ELKEM SOUTH ASIA P.LTD, NAVI MUMBAI V. DCIT (OSD)RG 10(1), MUMBAI

ITA 1070/MUM/2014

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 7213 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-04-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 14-10-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 17-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T ROUMUAN PAITE
• Keywords: Transfer pricing; International transaction; Rule of consistency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER ITA NO. 1070 / MUM . /2014 ( ASSESSMENT YEAR : 20 08 09 ) ELKEM SOUTH ASIA PVT. LTD. (FORMERLY KNOWN AS ORKLA INDIA P. LTD.) 307/308, B WING, 3 RD FLOOR BSEL TECH PARK, SECTOR 30 NAVI MUMBAI 400 705 PAN AAACE2668M . APPELLANT V/S DY. COMMISSIONER OF INCOME TAX (OSD), RANGE 10(1), MUMBAI . RESPONDENT ASSESSEE BY : SHRI NITESH JOSHI REVENUE BY : SHRI T. ROUMUAN PAITE DATE OF HEARING 23 .0 1 .201 9 DATE OF ORDER 22.04.2019 O R D E R PER SAKTIJIT DEY. J.M. T HE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE CHALLENGING THE ORDER DATED 5 TH DECEMBER 2013, PASSED BY THE LEARNED COMMISSIONER (APPEALS) 15, MUMBAI, PERTAINING TO THE ASSESSMENT YEAR 2008 09. 2 ELKEM SOUTH ASIA PVT. LTD. 2 . THE DISPUTE IN THE PRESENT APPEAL IS CONFINED TO THE ADDITION OF AN AMOUNT OF ` 24,54,556, ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 3 . BRIEF FACTS ARE, THE ASSES SEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING CERAMITE M ORTAR AND TRADING IN MICRO SILICA, FOUNDRY ALLOY. IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE HAD ENTERED INTO A NUMBER OF INTERNATIONAL TRANSACTIONS WIT H ITS O VERSEAS A ES. HOWEVER, IN THE PRESENT APPEAL, WE ARE CONCERNED WITH THE INTERNATIONAL TRANSACTION RELATING TO AVAILING OF SERVICES FROM THE A ES FOR WHICH AN AMOUNT OF ` 24,54 ,556, WA S PAID BY THE ASSESSEE TO THE A E. IN THE TRANSFER PRICING STUDY REPOR T, THE ASSESSEE HAS BENCH MARKED THE AFORESAID TRANSACTIONS BY SELECTING COMPARABLE UNCONTROL L ED PRICE (CUP) METHOD AS THE MOST APPROPRIATE METHOD AND HAS CLAIMED THAT THE AMOUNT PAID TOWARDS AVAILING SUCH SERVICES IS AT ARM'S LENGTH. IN THE COURSE OF PROCEEDINGS BEFORE HI M, THE TRANSFER PRICING OFFICER ON VERIFICATION OF MATERIAL ON RECORD INCLUDING FORM NO.3CEB REPORT, FOUND THAT THE AFORESAID PAYMENT WA S MADE BY THE ASSESSEE TO ITS AE ORKLA A.S. OSLO ON ACCOUNT OF ALLOCATION OF COSTS IN RESPECT OF LO TU S NOTE. IN RESPONSE TO THE QUERY RAISED BY THE TRANSFER PRICING OFFICER, THE ASSESSEE SUBMITTED THAT THE AE PROCURES THE USER RIGHT FOR LOTUS NOTE AND ALLOCATES THE COST OF LICENSE AND MAINTENANCE