SC ENVIRO AGRO INDIA P.LTD, MUMBAI V. DCIT CIR 3(3), MUMBAI

ITA 1601/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3825 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 10-04-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 06-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: R MURALIDHAR
• Keywords: Transfer pricing

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH K, MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO.1601/MUM/2012 ASSESSMENT YEAR : 2006-07 M/S. SC ENVIRO AGRO INDIA PVT. LTD. 3/33, MAKER CHAMBER VI 220 NARIMAN POINT MUMBAI-400 021. PAN :AAFCS 6405 F VS. DY. COMMISSIONER OF INCOME TAX -3(3) ROOM NO.606, 6 TH FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R. MURALIDHAR RESPONDENT BY : SHRI AJEET KUMAR JAIN DATE OF HEARING : 10.04.2013 DATE OF PRONOUNCEMENT : 10.04.2013 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 14.12.2011 OF CIT(A) FOR THE ASSESSMENT YEAR 2006-0 7. THE ONLY DISPUTE RAISED IN THIS APPEAL IS REGARDING TRANSFER PRICING ADJUSTMENT MADE BY AO AMOUNTING TO RS.58,09,820/- FOR ASSESSMENT YEAR 20 06-07 ON ACCOUNT OF PAYMENT OF ROYALTY. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE WHO WAS ENGAGED IN THE BUSINESS OF MANUFACTURE OF HOUSEHOLD AND AGRICULTUR AL PESTICIDES HAD ENTERED INTO AN AGREEMENT WITH PRINCIPAL I.E. SUMITOMO CHEM ICAL CO. LTD., JAPAN (SCJ) AS PER WHICH IT HAD TO MANUFACTURE CERTAIN P RODUCTS FOR THE PRINCIPAL AS PER SPECIFICATION IN THE AGREEMENT. THE PRINCIPAL H AD ALSO ALLOWED USE OF ITA NO.1601/M/12 A Y .06-07 2 TECHNICAL KNOW-HOW FOR WHICH ROYALTY WAS PAYABLE @ 5% OF EX-FACTORY SALE PRICE FOR SALE OF PRODUCTS WITHIN INDIA AND OUTSIDE INDIA. SINCE ASSESSEE HAD PAID ROYALTY TO THE ASSOCIATE ENTERPRISE (AE), THE AO HAD REFERRED THE ISSUE OF DETERMINATION OF TRANSFER PRICING ADJUSTMENT TO THE TRANSFER PRICING OFFICER (TPO). THE TPO NOTED FROM THE AGREEMENT THAT THE AS SESSEE HAD TO PURCHASE THE ENTIRE REQUIREMENT OF INTERMEDIARIES FROM THE P RINCIPAL (SCJ) FOR THE MANUFACTURE OF THE PRODUCT AND RAW MATERIAL REQUIRE D IN CONNECTION WITH MANUFACTURE HAD TO BE OBTAINED AS EXPRESSLY APPROVE D BY THE PRINCIPAL. THE TPO ALSO OBSERVED THAT THE ASSESSEE HAD NO OPTION R EGARDING PURCHASES, MANUFACTURING PROCESS AND SALES WHICH HAD TO BE MAD E ONLY TO THE APPROVED PARTIES. THE TPO ALSO NOTED THAT IN THE TRANSFER PR ICING STUDY, THE ASSESSEE ITSELF HAD STATED THAT THE ACTIVITIES OF THE ASSESS EE WERE IN THE NATURE OF CONTRACT MANUFACTURING. SINCE IT WAS A CASE OF CONT RACT MANUFACTURING, THE TPO HELD THAT NO ROYALTY WAS PAYABLE AND, THEREFORE , DETERMINED ARMS-LENGTH -PRICE OF ROYALTY AT NIL AND RECOMMENDED ADJUSTMENT OF RS.58,09,820/- AS THERE WAS NO JUSTIFICATION FOR PAYMENT OF ROYALTY T O THE PRINCIPAL. THE AO FOLLOWING THE ORDER OF TPO MADE AN ADDITION OF RS.5 8,09,820/- . 3. THE ASSESSEE DISPUTED THE DECISION OF THE AO AND SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE HAD REFERRED TO CONTRACT M ANUFACTURING IN TRANSFER PRICING ANALYSIS BY MISTAKE. THE ASSESSEE HAD PURCH ASED RAW MATERIAL, PACKING MATERIAL AND ALL OTHER CONSUMABLES ON ITS O WN ACCOUNT AND THE ASSESSEE HAD ALSO PAID SALES TAX ON SALE OF PRODUCT S. THE ENTIRE RISK RELATING TO PURCHASE OF RAW MATERIAL, MANUFACTURING ACTIVITY HAD TO BE UNDERTAKEN BY THE ASSESSEE. THE ONLY RESTRICTION IMPOSED BY PRINC IPAL WAS THAT THE GOODS HAD TO BE SOLD ONLY TO THE APPROVED PARTIES. THE AS SESSEE REFERRED TO SEVERAL ITA NO.1601/M/12 A Y .06-07 3 JUDGMENTS AS PER WHICH IT WAS HELD THAT WHERE THE V ENDOR PURCHASES RAW MATERIALS ON ITS OWN, MANUFACTURES GOODS AT HIS OWN RISK AS PER THE SPECIFICATIONS OF THE PRINCIPAL AND THE PROPERTY IN THE GOODS IS PASSED ON TO CUSTOMER AT THE POINT OF TIME WHEN GOODS WERE SOLD, IT HAS TO BE CONSIDERED AS SALE OF GOODS AND NOT JOB WORK OR CONTRACT MANUF ACTURING. CIT(A) DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY H IM THAT THE ASSESSEE ITSELF HAD STATED THAT THE ACTIVITIES OF THE ASSESSEE WERE IN THE NATURE OF CONTRACT MANUFACTURING. THE GOODS WERE SOLD MOSTLY TO THE PR INCIPAL AND ONLY SMALL PORTION OF PRODUCTS HAD BEEN SOLD TO THIRD PARTIES THAT TOO ONLY IF SUCH CUSTOMERS WERE APPROVED BY THE PRINCIPAL. THERE WAS THEREFORE NO JUSTIFICATION FOR PAYMENT OF ROYALTY WHEN THE GOODS WERE SOLD MOSTLY TO THE PRINCIPAL. CIT(A), THEREFORE CONFIRMED THE TRANSFER PRICING ADJUSTMENT MADE BY AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4. BEFORE US THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE SAME ISSUE HAD BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES O WN CASE IN ASSESSMENT YEARS 2003-04 AND 2004-05 IN ITA NOS.2057 AND 2058/ MUM/2009 IN WHICH ADJUSTMENT MADE ON ACCOUNT OF SIMILAR ROYALTY PAID BY THE ASSESSEE ON BASIS OF THE SAME AGREEMENT HAD BEEN DELETED BY THE TRIBU NAL. THE LD. DR ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF AUTHORI TIES BELOW. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING TRANSFER PRICIN G ADJUSTMENT MADE BY THE AO ON ACCOUNT OF PAYMENT OF ROYALTY TO THE PRINCIPA L WHO WAS AN ASSOCIATE ENTERPRISE (AE). WE FIND THAT THE SAME ISSUE HAS A LREADY BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT Y EARS 2003-04 AND 2004- ITA NO.1601/M/12 A Y .06-07 4 05 (SUPRA), IN WHICH CASE ALSO SIMILAR ROYALTY HAD BEEN PAID BY THE ASSESSEE BASED ON THE SAME AGREEMENT FOR MANUFACTURE OF PROD UCT ON BEHALF OF THE PRINCIPAL. THE TRIBUNAL NOTED THAT BOTH THE AO AND TPO HAD HELD THAT THERE WAS NO JUSTIFICATION FOR PAYMENT OF ROYALTY ON THE GROUND THAT IT WAS A CASE OF CONTRACT MANUFACTURING. THE TRIBUNAL FURTHER OBSER VED THAT UNDER TRANSFER PRICING PROVISIONS, THE TPO WAS REQUIRED TO DETERMI NE ARMS-LENGTH-PRICE AND THEN RECOMMEND ADJUSTMENT WHICH HAD NOT BEEN DONE. THE DISALLOWANCE HAD BEEN MADE ON THE GROUND THAT THERE WAS NO JUSTI FICATION FOR ROYALTY WHICH WAS NOT CORRECT. THE TRIBUNAL IN THIS REGARD REFE RRED TO THE JUDGMENT OF HONBLE HIGH COURT OF DELHI IN CASE OF EKL APPLIAN CES IN ITA NO.1068/70/2011(DEL HC) IN WHICH SUCH METHOD ADOPTE D BY TPO WAS NOT UPHELD. THE TRIBUNAL, THEREFORE, HELD THAT TPO EXC EEDED ITS JURISDICTION IN MAKING RECOMMENDATION FOR DISALLOWANCE OF ROYALTY O N THE GROUND OF NO JUSTIFICATION. THE TRIBUNAL FURTHER OBSERVED THAT EVEN ON MERIT, NO ADDITION WAS REQUIRED. IT WAS POINTED OUT THAT THOUGH THE A SSESSEE BY MISTAKE IN THE TP STUDY HAD REFERRED ITS ACTIVITIES AS CONTRACT MA NUFACTURING, THE FACTS INDICATED OTHERWISE. THE ASSESSEE WAS MANUFACTURING SPECIFIC PRODUCTS AS PER SPECIFICATION OF THE PRINCIPAL AND SELLING THE SAME TO PRINCIPAL AND TO OTHER PARTIES. THE ASSESSEE HAD IMPORTED INTERMEDIARIES AND WAS ALSO USING INDIGENOUS MATERIAL FOR MANUFACTURE OF THE SPECIFIE D PRODUCTS. THE TRIBUNAL FURTHER NOTED THAT THE ROYALTY WAS PAYABLE AS PER A GREEMENT FOR USING OF TECHNICAL KNOW-HOW ON VALUE ADDED PRICE TO THE PRIN CIPAL. THUS ROYALTY PAYMENT WAS INDEPENDENT OF MANUFACTURING OF GOODS. FURTHER, ROYALTY HAD BEEN PAID NOT ON ENTIRE SALE PRICE BUT ONLY VALUE A DDED PRICE WHICH WAS WORKED OUT SEPARATELY. THE ROYALTY HAD ALSO BEEN P AID ON SALE TO THIRD ITA NO.1601/M/12 A Y .06-07 5 PARTIES WHICH HAD BEEN ALLOWED BUT ROYALTY ON SALES TO AE HAD NOT BEEN ALLOWED WHEN RATE OF ROYALTY WAS THE SAME. FURTHER , NO DISALLOWANCE HAD BEEN MADE IN THE EARLIER YEAR. IT WAS THUS HELD BY THE TRIBUNAL THAT THE ROYALTY WAS THUS FOR THE PURPOSE OF BUSINESS. THE TRIBUNAL ACCORDINGLY, DELETED THE ADDITION ON MERIT ALSO. FACTS THIS YEA R IN WHICH ROYALTY HAS BEEN PAID BASED ON THE SAME AGREEMENT AS IN EARLIER ARE IDENTICAL. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEARS 2003-04 AND 2004-05 (SUPRA), WE SE T ASIDE THE ORDER OF CIT(A) AND DELETE THE ADDITION MADE. 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 10.4.2013. SD/- SD/- (VIVEK VARMA) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 10.4.2013. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.