M/s. SSL TTK Limited, CHENNAI V. ACIT, CHENNAI

ITA 1953/CHNY/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8661 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 09-08-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 05-12-2011
• Court: TRIBUNAL
• Department Lawyers: R MOHANCIT
• Assessee Lawyers: R VIJAYARAGHAVAN; S P CHIDAMBARAM S
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Retrospective amendment
• Section: 92C

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , ! ' #! ' $ . & ' () BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.1953/MDS./2011 ' * !+* / ASSESSMENT YEAR : 2007-08 M/S.SSL TTK LTD ., 06,CATHERDRAL ROAD, CHENNAI 600 086. VS. THE ASSISTNAT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(1), CHENNAI 600 034. [ PAN AAFCS 5498 E ] ( ,- /APPELLANT) ( ./,- /RESPONDENT) ,- 0 1 / APPELLANT BY : MR.R.VIJAYARAGHAVAN, & MR.S.P.CHIDAMBARAM ADVOCATES ./,- 0 1 /RESPONDENT BY : MR. R.MOHAN,CIT D.R ' ! 0 2 / DATE OF HEARING : 09 - 08 - 201 6 34+ 0 2 / DATE OF PRONOUNCEMENT : 24 - 08 - 2016 / O R D E PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE ASST. COMMISSIONER OF INCOME TAX, CHENNAI DATE D 30.09.2011 PASSED U/S.143(3) R.W.S. 92C(4) OF THE ACT, WHICH IS EMANATED FROM :- 2 -: ITA NO.1953/MDS./2011 DIRECTION OF THE DISPUTE RESOLUTION PANEL (DRP), CH ENNAI PASSED U/S.144C(5) OF THE ACT DATED 19.08.2011 OF THE ACT PERTAINING TO ASSESSMENT YEAR 2007-08. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS F OR OUR CONSIDERATION. 1. THE ORDER OF THE TRANSFER PRICING OFFICER (TPO) AND ASSISTANT COMMISSIONER OF INCOME TAX (ACIT) READ WITH DIRECTI ONS OF THE DISPUTE RESOLUTION PANEL (DRP) IS CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE. 2. UPWARD TRANSFER PRICING (TP) ADJUSTMENT TO INTER NATIONAL TRANSACTION OF EXPORT OF FOOT CARE PRODUCTS BY THE APPELLANT TO ASSOCIATED ENTERPRISE (AE). 2.1 THE DIRECTIONS OF THE DRP, THE CONSEQUENTIAL TP ORDER AND THE FINAL ASSESSMENT ORDER IS ERRONEOUS IN MAKING AN UP WARD TP ADJUSTMENT IN RELATION TO THE INTERNATIONAL TRANSAC TION VIZ., EXPORT OF FOOT CARE PRODUCTS BY THE APPELLANT TO THE AE. 2.2 THE DRP ERRED IN UPHOLDING THE ACTION OF THE TP O WITHOUT APPRECIATING THE CONTENTIONS, ARGUMENTS, AND EVIDEN TIARY DATA PUT FORWARD BY THE APPELLANT DURING THE COURSE OF T HE DRP PROCEEDINGS BEFORE THEM 2.3 THE DRP/TPO OUGHT NOT TO HAVE CONSIDERED AMAR R EMEDIES LIMITED AS COMPARABLE COMPANY SINCE IT HAS A DIFFER ENT YEAR END. :- 3 -: ITA NO.1953/MDS./2011 2.4 WITHOUT PREJUDICE TO THE ABOVE, IF AMAR REMEDIE S LTD IS RETAINED AS A COMPARABLE, THE FINANCIAL DATA PERTAI NING TO YEAR ENDED JUNE 2007 HAS TO BE CONSIDERED, AS THIS WILL HAVE DATA OF 9 MONTHS IN COMMON BETWEEN THE APPELLANT AND THE CO MPARABLE COMPANY RATHER THAN CONSIDERING THE DATA PERTAINING TO YEAR ENDED JUNE 2006 ADOPTED BY TPO WHICH HAS DATA OF ON LY 3 MONTHS IN COMMON BETWEEN THE APPELLANT AND THE COMP ARABLE COMPANY. 