Western Thomson (India) Private Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1093/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5971 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 02-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN
• Assessee Lawyers: V RA VICHANDRAN; P B SRINIVASAN
• Keywords: Depreciation; Transfer pricing; International transaction

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , !, # !$ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ ITA NO.1093/MDS/2017 ' (' / ASSESSMENT YEAR : 2012-13 M/S WESTERN THOMSON (INDIA) PRIVATE LTD., C/O P.B. VIJAYARAGHAVAN & CO., CHARTERED ACCOUNTANTS, 14, CATHEDRAL GARDEN ROAD, NUNGAMBAKKAM, CHENNAI - 600 034. PAN : AAACW 0319 F V. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 3(2), CHENNAI - 600 034. (*+/ APPELLANT) (,-*+/ RESPONDENT) *+ . / / APPELLANT BY : SHRI V. RAVICHANDRAN, CA & SHRI P.B. SRINIVASAN, CA ,-*+ . / / RESPONDENT BY : SHRI N. MADHAVAN, ADDL.CIT 0 . 1# / DATE OF HEARING : 20.09.2017 23( . 1# / DATE OF PRONOUNCEMENT : 27.10.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) -13, CHENN AI, DATED 28.02.2017 AND PERTAINS TO ASSESSMENT YEAR 2012-13. 2 I.T.A. NO.1093/MDS/17 2. THE FIRST ISSUE ARISES FOR CONSIDERATION IS TRAN SFER PRICING ADJUSTMENT MADE BY THE ASSESSING OFFICER TO THE EXT ENT OF ` 54 LAKHS. 3. SHRI V. RAVICHANDRAN, THE LD. REPRESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSING OFFICER ISSU ED A SHOW CAUSE NOTICE ON 24.03.2015 CALLING UPON THE ASSESSE E WHY ARM'S LENGTH PRICE SHOULD NOT BE DETERMINED AT ` 7.43 CRORES IN RESPECT OF TRANSACTION WITH ASSOCIATED ENTERPRISE. THE LD. RE PRESENTATIVE FURTHER SUBMITTED THAT THE ASSESSEE IS MANUFACTURIN G WATER THERMOSTATS FOR AUTOMOBILES. THE COMPANY IS ENGAGE D IN THE BUSINESS FOR MORE THAN 45 YEARS. THE TURNOVER OF T HE COMPANY, ACCORDING TO THE LD. REPRESENTATIVE, IS ` 48 CRORES DURING THE YEAR UNDER CONSIDERATION. ACCORDING TO THE LD. REPRESEN TATIVE, THE ASSESSING OFFICER IN THE GUISE OF MAKING TRANSFER P RICING ADJUSTMENT, FOUND THAT THE ASSESSEE-COMPANY IS A PART OF WESTER N THOMSON GROUP. THE ASSESSING OFFICER FOUND THAT 12 COMPANI ES, INCLUDING ONE SELECTED BY THE ASSESSEE, WERE COMPARABLES AND THE COMPARABLE COMPANIES ARITHMETIC MEAN WAS DETERMINED AT 13.68%. 