PETRO ARALDITE P. LTD, MUMBAI V. DCIT 8(2), MUMBAI

ITA 1538/MUM/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8178 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 15-09-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 05-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BE NCH, MUMBAI , ! '# $ $ $ $ , % &' , '# ( BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ./I .T.A. NO. 1538/MUM/2014 ( ) ) ) ) / ASSESSMENT YEAR : 2009-10 M/S. PETRO ARALDITE PVT. LTD., 5 TH FLOOR, BUILDING NO. 10, SOLITAIRE CORPORATE PARK, 167, GURU HARGOVINDJI MARG, CHAKALA, ANDHERI (E), MUMBAI-400 093 / VS. THE DCIT 8(2), AAYAKAR BHAVAN, MUMBAI ./I .T.A. NO. 2068/MUM/2014 ( ) ) ) ) / ASSESSMENT YEAR : 2009-10 THE DCIT 8(2), AAYAKAR BHAVAN, MUMBAI / VS. M/S. PETRO ARALDITE PVT. LTD., 5 TH FLOOR, BUILDING NO. 10, SOLITAIRE CORPORATE PARK, 167, GURU HARGOVINDJI MARG, CHAKALA, ANDHERI (E), MUMBAI-400 093 #* ! ./ +, ./ PAN/GIR NO. : AAACP 5685K ( *- / APPELLANT ) .. ( ./*- / RESPONDENT ) *- 0 / ASSESSEE BY: SHRI S.N. SOPARKAR SHRI BANDISH SOPARKER ./*- 1 0 / REVENUE BY: SHRI SANTOSH KUMAR 1 %2! / DATE OF HEARING :15.09.2014 34) 1 %2! / DATE OF PRONOUNCEMENT :19.09.2014 ITA NOS. 1538 & 2068/M/14 2 '& / O R D E R PER N.K. BILLAIYA, AM: THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE ARE AGAINST THE ORDER DT.31.1.2014 PASSED BY THE DCIT-8(2), MUM BAI U/S. 143(3) R.W. SEC. 144C(13) OF THE ACT PERTAINING TO A.Y.2009-201 0. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURING BASIC LIQUID RESINS, SOLID RESINS AND FORMULATIONS THEREO F. THE PRODUCTS ARE SOLD UNDER THE BRAND NAME OF ARALDITE. THESE PRODUCTS ARE KNOWN FOR THEIR BONDING STRENGTH, ELECTRICAL INSULATION CAPABILITY, DIMENSIONAL STABILITY, CHEMICAL AND CORROSION RESISTANCE AND LONG TERM DUR ABILITY. 2.1. THE ASSESSEE IS A MANUFACTURING CONCERN AND OP ERATES IN THE SPECIALITY CHEMICAL INDUSTRY. ITS MAIN PRODUCT I S EPOXY RESIN. THE MAJOR PRODUCTS GROUPS ARE: BASIS LIQUID RESINS SOLID RESINS FORMULATED PRODUCTS 2.2. THE USER INDUSTRIES FOR THE ABOVE PRODUCTS ARE AS FOLLOWS: PAINT INDUSTRY CIVIL ENGINEERING APPLICATIONS STRUCTURAL COMPOSITES ELECTRICAL INSULATION MATERIAL ADHESIVES TOOLING MATERIALS ITA NOS. 1538 & 2068/M/14 3 2.3. A COPY OF THE TRANSFER PRICING STUDY REPORT FO R THE YEAR ENDED 31 ST MARCH, 2009 WAS FURNISHED TO THE TPO ON 13 TH JANUARY, 2012. THE SAID REPORT, INTER-ALIA INCLUDED THE BASIS FOR SELECTION OF THE MOST APPROPRIATE MET HOD, IN ACCORDANCE WITH RULE 10C OF INCOME-TAX RULES, 1962 ( THE RULES) AND THE INFORMATION AND DOCUMENTATION AS PRESCRIBED U/S . 92D(1) OF THE ACT READ WITH RULE 10D(1) OF THE RULES. 