ACIT, New Delhi V. M/s Hosley India Pvt. Ltd., New Delhi

ITA 1053/DEL/2011

• Counselvise Citation: 105320114 RSA 2011
• Duration Of Justice: 3 year(s) 8 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 13-11-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 25-02-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: YOGESH VERMA
• Assessee Lawyers: NAGESHWAR RAO
• Keywords: Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I : NEW DELHI) BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.1053/DEL./2011 (ASSESSMENT YEAR : 2005-06) ACIT, CIRCLE 12 (1), VS. M/S. HOSLEY INDIA PRIVATE LTD., NEW DELHI. 835, MAIN VASANT KUNJ ROAD, MAHIPALPUR, NEW DELHI. (PAN : AABCH0722N) CO NO.313/DEL/2012 (IN ITA NO.1053/DEL./2011) (ASSESSMENT YEAR : 2005-06) M/S. HOSLEY INDIA PRIVATE LTD., VS. ACIT, CIRCLE 1 2 (1), 835, MAIN VASANT KUNJ ROAD, NEW DELHI. MAHIPALPUR, NEW DELHI. (PAN : AABCH0722N) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO, ADVOCATE REVENUE BY : SHRI YOGESH VERMA, CIT DR O R D E R PER B.C. MEENA, ACCOUNTANT MEMBER : THE APPEAL FILED BY THE REVENUE AND CROSS OBJECTION FILED BY THE ASSESSEE EMANATES FROM THE ORDER OF THE CIT (APPEAL S)-XX, NEW DELHI DATED 16.12.2010 FOR THE ASSESSMENT YEAR 2005-06. 2 ITA NO.1053/DEL/2011 CO NO.313/DEL/2012 2. THE ASSESSEE IS A MANUFACTURER AND EXPORTER OF H ANDICRAFTS AND OTHER DECORATIVE ITEMS. THE COMPANY IS A 100% EXPO RT ORIENTED UNIT AND IT MANUFACTURES FLORAL CONTAINERS, CANDLEHOLDER, HO ME DECOR ACCESSORIES AND SEASONAL DCOR MADE OUT OF IRON, GLASS RESIN AN D WAX ETC. THE STRUCTURE OF THE ASSESSEE COMPANY IS AS UNDER :- S.NO. NAME OF ADDRESS OF SHAREHOLDER NO. OF SHARES % OF HOLDING 1. M/S. HOLSELY GROUP INDUSTRIES, 608, ST. JAMES COURT, ST. DENIS STREET, PORT LOUIS, MAURITIUS 898840 90.00 2. MR. J.C. MEHATA C-II/2531, VASANT KUNJ, NEW DELHI- 110070 89870 9.00 3. MR. ARJUN MEHATA 10000 1.00 TOTAL 998710 100.00 THE RETURN OF INCOME WAS FILED ON 28.10.2005 DECLAR ING INCOME AT RS.5,27,272/-. THE ASSESSING OFFICER MADE AN ADDIT ION OF RS.2,33,16,297/- ON ACCOUNT OF DIFFERENCE IN THE AR MS LENGTH PRICE. THE CIT (A) HAS DELETED THIS ADDITION BY HOLDING AS UND ER :- 12. ADJUDICATION I HAVE CONSIDERED THE ARGUMENTS OF THE AR AND HAVE ALSO GONE THROUGH THE OBSERVATION OF THE AO/TPO. GROUND 3 OF THE ASSESSEE HAS BEEN DISCUSSED IN DETAIL. I AM OF THE VIEW THAT PHOENIX LAMPS SHOULD NOT BE TAKEN AS COMPARABLE FOR THE REASONS DISCUSSED ON PAGES 8 TO 10 OF MY ORDER. 