3 I.T.A. NO.1093/MDS/17 4. THE LD. REPRESENTATIVE FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSING OFFICER ALSO FOUND THAT THE RATI O OF DEPRECIATION AND OPERATING INCOME OF COMPARABLE COMPANIES IS 4.7 2% AS AGAINST THAT OF THE ASSESSEE WHICH IS 0.95%. ACCOR DING TO THE LD. REPRESENTATIVE, THE ASSESSEE-COMPANY WAS ESTABLISHE D 45 YEARS AGO AND IT WAS USING OLD MACHINERIES, THE EFFICIENC Y OF WHICH CANNOT BE COMPARED WITH OTHER COMPARABLE COMPANIES WHICH A RE ESTABLISHED RECENTLY. THEREFORE, ACCORDING TO THE LD. REPRESENTATIVE, THERE SHOULD BE SOME ADJUSTMENT OF DEPRECIATION. IN OTHER WORDS, THE DEPRECIATION OF THE MACHINERIES OF THE COMPARABLE COMPANIES AND THAT OF THE ASSESSEE-COMPANY SHOULD B E TAKEN INTO CONSIDERATION WHILE MAKING ADJUSTMENT. ACCORDING T O THE LD. REPRESENTATIVE, THE ASSESSING OFFICER, HOWEVER, REJ ECTED THE CLAIM OF THE ASSESSEE AND REDUCED THE DEPRECIATION BOTH IN T HE CASE OF THE ASSESSEE AND COMPARABLE COMPANIES. 5. REFERRING TO THE ASSESSMENT ORDER, MORE PARTICUL ARLY PARA 5.6, THE LD. REPRESENTATIVE FOR THE ASSESSEE SUBMIT TED THAT THE PROFIT LEVEL INDICATOR CALCULATION OF 12 COMPANIES ALONG W ITH EMPLOYEE COST AND DEPRECIATION WAS CONSIDERED BY THE ASSESSI NG OFFICER. REFERRING TO THE OPERATING INCOME, THE LD. REPRESEN TATIVE SUBMITTED 4 I.T.A. NO.1093/MDS/17 THAT THE OPERATING INCOME WAS 2882.4 IN RESPECT OF COMPARABLE COMPANIES. THE LD. REPRESENTATIVE FURTHER SUBMITTE D THAT THE ASSESSEE SELECTED RPM METHOD AS MOST APPROPRIATE ME THOD. HOWEVER, THE SAME WAS REJECTED BY THE ASSESSING OFF ICER AND THE ASSESSING OFFICER ADOPTED TNMM METHOD AS MOST APPRO PRIATE METHOD. THE LD. REPRESENTATIVE VERY FAIRLY SUBMITT ED THAT THE METHOD, NAMELY, TRANSACTION NET MARGIN METHOD SELEC TED BY THE ASSESSING OFFICER IS NOT CHALLENGED BY THE ASSESSEE . ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEE IS A SMALL COM PANY HAVING A TURNOVER OF ` 48 CRORES DURING THE YEAR UNDER CONSIDERATION. THE COMPARABLE COMPANIES ARE HAVING VERY HIGHER TURNOVE R, THEREFORE, BY ADOPTING TURNOVER FILTER, THE COMPARABLE COMPANI ES SELECTED BY THE ASSESSING OFFICER CANNOT BE COMPARED WITH THE A SSESSEE- COMPANY. ACCORDING TO THE LD. REPRESENTATIVE, THE PLI COMPUTED BY THE ASSESSEE COMES TO 6.46%. HOWEVER, THE ARITHMET IC MEAN OF COMPARABLE COMPANIES COMES TO 12.76%. THE ARM'S LE NGTH PRICE OF TRANSACTION WAS DETERMINED AT ` 7.51 CRORES. AFTER TAKING INTO CONSIDERATION ALL +5% RANGE AS PROVIDED IN THE RULE S, ACCORDING TO THE LD. REPRESENTATIVE, IT COMES TO ` 8.75 CRORES TO ` 7.65 CRORES. THE ASSESSING OFFICER FOUND THAT THE ALP TRANSACTIO N OF THE 5 I.T.A. NO.1093/MDS/17 ASSESSEE COMES TO ` 7.51 CRORES AND BY TAKING INTO CONSIDERATION +5%, THE ALP COMES TO ` 7.65 CRORES. THEREFORE, ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSING OFFICER FOUND THA T THERE WAS VARIATION OF 0.14% ON THE HIGHER SIDE. THE VARIATI ON OF 0.14% COMES TO NEARLY 0.54 CRORES. 6. THE LD. REPRESENTATIVE FOR THE ASSESSEE FAIRLY S UBMITTED THAT THE CALCULATION MADE BY THE ASSESSING OFFICER IS CO RRECT. HOWEVER, THE OLD MACHINERIES CANNOT BE COMPARED WITH NEW MAC HINERIES, THEREFORE, ACCORDING TO THE LD. REPRESENTATIVE, THE DEPRECIATION HAS TO BE CONSIDERED WHILE CONSIDERING THE OPERATING CO ST. THE ASSESSING OFFICER HAS REDUCED THE DEPRECIATION BOTH IN THE HANDS OF THE ASSESSEE-COMPANY AS WELL AS THE COMPARABLE COMP ANIES WHICH RESULTED IN DIFFERENCE OF 0.14%. THEREFORE, ACCORD ING TO THE LD. REPRESENTATIVE, THE ASSESSING OFFICER IS NOT JUSTIF IED IN REDUCING THE DEPRECIATION. 7. ON THE CONTRARY, SHRI N. MADHAVAN, THE LD. DEPAR TMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE IS AN IN DUSTRY MANUFACTURING VALVES TO AUTOMOBILES. REFERRING TO THE ORDER OF THE CIT(APPEALS), THE LD. D.R. SUBMITTED THAT THE ASSES SING OFFICER ALSO 6 I.T.A. NO.1093/MDS/17 ADOPTED FILTERS SUCH AS FUNCTIONAL PERFORMANCE, ASS ET UTILISED, RISK CARRIED BY THE ASSESSEE AS WELL AS ASSOCIATED ENTER PRISE. ACCORDING TO THE LD. D.R., BY TAKING 13 COMPARABLES , WHICH INCLUDE FOUR COMPARABLES SELECTED BY THE ASSESSEE, THE ASSE SSING OFFICER FOUND THAT M/S BRAKES AUTO (INDIA) LIMITED IS ENGAG ED IN THE BUSINESS OF TRADING IN SHIRTING AND SUITING, THEREF ORE, IT CANNOT BE TAKEN AS COMPARABLE. SIMILARLY, THE ASSESSING OFFI CER FOUND THAT M/S LAMINA SUSPENSION PRODUCTS LIMITED ALSO CANNOT BE TAKEN AS COMPARABLE IN THE ABSENCE OF RELATED PARTY DETAILS. IN THE CASE OF M/S ZF HERO CHASSIS SYSTEMS PVT. LTD. ALSO THE RELA TED PARTY DETAILS ARE NOT DISCLOSED BY THE ASSESSEE. HENCE, ACCORDING TO THE LD. D.R., THE ASSESSING OFFICER HAS RIGHTLY REJECTE D THE ABOVE THREE COMPANIES. ACCORDING TO THE LD. D.R., THE ASSESSIN G OFFICER HAS ALSO REJECTED M/S DELPHI TVS DIESEL SYSTEMS LTD. ON THE GROUND THAT RPT IS MORE THAN 25%. SIMILARLY, M/S SHRIRAM P ISTONS & RINGS LIMITED WAS ALSO TAKEN AS NON-COMPARABLE SINCE THE TURNOVER WAS MORE THAN 23 TIMES OF THE ASSESSEES TURNOVER. IN T HE CASE OF M/S MOTHERSON SUMI SYSTEMS LIMITED, THE TURNOVER WAS MO RE THAN 66 TIMES OF THE ASSESSEES TURNOVER. THEREFORE, ACCOR DING TO THE LD. D.R., THE ASSESSING OFFICER HAS RIGHTLY REJECTED TH E SAID COMPARABLES. 