2.4. THE INTERNATIONAL TRANSACTIONS ENTERED INTO BE TWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES DURING THE A.Y. 2009 -10, ARE SUMMARIZED BELOW: NATURE OF TRANSACTION DESCRIPTION OF TRANSACTION NAME OF THE ASSOCIATED ENTERPRISE AMOUNT (RS.) PURCHASE OF RAW MATERIALS IMPORT OF RAW MATERIALS HUNTSMAN ADVANCED MATERIALS (AUSTRALIA)PTY LTD. 11,94,229/- HUNTSMAN ADVANCED MATERIALS (EUROPE) BVBA 18,505,062/- HUNTSMAN ADVANCED MATERIALS AMERICAS INC 41,55,612/- HUNTSMAN (SINGAPORE)PTE LTD. 33,59,362/- TOTAL 2,72,14,265/- SALE OF TANGIBLE PROPERTY EXPORT OF FINISHED GOODS HUNTSMAN ADVANCED MATERIALS (U.A.E.) FZE 16,69,43,313/- HUNTSMAN ADVANCED MATERIALS (HONG KONG) LTD. 5,35,36,679/- HUNTSMAN ADVANCED MATERIALS (AUSTRALIA)PTY LTD.QUIMICA BRAZIL 30,87,66,939/- ITA NOS. 1538 & 2068/M/14 4 LTDA, BRAZIL HUNTSMAN ADVANCED MATERIALS (ARGENTIAN) SRL 9,47,10,566/- HUNTSMAN (SINGPORE) PTE LTDE 18,43,836/- HUNTSMAN ADVANCED MATERIALS (TAIWAN) CORP 61,68,253/- HUNTSMAN ADVANCED MATERIALS (EUROPE) BVBA 60,59,494/- HUNTSMAN ADVANCED MATERIALS (AUSTRALIA)PTY LTD. 2,00,83,554/- HUNTSMAN ADVANCED MATERIALS ISANDO, SOUTH AFRICA 22,460/- TOTAL 65,81,35,094/- SERVICES AVAILED MANAGEMENT SERVICES AVAILED HUNTSMAN ADVANCED MATERIALS (SWITZERLAND) GMBH 85,68,250/- WITH THE AFOREMENTIONED FACTUAL MATRIX THE ASSESSE E IS AGGRIEVED 3. GROUND NO. 1 IS OF GENERAL IN NATURE AND NEEDS N O SEPARATE ADJUDICATION. 4. GROUND NO. 2 RELATES TO THE TREATMENT OF FOREIGN EXCHANGE FLUCTUATION AS OPERATING IN NATURE WHILE COMPUTING THE OPERATING MARK-UP EARNED BY THE ASSESSEE. 4.1. THE ASSESSING OFFICER NOTICED THAT THE ASSESSE E HAS TREATED FOREIGN EXCHANGE LOSS OF RS. 2,10,40,000/- AS NON OPERATING ITEM OF EXPENSE. THE ASSESSEE WAS ASKED TO JUSTIFY THE SAME. IN ITS REP LY, THE ASSESSEE CONCEDED THAT THE LOSSES WERE INCURRED IN THE COURS E OF BUSINESS ACTIVITY OF THE ASSESSEE ON ACCOUNT OF IMPORT/EXPORT OF RAW MATERIALS/FINISHED ITA NOS. 1538 & 2068/M/14 5 GOODS ETC. THE AO WAS OF THE OPINION THAT THE PROF IT OR LOSS ARISING OUT OF FOREIGN EXCHANGE FLUCTUATION IS DIRECTLY LINKED TO THE ASSESSEES BUSINESS ACTIVITIES. 4.2. THE DRP REJECTED ASSESSEES CONTENTION STATING THAT THE EXCHANGE LOSS HAS BEEN INCURRED AS THE PART OF PURCHASE/SALE TRANSACTION AND HENCE IS OPERATING IN NATURE. 4.3. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE CL AIMED THAT THE ASSESSEE HAS CONSIDERED FOREIGN EXCHANGE LOSS AS NO N-OPERATING IN NATURE AND THEREFORE THE SAME SHOULD BE EXCLUDED WHILE COM PUTING THE OPERATING MARK-UP EARNED BY THE ASSESSEE. 4.4. WE FIND THAT THERE IS NO DISPUTE THAT THE ASSE SSEE HAS BOUGHT MATERIAL FROM ITS AE AND THE PRICING WAS DONE IN FO REIGN CURRENCY WHICH MEANS THAT THE CURRENCY FLUCTUATION IS DIRECTLY REL ATED AND IS INBUILT IN THE PRICING POLICY WHICH THE ASSESSEE HAS BEEN FOLLOWIN G WITH ITS AES THEREFORE, WE DO NOT FIND ANY REASON OR MERIT IN EX CLUDING THE SAME FOR COMPUTING THE OPERATING MARK-UP EARNED BY THE ASSES SEE. THEREFORE, WE DO NOT FIND ANY ERROR OR INFIRMITY. THE ORDER IS A CCORDINGLY CONFIRMED. GROUND NO. 2 IS DISMISSED. 