DOW CORNING INDIA P.LTD, MUMBAI V. ASST CIT RG 14(1)(2), MUMBAI

ITA 1050/MUM/2015

• Counselvise Citation: 105019914 RSA 2015
• Duration Of Justice: 5 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-07-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2010-2011
• Appeal Filed On: 18-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Assessee Lawyers: NISHANT THAKKAR
• Keywords: Transfer pricing; International transaction; Additional evidence; Commercial expediency
• Section: 92C; 234B

Judgement Text

1 , INCOME TAX APPELLATE TRIBUNAL,MUMBAI K BENCH . . , , , BEFORE S/SH.A.D. JAIN,JUDICIAL MEMBER & RAJE NDRA,ACCOUNTANT MEMBER /. ITA NO. 1050 /MUM/201 5 , / ASSESSMENT YEAR - 20 10 - 11 DOW CORNING INDIA PRIVATE LIMITED 5 TH FLOOR SCORPIO HOUSE HIRANANDANI BUSINESS PARK, OPPOSITE GALLERIA,POWAI MUMBAI - 400 020. PAN: AAACU 0807 G VS AC IT RANGE 14(1)(2) ROOM NO.460, AAYAKAR BHAVAN, M.K. ROAD MUMBAI - 400 020. ( / APPELLANT ) ( / RESPONDENT ) /ASSESSEE BY : SHRI NISHANT THAKKAR / REVENUE BY : SHRI JITENDRA YADAV / DATE OF HEARING : 28 - 07 - 2015 / DATE OF PRONOUNCEMENT : 28 - 07 - 2015 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 18.12.2014 OF THE DRP - I, MUMBAI, THE ASSESSEE HAS RAISED FOLLOWIN G GROUNDS OF APPEAL: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICER/ ADDITIONAL COMMISSIONER OF INCOME - TAX (TRANSFER PRICING) - 1(5) (TPO') ON FACT AND IN LAW HAS: TRANSFER PRICING ADJUSTMENTS GENERAL 1. ERR ED IN ASSESSING THE TOTAL INCOME AT RS. 45,74,01,467 AS AGAINST RETURNED INCOME OF RS.36,54,01 ,584 COMPUTED BY THE APPELLANT . I. EXPORT OF FINISHED GOODS TO ASSOCIATED ENTERPRISES ('AES') GENERAL 2. ERRED IN MAKING AN ADJUSTMENT OF RS 1,77,93,867 TO TH E TOTAL INCOME OF THE APPELLANT UNDER SECTION 92CA(3) OF THE ACT ON ACCOUNT OF THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS TO AES. REJECTION OF THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT 3. ERRED IN REJECTING THE ECONOMIC ANALYSIS UN DERTAKEN BY THE APPELLANT WITHOUT POINTING OUT ANY DEFECTS IN THE SAME AS WELL AS NOT APPRECIATING THAT THE APPELLANT HAS ADHERED TO ALL THE CONDITIONS LAID OUT IN SEC 92C(3) OF THE ACT. 4. ERRED IN NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE AP PELLANT INCLUDING THE ANALYSIS USING THE TRANSACTIONAL NET MARGIN METHOD (TNMM'), IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME - TAX RULES, 1962 ('THE RULES'), FOR THE DETERMINATION OF THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACT ION OF EXPORT OF FINISHED GOODS, WITHOUT PROVIDING ANY COGENT REASONS. 2 2 INAPPROPRIATE APPLICATION OF COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTION 5. ERRED IN CONSIDERING CUP METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINATION OF ARM'S LENGTH PRICE WITHOUT APPRECIATING THAT THERE ARE DIFFERENCES THAT EXIST ON ACCOUNT OF FUNCTION, ASSETS AND RISK ('FAR') BETWEEN PRODUCTS SOLD TO AES VIS - A - VIS PRODUCTS SOLD LOCALLY TO THIRD PARTIES. 