M/s Metal Closures Private Limited, Bangalore V. DCIT, Bangalore

ITA 116/BANG/2012

• Counselvise Citation: 11621114 RSA 2012
• Duration Of Justice: 2 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 26-08-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 25-01-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO CITI
• Keywords: Transfer pricing; International transaction; Period of limitation; Time period of passing order
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH A, BANGALORE BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER IT(TP)A NO.138(BANG) 2014 (ASSESSMENT YEAR : 2009-10) M/S DIGITAL JUICE ANIMATIONS PVT. LTD., NO.14, 2 ND MAIN ROAD, SANKEY ROAD, SADASHIV NAGAR, BANGALORE-560 003. APPELLANT PAN NO.AABCD9298H VS THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-11(1), BANGALORE RESPONDENT ASSESSEE BY : SHRI SURESH MUTHUKRISHNAN, CA REVENUE BY : SHRI C.H.SUNDAR RAO, CIT-I DATE OF HEARING : 01-09-2014 DATE OF PRONOUNCEMENT : 05-09-2014 O R D E R PER SHRI ABRAHAM P GEORGE, AM: IN THIS APPEAL FILED BY THE ASSESSEE DIRECTED AGAI NST AN ORDER PASSED U/S 143(3) OF THE IT ACT, 1961 (IN SHORT THE ACT) , PURSUANT TO THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL (D RP), IT HAS RAISED 10 GROUNDS. WHILE ITS GROUND 9 & 10 ARE GENERAL, ITS GROUNDS 2 TO 8 ARE ON FILTERS APPLIED FOR SELECTION OF COMPARABLES. IN IT S GROUND NO.1, GRIEVANCE OF THE ASSESSEE IS THAT REVISED SEGMENTAL RESULTS GIVE N BY IT WAS NOT CONSIDERED BY THE AO AND THE TPO. ITA NO.138(BANG)2014 2 2. GROUND NUMBER ONE IS TAKEN UP FOR DISPOSAL FIR ST. 3. FACTS APROPOS ARE THAT THE ASSESSEE ENGAGED IN T HE BUSINESS OF DESIGN & DEVELOPMENT OF ANIMATION AND MANUFACTURE O F PACKAGING UNITS HAD FILED ITS RETURN DECLARING AN INCOME OF RS.1,26 ,76,520/-. THE AO REFERRED THE INTERNATIONAL TRANSACTIONS ENTE RED DURING THE RELEVANT PREVIOUS YEAR TO THE TPO FOR DETERMINING THE ARMS L ENGTH PRICE (ALP). ASSESSEE HAD TWO SEGMENTS OF OPERATIONS. ONE WAS I NFORMATION TECHNOLOGY ENABLED SERVICES (ITES) SEGMENT AND THE OTHER WAS P ACKAGING UNIT SEGMENT. IN THE ITES SEGMENT, IT HAD INTERNATIONA L TRANSACTIONS WORTH RS.9,32,00,220/-. FOR JUSTIFYING THE PRICES CHARGED ON THE ASSOCIATED ENTERPRISES(AE), ASSESSEE HAD TAKEN 16 COMPARABLES FROM WHICH AN AVERAGE PROFIT MARGIN OF 10.79% OF COST WAS WORKED OUT AS PLI OF THE COMPARABLES. ASSESSEE HAD FOLLOWED TNMM METHOD WH ICH WAS ACCEPTED BY THE TPO. THE MARGIN SHOWN BY THE ASSESSEE WAS 13.20% OF THE COST FOR THE ITES SEGMENT AS PER ITS OWN TP DOCUMENTATION. 4. DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO, ASSESSEE FILED A REVISED SEGMENTAL WORKOUT ON 16-02-2012. THROUGH S UCH REVISION THE OPERATING PROFIT TO TOTAL COST RATIO OF THE ITES SE GMENT WAS RE-WORKED TO 20.74% AGAINST 13.20% SHOWN IN THE TP DOCUMENTS ORI GINALLY FILED. THE VARIATION BETWEEN THE TWO STUDIES WAS IN THE TOTAL OPERATING COST. IN THE ORIGINAL TP WORKOUT, TOTAL OPERATING COST WAS SHOWN AT RS.8,23,31,210/-, WHEREAS IN THE REVISED STUDY, IT WAS SHOWN AS RS.77 ,188,082/- FOR THE ITES SEGMENT. BECAUSE OF THE REDUCTION IN THE TOTAL OPE RATING COST, THE MARGIN ITA NO.138(BANG)2014 3 OF 13.20 SHOWN INITIALLY HAD GONE UPTO 20.74%. IN OTHER WORDS, A PART OF THE TOTAL OPERATING COST EARLIER CONSIDERED AS PERT AINING TO ITES SEGMENT, WAS MOVED OUT OF THAT SEGMENT AND AGGREGATED WITH T HE PACKAGING SEGMENT. HOWEVER, THE TPO WHILE PASSING HIS ORDER U/S 92CA DID NOT CONSIDER REVISED WORKING OF MARGIN SUBMITTED BY THE ASSESSEE AND PROCEEDED TO MAKE A COMPARISON BASED ON ORIGINAL MA RGIN OF 13.20% GIVEN BY THE ASSESSEE IN THE FIRST SET OF TP DOCUMENTS. THE TPO ARRIVED AT ARMS LENGTH MEAN MARGIN ON COST CONSIDERING THE 8 COMPAR ABLES. WHILE ARRIVING AT THE 8 COMPARABLES HE APPLIED CERTAIN FILTERS AND EXCLUDED SOME OF THOSE COMPARABLES TAKEN BY THE ASSESSEE. ARMS LENGTH MEA N MARGIN OF 25.04% ON COST WAS WORKED OUT BY THE TPO, AND AN UPWARD AD JUSTMENT OF RS.1,00,04,375/- WAS RECOMMENDED. 4. AO ISSUED A DRAFT ASSESSMENT ORDER (DAO) ,ON THE LINES PROPOSED BY THE TPO. ASSESSEE PREFERRED TO TAKE UP THE MA TTER BEFORE THE DRP. ASSESSEE MENTIONED BEFORE THE DRP THAT IT HAD FILED A RECTIFICATION LETTER POINTING OUT THE REVISED MARGIN WORK-OUT FURNISHED BY IT, WHICH WAS NOT CONSIDERED BY THE TPO. AS PER THE ASSESSEE, SUCH R ECTIFICATION PETITION WAS NOT DISPOSED OFF. FURTHER, AS PER THE ASSESSEE NON -CONSIDERATION OF THE REVISED SEGMENTAL RESULTS, RESULTED IN A ARBITRARY ADDITION. AS PER THE ASSESSEE, IF THE REVISED MARGIN OF 20.74% WAS COMPA RED WITH THE AVERAGE MEAN OF THE COMPARABLES IT WOULD FALL WITHIN +/- 5% RANGE. RESULTANTLY, ACCORDING TO THE ASSESSEE THERE WAS NO NEED FOR ANY ADJUSTMENT IN THE ALP. ITA NO.138(BANG)2014 4 5. THE DRP IN ITS DIRECTION DATED 29-11-2013 U/S 14 4C(5) OF THE ACT STATED AS UNDER; 4.1 THE ASSESSEE HAS MENTIONED THAT IT HAD FILED A RECTIFICATION LETTER STATING THAT THE LEARNED TPO H AS NOT CONSIDERED THE REVISED PLI WHILE COMPUTING THE ARM S LENGTH PRICE AND CONSEQUENTLY ERRED IN CALCULATING THE TRA NSFER PRICING ADJUSTMENT. IF THE AO/TPO HAS NOT ALREADY PASSED THE RECTIFICAT ION ORDER U/S 92CA(5), THEN HE IS REQUIRED TO PASS THE ORDER WITHIN THE LIMITATION PERIOD. IN ANY CASE, THE AO IS DIRECT ED TO VERIFY THE ACTUAL SEGMENT COST BASE AND COMPUTE THE ARMS LENGTH PRICE IN ACCORDANCE WITH THE SAME UNDER TNMM. 6. THE AO WHILE PASSING THE ASSESSMENT ORDER, PURS UANT TO THE DIRECTIONS OF THE DRP, HELD AS UNDER; THE DRP HAS GIVEN FOLLOWING DIRECTIONS, VIDE PAR A 4.1 OF THE SAID ORDER; IF THE AO/TPO HAS NOT ALREADY PASSED THE RECTIFI CATION ORDER U/S 92CA(5), THEN HE IS REQUIRED TO PASS THE ORDER WITHIN THE LIMITATION PERIOD. IN ANY CASE, THE AO IS DIRECTED TO VERIFY THE ACTUAL SEGMENT COST BASE AND COMPUTE THE ARMS LENGTH PRICE IN ACCORDANCE WITH THE SAME UNDE R TNMM. THE DEPUTY COMMISSIONER OF INCOME-TAX (TP)A-IV, BANGALORE HAS REPORTED ON 18-12-2013: THE RECTIFICATION PETITION FILED BY THE ASSESSEE ON 06-02- 1013 HAS ALREADY BEEN REJECTED VIDE ORDER DATED 30- 08- 2013 ITA NO.138(BANG)2014 5 FURTHER, TPO REJECTS THE REVISED FINANCIALS FIL ED BY THE TAX PAYER.. THE TPO, VIDE LETTER DATED 18-12-2013, HAS REPORT ED NO CHANGE IN ADJUSTMENT OF RS.1,04,05,375/- MADE U/S 9 2CA AS PER TPOS EARLIER ORDER DATED 18-02-2013. HENC E THE SAME IS ADOPTED AS ADDITION TOWARDS THE RETURNED IN COME N ACCOUNT OF ADJUSTMENT U/S 92CA. 7. NOW BEFORE US, LEARNED AR SUBMITTED THAT THE AS SESSEE PURSUANT TO THE DIRECTIONS OF THE DRP, HAD SUBMITTED BEFORE THE TPO ON 19-12-2013 A LETTER IN WHICH IT HAD GIVEN THE DETAILS OF THE R EALLOCATION OF COST IN THE REVISED SEGMENTAL RESULT. AS PER THE LEARNED AR, A NNEXURE TO THE SAID LETTER GAVE THE DETAILED ALLOCATION OF EXPENDITURE BETWEEN THE PACKAGING UNIT SEGMENT AND ITES SEGMENT, BUT THE AO HAD NOT CONSID ERED IT. AS PER LEARNED AR, ITS EARLIER RECTIFICATION PETITION WAS REJECTED BY THE TPO THROUGH A SHORT ORDER DATED 30-08-2013 WHICH DID NOT GO INT O THE MERITS. 8. PER CONTRA, LEARNED DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. ACCORDING TO HIM, HE AO HAD REJECTED THE REVISED SEGMENTAL RESULTS SINCE IT WAS ALREADY REJECTED BY THE TPO PU RSUANT TO A RECTIFICATION PETITION FILED BY THE ASSESSEE. 9. WE HAVE PERUSED THE ORDER AND HEARD THE RIVAL C ONTENTIONS. THE DIRECTIONS OF THE DRP WITH REGARD TO THE CLAIM OF A SSESSEE FOR RE-ALLOCATION ITA NO.138(BANG)2014 6 OF COST BETWEEN ITS PACKAGING UNIT AND ITES UNIT, I N OUR OPINION, UNAMBIGUOUS. THE DRP HAS DIRECTED THE AO TO VERIF Y ACTUAL SEGMENTED COST BASE AND COMPUTE THE ALP. PURSUANT TO SUCH D IRECTIONS DATED 29-11- 2013, ASSESSEE HAD ON 20-12-2013, FILED A LETTER DA TED 19-12-2013, BEFORE THE TPO WHEREIN IT HAD GIVEN THE HEADS OF EXPENDITU RE WHICH WERE SUBJECT TO RE-ALLOCATION. THE CHANGE IN THE NET RESULT BETW EEN THE ORIGINAL SEGMENTAL WORKING AND THE REVISED SEGMENTAL WORKING OF MARGIN IS CLEAR FROM THE TABLE BELOW; ORIGINAL MARGINS SUBMITTED A PER LETTER DATED 19-07 -2011 AMOUNT IN INR AY: 2009-10 PARTICULARS IT/ITES PACKAGING UNIT TOT AL REVENUE 93,200,220 60,563,338 153,763,557 TOTAL OP.COST (TC) 82,331,210 50,090 ,214 132,421,424 OP.COST(OP) 10,869,010 10,4 73,124 21,342,134 OP/TC 13.20% 20.91% REVISED MARGINS AS PER LETTER DATE 16-02-2012 PARTICULARS IT/ITES PACKAGING UNIT TOTAL REVENUE 93,200,220 60,563,338 153,763,557 TOTAL OP.COST (TC) 77,188,082 5523334 2 132,421,424 OP.COST(OP) 16,012,138 5,329 ,996 21,342,134 OP/TC 20.74% 9.65% 10. IN OUR OPINION, THE AO SHOULD NOT HAVE TAKEN R EFUGE UNDER AN ORDER PASSED ON AN EARLIER RECTIFICATION PETITION B Y THE ASSESSEE IN WHICH IT ITA NO.138(BANG)2014 7 HAD POINTED OUT THE NON-CONSIDERATION OF THE REVISE D SEGMENTAL RESULTS FILED BY IT. EVEN THAT ORDER DATED 30-08-2013, IN OUR OP INION, WAS VERY CRYPTIC. RELEVANT PARA-3 OF THE SAID ORDER IS REPRODUCED HER E UNDER; I HAVE CAREFULLY GONE THROUGH THE PETITION OF THE TAXPAYER AND THE INFORMATION AVAILABLE ON RECORD. VIDE LETTER DATED 14.08.2013, THE CASE WAS ALSO FIXED FO R HEARING ON 26.8.2013. THE TAXPAYERS AR SRI SUPRATIM MUKHERJEE, APPEARED ON BEHALF OF THE TAXPAYER ON 26.8.2013 AND WAS HEARD. IN THIS CASE, THE TPO HAD IN THE TP ORDER DATED 18.01.2013, CONSIDERED THE SEGME NTAL RESULTS FURNISHED IN THE TP DOCUMENTATION, AND NOT THE REVISED SEGMENTAL RESULTS FURNISHED BY THE TAXPAYER LATER, AS IT WAS SEEN THAT NO BASIS/EVIDENCES IN SUPPORT O F THE ALLOCATION OF EXPENSES I THE REVISED SEGMENTAL FIN ANCIALS, WERE FURNISHED BY THE TAXPAYER. 11. WE ARE THEREFORE, OF THE OPINION THAT THE DIRE CTIONS OF THE DRP HAS NOT BEEN PROPERLY CONSIDERED BY THE LOWER AUTHO RITIES. IF THE ASSESSEES CLAIM FOR REVISED SEGMENTAL RESULTS ARE FOUND TO BE ACCEPTABLE, THERE IS EVERY POSSIBILITY THAT PRICING OF ITS INTERNATIONAL TRANSACTIONS WOULD COME WITHIN +/- 5% OF THE PLI WORKED OUT BY THE TPO HIMS ELF. . THEN THE ISSUE REGARDING EXCLUSION AND/OR INCLUSION OF COMPARABLES MAY NOT ARISE AT ALL. WE THEREFORE, SET ASIDE THE ORDERS OF THE AUTHORITI ES BELOW AND REMIT THE ISSUE BACK TO THE FILE OF THE AO/TPO FOR CONSIDERAT ION AFRESH IN ACCORDANCE WITH LAW. RIGHT OF THE ASSESSEE TO CHALLENGE ALL OT HER ASPECTS OF THE ASSESSMENT AND CONDITIONS ARE KEPT OPEN. ITA NO.138(BANG)2014 8 IN THE RESULT, GROUND NO.1 OF THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSES. 12. APPEAL OF THE ASSESSEE IS THEREFORE, PARTLY AL LOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH SEPTEMBER, 2014. SD/- (RAJPAL YADAV) SD/- (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE: D A T E D : 05-09-2014 AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE