Doowon Automotive Systems India Private Limited, Kancheepuram V. DCIT, CHENNAI

ITA 1016/CHNY/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9075 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 10-05-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 05-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SP CHIDAMBARAM
• Keywords: Capital asset; Transfer pricing; International transaction
• Section: 92C; 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , . !'# ! , % !& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO.1016/MDS/2015 ( )( / ASSESSMENT YEAR : 2010-11 M/S DOOWON AUTOMOTIVE SYSTEMS INDIA PVT. LTD., PLOT NO.B-19 & 20, SIPCOT INDUSTRIAL PARK, ORAGADAM, SRIPERUMBUDUR TALUK, KANCHEEPURAM DISTRICT-602 105. PAN : AACCD 4172 F V. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(1), CHENNAI - 600 034. (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SH. S.P. CHIDAMBARAM, ADVOCATE -.+, / 0 / RESPONDENT BY : SMT. VIJAYALAKSHMI, CIT 1 / 2% / DATE OF HEARING : 10.05.2016 3') / 2% / DATE OF PRONOUNCEMENT : 17.06.2016 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE ASSESSING OFFICER, CONSEQUENT TO THE DIRECTIONS OF DISPUTE RESOLUTION PANEL DATED 10.12.2014 AND PERTAINS TO A SSESSMENT YEAR 2010-11. 2 I.T.A. NO.1016/MDS/15 2. SH. SP. CHIDAMBARAM, THE LD.COUNSEL FOR THE ASSE SSEE, SUBMITTED THAT THE ASSESSEE-COMPANY IS A WHOLLY OWN ED SUBSIDIARY OF DOOWON CORPORATION KOREA. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF MANU FACTURING AUTOMOTIVE AIR CONDITIONING SYSTEMS AND ITS PARTS. THE MANUFACTURING PLANT IS SITUATED NEAR CHENNAI. ACCO RDING TO THE LD. COUNSEL, IN THE COURSE OF ITS MANUFACTURING ACTIVIT Y, THE ASSESSEE HAS PURCHASED RAW MATERIAL FROM ITS ASSOCIATE ENTER PRISE OUTSIDE INDIA. THE ASSESSEE HAS ALSO PAID FEE FOR TECHNICA L SERVICES. THE LD.COUNSEL FURTHER SUBMITTED THAT CAPITAL ASSETS WE RE ALSO PURCHASED FROM ASSOCIATE ENTERPRISE. IN RESPECT OF THE TRANSACTION ENTERED WITH ASSOCIATE ENTERPRISE FOR PURCHASING RA W MATERIAL AND ITS COMPONENTS, CAPITAL ASSETS AND PAYMENT OF FEE F OR TECHNICAL SERVICES, THE ASSESSEE MAINTAINED TRANSFER PRICING DOCUMENTATION BY ADOPTING TRANSACTION NET MARGIN METHOD. THE LD. COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE HAS ALSO MADE A DJUSTMENT TOWARDS CUSTOMS DUTY PAYMENT AND WORKING CAPITAL. THE TRANSFER PRICING OFFICER AND THE DISPUTE RESOLUTION PANEL HA VE MADE ADJUSTMENTS RESORTING TO STATISTICAL METHOD TO BENC HMARK THE INTERNATIONAL TRANSACTION. ACCORDING TO THE LD. CO UNSEL, TRANSACTION 3 I.T.A. NO.1016/MDS/15 NET MARGIN METHOD IS THE MOST APPROPRIATE METHOD, T HEREFORE, THE CUSTOMS DUTY PAID BY THE ASSESSEE FOR IMPORTING THE RAW MATERIAL AND CAPITAL EMPLOYED HAS TO BE TAKEN INTO CONSIDERA TION WHILE MAKING TRANSFER PRICING ADJUSTMENT. 