SANKEI gIKEN iNDIA pVT. lTD., Rewari V. JCIT, Rewari

ITA 197/DEL/2016

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 2842 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2009-2010
• Appeal Filed On: 14-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M BARANWAL
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Set aside
• Section: 92C; 143(3); 144C

Judgement Text

PAGE | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2: NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER (THROUGH VIDEO CONFERENCING) ITA NO. 197/DEL/2016 (ASSESSMENT YEAR: 2009-10) SANKEI GIKEN INDIA PVT. LTD, PLOT NO. 84-93, SECTOR-, INDUSTRIAL ESTATE, BAWAL, REWARI PAN: AAICS3604B VS. JCIT, REWARI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S. D. KAPILA, ADV SHRI R. R. MOURYA, ADV SHRI SUSHIL KUMAR, ADV REVENUE BY: M. BARANWAL, SR. DR DATE OF HEARING 08/03/2021 DATE OF PRONOUNCEMENT 04/06/2021 O R D E R PER PRASHANT MAHARISHI, A. M. 1. THIS IS AN APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD CIT(A)-2, GURGAON DATED 30.10.2015 FOR ASSESSMENT YEAR 2009-10. THE ASSESSEE IS AGGRIEVED AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THAT THE LD CIT GROSSLY ERRED IN UPHOLDING THE ERRONEOUS APPROACH FOLLOWED BY LD TPO IN APPLYING THE COST PLUS METHOD (CPM) IN RESPECT OF INTERNATIONAL TRANSACTIONS INVOLVING PURCHASE OF RAW MATERIAL AND MACHINERY BY COMPARING THE TRANSACTIONAL MARGIN OF ITS ASSOCIATED ENTERPNSE (AE) WITH THE ENTERPRISE LEVEL AVERAGE GROSS PROFIT MARGIN (GPM) EARNED BY COMPARABLE UNCONTROLLED COMPANIES IN JAPAN. THIS ERRONEOUS APPROACH OF THE LD TPO RENDERS THE ASSESSMENT, ARBITRARY, INCONSISTENT AND WITHOUT JURISDICTION. 2. THAT THE LD CIT ERRED IN UPHOLDING LD TPO'S APPROACH OF REJECTING THE COMPARABLE SET SELECTED BY SGIPL IN ITS TRANSFER PRICING STUDY. THE REJECTION IS NEITHER SUPPORTED BY AN ANALYSIS NOR CORROBORATIVE EVIDENCE, WHICH RENDERS THE PROCESS ARBITRARY AND LIABLE FOR OUTRIGHT REJECTION. 3. THAT THE LD CIT HAS ERRED IN ACCEPTING THE FRESH BENCHMARKING PROCESS UNDERTAKEN BY LD TPO WITHOUT IDENTIFYING ANY SPECIFIC DEFICIENCY OR INSUFFICIENCY IN THE SEARCH PROCESS ADOPTED BY SGIPL. THE FRESH BENCHMARKING UNDERTAKEN BY LD TPO IS UNWARRANTED, ILLEGAL AND WITHOUT JURISDICTION. 4. THAT THE LD CIT ERRED ON FACTS AND IN LAW IN ACCEPTING THE INCONSISTENT APPROACH OF LD. TPO WHILE ANALYZING ALP AS COMPARED TO PREVIOUS ASSESSMENT YEARS EVEN WHEN THE BUSINESS MODEL, NATURE OF TRANSACTION OF SGIPL HAD NOT UNDERGONE ANY CHANGE. 5. THAT THE LD CIT GROSSLY ERRED ON FACTS AND IN LAW, IN ADOPTING A DIFFERENT BASE FOR COMPUTING THE TP ADJUSTMENT OF RS 42,18,243 I.E. TRANSACTIONAL GROSS PROFIT MARGIN (BASED ON COST) CHARGED BY AES HAS BEEN COMPARED TO ARMS LENGTH COMPARABLE MARGIN (BASED ON SALES) TO ARRIVE AT THE TP ADJUSTMENT. THE APPROACH OF THE LD PAGE | 2 TPO/AO IS GROSSLY ERRONEOUS, EXHIBITS NON APPLICATION OF MIND AND LIABLE TO BE REJECTED. 6. THE LD CIT HAS ERRED IN FACTS AND IN LAW IN UPHOLDING PENALTY PROCEEDINGS U/S 271 (L)(C) OF THE ACT AGAINST THE APPELLANT FOR CONCEALING THE PARTICULARS OF INCOME OR FURNISHING INACCURATE PARTICULARS OF INCOME. 