BASF COATINGS (INDIA) P.LTD ( SINCE MERGED WITH BASF INDIA LTD), MUMBAI V. ASST CIT CIR 6(1), MUMBAI

ITA 1555/MUM/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1032 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 1 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: K
• Next Hearing Date: 17-04-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 05-03-2012
• Court: TRIBUNAL
• Department Lawyers: HEENA SHETH
• Assessee Lawyers: P PARDIWALA
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA , ACCOUNTANT MEMBER AND SHRI SANDEEP GOSAIN, JUDICIAL MEMBER ITA NO.1555/MUM./2012 ( ASSESSMENT YEAR :2007 - 2009 ) BASF COATINGS ( INDIA ) P.LTD (SINCE MERGED WITH BASF INDIA LTD.) VIBGYOR TOWER, UNIT NO.1, 1 ST FLOOR, PLOT NO.C - 62, G BLOCK BANDRA KURLA COMPLEX, MUMBAI 400051 PAN AAACB4599E . APPELLANT V/S ACIT CIT CIR 6(1) AAYAKAR BHAVAN, M.K ROAD MUMBAI 400 020 . RESPONDENT ASSESSEE BY : SHRI. P. PARDIWALA REVENUE BY : MS. HEENA SHETH DATE OF HEARING 17.04.2017 DATE OF ORDER 28.04.2017 O R D E R PER: SHAMIM YAHYA THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST ORDER OF ASSESSING OFFICER DATED 28.12.2010 PASSED UNDER SECTION 143(3), R.W.S. 144C U NDER THE DIRECTION OF DISPUTE RESOLUTION PANEL 1 MUMBAI VIDE DIRECTION DATED 23.09.2011. 2. THE GROUNDS OF APPEAL READ AS UNDER: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICE R HAS ERRED IN MAKING AN ADDITION OF RS. B ASF COATINGS INDIA P.LTD ITA NO.1555/MUM./2012 2 17, 84,41 ,000/ - PURSUANT TO ORDER U/ S 92CA(3) OF THE ACT. SHE OUGHT NOT TO HAVE DONE SO. 2. WITHOUT PREJUDICE TO GROUND NO.1, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICE R ERRED BY NOT GIVING EFFECT TO THE CERTIFICATORY ORDER DATED 22/12/2010 PASSED BY THE LEA RNED TRANSFER PRICING OFFICER U/ S 92CA(5) R.W.S 154 OF THE ACT. SHE OUGHT NOT TO HAVE DONE SO. 3. WITHOUT PREJUDICE TO GROUND NO.1 AND 2, THE LEARNED ASSESSING OFFIC ER OUGHT TO HAVE RESTRICTED THE TRA NSFER PRICING ADJUSTMENT TO RS. 4,18,04,000 / - FOLLOWING THE DIRECTIONS OF THE LEARNED DRP. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICE R HAS ERRED IN MAKING AN ADDITION ON ACCOUNT OF MODVAT UNDER SECTION 145A OF THE ACT TO THE EXTENT OF RS.9,49,968/ - . SHE OUGHT NOT TO HAVE DONE SO. 5. WITHOUT PREJUDICE TO GROUND NO.4 , ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICER OUGHT TO BE DIRECTED TO ALLOW DEDUCTION IN RESPECT OF MODVAT CREDIT RELATING TO OPENING INVENTORY AND NOT TO MAKE ADJUSTMENT IN THE FORM OF ADDITION OF MODVAT CREDIT REL ATING TO CLOSING INVENTORY. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICE R HAS ERRED IN MAKING AN AD DITION OF B ASF COATINGS INDIA P.LTD ITA NO.1555/MUM./2012 3 RS.8,16,19, 125/ - U/ S 40(A)(IA) OF THE ACT. SHE OUGHT NOT TO HAVE DONE SO. 7. ON THE FACTS AND CIRCUMSTA NCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICE R HAS ERRED IN MAKING AN ADDITION ON ACCOUNT OF INTEREST FREE DEPOSIT/ADVANCE OF RS.2,50,000/ - . SHE OUGHT NOT TO HAVE DONE SO. 8. YOUR APPELLANT CRAVES LEAVE TO ADD, TO AMEND, TO MODIFY ANY OF THE F OREGOING GROUNDS OR TAKE ADDITIONAL GROUND IF NEED BE. APROPOS GROUND NUMBER 1, 2 AND 3 3. BRIEF FACTS ON THIS ISSUE AS UNDER: - 3.1 BASF COATINGS (INDIA) PVT. LTD. HEREINAFTER REFERRED TO AS BCIL, (BASED AT BANGALORE) IS A 55.4% OWNED SUBSIDIARY OF BASF COATING, UK. THE COMPANY IS ENGAGED IN MANUFACTURING OF COIL COATING IN INDIA AND SUPPLYING THEM TO GROUP COMPANIES AND OTHER COUNTRIE S AS WELL. THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE FOR THE RELEVANT PREVIOUS YEAR ARE AS UNDER: - S.NO. INTERNATIONAL TRANSACTION AMOUNT (RS.) MOST APPROPRIATE METHOD USED 1 PURCHASE OF RAW MATERIAL 159,148,000 TNMM 2 PURCHASE OF FINISHED GOODS 46,276,000 TNMM 3 PAYMENT OF ROYALTY 21,772,000 TNMM 4 PAYMENT OF SAP CHARGES, ETC. 7,830,000 TNMM TOTAL ... 235;026,000 B ASF COATINGS INDIA P.LTD ITA NO.1555/MUM./2012 4 3.2 THE ASSESSEE HAS UNDERTAKEN A TRANSFER PRICING (TP) STUDY TO JUSTIFY ITS ARM'S LENGTH PRICE (ALP) FOR ITS TRANSACTIONS. IT HAS SELECTED TNMM AS THE MOST APPROPRIATE METHOD FOR ALL THE TRANSACTIONS. IT HAS UNDERTAKEN STUDY FROM PROWESS DATA BASE UNDER THE KEY WORDS 'PAINT AND VARNISHES, AND PAINTINGS, WRITING OR DRAWING INK'. THEREAFT ER THE ASSESSEE HAS APPLIED THE FILTERS OF DATA AVAILABILITY FROM FINANCIAL YEAR 2005 AND MANUFACTURING SALES TO TOTAL SALES GREATER THAN 90% AND HAS SHORT LISTED 20 COMPANIES ENGAGED IN COMPARABLE ACTIVITIES. IT WAS OBSERVED THAT TWO COMPANIES NAMELY ASIA N PAINTS LTD. AND GOODLAS NEROLAC PAINTS LTD. HAD BEEN REJECTED BY THE ASSESSEE ON ACCOUNT OF RELATED PARTY TRANSACTIONS. WH EN VERIFIED FROM DATABASE BY TPO , IT WAS FOUND THAT THEIR RELATED PARTY TRANSACTIONS WERE NEGLIGIBLE AND LESS THAN 5% WHICH IS NOT D ISPUTED. THE ASSESSEE, HOWEVER, DIDN'T ACCEPT ASIAN PAINTS LTD. AND GOODL AS NEROLAC PAINTS LTD., AS COM PARABLES CLAIMING THAT THE FIRST ONE HAS A HUGE TURNOVER AND HAS ENGAGED IN MANUFACTURING DECORATIVE PAINTS' WHEREAS THE LATTER IS A FORE RUNNER IN INDUS TRIAL AND AUTOMOTIVE COATINGS BUSINESS AND IS ALSO ENGAGED IN DECORATIVE PAINTS AND FURTHER, IT HAS A COLLABORATION WITH KANSAI JAPAN WHICH HELPS THEM TO OBTAIN BUSINESS. 3.3 HOWEVER, THE TPO HAS REJECTED SUCH OBJECTIONS AS THESE TWO COMPANIES ARE SELECTED IN THE ASSESSEE'S OWN SEARCH PROCESS AND B ASF COATINGS INDIA P.LTD ITA NO.1555/MUM./2012 5 THE ASSESSEE'S OBJECTION IS 'ONLY QUALITATIVE, AN D THUS IS NOT ACCEPTABLE. IN TPO 'S VIEW, NO TWO COMPANIES ARE IDENTICAL, AND THERE MAY BE SOME DISSIMILARITIES IN OPERATION, BUT IT HAS TO BE SEEN WHETHER SUCH DISSI MILARITIES ARE MATERIAL TO EXCLUDE SUCH COMPANIES WITH THE COMPARABLE SELECTED BY ASSESSEES OWN ROBUST SEARCH. ACCORDINGLY, THE TP O HAS INCLUDED THESE 2 COMPANIES IN THE LIST OF COMPARABLE. ACCORDINGLY, THE TPO HAS IDENTIFIED 9 COMPANIES UNDER: C O M PARABLE COMPANIES COMPARABLE OPERATION PBIT / SALES AS S.NO INTRODUCED BY MARGIN AS PER TPO (%) PER ASSESSEE 1 ASIAN PAINTS INDUSTRIAL ASSESSEE 2.73% 4% CO ATINGS LIMITED 2 BERGER PAINTS INDIA LTD. ASSESSEE 7.23% 8% 3 D I C INDIA LTD. ASSESSEE 4.15% 5% 4 I C I INDIA LTD. ASSESSEE 7.19% 54% 5 ORGANIC COATINGS LTD. ASSESSEE 1.10% 1% 6 SHALIMAR PAINTS LTD. ASSESSEE 4.00% 5% 7 ASIAN PAINTS LTD. TPO 10.85% 12% 8 D I C COATINGS LIMITED TPO 10.52% 10% 9 GOODLAS NEROLAC PAINTS LTD. TPO 9.22% 11% (NOW KANSAI NEROLAC PAINTS) AVERAGE 6.33% 12.22% 3.4 THE C OMPARABLES (INCLUDING D I C COATINGS INDIA LTD.) INCLUDE 6 COMPANIES IDENTIFIED BY THE ASSESSEE ITSELF. THE TPO HAS PROPOSED TO ADOPT THE AVERAGE PLI (PBIT / SALES) OF 9 COMPARABLE COMPANIES COMPUTED AT 12.22% FOR F.Y.2006 - 07 FOR DETERMINING THE ALP. 3.5 T HE ASSESSEE HAS OBJECTED TO THE TPO'S PROPOSAL CLAIMING THAT AS PER PROVISION OF RULE 10B(4), THAT THE DATE AVAILABLE AT THE TIME OF FILING THE RETURN HAS TO BE MADE USE OF AND ALSO OBJECTED TO THE B ASF COATINGS INDIA P.LTD ITA NO.1555/MUM./2012 6 INCLUSION OF D I C COATINGS INDIA PVT. LTD. AS COMPARABLE BY THE TPO. HOWEVER, THE AO HAS REJECTED THE ASSESSEE'S OBJECTION AND ADOPTING AVERAGE PLI AT 12.22% AS SHOWN ABOVE MARGIN OF 5.02% SHOWN BY THE ASSESSEE, HAS COMPUTED THE TP ADJUSTMENT AT RS.17,84,40,000 / - . 3.6 WHILE CONSIDERING THE ASSESSEE 'S OBJECTIONS TO THE PLI OF COM PARABLES, TPO HAS ACCEPTED THE ASSESSEE'S CLAIM THAT WHILE DETERMINING THE PBIT / SALES, IN THE CASE OF I C I INDIA LTD., NON - OPERATING 'INCOME AND EXPENSES' HAVE TO BE EXCLUDED AND ARRIVED AT THE REVISED MARGIN AT 26.55%. HOWEVER, WHILE C OMPUTING THE ALP I AVERAGE PROFI T MARGIN, HE HAS ADOPTED PBIT/ SALES AT 54% ONLY. SUBSEQUENTLY, ON THE BASIS OF ASSESSEE'S APPLICATION U/S. 154, THE TPO HAS PASSED AN ORDER U/S. 154 R.W.S 92CA(5) ON 22.12.2010 RECOMPUTING THE TP ADJUSTMENT AT RS.10,51,78,00 0/ - IN THE PLACE OF RS.17,84,41,000/ - COMPUTED EARLIER. 4. THE LD. DRP AFTER CONSIDERING THE ASSESSEE SUBMISSIONS DIRECTED AS UNDER: - THE DRP HAS CAREFULLY CONSIDERED THE FACTS OF THE CASE, THE TPO'S FINDINGS AND THE SUBMISSIONS FURNISHED ON BEHALF OF THE ASSESSEE. THE DRP'S DIRECTIONS ON THIS ISSUE ARE AS UNDER: B ASF COATINGS INDIA P.LTD ITA NO.1555/MUM./2012 7 A) THE TPO HAS IDENTIFIED THE 9 COMPANIES FROM THE SEARCH PROCESS ADOPTED BY THE ASSESSEE ITSELF, AND HENCE, THERE IS NO MERIT IN ASSESSEE'S CONTENTION ON THIS POINT. (B) D I C COATINGS LTD. IS FOUND TO BE COMPARABLE BASED ON THE FINANCIAL DATA FOR THE RELEVANT F.Y.2006 - 07, AND HENCE, THE TPO IS CORRECT IN INCLUDING THIS COMPANY. (C) ASIAN PAINTS LTD. AND KANSAI NEROLAC PAINTS LTD. ARE ALSO COMPARABLES AS POINTED OUT BY THE TPO, AND HENCE, THE ASSESSEE CONTENTIONS ARE REJECTED. (D) THE TPO IS CORRECT IN ADOPTING PBIT/SALES, AS WAS DONE FOR ALL THE COMPARABLES. (E) IN THE CASE OF I C I INDIA. LTD. THE TPO HAS RECOMPUTED THE PLI AT 26.55% THOUGH HE HAS BY MISTAKE OMITTED TO ADOPT THIS FIGURE WHILE ARRIVING AT THE ARITHMETIC MEAN PLI TO 9 COMPANIES. IN THIS REGARD, THE ASSESSEES OBJECTION IS FOUND TO BE CORRECT. BEFORE THE DRP, THE ASSESSEE HAS FURNISHED RECOMPUTATION OF PLI OF THIS COMPANY AS UNDER: ~ MARGIN CALCULATION OF I C I INDIA LTD. CPLI = PBIT / REVENUE - WITHOUT PREJUDICE) I CI IN D I A LIMTIED MARCH 2007 T O TA L REVENUE 954.32 P BT 140.11 A DD: INTEREST 2.29 PBIT 142.4 PBIT / REVENUE 14.92% B ASF COATINGS INDIA P.LTD ITA NO.1555/MUM./2012 8 THIS IS AFTER EXCLUDING THE NON - OPERATING INCOME AND NON - OPERATING EXPENSES AS VERIFIED FROM THE ACCOUNTS. TPO HAS TO VERIFY THIS COMPUTATION. (F) BY ADOPTING THE PLI OF ICI INDIA LTD. AT 14.92% THE ARITHMETIC MEAN OF PLI FOR 9 COMPANIES IS ARRIVED AT 7.88% BY THE ASSESSEE WHICH IS PRIMA FACIE FOUND TO BE CORRECT. ASSESSEE'S CONTENDS THAT ADOPTING SUCH MODIFIED ARITHMETIC MEAN PLL OF 9 COMPANIES @ 7.88%, THE TP ADJUSTMENT WORKS OUT TO RS.4,18,04,OOO/ - ONLY. TPO J AO IS DIRECTED TO VERIFY THE CORRECTNESS OF FIGURES AND RECOMPUTE THE TP ADJUSTMENT/ADDITION ACCORDINGLY. (G) THE TPO IS CORRECT IN HIS APPROACH AS HE HAS FOLLOWED SUB - RULE (2) OF RULE 10B AND SUB RULE 10B (4). HENCE, ASSESSEE'S CONTENTIONS ARE WITHOUT MERIT AND HENCE, REJECTED. (H) THE TPO IS C ORRECT IN NOT ALLOWING (+/ - ) ADJUSTMENT AS PER PROVISO TO SEC.92C(2) CLAIMED BY THE ASSESSEE, THE DRP IS OF THE VIEW THAT THERE IS NO NEED TO ALLOW SUCH RELIEF AS IT IS ALLOWABLE ONLY WHEN ASSESSEE MAKES ADJUSTMENT AND NOT TPO. FURTHER, THE BOARD CIRCULAR DATED 30TH SEPTEMBER, 2010, AMENDING EARLIER CIRCULAR NO.5 OF 2010 DATED 03.06.2010 B ASF COATINGS INDIA P.LTD ITA NO.1555/MUM./2012 9 CLEARLY EXPLAINS THE SCOPE OF AMENDMENT BROUGHT OUT THROUGH FINANCE ACT, 2009 W.E.F 01.10.2009 THAT THE SAFE HARBOR RULE OF PROVIDING ADJUSTMENT OF (+/ - ) 5% IS .APPLICABLE ONLY WHERE THE DIFFERENCE BETWEEN THE PRICE SHOWN BY THE ASSESSEE AND ALP DETERMINED BY THE TPO IS LESS THAN 5% AND NOT OTHERWISE. THE DECISION OF THE ITAT IN THE CASE OF MARUBENI INDIA PVT. LTD. V/S. ACIT (ITAT DELHI) ALSO SUPPORTS THE ABOVE VIEW. (I) WE WOULD LIKE TO MENTION THAT DRP IN THE ASSESSEES CASE FOR A.Y.2006 - 07 HAS UPHELD SIMILAR TP ADJUSTMENT BY INCLUDING THE TWO COMPARABLES M/S. ASIAN PAINTS LTD. AND BERGER PAINTS INDIA LTD. ACCORDINGLY, THE TPO/AO IS DIRECTED TO RECOMPUTED THE TP ADJUSTME NT AS PER DIRECTIONS GIVEN AFTER VERIFYING THE CORRECTNESS OF THE PLI OF I C I INDIA LTD. AS DISCUSSED ABOVE. 5. AGAINST THE ABOVE ASSESSEE IS IN APPEAL BEFORE US. WE HAVE BOTH THE COUNSEL AND PERUSED THE RECORDS. 6. LD. COUNSEL OF THE ASSESSEE HAS SUBMI TTED THAT ASSESSEE HAS POINTED OUT SOME BASIC FLAWS IN THE WORKINGS OF THE A.O. ACCORDINGLY ASSESSING OFFICER HAS PASSED AN ORDER U/S. 154 OF THE INCOME TAX ACT DATED 2 2.12.2010, WHICH IS SUBSEQUENT TO THE DATE OF THE DIRECTION BY THE LEARNED DISPUTE RESOL UTION PANEL. LD. COUNSEL FOR THE B ASF COATINGS INDIA P.LTD ITA NO.1555/MUM./2012 10 SUBMITTED THAT IF THE ORDER PASSED U/S. 154 OF THE INCOME TAX ACT BY THE A.O IS SUBJECTED TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL THE VARIATION MAY BE WITHIN THE +/ - 5% VARIATION AND ACCORDINGLY NO ARMS LENGTH AD JUSTMENT WILL BE REQUIRED. IN THIS REGARD THE LD. COUNSEL OF THE ASSESSEE HAS SUBMITTED FOLLOWING WORKINGS; MARGIN WORKING FOR ICI INDIA LIMITED AS COMPUTED BY THE TPO - 14.92% (AS PER THE DIRECTIONS OF THE DRP) PBIT / SALES AS NAME OF COMPARABLE COMPUTED IN THE ORDER I C I INDIA LTD 14.92% ASIAN PAINTS INDUSTR I AL CCATINCS LTD. 4 . 00% ASIAN PAINTS LTD. 12.00% BERQER PA I NTS INDIA LTD . 8.00% D I C INDIA LTD . 5.00% KANSAI NEROLAC PAINTS LTD . 11 . 00 % ORQANIC COAT I NQS LTD . 1.00% SHALIMAR PA I NTS LTD . 5.00% DIC COATINQS L I MITED 10.00% AIRTHMETIC MEAN 7.88% +/ - 5% VARIATION BETWEEN ALP AND INTERNATIONAL TRANSACTION. PLI PBIT/SALES SAY SALES IS RS. 100 PARTICULARS RS. RS. SALES (A) 1 , 460,239 100 COST (B) 1,386,976 94.98 OPERATING PROFIT/ LOSS (C) = (A) - (B) 73 . 2 . 6 .. 3 5 . 02 MARGIN OF THE ASSESSEE 5.02 5 .02 D =AS CALCULATED -- - ARM'S LENGTH MARG I N AS PER TP ORDER ABOVE 7 . 88% 7.88 % ARM'S LENGTH PR I CE {COST } (E) = (A) - (A X D) 1,345,172 92 DIFFERENCE (F) - (B) - (E) 41,804 3 5% OF TRANSFER PRICE (G) = (B) X 5 % 69,349 4.75 B ASF COATINGS INDIA P.LTD ITA NO.1555/MUM./2012 11 7. PER CONTRA LD. D.R SUBMITTED THAT THE SHE HAS RESERVATIONS TO THE ABOVE COMPUTATION, HOWEVER SHE DID NOT OBJECT TO THE PROPOSITION THAT THE ISSUE MAY BE REMITTED TO THE FILE OF THE A.O TO VERIFY THE VERACITY OF THE COMPUTATIONS, NOW BEIN G SUBMITTED BY THE LD. COUNSEL OF THE ASSESSEE. 8. UPON CAREFUL CONSIDERATION WE ARE OF THE CONSIDERED OPINION THAT THE ISSUE IN THIS CASE NEEDS TO BE REMITTED TO THE FILE OF THE A.O. THE A.O SHALL CONSIDER THE WORKINGS GIVEN BY THE LD. COUNSEL OF THE ASSE SSEE IN THE LIGHT OF THE ORDER PASSED U/S. 154 OF THE INCOME TAX ACT ALONG WITH THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL. THEREAFTER THE A.O SHALL DECIDE AS PER LAW AFTER GIVING THE ASSESSEE PROPER OPPORTUNITY OF BEING HEARD. APROPOS GROUND NO. 4 AN D 5 9 . BRIEF FACTS ON THIS ISSUE ARE THAT IT IS CLAIMED BY THE ASSESSEE THAT AO SHOULD HAVE ALLOWED DEDUCTION IN RESPECT OF MODVAT CREDIT CONCLUSION SINCE, VARIATION BETWEEN THE ALP AND VALUE OF INTERNATIONAL TRANSACTION DOES NOT EXCEED 5% OF THE LATTER, THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN IS BE DEEMED TO BE THE ARMS LENGTH PRICE. IF F