M/s. Otto Bilz (India) Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1331/BANG/2010

• Counselvise Citation: 133121114 RSA 2010
• Duration Of Justice: 9 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 22-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 26-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIIIDR
• Assessee Lawyers: VISHVESHWARA MUDI SONDA
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 234B; 143(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO. 1331/BANG/2010 ASSESSMENT YEAR : 2006-07 M/S. OTTO BILZ (INDIA) PVT. LTD., NO.5B/6A, KIADB INDL. AREA, DODDABALLAPUR 561 203. BANGALORE DIST. PAN : AAACO2164N VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI VISHVESHWARA MUDI SONDA, C.A. RESPONDENT BY : SHRI ETWA MUNDA, CIT-III(DR) DATE OF HEARING : 22.08.2011 DATE OF PRONOUNCEMENT : 07.09.2011 O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL IS FILED BY THE ASSESSEE AGGRIEVED B Y THE ORDER OF DISPUTE RESOLUTION PANEL DATED 29.9.2010 FOR THE A. Y. 2006-07. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS APPEAL A ND THEY ARE LISTED HEREINBELOW: ITA NO.1331/BANG/10 PAGE 2 OF 8 GROUNDS OF APPEAL I. TRANSFER PRICING 1. THE HONBLE DRP AND THE LD. AO ERRED IN MAKING T RANSFER PRICING ADJUSTMENTS IN RESPECT OF THE INTERNATIONAL TRANSACTIONS OF OTTO BILZ. 2. REJECTION OF SEGMENTAL MARGIN ANALYSIS OF THE AP PELLANT BETWEEN ASSOCIATED ENTERPRISES AND NON ASSOCIATED ENTERPRISES. 3. THE HONBLE DRP AND THE LD. AO ERRED IN CONCLUDI NG THAT THE ALLOCATION KEYS TO THE SEGMENTAL MARGIN ANALYSI S OF OTTO BLITZ, DOES NOT EXPLAIN THE VARIATION IN THE R ATIO OF COST ALLOCATED TO ASSOCIATED ENTERPRISES AND NON ASSOCIATED ENTERPRISES. 4. THE HONBLE DRP AND THE LD. AO ERRED CONSIDERING THE MARGINS OF THE COMPANY ON OVERALL BASIS AND NOT SEG MENT WISE BASIS. 5. THE HONBLE DRP AND THE LD. AO ERRED IN NOT CONS IDERING THE IMPACT OF LABOUR UNREST FOR A PERIOD OF 64 DAYS DURING THE FINANCIAL YEAR. 6. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE CON TENTION THAT THE INTERNATIONAL TRANSACTIONS ARE AT ARMS LE NGTH PRICE. THE HONBLE DRP AND THE LD. AO ERRED IN MAKING ADJUSTMENTS TO THE TOTAL VALUE OF SALE OF FINISHED GOODS BY OTTO BILZ TO ASSOCIATED ENTERPRISES AND ERRED IN NO T REDUCING THE PROPORTIONATE ADJUSTMENTS MADE IN RESP ECT OF PURCHASE OF COMPONENTS UTILISED IN THE SALE OF FINI SHED GOODS TO ASSOCIATED ENTERPRISES. 7. USE OF CONTEMPORANEOUS DATA 8. SAFE HARBOUR AND APPLICATION OF +-5% ARMSS LENG TH RANGE. II. CORPORATE TAX 1. INTEREST UNDER SECTION 234B OF THE ACT. 2. INTEREST UNDER SECTION 234C OF THE ACT. ITA NO.1331/BANG/10 PAGE 3 OF 8 2. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME FOR THE A.Y. 2006- 07 ON 27.11.2006 BY DECLARING THE TAXABLE INCOME OF RS.80,33,451/-. INITIALLY THE RETURN WAS PROCESSED U/S. 143(1) OF T HE ACT ON 29.2.2008 AND SUBSEQUENTLY TAKEN UP FOR SCRUTINY ASSESSMENT AND O RDER U/S. 143(3) WAS PASSED ON 12.10.2010. THE COMPANY IS ENGAGED IN TH E BUSINESS OF MANUFACTURING TAPPING ADAPTORS AND CHUCKS. THE ASS ESSEE COMPANY HAD INTERNATIONAL TRANSACTIONS FOR MORE THAN RS.15 CROR ES AND THEREFORE IT HAD FILED FORM 3CEB. ACCORDINGLY THE MATTER WAS REFERR ED TO TPO FOR DETERMINING THE CORRECT ALP WITH PRIOR APPROVAL OF THE LD. CIT. AS PER THE PROVISIONS OF SECTION 92CA(4) OF THE ACT, ADJUSTMEN TS TO THE ALP AS DETERMINED BY THE TPO WAS ADOPTED. 3. AT THE BEGINNING OF THE HEARING, LD. AR SUBMITTE D THAT THE REVENUE HAD ERRED IN CONCLUDING THAT THE COST ALLOCATION TO DIFFERENT SEGMENTS AND PRODUCTS SHOULD BE DIRECTLY PROPORTIONATE TO THE SA LES REVENUE EARNED IN THE RESPECTIVE SEGMENT/PRODUCT. FURTHER, THE REVEN UE ERRED IN CONCLUDING THAT THE COST ALLOCATED BETWEEN ASSOCIATED ENTERPRI SES AND NON-ASSOCIATED ENTERPRISES ARE NOT RELIABLE AS THE COST ALLOCATED IS NOT DIRECTLY PROPORTIONATE TO THE SALES REVENUE OF EACH SEGMENT. LD. AR EXPLAINED THAT THE COMPLETE DETAILS OF THE BASIS OF SEGMENT NET MA RGINS WERE CALCULATED BY THE COMPANY. THE SEGMENTAL MARGIN CALCULATION W AS BASED ON THE ACTIVITY BASED COSTING SYSTEM FOLLOWED BY THE COM PANY WHEREIN COST IS CALCULATED IN RESPECT OF EACH PRODUCT MANUFACTURED BY CONSIDERING THE MATERIAL COST, DIRECT COST BASED ON MACHINE HOUR RA TE FOR MANUFACTURING OF PRODUCTS, PRODUCTION SUPPORT COST, ETC. FURTHER, I NDIRECT COST WAS ALSO ALLOCATED BASED ON THE SALES REVENUE EARNED BY EACH SEGMENT AND BY ITA NO.1331/BANG/10 PAGE 4 OF 8 IDENTIFYING EXPENSES ATTRIBUTABLE FOR EACH SEGMENT. LD. AR FURTHER EXPLAINED THAT THE COST OF EACH SEGMENT CANNOT BE D IRECTLY PROPORTIONATE TO THE SALES VALUE, AS THE PRODUCTS MANUFACTURED AND S OLD TO ASSOCIATE ENTERPRISES AND NON-ASSOCIATE ENTERPRISE ARE NOT SI MILAR IN NATURE. LD. AR SUBMITTED THAT THE COMPLETE LIST OF PRODUCTS SOLD T O ASSOCIATE ENTERPRISES AND NON-ASSOCIATE ENTERPRISE WERE SUBMITTED ALONG W ITH THE INVOICE COPIES. IT WAS SUBMITTED THAT THE APPELLANT INCURR ED LOSSES IN THE NON- ASSOCIATE ENTERPRISE AS THE PRODUCTS WERE OF NEW VA RIETY AND WERE IN SMALL QUANTITIES WHICH RESULTED IN HIGHER SET UP TIME AND INCREASED COST OF PRODUCTION. LD. AR FURTHER ARGUED THAT THE COMPANY HAD EARNED LOWER MARGIN MAINLY DUE TO THE STRIKE PERIOD OF 64 DAYS D URING THE FINANCIAL YEAR AND THIS HAS RESULTED IN HIGHER COST. LD. AR FORCI BLY SUBMITTED THAT ALL RECORDS WITH RESPECT TO COST WERE AVAILABLE WITH TH E APPELLANT AND THEY WERE SUBMITTED BEFORE THE LD. AO WHO HAD FAILED TO EXAMINE THE SAME. DETAILS OF STOCK REGISTER WAS PROVIDED FOR THE FINA NCIAL YEAR 2005-06, CALCULATION OF FACILITY COST DETAILS WERE SUBMITTED AND IT WAS ALSO EXPLAINED THAT THIS COST ARE NOT DIRECTLY PROPORTIONATE TO TH E SALES VALUE FOR THE AE AND NON-AE SINCE CERTAIN COSTS WHICH ARE NOT INCURRED T OWARDS AE ARE NOT ALLOCATED TO THE SEGMENT. THE DETAILS OF THE EXPEN SE NOT ALLOCATED TO AE ARE MAINLY IN THE NATURE OF ADVERTISEMENT AND SELLI NG EXPENSE WHICH ARE NOT RELATED TO AE. FURTHER, COMPLETE DETAILS RELAT ING TO THE CALCULATION OF COST TO AE AND NON-AE WERE IDENTIFIED BY (A) DERIVA TION OF MATERIAL COST THROUGH ROUTE CARDS (B) THE MACHINE HOURS WERE ALSO TRACKED THROUGH ROUTE CARDS AND COST WORKED OUT ON MACHINE HOUR BASIS (C) THE COST OF UTILIZATION OF MACHINE WERE WORKED OUT BY ITA NO.1331/BANG/10 PAGE 5 OF 8 (I) ASSET DEPLOYMENT COST, (II) POWER, (III) SPARE TOOLS AND CONSUMABLES, (IV) SALARY COMMISSION OPERATORS, (V) AIR COMPRESSOR CHARGES, (VI) GENERAL EXPENDITURE. 4. LD. AR PRAYED THAT SINCE THE TPO HAD NOT EXAMINE D ALL THE RECORDS PRODUCED BY THE APPELLANT AND SO THE MATTER MAY BE REMITTED BACK TO THE FILE OF LD. TPO FOR A CLEAR FINDING. ON A QUERY BY THE BENCH, LD. AR PROMPTLY ANSWERED THAT THE APPELLANT HAD MAINTAINED COST REC ORDS AND HAD INTEGRATED COST ACCOUNTS ALONG WITH FINANCIAL ACCOU NTS IN ORDER TO OBTAIN ACCURACY FOR CHARGING ALL THE EXPENDITURE INVOLVED TO THE APPROPRIATE COST CENTERS. 5. LD. DR ON THE OTHER HAND VEHEMENTLY OPPOSED TO T HE ARGUMENTS OF THE LD. AR AND RELIED ON THE ORDER OF THE REVENUE. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORDS AVAILABLE BEFORE US. THE HUMBLE PRAYER OF THE LD. AR WAS THAT THE COST RECORDS OF THE ASSESSEE WERE NOT EXAMINED BY THE LD . TPO IN ARRIVING AT A FAIR CONCLUSION. COST ALLOCATION TO VARIOUS PRODUC TS AND SEGMENTS IS A HIGHLY SKILLED TASK AND IT CAN BE COMPLIED BY ONLY FOLLOWING THE PRINCIPLES OF COST ACCOUNTANCY. FINANCIAL ACCOUNTANCY ONLY RECOR DS THE FINANCIAL TRANSACTION OCCURRED DURING THE PREVIOUS YEAR IN TH E BOOKS OF ACCOUNTS IN A PRESCRIBED MANNER, WHEREAS BOOKS OF ACCOUNTS PERTAI NING TO COST ACCOUNTANCY PICKS UP THE FINANCIAL TRANSACTION FROM THE FINANCIAL BOOKS OF ITA NO.1331/BANG/10 PAGE 6 OF 8 ACCOUNTS AND ALLOCATES IT TO THE VARIOUS COST CENTE RS IN THE ORGANIZATION AND THEREBY DETERMINES THE COST OF PRODUCTION/SERVICE F OR EACH PRODUCT/SEGMENT. ON THE ONE HAND, THE ASSESSEE CLA IMS THAT IT HAS MAINTAINED ALL SUCH RECORDS AND PLACED BEFORE THE R EVENUE, HOWEVER, ON THE OTHER HAND, WE DO NOT FIND ANY SUCH OBSERVATION FROM THE ORDER OF THE LD. TPO. THE OBSERVATION IN THIS REGARD BY THE LD. AO IS REPRODUCED HEREINBELOW TO REVEAL THE FALLACY: FROM WHAT HAS BEEN STATED ABOVE AND WHAT WAS EXPL AINED DURING THE DISCUSSION AT THE TIME OF HEARING, IT IS SEEN THAT TOTAL COST IS EQUAL TO WORK COST PLUS FACILITY COST. HERE WORK COST = MATERIAL COST + CONVERSION COST + PRODUCTION SUPPORT COST. MATERIAL COST IS AS PER ROUTE CARDS. CONVERSION COST = (TIME FOR WHICH USED X MACHINE H OUR RATE) IN RESPECT OF EACH MACHINE USED FOR CONVERSION. PRODUCTION SUPPORT COST = ON THE BASIS OF QUANTITY RELEASED FOR PRODUCTION. FACILITY COST IT IS TAKEN ON THE BASIS OF SALE VA LUE OF PRODUCTS. THE ABOVE ALLOCATION KEYS, HOWEVER, DO NOT EXPLAIN THE WIDE VARIATIONS IN THE COST ALLOCATIONS IN AE AND OTHER SEGMENTS. IT MAY BE SEEN FROM THE TABLES GIVEN IN PARAS 6 AND 7. 1 THAT THE AE SALES ARE ABOUT 47% OF THE TOTAL OPERATING SALES AN D ITS TOTAL COST IS ABOUT 42% OF THE TOTAL COST. THE FACILITY COST OF THIS SEGMENT IS ONLY ABOUT 38.5% (14433/37397). IT IS SO DESPITE T HE FACT THAT THE FACILITY COST IS BASED ON THE VALUE OF PRODUCTS SOL D. IT MEANS THE WORK COST ALSO, MACHINE HOUR RATE AND THE TIME OF U SE ARE SUCH VARIABLES AS CAN CHANGE THE COST EASILY. THERE IS NO MATERIAL FOR VERIFICATION OF SUCH VARIABLES. HENCE, THE COST AL LOCATIONS ARE NOT RELIABLE. IT MAY BE POINTED OUT THAT IN THE PRECEDING YEARS A LSO LOSSES WERE SHOWN IN THE NON-AE SEGMENT AND THE OVERALL LOW MAR GINS WERE ATTRIBUTED TO THIS SEGMENT. THEREFORE, THE ABOVE C HARTS SHOWING ALLOCATIONS OF COST ARE NOT ACCEPTED. TAKING THE ENTIRE MANUFACTURING AS A WHOLE THE TAXP AYER HAS INCURRED LOSS WHERE AS THE COMPARABLES SELECTED IN THE TP DOCUMENT HAVE EARNED PROFIT MARGIN (TO SALE) OF 12. 21% ON THE ITA NO.1331/BANG/10 PAGE 7 OF 8 BASIS OF THEIR CURRENT YEAR DATA. THEREFORE, THE I NTERNATIONAL TRANSACTIONS ARE NOT AT ARMS LENGTH WITH IN THE ME ANING OF SECTION 92C(3) OF THE I.T. ACT READ WITH RULE 10B(1)(E) OF THE I.T. RULE. 7. CONSIDERING THE FORCEFUL SUBMISSION OF THE LD.AR THAT THIS ISSUE IS A MAJOR FACTOR IN DECIDING THIS CASE AND THEREFORE IT HAS TO BE REMITTED BACK TO THE FILE OF THE LD.AO NEEDS TO BE JUDICIOUSLY CONSI DERED. ON OUR CAREFUL EXAMINATION OF THE FACTS AND CIRCUMSTANCES OF THE C ASE, IN THE INTEREST OF JUSTICE, WE ARE OF THE CONSIDERED VIEW THAT THE ENT IRE MATTER NEEDS A FRESH EXAMINATION. THEREFORE, WE HEREBY REMIT THE CASE B ACK TO THE FILE OF LD. AO WHO SHALL TAKE APPROPRIATE STEPS FOR DE NOVO CONSID ERATION. FURTHER, THE LD. AO IS DIRECTED TO VERIFY IN DETAIL THE COST RECORDS MAINTAINED BY THE ASSESSEE AND ENSURE THAT THEY ARE RECONCILED WITH T HE FINANCIAL BOOKS OF ACCOUNTS BEFORE ARRIVING AT A CONCLUSION. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 7 TH DAY OF SEPTEMBER, 2011. SD/- SD/- ( SMT. P. MADHAVI DEVI) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 7 TH SEPTEMBER, 2011. DS/- ITA NO.1331/BANG/10 PAGE 8 OF 8 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.