPO made impunged addition of Rs.14,78,78,398/-.
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The assessee transfers its goods from non 80IC unit to 80IC unit. In response to show cause of the TPO the assessee has contended that no TP adjustments are required to be made in its case, as the gross level margin of the eligible 80IC undertaking was lower than the gross level margin of the domestic vehicle segment at the entity level after excluding the profit of eligible undertaking.
The TPO however rejected the arguments of the assessee on the premise that in the books of eligible unit though there was an incidence of excise duty but no revenue was recognized by the assessee. TPO concluded that a meaningful comparison between the two units - eligible vs domestic is only possible by eliminating the excise duty element from the eligible unit.
The impugned exercise by the TPO led to variance in GP margin translating into alleged addition profit of Rs.23.78 Crores app. or 9.86%. The TPO therefore concluded that there was a requirement for loading the transactions with a 10% markup and proceeded to make an addition of Rs.14,78,78,398/-. Before the CIT(A), the assessee reiterated its objections made before the TPO.
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It was contended that gross margin earned by eligible unit is less than those of domestic unit, price at which components are transferred by its Hosur Unit to its 80IC unit were the same as that transfer from Hosur to Mysore unit.
The assessee had contended that it has been consistently following a uniform pricing for transfer of components to all its branches. The Counsel for the assessee submitted that before the CIT(A) it had submitted an alternate computation of gross profits of domestic and eligible units. It revealed that the difference in gross profit was only 0.54% i.e 19.41% minus 18.87 %. This exercise was done after eliminating the excise duty comparison.
The AR submitted that the First Appellate Authority estimated a figure of 2% which gave the excess profit figure of Rs.2.25 Crores. Accordingly, he ordered to reduce Rs.2.25 Crores from the 80IC computation of the eligible unit. The DR vehemently argued in favour of the order of the AO submitting that the CIT(A) has allowed
The assessee is indeed engaged in a captive customer scenario as it is into activity of customized manufacturing of components to be used in motor bikes. The element of market value therefore cannot be attributed to its products as they are specific to its own motor bikes. The tribunal was of view that there is no case made out for intervention to the order of the CIT(A).
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A two member bench of Shri Aby T Varkey, Judicial Member and Shri Amitabh Shukla, Accountant Member uphold the order of the CIT(A) on the issue of upward adjustments and dismiss all the grounds of appeal raised by the Revenue.
The Counsel for the assessee submitted that the expenses have been governed by a management services agreement dated 29.03.1997 and consequently the assessee has been paying amounts to its holding company SCL. It was submitted that it is common practice to appropriate such expenses among group companies by the holding companies and that it is not the case of profit shifting.
The assessee has also contended that no disallowance was made by the Revenue in the earlier years and was made only once in AY-2017-18. Since AY-2018-19 again no disallowance was made. The basic objections of the TPO was non-rendering of services, a fact which has been adequately and appropriately examined and negated by the CIT(A) before according relief to the assessee.
Non-interference by the Revenue on this issue in earlier or subsequent years has also been considered. Principle of consistency deserves to be followed by Revenue in matters particularly when there is no change in facts. The Tribunal upheld the order of the CIT(A) and dismiss all the grounds of appeal raised by the Revenue on the issue of upward adjustment of Rs.17,69,67,000/- on account of management support services.
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