7 I.T.A. NO.1093/MDS/17 8. REFERRING TO THE DEPRECIATION ADJUSTMENT, THE LD . DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSE SSEE HAS NOT FURNISHED THE DETAILS OF PRICING STUDY OF EACH FINI SHED PRODUCTS. THEREFORE, IN ORDER TO NULLIFY THE DIFFERENCE IN TH E CASE OF COMPARABLES, ACCORDING TO THE LD. D.R., DEPRECIATIO N WAS REMOVED BOTH IN THE CASE OF COMPARABLE COMPANIES AND IN THE CASE OF ASSESSEE. 9. REFERRING TO ALP CALCULATION, THE LD. DEPARTMENT AL REPRESENTATIVE SUBMITTED THAT THE MARGIN OF THE ASS ESSEES CASH PROFIT WAS 6.46%. ARITHMETIC MEAN OF MARGIN COMPAR ABLE COMES TO NEARLY 12.76%. THE ALP TRANSACTION IS ` 7.51 CRORES. ACCORDING TO THE LD. D.R., AFTER MAKING ADJUSTMENT OF +5% RANGE, IT COMES TO ` 8.45 CRORES TO ` 7.65 CRORES. THERE WAS A DIFFERENCE OF 0.14%. THEREFORE, ACCORDING TO THE LD. D.R., THE ASSESSING OFFICER MADE ADJUSTMENT OF ` 0.54 CRORES TOWARDS THE INTERNATIONAL TRANSACTION. SINCE THE ARM'S LENGTH PRICE OF TRANSACTION WAS 5.1 4%, THE ASSESSING OFFICER HAS TAKEN 0.14% TOWARDS UPWARD AD JUSTMENT WHILE DETERMINING THE TRANSFER PRICING ADJUSTMENT. THEREFORE, 8 I.T.A. NO.1093/MDS/17 ACCORDING TO THE LD. D.R., THE CIT(APPEALS) HAS RIG HTLY CONFIRMED THE ADDITION OF ` 0.54 CRORES. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THERE IS NO MUCH OF DISPUTE WITH REGARD TO COMPARABLE COMPANIES SELECTED BY THE ASSESSEE OR BY THE ASSESSING OFFICER. THE DISP UTE NOW RAISED BY THE ASSESSEE BEFORE THIS TRIBUNAL IS THAT THE MA CHINERIES UTILISED FOR MANUFACTURING THE PRODUCTS ARE VERY OLD ONE, TH EREFORE, IT WAS CLAIMING ONLY 0.95% AS DEPRECIATION. IT IS NOT IN DISPUTE THAT THE ASSESSEE-COMPANY WAS ESTABLISHED IN 1967 AND IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING THERMOSTAT WHICH IS USED IN AUTOMOBILE INDUSTRIES. THE COMPARABLE COMPANIES DEPRECIATION RATIO COMES TO 4.72% WHILE THE ASSESSEES DEPRECIATION COMES TO 0. 95%. THEREFORE, THE ASSESSING OFFICER FOUND THAT THE DEP RECIATION RATIO HAS TO BE REMOVED BOTH FROM COMPARABLE COMPANIES AS WELL AS FROM THE ASSESSEE-COMPANY. 11. THE DEPRECIATION RATIO OF THE ASSESSEE-COMPANY AT 0.95% AND DEPRECIATION RATIO OF THE COMPARABLE COMPANIES AT 4.72% IS NOT IN DISPUTE. THEREFORE, IT IS OBVIOUS THAT THE MACH INERIES UTILISED BY 9 I.T.A. NO.1093/MDS/17 COMPARABLE COMPANIES ARE LATEST ONES, WHEREAS, THE MACHINERIES USED BY THE ASSESSEE-COMPANY ARE OLDER ONES. IT IS ALSO NOT IN DISPUTE THAT THE MACHINERIES OF THE ASSESSEE-COMPAN Y ARE MORE THAN 40 YEARS OLD, WHEREAS, THE MACHINERIES OF THE COMPARABLE COMPANIES ARE LATEST ONE. THE COMPARABLE COMPANIES ARE CLAIMING HIGHER RATE OF DEPRECIATION AND THE ASSESSEE IS CLA IMING ONLY 0.95%. THE QUESTION ARISES FOR CONSIDERATION IS WHEN THE R ATIO OF DEPRECIATION DOES NOT REMAIN THE SAME BETWEEN THE A SSESSEE- COMPANY AND THAT OF COMPARABLE COMPANIES, WHETHER T HE DEPRECIATION HAS TO BE REDUCED FROM THE OPERATING C OST? THE ASSESSING OFFICER FOUND THAT DEPRECIATION RATIO HAS TO BE REMOVED IN BOTH THE CASES I.E. IN THE CASE OF ASSESSEE AS WELL AS IN THE CASE OF COMPARABLE COMPANIES. WHEREAS, THE ASSESSEE CLAIMS THAT DEPRECIATION HAS TO BE TAKEN INTO CONSIDERATION IN THE HANDS OF THE ASSESSEE-COMPANY AS WELL AS COMPARABLE COMPANIES. THE FACT REMAINS THAT THE DIFFERENCE OF 0.14% IN ARM'S LENGT H PRICE COMES, BECAUSE THE DEPRECIATION WAS REDUCED BOTH IN THE HA NDS OF THE ASSESSEE-COMPANY AS WELL AS COMPARABLE COMPANIES. IN CASE DEPRECIATION RATIO WAS NOT REDUCED IN THE CASE OF A SSESSEE- COMPANY AS WELL AS COMPARABLE COMPANIES, THE PRICE ADOPTED BY THE ASSESSEE WOULD BE WELL WITHIN THE +5% RATIO. T HE DIFFERENCE OF 10 I.T.A. NO.1093/MDS/17 0.14% ARISES BECAUSE OF REDUCING DEPRECIATION BOTH IN THE HANDS OF THE ASSESSEE-COMPANY AS WELL AS COMPARABLE COMPANIE S. THE QUESTION NOW ARISES IS WHEN THERE IS A PRICE DIFFER ENCE OF 0.14% OVER AND ABOVE +5% OF PERMISSIBLE LIMIT, WHETHER TH ERE CAN BE ANY ADDITION WHILE DETERMINING ARM'S LENGTH PRICE? THE UNDISPUTED FACT IN THIS CASE IS THAT THE ASSESSEE-COMPANY WAS ESTAB LISHED IN 1967 AND MACHINERIES USED ARE OLDER THAN THE MACHINERIES USED BY OTHER COMPARABLE COMPANIES TAKEN BY THE ASSESSING OFFICER . WHEN THE ASSESSEE-COMPANY WAS USING THE OLD MACHINERIES, EFF ICIENCY OF SUCH OLD MACHINERIES WOULD MUCH LESS WHEN COMPARED TO NEW MACHINERIES USED BY COMPARABLE COMPANIES. IN SUCH A SITUATION, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT IGN ORING THE DIFFERENCE OF 0.14% OVER AND ABOVE +5% OF PERMISSIBLE LIMIT WO ULD MEET THE ENDS OF JUSTICE. ACCORDINGLY, THE ASSESSING OFFIC ER IS DIRECTED TO IGNORE 0.14% OF DIFFERENCE OVER AND ABOVE +5% OF TH E PERMISSIBLE LIMIT. 12. IN VIEW OF THE ABOVE, THIS TRIBUNAL IS UNABLE T O UPHOLD THE ORDERS OF AUTHORITIES BELOW. THEREFORE, ORDERS OF BOTH AUTHORITIES BELOW ARE SET ASIDE AND THE ADDITION OF ` 54,00,000/- IS DELETED. 11 I.T.A. NO.1093/MDS/17 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 27 TH OCTOBER, 2017 AT CHENNAI. SD/- SD/- ( ! ) ( . . . ) (S. JAYARAMAN) (N.R.S. GANESAN) # / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 27 TH OCTOBER, 2017. KRI. . ,167 87(1 /COPY TO: 1. *+ /APPELLANT 2. ,-*+ /RESPONDENT 3. 0 91 () /CIT(A)-13, CHENNAI-34 4. PRINCIPAL CIT- 3, CHENNAI-34 5. 7: ,1 /DR 6. ' ; /GF.