Nila Mehta, Ghaziabad V. ACIT, Circle-54(1), New Delhi

ITA 1357/DEL/2019

• Counselvise Citation: [2019] 111 COUNSELVISE.COM (IT) 8519 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2013-2014
• Appeal Filed On: 19-02-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NAMITA
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction; Set aside
• Section: 92C; 92D; 92E; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO.1357/DEL./2009 (ASSESSMENT YEAR : 2004-05) M/S. SHIVKA TRADING PVT. LIMITED, VS. DCIT, CIR CLE 8 (1), 3 RD FLOOR, VARDHMAN SHOPPING COMPLEX, NEW DELHI. 1, LSC ROHIT KUNJ, PITAMPURA, NEW DELHI 110 034. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NEERAJ JAIN, ADVOCATE SHRI ABHISHEK AGGARWAL, ADVOCATE REVENUE BY : MS. NAMITA PANDEY, SENIOR DR DATE OF HEARING : 16.12.2019 DATE OF ORDER : 31.12.2019 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER APPELLANT, M/S. SHIVKA TRADING PVT. LIMITED (HEREI NAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESEN T APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 27.01.2009 PASSE D BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-XX, NEW DELHI IN AN APPEAL CHALLENGING THE ORDERS PASSED BY THE LD. TPO /AO QUA THE ASSESSMENT YEAR 2004-05 ON THE MODIFIED GROUNDS INT ER ALIA THAT :- ITA NO.1357/DEL./2009 2 MODIFIED GROUDS OF APPEAL 1. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ['CIT(A)'] ERRED ON FACTS AND IN LAW IN SUSTAINING TRANSFER PRICING ADJUSTMENT TO THE EXTENT OF RS.1,99,50,227 ALLEGEDLY ON ACCOUNT OF DIFFERENCE IN ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF PURCHASE OF TRADED GO ODS UNDERTAKEN BY THE APPELLANT WITH ITS ASSOCIATED ENT ERPRISE [' AE']. 2. THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN UPHOLDING THE BENCHMARKING ANALYSIS UNDERTAKEN BY T HE TRANSFER PRICING OFFICER ['TPO'] APPLYING TNMM AS T HE MOST APPROPRIATE METHOD, NOT APPRECIATING THAT ON T HE BASIS OF FUNCTIONS PERFORMED BY THE APPELLANT, IT IS CHAR ACTERIZED AS A DISTRIBUTOR AND THEREFORE, RPM IS THE MOST APP ROPRIATE AND DIRECT METHOD OF BENCHMARKING IN TERMS OF RULE 10B(1)(C) OF THE INCOME TAX RULES, 1962 ['RULES']. 2.1 THE CIT(A) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE REVENUE OUGHT TO MAINTAIN CON SISTENCY IN ITS APPROACH AND THEREFORE, SINCE RPM IS ACCEPTE D TO BE THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF PURCHASE OF TRADED GOO DS UNDERTAKEN IN THE PRECEDING YEAR, ITS APPLICATION O UGHT NOT BE DISPUTED FOR BENCHMARKING THE SAME TRANSACTION UNDERTAKEN IN THE YEAR UNDER CONSIDERATION. 2.2 THAT THE CIT(A) ERRED IN FACTS AND IN LAW IN CONSIDERING FOLLOWING COMPANIES AS COMPARABLE TO TH E APPELLANT, WITHOUT APPRECIATING THAT SUCH COMPANIES , BEING ENGAGED IN MANUFACTURING ACTIVITIES, DOES NOT SATIS FY THE TEST OF COMPARABILITY LAID DOWN UNDER RULE 10B(2) OF THE RULES: (I) AKASAKA ELECTRONICS LTD. (II) ROOP TELSONIC ULTRASONIX LTD. (III) VIJAI ELECTRICAL LTD. 2.3 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN N OT APPRECIATING THAT THE APPELLANT IS INCURRING HUGE C USTOM DUTY ON GOODS PURCHASED FOR THE PURPOSE OF BUSINESS OF TRADING, AND THEREFORE, IN ORDER TO ELIMINATE DIFFE RENCES WITH THE COMPARABLE COMPANIES, COMPARABILITY ADJUSTMENT TO ACCOUNT FOR SUCH DIFFERENCE IN CUSTOM DUTY EXPENSE OUGHT TO BE ALLOWED IN TERMS OF RUE 10B(3) OF THE RULES. ITA NO.1357/DEL./2009 3 2.4 THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AN D III LAW, THE CIT(A) ERRED IN NOT APPRECIATING THAT THER E COULD BE NO MOTIVE ON THE PART OF THE APPELLANT TO DIVERT AN Y PART OF ITS PROFIT TO ITS FOREIGN ASSOCIATED ENTERPRISES, B Y WAY OF PAYING HIGHER PRICE OF THE GOODS PURCHASED FROM THE ASSOCIATED ENTERPRISE, WHEN THE GOODS PURCHASED ARE SUBJECTED TO CUSTOM DUTY AT THE RATE OF 56% AND ITS INCOME IS SUBJECT TO TAX AT THE RATE OF 30%. 2.5 THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE CIT(A) ERRED IN NOT HOLDING THAT THE TRANS FER PRICING ADJUSTMENT, AT BEST, COULD NOT EXCEED THE T OTAL PROFIT EARNED BY THE ASSOCIATED ENTERPRISE IN SELLING THE TRADED GOODS TO THE APPELLANT, AS THE SAME WOULD RESULT IN TAXATION OF NOTIONAL INCOME. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 234 C OF THE ACT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. SHIVKA TRADING PVT. LIMITED, THE TAXPAYER IS INTO THE BUSINESS OF IMPORTING AND RESE LLING OF ELECTRONIC GOODS MAINLY VCD/DVD/HOME THEATRE AND AM PLIFIED SPEAKERS ETC. AND COMPONENTS THEREOF AND ASSEMBLY O F SOME OF THESE ITEMS. THE PRODUCTS ARE BRANDED ITEM UNDER T HE NAME DAPIC. THE GOODS ARE IMPORTED FROM M/S. PAROS HO NG KONG LIMITED, HONG KONG. M/S. PAROS HONG KONG IS A DEEM ED ASSOCIATE ENTERPRISE (AE) AS PER PROVISIONS CONTAIN ED U/S 92CA(2)(G) AND (H) OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) AS REPORTED IN THE FORM 3CED AS UNDER :- ITA NO.1357/DEL./2009 4 S. NO. DESCRIPTION OF TRANSACTION METHOD VALUE (IN RS.) 1 PURCHASE OF GOODS NONE 6,80,04,358/- 3. THE TAXPAYER BROUGHT ON RECORD THE COMPLETE DETA IL OF PURCHASES / MADE FROM ITS ASSOCIATED ENTERPRISES (A E) TO THE TUNE OF RS.10,75,44,366/-. SO, THE TOTAL VALUE OF THE I NTERNATIONAL TRANSACTIONS ENTERED INTO BY THE TAXPAYER DURING TH E YEAR UNDER ASSESSMENT IS RS.10,75,44,366/-. 4. LD. TPO OBSERVED THAT THE TAXPAYER HAS NOT COMPU TED THE ARMS LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTI ONS IN ACCORDANCE WITH ANY OF THE PRESCRIBED METHOD. THE TAXPAYER BROUGHT ON RECORD THE FACT DURING TP PROCEEDINGS TH AT ITS GROSS MARGIN WAS 15.94% AND THE AVERAGE GROSS MARGIN OF M /S. VIDEOCON INTERNATIONAL LTD., MIRC ELECTRONICS LTD. AND SHARP INDIA LTD. WAS 13.78% ONLY AND FOUND ITS TRANSACTIO NS AT ARMS LENGTH. TPO, HOWEVER, NOTED THAT TP ANALYSIS IS NO T IN ACCORDANCE WITH RULE 10B(1)(2) & (3), RULE 10C AND RULE 10D OF THE INCOME- TAX RULES, 1962 (FOR SHORT THE RULES) AND SECTION 92C(1) & 92C(2) OF THE ACT. LD. TPO IN ORDER TO BENCHMARK T HE INTERNATIONAL TRANSACTIONS APPLIED TRANSACTIONAL NE T MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD (MAM) WITH OPERATING PROFIT/SALES (OP/SALES) AS PROFIT LEVEL I NDICATOR (PLI) ITA NO.1357/DEL./2009 5 AND COMPUTED THE MARGIN OF THE TAXPAYER AT (-) 1.72 %. LD. TPO SELECTED 9 COMPARABLES WITH AVERAGE OF 11.71% AS UN DER :- S.NO. CO.NAME NET SALES FOR THE F.Y. 2003-04 OPERATING PROFIT FOR THE F.Y. 2003-04 (IN CRORES) NPM (%) 1. AKASAKA ELEC 17.65 1.89 10.71 2. BHARAT ELECTRON 2736.2 384.45 14.05 3. DYNAVISION 3.85 0.9 23.37 4. MIRC ELECTRONICS 928.32 45.64 4.91 5. ROOP TELSONIC 7.4 .93 12.56 6. VIDEOCON APPL. 1072.12 81.67 7.61 7. VIDEOCON COMMUN. 674.92 35.33 5.23 8. VIJAI ELECTRICAL 266.83 41.45 15.53 9. ZICOM ELECTRONIC 40.84 4.67 11.43 AVERAGE 11.71% 5. CONSEQUENTLY, TPO PROCEEDED TO DETERMINE ALP OF THE INTERNATIONAL TRANSACTION DURING THE YEAR UNDER ASS ESSMENT AS UNDER:- THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSA CTIONS ENTERED INTO WITH THE AE IS COMPUTED IN THE FOLLOWING MANNE R :- TOTAL SALES RS.15,02,82,646 OPERATING PROFIT RS.(-25,92,582) OPERATING PROFIT MARGIN -1.72% ARMS LENGTH OPERATING PROFIT MARGIN 11.71% ARMS LENGTH OPERATING PROFIT RS.17,59,80,97 ACTUAL OPERATING PROFIT (-25,92,582) DIFFERENCE BEING ADJUSTMENT REQUIRED RS.2,01,90,679 6. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. C IT (A) BY WAY OF FILING THE APPEAL WHO HAS PARTLY ALLOWED THE APPEAL. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. ITA NO.1357/DEL./2009 6 7. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 8. UNDISPUTEDLY, THE TAXPAYER IS ENGAGED IN SELLING AND DISTRIBUTING PRODUCTS FROM ITS AE. IT IS ALSO NOT IN DISPUTE THAT THE TAXPAYER IS CATEGORIZED AS PERFORMING NORMAL BUSINE SS FUNCTION BEING A FULL-FLEDGED RISK BEARING DISTRIBUTOR BEARI NG ALL RISKS WARRANTED IN THE BUSINESS ACTIVITIES LIKE FOREIGN E XCHANGE RISK, PRICE/MARKET RISK, PRODUCT OBSOLESCENCE RISK.\ 9. AT THE VERY OUTSET, IT IS BROUGHT TO OUR NOTICE BY THE LD. DR FOR THE REVENUE THAT DURING TP PROCEEDINGS, THE TAX PAYER HAS NOT COMPUTED ALP OF INTERNATIONAL TRANSACTIONS BY APPLY ING THE PRESCRIBED METHOD TO DETERMINE THE ARMS LENGTH VAL UE OF THE INTERNATIONAL TRANSACTIONS AS REQUIRED UNDER SUB-SE CTION (1) & (2) OF SECTION 92C OF THE ACT. THE TAXPAYER DURING THE TP PROCEEDINGS MADE SUBMISSIONS BY CLAIMING ITS GROSS MARGIN AT 15 .94% AND AVERAGE GROSS MARGIN OF 3 COMPARABLES AT 13.78% WIT HOUT CONDUCTING ANY TP ANALYSIS, WHICH IS NOT IN ACCORDA NCE WITH THE PROVISIONS CONTAINED UNDER RULE 10B, 10C AND 10D OF THE RULES AND SECTION 92C OF THE ACT. THESE FACTS ARE PROVED FROM PAGE 4 OF THE TP ORDER. ITA NO.1357/DEL./2009 7 10. FURTHERMORE, WHEN WE PERUSED THE ORDER PASSED B Y THE LD. CIT (A) IN PARA 6.5, IT IS ALSO OBSERVED THAT TP AN ALYSIS HAS NOT BEEN MADE BY THE TAXPAYER IN ACCORDANCE WITH THE PR OVISIONS CONTAINED UNDER SECTION 92C & 92D OF THE ACT BY RET URNING FOLLOWING FINDINGS:- CHARTERED ACCOUNTANT WHO HAS GIVEN THE REPORT UNDE R SECTION 92E IN FORM 3CEB, IN PART B, AGAINST POINT 8B HAS Q UALIFIED HIS REPORT BY STATING THAT ****THOUGH THE REASONABLE INFORMATION AND DOCUMENTS PRESCRIBED U/S .920(1) HAVE BEEN KEPT BY THE ASSESS EE, THE ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANS ACTION HAS NOT BEEN DETERMINED BY THE ASSESSEE THROUGH THE MOST AP PROPRIATE METHODS PRESCRIBED UNDER THE ACT. AS EXPLAINED BY THE ASSESSEE, THE GOODS IMPORTED BY THE ASSESSEE HAVE BEEN SPECIALLY MADE TO ORDER BY THE ASSOCIATED ENTERPRISE MADE TO THEIR SPECIFICATIONS AND ARE OF A EXCLUSIVE BRAND NAME CARRYING SPECIAL FEATURES. WE HAVE ALSO BEEN EXPLAI NED THAT THE QUALITY OF THE PRODUCTS IMPORTED IS ALSO ABOVE THE NORMAL STANDARDS AND IS INCOMPARABLE AND HENCE COMPUTATION OF ARMS' LENGTH PRICE CANNOT BE DONE. AND DESPITE THE SINCERE EFFORTS, THE ASSESSEE WAS U NSUCCESSFUL TO OBTAIN THE INVOICE-WISE INFORMATION FROM THE ASSOCI ATED ENTERPRISE REQUIRED FORM DETERMINATION OF ARM'S LEN GTH PRICE. AS INFORMED BY THE ASSESSEE, THE ASSOCIATED ENTERPRISE CHARGE A COMMISSION OF 3% INCLUSIVE OF INSURANCE AND FREIGHT FROM THE ASSESSEE AS THEY ARE DISTRIBUTING THE BRAND NAME ON ALL THE SHIPMENTS MADE.' 11. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT THE TAXPAYER HAS NOT MADE TRUE DISCLOSURES BY BRINGING ON RECORD ITS TP ANALYSIS BY APPLYING THE MAM TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS NOR HAS BR OUGHT ON RECORD INVOICE-WISE INFORMATION FROM ITS AE NECESSARY FOR DETERMINATION ITA NO.1357/DEL./2009 8 OF ALP AND CONSEQUENTLY, LD. TPO PROCEEDED TO DETER MINE THE ALP OF INTERNATIONAL TRANSACTIONS EX-PARTE. 12. IN THESE CIRCUMSTANCES, LD. AR FOR THE TAXPAYER CONTENDED THAT ONE OPPORTUNITY MAY BE GRANTED TO THE TAXPAYER TO BRING ON RECORD TP ANALYSIS ALONG WITH CONTEMPORANEOUS DOCUM ENTS, COMPLETE 3CEB REPORT ETC. TO BENCHMARK THE INTERNAT IONAL TRANSACTIONS. TO DECIDE THE CONTROVERSY AT HAND ON CE FOR ALL AND TO AVOID THE MULTIPLICITY OF THE LITIGATION, WE ARE OF THE CONSIDERED VIEW THAT THE TAXPAYER IS ENTITLED FOR ONE MORE OPP ORTUNITY TO PROVE ITS CASE AND CONSEQUENTLY, THE CASE IS REMITTED BAC K TO THE LD. TPO TO DECIDE AFRESH ON FILING CONTEMPORANEOUS DOCUMENT S AND COMPLETE 3CEB REPORT IN ORDER TO DETERMINE THE ARM S LENGTH VALUE OF ITS INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ITS AE AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE TAXP AYER. SO, THE APPEAL FILED BY THE TAXPAYER IS ALLOWED FOR STATIST ICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 31 ST DAY OF DECEMBER, 2019. SD/- SD/- (PRASHANT MAHARISHI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 31 ST DAY OF DECEMBER , 2019 TS ITA NO.1357/DEL./2009 9 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.