6. ERRED IS NOT APPRECIATING THAT THE PRICE AT WHICH GOODS ARE SOLD TO NON AES ARE AFFECTED BY VARIOUS FACTORS SUCH AS MARKET CONDITIONS, FUNCTIONS PERFORMED, RISKS ASSUMED, GEOGRAPHICAL CONSIDERATIONS, BUSINESS REASONS FOR SALE OF PRODUCTS, GOVERNMENT REGULATIONS, ETC. WHICH IN THE P RESENT CASE ARE NOT SO REASONABLY QUANTIFIED AND HENCE CUP METHOD SHOULD BE REJECTED. 7. WITHOUT PREJUDICE TO THE ABOVE, IF CUP IS TAKEN AS MOST APPROPRIATE METHOD, ADJUSTMENT SHOULD BE GRANTED FOR DIFFERENCE IN PRICES AT WHICH FINISHED GOODS WERE SOLD TO AES AND NON AES, ON ACCOUNT OF ECONOMIC FACTORS WHICH COULD BE REASONABLY QUANTIFIED, WHILE APPLYING CUP, FOR BENCHMARKING THE AFORESAID TRANSACTION. RECTIFICATION OF THE AMOUNT OF ADJUSTMENT: 8. ERRED IN INADVERTENTLY MAKING DOUBLE ADDITION OF ADJUSTME NT ON ACCOUNT OF EXPORT OF FINISHED GOODS OF RS 1,77,93,867 WHILE COMPUTING THE TOTAL INCOME OF THE APPELLANT. II. PAYMENT FOR AVAILING OF MARKETING, ADMINISTRATIVE AND LOGISTICS SUPPORT SERVICES FROM AES AND AVAILLNG OF INFORMATION TECHNOLOGY SERVICES FR OM AES GENERAL 9. ERRED IN MAKING AN ADJUSTMENT OF RS 5,64,12,145 TO THE TOTAL INCOME OF THE APPELLANT UNDER SECTION 92CA(3) OF THE ACT ON ACCOUNT OF ADJUSTMENT IN THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PAYMENT FOR MARKETING, ADMINIST RATIVE AND LOGISTICS SUPPORT SERVICES AND PAYMENT FOR INFORMATION TECHNOLOGY SERVICES TO AES. REJECTION OF ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT 10. ERRED IN NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT INCLUDING THE ANALYSIS U SING COST ALLOCATION METHODOLOGY, WHICH WAS IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, FOR DETERMINATION OF ARM'S LENGTH PRICE. 11. ERRED IN NOT APPRECIATING THAT SINCE COSTS IN RELATION TO THE SERVICES AVAILED BY THE APPELLANT WERE ALLOCATED TO THE MANUFACTURING, TRADING AND ENGINEERING SERVICE SEGMENT WHICH WERE AT ARM'S LENGTH (BASED ON NET LEVEL MARGIN ANALYSIS USING TNMM) THE TRANSACTION OF AVAILING SERVICES BY THE ASSESSEE FROM ITS AES ALSO MEETS THE ARM'S LENGTH TEST. 12. ERR ED IN NOT APPRECIATING THAT SINCE THE SUBJECT TRANSACTION WAS CLOSELY LINKED TO THE PRIMARY BUSINESS OPERATIONS OF THE APPELLANT (IE MANUFACTURING AND TRADING ACTIVITIES WHICH HAVE BEEN BENCHMARKED SEPARATELY), NO SEPARATE BENCHMARKING WAS REQUIRED FOR THE SAME. INAPPROPRIATE APPLICATION OF CUP METHOD TO BENCHMARK INTERNATIONAL TRANSACTION 13. ERRED IN NOT USING ANY OF THE FIVE METHOD PRESCRIBED UNDER SECTION 92C TO BENCHMARK THE INTERNATIONAL TRANSACTION OF PAYMENT FOR AVAILING OF SERVICES. 14. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN COMPUTING THE ARM'S LENGTH PRICE BY APPLYING SOME AD - HOC MAN HOUR RATE TO SOME AD - HOC NUMBER OF MAN HOURS (SO CALLED CUP) WHICH IS NOT IN ACCORDANCE WITH THE TRANSFER PRICING REGULATIONS PRESCRIBED IN INDIA. 