Hoganas India Pvt. Ltd., Pune V. Dy. Comm. of Income-tax, Pune

ITA 1579/PUN/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2013 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 2 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 08-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 92

Judgement Text

ITA NO.1579/PN/11 HOGANAS (I) PVT. LTD., PUNE IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE: SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO. 1579 / P N / 20 11 ASSESSMENT YEAR : 2007 - 08 HOGANAS (I) PVT. LTD. PUNE VS. DCIT, CI RCLE - 2 PUNE (APPELLANT) (RESPONDENT) PAN NO. AAACH 5156K APPELLANT BY: SHRI NIKHIL PATHAK, CA RESPONDENT BY: SHRI AJIT KORDE, DR DATE OF HEARING : 21.02.2013 DATE OF PRONOUNCEMENT : 26 .02.2013 ORDER PER R.S. PADVEKAR:- IN THIS APPEAL, THE ASSESSEE HAS CHALLENGED THE I MPUGNED ASSESSMENT ORDER WHICH IS PASSED BY THE A.O. IN COMPLIANCE WIT H THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP) PASSED U/S 144C(5) O F THE ACT AND ASSESSMENT YEAR INVOLVED IS 2007-08. THE CORE ISSUE FOR ADJUD ICATION IS IN RESPECT OF DETERMINATION OF THE ALP OF THE TRANSACTIONS BETWEE N THE ASSESSEE AND A.ES U/S 92 CA(3) OF THE ACT BY THE TPO WHICH WAS CONFIRMED BY THE DRP PUNE. THE ASSESSEE HAS TAKEN THE MULTIPLE GROUNDS ARE AS UNDE R: 1. ON THE FACTS OF THE CASE AND IN LAW, THE H'BLE DISP UTE RESOLUTION PANEL, PUNE ERRED IN CONFIRMING THAT AN ADDITION OF RS. 29 ,10,263/-HAS TO BE MADE TO THE INTERNATIONAL TRANSACTION OF RECEIPT OF SALES COMMISSION BY THE APPELLANT COMPANY OF RS. 18,87,863/- FROM ITS A E FOR ARRIVING AT THE ARM'S LENGTH PRICE OF THIS INTERNATIONAL TRANSACTIO N. 2. THE H'BLE DISPUTE RESOLUTION PANEL, PUNE AND/OR THE LEARNED TRANSFER PRICING OFFICER ERRED IN NOT APPRECIATING THAT THE TRANSACTION OF RECEIPT OF SALES COMMISSION AND IMPORT OF TRADED GOODS BY THE APPELLANT COMPANY WERE CLOSELY LINKED TRANSACTIONS AND THAT FOR THE P URPOSE OF BENCHMARKING, THE ABOVE TRANSACTIONS WERE TO BE AGG REGATED UNDER THE SEGMENT 'DISTRIBUTION ACTIVITY' IN ACCORDANCE WITH THE PROVISIONS OF RULE 10A(D). 3. WITHOUT PREJUDICE TO GROUND NO. 2, THE H'BLE DISPUT E RESOLUTION PANEL, PUNE AND THE LEARNED TRANSFER PRICING OFFICER ERRED IN NOT APPRECIATING THAT US $ 30 PER METRIC TON WAS THE ARM'S LENGTH PR ICE OF THE AFORESAID INTERNATIONAL TRANSACTION. 4. WITHOUT PREJUDICE TO ABOVE, IF THE H'BLE DISPUTE RE SOLUTION PANEL, PUNE WAS OF THE VIEW THAT FROM FAR, ANALYSIS, THE FUNCTIONS UNDERTAKEN, RISKS ASSUMED AND ASSETS UTILISED FOR EARNING COMMISSION ON SALES WERE SIMILAR TO THOSE WHICH THE COMPANY UNDERTAKES FOR THE MARKE TING FUNCTIONS OF ITS OWN MANUFACTURED PRODUCTS, THE PANEL SHOULD HAVE AG GREGATED THE 2 ITA NO.1579/PN/11 HOGANAS (I) PVT. LTD., PUNE 2 TRANSACTION OF RECEIPT OF SALES COMMISSION FROM AE WITH THE OTHER INTERNATIONAL TRANSACTIONS OF THE MANUFACTURING SEG MENT WHICH WERE ACCEPTED BY THE TPO AT ARM'S LENGTH PRICE AS PER TN MM. 5. THE H'BLE DISPUTE RESOLUTION PANEL, PUNE ERRED IN : APPLYING THE CUP METHOD BY HOLDING THAT THERE IS AN INTERNAL COMPARABLE AVAILABLE WHICH IS THE PROFIT ATTRIBUTAB LE TO THE MARKETING FUNCTION OF THE MANUFACTURING SEGMENT OF THE COMPAN Y I.E. THE INTERNAL RATE OF RETURN ATTRIBUTABLE TO THE MARKETI NG FUNCTION OF THE COMPANY FOR ITS OWN MANUFACTURED PRODUCTS ; NOT APPRECIATING THAT IT IS NOT POSSIBLE TO SPLIT T HE PROFITABILITY IN THE MANUFACTURING SEGMENT TO ARRIVE AT THE SEPARATE PRO FITABILITY EARNED DUE TO THE MANUFACTURING FUNCTION AND DUE TO THE SA LES / MARKETING FUNCTION ; CONFIRMING THAT THE PROFIT EARNED BY AN ENTERPRISE IS A FUNCTION OF THE PRODUCTION OVERHEADS AND MARKETING OVERHEADS AND TH AT THE CONTRIBUTION OF MARKETING CAN BE REASONABLY WORKED OUT BY MULTIPLYING THE PBIT OF THE MANUFACTURING SEGMENT WITH THE PROP ORTION OF MARKETING OVERHEADS AND DIVIDING THE RESULT THEREOF BY THE TOTAL OF PRODUCTION AND MARKETING OVERHEADS ; NOT APPRECIATING THAT FOR THE APPELLANT COMPANY'S R ANGE OF PRODUCTS, MARKETING IS A VERY INSIGNIFICANT FUNCTION AND INFA CT PROCUREMENT OF RAW MATERIAL (I.E. MATERIAL CONSUMED) AND PROCESS O F MANUFACTURING ARE THE IMPORTANT FUNCTIONS WHICH GENERATE THE VALU E ADDITION OR THE PBIT. 6. THE H'BLE DISPUTE RESOLUTION PANEL, PUNE ERRED IN N OT APPRECIATING THAT THE FUNCTIONS PERFORMED AND RISKS ASSUMED BY THE AP PELLANT COMPANY WHEN ACTING AS AN AGENT OF HOGANAS AB SWEDEN WERE I NSIGNIFICANT VIS-A- VIS FUNCTIONS PERFORMED AND RISKS ASSUMED IN THE MA RKETING ACTIVITY CARRIED ON BY THE APPELLANT COMPANY IN ITS MANUFACT URING SEGMENT AND SUITABLE DOWNWARD ADJUSTMENT WAS REQUIRED TO BE GIV EN WHILE WORKING THE ARM'S LENGTH PRICE FOR THE LOW RISKS AND LESSER FUN CTIONS INVOLVED IN THE ACTIVITY OF SALES COMMISSION VIS-A-VIS THE MARKETIN G FUNCTION OF MANUFACTURING SEGMENT. 7. THE H'BLE DISPUTE RESOLUTION PANEL, PUNE ERRED IN N OT APPRECIATING THAT THE LEARNED TPO ERRED IN WORKING OUT THE ARM'S LENG TH PERCENTAGE OF THE COMMISSION RECEIVED FROM THE APPELLANT COMPANY'S AE @ 3.41% INSTEAD OF @ 0.73% BEING THE CORRECT PERCENTAGE AND CONSIDE RING THE FACT THAT THE SALES COMMISSION RECEIVED BY THE APPELLANT COMPANY WORKED OUT TO 1.34% OF THE ACTUAL SALES PRICE, NO UPWARD ADJUSTME NT / ADDITION WAS WARRANTED ON THE FACTS OF THE CASE. 8. THE H'BLE DISPUTE RESOLUTION PANEL, PUNE ERRED IN N OT APPRECIATING THAT INADVERTENTLY THE INTERNAL RATE OF RETURN ATTRIBUTA BLE TO THE MARKETING FUNCTIONS FOR THE MANUFACTURING SEGMENT OF THE APPE LLANT COMPANY WAS WORKED OUT @ 3.41% BY MULTIPLYING THE PERCENTAGE OF PBIT OF MANUFACTURING SEGMENT OF THE COMPANY WITH THE NUMER ATOR OF SELLING AND ADMN. OVERHEADS (INSTEAD OF ONLY SELLING OVERHE ADS AS THE CORRECT NUMERATOR) AND DIVIDING BY DENOMINATOR BEING AGGREG ATE OF SELLING AND ADMN. OVERHEADS AND FACTORY OVERHEADS. 3 ITA NO.1579/PN/11 HOGANAS (I) PVT. LTD., PUNE 3 9. THE H'BLE DISPUTE RESOLUTION PANEL, PUNE ERRED IN N OT APPRECIATING THAT ON THE FACTS OF THE CASE AND IN LAW, THE BENEFIT OF OP TION AVAILABLE TO THE APPELLANT UNDER THE PROVISO TO SECTION 92C(2) OF TH E ACT AND AS PER CBDT'S CIRCULAR NO. 12 OF 2001 DATED AUGUST 23, 2001 OF AD OPTING AS ARM'S LENGTH PRICE, A PRICE WHICH VARIES BY NOT MORE THAN 5% FROM THE ARM'S LENGTH PRICE OUGHT TO BE GRANTED AND THAT THE UPWAR D ADDITION HAD TO BE MADE IN RESPECT OF THE BALANCE AMOUNT, IF ANY. 2. THE FACTS WHICH REVEAL FROM THE RECORD ARE AS UN DER. THE ASSESSEE IS IN THE MANUFACTURING, DISTRIBUTION AND MARKETING OF IR ON AND VARIOUS FERROUS POWDERS IN INDIA. IT ALSO UNDERTAKES INDENT SALES OF PRODUCTS OF THE GROUP COMPANIES ON COMMISSION BASIS. THE ASSESSEE FILED THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS.12,83,21,199/- FOR THE A.Y. 2007-08. AS THERE WERE TRANSACTIONS BETWEEN THE ASSESSEE AND THE ASSOCIATE ENTERPRISES (A.E.), MORE PARTICULARLY THE RECEIPT OF THE COMMISSION, REFEREN CE U/S 92CA(1) OF THE I.T. ACT WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF THE ARMS LENGTH PRICE (ALP). THE TPO PROPOSED THE ADDITION OF RS.29,10,263/- ON THE REASONING THAT THE INITIAL RATE OF RETURN ATTRIBUTA BLE TO MARKETING AVENUES OF THE COMPANY WORKS OUT TO 3.41% AND THE SALES COMMISSION RECEIVED BY THE ASSESSEE COMPANY FROM ITS A.E. I.E. HOGANAS A.B. SW EDEN IS ONLY RS.18,87,863/- I.E. 1.34% OF THE SALES OF RS.14,05,92,450/- ACHIEV ED BY HOGANAS AB SWEDEN IN INDIA. THE TPO, THEREFORE, PROPOSED THE ADDITION O F RS.29,10,263/- THAT WAS THE DIFFERENCE BETWEEN 3.41% AND 1.34%. THE ASSESSEE F ILED THE OBJECTION BEFORE THE DRP BUT WITHOUT ANY SUCCESS AS THE DRP CONFIRME D THE ACTION OF THE TPO PROPOSING THE ADDITION. IN HIS SHORT DECISION, THE DRP HELD THAT THE VIEW TAKEN BY THE TPO IS CORRECT AND IS NOT CALLED FOR ANY INT ERFERENCE. 3. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD . THE LD. COUNSEL SUBMITS THAT IN THE IMMEDIATE PRECEDING YEAR I.E.A. Y. 2006-07 IDENTICAL ISSUE HAS COME FOR THE CONSIDERATION BEFORE THE TRIBUNAL IN A SSESSEES OWN CASE IN RESPECT OF THE COMMISSION RECEIVED BY THE ASSESSEE AT $30 P ER METRIC TONNE AND THE HON'BLE TRIBUNAL HAS ACCEPTED THE EXPLANATION OF TH E ASSESSEE AND DELETED THE ADDITION PROPOSED BY THE TPO AND CONFIRMED BY THE D RP IN THE SAID ASSESSMENT YEAR. THE LD. COUNSEL ALSO FILED THE COPY OF THE T RIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2006-07 I.E. HOGANAS INDIA PVT. LTD. V S. DCIT CIRCLE-1(2) PUNE IN ITA NO.1463/PN/2010 ORDER DATED 11.1.13. WE HAVE A LSO HEARD THE LD. D.R. WHO FAIRLY CONCEDED THAT ISSUE STANDS COVERED IN FA VOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN THE IMMEDIATE PRECEDING YEAR. 4. WE FIND THAT IN THE A.Y. 2006-07 IN THE CASE OF HOGANAS (I) PVT. LTD. (SUPRA), THE PRESENT ASSESSEE, THE TRIBUNAL HAS ADJ UDICATED IDENTICAL ISSUE IN RESPECT OF THE RECEIPT OF THE COMMISSION AT $30 PER M.T. RECEIVED FROM ITS 4 ITA NO.1579/PN/11 HOGANAS (I) PVT. LTD., PUNE 4 PARENT COMPANY I.E. HOGANAS A.B. SWEDEN. THE OPERA TIVE PART OF THE TRIBUNALS ORDER IS AS UNDER: WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIE S AND PERUSED THE RECORD. THE SHORT CONTROVERSY IN THIS APPEAL IS IN RESPECT OF THE COMMISSION RECEIVED BY THE ASSESSEE FROM ITS PARENT COMPANY I. E. HOGANAS AB SWEDEN. AS PER THE AGREEMENT WITH HOGANAS AB SWEDEN, THE SALES DIRECTLY MADE BY THE PARENT COMPANY IN INDIA AND OTHER ASIA REGION, THE ASSESSEE HAS TO RECEIVE COMMISSION @ $ 30 PER MT. THE ASSESSEE-COMPANY WOR KED OUT THE PROFIT LEVEL INDICATOR AS OPERATING PROFIT OR OPERATING REVENUE OF THE AFORESAID DISTRIBUTION ACTIVITY AT 15.37% AND ACCORDING TO THE ASSESSEE TH E ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATOR OF THE COMPARABLE TRADING CO MPANIES WAS AT 1.96% ONLY. WHILE FILING THE WORKING BEFORE THE TPO AS WELL AS THE DRP, THE ASSESSEE AGGREGATED THE SALES OF THE MANUFACTURED GOODS AND TRADED GOODS AND ACCORDINGLY WORKED OUT THE PERCENTAGE OF SADA. THE CORE ISSUE BEFORE US IS WHETHER COMMISSION @ $ 30 PER MT RECEIVED BY THE AS SESSEE FROM ITS AE, ITS PARENT COMPANY IS AT ALP. THE PRINCIPLES FOR DETER MINING THE ALP ARE WELL SETTLED BY DIFFERENT JUDICIAL PRONOUNCEMENTS. WHAT IS TO BE CONSIDERED WHILE ADOPTING THE COMPARABLE ARE THE FUNCTIONS PERFORMED , CAPITAL UTILIZED AND RISKS ASSUMED. IT IS PERTINENT TO NOTE HERE THAT THE DRP AS WELL AS TPO HAS NOT QUESTIONED THE NATURE OF THE FUNCTIONS TO BE PERFOR MED BY THE PARENT COMPANY. THE ASSESSEES CLAIM IS THAT THERE IS A MINIMAL RIS K AND NO COST IS INVOLVED FOR ACQUIRING THE BUSINESS BY THE PARENT COMPANY, FOR W HICH ASSESSEE IS PAID COMMISSION. THE SALE PRICE OF THE PRODUCT IS NOT C ONSIDERED BUT WEIGHT IS CONSIDERED. THE ASSESSEE RECEIVED COMMISSION OF RS .14,41,555/- WHICH WORKED OUT TO 1.49% TO THE SALES ACHIEVED BY THE PARENT CO MPANY I.E. HOGANAS AB SWEDEN. IN OUR OPINION, THE BENCHMARKING ADOPTED B Y THE TPO AS WELL AS THE DRP TREATING THE ASSESSEE ITSELF AS A COMPARABLE IS NOT CORRECT. ADMITTEDLY THE ASSESSEE IS INVOLVED IN THE MANUFACTURING ACTIVITY ALSO AND MARKETING ITS OWN PRODUCTS I.E. IRON POWDER. APART FROM THAT, THE AS SESSEE IS IMPORTING IRON PRODUCT AND MARKETING THE SAME THAT IS A TRADING AC TIVITY. NOTHING HAS BEEN BROUGHT OUT ON RECORD BY THE DRP AS WELL AS THE TPO THAT THE ASSESSEE HAS TO INCUR COST FOR THE SALES ACHIEVED BY THE PARENT COM PANY AS IN THE CASE OF ITS OWN MARKETING. THE LD. COUNSEL FOR THE ASSESSEE ALSO S UBMITTED THAT NO RISK IS INVOLVED. HENCE, HOW THE ASSESSEE CAN BE TREATED A S INTERNAL COMPARABLE AS THE BENCHMARKING. IN OUR OPINION, THE APPROACH OF THE TPO AS WELL AS THE DRP IS NOT CORRECT. IT IS SEEN THAT THE RISK INVOLVED AND ASSET EMPLOYED BY THE ASSESSEE-COMPANY COMPARED TO ITS OWN MARKETING WITH THAT OF THE MARKETING OF THE PARENT COMPANY, OF WHICH COMMISSION IS PAID, IS UNMATCHED. MOREOVER, MINIMUM RISK IS INVOLVED AS THE ASSESSEE IS NOT DIR ECTLY INVOLVED IN ANY OF THE SALE TRANSACTIONS BY THE PARENT COMPANY. IT APPEAR S THAT THE COMMISSION IS PAID BY THE PARENT COMPANY TO ITS SUBSIDIARIES IN THE AS IA REGION TO COMPENSATE LOSS OF PROFIT WHEN DIRECT SALES ARE MADE. IN OUR OPINI ON, THE BENCHMARKING DONE BY THE TPO AS WELL AS THE DRP IS NOT CORRECT, AS THE P ARAMETERS OF THE RISK AND THE ASSETS INVOLVED ARE NOT MATCHING. WE, THEREFORE, D ELETE THE ADDITION MADE BY THE TPO ON THE DIRECTIONS OF THE DRP AND ALLOW THE APPEAL FILED BY THE ASSESSEE. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. 5. IN THIS YEAR, THE ADDITION PROPOSED BY THE TPO I S ALSO IN RESPECT OF THE COMMISSION RECEIVED BY THE ASSESSEE FROM HOGANAS AB SWEDEN WHICH IS THE PARENT COMPANY AND AS THE FACTS ARE IDENTICAL, WE T HEREFORE FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATE PRECEDING YEAR ALLOW THE APPEAL FILED BY THE ASSESSEE AND DELETE T HE ADDITION MADE BY THE A.O. 5 ITA NO.1579/PN/11 HOGANAS (I) PVT. LTD., PUNE 5 ON THE BASIS OF DRPS DIRECTIONS U/S 144C(5) OF THE ACT TO THE EXTENT OF RS.29,10,263/-. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 26.02.2013 SD/- SD/- ( G.S. PANNU ) ( R.S. PADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER VG/SPS PUNE, DATED 26 TH FEBRUARY, 2013 COPY TO 1 ASSESSEE 2 DEPARTMENT 3 THE DCIT (CIRCLE - 2), PUNE 4 THE CIT (A) , PUNE 5 THE DR, ITAT, PUNE . 6 GUARD FILE. BY ORDER