2. BRIEF FACTS OF THE CASE SHOWS THAT THE ASSESSEE IS A COMPANY ENGAGED IN MANUFACTURING OF AUTOMOBILE COMPONENTS FOR TWO WHEELERS AND FOUR WHEELERS AUTOMOBILES. THE ASSESSEE FILED ITS RETURN OF INCOME ON 27.09.2009 DECLARING LOSS OF RS. 70,00,44,788/-. THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION OF PURCHASE OF GOODS AS RAW MATERIAL AMOUNTING TO RS. 2,37,29,441/- AND ALSO PURCHASE OF MACHINERY WHICH IS A CAPITAL ASSET AMOUNTING TO RS. 24,13,74,960/-. BOTH THESE TRANSACTIONS WERE BENCHMARKED BY TAKING JAPANESE ASSOCIATED ENTERPRISES AS A TESTED PARTY, ADOPTING MOST APPROPRIATE METHOD AS COST PLUS METHOD. THERE ARE CERTAIN OTHER INTERNATIONAL TRANSACTIONS BUT THEY ARE ACCEPTED BY BOTH THE PARTIES AND THEREFORE, THOSE DO NOT REQUIRE ANY FURTHER NARRATION. THE LD AO ACCEPTED THAT JAPANESE AE AS THE TESTED PARTY EXAMINED ITS PROFIT AND LOSS ACCOUNT. HE NOTED THAT THE GROSS MARGIN OF THE JAPANESE AE IS ONLY 3.05% WHEREAS IT IS STATED THAT IT CHARGES MARK UP FROM THE ASSESSEE @10% ON RAW MATERIAL AND 10.25% ON MACHINERY ETC. HE THEREFORE, HELD THAT THE JAPANESE AE IS CHARGING 7.43% HIGHER MARGIN ON SUPPLY OF RAW MATERIAL TO THE ASSESSEE AND 7.68% OF EXCESS MARGIN ON SUPPLY OF MACHINERY. THEREFORE, THE LD TPO MADE AN ADJUSTMENT ON ACCOUNT OF RAW MATERIAL @7.43% AMOUNTING TO RS. 17,63,097/- AND EXCESS MARGIN CHARGED ON SUPPLY OF MACHINERY @7.68 % AMOUNTING TO RS. 1,85,37,597/-. THUS THE TOTAL ADJUSTMENT WAS RS. 2,03,00,694/-. THE LD AO INCORPORATING THE ABOVE ADJUSTMENT PASSED ASSESSMENT ORDER U/S 143(3) READ WITH SECTION 144C OF THE ACT ON 09.04.2013 DETERMINING THE TAXABLE LOSS OF RS. 67,97,44,090/- AGAINST THE RETURNED LOSS OF RS. 70,00,44,788/-. 3. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE THE LD CIT(A). THE LD CIT(A) HELD THAT JAPANESE AE IS HAVING A GROSS MARGIN OF ONLY 3.02 % AND JAPANESE AE CHARGING MARGIN OF 10% ON RAW MATERIAL AND 10.25% ON MACHINERY. THE ADJUSTMENT PROPOSED BY THE TPO AS THE MOST APPROPRIATE METHOD ACCEPTED BY THE PARTIES IS COST PLUS MARGIN. HOWEVER, WITH RESPECT TO THE ADJUSTMENT OF RS. 1,85,37,597/- MADE ON PURCHASE OF MACHINERY HE HELD THAT DUE TO THIS ABOVE ADJUSTMENT ASSESSEE HAS CLAIMED EXCESS DEPRECIATION OF RS. 24,55,146/- ONLY. THEREFORE, HE DIRECTED THE LD AO TO MERELY RE-COMPUTE THE DEPRECIATION BY REDUCING WDV OF MACHINERIES AND ACCORDINGLY INSTEAD OF ADJUSTMENT OF RS. 1,85,37,597/- HE RESTRICTED THE ADDITION TO THE EXCESS CLAIM OF DEPRECIATION ONLY. THUS, THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE LD CIT(A) AND HAS PREFERRED THIS APPEAL BEFORE US. 4. THE LD AR REFERRED TO THE FUNCTIONAL PROFILE OF THE ASSESSEE AND HE SUBMITTED THAT THE TESTED PARTY I.E. JAPANESE AE HAS CARRIED OUT THE FUNCTIONS OF PROCUREMENT AND EXPORT OF CAPITAL MACHINERY. THUS, WITH A VIEW TO COVER THIS COST THE AE HAS CHARGED 10.25% MARK UP ON THE ORIGINAL INVOICES VALUE OF PURCHASE OF PLANT AND MACHINERY BY THE AE. IN OTHER WORDS HE PAGE | 3 SUBMITTED THAT MARKUP IS ON COST OF THE PURCHASE OF THE AE AND NOT ON THE SALE PRICE AS PER THE PROFIT AND LOSS ACCOUNT. IT WAS SUBMITTED THAT THE LD TPO AND THE LOWER AUTHORITIES HAVE INCORRECTLY APPLIED MARKUP