15. ERRED IN N OT APPRECIATING THAT ONE OF THE BASIC CONDITIONS FOR APPLYING CUP IS AVAILABILITY OF THE PRICE OF THE SAME SERVICE IN UNCONTROLLED CONDITION AND IT CANNOT BE HYPOTHETICAL OR IMAGINARY VALUE BUT REAL VALUE ON WHICH SIMILAR TRANSACTIONS HAVE TAKEN PLACE. 16 . WITHOUT PREJUDICE TO THE ABOVE, ERRED IN DISALLOWING AD - HOC 25 PERCENT OF THE PAYMENT MADE FOR AVAILING INFORMATION TECHNOLOGY SERVICES TO AE WITHOUT PROVIDING ANY COGENT REASONS FOR THE SAME. BENEFIT TEST/ COMMERCIAL EXPEDIENCY FOR AVAILING SERVICES 3 3 1 7. FAILED TO APPRECIATE THE BUSINESS MODEL AND BUSINESS REALITIES OF THE APPELLANT AND THE ROLE OF ITS AES AND CONCLUDING THAT NO SERVICE IS RECEIVED OR BENEFITS HAVE BEEN AVAILED BY THE APPELLANT. IGNORED EVIDENCES SUBMITTED FOR SERVICE AVAILED AND BENEF ITS DERIVED 18. ERRED IN BRUSHING ASIDE THE ADDITIONAL EVIDENCES SUBMITTED BY THE APPELLANT TO PROVE EXISTENCE/ BENEFIT RECEIVED BY THE APPELLANT. 19. ERRED IN NOT CONSIDERING THE DETAILED COST ALLOCATION SHEET SUBMITTED BY THE APPELLANT WHICH DEMONSTRAT ES THAT COST HAS BEEN ALLOCATED USING APPROPRIATE ALLOCATION KEYS AND THAT THE TRANSACTION IS AT ARM'S LENGTH. LEVY OF INTEREST UNDER SECTION 234B OF THE ACT 20. ERRED IN LEVY OF INTEREST UNDER SECTION 2348 OF THE ACT OF RS. 1,96,28,278. INITIATION OF P ENALTY PROCEEDINGS UNDER SECTION 271 (1 )(C) OF THE ACT 21. ERRED IN INITIATING THE PENALTY PROCEEDINGS UNDER SECTION 271 (1 )(C) OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, DELETE OR WITHDRAW ANY OR ALL OF THE GROUNDS OF APPEAL AT OR BE FORE THE HEARING OF THE APPEAL SO AS TO ENABLE THE INCOME TAX APPELLATE TRIBUNAL TO DECIDE THE APPEAL ACCORDING TO LAW. 2. VIDE ITS APPLICATION,FILED ON 17.07.2015, THE ASSESSEE HAS REQUESTED TO ADMIT ADDITIONAL EVIDENCES. IN ITS APPLICATION THE ASSESSEE HA S STATED THAT THE APPEAL BEFORE THE TRIBUNAL WAS RELATED TO TRANSFER PRICING ADJUSTMENTS,THAT AS PER THE DIRECTIONS OF THE DISPUTE RESOLUTION PAN EL THE ASSESSING OFFICER (AO)HAD PASSED ORDER FOR I).PAYMENT OF CHARGES FOR RECEIPT OF INFORMATION TECHNOLOGY SERVICES II).PAYMENT OF CHARGES FOR RECEIPT OF MARKETING, ADMINISTRATION AND LOGISTICS SUPPORT SERVICE AND III).EXPORT OF FINISHED GOODS TO AES., THAT DURING THE COURSE OF TRANSFER PRICING ASSESSMENT AND DRP PROCEEDINGS IT HAD FURNISHED DOCUMENTS TO EVI DENCE RECEIPT OF INFORMATION TECHNOLOGY SUPPORT SERVICES FROM ITS AE, THAT IT DID NOT EMPLOY ANY PERSON ON ITS PAY ROLL TO SUPPORT IT IN RELATION TO IT RELATED SERVICES, THAT THE AES HAD A POOL OF EXPERIENCED IT RESOURCES, THAT THEIR SUPPORT ALLOWED THE AS SESSEE TO HAVE HIGHLY TECHNICAL AND EXPERIENCED IT PERSONNEL AT ITS DISPOSAL, THAT IT SAVED THE COST, THAT THE DRP WHILE ISSUING THE DIRECTION HAD STATED THAT THE WORKSHEET SUBMITTED BY THE ASSESSEE WAS NOT AUTHENTICATED, THAT THE ASSESSEE HAD OBTAINED A CERTIFIED COPY FROM AN EXTERNAL ACCOUNTANT CERTIFYING THE REASONABLENESS OF THE COSTS ALLOCATED BY THE AE TO THE ASSESSEE IN RELATION TO AFORESAID SERVICES.THE ASSESSEE HAS FURTHER MENTIONED THAT IN RELATION TO DETAILS OF COST ALLOCATION FOR MARKETING AD MINISTRATIVE AND LOGISTIC SUPPORT SERVICES THE DRP HAD OBSERVED THAT THE WORKSHEET SUBMITTED BY THE CO. WAS UNAUTHENTICATED, THAT IT HAD OBTAINED A CERTIFIED COPY FROM AN EXTERNAL ACCOUNTANT CERTIFYING THE REASONABLENESS OF THE COSTS ALLOCATED TO THE ASSES SEE IN RELATION TO AFORESAID SERVICES, THAT THE AO/TPO/DRP HAD COMPARED EXPORT PR OCEEDS FOR FINISHED PRODUCTS SOLD TO AES VIS A VIS SALES MADE TO THIRD PARTIES, THAT THEREAFTER ADJUSTMENT WAS MADE TO SUCH INTERNATIONAL TRANSACTIONS, THAT THOSE PAPERS WERE NOT IN POSSESSION OF THE ASSESSEE AT THE TIME OF MAKING SUBMISSIONS BEFORE THE AO/TPO/DRP, THAT THE DRP HAD NOT TAKEN INTO COGNIZANCE THE PAPERS, THAT IT HAD RESULTED IN UNJUSTIFIED ADDITIONS, THAT THE EXPORT PRICES FOR FINISHED PRODUCTS SOLD TO AES WERE NOT COMPARABLE TO THIRD PARTIES, THAT THE ADJUSTMENTS WERE WRONGLY MADE. THE ASSESSEE SUBMITTED A TABLE SHOWING LIST DETAILS OF TOP SIX PRODUCTS WHERE TPO HAD MADE ADJUSTMENTS AND STATED THAT THE DETAILS INCLUDED PRODUCT MANUFACTURING DATE AND 4 4 EXPIRY DATE , THAT THE PRODUCT SOLD TO AES WERE EXPIRING WITHIN ONE YEAR, THAT FOR ARRIVING AT REASONABLE ALP THE DATA HAD TO BE CONSIDERED. 3. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORISED REPRESENTATIVE(AR) REITERATED THE SUBMISSIONS MADE IN THE AP PLICATIONS A ND ARGUED THAT WORK - SHEETS AUTHENTICATED BY AN AUTHORISED PERSON CAME INTO POSSESSION OF THE ASSESSEE AFTER THE ORDER OF THE AO, THAT SAME WOULD HAVE BEARING ON THE OUTCOME OF THE TP ADJUSTMENTS. DEPARTMENTAL REPRESENTATIVE( DR ) OPPOSED THE ADMISSION OF ADDI TIONAL EVIDENCES.WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. 4. WE FIND DRP HAS NOT ACCEPTED THE WORKSHEETS FILED BY THE ASSESSEE COMPANY . AS SAME WERE NOT AUTHENTICATED. WE ARE OF THE OPINION THAT ONCE THE WORKSHEETS AUTHENTICATED BY A PROPER PERSON ARE AVAILABLE THEY WILL HAVE TO BE CONSIDERED FOR DETERMINING THE TP ADJUSTMENTS ON A REASONABLE BASIS. S IMILALRY, THE DOCUMENTS WITH REGARD TO EXPORT OF FINISHED GOODS TO AES WILL HAVE TO BE TAKEN INTO CONSIDERATION.THEREFO RE, IN THE INTEREST OF JUSTICE, WE ARE REMITTING BACK THE MATTER TO THE FILE OF THE DRP WHO WOULD AFFORD A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE AND DECIDE THE ISSUE AFTER CONSIDERING THE ADDITIONAL EVIDENCES PRODUCED BEFORE US. AS A RESULT, AP PEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH ,JULY,2015. 28 2015 SD/ - SD/ - ( . . /A.D. JAIN) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 28 . 0 7. 2015 . . . JV . SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , / ITAT, MUMBAI.