Asstt.Commissiner of Income Tax-6, Kanpur V. M/S. Mirza International Ltd., Kanpur

ITA 185/LKW/2012

• Counselvise Citation: 18523714 RSA 2012
• Duration Of Justice: 1 year(s) 8 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 11-11-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 13-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S K JAIN
• Keywords: Business income; Transfer pricing; International transaction
• Section: 92A; 154; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A , LUCKNOW BEFORE SHRI S UNIL KUMAR YADAV , JUDICIAL MEMBER AND SHRI. A. K. GARODIA , ACCOUNTANT MEMBER ITA NO. 185/LKW/2012 ASSESSMENT YEAR: 2008 - 09 JOINT CIT (OSD) KANPUR V. M/S MIRZA INTERNATIONA L LTD. 14/6, CIVIL LINES, KANPUR PAN: AAVFN2644R (APP ELL ANT) (RESPONDENT) C.O. NO.42/LKW/2012 [IN ITA NO.185/LKW/2012] ASSESSMENT YEAR: 2008 - 09 M/S MIRZA INTERNATIONAL LTD. 14/6, CIVIL LINES, KANPUR V. JOINT CIT (OSD) KANPUR PAN: AAVFN2644R ( CROSS OBJECTOR ) (RESPONDENT) DEPARTMENT BY: SHRI. MANOJ KUMAR GUPTA, CIT (DR) ASSESSEE BY: SHRI. S. K. JAIN, ADVOCATE DATE OF HEARING: 11.11.2013 DATE OF PRONOUNCEMENT: 07.01.2014 O R D E R PER SUNIL KUMAR YADAV: THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE LD. CIT(A), INTER ALIA, ON VARIOUS GROUNDS WHICH ARE AS UNDER: - 1 . THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS BY NOT APPRECIATING THE FACTS THAT AS MENTIONED IN THE ORDER U/S. 92CA (3) OF : - 2 - : THE INCOME TAX ACT, 1961 DATED 31 . 10 . 2011 AND ADOPTING CONTRARILY VIEW WHILE DECIDING THE ABOVE ISSUE. 2 . THE LD . CIT (A) HAS ERRED IN LAW AND ON FACTS BY DIRECTING TO ASSESSING OFFICER TO RECOMPUTE THE DISALLOWANCE BASED ON SIMILAR STATUS OF COMPARABLE CASES EITHER WITH EXPORT INCENTIVE OR WITHOUT EXPORT INCENTIVES WITHOUT DECIDING THE FOLLOWING ISSUES: (I) WHETHER EXPORT INCENTIVES RECEIV ED ON EXPORT OF FOOTWEAR BY THE APPELLANT COMPANY WILL CONSTITUTE OPERATING PROFIT OF THE COMPANY OR NOT; AND (II) WHETHER EXPORT INCENTIVES SHOULD BE EXCLUDED OR INCLUDED IN THE WORKING OF PROFIT MARGIN VI Z A VIZ ARMS LENGTH PRICE AND IN DOING SO WHETHER SAME TREATMENT SHOULD BE DONE IN THE FINANCIAL RESULTS OF THE APPELLANT COMPANY AS WELL AS THE OTHER COMPANIES (COMPARABLE) 3 . T HE LD. CIT (A) HAS CON SIDERED THE FATS MENTIONED IN PETITION U/S. 154 FILED BY THE ASSESSEE BEFORE ASSESSING OFFICER & T.P.O. WHICH WAS PENDING BEFORE THEM AND WITHOUT CALLING RE QUIRE D REPORT AS REQUIRED UNDER RULE 46A. 4 . THAT THE ORDER OF THE LD. CIT (A) - II, KANPUR BEING ERRONEO US IN LAW AND ON FACTS DESERVES TO BE VACATED AND THE ORDER OF T HE AO BE RESTORED. 2 . THOUGH VARIOUS GROUNDS ARE RAISED, BUT THEY ALL RELATE TO THE TRANSFER PRICING ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER (TPO) WHILE PASSING AN ORDER UNDER SECTION 92 CA(3) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER REFERRED IN SHORT 'THE ACT'). : - 3 - : 3 . THE ASSESSEE HAS ALSO FILED CROSS OBJECTION WHICH IS IN SUPPORT OF THE ORDER OF THE LD. CIT(A). 4 . THE FACTS IN BRIEF BORNE OUT FROM THE RECORD ARE THAT THE ASSESSEE - COMPANY HAS AN A SSOCIATE COMPANY, M/S MIRZA U.K. LTD., IN WHICH THE ASSESSEE - COMPANY HAS 45% EQUITY SHARE CAPITAL AND MADE SALES TO IT OVER ` 100 CRORES EVERY YEAR. THE REFORE THE ASSESSEE - COMPANY HA S AN ASSOCIATE ENTERPRISES (AE) IN TERMS OF SECTION 92A OF THE ACT. SINCE THE TOTAL VALUE OF THE EXPORT SALES OF THE ASSESSEE - COMPANY TO AE EXCEEDED ` 5 CRORES, IT WAS MANDATORY FOR THE ASSESSING OFFICER TO MAKE A REFERENCE TO THE TPO UNDER SECTION 92CA OF THE ACT. THE TPO ISSUED VARIOUS NOTICES TO THE ASSESSEE AND REQUIRED JUS TIFICATION OF THE SALE PRICE CHARGED TO AE FROM VARIOUS PARAMETERS OF THE ARMS LENGTH PRICE. IN COMPLIANCE THEREOF , THE ASSESSEE - COMPANY FILED THE T RANSFER P RICING STUDY R EPORT FURNISHING THE DETAILED EXPLANATIONS. INITIALLY THE TPO HAS TAKEN INTO ACCOUN T THE PROFIT MARGIN SHOWN BY M/S LIBERTY SHOES LTD.; M/S WORLDWIDE LEATHER PRODUCTS LTD.; M/S FLOWSERVE SONMAR LTD. AND M/S MAYUR LEATHER PRODUCTS LTD. A ND COMPUTED THE AVERAGE OPERATING PROFIT AT 19% BUT LATER ON THE TPO WORKED OUT THE PERCENTAGE OF DIFFE RENCE IN INTERNATIONAL TRANSACTION AT 17.19% AND SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. IN RESPONSE THERETO THE ASSESSEE - COMPANY HAS FURNISHED DETAILED EXPLANATIONS WHICH WAS CONSIDERED BY THE TPO AND RE - COMPUTED THE PERCENTAGE OF DIFFERENCE WITH I NTERNATIONAL TRANSACTION AT 7.91% AND SUBMITTED THE REPORT TO THE ASSESSING OFFICER TO MAKE TOTAL ENHANCEMENT OF THE ASSESSEES INCOME AT ` 12,97,33,913. THE ASSESSING OFFICER ACCORDINGLY ADOPTED THE SAID FIGURE WHILE COMPLETING THE ASSESSMENT AND MADE THE ADDITION ACCORDINGLY. 5 . AGGRIEVED , THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WITH THE SUBMISSION THAT THE ASSESSEE HAS ALSO FILED AN APPLICATION UNDER SECTION 154 OF THE ACT BEFORE THE TPO POINTING OUT THEREIN THAT SHE HAS NOT : - 4 - : PICKED UP COMPARA BLE CASES IN A SIMILAR ATMOSPHERE. HE HAS FURNISHED A DETAILED EXPLANATION BEFORE THE LD. CIT(A) WITH THE SUBMISSION THAT THE TPO HAS PICKED UP CERTAIN COMPARABLE CASES WHICH ARE NOT SIMILAR IN THE BUSINESS PRACTICE AND ANALOGOUS TO THE ASSESSEE - COMPANY. IT WAS ALSO CONTENDED BEFORE THE LD. CIT(A) THAT THE TPO HAS WORKED OUT THE PROFIT MARGIN BY INCLUDING EXPORT INCENTIVES OF THE COMPARABLE CASES TO COMPARE THE