Indian Additives Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1289/CHNY/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 2831 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Chennai
• Assessment Year: 2007-2008
• Appeal Filed On: 22-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M SRINIVASA RAO
• Assessee Lawyers: M VISWANATHAN
• Keywords: Related party transaction; Depreciation; Transfer pricing; Rectification of order

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D B ENCH, CHENNAI . . . , ., # BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI S.JAYARAMAN, ACCOUNTANT MEMBER / I.T.A. NO.1289/CHNY/2017 '' /ASSESSMENT YEAR : 2007-08 M/S. INDIAN ADDITIVES LTD., EXPRESS HIGHWAY, MANALI, CHENNAI600 068. VS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-2(2), CHENNAI. PAN: AAACI1445G ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. M.VISWANATHAN,ADVOCATE /RESPONDENT BY : MR.M.SRINIVASA RAO, CIT /DATE OF HEARING : 22.01.2019 /DATE OF PRONOUNCEMENT : 28.02.2019 / O R D E R PER S.JAYARAMAN, AM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE O RDER OF COMMISSIONER OF INCOME TAX (APPEALS)-9, CHENNAI, IN ITA NO. 36/CIT(A)-9/2010-11 DATED 31.03.2017 FOR ASSESSMENT YEAR 2007-08. 2. M/S. INDIAN ADDITIVES LTD., THE ASSESSEE COMPAN Y, IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF LUBRICATING OIL ADDITIVES, WHICH IS USED FOR AUTOMOBILES. WHILE MAKING THE ASSESSMENT F OR THE ASSESSMENT YEAR 2007-08, THE TRANSFER PRICING OFFICER/ ASSESSI NG OFFICER, INTER-ALIA, DETERMINED THE ARMS LENGTH PRICE AT 7,52,00,000/- ADOPTING TNMM BY 2 ITA NO.1289/CHNY/2017 COMPARING THREE COMPANIES. AGGRIEVED, THE ASSESSEE FILED AN APPEAL AND THE LEARNED CIT(A) ENHANCED THE SAME. AGGRIEVED AGAINST THAT ORDER, THE ASSESSEE RAISED THE FOLLOWING GROUNDS IN THIS APPEAL:- 1. ARMS LENGTH PRICE - RS.1.74 CRORES SUBSEQUENTLY REDUCED BY AO BY WAY OF RECTIFICATION ORDER RS.1.22 CRORES AND FU RTHER ENHANCED TO RS.0.52 CRORES BY THE CIT(A): THE APPELLANT SUBMITS THAT THE APPELLANT IS IN THE MANUFACTURE OF LUBRICATING OIL ADDITIVES WHICH IS USED FOR AUTOMOB ILE INDUSTRY. WHEREAS THE COMPANY SELECTED BY TPO IN HIS ORDER DA TED 28.10.2010 IS NOT COMPARABLE AS THE LINE OF BUSINES S IS ENTIRELY DIFFERENT. MOREOVER, THE SIZE AND NATURE OF COMPARA BLES BUSINESS VARIES WITH APPELLANT COMPANY. THE SAME ISSUE HAS ALREADY BEEN ALLOWED IN THE EARL IER ASSESSMENT YEARS NAMELY AY 2005-06 AND 2006-07.FURTHER THE APP ELLANT SUBMITS THAT THE ENHANCEMENT MADE BY THE CIT IS WIT HOUT ANY BASIS AS THE COMPANY ADOPTED BY THE TPO IS NOT IN LINE WI TH THE APPELLANTS COMPANY IN ALL RESPECTS. 3. THE LEARNED AR SUBMITTED THAT THE ASSESSEE IS A JOINT VENTURE BETWEEN CHEVRON ORONITE COMPANY LLC, US AND CHENNAI PETROLEUM CORPORATION LIMITED, CHENNAI WITH EACH ENTITY HOLDI NG 11,83,401 SHARES OF THE FACE VALUE OF RS.100/- EACH, AMOUNTING TO A TOTAL PAID UP SHARE CAPITAL OFRS.23,66,80,200/-.THE ASSESSEE SUPPLIES A DDITIVES DIRECTLY TO FUEL AND LUBRICANT COMPANIES WHICH USE SSUCH ADDITI VE TO BLEND LUBRICANTS AND EITHER SUPPLY THE SAME TO ORIGINAL E QUIPMENT MANUFACTURERS ( OEMS )DIRECTLY OR MARKET THEM UNDE R THEIR OWN BRAND NAMES THROUGH THEIR RETAIL DISTRIBUTION CHANNELS. T HE ASSESSEE IS LICENSED TO MANUFACTURE, MARKET AND SUPPLY ORONITE FUEL AND LUBRICANT 3 ITA NO.1289/CHNY/2017 PRODUCTS IN INDIA. THE PRODUCTS SOLD TO CHEVRON, SI NGAPORE ORONITE ARE OVER-BASED SULFURISED CALCIUM PHENATE AND CALCIUM S ALT OF A MANNICH BASED ALKYL PHENOL. THE METHOD ADOPTED IN RESPECT O F COSTING THE SAME IS A SUM OF THE FOLLOWING ; 1. COST OF RAW MATERIALS CONSUMED IN THE PROCESS OF MANUFACTURE BASED ON ACTUAL PURCHASE PRICES AND ACT UAL USAGE IN PROCESS 2. COST OF ACTUAL OVERHEADS INCURRED ALLOCATED OVER THE ACTUAL PLANT OUTPUT BASED ON AUDITED DATA AVAILABLE FOR THE YEAR ENDED 31 ST MARCH 2007. OVERHEADS INCLUDE EMPLOYEE COSTS, POWER-WATER-FUEL COSTS, REPAIRS & MAINT COST S, DEPRECIATION, TRANSPORT, RENT, RATES & TAXES, INSUR ANCE, SECURITY EXPENSES, PRINTING & STATIONERY AND TELEPH ONE COSTS. 3.1 THUS, THE LD AR CONTINUED HIS SUBMISSIONS STATI NG THAT IT IS APPARENT FROM THE ABOVE THAT THE RAW MATERIALS USED BY THE APPELLANT ARE SUBJECTED TO A PROPRIETARY PROCESS IN ORDER TO ARRIVE AT THE SPECIFICATIONS OF THE SEMI-FINISHED PRODUCTS SOLD T O CHEVRON ORONITE, SINGAPORE. FURTHER PROCESSING IS CARRIED ON BY CHEV RON ORONITE, SINGAPORE, IN ORDER TO MEET THE SPECIFICATIONS REQU IRED BY THEIR END CUSTOMERS. SUCH SEMI-FINISHED PRODUCTS HAVE NEVER B EEN SOLD TO ANY OTHER CUSTOMER IN LARGE QUANTITIES AS RESULT OF WHI CH THERE ARE NO INSTANCES OF COMPARATIVE SALES THAT COULD BE FURNIS HED. THE TRANSFER PRICING STUDY DONE BY THE ASSESSEE IS IN ACCORDANC E WITH SEC.10 B OF THE INCOME TAX RULES CONTAINS THE BASIS OF THE PRIC ES ADOPTED BY IT WHICH WAS THE MARKET ACCEPTED, CONTEMPORANEOUS MARK ET RATES. THE 4 ITA NO.1289/CHNY/2017 PRICING WAS WITH REFERENCE TO THE MATERIAL AVAILABL E AS ON THE DATE WHEN THE STUDY WAS MADE, I.E 24-10-2007. THE TPO WAS OF THE OPINION THAT THE PRICING ADOPTED BY THE APPELLANT WAS NOT AT ARM S LENGTH. NO REASONING WHATSOEVER WAS ADDUCED BY THE TPO FOR THE ARBITRARY REJECTION OF THE JUSTIFICATION PROVIDED BY THE ASSE SSEE COMPANY. THEREAFTER, THE TPO INITIATED A SEARCH , IDENTIFIED FOUR COMPANIES VIZ M/S.AMINES LTD, CIBA INDIA LTD (MERGED), IFTEX OIL & CHEMICALS LTD, PONDY OXIDES & CHEMICALS LTD AS THE COMPARABLES T O THE ASSESSEE COMPANY. THE LD AR SUBMITTED THAT THE COMPANIES VI Z:- M/S.AMINES PLASTICIZERS LTD, CIBA INDIA LTD (MERGED), IFTEX OI L & CHEMICALS LTD, PONDY OXIDES & CHEMICALS LTD ARE NOT COMPARABLE WIT H THE APPELLANT FOR THE FOLLOWING REASONS; BASIS ASSESSEE COMPANY INDIAN ADDITIVES LTD(IAL) AMINES & PLASTICIZERS LTD CIBA INDIA LTD IFTEX OIL & CHEMICALS LTD PONDY OXIDES & CHEMICALS LTD 1) STRUCTURE OF ENTITY JOINT VENTURE BETWEEN CHENNAI PETROLEUM CORPORATION LTD (CPCL) AND CHEVRON ORONITE USA (COCL). CPCL IS A GOVERNMENT COMPANY AND HOLDS 50% OF EQUITY IN IAL. IAL IS UNLISTEDCOMPANY. LISTED COMPANY LISTED COMPANY INFORMATION NOT AVAILABLE LISTED COMPANY 2) CAPITAL STRUCTURE EQUALLY HELD BY INDIAN COMPANY (CPCL) AND FOREIGN COLLABORATOR (CCCL) 100% SHAREHOLDING INDIAN, NO FOREIGN PARTICIPATION HELD BY FOREIGN ENTITY (BASE GROUP) 100% SHAREHOLDING INDIAN, NO FOREIGN PARTICIPATION 100% SHAREHOLDING INDIAN, NO FOREIGN PARTICIPATION 5 ITA NO.1289/CHNY/2017 3) RELATED PARTY TRANSACTIONS FORAY 2007-08 YES NIL YES NIL NIL 4) NATURE OF ACTIVITIES MANUFACTURE, SALE, TRADING AND TESTING ANALYSIS, BOTH WITH RELATED AND UNRELATED PARTIES. MANUFACTURE, TRADING AND TECHNICAL SERVICES OF PLASTICIDES MANUFACTURE, TRADING OF SYNTHETIC COLOURING SUBSTANCE MANUFACTURE, TRADING LUBE OIL ADDITIVES MANUFACTURE, TRADING OF ZINC OXIDES 5) SCOPE OF BUSINESS ACTIVITIES INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC DOMESTIC 6) TYPE OF CUSTOMERS GOVT OWNED OIL COMPANIES CUM LUBRICANT MANUFACTURERS LIKE INDIANOIL, BPCL, HPCL AND PRIVATE LUBRICANT MANUFACTURERS LIKE GULF OIL, TIDEWATER, SHELL, ETC... 6) NATURE OF PRODUCT ADDITIVE PACKAGES FOR LUBRICANT INDUSTRY ETHANOLAMINES, PLASTICIZERS FOR THE PLASTIC INDUSTRY COATING CHEMICALS, TEXTILE CHEMICALS FOR THE SYNTHETIC COLOURING SUBSTANCES ADDITIVES FOR LUBRICATING OIL FOR THE AUTOMOBILE INDUSTRY METALLIC OXIDES, PLASTIC ADDITIVES FOR THE PLASTIC INDUSTRY 7) VOLUME OF BUSINESS AS COMPUTED BY TPO OPERATING INCOME RS.156.99 CRORES OPERATING COST RS.156.63 CRORES OPERATING PROFIT RS.0.36 CRORES OPERATING INCOME RS.101.30 CRORES OPERATING COST RS.95.96 CRORES OPERATING PROFIT RS.5.34 CRORES OPERATING INCOME RS.527.44 CRORES OPERATING COST RS.501.83 CRORES OPERATING PROFIT RS.25.61 CRORES OPERATING INCOME RS.8.47 CRORES OPERATING COST RS.7.28 CRORES OPERATING PROFIT RS.1.19 CRORES OPERATING INCOME RS.1 10.40 CRORES OPERATING COST RS.104.04 CRORES OPERATING PROFIT RS.6.36 CRORES 8) PROFIT MARGIN 0.23% AS PER TPO 0.23% 5.27% 4.86% 14.05% 5.76% THE AFORESAID COMPANIES HAVE NEVER COMPETED WITH IA L IN ANY OF THE BUSINESSES SINCE IALS INCEPTION AND ON ACCOUNT OF THE FACT THAT THEY ARE ENGAGED IN TOTALLY DIFFERENT STREAMS OF BUSINESSES. HENCE, THESE 6 ITA NO.1289/CHNY/2017 COMPANIES ARE NOT COMPARABLE COMPANIES. THUS, NEITH ER IN TERMS OF THE INDUSTRY SERVICED, PRODUCTS DEALT WITH, SIZE OF BUS INESS OPERATIONS, THE VOLUME OF TRANSACTIONS ENGAGED IN NOR TURNOVER EARN ED WAS THERE ANY COMPARABLE PARAMETER BETWEEN THE APPELLANT AND THES E COMPANIES. THE LD AR SUBMITTED THAT 40% SALES ARE MADE TO GOVE RNMENT COMPANIES VIZ BPCL,HPCL& IOC , THE SALES ARE MADE O N COMPETITIVE BASIS THROUGH TENDER, THE SAME TRANSACTIONS HAVE TA KEN PLACE IN THE EARLIER YEARS AND IT HAS BEEN DECIDED IN ITS FAVOUR BY THE CIT(A) AND IT HAS BEEN ACCEPTED. FURTHER, THERE ARE DISCREPANCIE S IN THE FIGURES TAKEN BY THE TPO FROM ITS FINANCIALS . THE LD AR RELIED ON VARIOUS CASE LAWS AND EMPHASIZED THAT ONLY LIKES CAN BE WITH LIKE ET C. PER CONTRA, THE LD DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 4. WE HEARD THE RIVAL SUBMISSIONS AND GONE THROU GH RELEVANT MATERIALS. IT IS CLEAR FROM THE SUBMISSIONS OF THE LD AR , EXTRACTED SUPRA, THERE ARE APPARENT VARIATIONS IN TERMS OF TH E INDUSTRY SERVICED, PRODUCTS DEALT WITH, SIZE OF BUSINESS OPERATIONS, T HE VOLUME OF TRANSACTIONS ENGAGED , TURNOVER EARNED ETC BETWEEN THE IMPUGNED COMPARABLES AND THE ASSESSEE. FURTHER, THE AS SESSEE PLEADED THAT THE SAME TRANSACTIONS HAVE TAKEN PLACE IN TH E EARLIER YEARS AND IT HAS BEEN DECIDED IN ITS FAVOUR BY THE CIT(A) AND IT HAS BEEN ACCEPTED ETC. IN THE FACTS AND CIRCUMSTANCES, WE DEEM IT FIT TO REMIT THESE 7 ITA NO.1289/CHNY/2017 ISSUES BACK TO THE TPO/AO FOR A FRESH EXAMINATION AND DUE DECISION IN ACCORDANCE WITH LAW. THE ASSESSEE SHALL PLACE ALL T HE MATERIALS IN SUPPORT OF ITS CONTENTIONS BEFORE THE AO AND COMPL Y TO THE AOS REQUIREMENTS AS PER LAW. THE A O SHALL FURNISH AD EQUATE OPPORTUNITY TO THE ASSESSEE AND DECIDE THESE ISSUES IN ACCORDANC E WITH LAW . THE ASSESSEES APPEAL IS TREATED AS ALLOWED FOR STATI STICAL PURPOSES. 5. IN THE RESULT, THE ASSESSEES APPEAL IS TREATE D AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 28 TH FEBRUARY, 2019 AT CHENNAI. SD/- SD/- ( . . . ) ( . ) (N.R.S.GANESAN) (S.JAYARAMAN) ( ! / JUDICIAL MEMBER) ( ! / ACCOUNTANT MEMBER) /CHENNAI, $ /DATED 28 TH FEBRUARY, 2019 SOMU () *) /COPY TO: 1. APPELLANT 2. RESPONDENT 3. + ( ) /CIT(A) 4. + /CIT 5. ) / /DR 6. 2 /GF