ON THE SALE PRICE. HE REFERRED TO THE LETTER DATED 08/01/2013 WHEREIN IT WAS EXPLAINED THAT THE MACHINERY PURCHASED FROM THE VENDOR REQUIRED SPECIFIC MODIFICATION AND FOR WHICH APART FROM OTHER COST , MARKUP WAS CHARGED ON THE INITIAL INVOICES OF PURCHASE. HE THEREFORE SUBMITTED THAT MARKUP OF COST OF IMPROVEMENT AND OTHER MODIFICATION ARE REFLECTED IN THE SALE OF AE. HE SUBMITTED THAT THE LOWER AUTHORITIES FAILED TO APPRECIATE AND INCORRECTLY APPLIED MARK UP ON SALES REFLECTED IN THE PROFIT AND LOSS ACCOUNT WHICH IS NOT IN ACCORDANCE WITH THE COST PLUS METHOD WHEN THE JAPANESE AE IS CONSIDERED AS THE TASTED PARTY. THUS, IT WAS STATED THAT THE LD TPO HAS COMPARED ALL PURCHASE AND SALE OF CAPITAL MACHINERY WITH THE GROSS MARGIN OF MANUFACTURING AND SALE OF AUTO PARTS BY THE COMPARABLES. IN THE END IT WAS SUBMITTED THAT THE GROSS MARGIN OF THE TESTED PARTY IS 3.05% ON ENTITY EVEL AND ARITHMETIC MEAN OF MARGIN OF COMPARABLE SELECTED BY TPO IS MERELY 2.57% AND THEREFORE GROSS MARGIN OF THE TESTED PARTY IS WITHIN 5% OF ALP AND THEREFORE AS PER THE PROVISION OF SECTION OF PROVISO 92C NO FURTHER ADJUSTMENT CAN BE MADE. HE ALSO REFERRED TO THE COMPARABLE COMPANIES SELECTED BY THE LD TPO STATING THAT BOTH THE COMPARABLES ARE MANUFACTURING AND SELLING AUTO PARTS AND NOT A MANUFACTURER AND TRADER OF MACHINERY. THEREFORE, THOSE CANNOT BE COMPARED WITH THE MARGINS OF THE AE WITH RESPECT TO SALE OF CAPITAL GOODS/ MACHINERY TO THE ASSESSEE. 5. THE LD DR VEHEMENTLY SUPPORTED THE ORDER OF THE LD TPO/ AO. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. ADMITTEDLY IN THIS CASE A JAPANESE AE WAS SELECTED AS THE TESTED PARTY WHICH WAS HAVING A MARGIN OF ONLY 3.05 % AND ASSESSEE CLAIMED THAT IT HAS PAID A MARGIN OF 10% ON RAW MATERIALS AND 10.25% ON CAPITAL GOODS. ADMITTEDLY THE MARGINS PAID BY THE ASSESSEE TO ITS AE ARE DEFINITELY QUITE HIGH COMPARED WITH THE MARGIN EARNED BY THE AE I.E. JUST 3.02 %. BOTH THE PARTIES HAVE AGREED THAT THE COST PLUS METHOD IS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE ABOVE INTERNATIONAL TRANSACTION. ACCORDING TO RULE 10B(I)(C) COST PLUS METHOD REQUIRES AGGREGATION OF DIRECT AND INDIRECT COST OF PRODUCTION INCURRED SHOULD BE DETERMINED WITH RESPECT TO THE GOODS SOLD TO AN AE. ON THAT COST BASIS, AN APPROPRIATE GROSS PROFIT MARKUP IS DETERMINED, THE FUNCTIONAL DIFFERENCES ARE ADJUSTED AND THE SUM IS ARRIVED WHICH IS STATED TO BE AT ARM'S LENGTH PRICE FOR SUPPLY OF THE ABOVE PROPERTY/ GOODS. IN THE PRESENT CASE THE LD TPO INSTEAD OF APPLYING THE MARGIN OF PROFIT ON THE COST , APPLIED THE MARGIN OF PROFIT ON THE SALES, WHICH IS NOT CORRECT FOR THE PURPOSE OF BENCHMARKING INTERNATIONAL TRANSACTION ADOPTING COST PLUS METHOD. FURTHERMORE, THE GRIEVANCE OF THE ASSESSEE IS THAT THE TWO COMPARABLE COMPANIES ACCEPTED BY THE TPO AS COMPARABLE WERE NOT IN BUSINESS FOR SUPPLY OF MACHINERY BUT WERE IN BUSINESS OF SUPPLY OF AUTOMOBILE COMPONENTS AND THEREFORE SAME SHOULD BE REJECTED. HOWEVER, ON READING OF THE ORDER OF THE LD TPO WE FIND THAT THE ASSESSEE HAS SELECTED IN ITS TP STUDY REPORT JAPANESE PAGE | 4 AE AS THE TESTED PARTY AND FOR COMPARABILITY ANALYSIS SELECTED