AMONGST ALL USERS WORLDWIDE KEEPING IN VIEW THE NUMBER OF USERS ON QUARTERLY BASIS. IT WAS SUBMITTED , ASSESSEES 3 ELKEM SOUTH ASIA PVT. LTD. SHARE IN COST ALLOCATION OF USAGE OF LOTUS NOTE WORK ED OUT TO ` 24,54,556, REPRESENTING 38 USERS. THE TRANSFER PRICING OFFICER WAS OF THE VIEW THAT THE PAYMENT MADE BY THE ASSESSEE WORKS OUT TO ` 64,5 94, PER USER ON YEARLY BASIS WHICH IS EXORBITANT. ALL EGING THAT THE ASSESSEE WAS UNABLE TO PRODUCE ANY DETAILS TO DEMONSTRATE THE WORKING AND DISTRIBUTION OF COST AND FURTHER , NO EVIDENCE WAS FURNISHED BY THE ASSESSEE TO ESTABLISH THAT 38 USERS HAVE RECEIV ED AND USE D THE SOFTWARE IN INDIA, THE TRANSFER PRICING OFFICER DETERMINED THE ARM'S LENGTH PRICE OF THE SERVICES AVAILED AT NIL. ACCORDINGLY, HE PROPOSED AN ADJUSTMENT OF ` 24,54,556. 4 . THOUGH, THE ASSESSEE CHALLENGED THE AFORESAID ADJUSTMENT BEFORE THE FI RST A PPELLATE AUTHORITY, HOWEVER, LEARNED COMMISSIONER (APPEALS) UPHELD THE DECISION OF THE TRANSFER PRICING OFFICER. 5 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , BEFORE THE TRANSFE R PRICING OFFICER AS WELL AS LEARNED COMMISSIONER (APPEALS), THE ASSESSEE HAS NOT ONLY FILED DETAILED SUBMISSIONS BUT FURNISHED ALL DOCUMENTARY EVIDENCES TO DEMONSTRATE THE MECHANISM OF COST ALLOCATION AS WELL AS THE SERVICES RENDERED TO THE CUSTOMERS. IN THIS REGARD HE DREW OUR ATTE NTION TO THE SUBMISSIONS MADE BEFORE LEARNED COMMISSIONER (APPEALS), AS REPRODUCED IN THE APPEAL ORDER. HE ALSO DREW OUR ATTENTION TO THE SUBMISSIONS MADE BEFORE THE TRANSFER 4 ELKEM SOUTH ASIA PVT. LTD. PRICING OFFICER AND THE DOCUMENTARY EVIDENCES FILED BEFORE HIM. THE LEARNED AUTHO RISED REPRESENTATIVE SUBMITTED , THE MODALITIES OF COST ALLOCATION WERE ALSO FURNISHED BEFORE THE TRANSFER PRICING OFFICER AND LEARNED COMMISSIONER (APPEALS). HE SUBMITTED , THE AGREEMENT UNDER WHICH COST IS DISTRIBUTED TO THE GROUP ENTITIES HAS CONTINUED IN SUBSEQUENT ASSESSMENT YEARS ALSO. HE SUBMITTED , IN THE SUBSEQUENT ASSESSMENT YEARS I.E., A.Y. 2009 10, 2010 11 AND 2011 12, THE TRANSFER PRICING OFFICER HAS ACCEPTED THE PAYMENT MADE TOWARDS SERVICES AVAILED BY THE ASSESSEE ON LOTUS NOTE. HE SUBMITTED , IN THE PRECEDING YEAR S ALSO THE AMOUNT PAID TOWARDS COST ALLOCATION WAS ALLOWED. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , WHEN THE ASSESSEE HAS RECEIVED SERVICES AND BENCH MARKED THE INTERNATIONAL TRANSACTION BY FOLLOWING ONE OF THE APPROVED METHODS, THE TRANSFER PRICING OFFICER CANNOT DETERMINE THE ARM'S LENGTH PRICE AT NIL WITHOUT FOLLOWING ANY PRESCRIBED METHOD AND PURELY ON AD HOC BASIS. FURTHER, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THOUGH AS PER AGREEMENT THE TOTAL COST PAYABLE TO THE AE IS 4,62,649 KRONER, HOWEVER, THE ASSESSEE HAS ACTUALLY PAID LESS AT 3,23,677 KRONER, WHICH PROVE S THAT THE PAYMENT MADE FOR THE SERVICES AVAILED IS AT ARMS LENGTH . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THE TRANSFER PRICING OFFICER HAS TO DET ERMINE THE ARM'S LENGTH PRICE BY FOLLOWING ANY ONE OF THE PRESCRIBED METHODS. HE SUBMITTED , SINCE THE 5 ELKEM SOUTH ASIA PVT. LTD. TRANSFER PRICING OFFICER HAS DETERMINED THE ARM'S LENGTH PRICE AT NIL WITHOUT FOLLOWING ANY PRESCRIBED METHOD, SUCH DETERMINATION OF ARM'S LENGTH PRICE HA S TO BE REJECTED. IN THIS CONTEXT, HE DREW OUR ATTENTION TO THE FOLLOWING DECISIONS OF THE HON'BLE JURISDICTIONAL HIGH COURT: I ) CIT V/S KODAK INDIA PVT. LTD., ITA NO.15/2014, DATED 11.07.2016; II ) CIT V/S JOHNSON & JOHNSON LTD., ITA NO.1291/2014, DATED 03.04. 2017; III ) CIT V/S MERCK LTD., ITA NO.272/2014, DATED 08.08.2016; AND IV ) CIT V/S LE VER INDIA EXPORTS LTD., [2017] 78 TAXMANN.COM 88. 6 . FURTHER, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , SINCE IN THE PRECEDING AND SUBSEQUENT ASSESSMENT YEARS THE DEPARTMENT HAS ACCEPTED THE BENCHMARKING DONE BY THE ASSESSEE FOR PAYMENT MADE TO THE AE FOR SIMILAR SERVICES AVAILED , APPLYING THE RULE OF CONSISTENCY NO DISALLOWANCE CAN BE MADE IN THE IMPUGNED ASSESSMENT YEAR. IN SUPPORT, HE RELIED UPON THE DECISION OF THE HON'BL E SUPREME COURT IN CIT V/S KARGILL FOODS INDIA LTD., JUDGMENT DATED 24 TH OCTOBER 2016. 7 . THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED , THE DETAILS OF COST ALLOCATION W ERE NEITHER FURNISHED BEFORE THE TRANSFE R PRICING OFFICER NOR BEFORE LEARNED COMMISSIONER (APPEALS). HE SUBMITTED , THE ASSESSEE ALSO FAILED TO FURNISH ANY EVIDENCE TO ESTABLISH THAT SE RVICES 6 ELKEM SOUTH ASIA PVT. LTD. WERE RECEIVED FROM THE A E. THEREFORE, IN THE AFORESAID CIRCUMSTANCES, THE TRANSFER PRICING OFFICER HAD NO OTHER OPTION BUT TO DETERMI NE THE ARM'S LENGTH PRICE AT NIL. 8 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. AS COULD BE SEE N FROM THE IMPUGNED ORDER OF LEARNED COMMISSIONER (APPEALS) AS WELL AS OTHER MATERIALS BROUGHT ON RECORD , NOT ONLY BEFORE THE TRANSFE R PR ICING OFFICER BUT BEFORE LEARNED COMMISSIONER (APPEALS), THE ASSESSEE HAS MADE ELABORATE SUBMISSIONS WITH REGARD TO THE SERVICES AVAILED AND COST ALLOCATION RELATING TO LOTUS NOTE AND OTHER EVIDENCES TO JU STIFY THE PAYMENT MADE TO THE A E. IT IS ALSO A FACT ON REC ORD THAT THE ASSESSEE HAS BENCH MARKED THE ARM'S LENGTH PRICE OF THE PAYMENT M ADE TOWARDS SERVICES AVAILED FROM THE AE BY APPLYING CUP METHOD. EXCEPT MAKING SOME GENERAL OBSERVATIONS, THE TRANSFER PRICING OFFICER HAS NOT PROVIDED ANY VALID REASON WHY THE BENCH MARKING DONE BY THE ASSESSEE IS NOT ACCEPTABLE. FURTHER, THE TRANSFER PRICING OFFICER WHILE DETER MINING THE ARM'S LENGTH PRICE OF THE SERVICES AVAILED FROM THE AE AT NIL HAS APPARENTLY NOT FOLLOWED ANY OF THE METHODS PRESCRIBED UNDER THE STATUTE. IT IS ALSO RELEVANT TO OBSERVE , THE AGREEMENT UNDER WHICH THE ASSESSEE IS MAKING PAYMENT FOR AVAILING SUCH SERVICES HAS CONTINUED FROM THE PRECEDING ASSESSMENT YEAR S AND IS ALSO CONTINUING IN THE SUBSEQUENT ASSESSMENT YEARS. IT IS WORTH MENTIONING , IN THE 7 ELKEM SOUTH ASIA PVT. LTD. SUBSEQUENT ASSESSMENT YEARS I.E., A.Y. 2009 10, 2010 11, 2011 12 AND 2012 13, THE TRANSFER PRICING OFFICER HAS ACCEPTED SIMILAR BENCHMARKING OF ARM'S LENGTH PRICE OF THE SERVICES AVA ILED BY THE ASSESSEE FROM THE AE ON ACCOUNT OF LOTUS N OTE. THEREFORE, AS HELD BY THE HON'BLE SUPREME COURT IN KARGILL FOOD INDIA LTD. (SUPRA), EVEN APPLYING THE RULE OF CONSISTENCY THE BENCH MARKING DONE BY THE ASSESSEE UNDER CUP METHOD IS TO BE ACCEPTED. 9 . EVEN OTHERWISE ALSO, IF THE TRANSFER PRICING OFFICER W AS NOT CONVINCED W ITH THE BENCH MARKING DONE BY THE ASSESSEE, HE SHOULD HAVE BENCH MARKED THE ARM'S LENGTH PRICE OF THE SERVICES AVAILED BY FOLLOWING ANY ONE OF THE PRESCRIBED METHODS AS PROVIDED UNDER THE STATUTE. A PERUSAL OF THE ORDER PASSED BY THE TRANSFER PRICING OFFICER WOULD REVEAL THAT WHILE REJECTING THE BENCH MARKING DONE BY THE ASSESSEE AND DETERMINING THE ARM'S LENGTH PRICE AT NIL, HE HAS NOT FOLLOWED ANY PRESCRIBED METHOD AS PROVIDED UNDER THE STATUTE. THAT BEING THE CASE, THE DETERMINATION OF ARM'S LENGTH PRICE AT NIL BY THE TRANSFER PRICING OFFICER BEING CONTRARY TO THE PROVISIONS OF THE ACT IS NOT ACCEPTABLE. THIS VIEW OF OURS GETS SUPPORT FROM THE DECISIONS OF HONBLE JURISDICTIONAL HIGH COURT (SUPRA) CITED BY LEARNED AUTHORISED REPRESENTATIVE. MOREOVER , THE TR ANSFER PRICING OFFICER HAVING FAILED TO POINT OUT ANY SPECIFIC DEFECT OR INVALIDITY IN BENCH MARKING DONE BY THE ASSESSEE, THE PRIC E PAID BY THE ASSESSEE TO THE AE FOR THE SERVICES 8 ELKEM SOUTH ASIA PVT. LTD. AVAILED HAS TO BE HELD TO BE AT ARM'S LENGTH. IN VIEW OF THE AFORESAID, WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF ` 24,54,556. GROUNDS ARE ALLOWED. 10 . IN THE RESULT, APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22.04.2019 SD/ - MANOJ KUMAR AGGARWAL ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 22.04.2019 COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (SR. PRIVATE SECRETARY) ITAT, MUMBAI