3 ITA NO.1053/DEL/2011 CO NO.313/DEL/2012 HENCE, THIS GROUND HAS BEEN ADJUDICATED IN THE FAVO R OF THE APPELLANT. ON REJECTING THIS COMPANY, THE REVISED A VERAGE OF OPERATING MARGIN OF THE BALANCE COMPARABLE COMPANIE S WORKS OUT TO 2.56%. S.NO. COMPANY NAME OP/TC % 1. TATA INTERNATIONAL 0.45% 2. B.P. ERGO 4.66% AVERAGE 21.56% CALCULATION OF ARMS LENGTH REVENUES AT THIS MARGIN IS AS FOLLOWS :- TOTAL COST (A) 340,729,119 REVISED ARMS LENGTH MARGIN (B) 2.56% ARMS LENGTH REVENUE (C=A*(100+B)%) 349,451,784 OPERATING INCOME (AS PER TPOS ORDER) (D) 334,449,2 78 DIFFERENCE E = (C-D) 15,002,506 % OF DIFFERENCE VIS--VIS ARMS LENGTH REVENUES (E/C) 4.29% FROM THE ABOVE, IT CAN BE SEEN THAT THE % DIFFERENC E OF PRICE AT WHICH INTERNATIONAL TRANSACTION TOOK PLACE AND THE ARM'S LENGTH PRICE IS LESS THAN 5%. HENCE, IT CAN BE CONCLUDED T HAT THE APPELLANT'S TRANSACTIONS ARE AT ARM'S LENGTH UNDER PROVISO TO SECTION 92C(2). HENCE, THE ADJUSTMENT OF RS.2,33,16 ,297 STANDS DELETED. 13. SINCE THE INTERNATIONAL TRANSACTIONS OF THE APP ELLANT HAVE BEEN CONSIDERED TO BE AT ARM'S LENGTH, THE REMAININ G GROUNDS (GROUND 4, 5 AND ADDITIONAL GROUNDS TAKEN BY THE AP PELLANT) ARE JUST ACADEMIC IN NATURE AND THEREFORE ARE NOT BEING ADJUDICATED UPON. 3. AT THE OUTSET OF THE HEARING, LD. DR SUBMITTED T HAT THE CIT (A) HAS NOT PASSED A SPEAKING ORDER. HE HAS SIMPLY ACCEPTE D THE SUBMISSIONS OF THE ASSESSEE WHICH IS EVIDENT FROM PARA 12 OF THE C IT (A)S ORDER WHERE HE NOTES THAT PHOENIX LAMPS SHOULD NOT BE COMPARED FOR THE REASONS AS 4 ITA NO.1053/DEL/2011 CO NO.313/DEL/2012 DISCUSSED AT PAGES 8 TO 10 OF HIS ORDER. PAGES 8 T O 10 OF HIS ORDER ARE NOTHING BUT THE SUBMISSIONS MADE WHICH HAS BEEN ACC EPTED WITHOUT ANY REASON. NO OPPORTUNITY WAS GRANTED TO ASSESSING OF FICER FOR WORKING OUT THE MARGINS OF COMPARABLES. THE ASSESSEE HAS APPLI ED TRANSACTIONAL NET MARGIN METHOD (TNMM) TO ANALYSE THE ARMS LENGTH PR ICE OF THE INTERNATIONAL TRANSACTIONS IN BOTH THE SEGMENTS THA T IS MANUFACTURING AND TRADING. THE TPO ALSO ADOPTED THE TNMM WHILE ANALY ZING THE TRANSFER PRICING ISSUE AND ALSO STATED THAT ONCE THE TNMM AP PLIED IT TAKES CARE OF FUNCTIONAL DIFFERENCES. THE TOP ADOPTED THREE COMP ARABLES IN ITS REPORT AND THE AVERAGE OF OP/TC WAS WORKED OUT AT 5.72% AN D ON THAT BASIS, THE DIFFERENCE WAS CALCULATED AT RS.2,33,16,297/- WHICH WAS ADDED BY THE ASSESSING OFFICER. AS STATED EARLIER ABOVE IN THIS ORDER, THE CIT (A) HAS DELETED THE ADDITION ON THE BASIS OF SUBMISSIONS MA DE BY THE ASSESSEE WHICH HAS BEEN REPRODUCED IN PAGES 8 TO 10 WHEREIN THE ASSESSEE HAS SUBMITTED THAT THERE WAS NO FUNCTIONAL DIFFERENT IN PHOENIX LAMPS AND AUTOLITE AND THE TPO HAS ACCEPTED ONE AS COMPARABLE WHILE REJECTING THE OTHER. AT THIS, LD. DR SUBMITTED THAT THE REJECTIO N OF AUTOLITE WAS NOT ONLY BASED ON FUNCTIONAL DISSIMILARITIES BUT THE NE T WEALTH OF THIS COMPANY WAS NEGATIVE FOR THE YEAR ENDING 2005-06. IT WAS ALSO SUBMITTED THAT WHILE APPLYING TNMM, THE PRODUCT SIM ILARITY IS NOT ESSENTIAL AND THE TPO HAS RIGHTLY TAKEN THE PHOENIX LAMPS AS A 5 ITA NO.1053/DEL/2011 CO NO.313/DEL/2012 COMPARABLE. FURTHER, THE LD. AR RELIED ON THE ORDE R OF THE ITAT, PUNE BENCH IN THE CASE OF SKODA AUTO INDIA (P) LTD. VS. ACIT REPORTED IN (2009) 30 SOT 319 FOR CANVASSING THE VIEW THAT THE DUTY DRAWBACK SHOULD BE CONSIDERED AS OPERATING INCOME. FOR THIS , LD. DR RELIED ON THE ORDER OF THE ITAT, DELHI BENCHES, NEW DELHI IN THE CASE OF GOODYEAR INDIA LTD. VS. DCIT REPORTED IN 2013-TII-10-ITAT-DE L-TP WHEREIN THE ITAT HAS HELD THAT TPOS APPROACH FOR REJECTION OF EXPORT INCENTIVE FOR GOODS SOLD HAS CONSIDERABLE COGENCY. THE EXPORT BE NEFITS ARE GIVEN TO THE TAXPAYERS TO PROMOTE AND STIMULATE THE GROWTH O F EXPORTS OF GOODS AND SERVICES IN INDIA. THEY ARE ALSO MEANT TO EARN VALUABLE FOREIGN EXCHANGE FOR THE COUNTRY. THE EXPORT INCENTIVE WA S AVAILABLE TO THE ASSESSEE ONLY AFTER TRADING. IN THE GLOBAL TRANSFER PRICING POLICY, THE FUTURE VALUE OF BENEFITS WHICH MAY BE AVAILABLE IN A FEW COUNTRIES CANNOT BE INCLUDED, AS THIS WILL DISTURB THE VERY BASIS/PU RPOSE OR PROVIDING UNIFORM RETURN TO EACH AND EVERY ENTERPRISE WHICH I S A MEMBER OF GLOBAL TRANSFER PRICING POLICY. WE ARE ALSO OF THE VIEW THAT INCENTIVES PROVIDED IN THE TAX POLICIES ARE TO COMPENSATE THE TAXPAYER ON THE BASIS OF ECONOMIC SITUATION OF THE COUNTRY AND THESE BENEFIT S ARE AVAILABLE TO THE ENTITIES LOCATED IN INDIA AND THE SAME CANNOT BE TR ANSFERRED OR CREDITED IN THE ENTITIES LOCATED OUTSIDE INDIA. THIS KIND OF S HIFTING OF ECONOMIC AND TAX INCENTIVES OFFERED TO LOCAL COMPANY WILL DISTUR B THE FISCAL STRUCTURE OF 6 ITA NO.1053/DEL/2011 CO NO.313/DEL/2012 A COUNTRY AND WILL RESULT IN SHIFTING OF PROFITS FR OM ONE TAX JURISDICTION TO OTHER TAX JURISDICTION. THE ECONOMIC AND TAX INCE NTIVES OFFERED BY THE INDIAN GOVERNMENT TO INDIAN ENTITIES WERE NEVER MEA NT TO SUBSIDIZE THE ENTITIES OF FOREIGN JURISDICTION. 4. THE OTHER ISSUES RAISED IN THE CROSS OBJECTION A RE WITH REGARD TO ALLOW THE DOWNWARD VARIATION OF 5% IN DETERMINING T HE ARUMS LENGTH PRICE AND ADJUDICATING ON THE ISSUE OF DIFFERENCE I N FUNCTIONAL AND RISK PROFILE. AFTER HEARING BOTH THE SIDES ON THESE VAR IOUS ISSUES, WE HOLD THAT THESE ISSUES NEED TO BE DECIDED BY A SPEAKING ORDER OF THE CIT (A). AFTER HEARING BOTH SIDES AND CONSIDERING THE ALL RELEVANT FACTS, WE ARE OF THE VIEW THAT THESE ISSUES NEED A SPEAKING ORDER AT THE LEVEL OF CIT (A) THAT IS FIRST APPELLATE AUTHORITY FOR THE ASSESSMENT YEAR U NDER CONSIDERATION. 5. IN THE INTEREST OF JUSTICE AND EQUITY, WE REMAND ALL THE ISSUES RAISED IN APPEAL OF THE REVENUE AS WELL AS IN CROSS OBJECT ION OF THE ASSESSEE TO THE CIT (A) FOR FRESH ADJUDICATION ON THESE ISSUES. 6. IN THE RESULT, REVENUES APPEAL AND CROSS OBJECT ION OF ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 21 ST DAY OF NOVEMBER, 2014. SD/- SD/- (DIVA SINGH) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 21 ST DAY OF NOVEMBER, 2014/TS 7 ITA NO.1053/DEL/2011 CO NO.313/DEL/2012 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR/ITAT