M/s. Magick Woods Exports Pvt. Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1878/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64382 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 16-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 21-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR S MOHARANA
• Assessee Lawyers: S SRIDHAR
• Keywords: Transfer pricing; Principle of natural justice; International transaction
• Section: 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ITA NO. 1878/MDS/2011 ASST. YEAR : 2007-08 M/S. MAGIC WOODS EXPORTS PVT. LTD., A-8 INDUSTRIAL COMPLEX, MARAIMALAI NAGAR, CHENGALPET 603 209. PAN : AADCM6228N. (APPELLANT) V. THE ASST. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(1) CHANNAI 600 034. (RESPONDENT) APPELLANT BY : SHRI S. SRIDHAR, ADVO CATE RESPONDENT BY : DR. S. MOHARANA DATE OF HEARING : 16 TH OCT. 2012 DATE OF PRONOUNCEMENT : 16 TH OCT. 2012 O R D E R PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF ACIT, COMPANY CIRCLE-IV(1), CHENNAI, DATED 28.10 .2010 PASSED UNDER SEC.143(3) READ WITH SEC.144C(8) OF THE ACT F OR THE ASST. YEAR ITA 1878/MDS/11 2 2007-08. THE ASSESSEE RAISED SEVERAL GROUNDS IN IT S GROUNDS OF APPEAL. GROUND NOS.15 TO 18 OF SUCH GROUNDS OF APP EAL ARE REPRODUCED BELOW:- 15. THE ACIT FAILED TO APPRECIATE THAT THE DETAILED SUBMISSIONS WITH EVIDENCE FILED BEFORE THE DRP AS W ELL AS BEFORE THE TPO WERE NOT TAKEN INTO CONSIDERATION IN PROPER PERSPECTIVE AND ADOPTION OF THE PROPOSED ADJUSTMENT IN THE IMPUGNED ORDER MECHANICALLY WAS WRONG, INCORRECT, UNJUSTIFIED, ERRONEOUS AND NOT SUSTAINABLE BOTH ON FACTS AND IN LAW. 16. THE ACIT FAILED TO APPRECIATE THAT IN ANY EVEN T THE DIRECTIONS OF THE DRP FOR CONSIDERING AND ADOPTING SEGMENTAL DETAILS WEE ERRONEOUSLY REJECTED IN THE O RDER DATED 23.10.2011 PASSED BY THE TPO AND ADOPTED IN T HE IMPUGNED ORDER AND NON IMPLEMENTATION OF THE SAID DIRECTIONS BY THE TPO IN THE COMPUTATION OF TAXABLE TOTAL INCOME WAS ERRONEOUS AND INVALID. 17. THE ACIT FAILED TO APPRECIATE THAT THE FINDINGS RECORDED IN THIS REGARD IN PARA (IV) OF PAGE 5 OF T HE IMPUGNED ORDER WERE WRONG, INCORRECT, UNJUSTIFIED, ERRONEOUS AND NOT SUSTAINABLE BOTH ON FACTS AND IN LAW. ITA 1878/MDS/11 3 18. THE ACIT FAILED TO APPRECIATE THAT THERE WAS NO PROPER OPPORTUNITY GIVEN BEFORE THE IMPUGNED ORDER AND ANY ORDER PASSED IN VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE IS NULLITY IN LAW. 2. WITH REFERENCE TO THE ABOVE GROUNDS OF APPEAL, THE COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ASSESSEE A COMPANY ENGAGED IN MANUFACTURE OF BATH VANITIES AND FURNITU RE FILED ITS RETURN OF INCOME FOR THE ASST. YEAR 2007-08 ON 29.7.2007 A DMITTING NIL INCOME. THE ASSESSEE HAD INTERNATIONAL TRANSACTIO NS WITH ITS ASSOCIATE ENTERPRISES. THE TRANSACTIONS WITH ASSOC IATE ENTERPRISES WERE REFERRED TO TPO FOR DETERMINING ARMS LENGTH P RICE (ALP). THE TPO-IV, CHENNAI PASSED ORDER UNDER SEC.92CA(3) OF I .T. ACT DETERMINING ARMS LENGTH PRICE ON THE TRANSACTION S OF ASSOCIATE ENTERPRISES AT G.44,14,35,813/- AS AGAINST ACTUAL S ALE OF G.41,59,35,064/- AND THE DIFFERENCE OF G.2,55,00,74 9/- WAS PROPOSED TO BE MADE AS UPWARD ADJUSTMENT. THE COUNSEL FOR T HE ASSESSEE SUBMITS THAT WHILE PROPOSING TO MAKE UPWARD ADJUSTM ENT OF G.2.55 CRORES THE TPO ADOPTED OPERATING PROFIT AT 10.02% O F OPERATING COST AS AGAINST 4.21% ADOPTED BY THE ASSESSEE. ITA 1878/MDS/11 4 3. THE COUNSEL FOR THE ASSESSEE FURTHER SUBMITS THAT DURING THE COURSE OF PROCEEDINGS BEFORE TPO, THE AS SESSE HAD SUBMITTED SEGMENTAL REPORTS. ACCORDING TO SUCH SEG MENTAL REPORTS THE PERCENTAGE OF OPERATING COST WORKS OUT TO 6.16% AS AGAINST 10.02% ADOPTED BY THE TPO. THE COUNSEL FOR THE AS SESSEE SUBMITS THAT THE TPO WITHOUT PROPERLY APPRECIATING AND CONS IDERING THE SEGMENTAL REPORTS SUBMITTED BY THE ASSESSEE PASSED ORDER UNDER SEC.92CA(3) OF THE ACT, MAKING THE UPWARD ADJUSTMEN T TO THE SALE PRICE OF ASSOCIATE ENTERPRISES AT G.2.55 CRORES. T HE COUNSEL FOR THE ASSESSEE SUBMITS THAT THE DRAFT ASSESSMENT ORDER WA S PASSED ON 30.12.2010 UNDER SEC.144C, MAKING ADDITION OF G.2.5 5 CRORES AS ALP ON THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATE EN TERPRISES. THE COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ASSESSEE FILED OBJECTIONS BEFORE DRP AND THE DRP BY ITS ORDER DATED 28.9.2011 PASSED ORDER UNDER SEC.144C(5) READ WITH SEC.144C(8) OF THE I.T. ACT DIRECTING THE TPO TO CONSIDER THE SEGMENTAL REPORTS FILED BY THE ASSESSEE AND THEN COMPUTE THE ADJUSTMENTS, IF ANY. ITA 1878/MDS/11 5 4. THE COUNSEL FOR THE ASSESSEE SUBMITS THAT PURS UANT TO THE DIRECTIONS OF THE DRP, THE TPO SEEMS TO HAVE PA SSED AN ORDER DATED 23.10.2011 AND THIS ORDER IS NOT SERVED BY T HE TPO ON THE ASSESSEE. THE COUNSEL FOR THE ASSESSEE FURTHER SU BMITS THAT THE DRAFT ASSESSMENT ORDER PASSED PURSUANT TO TPOS ORD ER DATED 23.10.2011 WAS ALSO NOT SERVED ON THE ASSESSEE BY T HE ASSESSING OFFICER. THEREFORE, THE COUNSEL FOR THE ASSESSEE SUBMITS THAT SINCE THE ORDER PASSED BY THE TPO OR THE DRAFT ASSESSMENT ORDER, IF ANY, PASSED UNDER SEC.144 OF THE ACT WERE NOT SERVED O N THE ASSESSEE, THE ASSESSMENT ORDER PASSED BY THE ACIT, CO. CIR-IV (1) UNDER SEC.143(3) READ WITH SEC.144C(8) READ WITH SEC.92CA (3) DATED 28.10.2011 IS INVALID. THEREFORE, THE COUNSEL FO R THE ASSESSEE SUBMITS THAT THE ADDITION MADE TOWARDS ALP ON THE I NTERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISES BE DELETED. 