3. THE LD.COUNSEL FOR THE ASSESSEE FURTHER SUBMITTE D THAT THIS IS THE THIRD YEAR OF BUSINESS OPERATION, THEREFORE, TH E ASSESSEE HAD TO IMPORT HUGE VOLUME OF COMPONENTS AND RAW MATERIAL B Y PAYING CUSTOMS DUTY. ACCORDING TO THE LD. COUNSEL, THE CO MPARABLE COMPANIES SELECTED BY THE TPO AND THE DRP HAVE PURC HASED THE RAW MATERIAL AND COMPONENTS IN THE DOMESTIC MARKET, THEREFORE, THEY HAVE NOT PAID ANY CUSTOMS DUTY. SINCE THE ASS ESSEE HAS IMPORTED 85% OF RAW MATERIAL FROM OUTSIDE THE COUNT RY, THE ASSESSEE HAD TO INCUR AN ADDITIONAL LIABILITY TOWAR DS CUSTOMS DUTY, THEREFORE, ACCORDING TO THE LD. COUNSEL, THE PAYMEN T OF CUSTOMS DUTY HAS TO BE NECESSARILY ELIMINATED WHILE MAKING COMPARISON BY ADOPTING TRANSACTION NET MARGIN METHOD. HOWEVER, T HE DISPUTE RESOLUTION PANEL, AFTER CONSIDERING ITS OWN DIRECTI ONS IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2009-10, CO NFIRMED THE ORDER OF THE TRANSFER PRICING OFFICER BY HOLDING TH AT THE CUSTOMS DUTY PAYMENT NEED NOT BE ALLOWED. 4 I.T.A. NO.1016/MDS/15 4. REFERRING TO THE ORDER OF THE DRP, THE LD.COUNSE L FOR THE ASSESSEE SUBMITTED THAT THE TRANSFER PRICING OFFICE R ADOPTED NET PROFIT MARGIN AT 14.6% AS BENCHMARK AS AGAINST 1.86 % ACTUALLY SHOWN BY THE ASSESSEE. CONSIDERING THE DIFFERENCE OF 12.74% ON THE ASSESSEES OPERATING TURNOVER, THE TRANSFER PRI CING OFFICER DETERMINED THE DOWNWARD ADJUSTMENT AT ` 30,29,38,756/-. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE COULD NO T LOCALIZE THE PURCHASES, THEREFORE, THE ASSESSEE WAS FORCED TO IN CUR AN ADDITIONAL LIABILITY TOWARDS CUSTOMS DUTY. DUE TO HIGH COST OF IMPORT, THE ASSESSEE HAD TO INCUR A PAYMENT OF ` 14,27,43,259/- TOWARDS BASIC CUSTOMS DUTY. THE COMPARABLE COMPANI ES TAKEN BY THE TRANSFER PRICING OFFICER AND THE DRP ARE ESTABL ISHED COMPANIES AND THEY HAVE PURCHASED THE COMPONENTS TO THE EXTEN T OF 84% IN INDIA. SINCE THE ASSESSEE-COMPANY IS AT INCEPTION STAGE, THEY COULD NOT PASS THE CUSTOMS DUTY TO ITS CUSTOMERS. THEREFORE, ACCORDING TO THE LD. COUNSEL, THE ASSESSEES PROFIT LEVEL INDICATOR NEEDS TO BE ADJUSTED IN ORDER TO NEUTRALIZE THE COM PARISON WITH THE COMPARABLE COMPANIES WHICH ARE IN THE BUSINESS FOR MORE THAN A DECADE. 