2.5 THE DRP/TPO ERRED IN NOT ADOPTING SEGMENTAL MAR GINS OF ADOR MULTIPRODUCTS LIMITED AND AJANTA INDIA LIMITED WHIL E COMPUTING THE MARGINS OF THE FUNCTIONALLY COMPARABLE COMPANIE S. 2.6 THE DRP OUGHT TO HAVE APPRECIATED THAT MERELY B ECAUSE THE APPELLANT HAS CONSIDERED ADOR MULTIPRODUCTS LIMITED AND AJANTA INDIA LIMITED AT ENTERPRISE LEVEL DOES NOT PRE-EMPT THE DRP FROM PASSING A DIRECTION IN ACCORDANCE WITH LAW TO CONSI DER SEGMENTAL MARGINS OF THE SAID COMPARABLE COMPANIES, MORE SO W HEN THE SAID ANALYSIS WAS SUBMITTED DURING THE COURSE OF AS SESSMENT PROCEEDINGS UNDER SECTION 92CA(3) OF THE ACT. 2.7 THE TPO AND THE DRP ERRED IN NOT ALLOWING THE B ENEFIT OF RANGE OF +1- 5% AS PROVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT TO THE APPELLANT, WHILE DETERMINING THE ARMS LENGTH P RICE. :- 4 -: ITA NO.1953/MDS./2011 2.8 THE TPO OUGHT TO HAVE CONSIDERED THE PROVISIONS FOR ARMS LENGTH RANGE OF +1- 5% VARIATIONS AS PER THE PROVIS IONS OF THE FINANCE ACT RELEVANT TO ASSESSMENT YEAR 2007-08. 2.9 THE DRP/TPO ERRED IN NOT PROVIDING ANY ADJUSTME NTS TO THE ARMS LENGTH MARGIN OF COMPARABLE COMPANIES ON ACCO UNT OF DIFFERENCES IN RESEARCH & DEVELOPMENT AND MARKETING ACTIVITIES. 2.10 THE DRP AND TPO OUGHT TO HAVE APPRECIATED THAT TP IS AN ANTI-AVOIDANCE MECHANISM AND WHEN THE APPELLANT IS ELIGIBLE FOR TAX HOLIDAY BENEFITS UNDER SECTION 1 OB OF THE ACT, THE DRP/TPO OUGHT TO HAVE APPRECIATED THAT THE APPELLANT HAS NO REASON TO SHIFT/SUPPRESS ITS PROFIT FROM ITS OPERATIONS TO MA NIPULATE THE TRANSFER PRICES. 2.11 THE ACIT ERRED IN NOT SETTING OFF THE CARRIED FORWARD LOSSES OF ` 4,55,10,981/- BEFORE COMPUTING THE TAX PAYABLE. 2.12 THE ACIT GROSSLY ERRED IN PASSING THE FINAL OR DER WITHOUT GRANTING THE SET OFF OF CARRIED FORWARD LOSSES DESP ITE THE SPECIFIC DIRECTIONS OF THE DRP TO ALLOW THE SAME. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A JOINT VENTURE BETWEEN SSL INTERNATIONAL PLC. UK AND TTK LIG LTD., AND IS ENGAGED IN THE MANUFACTURE AND SALE OF FOOT CARE AND FOOT CARE PRODUCTS TO THE DOMESTIC AND EXPORT MARKET UNDER THE POPULAR BRAND NAME SCHOLL. :- 5 -: ITA NO.1953/MDS./2011 THE SHARE HOLDING OF THE JOINT VENTURE PARTNER IS I N THE RATIO OF 51 : 49. SSL TTK LTD., IS A 100% EOU. THE COMPANYS FIRST YE AR OF OPERATION WAS DURING THE YEAR 2005-06. ALMOST 95% OF THE SALE S ARE MADE TO SSL INTERNATIONAL PLC WITH THE BALANCE BEING SOLD I N INDIA. THE PRODUCTS ARE MARKETED IN INDIA THROUGH TTK HEALTH C ARE LTD. BROADLY THE PRODUCTS MANUFACTURED CAN BE CLASSIFIED UNDER T WO CATEGORIES I.E MEDICATED PRODUCTS AND NON MEDICATED PRODUCTS. 3.1. FURTHER, THE AO REFERRED THE CASE TO THE TPO U/S.92CA OF THE ACT FOR COMPUTATION OF ALP IN RELATION TO INTERNATI ONAL TRANSACTIONS. THE TPO VIDE ORDER DATED 06.09.10 HAD SUGGESTED AN ADJU STMENT OF RS.8.31 CRORES AS UNDER:- A.ES & DETAILS OF INTERNATIONAL TRANSACTIONS NAME OF ASSOCIATE DETAILS OF TRANSACTION AMOUNT OF TRANSACTION (IN RS.) SSL INTERNATIONAL PLC UK FOOT CARE COMPONENTS PUUCHASE 57871287 MACHINERY AND ACCESS ORIES PRUCHASE 18140732 SALE OF FOOTCARE PRODUCTS - FULLY PACKED 1063855036 AFTER EXAMINING THE TPO DOCUMENTATION AND RATIO OF OPERATING PROFIT TO THE OPERATING COST AS PROFIT LEVEL INDICATOR (PLI) AND COMPUTED ASSESSEES OWN PLI AT PAGE-6 OF TPOS ORDER, THE TP O DID NOT ACCEPT ITS COMPUTATION OF THE PLI. TPO WAS OF THE VIEW THA T THE FOREX LOSS OF ` 1,06,69,490/- AND THE FINANCIAL CHARGES ` 1610205/-, SHOULD NOT HAVE :- 6 -: ITA NO.1953/MDS./2011 BEEN ADJUSTED AS BOTH THESE WERE PART OF THE OPERAT ING COST. THE TPO ISSUED A NOTICE ON 24.06.2010 REQUIRING THE ASSESSE E TO EXPLAIN WHY THE SAID ADJUSTMENT SHOULD NOT BE REJECTED. THE TPO DID NOT ACCEPT THE ASSESSEES REPLY AND RECOMPUTED THE ASSESSEES PLI AS UNDER REJECTING THE ADJUSTMENT OF FOREX LOSS AND THE FINA NCIAL CHARGES. MARGIN ANALYSIS OF SSL-TTK LTD. FINANCIAL YEAR ENDED 31 ST MARCH, 2007 PARTICULARS RS. RS. INCOME 1,108,883,010 SALES TURNOVER 5,827,391 EXCISE DUTY 1,103,055,619 NET SALES (31,913,167) STOCK ADJUSTMENTS 12,394,212 OTHER INCOME 1,083,536,664 EXPENDITURE RAW MATERIALS 953,742,201 MANUFACTURING & OTHER EXPENSES 136,838,137 DEPRECIATION 10,365,214 INTER E ST 13,326,648 TOTAL EXPENDITRUE 1,114,272,200 PROFIT BEFORE TAX (30,735,536) ADJUSTMENTS INTEREST (INCOME) (89,314) INTEREST AND FINA NCE CHARGE (EXP) 17,716,443 11,627,129 OPERATING PROFIT(A) (19,108,407) OPERATING COST(B) 1,134,468,924 PERCENTAGE OF PROFIT ON OPERATING COST - 1.68 THUS, THE TPO DETERMINED THE PLI OF THE ASSESSEE ( -) 1.68% ON COST. FURTHER, THE TPO HAD DISAGREED WITH THE COMPUTATION OF PLIS OF THE FOLLOWING COMPARABLE COMPANIES WHILE DETERMINING TH E ALP. :- 7 -: ITA NO.1953/MDS./2011 1. ADOR MULTI PRODUCTS 2.AJAY HOME PRODUCTS 3.J.L.MORISON (INDIA) 4.AJANTA INDIA 5.AMAR REMEDIES 6.J.K.HELENE CURTIS TOP COMPUTED AVERAGE OP MARGIN OF COMPARABLES AT 5. 64%. THUS, THE TPO COMPUTED THE ALP OF THE INTERNATIONAL TRANS ACTION OF SALE AS UNDER:- ALP WORKINGS FOR SALES PARTICULARS A.E NON - A.E TOTAL SALES 106,38,55,036 5,08,85,278 111,47,40,314 OPERATING COST 108,26,83,081 5,17,85,843 113,44,68,92 4 ARMS LENGTH MARK UP ON COST (5) : 5.64% MARK UP ON COST : ` 6,10,63,325.77 INCOME (OPERATING COST+MARK UP) : ` 114,37,46,407(ALP) +5% OF INTERNATIONAL TRANSACTION : ` 111,70,47,787 -5% OF INTERNATIONAL TRANSATION : ` 101,06,62,284 THE DIFFERENCE BETWEEN THE ALP COMPUTED BY THE TPO AND THE SALE PRICE SHOWN BY THE ASSESSEE BEING MORE THAN 5% OF T HE LATTER, THE :- 8 -: ITA NO.1953/MDS./2011 TPO CONCLUDED THAT THE TRANSACTIONS HAD NOT BEEN MA DE AT ARMS LENGTH AND AN ADJUSTMENT WAS REQUIRED. AGAINST THE ORDER OF TPO, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. 3.2 THE DRP AFTER PERUSING THE ORDER OF TPO AND TR ANSFER PRICING DOCUMENTS UPHELD THE ORDER OF TPO IN UPWARD TRANSFE R PRICING ADJUSTMENT TO INTERNATIONAL TRANSACTION OF EXPORT O F FOOT CARE PRODUCTS BY THE ASSESSEE TO AE. BEFORE THE DRP, THE ASSESSEE CHALLENGED THE INCLUSION OF AMAR REMEDIES LTD., ON THE REASON THAT IT HAS A DATA FINANCIAL YEAR ENDING AND IT CANNOT BE CONSIDERED A S COMPARABLES. FURTHER, REGARDING ADOR MULTI PRODUCTS, IT WAS STAT ED THAT ONLY SEGMENTED DATA IS CONSIDERED AS IS ENGAGED IN THE T RADING AND PERSONAL CARE PRODUCTS. THE SAME ARGUMENT WAS PLACE D REGARDING AJANTA INDIA STATING THAT ONLY SEGMENTED DATA WILL BE CONSIDERED. THE ASSESSEE ALSO HAS TAKEN A PLEA BEFORE THE LOWER AUT HORITIES, THE RISK ADJUSTMENT TO BE GIVEN AS IT IS SUPPLYING ONLY TO A E AND RISK INVOLVED IS LESS. HOWEVER, THE DRP CONCURRED WITH THE FINDINGS OF THE TPO AND NOT GIVEN ANY RELIEF TO THE ASSESSEE. CONSEQUENTLY, THE ASSESSMENT ORDER PASSED U/S.143(3) R..W.S.93C(14). AGAINST THI S DIRECTION OF THE DRP, THE ASSESSEE IS IN APPEAL BEFORE US. :- 9 -: ITA NO.1953/MDS./2011 4. BEFORE US, LD.A.R SUBMITTED THAT IN CASE OF AMA R REMEDIES, FINANCIAL DATA RELATING TO ACCOUNTING YEAR IS DIFF ERENT AND TPO CONSIDERED ONLY 3 MONTHS DATA OF THAT COMPANY RELAT ING TO THE ASSESSMENT YEAR 2007-08 AND HENCE HE SUBMITTED THAT IT CANNOT BE COMPARED WITH THE ASSESSEES CASE. FURTHER, LD.A.R RELIED ON THE DECISION OF PUNE TRIBUNAL IN THE CASE OF HONEYWELL AUTOMATION INDIA LTD. VS. DCIT IN TIOL-104 ITAT PUNE. 5. ON THE OTHER HAND, DEPARTMENTAL REPRESENTATIVE S UBMITTED THAT THE TPO CORRECTLY ADOPTED THE FINANCIALS FOR T HE YEAR ENDED ON 31.03.2007 BY PULLING OUT THE SAME FROM THE PROWESS DATA BASE. THEREFORE THERE CANNOT BE ANY OBJECTION TO THE STAN D TAKEN BY THE TPO. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION THE ACCOUNTING YEAR OF THE A SSESSEE AND COMPARABLES ARE DIFFERENT. THE TPO AT LIBERTY TO RE CAST THE FINANCIAL FOR THE PERIOD INVOLVED IN THE ASSESSEES CASE. ACCORDI NGLY, WE DIRECT THE TPO TO RECAST THE FINANCIAL FOR THE FULL PERIOD OF 12 MONTHS COVERING THE PREVIOUS YEAR 2006-07 RELEVANT TO THE ASSESSMEN T YEAR 2007-08 AND THEREAFTER COMPARE WITH THE ASSESSEES CASE SO AS TO CORRECT ALP. THIS GROUND IS REMITTED TO THE FILE OF TPO FOR FRES H CONSIDERATION. :- 10 -: ITA NO.1953/MDS./2011 7. THE NEXT GROUND IS REGARDING SEGMENTED DATA IN THE CASE OF ADOR MULTI PRODUCTS AND AJANTA INDIA. ADMITTEDLY, T HERE IS SEGMENTED DATA IS AVAILABLE IN THESE CASES, AS SUCH ONLY SEGM ENTAL INFORMATION WHICH REFLECTS THE COMPARABLE COMPANIES BUSINESS F UNCTION RELATED MARGINS SHOULD BE ADOPTED. ACCORDINGLY WE REMIT TH IS ISSUE TO THE FILE OF TPO TO CONSIDER THE SEGMENTED DATA OF THESE TWO COMPANIES TO DETERMINE THE ALP IN THIS CASE. THIS ISSUE IS REMIT TED TO THE FILE OF TPO FOR FRESH CONSIDERATION. 