5. THE DEPARTMENTAL REPRESENTATIVE SUBMITS THAT PURSUANT TO THE DRPS DIRECTIONS, ASSESSMENT WAS MA DE. THE OBJECTIONS OF THE ASSESSEE WERE CONSIDERED BY THE D RP AND THE A.O. AND, THEREFORE, THE ADDITION MAY BE SUSTAINED. WITH REGARD TO NON SERVICE OF ORDERS PASSED BY TPO/A.O. UNDER ITA 1878/MDS/11 6 SEC.92CA(3) READ WITH SEC.144C(5) AND SEC.144C RESP ECTIVELY, HE SUBMITS THAT THE MATTER MAY BE REMITTED TO THE F ILE OF ASSESSING OFFICER FOR SERVICE OF RELEVANT ORDERS ON THE ASSESSEE AND COMPLETING ASSESSMENT PROCEEDINGS IN ACCORDANCE WITH LAW. 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIAL ON RECORD AND THE ORDERS OF THE LOWER AUTHORITIES. TH E DRP, IN ITS ORDER DATED 28.9.2011 AT PARAGRAPHS 10 TO 12 OBSERVED ON THE SEGMENTAL REPORTS FILED BY THE ASSESSEE BEFORE TPO AS UNDER : - 10. WHILE REPLYING TO THE SHOW CAUSE NOTICE ISSUE D BY THE TPO, THE ASSESSEE HAD FURNISHED THE SEGMENTAL DETAI LS TO THE TPO. IT HAD EXPLAINED THE MANNER OF COMPUTATION OF THE SEGMENTAL DETAILS. HOWEVER, THE TPO HAD REJECTED TH E DETAILS FURNISHED, APPARENTLY, ON THE FOLLOWING GROUNDS: I) THE ASSESSEE DOES NOT MAINTAIN SEPARATE BOOKS FOR AE AND NON-AE SEGMENTS. ONLY AFTER ISSUE OF SHOW CAUSE NOTICE HAS THE ASSESSEE COME UP WITH THE SEGMENTAL DETAILS; II) THE ASSESSEE COMPANY DOES NOT HAVE AUDITED SEGMENTAL ACCOUNTS FOR AE AND NON-AE TRANSACTIONS; III) TRANSFER PRICING PROVISIONS DOES NOT ALLOW SEGMENTATION. ITA 1878/MDS/11 7 11. THE REASONS GIVEN ABOVE FOR REJECTING THE SEGM ENTAL DETAILS FURNISHED ARE NOT WELL-FOUNDED, FOR THE FOL LOWING REASONS: I) THE ASSESSEE IS NOT REQUIRED TO, MAINTAIN SEPARATE BOOKS OF ACCOUNTS FOR AE AND NON-AE TRANSACTIONS, LEAVE ALONE GETTING THEM AUDITED, EITHER AS PER ACCOUNTING STANDARDS OR AS PER TP PROVISIONS. WHAT IS NOT MANDATED BY LAW CANNOT BE IMPOSED ON THE ASSESSEE UNILATERALLY. II) THERE IS NOTHING IN THE TP PROVISIONS WHICH PROHIBIT SEGMENTATION OF THE RESULTS OF AE AND NON-AE TRANSACTIONS. III) WHEN ISSUED WITH A SHOW CAUSE NOTICE REJECTING HIS METHODOLOGY; THE ASSESSEE HAD GIVEN THE SEGMENTATION DETAILS, MORE AS AN ALTERNATIVE SUBMISSION. BECAUSE THE SEGMENTATION HAS BEEN MADE FOR TP PURPOSES DOES NOT AUTOMATICALLY MAKE IT UNRELIABLE OR UNACCEPTABLE. 