DCIT LTU, MUMBAI V. KSB PUMPS LTD, MUMBAI

ITA 1397/MUM/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88123 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 22-01-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 17-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N PADMANABAN
• Keywords: Transfer pricing; International transaction; Question of law
• Section: 92C; 92

Judgement Text

, , , , , ,, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K, MUMBAI . . , !'# , !$ BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ITA NO.1397/MUM/2011 ASSESSMENT YEAR: 2005-06 DCIT - LTU, 28 TH FLOOR, CENTRE-1, WORLD TRADE CENTRE, CUFFE PARADE, MUMBAI-400005 / VS. M/S KSB PUMPS LTD. 126, MAKER CHAMBERS-III, NARIMAN POINT, MUMBAI-400021 ( '# / REVENUE) ( ()* /ASSESSEE) P.A. NO.AAACT2724P '# + , ! + , ! + , ! + , ! / REVENUE BY SMT. N. PADMANABAN - DR ()* + , ! + , ! + , ! + , ! / // / ASSESSEE BY): SHRI JITENDRA SANGHAVI ! + *- / / / / DATE OF HEARING : 22/01/2015 ./0 + *- / DATE OF PRONOUNCEMENT : 22/01/2015 '1 '1 '1 '1 + *- / DATE OF ORDER : 28/01/2015 '1 '1 '1 '1 / / / / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) : THE REVENUE IS AGGRIEVED BY THE IMPUGNED ORDER DATE D 01/12/2010 OF THE LD. FIRST APPELLATE AUTHORITY, MU MBAI . 2. THE FIRST GROUND RAISED BY THE REVENUE PERTAINS TO DELETING THE ADDITIONS MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT, BEING COMMISSION PAYMENT TO KSB AMRI (ASIA PACIFIC) PTE. LTD. (M/S KSB SINGAPORE). AT M/S KSB PUMPS LTD 2 THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESS EE, SHRI JITENDRA SANGHAVI, AT THE OUTSET, POINTED OUT THAT THE IMPUGNED ISSUE IS COVERED BY THE DECISION DATED 08/08/2013 OF THE TRIBUNAL IN THE CASE OF ASSESSEE ITSELF. THIS FACTUAL MATRIX WAS NOT CONTROVERTED B Y SHRI N. PADMANABAN, LD. DR. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN VIEW OF THE ABOVE, WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION FROM THE AFORESAID ORDER DATED 08/08/2013 F OR READY REFERENCE:- 12. WE HAVE HEARD BOTH PARTIES AND THEIR CONTENTIO NS HAVE CAREFULLY BEEN CONSIDERED. WE HAVE CAREFULLY GONE THROUGH TP REPORT FIELD BY THE ASSESSEE WHICH HAS BEEN MADE THE BASIS FOR CLAIMING THAT ALL THE 14 INTERNATIONAL TRANSACTIONS OF THE ASSESSEE ARE AT A LP. THESE TRANSACTIONS HAVE BEEN LISTED IN THE ORDER OF TPO A ND FOR THE SAKE OF CONVENIENCE ARE REPRODUCED BELOW: S. NO. NATURE OF TRANSACTION AMOUNT(RS.) 1 PURCHASES A) PURCHASE OF FINISHED GOODS FOR TRADING B) PURCHASE OF COMPONENTS 2,81,48,911 2. EXPORT SALES TO AE 20,10,53,203/- 3. INCOME FROM SERVICES RECEIVED 1,19,52,815/- 4. COMMISSION INCOME (RECEIVED) 1,91,38,200/- 5. ORDER CANCELLATION CHARGES (RECEIVED) 1,02,125/ - 6. TOTAL CHARGES RECEIVED 84,600/- 7. REIMBURSEMENT OF EXPENSES (ACTUAL) 26,66,790/- 8. COMMISSION PAID 3,18,03,660/- 9. ROYALTY PAID 2,00,74,971/- 10. TECHNICAL KNOW-HOW ACQUIRED 7,59,248/- 11 PAYMENTS FOR TECHNICAL AND OTHER SERVICES 12,18, 578/- 12. TESTING CHARGES PAID 11,26,574/- 13. EXPENSES REPAID 4,614/- 14. WARRANTY CHARGES PAID 55,10,500/- 15. TOTAL 32,36,44,644/- M/S KSB PUMPS LTD 3 EACH OF THE ABOVE MENTIONED INTERNATIONAL TRANSACTI ONS HAS NOT BEEN SEPARATELY CONSIDERED IN THE TP REPORT AND BASIS HA S BEEN ADOPTED AS TNMM. AS PER SECTION 92 OF THE ACT ANY INCOME ARISI NG FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO ALP. AS PER SECTION 92C THE ALP IN RELATION TO AN INTERN ATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTIONS OR CLASS OF TRANSACTION, OR CLASS OF A SSOCIATE BUSINESS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER R ELEVANT FACTORS DESCRIBED BY THE BOARD; (A) COMPARABLE UNCONTROLLED PRICE METHOD(CUP); (B) RESALE PRICE METHOD; (D) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTION NET MARGIN MET HOD(TNMM); SUCH OTHER METHOD AS MAY BE DESCRIBED BY THE BOARD. AS IT CAN BE SEEN FROM THE ABOVE LIST OF INTERNATIONAL TRANSACTI ONS THAT NONE OF THE INTERNATIONAL TRANSACTIONS MATCH TO EACH OTHER. THE REFORE, IT CANNOT BE SAID THAT A COMMON METHOD WILL BE SUFFICIENT TO COMPUTE THE ALP AS FIRSTLY IT HAS TO BE DETERMINED THAT WHICH METHO D WILL BE APPROPRIATE METHOD TO COMPUTE THE ALP OF AN INTERNA TIONAL TRANSACTION. THERE IS NO DISPUTE WITH REGARD TO OTH ER INTERNATIONAL TRANSACTIONS WHICH HAVE BEEN ACCEPTED BY THE TPO. T HE DISPUTE IS ONLY IN RESPECT OF COMMISSION PAYMENT. IT IS THE CA SE OF THE ASSESSEE THAT TNMM SHOULD BE APPLIED AND IT IS THE CASE OF T HE REVENUE THAT CUP METHOD IS APPROPRIATE METHOD. RULE 10B(1) DESCR IBES THAT FOR THE PURPOSE OF SUB-SECTION(2) OF SECTION 92C, THE A LP IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHODS WHICH HAVE ALREADY BEEN DESCRIBED IN THE AB OVE PART OF THIS ORDER BEING MOST APPROPRIATE METHOD IN THE FOLLOWIN G MANNER. SUB- CLAUSE (A) DESCRIBED CUP METHOD WHICH READ AS UNDER : (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH,- (I ) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICE S PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJ USTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (II) IS TAKEN TO BE AN ARMS LENGTH PRIC E IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE IN TERNATIONAL M/S KSB PUMPS LTD 4 TRANSACTION; CLAUSE (E) DESCRIBE TNMM METHOD WHICH IS AS UNDER: (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH,- (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FR OM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASS ETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO A NY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE O R BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO T HE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (I I) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BE TWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE A ND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TA KEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION; 12.1. IF WE SEE THE MODE OF COMPUTATION PROVIDED U NDER BOTH THESE METHODS FOR COMPUTING ALP IN RESPECT OF COMMISSION THE MOST APPROPRIATE METHOD WILL BE COMPARABLE UNCONTROLLED PRICE METHOD AS THE COMMISSION IS PAID BY THE ASSESSEE IN RESPEC T OF SERVICES PROVIDED BY ITS AE. TNMM METHOD IS MOST APPROPRIATE METHOD IN THE CASES WHERE SALE AND PURCHASE IS INVOLVED. THEREFOR E, IN OUR OPINION THE MOST APPROPRIATE METHOD TO COMPUTE ALP IN RESPE CT OF COMMISSION PAID BY THE ASSESSEE IS CUP METHOD. HOWE VER, THE WAY IN WHICH TPO HAS APPLIED CUP METHOD IS NOT APPROPRI ATE. THE AO M/S KSB PUMPS LTD 5 HAS RELIED UPON THE INTERNAL TRANSACTIONS FOR ARRIV ING AT A CONCLUSION THAT THE COMMISSION PAID BY THE ASSESSEE IS ON HIGH ER SIDE. SUCH OPINION HAS BEEN FORMED BY TPO WITHOUT GIVING ANY F INDING THAT WHETHER OR NOT ANY OUTSIDE COMPARISON IS AVAILABLE IN SIMILAR TYPE OF TRANSACTIONS. SUCH COURSE CAN BE ADOPTED ONLY IN TH E CIRCUMSTANCES WHERE IT IS FOUND THAT OUTSIDE COMPARISON IS NOT AV AILABLE. IN THIS VIEW OF THE SITUATION, WE ARE OF THE OPINION THAT T HE MATTER SHOULD BE RESTORED BACK TO THE FILE OF AO WITH A DIRECTION TO PROVIDE THE ASSESSEE A REASONABLE OPPORTUNITY TO SUPPORT ITS CA SE IN RESPECT OF ALP OF COMMISSION PAYMENT. THE ASSESSEE MAY FILE FR ESH TP STUDY FOR THIS TRANSACTION AND IF THE ASSESSEE DOES NOT D ESIRE TO DO SO THEN THE AO AT HIS DISCRETION GIVEN IN THE PROVISIONS OF LAW MAY REFER THE SAME TO TPO AND THIS ISSUE HAS TO BE RE-ADJUDICATED IN THIS MANNER AFRESH. WE DIRECT ACCORDINGLY. IN THE RESULT, THE A FOREMENTIONED GROUNDS ARE ALLOWED FOR STATISTICAL PURPOSES. IN VIEW OF THE ABOVE, ON IDENTICAL REASONING, WE DIRECT THE TPO TO RE-ADJUDICATE THE MATTER AFRESH, AS DISCUSSED HEREINABOVE, THUS, THIS GROUND OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 3. THE NEXT GROUND PERTAINS TO DELETING THE ADDITIO NS MADE ON ACCOUNT OF DIFFERENCE BETWEEN SALES TAX LOA N LIABILITY AND ACTUAL PAYMENT, THEREFORE, AT THE DISCOUNTED RATE UNDER THE SCHEME ANNOUNCED BY MAHARASHTRA GOVERNMENT. THIS GROUND WAS ALSO CLAIMED TO BE COVERED BY THE DECISION FROM HONBLE BOMBAY HIGH COURT IN CIT VS M/S KBS PUMPS LTD. (ITA NO.909 OF 2012). THIS FACTUAL MATRIX WAS ALSO CONSENTED TO BE CORRECT BY THE LD. DR. 3.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN VIEW OF THE M/S KSB PUMPS LTD 6 ABOVE, WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION FROM THE AFORESAID ORDER 5 TH DECEMBER, 2014. 52. WE ARE OF THE OPINION THAT THE REVENUE AGREEMENT REALLY MISSES THE POINT. THE INCENTIVE T O ESTABLISH A UNIT OR FACTORY IN A INDUSTRIALLY BACKW ARD OR HILLY AREA IS THE CORE OF THE SALES TAX DEFERRAL SCHEME. SOME TIME HAS TO BE GIVEN TO THE UNIT TO ESTABLISH ITSELF BEFORE IT STARTS GIVING CORRESPOND ING BENEFIT TO THE STATE. THAT OPPORTUNITY IS GRANTED BY DEFERRING THE REMITTANCE OF THE SALES TAX COLLECTED BY THE UNIT LIKE THE ASSESSEE. IN THAT REGARD, WE HAVE PERUSED THE COMPILATION OF ADMITTED DOCUMENTS PLACED ON RECORD BY SHRI. DASTUR. FROM A PERUSAL THEREOF, IT IS APPARENT THAT THE GOVERNMENT RESOLUT ION DATED 4 TH MAY, 1983 EVOLVES A PACKAGE OF INCENTIVES TO DISPERSE THE INDUSTRIES FROM BOMBAY-THANE-PUNE BELT AND TO ATTRACT THEM TO UNDERDEVELOPED AND DEVELOPING AREAS OF THE STATE OF MAHARASHTRA. THIS PACKAGE EVOLVES SEVERAL MEASURES TO ACHIEVE THIS OBJECT. THEN, THERE IS A NEW PACKAGE SCHEME OF INCENTIVES, 1988. BOTH SCHEMES HAVE CLAUSES AND PARAS CONTAINING SALES TAX DEFERRAL INCENTIVES. TO CARRY THIS OBJECT FURTHER AND ALSO TO ACHIEVE THE PURPOSE OF EARLY REMITTANCE OF DEFERRED SALES TAX COLLECTED BY THE UNITS AVAILING OF THE SCHEMES, THE STATUTORY OPTION WAS INCORPORATED IN SECTION 38 BY SUBSTITUTING THE 4 TH PROVISO TO SUB-SECTION 4 OF SECTION 38 OF THE BOMBAY SALES TAX ACT, 1959. THAT IS INFORMED BY THE TRADE CIRCULAR DATED 12 TH DECEMBER, 2002 ISSUED BY THE COMMISSIONER OF SALES TAX, MAHARASHTRA. A COMBINED READING OF THE SCHEMES M/S KSB PUMPS LTD 7 AND THIS CIRCULAR REVEALS THE LEGISLATIVE INTENT AS NOTED ABOVE. IN SUCH CIRCUMSTANCES, A PROPER UNDERSTANDING OF ALL THIS BY THE TRIBUNAL CANNOT BE TERMED AS PERVERSE. THE VIEW TAKEN BY IT IS IMMINENTLY POSSIBLE. ONCE THIS CONCLUSION IS REACH ED, THE OTHER JUDGMENTS CITED BY THE REVENUE ARE OBVIOUSLY DISTINGUISHABLE AND ON FACTS. 53. AS A RESULT OF THE ABOVE DISCUSSION, WE FIND THAT THE QUESTIONS OF LAW FORMULATED BY US AND TERMED AS SUBSTANTIAL WILL HAVE TO BE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THOSE ARE ANSWERED ACCORDINGLY. THE APPEALS ARE DISMISSED. INSOFAR AS INCOME TAX APPEAL NO.909 OF 2012 IS CONCERNED, AT PAGE 4 OF THE PAPER BOOK IN T HAT APPEAL, TWO ADDITIONAL QUESTIONS IN PARA 4(B) AND 4 (C) ARE TERMED AS SUBSTANTIAL QUESTIONS OF LAW. HOWEVER, THE COUNSEL APPEARING FOR THE PARTIES CONCEDED THAT QUESTIONS (B) AND (C) ARE COVERED BY TWO JUDGMENTS NOTED BY THE TRIBUNAL, NAMELY, IN THE CASE OF ASSOCIATED CAPSULES PVT. LTD. VS DEPUTY COMMISSIONER OF INCOME TAX AND ANR. REPORTED IN (2011) 332 ITR 42 (BOM) AND COMMISSIONER OF INCOME TAX VS VS SAUMYA FINANCE AND LEASING COMPANY PVT. LTD. REPORTED IN (2008) 300 ITR 422 (BOM). THESE ARE JUDGMENTS WHICH ARE RENDERED IN FAVOUR OF THE ASSESSEE BYTHIS COURT AND AGAINST THE REVENUE. THEREFORE, THE ADDITIONAL QUESTIONS ALSO CANNOT BE TERMED AS SUBSTANTIAL QUESTION OF LAW. THAT APPEAL IS ALSO DISMISSED ACCORDINGLY. HOWEVER , IN THE FACTS AND CIRCUMSTANCES, THERE WOULD BE NO ORDER AS TO COSTS. M/S KSB PUMPS LTD 8 3.2. IN VIEW OF THE ABOVE, RESPECTFULLY FOLLOWING T HE HONBLE JURISDICTIONAL HIGH COURT, WE FIND NO MERIT IN THIS GROUND OF THE REVENUE, CONSEQUENTLY, DISMISSED. FINALLY, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 28/01/2015. '1 + ./0 2'3 28/01/2015 / + 9 SD/- (N.K.BILLAIYA) SD/- (JOGINDER SINGH) !'# !'# !'# !'# / ACCOUNTANT MEMBER !'# !'# !'# !'# / JUDICIAL MEMBER MUMBAI; 2' DATED : 28/01/201 5 F{X~{T? P.S/. .!. '1 + :* ;0* '1 + :* ;0* '1 + :* ;0* '1 + :* ;0*/ COPY OF THE ORDER FORWARDED TO : 1. <= / THE APPELLANT 2. :><= / THE RESPONDENT. 3. ? ( ) / THE CIT, MUMBAI. 4. ? / CIT(A)- , MUMBAI 5. A9 :* , , / DR, ITAT, MUMBAI 6. 9B( C / GUARD FILE. '1! '1! '1! '1! / BY ORDER, !>* :* //TRUE COPY// D DD D/ // /!E ' !E ' !E ' !E ' (DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI