OKS Prepress Services Private Limited, CHENNAI V. ITO, CHENNAI

ITA 1565/CHNY/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6284 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-06-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 23-04-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 18-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MOHAMMED SHAFFIQ
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Wholly owned subsidiary
• Section: 133(6)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHE NNAI . . . , ! , ' # $ BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT & SHRI VIKAS AWASTHY, JUDICIAL MEMBER . / I.T.A. NO. 1565/MDS/2013 / ASSESSMENT YEAR : 2008-09 M/S. OKS PREPRESS SERVICES PRIVATE LIMITED, (FORMERLY ALDEN PREPRESS SERVICES PRIVATE LIMITED) , SP-7A, GUPTA TOWERS, 3 RD FLOOR, GUINDY INDUSTRIAL ESTATE, GUINDY, CHENNAI-600 032 [PAN: AACCA 8961 F] ( !% /APPELLANT) VS THE INCOME TAX OFFICER, COMPANY WARDI(1), CHENNAI ( &'!% /RESPONDENT) / APPELLANT BY : MR. MOHAMMED SHAFFIQ, ADV. / RESPONDENT BY : MR. SHAJI P. JACOB, ADDL.CIT / DATE OF HEARING : 23-04-2014 ! / DATE OF PRONOUNCEMENT : 20-06-2014 #( / O R D E R PER VIKAS AWASTHY, J.M: THE APPEAL HAS BEEN FILED BY THE ASSESSEE IMPUGNIN G THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-VI , CHENNAI DATED 22-02-2013 FOR THE ASSESSMENT YEAR (AY) 2008- 09. IN APPEAL, THE ASSESSEE HAS ASSAILED THE FINDINGS OF C IT(APPEALS) CONFIRMING UPWARD ADJUSTMENT OF ` 2.10 CRORES MADE U/S.92CA(3) OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT) I.T.A. NO. 1565/MDS/2013 2 RELATING TO INTERNATIONAL TRANSACTIONS OF THE ASSES SEE WITH ITS ASSOCIATED ENTERPRISES [AE]. 2. THE FACTS AS EMANATING FROM THE DOCUMENTS ON REC ORD ARE, THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF M/S.AL DEN GROUP LTD., UNITED KINGDOM. THE ASSESSEE IS PROVIDING PR E-PRESS RELATED ACTIVITIES OF DATA CAPTURE, ON SCREEN EDITING, STRU CTURE AND CODING ON SCREEN DRAWING AND RELABELING, DATA CONVERSION A ND PROCESSING FOR WEB APPLICATIONS AND OTHER RELATED FACILITIES. APART FROM ABOVE, THE ASSESSEE IS ALSO ENGAGED IN EDITING OF SCIENTIF IC, TECHNICAL AND MEDICAL JOURNALS AND BOOKS FOR ITS AE AS WELL AS UN -RELATED PARTIES. THE ASSESSEE IS ALSO PROVIDING SERVICES OF MEDICAL TRANSCRIPTION EXCLUSIVELY TO UN-RELATED PARTIES. FOR THE AY UNDE R CONSIDERATION, THE ASSESSEE FILED ITS RETURN OF INCOME ON 29-09-20 08 ADMITTING TAXABLE INCOME AS NIL. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2) OF THE ACT WAS ISSUED TO THE ASSESSEE ON 14-08-2009. DURING THE RELEVANT PERIOD , THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION S EXCEEDING ` 15.00 CRORES WITH AE, THEREFORE, THE CASE OF THE AS SESSEE WAS REFERRED TO TRANSFER PRICING OFFICER [TPO] TO DETER MINE ARMS LENGTH PRICE [ALP] OF THE SAID TRANSACTIONS. I.T.A. NO. 1565/MDS/2013 3 THE ASSESSEE HAD ADOPTED COST PLUS METHOD WITH A MA RKUP COST OF 15%. THE TPO REJECTED THE TP DOCUMENTS OF THE ASSESSEE AND THE METHOD ADOPTED BY THE ASSESSEE TO DETERMINE ALP. THE TPO DETERMINED THE ALP OF THE INTERNATIONAL TRANSAC TIONS BY FOLLOWING TRANSACTION NET MARGIN METHOD [TNMM]. TH E TPO SELECTED COMPARABLES AND DETERMINED THE ALP OF AE S ALES AT ` 4.93 CRORES AS AGAINST ` 2.83 CRORES ARRIVED AT BY THE ASSESSEE. THE PLI OF THE ASSESSEE WAS 3.79%, WHEREAS, THE ARI THMETIC MEAN OF COMPARABLES WAS DETERMINED AT 16.70%, GIVING RIS E TO UPWARD ADJUSTMENT OF ` 2.10 CRORES. ON THE BASIS OF THE ORDER OF TPO DT.24-10-2011, THE ASSESSING OFFICER MADE UPWARD AD JUSTMENT U/S.92CA(3) IN THE INCOME RETURNED BY THE ASSESSEE. AGGRIEVED BY THE ASSESSMENT ORDER DT.08-02-2012, TH E ASSESSEE FILED APPEAL BEFORE THE CIT(APPEALS). THE CIT(APPEALS) VIDE IMPUGNED ORDER, CONFIRMED THE FINDINGS OF TPO AND DISMISSED THE APPEAL OF THE ASSESSEE. NOW, THE ASSESSEE HAS COME IN SECOND APPEAL BEFORE THE TRIBUNAL ASSAILING THE FIN DINGS OF CIT(APPEALS). THE GROUNDS RAISED BY THE ASSESSEE I N ITS APPEAL ARE AS UNDER: 1. THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-VI IS CONTRARY TO LAW AND FACT S OF THE CASE. I.T.A. NO. 1565/MDS/2013 4 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI HAS ERRED IN ADDING A SUM OF ` 2,10,00,000/- BEING THE UPWARD ADJUSTMENT MADE UNDER SECTION 92CA(3) OF THE INCOME -TAX ACT, 1961 RELATING TO THE INTERNATIONAL TRANSACTIONS WHI CH THE ASSESSEE HAD WITH ITS ASSOCIATED ENTERPRISE. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI ERRED IN NOT CONSIDERING THE COST PLUS METHOD ADOPT ED BY THE APPELLANT AND DETERMINING THE ARM'S LENGTH PRICE UN DER TRANSACTION NET MARGIN METHOD. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI FAILED TO APPRECIATE THE FACT THAT THE TRANSFER PRI CING OFFICER HAD NOT PROVIDED THE LIST OF COMPANIES THAT WERE EXCLUD ED WHILE ARRIVING AT THE FINAL LIST OF COMPANIES BASED ON WH ICH THE ARM'S LENGTH PRICE WAS ARRIVED AT IN THE ORDER UNDER SECT ION 92CA OF THE INCOME-TAX ACT, 1961. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI ALSO FAILED TO GIVE A FINDING ON THE APPELLANTS SU BMISSION THAT THE BUSINESS OF THE APPELLANT WAS TOTALLY DIFFERENT FROM THE BUSINESS OF THE COMPARABLE COMPANIES CONSIDERED BY THE TRANSFER PRICING OFFICER IN ARRIVING AT THE ARM'S L ENGTH PRICE AND IN THE PROCESS DISREGARDED THE JUSTIFICATION GI VEN BY THE APPELLANT BASED ON THE BUSINESS PROFILE OF THE COMP ANIES TAKEN AS COMPARABLES BY TRANSFER PRICING OFFICER AS TO WH Y THOSE COMPANIES COULD NOT BE CONSIDERED AS COMPARABLE. 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI FAILED TO CONSIDER THE SUBMISSION OF THE APPELLANT MADE DURING THE APPEAL PROCEEDINGS THAT THE COMPANY HAD SIMILAR TRANSACTIONS WITH UNRELATED PARTIES WHICH COULD BE CONSIDERED AS COMPARABLE AND THE APPELLANT HAD ALSO PROVIDED T HE DETAILS I.T.A. NO. 1565/MDS/2013 5 OF SUCH COMPANIES DURING THE APPEAL PROCEEDINGS WHI CH WERE NOT AT ALL DISCUSSED IN THE ORDER OF THE LEARNED CO MMISSIONER OF INCOME TAX (APPEALS)-VI. 7. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI ERRED IN NOT CONSIDERING THE FACT THAT THE INTERNAT IONAL TRANSACTION WITH THE ASSOCIATE ENTERPRISE WAS ONLY BY A DIVISION OF THE COMPANY AND CONSEQUENTLY ERRED IN DETERMININ G THE ARM'S LENGTH PRICE CONSIDERING THE TOTAL PROFITS OF THE COMPANY. 8. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI ERRED IN DETERMINING THE ARM'S LENGTH PRICE BASED O N THE PROFIT OF THE WHOLE YEAR WITHOUT CONSIDERING THE FACT THAT THE ASSOCIATED ENTERPRISE WAS A HOLDING COMPANY ONLY FO R A PART OF THE YEAR. 9. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI FAILED TO APPRECIATE THE MERITS OF THE APPELLANTS SUBMISSIONS AND ERRONEOUSLY HELD THAT THE TRANSFER PRICING OFF ICER HAS CLEARLY MADE OUT THE LIST OF CASES TAKEN UP AND FIL TERED BY HER FOR ARRIVING AT THE ARM'S LENGTH PRICE WITH THE ASS OCIATED ENTERPRISE AND THAT SHE HAD MADE ADJUSTMENTS AS IND ICATED BY THE APPELLANT AS PER DUE PROCESS. 3. SHRI MOHAMMED SHAFFIQ, ADVOCATE APPEARING ON BEH ALF OF THE ASSESSEE, REITERATING THE GROUND OF APPEAL SUBM ITTED THAT THE CIT(APPEALS) HAS MECHANICALLY FOLLOWED THE ORDER OF TPO WITHOUT APPRECIATING THE FACT THAT THE NATURE OF BUSINESS O F THE ASSESSEE IS ENTIRELY DIFFERENT FROM THE BUSINESS OF COMPARABLES ADOPTED BY THE TPO. NO VALID REASON WHAT-SO-EVER HAS BEEN GIVEN F OR REJECTING THE METHOD ADOPTED BY THE ASSESSEE IN DETERMINING A LP. THE I.T.A. NO. 1565/MDS/2013 6 ASSESSEE WAS NOT PROVIDED WITH THE FINAL LIST OF CO MPARABLES CONSIDERED BY THE TPO. IN ORDER TO SUPPORT HIS CON TENTIONS THE LD.COUNSEL FOR THE ASSESSEE RELIED ON THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN W.P.NO.23564 OF 2011 IN THE CASE OF M/S.POLARIS SOFTWARE LAB LIMITED., VS. DRP AND OTHE RS DECIDED ON 15-11-2011. 4. ON THE OTHER HAND, SHRI SHAJI P.JACOB, APPEARING ON BEHALF OF THE REVENUE VEHEMENTLY SUPPORTED THE ORDER OF CI T(APPEALS) AND PRAYED FOR DISMISSAL OF THE APPEAL OF THE ASSES SEE. 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF BOTH THE SIDES. WE HAVE ALSO PE RUSED THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE JUDG MENT OF THE HONBLE MADRAS HIGH COURT ON WHICH THE LD.COUNSEL F OR THE ASSESSEE HAS PLACED RELIANCE. THE ASSESSEE HAS ASSA ILED THE FINDINGS OF CIT(APPEALS) PRIMARILY ON THE GROUND TH AT THE TPO HAD NOT PROVIDED THE LIST OF COMPANIES THAT WERE FINALL Y CONSIDERED TO DETERMINE ALP U/S.92CA OF THE ACT AND THE NATURE OF BUSINESS OF THE ASSESSEE IS ENTIRELY DIFFERENT FROM THE BUSINES S OF THE COMPARABLES TAKEN INTO CONSIDERATION BY THE TPO. T HE LD.COUNSEL DURING THE COURSE OF MAKING SUBMISSIONS REFERRED TO PAGE 4 OF THE I.T.A. NO. 1565/MDS/2013 7 PAPER BOOK WHEREIN THE LIST OF COMPANIES INITIALLY CONSIDERED BY THE TPO IS GIVEN. A CLOSE READING OF THE PARAMETERS OF THE COMPARABLES SHOW OPERATING PROFIT TO OPERATING COST RATIO OF THE COMPARABLES RANGE FROM 1.87% TO 58.36%. THUS, AVER AGE ARITHMETIC MEAN OF THE COMPARABLES AS DRAWN BY THE TPO COMES TO 24.10%. ON THE OBJECTION RAISED BY THE ASSESSEE , THE TPO RE- CALCULATED THE ARITHMETIC MEAN OF COMPARABLES TO 16 .70%. WHILE DOING SO, THE TPO HAS NOT GIVEN THE DETAILS OF THE COMPANIES CONSIDERED FOR ARRIVING AT SUCH ARITHMETIC MEAN. T HE LD.COUNSEL HAS CONTENDED THAT THE ENTIRE PROCESS OF DETERMININ G ALP IS ARBITRARY. TO SUPPORT HIS SUBMISSIONS, THE LD.COUN SEL HAS RELIED ON THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF M/S.POLARIS SOFTWARE LAB LIMITED., VS. DRP AND OTHE RS (SUPRA) WHEREIN THE HONBLE HIGH COURT HAS OBSERVED AS UNDE R: 11. A PERUSAL OF THE TRANSFER PRICING REPORT FURN ISHED BY THE PETITIONER SHOWS THAT IT CONTAINS NECESSARY DETAILS AS TO THE WORKING OF ITS TRANSFER PRICING IN ACCORDANCE WITH THE REQUIREMENT UNDER LAW. CONTRARY TO THE ASSERTION O F THE RESPONDENTS THAT THE SECOND RESPONDENT HAD FURNISHE D THE DETAILS IN ITS NOTICE ISSUED ON 17.9.2010, A PERUSA L OF THE SAID PROCEEDINGS SHOW THAT WHILE THE SAID AUTHORITY REFE RRED TO THE TOTAL NUMBER OF COMPANIES TAKEN FOR COMPARISON AS 8 01 AND THE SEARCH PROCESS CARRIED ON UNDER THE HEAD OF IN DUSTRY TO RESULT IN FILTERING OF 28 COMPANIES AS COMPARABLE C ASES, THE NOTICE MAKES NO REFERENCE TO THE REQUEST MADE BY TH E I.T.A. NO. 1565/MDS/2013 8 PETITIONER ON THE DETAILS SOUGHT FOR. THUS, WHAT W AS REQUIRED BY THE PETITIONER HEREIN WAS THE METHOD OF FILTERING W HICH HAD RESULTED IN TAKING 28 COMPARABLE CASES, THE DETAILE D SEARCH PROCESS CARRIED BY THE SECOND RESPONDENT, THE NOTIC ES ISSUED TO THE COMPANIES UNDER SECTION 133(6), DETAILS RECE IVED IN RESPONSE TO THE NOTICE UNDER SECTION 133(6) AND THE DETAILED MARGIN COMPUTATION OF THE COMPARABLE COMPANIES TO V ALIDATE THE SAME, SO AS TO ENABLE THE PETITIONER TO MAKE AN EFFECTIVE REPLY TO THE NOTICE. 12. GOING BY THE COMPLEXITIES THUS INVOLVED IN THE SECOND RESPONDENT ARRIVING AT HIS DECISION ON THE ASSESSEE S TRANSACTION AS NOT ARMS LENGTH, ON THE LIMITED QUES TION OF COMPLIANCE OF THE PROVISIONS OF THE ACT AS WELL AS THE BASIC PRINCIPLES OF NATURAL JUSTICE, WITHOUT EXPRESSING A NY OPINION ON THE MERITS, I FEEL THAT IT IS A FIT CASE WHEREIN TH IS COURT SHOULD SET ASIDE THE ORDER OF THE SECOND RESPONDENT AND CO NSEQUENTLY THAT OF THE DISPUTE RESOLUTION BOARD SO AS TO ENABL E THE PETITIONER TO HAVE THE PARTICULARS FURNISHED AS SOU GHT FOR BY THE PETITIONER IN ITS REPLY DATED 28.9.2010 AND 20.10.2 010 BEFORE THE SECOND RESPONDENT SO THAT THE OPPORTUNITY OF FI LING ON OBJECTION REMAINS A REAL AND EFFECTIVE OPPORTUNITY AND NOT A PAPER OPPORTUNITY. 6. WE FIND THAT THE OBJECTIONS RAISED BY THE ASSESS EE ARE VALID. THE ASSESSEE HAS NOT BEEN PROVIDED WITH THE LIST OF COMPARABLES CONSIDERED FOR FINAL DETERMINATION OF THE ALP. EVE N THE OBJECTIONS OF THE ASSESSEE WITH RESPECT TO THE BUSINESS ACTIVI TIES OF THE COMPARABLES HAVE NOT BEEN ADDRESSED. THUS, THE PR INCIPLES OF NATURAL JUSTICE AND FAIR PLAY HAVE BEEN VIOLATED. THE I.T.A. NO. 1565/MDS/2013 9 IMPUGNED ORDER IS SET ASIDE, THE FILE IS REMITTED B ACK TO THE ASSESSING OFFICER WITH A DIRECTION TO RE-DETERMINE ALP AFTER ADOPTING EXTERNAL COMPARABLES AND SUITABLE METHOD T O DETERMINE ALP OF THE TRANSACTIONS WITH THE AE. NEEDLESS TO S AY THAT, WHILE DETERMINING ALP, THE ASSESSING OFFICER SHALL ONLY T AKE INTO CONSIDERATION THE INTERNATIONAL TRANSACTIONS WITH A E AND NOT THE TRANSACTIONS WITH UN-RELATED PARTIES. THE ASSESSIN G OFFICER SHALL GRANT REASONABLE OPPORTUNITY OF HEARING TO THE ASSE SSEE AND THEREAFTER, PASS DENOVO ASSESSMENT ORDER IN ACCORDA NCE WITH LAW. THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTIC AL PURPOSES. ORDER PRONOUNCED ON FRIDAY, THE 20 TH JUNE, 2014 AT CHENNAI. SD/- SD/ - ( . . . ) ( ! ) (DR. O.K. NARAYANAN) (VIKAS AWAS THY) '#$ / VICE PRESIDENT % &' / JUDICIAL MEMBER (% /CHENNAI, )& /DATED: 20 TH JUNE, 2014 TNMM &* +,-, /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ./0 /CIT(A) 4. . /CIT 5. ,12 3 /DR 6. 245 /GF