PROFIT MARGIN EXCLUDING THE EXPORT INCENTIVES OF THE ASSESSEE - COMPANY. THE CONTENTIONS OF THE ASSESSEE WAS MINUTELY EXAMINED BY THE LD. CIT(A) AND THE LD. CIT(A) HAS NOTICED FROM THE ORDER OF THE TPO THAT THE TPO HAS WORKED OUT THE OPERATING PROFIT AT 1.57% (EXCLUDING THE EXPORT INCENTIVES) OF THE ASSESSEE, BUT WHILE WORKING OUT THE OPERATING PROFI T OF THE OTHER COMPANIES (COMPARABLES) EXPORT INCENTIVES HAS NOT BEEN EXCLUDED. THE LD. CIT(A) FURTHER OBSERVED THAT FOR ANY COMPARISON S A ME PARAMETERS WILL HAVE TO BE ADOPTED. THE LD. CIT(A) ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO RE - COMPUTE THE D ISALLOWANCE BASED ON SIMILAR STATUS OF COMPARABLE S EITHER WITH EXPORT INCENTIVES OR WITHOUT EXPORT INCENTIVES AND THE ASSESSEE SHOULD BE SEEN WITH SIMILAR ATMOSPHERE AND STATUS AS FAR AS POSSIBLE. A FURTHER DIRECTION WAS ALSO GIVEN THAT IF VARIATION IS BE LOW 5% , IT NEEDS TO BE ACCEPTED. THE RELEVANT OBSERVATIONS OF THE LD. CIT(A) ARE EXTRACTED HEREUNDER: - I HAVE CAREFULLY GONE THROUGH THE ASSESSMENT ORDER, ORDER OF T.P.O., SEPARATE RECTIFICATION APPLICATION FILED BEFORE THE T.P.O. AND THE A.O., WRITTEN S UBMISSIONS DATED 18.01.2012 FILED BEFORE ME AND THE TRANSFER PRICING STUDY REPORT GIVEN BY M/S. LAXMI KUMARAN & SRIDHDRAN, ADVOCATES, NEW DELHI. I FIND THAT THERE ARE MAINLY TWO ISSUES IN THE GROUNDS OF APPEAL NO.1 TO 7 OF THE GROUNDS OF APPEAL, WHICH ARE SUMMARIZED BELOW: I ) WHETHER EXPORT INCENTIVES RECEIVED ON EXPORT OF FOOTWEAR BY THE APPELLANT COMPANY WILL CONSTITUTE OPERATING PROFIT OF THE COMPANY OR NOT, AND : - 5 - : II ) WHETHER EXPORT INCENTIVES SHOULD BE EXCLUDED OR INCLUDED IN THE WORKING OF PROFIT MARGIN VIS A VIZ ARMS LENGTH PRICE AND IN DOING SO WHETHER SAME TREATMENT SHOULD BE DONE IN THE FINANCIAL RESULTS OF THE APPELLANT COMPANY AS WELL AS THE OTHER COMPANIES (COMPARABLES). AT THIS STAGE I DO NOT WANT TO GO INTO THE CONTROVERSY OF THE NATURE AND CHARACTER OF EXPORT INCENTIVES, BECAUSE THE SAME IS HIGHLY DEBATABLE BUT I AGREE WITH THE CONTENTIONS OF THE ID. A.R. THAT SEPARATE PARAMETERS CANNOT BE ADOPTED FOR WORKING OUT OF OPERATING PROFITS OF THE APPELLANT COMPANY AND OTHER COMPANIES (COMPARABLES) WITH WHI CH THE T.P.O. HAS COMPARE THE TRANSACTIONAL NET MARGIN AND ACCORDINGLY WORKED OUT THE ARMS LENGTH PRICE. FROM THE ORDER OF THE T.P.O., IT IS APPARENT THAT AS AGAINST THE OPERATING MARGIN OF 14.23% (INCLUDING EXPORT INCENTIVES) SHE HAS WORKED OUT OPERATING PROFITS AT 1.57% (EXCLUDING EXPORT INCENTIVES) WHILE WORKING OUT THE OPERATING PROFIT OF THE OTHER COMPANIES (COMPARABLES) EXPORT INCENTIVES HAS NOT BEEN EXCLUDED. FOR ANY COMPARISON IT IS BUT NATURAL THAT SAME PARAMETERS WILL HAVE TO