12. THE FUNDAMENTAL CONCEPT IN TP ANALYSIS IS THE COMPARABILITY. EVEN UNDER TNMM, THE ARMS LENGTH PR ICE IS DETERMINED BY COMPARING THE CONTROLLED TRANSACTION WITH UNCONTROLLED COMPARABLE TRANSACTION. ONLY THE BASIS OF WORKING OUT THE COMPARISON IS RECKONED AT AN ENTITY LEVEL. THAT DOES NOT IN ANY WAY COMPROMISE THE BASIC REQUI REMENT OF COMPARING THE INTERNATIONAL TRANSACTION WITH A C OMPARABLE UNCONTROLLED TRANSACTION. IN VIEW OF THE ABOVE, THE TPO IS DIRECTED TO CONSIDER THE SEGMENTAL DETAILS FURNISHE D BY THE ASSESSEE AND THEN COMPUTE THE ADJUSTMENT, IF ANY. ITA 1878/MDS/11 8 7. AS CAN BE SEEN FROM THE ORDER OF DRP, THE DRP S TATED THAT REASONS GIVEN BY THE TPO FOR REJECTING THE SEG MENTAL DETAILS FURNISHED BY THE ASSESSEE ARE NOT WELL FOUNDED AND DIRECTED THE TPO TO CONSIDER THE SEGMENTAL DETAILS FURNISHED BY THE ASSESSEE AND THEN COMPUTE THE ADJUSTMENTS, IF ANY, TOWARDS ALP ON THE INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ASSOCIATE ENTERPRISE S BY THE ASSESSEE. PURSUANT TO THE ORDERS OF DRP, THE TPO SEEMS TO HAV E PASSED AN ORDER DATED 23.10.2011, BUT SUCH ORDER WAS NOT SERV ED ON THE ASSESSEE. THE DEPARTMENT ALSO DID NOT FURNISH ANY PROOF OF SERVICE OF SUCH ORDER ON THE ASSESSEE. THE ASSESSING OFFIC ER ALSO DID NOT SERVE THE ORDER PASSED UNDER SEC.144C OF THE ACT ON THE ASSESSEE. HOWEVER, NON SERVICE OF SUCH ORDERS BY THE LOWER AU THORITIES IS NOT FATAL TO THE ASSESSMENT MADE UNDER SEC.143(3) READ WITH SEC.144C(8) READ WITH SEC.92CA(3) OF THE ACT. IN T HE CIRCUMSTANCES, WE FEEL IT APPROPRIATE TO SET ASIDE THE WHOLE ASSES SMENT TO THE FILE OF THE ASSESSING OFFICER TO RE-FRAME THE ASSESSMENT AF RESH IN ACCORDANCE WITH LAW COVERING ALL THE ASPECTS, AFTER PROVIDING ADEQUATE OPPORTUNITY OF HEARING TO THE ASSESSEE. W E ALSO DIRECT THE TPO TO FURNISH A COPY OF ORDER DATED 23.10.2011, SA ID TO HAVE BEEN ITA 1878/MDS/11 9 PASSED IN PURSUANCE TO THE DIRECTIONS OF THE DRP. THE ASSESSING OFFICER SHALL ALSO SERVE ON THE ASSESSEE ORDER UND ER SEC.144C OF THE ACT, IF ANY, PASSED BY HIM IN PURSUANT TO THE ORDER OF THE TPO, AND COMPLETE ASSESSMENT IN ACCORDANCE WITH LAW. WE DIR ECT THE ASSESSING OFFICER ACCORDINGLY. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 9. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING ON TUESDAY, THE 16 TH DAY OF OCTOBER 2012, AT CHENNAI. SD/- SD/- ( DR. O.K. NARAYANAN) (CHALLA NAGEND RA PRASAD) VICE PRESIDENT JUDICIAL MEMB ER CHENNAI, DATED : 16 TH OCTOBER 2012. JLS. COPY TO:- (1) APPELLANT (2) RESPONDENT (3) CIT(A)-II, COIMBATORE (4) CIT-III, COIMBATORE (5) D.R. (6) GUARD FILE