COMPARABLE FROM INDIA. THIS APPROACH APPARENTLY IS NOT CORRECT AND THEREFORE THE LD TPO ASKED ASSESSEE TO CONDUCT FRESH SEARCH AND EXTRACT JAPANESE COMPANIES WHICH ARE POTENTIALLY COMPARABLE TO THE TESTED PARTY. THUS COMPARABLES WERE PROVIDED BY ASSESSEE AND NOW IT IS RESILING FROM THOSE COMPARABLES STATING THAT THOSE DO NOT ENGAGE IN SUPPLY OF MACHINERIES. THEREFORE, NOW THE ASSESSEE SAYING THAT THE COMPARABLE WHICH WERE SELECTED BY THE ASSESSEE ITSELF ARE NOT ENGAGED IN THE BUSINESS OF SUPPLY OF MACHINERY BUT IN THE BUSINESS OF SUPPLY OF AUTO COMPONENTS AND HENCE ARE NOT COMPARABLE. IT IS A FACT THAT THE OVERSEAS COMPANIES WERE ACTUALLY PROPOSED AS COMPARABLE BY THE ASSESSEE. THE ASSESSEE ITSELF COMPUTED THE MARGINS BY APPLYING GROSS PROFIT TO SALES. THEREFORE, ON LOOKING AT THE TRANSFER PRICING ANALYSIS WE FIND THAT THERE IS GROSS INFIRMITY IN COMPUTING THE MARGIN OF THE TESTED PARTY BY APPLYING APPROPRIATE PLI, SELECTION OF APPROPRIATE COMPARABLES WHICH ARE ENGAGED IN BUSINESS OF SALE OF COMPONENTS WHEREAS THE ASSOCIATED ENTERPRISES IS SUPPLYING COMPONENTS AS WELL AS ALSO SUPPLYING THE MACHINERY. HOWEVER, THE CLAIM OF THE ASSESSEE IS THAT GROSS MARGIN OF THE TESTED PARTY AT 3.05 % AND THE MARGIN OF THE COMPARABLE IS ONLY 3.57 % THEREFORE IT FALLS WITHIN THE MARGIN OF THE 5% OF ALP. WE DO NOT AGREE TO SUCH AN ARGUMENT, WHERE THE ASSESSEE ON ONE SIDE CHALLENGES THE COMPARABLE AND ON OTHER SIDE HIDE BEHIND THE RANGE OF MARGIN. THUS, IN VIEW OF THIS, IT IS APPARENT THAT THERE IS NO PROPER COMPUTATION OF MARGIN OF AE, NO PROPER SELECTION OF COMPARABLES AND NO PROPER DETERMINATION OF ALP OF INTERNATIONAL TRANSACTIONS. THEREFORE, IN THE INTEREST OF JUSTICE WE SET ASIDE THE WHOLE ISSUE BACK TO THE FILE OF THE LD TPO/AO WHERE ASSESSEE IS DIRECTED TO SUBMIT THE PROPER COMPARABILITY ANALYSIS ALONG WITH THE COMPUTATION OF MARGIN. THE LD TPO MAY EXAMINE THE SAME AND THEN DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION AFTER GRANTING PROPER OPPORTUNITY OF HEARING TO THE ASSESSEE. HOWEVER, LD TPO IS ALSO DIRECTED TO EXAMINE WHETHER THE ASSESSEE IS ENTITLED TO THE BENEFIT OF MARGIN OF (+)(-) 5% OF ALP AND APPROPRIATELY CONSIDERING THE SAME. IN VIEW OF THIS ALL THE GROUNDS OF THE APPEAL ARE RESTORED BACK TO THE FILE OF THE LD TPO ACCORDINGLY. 7. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 8. ORDER PRONOUNCED IN THE OPEN COURT ON 04/06/2021. SD/- SD/- ( AMIT SHUKLA ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 04/06/2021 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT PAGE | 5 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI PAGE | 6 DATE OF DICTATION 4.06.2021 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 4.06.2021 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER 4.06.2021 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/ PS 4.06.2021 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 4.06.2021 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS 4.06.2021 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 4.06.2021 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 4.06.2021 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER