M/s. SAERTEX India Pvt. Ltd., Pune V. Asst. Comm. of Income-tax, Pune

ITA 1711/PUN/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 85037 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 09-01-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 29-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS MINI VERMA
• Keywords: Transfer pricing; International transaction
• Section: 92C; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO.1711/PN/2011 (A.Y:2007-08) M/S. SAERTEX INDIA PVT. LTD. APPELLANT S. NO. 282, VILLAGE MANN, HINJEWADI, TALUKA MULSHI, DISTRICT PUNE. VS. ACIT, CIRCLE 6, PUNE. RESPONDENT APPELLANT BY : SHRI KISHOR PHADKE RESPONDENT BY : MRS. MINI VERMA DATE OF HEARING : 02.09.2014 DATE OF PRONOUNCEMENT : 29.09.2014 ORDER PER SHAILENDRA KUMAR YADAV : THIS APPEAL HAS BEEN FILED BY THE ASSESSEE IS DIRE CTED AGAINST THE ORDER DATED 21/10/2011 PASSED U/S 143(3) R.W.S. 144C AFTER CONSIDERING THE GUIDELINES ISSUED BY THE DISPUTE RE SOLUTION PANEL VIDE ITS ORDER DATED 20/05/2011. THE MODIFIED GROU NDS OF APPEAL OF THE APPELLANT READ AS UNDER. 1. THE ACIT, CIRCLE-6, PUNE (AO) ERRED IN LAW AND ON F ACTS IN MAKING A REFERENCE TO THE DCIT (TRANSFER PRICING)-I V, PUNE (TPO) U/S 92CA OF THE ITA, 1961 FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE APPELLANTS INTERNATIONAL TRANSACTIONS; WITHOUT FORMING ANY OPINION AS ENVISA GED U/S 92C(3) OF THE ITA, 1961. 2. THE HONBLE DISPUTE RESOLUTION PANEL (DRP) ERRED IN LAW AND ON FACTS IN SUSTAINING ADDITION OF RS 96,49,504/- T O THE ITA NO.1711/PN/11 M/S. SARTEX INDIA P.LTD. APPELLANTS INCOME ON ACCOUNT OF TRANSACTION OF SAL E OF FINISHED GOODS TO THE AE PARTIES; AS SO PROPOSED BY THE TPO VIDE ORDER U/S 92CA(3) OF THE ITA, 1961. 3. THE HONBLE DRP, TPO AND AO ERRED ON FACTS IN NOT APPRECIATING THE APPELLANTS REQUESTS FOR BENCHMARK ING SALES TRANSACTIONS TO THE AE PARTIES, UNDER VARIOUS ALTE RNATE APPROACHES AS FOLLOWS : - COMPARISON OF TRANSACTION-BY-TRANSACTION SALES RATE - COMPARISON OF AVERAGE RATE OF SALES ON A MONTH-BY-M ONTH BASIS - COMPARISON OF AVERAGE RATE OF SALES FOR THE PERIOD FROM 1/4/06 TILL 02/02/07 - COMPARISON OF AVERAGE RATE OF SALES FOR THE PERIOD FROM 1/4/06 TILL 28/2/07 THE AUTHORITIES ERRED IN NOT APPRECIATING THE DISTO RTED PICTURE OF AVERAGE RATE EMERGING DUE TO AN UNEQUAL COMPARISON OF AVERAGE SALES RATE ON A YEARLY BASIS (AND WITHOUT DUE ADJUS TMENTS). 4. THE HONBLE DISPUTE RESOLUTION PANEL (DRP) ERRED IN LAW IN NOT APPRECIATING THAT THE LEARNED DCIT, WHILE PASSI NG ORDER U/S 143(3) R.W.S. 144C, HAS NOT APPLIED HIS INDEPEN DENT MIND TO THE ADDITIONS PROPOSED BY THE LEARNED TPO VIDE H IS ORDER U/S 92CA(3) OF THE ITA, 1961. 5. THE HONBLE DRP ERRED IN LAW AND ON FACTS IN REJECT ING THE FOLLOWING ADJUSTMENTS TO THE TRANSFER PRICE OF INTE RNATIONAL TRANSACTION OF SALE OF GOODS : - ADJUSTMENT ON ACCOUNT OF ABSENCE OF MARKETING AND COMMERCIAL FUNCTIONS AS REGARDS TRANSACTIONS OF SAL ES TO AE PARTIES - PARTIAL ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL DIFFERENCE - ADJUSTMENT ON ACCOUNT OF VOLUME DISCOUNT 6. THE APPELLANT CRAVES LEAVE TO ADD/ MODIFY/ ALTER/ D ELETE ALL/ ANY OF THE GROUNDS OF APPEAL. 2. THE APPELLANT COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF STITCH BONDED FABRIC WHICH IS MAIN LY REQUIRED IN WINDMILL, AUTOMOBILE, BOAT BODIES ETC INDUSTRY. ITA NO.1711/PN/11 M/S. SARTEX INDIA P.LTD. 3. DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES (AE) AND NON-ASSOCIATED ENTERPRISES. COMPANY MADE TOTAL EXPORT SALE OF 15,69,025 KGS. OF STITCHED BOND FABRIC FOR RS. 15,60,27,886/- TO AE AND 344,295 KGS FOR RS. 3,67,22,755/- TO NON-ASSOCIATED ENTERPRISES. THE C OMPANY DECIDED THE PRICES OF SALES OF STITCHED BOND FABRIC ON A TRANSACTION TO TRANSACTION BASIS. THE REASONS FOR DIFFERENT PRI CES AT DIFFERENT TIMES ARE FACTORS SUCH AS PETROLEUM PRICE, YARN PRI CE, GLASS PRICE, ETC. ON A GLOBAL BASIS. 4. A.Y. 2007-08 WAS FIRST YEAR OF OPERATIONS OF THE COMPANY AND COMPANY REQUIRED STRONG SUPPORT FROM THE ASSOCIATED COMPANIES TO ACHIEVE THE VOLUME AND USE OF THE CAPACITY. DURING THE BENCH MARKING PROCESS, IN ORDER TO COMPARE THE PRICE AT W HICH GOODS ARE SOLD TO ASSOCIATES ENTERPRISES AND NON ASSOCIATED E NTERPRISES, THE ASSESSEE COMPANY MADE ADJUSTMENT TO FOR SELLING AND MARKETING EXPENSES OF 3% ON SALE PRICE AND CREDIT RISK OF 3% ON SALES. THE APPELLANT ALSO CONTENTED BEFORE THE TPOS TOWARDS T HE PROVISO TO SECTION 92C WHEREIN 5% TOLERANCE LIMIT HAS BEEN PRO VIDED FOR. 5. HOWEVER, THE ASSESSEE COMPANYS BENCHMARKING WAS NOT ACCEPTED BY THE TPO BY OBSERVING THAT, IF PRICES AR E COMPARED ON YEARLY AVERAGE BASIS, THE COMPANYS BENCHMARKING WA S INCORRECT. THE ASSESSEE COMPANY OBJECTED TO THE SAME BY STATIN G THAT THERE HAS NEVER BEEN ANY ATTEMPT FOR PASSING PROFIT FROM THE INDIAN ASSESSEE COMPANY TO THE PARENT USA COMPANY. HOWEVER , THE COMPANYS CONTENTIONS WERE REJECTED BY THE TPO AND ADDITION OF RS. 1,13,28,030 WAS PROPOSED BY THE TPO. 6. THE ASSESSEE COMPANY PREFERRED OBJECTION BE FORE THE DRP AND THE DRP REDUCED THE PROPOSED ADJUSTMENT TO RS. 96,49,504 BY ITA NO.1711/PN/11 M/S. SARTEX INDIA P.LTD. GRANTING 1% ADJUSTMENT TOWARDS CREDIT RISK. NO OTHE R ADJUSTMENT WAS PERMITTED BY THE DRP. THE AO, THEREAFTER, CONCL UDED THE ASSESSMENT AND PASSED THE FINAL SCRUTINY ORDER. 7. AGGRIEVED BY THE SAME, THE ASSESSEE FILED THE PRESENT APPEAL BEFORE US. DURING THE APPELLATE PROCEEDINGS, SHRI K ISHOR PHADKE, LEARNED COUNSEL OF THE ASSESSEE NARRATED THE FACTS OF THE CASE AND ALSO THE SUBMISSIONS MADE BEFORE THE TRANSFER PRICI NG OFFICER/ASSESSING OFFICER/DRP. MAIN PLANK OF THE A RGUMENT LEARNED ASSESSEES REPRESENTATIVE WAS AS UNDER. A) TRANSACTIONS OF SAME PERIOD OUGHT TO BE COMPARED THE LEARNED ASSESSEES REPRESENTATIVE SUBMITTED THAT UN DER CUP APPROACH, SAME PERIOD TRANSACTIONS OUGHT TO BE COMP ARED SO THAT CORRECT BENCHMARKING TAKES PLACE. THE LEARNED ASSES SEES REPRESENTATIVE SUBMITTED THAT AS PER WORKING ON PAG E-71 OF THE PAPER-BOOK, EXPORT SALES RATES IN THE MONTH OF MARC H-2007 HAVE INCREASED DRASTICALLY. IT WAS SUBMITTED, FOR A CORR ECT BENCHMARKING, TRANSACTIONS OF MARCH-2007 OUGHT TO H AVE BEEN IGNORED. SIMILAR SITUATION AROSE IN FEBRUARY-2007 ( IN PARTICULAR AFTER 2-2-2007) AND HENCE, SALES TO NON-ASSOCIATED ENTERPRISES AFTER 2-2-2007 SHOULD HAVE BEEN IGNORED. IT IS ALSO SUBMITTED THAT THIS ASPECT HAS NOT BEEN CONSIDERED BY THE I-T AUTH ORITIES DESPITE SPECIFIC ATTENTION BEING INVITED VIDE WRITTEN SUBMI SSION AND VIDE ORAL ARGUMENTS DURING THE PROCEEDINGS. B)ADJUSTMENTS SOUGHT FOR NOT GRANTED THE LEARNED ASSESSEES REPRESENTATIVE REQUESTED TO THE I-T AUTHORITIES FOR ADJUSTMENTS FROM AVERAGE EXPORT SALES PRICE OF NON-ASSOCIATED E NTERPRISES SALES. THE SAME WAS TURNED DOWN BY THE TPO. HOWEVER , THE DRP GRANTED 1% ADJUSTMENT FOR CREDIT RISK, WHICH, THE A R SUBMITS, IS TOO LOW. ITA NO.1711/PN/11 M/S. SARTEX INDIA P.LTD. 8. THE LEARNED ASSESSEES REPRESENTATIVE FURTHER SUBMITS THAT THE BENCHMARKING RESORTED TO BY THE APPELLANT UNDER THE TRANSACTION- BASED APPROACH WAS MORE RATIONAL AS COMPARED TO THE YEARLY AVERAGE APPROACH. THE LEARNED ASSESSEES REPRESENT ATIVE SUBMITTED THAT PRICES OF THE GOODS SUPPLIED BY THE COMPANY WERE OPEN FOR FLUCTUATION FROM TIME TO TIME CONSIDERING THE OPEN MARKET CONDITION. THE LEARNED ASSESSEES REPRESENTATIVE AL SO SUBMITS THAT THE PRICES OF THE GOODS SUPPLIED ARE NOT DECIDED / FIXED IN ADVANCE AND HENCE, THERE IS WAS NO PROPRIETY IN MAKING A CO MPARISON OF THE YEARLY AVERAGE RATES FOR THE PURPOSE OF BENCHMARKIN G. HE ALSO SUBMITTED THAT THE PRICES OF THE GOODS SUPPLIED BY THE COMPANY INCREASED SUBSTANTIALLY IN THE MONTH OF FEB-07 AND MAR-07 DURING WHICH PERIOD, THERE WAS NO / LOW SUPPLY TO THE ASSO CIATED ENTERPRISES PARTY, THOUGH THERE WAS SIZEABLE SUPPLY TO THE NON- ASSOCIATED ENTERPRISES PARTY. THE LEARNED ASSESSEE S REPRESENTATIVE SUBMITS THAT, DUE TO THIS PRICE FLU CTUATION, THE WHOLE YEARS AVERAGE RATE IS VITIATED. THE LEARNED ASSESSEES REPRESENTATIVE HAS FURTHER INVITED OUR ATTENTION TO THE BILL-WISE DETAILED WORKING WHEREIN, THE TRANSACTIONAL RATES W ERE LISTED FOR ASSOCIATED ENTERPRISES AND NON-ASSOCIATE ENTERPRISE PARTIES SEPARATELY AND CHRONOLOGICALLY. A PERUSAL OF THE SA ID WORKINGS REVEALS THAT THE RATES CHARGED BY THE ASSESSEE COMP ANY TO THE ASSOCIATED ENTERPRISES PARTY VIS--VIS NON-ASSOCIAT ED ENTERPRISES PARTY WERE IN CLOSE RANGE. IN FACT, IN MANY SITUATI ONS, THE ASSOCIATED ENTERPRISE RATES WERE SLIGHTLY MORE / HI GHER THAN THE NON-ASSOCIATED ENTERPRISES RATES. THE SAID BILL-WIS E WORKING WAS ALSO SUPPORTED WITH MONTH-WISE AVERAGES. THE FOLLOW ING SITUATION PREVAILS ON A MONTH-WISE AVERAGE BASIS WORKING. MONTH AVERAGE RATE CHARGED TO AE PARTY (RS. PER KG) AVERAGE RATE CHARGED TO NON-AE PARTY (RS. PER KG) APRIL - 06 NO SUPPLY NO SUPPLY ITA NO.1711/PN/11 M/S. SARTEX INDIA P.LTD. MAY - 06 NO SUPPLY NO SUPPLY JUNE - 06 NO SUPPLY 100=00 JULY - 06 99=97 NO SUPPLY AUGUTS T - 06 NO SUPPLY 109=23 SEP - 06 101=36 96=82 OCT - 06 100=07 95=78 NOV - 06 101=56 NO SUPPLY DEC - 06 96=16 NO SUPPLY JAN - 07 102=76 94=93 FEB - 07 88=10 115=48 MAR - 07 NO SUPPLY 113=57 9. APART FROM THESE SUBMISSIONS, THE LEARNED ASSESS EES REPRESENTATIVE ALSO INVITED OUR ATTENTION TO THE SU BSEQUENT YEARS T-P ORDERS WHEREIN, THERE WAS NO ANY DISTURBANCE TO THE PRICES FETCHED BY THE ASSESSEE COMPANY FROM THE ASSOCIATED ENTERPRISES PARTIES. THE LEARNED ASSESSEES REPRESENTATIVE ALSO SUBMITS THAT THE NET MARGIN OF THE COMPANY IS ANYWAY HEALTHY AND EVEN IN A.Y. 2007-08, THE COMPANY HAS EARNED A NET PROFIT OF 13. 77%, WHICH IS AN ACCEPTABLE MARGIN FOR MANUFACTURING COMPANIES. O N A WHOLE, THE AR SUBMITS THAT THE DETAILED BENCHMARKING SHOUL D BE APPRECIATED. AR ALSO RELIED ON THE ITAT DECISION OF MATTEL TOYS (I) (P) LTD. VS. DCIT 34 TAXMANN.COM 203 (MUM) FOR THE PROPOSITION THAT IMPROVEMENTS IN BENCHMARKING A RE PERMISSIBLE EVEN IN SUBSEQUENT STAGES. ON OTHER HAND LD. DEPARTMENTS REPRESENTATIVE SUBMITS THAT THE BE NCHMARKING DONE ON YEARLY BASIS IS MORE APPROPRIATE AND FAIR. THE LEARNED DEPARTMENTS REPRESENTATIVE JUSTIFIED THE ORDER PASS ED BY THE DRP AND OBJECTED TO THE APPEAL OF THE COMPANY. HOWEVER, THE LD. DR HAS NOT OBJECTED TO THE OTHER SUBMISSIONS MADE BY T HE LD. ASSESSEES REPRESENTATIVE. 10. WE HAVE HEARD THE PARTIES AND PERUSED THE ORDER S PASSED BY THE TPO/AO/DRP. WE HAVE ALSO GONE THROUGH THE SUBMI SSIONS MADE BY THE APPELLANT BEFORE THE DRP WHEREIN, IT WA S EXPLAINED THAT, IF THE BENCHMARKING IS DONE TRANSACTION-BY-TR ANSACTION, NO ITA NO.1711/PN/11 M/S. SARTEX INDIA P.LTD. ADDITIONS ARE WARRANTED AND SO ON. IN THIS REGARD, WE HAVE OBSERVED THE OECD COMMENTARY PUT FORTH BY THE LEARN ED ASSESSEES REPRESENTATIVE AND THE RELEVANT PARA OF THE OECD COMMENTARY READS AS UNDER. A.3.1 EVALUATION OF A TAXPAYERS SEPARATE AND COMBI NED TRANSACTIONS 3.9 IDEALLY, IN ORDER TO ARRIVE AT THE MOST PRECISE APPROXIMATION OF ARMS LENGTH CONDITIONS, THE ARM'S LENGTH PRINCIPLE SHOULD BE APPLIED ON A TRANSACTION-BY-TRA NSACTION BASIS. HOWEVER, THERE ARE OFTEN SITUATIONS WHERE SE PARATE TRANSACTIONS ARE SO CLOSELY LINKED OR CONTINUOUS TH AT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE BASIS. EXAMPLES MAY INCLUDE 1. SOME LONG-TERM CONTRACTS FOR THE SUPPLY OF COMMODITIES OR SERVICES, 2. RIGHTS TO USE INTANGIBLE PROPERTY, AND 3. PRICING A RANGE OF CLOSELY-LINKED PRODUCTS ( E.G. IN A PRODUCT LINE) WHEN IT IS IMPRACTICAL TO DETERM INE PRICING FOR EACH INDIVIDUAL PRODUCT OR TRANSACTION. ANOTHER EXAMPLE WOULD BE THE LICENSING OF MANUFACTURING KNO W-HOW AND THE SUPPLY OF VITAL COMPONENTS TO AN ASSOCIATED MANUFACTURER; IT MAY BE MORE REASONABLE TO ASSESS T HE ARM'S LENGTH TERMS FOR THE TWO ITEMS TOGETHER RATHER THAN INDIVIDUALLY. SUCH TRANSACTIONS SHOULD BE EVALUATED TOGETHER USING THE MOST APPROPRIATE ARM'S LENGTH METHOD. A F URTHER EXAMPLE WOULD BE THE ROUTING OF A TRANSACTION THROU GH ANOTHER ASSOCIATED ENTERPRISE; IT MAY BE MORE APPRO PRIATE TO CONSIDER THE TRANSACTION OF WHICH THE ROUTING IS A PART IN ITS ENTIRETY, RATHER THAN CONSIDER THE INDIVIDUAL TRANS ACTIONS ON A SEPARATE BASIS. CONSIDERING TOTALITY OF THE FACTS, THE ASSESSEES REPRESENTATIVES SUBMISSION DESERVES TO BE UPHELD. AS DEMONSTRATED, THERE ARE NO. OF INSTANCES WHEREIN, T HE PRICES CHARGED TO THE ASSOCIATED ENTERPRISES PARTY ARE HIG HER THAN PRICES CHARGED TO THE NON-ASSOCIATE ENTERPRISE PARTY. THOU GH YEARLY AVERAGE IS A GOOD AND REASONABLE INDICATOR FOR BENC HMARKING UNDER THE CUP APPROACH, A TRANSACTION BASED BENCHMARKING APPROACH SHOULD NOT BE REJECTED, AND ESPECIALLY IN SUCH CASE S WHERE, REJECTION OF A TRANSACTION-BASED BENCHMARKING MAY L EAD TO SOME ITA NO.1711/PN/11 M/S. SARTEX INDIA P.LTD. DISTORTION. IT IS A TRITE PRINCIPLE OF LAW THAT LIK E HAS TO BE COMPARED WITH LIKE. IN FACT, NATURAL PROCESS OF BENCHMARKING ITSELF CALLS FOR IGNORING THAT PERIOD WHEN, SUPPLIES ARE NOT MADE EI THER TO ASSOCIATED ENTERPRISES PARTY OR NON-ASSOCIATED ENTE RPRISES PARTY. FURTHER, IF MARCH-07 SUPPLIES ARE REMOVED FROM THE YEARLY BENCHMARKING AVERAGE, EVEN YEARLY AVERAGE RATES BEC OME COMPARABLE AND WITHIN THE PERMISSIBLE 5% VARIATION SCOPE AS FOLLOWS. PARTICU LARS AE PRICE (RS. PER KG) NON - AE PRICE (RS. PER KG) YEARLY AVERAGE PRICE 99=44 106=66 APRI - 06 TO FEB - 07 AVERAGE PRICE 99=44 103=28 IN VIEW OF ABOVE, WE DO NOT FEEL PROPRIETY IN SUSTA INING THE ADDITIONS PROPOSED BY THE TPO AND SUSTAINED BY THE DRP. ACCORDINGLY, WE ALLOW THE APPEAL OF THE ASSESSEE AN D DIRECT THE REVENUE TO DELETE THE ADDITIONS. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 29 TH DAY OF SEPTEMBER, 2014. SD/- SD/- (R.K. PANDA) (SHAILENDRA KUMAR YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED THE 29 TH SEPTEMBER, 2014 GCVSR ITA NO.1711/PN/11 M/S. SARTEX INDIA P.LTD. COPY TO:- 1) ASSESSEE 2) THE DEPARTMENT 3) THE CIT(A)-II, PUNE 4) THE CIT-II, PUNE 5) THE DR, A BENCH, I.T.A.T., PUNE. 6) GUARD FILE BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, PUNE.