5 I.T.A. NO.1016/MDS/15 5. REFERRING TO RULE 10B OF INCOME-TAX RULES, 1962, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE NET PROFIT MARGIN BETWEEN THE INTERNATIONAL TRANSACTION OF THE ASSESS EE AND THE COMPARABLE UNCONTROLLED TRANSACTION HAS TO BE ADJUS TED AFTER TAKING INTO CONSIDERATION THE DIFFERENCE, WHICH COULD MATE RIALLY AFFECT THE NET PROFIT MARGIN IN THE OPEN MARKET. PLACING RELI ANCE ON THE DECISION OF PUNE BENCH OF THIS TRIBUNAL IN SKODA AU TO INDIA (P.) LTD. V. ACIT (2009) 30 SOT 319, THE LD.COUNSEL SUBMITTED THAT THE BUSINESS MODEL OF THE ASSESSEE HAS TO BE TAKEN INTO CONSIDERATION WHILE COMPARING THE COMPARABLE COMPANIES. THE PUNE BENCH DID NOT AGREE WITH THE TRANSFER PRICING OFFICER THAT EV ERY TIME THE ASSESSEE PAYS HIGHER IMPORT DUTY, IT MUST BE PASSED ON THE CUSTOMERS OR IT MUST BE ADJUSTED FOR IN NEGOTIATING THE PURCHASE PRICE. THE LD.COUNSEL HAS ALSO PLACED RELIANCE ON T HE DECISION OF PANAJI BENCH OF THIS TRIBUNAL IN PUTZMEISTER CONCRE TE MACHINES PVT. LTD. V. DCIT IN I.T.A. NO.107/PNJ/2012 AND SUB MITTED THAT THE COST OF RAW MATERIAL VARIED DUE TO IMPORT, IT WILL HAVE IMPACT FOR DECIDING THE ARM'S LENGTH PRICE. IN FACT, THE PANA JI BENCH PLACED ITS RELIANCE ON THE PUNE BENCH IN SKODA AUTO INDIA (P.) LTD. (SUPRA). IN VIEW OF THE ABOVE, ACCORDING TO THE LD. COUNSEL, TH E STATISTICAL METHOD ADOPTED BY THE TRANSFER PRICING OFFICER AND THE DISPUTE 6 I.T.A. NO.1016/MDS/15 RESOLUTION PANEL IS NOT ONE OF THE METHODS PRESCRIB ED UNDER THE SCHEME OF INCOME-TAX ACT FOR MAKING ADJUSTMENT OF A RM'S LENGTH PRICE. THEREFORE, THE STATISTICAL METHOD ADOPTED B Y THE DRP IS NOT JUSTIFIED. ACCORDING TO THE LD. COUNSEL, TRANSACTI ON NET MARGIN METHOD IS THE MOST APPROPRIATE METHOD. 6. REFERRING TO ONE OF THE COMPARABLE COMPANIES, NA MELY, WABCO INDIA LTD., THE LD.COUNSEL FOR THE ASSESSEE S UBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASS ESSEE-COMPANY, THEREFORE, IT SHOULD BE REMOVED FROM THE LIST OF CO MPARABLE COMPANIES. 7. ON THE CONTRARY, SMT. VIJAYALAKSHMI, THE LD. DEP ARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASSESSEE-COMPANY IS A MANUFACTURER OF AUTOMOTIVE AIR CONDITIONER AND COOL ING SYSTEMS, AUTOMOTIVE ANCILLARIES, COMPONENTS AND OTHER AUTOMA TIVE PARTS. DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE HAS PURCHASED RAW MATERIAL FROM ITS ASSOCIATE ENTERPRIS E OUTSIDE THE COUNTRY TO THE EXTENT OF ` 1,39,92,81,610/-. THE PROFIT LEVEL INDICATOR RETURNED BY THE ASSESSEE WAS 6.53% AFTER ADJUSTING THE PAYMENTS OF CUSTOMS DUTY TO THE EXTENT OF ` 11,11,04,381/-. IF THIS ADJUSTMENT WAS NOT MADE, THE UNADJUSTED NET PROFIT MARGIN WOUL D BE 1.86%. 7 I.T.A. NO.1016/MDS/15 THE ASSESSEE COMPARED WITH THREE COMPARABLE COMPANI ES AFTER TAKING THREE YEARS AVERAGE OF NET PROFIT MARGIN AT 6.95%. THE TRANSFER PRICING OFFICER, DURING THE COURSE OF PROC EEDING, SELECTED 11 COMPARABLE COMPANIES WHERE ARITHMETIC MEANS OF G ROSS PROFIT MARGIN IS 35.28%. THEREFORE, THE GROSS PROFIT MARG IN OF THE ASSESSEE-COMPANY WAS 25.34% FROM THE MARKET BENCHMA RK OF THE AVERAGE PROFIT INDICATOR, I.E. GROSS PROFIT MARGIN OF COMPARABLE OF 35.28%. AFTER CONSIDERING THE COMPARABLE COMPANIES , THE TRANSFER PRICING OFFICER DETERMINED THE NET PROFIT MARGIN AT 14.6%. THE LD. D.R. FURTHER SUBMITTED THAT FOR THE PURPOSE OF COMP ARISON, THE CURRENT YEAR DATA OF COMPARABLE COMPANIES ALONE HAS TO BE CONSIDERED. THE ASSESSEE, HOWEVER, HAS TAKEN THE 3 -YEAR WEIGHTED AVERAGE OF THE COMPARABLE COMPANIES DATA. ACCORDING TO THE LD. D.R., THE ECONOMIC SCENARIO MAY BE CHANGING YEAR AFTER YEAR, THEREFORE, TAKING AVERAGE OF 3-YEARS DATA OF COMPARABLE COMPANIES WOULD NOT REFLECT THE CORRECT NET PROFIT MARGIN. THE CURRENT PERIOD OF COMPARABLE COMPANIES ALONE WOULD PROJECT THE REAL NET PROFIT MARGIN OF THE COMPARABLE COMPANIES. THE LD. D.R. FURTHER SUBMITTED THAT THE GROSS PROFIT MARGIN AND NET PROFIT MARGIN ARE TWO METHODS TO COMPARE THE DATA OF THE COMPARAB LE COMPANIES. THEREFORE, THE DISPUTE RESOLUTION PANEL FOUND THAT 8 I.T.A. NO.1016/MDS/15 COMPARISON OF GROSS PROFIT MARGIN IS ALSO ONE OF TH E METHODS TO BE ADOPTED IN COMPARING THE COMPARABLE COMPANIES. 8. REFERRING TO CUSTOMS DUTY ADJUSTMENT, THE LD. D. R. SUBMITTED THAT AN IDENTICAL ORDER OF THE TRANSFER P RICING OFFICER WAS CONFIRMED BY THE DISPUTE RESOLUTION PANEL FOR THE A SSESSMENT YEAR 2009-10 IN THE ASSESSEE'S OWN CASE. BY FOLLOWING T HAT ORDER, THE DRP CONFIRMED THE TPOS ORDER BY HOLDING THAT CUSTO MS DUTY PAYMENT NEED NOT BE ADJUSTED WHILE MAKING PRIMA FACIE ADJUSTMENT. REFERRING TO THE OTHER CONTENTION OF THE ASSESSEE, NAMELY, THE WORKING CAPITAL EMPLOYED, THE LD. D.R. SUBMITTED TH AT THE DRP HAS RIGHTLY FOUND THAT SINCE THE COMPARISON WAS MADE AT THE GROSS PROFIT MARGIN LEVEL, WORKING CAPITAL EMPLOYED BY THE ASSES SEE NEED NOT BE TAKEN INTO CONSIDERATION. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE CLAIMS THAT TRANSACTION NET MARGIN METHOD IS THE MO ST APPROPRIATE METHOD. FOR THE PURPOSE OF TRANSFER PRICING ADJUST MENT, SECTION 92C OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT' ) PROVIDES FOR THE METHOD TO BE ADOPTED. THEREFORE, THE TRANSFER PRIC ING OFFICER AND DISPUTE RESOLUTION PANEL HAVE TO DETERMINE THE TRAN SFER PRICING 9 I.T.A. NO.1016/MDS/15 ADJUSTMENT BY FOLLOWING ANY ONE OF THE METHODS PRES CRIBED UNDER SECTION 92C OF THE ACT, WHICH WOULD BE APPROPRIATE TO THE INTERNATIONAL TRANSACTION MADE BY THE ASSESSEE. IN THE CASE BEFORE US, THE DISPUTE RESOLUTION PANEL AND THE TRANSFER P RICING OFFICER HAVE NOT ADOPTED ANY OF THE METHODS PRESCRIBED UNDE R SECTION 92C OF THE ACT. AS RIGHTLY CONTENDED BY THE LD.COUNSEL FOR THE ASSESSEE, THE DRP RESORTED TO STATISTICAL METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTION. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE DRP IS EXPECTED TO FIND OUT MOST APPROPRIA TE METHOD AMONG THE METHODS PRESCRIBED UNDER SECTION 92C OF T HE ACT. THE DISPUTE RESOLUTION PANEL IS NOT EXPECTED TO TRAVEL BEYOND THE METHOD PRESCRIBED UNDER SECTION 92C OF THE ACT. 10. IN RESPECT OF THE CUSTOMS DUTY ADJUSTMENT AND W ORKING CAPITAL EMPLOYED, THE DISPUTE RESOLUTION PANEL HAS SIMPLY PLACED ITS RELIANCE ON ITS OWN ORDER IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2009-10. THIS TRIBUNAL EXAMINED TH E DIRECTIONS OF THE DISPUTE RESOLUTION PANEL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2009-10 IN I.T.A.NO. 852/MDS/2014 D ATED 19.05.2016. FOR THE ASSESSMENT YEAR 2009-10, THE D ISPUTE RESOLUTION PANEL DIRECTED THE TRANSFER PRICING OFFI CER TO DETERMINE 10 I.T.A. NO.1016/MDS/15 THE TRANSFER PRICING ADJUSTMENT AFRESH. THIS TRIBU NAL FOUND THAT SUCH A DIRECTION CANNOT BE GIVEN BY THE DISPUTE RES OLUTION PANEL. THE DISPUTE RESOLUTION PANEL CAN AT THE BEST CALL F OR A REMAND REPORT FROM THE TRANSFER PRICING OFFICER AND DETERM INE THE ISSUE BY DIRECTING THE ASSESSING OFFICER TO MAKE ADJUSTMENT AS DETERMINED IN THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL AND ACCORDINGLY, THIS TRIBUNAL REMANDED THE MATTER BACK TO THE FILE OF TH E ASSESSING OFFICER. IN THE CASE BEFORE US, THE ISSUE IS IDENT ICAL TO THAT OF ASSESSMENT YEAR 2009-10 AND THE DISPUTE RESOLUTION PANEL HAS SIMPLY FOLLOWED THEIR EARLIER ORDER. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE MATTER NEEDS TO BE RECO NSIDERED AS DIRECTED BY THIS TRIBUNAL IN THE EARLIER ORDER IN I .T.A. NO.852/MDS/2014 DATED 19.05.2016. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ENTIRE ISSU E IS REMITTED BACK TO THE FILE OF ASSESSING OFFICER. THE ASSESSING OF FICER SHALL REFER THE MATTER TO THE TRANSFER PRICING OFFICER ONCE AGAIN A S DIRECTED IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2009-10 AND THEREAFTER DECIDE THE ISSUE AFRESH, IN ACCORDANCE WITH LAW, AF TER GIVING REASONABLE OPPORTUNITY TO THE ASSESSEE. 11 I.T.A. NO.1016/MDS/15 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 17 TH JUNE, 2016 AT CHENNAI. SD/- SD/- (. !'# ! ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) % / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 17 TH JUNE, 2016. KRI. / -267 87)2 /COPY TO: 1. +, /APPELLANT 2. -.+, /RESPONDENT 3. ITO (HQ), INTERNATIONAL TAXATION, CHENNAI 4. ADDL. CIT (TPO-I), CHENNAI 5. CIT, CHENNAI-I, CHENNAI. 6. 79 -2 /DR 7. ( : /GF.