5. THE NEXT GROUND IS WITH REGARD TO GRANTING OF 5% BENEFIT PROVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT TO THE ASSESSEE WHILE DETERMINING THE ALP. IN OUR OPINION, WE FIND FORCE IN THE ARGUMENT OF THE LD.A.R THAT THE RETROSPECTIVE AMENDMENT TO SEC. 92C OF THE ACT BY INSERTING CLAUSE (2A) WITH RETROSPECTIVE EFFECT FRO M 01.04.2002 BY FINANCE ACT, 2012 WHICH READS AS UNDER:- (2A) WHERE THE FIRST PROVISO TO SUB-SECTION (2) AS IT STOOD BEFORE ITS AMENDMENT BY THE FINANCE (NO. 2) ACT, 20 09 (33 OF 2009), IS APPLICABLE IN RESPECT OF AN INTERNATIO NAL TRANSACTION INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION] FOR AN ASSESSMENT YEAR AND THE VARIATI ON BETWEEN THE ARITHMETICAL MEAN REFERRED TO IN THE SA ID PROVISO AND THE PRICE AT WHICH SUCH TRANSACTION HAS ACTUALLY :- 11 -: ITA NO.1953/MDS./2011 BEEN UNDERTAKEN EXCEEDS FIVE PER CENT OF THE ARITHM ETICAL MEAN, THEN, THE ASSESSEE SHALL NOT BE ENTITLED TO E XERCISE THE OPTION AS REFERRED TO IN THE SAID PROVISO. THE AFORESAID PROVISION MAKES IT CLEAR THAT AN ASSE SSEE SHALL NOT BE ENTITLED TO EXERCISE ITS OPTION AS REFERRED TO IN THE PROVIS O TO SUB-SECTION (2) IF THE VARIATION BETWEEN THE ARITHMETICAL MEAN AND THE PRI CE AT WHICH SUCH TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN EXCEEDS FI VE PER CENT. OF THE ARITH METICAL MEAN. IN VIEW OF THE RETROSPECTIVE OPERATIO N OF THE AFORESAID PROVISION, THE BENEFIT OF FIVE PER CENT AS A STA NDARD DEDUCTION CANNOT BE ALLOWED. IN OTHER WORDS, IF THE VARIATION OF ARITHM ETIC MEAN IS WITHIN THE RANGE OF 5%, , THEN THE ASSESSEE IS ENTITLED FOR BENEFIT OF 5% UNDER THE PROVISO TO SEC.92C(2) OF THE ACT. THE ABOVE VIE W IS FORTIFIED BY THE ORDER OF DELHI TRIBUNAL IN THE CASE OF ACIT VS.UE TRADE CORPORTION (INDIA) PVT LTD., REPORTED IN (2011) 136 TTJ 297(DE L.) ACCORDINGLY, WE DIRECT THE TPO TO ALLOW 5% IT, IT IS WITHIN THE RA NGE OF 5%. ORDERED ACCORDINGLY. 6. THE NEXT GROUND IS WITH REGARD TO DRP ERRED IN NOT PROVIDING ANY ADJUSTMENT TO ARMS LENGTH MARGIN OF COMPARABLE COMPANIES ON ACCOUNT OF DIFFERENCES IN RESEARCH & DEVELOPMENT AN D MARKETING ACTIVITIES. :- 12 -: ITA NO.1953/MDS./2011 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE SALES ONLY TO AE AND ONLY JOB WORK, NO WORK IS INVOLVED. HENCE BY PLACING RELIANCE WITH THE ORDER OF HYDERABAD BENCH IN THE CASE OF DCIT VS. HELLOSOFT INDIA PVT. LTD. IN ITA NO.645/HYD./2009 DATED 15.01.2013, WE DIRECT THE AO TO GRANT RISK ADJUSTMENT OF 1% TOWARDS RESEARCH AND DEVELOPMENT. 8. IN THE RESULT, THE APPEAL OF THE APPEAL OF ASSE SSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 24 TH AUGUST, 2016, AT CHENNAI. SD/ - SD/ - ( ' #! ' $ . & ) ( DUVVURU RL REDDY ) ) ' / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER / CHENNAI 5 / DATED: 24 TH AUGUST, 2016 K S SUNDARAM 6 0 .'278 98+2 /COPY TO: 1. ,- /APPELLANT 3. ' :2 ( ) /CIT(A) 5. 8!;< .'2' /DR 2. ./,- /RESPONDENT 4. ' :2 /CIT 6. < * = /GF