BE ADOPTED. THE LD. A.R. HAS SUBMITTED A CHART AT PAGE NO... OF THE WRITTEN SUBMISSIONS TO SHOW THAT IF THE EXPORT INCENTIVES ARE EXCLUDED FROM THE OPERATING PROFITS OF THE APPELLANT COMPANY AS WELL AS THE COMPARABLES THEN THE AVERAGE OPERATING PROFITS/TOTAL COST OF THE COMP ARABLES COMES TO 1.24% WHEREAS THE SAME FOR APPELLANT COMPANY COMES TO 1.54%, WHICH SHOWS THAT IF THE EXPORT INCENTIVES ARE EXCLUDED FROM THE OPERATING PROFITS THEN THE RATIO OF OPERATING PROFIT TO TOTAL COST OF THE APPELLANT COMPANY IS BETTER THAN THE AVE RAGE OF COMPARABLES. SIMILARLY, IF THE SAME RATIO IS RE - WORKED AFTER INCLUDING THE EXPORT INCENTIVES AS HAS BEEN DONE BY THE T.P.O. IN HER ORDER DATED 31.10.2011 (REFER PAGE 2 OF T.P.O.'S ORDER) THE AVERAGE RATIO OF OPERATING PROFIT TO TOTAL COST COMES TO 19% WHEREAS THE SAME RATIO FOR THE APPELLANT COMPANY COMES TO 14.23% AS PER DETAILS EXTRACTED FROM THE APPLICATION FILED, UNDER SECTION 154 OF THE INCOME TAX ACT, 1961 AND REPRODUCED BELOW: - : - 6 - : PARTICULARS AMOUNT (RS.) SALES TO AE TAKEN ON PAGE 3 OF ORD ER UNDER REFERENCE 166,33,22,320.00 ADD: PROPORTIONATE EXPORT INCENTIVE ((78.65% OF TOTAL EXPORT INCENTIVE) 20,72,39,809.00 TOTAL SALES OF AE INCLUDING EXPORT INCENTIVE 187,05,62,129.00 AFTER THE ABOVE FIGURES ARE TAKEN CORRECTLY, THE OPERATING P ROFIT UPON TOTAL COST (ON EXPORT TO AE SEGMENT) SHALL WORK OUT TO 14.23% AS UNDER: - PARTICULARS AMOUNT (RS.) TOTAL SALES OF AE INCLUDING EXPORT INCENTIVE 87,05,62,129.00 LESS: PROPORTIONATE EXPENSES ON EXPORT TO AE (78.65%) OF RS.208,20,49,758/ - BEING 82.29% OF TOTAL EXPENSES A RS.253,02,63,620/ - 163,75,74,511.00 OPENING PROFIT (TOTAL SALE TO AE INCLUDING EXPORT INCENTIVE ( - ) PROPORTIONATE EXPENSES ON EXPORT TO AE) 23,29,87,618.00 OP/TC(%) 14.23% IN THE LIGHT OF ABOVE DETAILS AN D FINANCIAL INFORMATION OF THE APPELLANT COMPANY AS WELL AS THE COMPARABLES, IT IS OBVIOUS THAT THE RATIO OF OPERATING PROFIT UPON TOTAL COST IN THE CASE OF APPELLANT COMPANY DOES NOT VARY BEYOND PERMISSIBLE MARGIN OF 5% COMPARED TO THE COMPARABLES UNDER B OTH THE CIRCUMSTANCES I.E. WHETHER EXPORT INCENTIVES IS INCLUDED IN THE OPERATING PROFIT OR IS EXCLUDED FROM THE OPERATING PROFIT. DECISION: ON OVER ALL CONSIDERATION OF THE ABOVE DISCUSSIONS, THE A.O IS HEREBY DIRECTED TO RECOMPUTE THE DISALLOWANCE BASED ON SIMILAR STATUS OF COMPARABLES EITHER WITH EXPORT INCENTIVES OR, WITHOUT EXPORT INCENTIVES. THE ASSESSEE SHOULD BE SEEN WITH COMPARABLES IN SIMILAR ATMOSPHERE AND STATUS AS FAR AS POSSIBLE. HOWEVER, THE VARIATIONS BELOW 5% NEED TO BE ACCEPTED. : - 7 - : 6 . AGGRIEVE D, THE REVENUE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL AND HAS PLACED RELIANCE UPON THE ORDERS OF THE ASSESSING OFFICER AND THE TPO, WHEREAS THE LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE TPO HAS NOT PICKED UP THE COMPARABLE CASES AND WORKED O UT THE OPERATING PROFIT UNDER DIFFERENT ATMOSPHERE. THE TPO HAS WORKED OUT THE PROFIT MARGIN OF COMPARABLE CASES BY ADOPTING A DIFFERENT FORMULA THAN THE FORMULA ADOPTED FOR WORKING OUT THE PROFIT MARGIN IN ASSESSEES CASE. SINCE THE LD. CIT(A) HAS TAKEN COGNIZANCE OF THIS FACT AND HAS GIVEN A PROPER DIRECTION TO THE ASSESSING OFFICER TO RE - COMPUTE THE DISALLOWANCE BASED ON SIMILAR STATUS OF COMPARABLES EITHER WITH EXPORT INCENTIV ES OR WITHOUT EXPORT INCENTIVES, NO INTERFERENCE IS CALLED FOR IN HIS ORDER. 7 . HAVING GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND FROM A CAREFUL PERUSAL OF THE ORDER OF THE TPO, WE FIND THAT FROM THE TPOS ORDER IT IS NOT CLEAR WHETHER HE HAS WORKED OUT THE OPERATING PROFIT OF THE COMPARABLES BY INCLUDING OR EXCLUD ING THE EXPORT INCENTIVES. THE CONTENTIONS OF THE ASSESSEE THAT THAT TPO HAS COMPUTED THE OPERATING PROFIT OF THE COMPARABLES BY EXC LUDING THE EXPORT INCENTIVES WHEREAS THE OPERATING PROFIT OF THE ASSESSEE - COMPANY WAS COMPUTED BY EXCLUDING THE EXPORT INCE NTIVES. THESE CONTENTIONS OF THE ASSESSEE WAS ACCEPTED BY THE LD. CIT(A) AND THE LD. CIT(A) HAS GIVEN A DIRECTION TO THE ASSESSING OFFICER TO RE - COMPUTE THE DISALLOWANCE BASED ON SIMILAR STATUS OF COMPARABLES EITHER WITH EXPORT INCENTIVES OR WITHOUT EXPORT INCENTIVES. WHILE MAKING A COMPARISON OF THE OPERATING PROFIT WITH OTHER COMPARABLES, THE TPO IS REQUIRED TO COMPUTE THE OPERATING PROFIT BY APPLYING THE SAME FORMULA. HE HAS NO JURISDICTION TO APPLY A DIFFERENT FORMULA TO WORK OUT THE OPERATING PROFIT FOR THE COMPARABLES AND FOR THE ASSESSEE. WE DO NOT FIND ANY INFIRMITY IN THE DIRECTIONS GIVEN BY THE LD. CIT(A) TO THE ASSESSING OFFICER TO : - 8 - : RE - COMPUTE THE DISALLOWANCE BASED ON SIMILAR STATUS OF COMPARABLES EITHER WITH EXPORT INCENTIVES OR WITHOUT EXPORT INCENTIVES. SINCE NO INFIRMITY IS NOTICED IN THE ORDER OF THE LD. CIT(A), WE CONFIRM HIS ORDER ON THIS ISSUE. 8 . THE CROSS OBJECTION FILED BY THE ASSESSEE IS IN SUPPORT OF THE ORDER OF THE LD. CIT(A). SINCE THE REVENUES APPEAL IS DISMISSED, THE CROSS OBJE CTION OF THE ASSESSEE HAS BECOME INFRUCTUOUS AND THE SAME IS ALSO DI S MISSED. 9 . IN THE RESULT, APPEAL OF THE REVENUE AS WELL AS THE CROSS OBJECTION OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 7.1.2014. SD/ - SD/ - [ A. K. GARODIA ] [ S UNIL KUMAR Y ADAV ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 7.1.2014 JJ: 0101 COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT 5 . DR ASSISTANT REGISTRAR