5. GROUND NO. 3 RELATES TO THE REJECTION OF THE COM PARABLE COMPANIES ACCEPTED BY THE ASSESSEE. FIRST GRIEVANCE RELATES TO THE REJECTION OF DAI- ICHI KARKARIA LTD AND NLC NALCO INDIA LTD. 5.1. IN SO FAR AS REJECTION OF DAI-ICHI KARKARIA LT D., IS CONCERNED, THE DRP HAS FOLLOWED THE FINDINGS OF THE TRIBUNAL IN AS SESSEES OWN CASE FOR A.Y. 2008-09. WE FIND THAT THE TRIBUNAL IN ITA NO. 6217/M/2012 VIDE PARA-2 ON PAGE-6 OF ITS ORDER HAS HELD ON THE EXCL USION OF DAI-ICHI ITA NOS. 1538 & 2068/M/14 6 KARKARIA LTD., FROM THE EVENTUAL LIST OF COMPARABLE . AS THE DRP HAS FOLLOWED THE ORDER OF THE TRIBUNAL IN ASSESSEES OW N CASE, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS. 5.2. IN SO FAR AS THE EXCLUSION OF NCL NALCO INDIA LTD., AFTER CONSIDERING THE FACTS, THE DRP HAS REJECTED BECAUSE THE RPT IS MORE THAN 25%. AS NO DISTINGUISHING FACT HAS BEEN BROUGHT ON RECORD, WE DO NOT FIND ANY ERROR IN THE FINDINGS OF THE DRP. GROUND NO. 3.1.1. IS ACCORDINGLY DISMISSED. 5.3. THE NEXT GRIEVANCE RELATES TO THE REJECTION OF THIRUMALAI CHEMICALS LTD. AS A COMPARABLE COMPANY. THE TPO HAS REJECTE D THIS COMPANY AS A COMPARABLE CASE ON THE GROUND THAT THE COMPANY IS F UNCTIONALLY DIFFERENT FROM THE ASSESSEE. IT MANUFACTURES PRODUCTS QUITE DIFFERENT FROM THE ASSESSEE AND IS ALSO IN THE BUSINESS OF HARNESSING WINDMILL ENERGY. THE DRP REFERRED TO THE DIRECTORS REPORT IN THE CASE O F THIS COMPANY AND OBSERVED THAT IN THE CASE OF THIS COMPANY, THERE WA S A HUGE FALL IN DEMAND FOR THE COMPANYS PRODUCTS. THE COMPANY COU LD NOT ACHIEVE ITS FULL CAPACITY UTILIZATION. THE DRP OBSERVED THAT T HIS COMPANY WAS OPERATING AT 55% CAPACITY IN THE CASE OF ONE PRODUC T AND 4% CAPACITY UTILIZATION IN RESPECT OF ITS OTHER MAIN PRODUCT D URING THE YEAR. REFERRING TO THE ASSESSEES CLAIM FOR USING AS A COMPARABLE OF M/S. PIDILITE INDUSTRIES LTD IN A.Y. 2008-09, THE DRP OBSERVED TH AT THE TRIBUNAL HAS REJECTED THE CASE OF M/S. PIDILITE INDUSTRIES AS A COMPARABLE FOR THE REASON THAT THERE WAS A MERGER IN THAT YEAR WHICH W AS REGARDED AS AN ABNORMAL FACTOR. TAKING A LEAF OUT OF THIS, THE DR P OBSERVED THAT M/S. THIRUMALAI CHEMICALS LTD WAS ALSO UNDER THE INFLUEN CE OF ABNORMAL FACTOR RESULTING IN VERY POOR CAPACITY UTILIZATION AND THEREFORE CANNOT BE CONSIDERED AS A COMPARABLE. ITA NOS. 1538 & 2068/M/14 7 5.4. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE ST ATED THAT EVEN THE ASSESSEE WAS WORKING AT 46% OF CAPACITY UTILIZATION AS AGAINST 50% OF CAPACITY UTILIZATION IN THE CASE OF M/S. THIRUMALAI CHEMICALS LTD. THE FACTORS WHICH HAVE BEEN CONSIDERED BY THE DRP ARE C OMMON TO THE ENTIRE INDUSTRY AND THE ENTIRE INDUSTRY HAS BEEN AFFECTED BECAUSE OF THOSE FACTORS. THEREFORE, THE REJECTION OF THE COMPARABL E IS NOT ON THE FACTS OF THE CASE. WE FIND FORCE IN THE CONTENTION OF THE L D. COUNSEL. IT IS NOT IN DISPUTE THAT THE PRODUCTS OF THE ASSESSEE ARE DEPEN DENT ON GLOBAL MARKETS WITH RECESSION IN WORLD MARKET, THE BUSINESS OF THE ASSESSEE HAS ALSO SUFFERED. WE FURTHER FIND THAT IF M/S. THIRUMALAI CHEMICALS LTD., WAS WORKING AT 50% OF CAPACITY UTILIZATION, THEN THE AS SESSEE WAS ALSO WORKING AT 46% OF ITS CAPACITY UTILIZATION. WE, TH EREFORE, DO NOT FIND ANY ERROR IN REJECTING M/S. THIRUMALAI CHEMICALS LTD., AS A COMPARABLE. WE, ACCORDINGLY SET ASIDE THIS ISSUE BACK TO THE FILE O F THE AO AND THE AO IS DIRECTED TO CONSIDER M/S. THIRUMALAI CHEMICALS AS A COMPARABLE CASE FOR DETERMINING THE ALP AFTER GIVING REASONABLE OPPORTU NITY OF BEING HEARD TO THE ASSESSEE. GROUND NO. 3.1.2 IS ALLOWED FOR ST ATISTICAL PURPOSE. 5.5. WE FURTHER FIND THAT ON THE REQUEST OF THE TPO , THE ASSESSEE HAD CONDUCTED A FRESH SEARCH. THE TPO HAS NOT CONSIDER ED THE FRESH SEARCH NOR THE DRP HAS DIRECTED THE TPO. IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE DIRECT THE AO TO ALSO CONSIDER THE COMPARABLES G IVEN BY THE ASSESSEE IN ITS FRESH SEARCH AND CONSIDER THE SAME AS PER PR OVISIONS OF LAW AFTER GIVING A FAIR OPPORTUNITY OF BEING HEARD TO THE ASS ESSEE. GROUND NO. 3.2 AND 3.3 ARE TREATED AS ALLOWED FOR STATISTICAL PURP OSE. 6. GROUND NO. 4.1 IS OF GENERAL IN NATURE AND NEED NO SEPARATE ADJUDICATION. ITA NOS. 1538 & 2068/M/14 8 7. GROUND NO. 4.3.1 RELATES TO THE INCLUSION OF GWA LIOR CHEMICAL INDUSTRIES LTD AND SUNSHIELD CHEMICALS LTD. AS A CO MPARABLE COMPANIES. 7.1. SINCE THE ASSESSEE HAS SELECTED THESE TWO COMP ANIES AS A COMPARABLES IN ITS TP STUDY REPORT, THE TPO HAS ACC EPTED ASSESSEES CONTENTION AND ACCEPTED THE SAME AS COMPARABLE COMP ANIES. 7.2. BEFORE THE DRP, IT WAS ARGUED THAT GWALIOR CHE MICAL INDUSTRIES LTD HAS ENTERED INTO A BUSINESS TRANSFER AGREEMENT WHICH CONSTITUTE AN EXTRA ORDINARY EVENT HAVING INFLUENCE IN THE PERFOR MANCE OF THE COMPANY THEREFORE THE SAID COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. 7.3. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE ST ATED THAT THE RESTRUCTURING IN THE CASE OF GWALIOR CHEMICAL INDUS TRIES LTD HAS ACTUALLY TAKEN PLACE IN THE SUBSEQUENT YEAR AND FAIRLY CONCE DED TO ITS INCLUSION. WE, THEREFORE, DO NOT FIND ANY INFIRMITY WITH THE A CTION OF THE AO. 7.4. IN SO FAR AS M/S. SUNSHIELD CHEMICALS LTD., IS CONCERNED, WE FIND THAT IN IMMEDIATELY PRECEDING ASSESSMENT YEAR I.E. A.Y. 2008-09, THIS COMPANY WAS INCLUDED BY THE ASSESSEE BUT EXCLUDED B Y THE TPO IN THE LIST OF COMPARABLES. THE TRIBUNAL AT PARA-13 OF IT S ORDER HAS UPHELD THE EXCLUSION OF M/S. SUNSHIELD CHEMICALS LTD., FROM TH E FINAL LIST OF COMPARABLES. SINCE THE TRIBUNAL HAS EXCLUDED THIS COMPANY FROM THE FINAL LIST OF COMPARABLE IN A.Y. 2008-09, THE SAME SHOULD BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES FOR THE YEAR UND ER CONSIDERATION ALSO. WE, DIRECT THE AO ACCORDINGLY. GROUND NO. 4.3.1 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 7.5. GROUND NO. 4.3.2 RELATES TO THE INCLUSION OF A TUL LTD AS COMPARABLE COMPANY. ITA NOS. 1538 & 2068/M/14 9 7.6. THE ASSESSEE HAS REJECTED THIS COMPANY ON THE BASIS OF TURNOVER FILTER STATING THAT THIS COMPANYS TURNOVER IS MORE THAN 750 CRORES. THE TPO OBSERVED THAT THE TURNOVER OF THIS COMPANY IS R S. 1159 CRORES WHEREAS THE TURNOVER OF ASSESSEE IS 312 CRORES. TH E TPO FURTHER OBSERVED THAT THE ASSESSEE ITSELF HAS CHOSEN THE TU RNOVER RANGE OF RS. 25 CRORES TO RS. 750 CRORES. ACCORDING TO THE TPO, THE LOWER RANGE HAS BEEN TAKEN IN A RANGE OF 12 TIMES BELOW ITS TURNOVER WHE REAS THE UPPER RANGE IS ONLY 2.5 TIMES. IN THE OPINION OF THE TPO, THE UPP ER RANGE SHOULD ALSO HAVE BEEN TAKEN IN THE RANGE OF 12 TIMES HIGHER THA N THE ASSESSEES TURNOVER. ACCORDINGLY, THE TPO INCLUDED M/S. ATUL LTD., AS A COMPARABLE. 7.7. THE DRP FOUND THAT IN A.Y. 2008-09, THIS COMPA NY WAS RETAINED BY THE TRIBUNAL IN THE FINAL COMPARABLE SET. WE FI ND THAT THE TRIBUNAL IN ITA NO. 6217/M/2012 AT PARA-21 OF ITS ORDER HAS DIR ECTED TO DETERMINE THE ARMS LENGTH MARGIN ON THE BASIS OF TWO CASES O NE OF WHICH IS M/S. ATUL LTD. AS THIS COMPANY WAS PART OF THE FINAL CO MPARABLE SET FOR A.Y. 2008-09, WE DO NOT FIND ANY REASON WHY THE SAME SHO ULD NOT BE CONSIDERED FOR THE YEAR UNDER CONSIDERATION. GROUN D NO. 4.3.2 IS ACCORDINGLY DISMISSED. 7.8. GROUND NO. 4.3.3 RELATES TO THE INCLUSION OF M /S. PIDILITE INDUSTRIES LTD., AS A COMPARABLE COMPANY. THE TPO OBSERVED TH AT THE ASSESSEE HAS REJECTED THIS COMPANY ON THE BASIS OF TURNOVER FILT ER. FOR THE SAME REASONS GIVEN FOR THE INCLUSION OF M/S. ATUL LTD., THE TPO PROCEEDED BY CONSIDERING THIS COMPANY AS ONE OF THE COMPARABLE. THE TPO FURTHER OBSERVED THAT M/S. PIDILITE INDUSTRIES LTD. IS ALSO ENGAGED IN THE MANUFACTURE OF EPOXY RESINS IN EARLIER YEAR ALSO. THE ASSESSEE STRONGLY ITA NOS. 1538 & 2068/M/14 10 OBJECTED FOR THE INCLUSION OF THIS COMPANY STATIN G THAT THE TURNOVER OF M/S. PIDILITE INDUSTRIES LTD. IS MORE THAN APPROXIM ATELY SIX TIMES THAT OF THE ASSESSEE. FURTHER M/S. PIDILITE INDUSTRIES LTD . HAS IDENTIFIED THREE BUSINESS SEGMENTS NAMELY CONSUMER, BAZAAR PRODUCTS AND SPECIALITY INDUSTRIAL CHEMICALS AND OTHERS. THEREFORE, M/S. P IDILITE INDUSTRIES LTD. CANNOT BE SAID TO OPERATE IN THE SAME SCALE OF OPER ATIONS AS THE ASSESSEE AND THEREFORE THE SAME SHOULD NOT BE CONSIDERED AS COMPARABLE. 7.9. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE R EITERATED WHAT HAS BEEN STATED BEFORE THE DRP. IN ALTERNATIVE, IT IS THE SAY OF THE LD. COUNSEL THAT SINCE SEGMENTAL ACCOUNTS ARE GIVEN IN THE ANNUAL REPORT OF M/S. PIDILITE INDUSTRIES LTD., THE RESULTS OF RELAT ED SEGMENT SHOULD HAVE BEEN CONSIDERED BY THE AO. WE FIND THAT IN A.Y. 20 08-09, THE TRIBUNAL HAS DELETED THIS COMPANY FROM FINAL LIST OF COMPARA BLES FOR REASON THAT THERE WAS A RE-ORGANIZATION IN THE COMPANY MAKING I T AN ABNORMAL YEAR AND THEREFORE CANNOT BE CONSIDERED AS A COMPARABLE. HOWEVER, THIS REASON NO LONGER SURVIVES. AT THE SAME TIME, WE FI ND FORCE IN THE CONTENTION OF THE LD. COUNSEL THAT WHEN SEGMENTARY REPORT IS AVAILABLE, THE SAME SHOULD HAVE BEEN CONSIDERED. WE, ACCORDIN GLY RESTORE THIS ISSUE TO THE FILES OF THE AO. THE AO IS DIRECTED TO CON SIDER THE RELATED SEGMENTARY FIGURE FOR DETERMINING THE ARMS LENGTH PRICE TAKING M/S. PIDILITE INDUSTRIES AS A COMPARABLE AFTER GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO. 4.3.3 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 8. GROUND NO. 5 WITH ITS SUB-GROUNDS RELATE TO THE DISALLOWANCE OF MANAGEMENT SERVICE CHARGES PAID BY THE ASSESSEE TO ITS AES. 8.1. IT WAS NOTICED THAT THE ASSESSEE HAS CLAIMED T O HAVE PROCURED SERVICES FROM ITS GROUP COMPANY M/S. HUNTSMAN ADVAN CED MATERIALS, ITA NOS. 1538 & 2068/M/14 11 GMBH. IT WAS CLAIMED THAT THE SERVICES PROCURED BY THE ASSESSEE ARE PROPRIETARY IN NATURE. INFORMATION ABOUT SIMILAR S ERVICES BEING RENDERED BY INDEPENDENT SERVICE PROVIDER IS NOT AVAILABLE, T HEREFORE, CUP METHOD COULD NOT BE APPLIED. THE ASSESSEE HAS CHOSEN TO AGGREGATE ITS TRANSACTION AND TEST IT WITH TNMM. THIS CONTENTION OF THE ASSESSEE WAS OUT-RIGHTLY REJECTED. THE ASSESSEE WAS ASKED TO EX PLAIN WHETHER THESE SERVICES WERE REQUESTED FOR, HOW THE SERVICES WERE RENDERED TO THE ASSESSEE, COPY OF THE WRITTEN AGREEMENT AND AT WHAT RATE THESE ARE AVAILABLE IN THE LOCAL MARKET. IT WAS EXPLAINED TH AT THE MANAGEMENT CHARGES ARE COVERED BY TWO AGREEMENTS I.E. SERVICE AGREEMENT AND CORE TECHNOLOGY SERVICE AGREEMENT. THESE AGREEMENTS ARE EFFECTIVE FROM 2001. THE ASSESSEE HAS RECEIVED VARIOUS SERVICES S UCH AS I.T. SERVICES, MARKETING SERVICES, FINANCE AND REPORTING SERVICES, HR SERVICES, LEGAL SERVICES, PURCHASING SERVICES ETC. IT WAS CLAIMED THAT THE ASSESSEE HAS DERIVED BENEFITS FROM THESE SERVICES. 8.2. THE SUBMISSIONS OF THE ASSESSEE DID NOT FIND F AVOUR. THE TPO WAS OF THE OPINION THAT THE AGREEMENTS ARE OF GENERAL I N NATURE AND DO NOT SUBSTANTIATE THAT SPECIFIC SERVICES WERE REQUESTED FOR BY THE ASSESSEE. THE TPO FINALLY CONCLUDED BY STATING THAT THE ASSESSEE HAS FAILED TO PROVIDE EVIDENCE THEREFORE THE ARMS LENGTH PRICE OF SUCH S ERVICES CLAIMED TO HAVE BEEN RECEIVED IS TREATED AS ZERO. 8.3. BEFORE THE DRP, IT WAS CLAIMED THAT THE ASSESS EE HAS CARRIED OUT A BENEFIT TEST ANALYSIS REGARDING RECEIPT OF MANAGEME NT CHARGES, PROVIDING INVOICES, SCREENSHOTS OF SERVICES PROVIDED BY AE. THE DRP WAS OF THE OPINION THAT THE ASSESSEE HAS NOT PROVIDED ANY EVID ENCE ON HOW THE SERVICES WERE RENDERED TO IT BY THE AE. THE DRP F URTHER OBSERVED THAT AS THERE WAS NO EVIDENCE, THERE IS NO OTHER OPTION BUT TO TREAT THE ALP OF ITA NOS. 1538 & 2068/M/14 12 SUCH TRANSACTIONS AT NIL. THE DRP RELIED UPON THRE E DECISIONS OF THE TRIBUNAL AS MENTIONED AT PARA-22 OF ITS ORDER. 8.4. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE ST RONGLY SUBMITTED THAT THE ACTION OF THE LOWER AUTHORITIES ARE BEYOND THE SCOPE AS THERE IS NO POWER TO THE TPO TO EXAMINE THE ALLOWABILITY OR OTH ERWISE OF THE EXPENDITURE WHILE MAKING TRANSFER PRICING ADJUSTMEN TS; 8.5. WE FIND THAT AN IDENTICAL ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y. 2008-09 IN ITA NO. 6217 /M/12. THE TRIBUNAL AT PARA-25 OF ITS ORDER HELD AS UNDER: HAVING REGARD TO THE FACTS OF THE INSTANT ISSUE, W E FIND THAT THERE CAN BE NO DISPUTE THAT ALP OF AN INTERNA TIONAL TRANSACTION IN THE NATURE OF EXPENSE CLAIMED CAN BE COMPUTED AT NIL, IF THE ASSESSEE FAILS TO PROVE THE FACTUM OF H AVING AVAILED ANY SERVICES FROM THE AE. EVEN IF THE SERVICES ARE AVA ILED, THE CONSIDERATION PAID HAS TO BE PROVED AT ALP, FAILING WHICH ADJUSTMENT IS INEVITABLE. ADVERTING TO THE FACTS O F THE INSTANT CASE, WE FIND THAT THE ASSESSEE CLAIMS TO HAVE AVAI LED SUCH SERVICES IN THE PAST AS WELL FOR WHICH DEDUCTION WA S NOT DENIED. AT THE SAME TIME, IT IS EQUALLY ESSENTIAL ON THE PA RT OF THE ASSESSEE TO PROVE IN THE FIRST INSTANCE THAT IT, IN FACT, AVAILED THE SERVICES PROVIDED BY ITS AES IN THE CURRENT YEAR AN D ALSO THAT THE PAYMENT IS AT ALP. AS THE ASSESSEE FAILED TO SUBSTA NTIATE ITS CLAIM FOR DEDUCTION IN THIS REGARD BEFORE THE AO/TP O AND IT IS FURTHER CLAIMED THAT ADEQUATE OPPORTUNITY WAS NOT P ROVIDED BY THE CONCERNED AUTHORITIES, WE ARE OF THE CONSIDERED OPINION THAT IT WILL BE IN THE FITNESS OF THE THINGS IF THE IMPUGNE D ORDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO TH E FILE OF AO/TPO FOR DECIDING THIS ISSUE AFRESH AS PER LAW AFTER ALL OWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. WHILE DECIDING THIS ISSUE IN THE FRESH PROCEEDINGS, THE A SSESSEES OTHER OBJECTIONS ON THIS SCORE SHALL ALSO BE DEALT WITH. 8.6. FACTS AND ISSUES BEING IDENTICAL, RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO ORDINATE BENCH, WE DIRECT THE AO/TPO ACCO RDINGLY. GROUND NO. 5 WITH ITS SUB GROUND IS TREATED TO BE ALLOWED FOR STATISTICAL PURPOSE. ITA NOS. 1538 & 2068/M/14 13 9. GROUND NO. 6 IS WITHOUT PREJUDICE TO THE OTHER G ROUNDS. THE GRIEVANCE OF THE ASSESSEE IS THAT THE AO/TPO AND TH E DRP ERRED IN NOT RESTRICTING THE AMOUNT OF ADJUSTMENT TO THE VALUE O F TRANSACTION WITH AES BY NOT FOLLOWING THE ORDER OF THE TRIBUNAL FOR A.Y. 2008-09. 9.1. WE FIND THAT THE TPO HAS PROPOSED ADJUSTMENT T O ENTIRE TURNOVER WHEREAS THE INTERNATIONAL SALES TO AES CONSTITUTE O NLY 21.06% OF TOTAL SALES. WE FIND THAT THE TRIBUNAL HAS RULED IN FAVO UR OF THE ASSESSEE ON THIS ISSUE IN A.Y. 2008-09. WE, ACCORDINGLY DIRECT THE AO/TPO TO DECIDE THIS ISSUE IN THE LIGHT OF THE DECISION OF THE TRIB UNAL IN A.Y. 2008-09. THE ASSESSEE IS DIRECTED TO PROVIDE SEGREGATED FIGU RES OF PROFITS EARNED IN AE TRANSACTIONS AND NON AE TRANSACTIONS. THIS GROU ND IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 10. THE OTHER GROUNDS ARE OF GENERAL IN NATURE AND THEREFORE NEEDS NO SEPARATE ADJUDICATION. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. ITA NO. 2068/M/2014 DEPARTMENTAL APPEAL 12. THE GRIEVANCE OF THE REVENUE READS AS UNDER: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HONBLE DRP WAS CORRECT IN HOLDING THAT MISCELLANEOUS INCOME WAS OPERATIONAL INCOME WITHOUT APPRECIATING THE FACT THAT THE COMPANIES SHOW INCOM E UNDER THE HEAD MISCELLANEOUS INCOME IN THEIR BOOKS ONLY WHEN THE SAME CANNOT BE TREATED AS THEIR OPERATIONAL INC OME WITHOUT APPRECIATING THE FACT THAT THE COMPANIES S HOW INCOME UNDER THE HEAD MISCELLANEOUS INCOME IN THE IR BOOKS ONLY WHEN THE SAME CANNOT BE TREATED AS THEIR ITA NOS. 1538 & 2068/M/14 14 OPERATIONAL INCOME OR WHEN THE SAME IS NOT CONNECTE D WITH THEIR OPERATIONS? 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE HONBLE DRP ERRED IN DIRECTING THE TPO TO CONSIDER PROVISIONS WRITTEN BACK AS OPERATIONAL INCOME FOR THE CURRENT YEAR WITHOUT APPRECIATING THE FACT THAT THE OPERATING PROFITS OF THE ASSESSEE OF THE CURRENT YE AR ARE COMPARED WITH THE OPERATING PROFITS OF THE COMPARAB LES AND PROVISIONS WRITTEN BACK BELONG TO EXPENSES OF EARLI ER YEARS, WHICH CANNOT BE CONSIDERED AS OPERATING PROFITS OF THE CURRENT YEAR? 13. THE TPO OBSERVED THAT THE ASSESSEE HAS SHOWN MI SCELLANEOUS INCOME OF RS. 61.61 LAKHS FOR WHICH THE ASSESSEE H AS NOT BROUGHT ANY MATERIAL ON RECORD TO PROVE THAT THIS REPRESENTS OP ERATING INCOME. THE TPO EXCLUDED THE MISCELLANEOUS INCOME FOR WORKING O F PLI. THE TPO FURTHER EXCLUDED PROVISIONS WRITTEN BACK. IT WAS CONTENDED BEFORE THE DRP THAT THE PROVISIONS WRITTEN BACK RELATE TO THE TRANSACTIONS ENTERED IN THE USUAL COURSE OF THE BUSINESS ACTIVITY OF THE AS SESSEE AND ARE CONSISTING WITH THE ACCOUNTING STANDARDS AND POLICIES ADOPTED BY THE ASSESSEE AND THEREFORE THE SAME HAVE TO BE CONSIDERED AS OPERATI NG INCOME. THE DRP WAS CONVINCED AND ACCORDINGLY DIRECT THE TPO TO TRE AT MISCELLANEOUS INCOME AND PROVISIONS WRITTEN BACK AS ITEMS OF OPER ATING IN NATURE. 13.1. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIV E RELIED UPON THE FINDINGS OF THE TPO. 13.2. WE FIND THAT ON IDENTICAL ISSUE, THE CO ORDIN ATE BENCH OF THE TRIBUNAL, MUMBAI IN ITA NOS. 2414/M/2013 AND 2474/M /13 HAD THE OCCASION TO CONSIDER THE SUNDRY BALANCES WRITTEN BA CK AS WELL AS EXCESS PROVISION WRITTEN BACK AND WHETHER THE SAME AMOUNTS TO OPERATING REVENUE. THE TRIBUNAL AT PARA 10.2 OF ITS ORDER HA S HELD THAT IF THE UNIFORM APPROACH IS ADOPTED, UNLESS ANY CONTRARY MA TERIAL HAS BEEN ITA NOS. 1538 & 2068/M/14 15 BROUGHT ON RECORD, WE SEE NO INFIRMITY IN SUCH BASI S OF THE CALCULATION. WE FURTHER FIND THAT PROVISIONS WRITTEN BACK RELATE TO GUARANTEE COMMISSIONS WAIVED BY THE AE AND PROVISION FOR INVE NTORY IS NO LONGER REQUIRED. THESE TRANSACTIONS WERE ENTERED IN THE U SUAL COURSE OF THE BUSINESS ACTIVITY OF THE ASSESSEE. FURTHER, THE MI SCELLANEOUS INCOME IS EARNED BY THE ASSESSEE OUT OF DAY TO-DAY OPERATIONS WHICH CONSISTS OF SALE OF SCRAPS AND DISCOUNT RECEIVED. SINCE THE ASSESSEE IS FOLLOWING CONSISTENT ACCOUNTING STANDARDS AND POLICIES, WE DO NOT FIND A NY REASON WHY THIS INCOME/WRITE BACK SHOULD NOT BE CONSIDERED AS OPERA TING INCOME. WE, THEREFORE DECLINE TO INTERFERE WITH THE DIRECTIONS OF THE DRP. GROUNDS RAISED BY THE REVENUE ARE ACCORDINGLY DISMISSED. 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE AND THE CROSS APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH SEPTEMBER, 2014 SD/- SD/- (AMIT SHUKLA ) (N.K. BILLAIYA) '# / JUDICIAL MEMBER ! '# / ACCOUNTANT MEMBER MUMBAI; 5' DATED : 19 TH SEPTEMBER, 2014 . . ./ RJ , SR. PS ITA NOS. 1538 & 2068/M/14 16 '& '& '& '& 1 11 1 .% .% .% .% 6)% 6)% 6)% 6)% / COPY OF THE ORDER FORWARDED TO : 1. *- / THE APPELLANT 2. ./*- / THE RESPONDENT. 3. 7 ( ) / THE CIT(A)- 4. 7 / CIT 5. 89 .% , , / DR, ITAT, MUMBAI 6. 9: ; / GUARD FILE. '& '& '& '& / BY ORDER, /% .% //TRUE COPY// < << < / = = = = + + + + (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI