PPG COATINGS INDIA P.LTD, MUMBAI V. DCIT CIR 9(2), MUMBAI

ITA 2093/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3852 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 16-03-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 27-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G M DOSSCIT
• Assessee Lawyers: P J PARDIWALA
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 154

Judgement Text

, , , , INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , . . , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND C.N. PRA SAD,JUDICIAL MEMBER ./I.T.A./2093/MUM/2014, /ASSESSMENT YEAR: 2009-10 PPG COATINGS INDIA PRIVATE LIMITED (NOW MERGED WITH PPG ASIAN PAINTS PRIVATE LIMITED), 158, VIDYANAGARI MARG, DANI WOOTEX COMPOUND, KALINA SANTACRUZ(WEST), MUMBAI-400 098. PAN: AABCS 4378 K VS. DY. CIT, CIRCLE-9(2) AAYAKAR BHAVAN, M.K. ROAD MUMBAI-20. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: S/SHRI G.M.DOSS-CIT ASSESSEE BY: SHRI P.J. PARDIWALA / DATE OF HEARING: 18.04.2016 / DATE OF PRONOUNCEMENT: 27.04.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DT.27.1.2014 PASSED BY THE AO ,U/S. 143(3) R.W.S.144C(13) OF THE ACT , IN PURSUANCE OF THE DIRECTION OF THE DRP-MUMBAI,DT. 10.12.13,THE ASSESSEE HAS FILED THE PRESENT APPEAL. 2. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF TRADING IN MARINE AND PROTECTIVE PAINTS FILED ITS RETURN OF INCOME 30.9.2009,DECLARING TOTAL INCO ME AT RS.NIL.DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAS ENTE RED UNTO INTERNATIONAL TRANSACTIONS. SO,HE MADE A REFERENCE U/S. 192CA(1) OF THE ACT, TO THE T RANSFER PRICING OFFICER(TPO)FOR DETERMIN -ING ARMS-LENGTH-PRICE (ALP).THE TPO FOUND THAT PPG INDUSTRIES INC,USA HAD ITS HEAD QUARTERS IN PENNSYLVANIA AND HAD MORE THAN 110 MANU FACTURING FACILITIES AND EQUITY AFFILIATES IN MORE THAN 20 COUNTRIES,THAT THE ASSESSEE WAS INC ORPORATED AS A PRIVATE LTD. COMPANY,THAT THE US COMPANY HELD 100% OF THE TOTAL SHARE CAPITAL OF THE SIGMA MARINE AND PROTECTIVE COATINGS HOLDINGS B.V.NETHERLANDS WHO IN TURN HELD 100% SHARES OF THE ASSESSEE. THE TPO FURTHER FOUND THAT THE INTERNATIONAL TRANSA CTIONS INCLUDED PURCHASE AND SALE OF FINISHED GOODS,PURCHASE OF SAP LICENCE,COMMISSION I NCOME,ADVANCE RECEIVED,COST SHARING EXPENSES,REIMBURSEMENT OF EXPENSES,THAT THE OPERATI NG MARGIN OF THE ASSESSEE WAS TAKEN AT 1.2% ,THAT IT HAD BENCHMARKED THE INTERNATIONAL TR ANSACTIONS ON AN AGGREGATE BASIS,THAT TRANSACTIONAL NET MARGIN METHOD (TNMM)WAS ADOPTED A S THE MOST APPROPRIATE METHOD, THAT IT HAD CONDUCTED SEARCH IN PROWESS DATA BASE TO IDE NTIFY THE COMPARABLE COMPANIES,THAT FHE FINAL COMPARABLES SELECTED BY THE ASSESSEE INCLUDED INCOKEM LTD.,JAYSYNTH DYESTUFF(INDIA) LTD.,MAHALAXMI DYES AND CHEMICALS LTD. AND VIPUL DY E CHEMLTD.,THAT THE OPERATING PROFIT/ SALES(OP/SALES)WAS CONSIDERED AS PROFIT LEVEL INDIC ATOR(PLI),THAT IT HAD CONSIDERED THE DATA OF PRIOR TWO FINANCIAL YEARS ALONG WITH THE CURRENT FINANCIAL YEAR I.E. AY.S 2007-08, 2008- 09 AND 2009-10 FOR ARRIVING AT PLI.THE PLI WAS WORK ED AS UNDER: SN. COMPANY NAME FY.2006-07 FY .2007-08 FY.2008- 09 WEIGHTED AVERAGE OPERATING MARGIN 1. INDOKEM LTD. 6.32 -0.46 NA 2.93 2. JAYASYNTH DYESTYFF -1.80 5.15 NA 1.67 2093/MUM/14-PPG COATING 2 (INDIA) LTD. 3. MAHALAXMI DYES & CHEMICALS LTD. 0.59 2.61 NA 1.60 4. VIPUL DYE CHEM LTD. 4.86 5.29 NA 5.08 AVERAGE 2.82% PLI OF THE ASSESSEE 1.12% DURING THE COURSE OF TP PROCEEDINGS THE ASSESSEE WA S CALLED UPON TO UPDATE THE MARGIN OF THE ABOVE FOUR COMPARABLE COMPANIES USING AY 2009-10 DA TA ON STANDALONE BASIS.THE ASSESSEE, VIDE ITS LETTER DT.7.11.2012,SUBMITTED THE UPDATED MARGIN FOR THE AY 2009-10 WAS AS UNDER : SR.NO. COMPANY NAME UPDATED PLI USING DATA FOR FY 2 008-09 1. INDOKEM LTD. 3.06 2. JAYSYNTH DYESTUFF (INDIA) LTD. 8.06 3. MAHALAXMI DYES & CHEMICALS LTD. 1.76 4. VIPUL DYE CHEM. LTD. 7.46 AVERAGE 5.09 THE TPO OBSERVED THAT THE ASSESSEE HAD IMPORTED PRO TECTIVE AND MARINE COATINGS FROM ITS AE AND HAD ALSO SOLD SAME MATERIAL TO ITS AES,THAT IT HAD AGGREGATED THE TRANSACTION OF PURCHASE AND SALE OF FINISHED GOODS WITH ITS OTHER INTERNATI ONAL TRANSACTIONS AND HAD BENCH MARKED THE SAME BY CONSIDERING TNMM AS THE MOST APPROPRIATE ME THOD. THE TPO WAS OF THE OPINION THAT ASSESSEE WAS NOT INTO TRADING OF PROTECTIVE AN D MARINE COATINGS,THEREFORE, THE TRANSACTION HAD TO BE BENCHMARKED APPLYING RE-SALE PRICE METHOD (RPM). IN ITS REPLIES DT. 7.12.2012 AND 14. 12.2012 THE ASSESSEE SUBMITTED THAT IDEALLY RPM SHOULD HAVE BEEN APPLIED,THAT SUFFICIENT RELIABLE INFORMATION WAS NOT AVAILABLE, THAT TNMM WAS USED AS BENCHMARK.THE ASSESSEE OBJECTED TO APPLICATION OF RPM. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE,TH E TPO HELD THAT A TRANSACTION BY TRANSACTION BENCHMARKING APPROACH SHOULD BE FOLLOWE D TO THE EXTENT POSSIBLE,THAT WHERE IT WAS NOT POSSIBLE A COMBINED TRANSACTION APPROACH CO ULD BE ADOPTED,THAT IN THE CASE UNDER CONSIDERATION THE TRANSACTION WERE REQUIRED TO BE B ENCH MARKED SEPARATELY TO DETERMINE THE ALP OF THE ASSESSEES TRADING ACTIVITY,THAT IN CASE OF TRADING CONCERN THE RPM WAS MORE APPROPRIATE THAN ANY OTHER METHOD,THAT IT FOCUSED O N COMPARISON OF GROSS MARGINS AND DID NOT GET DISTURBED BY THE GENERAL AND ADMINISTRATIVE OVE RHEADS,THAT THE ASSESSEE WAS A TRADER, THAT THE PRINCIPAL TRANSACTIONS WERE OF PURCHASE AND SAL E OF FINISHED GOODS.THE TPO CONDUCTED A FRESH SEARCH AND IDENTIFIED FOUR COMPARABLES,NAMELY ,HARD CASTLE AND WAUD MFG CO. LTD., CASTROL INDIA LTD., HINDUSTAN PETROLEUM LTD. AND IN DIAN OIL CORPN. LTD. HE REQUIRED ASSESSEE TO FURNISH A DETAILED REASONING SO AS TO WHY THE AB OVE REFERRED 4 COMPANIES SHOULD NOT BE CONSIDERED AS VALID COMPARABLES.VIDE ITS LETTER,DT. 11.1.13,THE ASSESSEE MADE ELABORATE SUBMISSIONS BEFORE THE TPO.AFTER CONSIDERING THE CO MPARABLES SELECTED BY THE ASSESSEE THE TPO SELECTED FINAL SET OF COMPARABLES.THE FINAL COM PARABLES WERE AS UNDER :- SN. COMPANY NAME FUNCTIONS MARGINS AS PER ASSESSEE COMPUTED FROM THE ANNUAL REPORTS FY 2008-09 1. HARDCASTLE & WAUD MFG. CO. LTD. HEAT TREATMENT/M ETAL WORK PROD 32.46 2. CASTROL INDIA LTD. LUBRICANTS-OILS/GREASES ETC. 40.47 3. HINDUSTAN PETROLEUM CORPORATION LIMITED GREASES 60.20 4. INDIAN OIL CORPORATION LTD. LUBRICANTS-GREASES 4 8.46 5. INDOKEM LTD. SYNTHETIC ORGANIC AND DYES 22.34 2093/MUM/14-PPG COATING 3 6. JAYSYNTH DYESTUFF (INDIA) LTD. ORGANIC COLOURANT S, PIGMENTS AND REACTIVE DYES 20.80 7. MAHALAXMI DYES & CHEMICALS LTD. SOLVENTS AS WELL AS SPECIALTY CHEMICALS 6.12 8. VIPUL DYE CHEM LTD. DYES, CHEMICALS AND INTERMEDIATES 18.55 AVERAGE 31.68 THE TPO HELD THAT THE GROSS MARGIN EARNED BY THE AS SESSEE WAS 28.45%, THAT IT WAS LESS THAN THE GROSS MARGIN EARNED BY THE COMPARABLE COMPANIES , THAT ALP OF THE PURCHASE AND SALE OF FINISHED GOODS COULD NOT BE CONSIDERED AT ALP. HE C OMPUTED THE ADJUSTMENT AS UNDER : PARTICULARS PPG INDIAS GM% (A) 28.45% AS SUBMITTED BY ASSESSEE INCOME RECEIVED (B) 37,11,29,418 AS SUBMITTED BY AS SESSEE COGS( C) 26,55,26,716 AS SUBMITTED BY ASSESSEE ACTUAL GM 10,56,02,702 AS SUBMITTED BY ASSESSEE ARMS LENGTH GM% (D) 31.68 ARMSLENGTH GM(E=B*D) 11,75,73,799 ARMS LENGTH COGS(F=B-E) 25,35,55,618 AMOUNT OF ADJUSTMENT (TRADING)(G=C-F) 1.19 CRORES BASED ON THE ORDER OF THE TPO,THE AO ISSUED A DRAFT ORDER TO THE ASSESSEE. 3. AGGRIEVED BY THE DRAFT ORDER OF THE AO THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL(DRP).BEFORE IT,THE ASSESSEE SUBMIT TED THAT THE INTERNATIONAL TRANSACTION ON PURCHASE AND SALE OF FINISHED GOODS,PURCHASE OF SAP LICENSE,COMMISSION INCOME, COST SHARING EXPENSES WERE INEXPLICABLY LINKED TO ITS TR ADING ACTIVITIES,THAT SAME HAD TO BE BENCH MARKED ON AN AGGREGATE BASIS CONSIDERING THE TNMM A S THE MOST APPROPRIATE METHOD, THAT IT HAD CONSISTENTLY BENCHMARKED ITS TRANSACTION WITH T HE AES ON AN AGGREGATE BASIS ADOPTING TNMM,THAT THE TPO HAD ACCEPTED THE METHOD AND BENCH MARKING IN THE EARLIER YEARS, THAT THE TPO HAD FAILED TO APPRECIATE THAT GIVEN THE LIMITAT ION OF APPLICABILITY OF RPM IT WAS NOT THE MOST APPROPRIATE METHOD FOR BENCHMARKING,THAT THE A SSESSEE HAD CONDUCTED A CONTEMPORANEOUS SCIENTIFIC STUDY TO ARRIVE AT A FIN AL SET OF COMPARABLES, THAT THE TPO HAD USED CURRENT DATA BASE AND HAD IGNORED THE CONTEMPO RANEOUS DATA AVAILABLE, THAT HE HAD NOT USED THE KEY WORDS SIMILAR TO THE WORDS USED BY THE ASSESSEE, THAT THE TPO HAD SELECTED FOUR COMPARABLES ENGAGED IN OTHER BUSINESSES LIKE MANUFA CTURING LUBRICATING OIL, GREASE, OIL AND GAS,THAT THEY WERE NOT COMPARABLES TO THE ASSESSEE, THAT HE HAD ERRONEOUSLY COMPUTED THE GROSS MARGIN AT OF THE COMPARABLE COMPANIES AT 3 1.68%,THAT IT HAD FILED RECTIFICATION LETTER DATED 18.2.2013 U/S.154 OF THE ACT, THAT THE TPO HA D NOT PASSED THE ORDER TILL FILING OF THE OBJECTIONS,THAT THE REVISED GROSS MARGIN OF THE COM PARABLES WORKED OUT TO 19.35%, THAT THE COMPANIES WERE NOT COMPARABLE TO THE ASSESSEE,THAT THE GROSS MARGIN EARNED BY THE ASSESSEE WAS HIGHER THAN THE GROSS MARGIN OF COMPARABLE COMP ANIES,THAT THE QUANTUM OF AE PURCHASE WAS LESS THAN AS COMPARED TO THE TOTAL PURCHASES(12 .69%).ALTERNATIVELY IT WAS ARGUED THAT EVEN IF TP ADJUSTMENTS WERE WARRANTED SAME HAD TO B E RESTRICTED TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE.S AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D TPOS ORDER THE DRP HELD THAT ASSESSEE HAD ENTERED INTO SEVEN DIFFERENT KIND OF TRANSACTI ONS,THAT SAME WERE DIFFERENT IN NATURE AND SCOPE,THAT THE ASSESSEE HAD AGGREGATED ALL THE TRA NSACTIONS WORTH RS.14.26 CRORES FOR BENCH - MARKING AT ENTITY LEVEL,THAT THE TRANSACTIONS WERE DIFFERENT IN THEIR NATURE AND THEIR SCOPE AND THAT THEIR SEPARATE EVALUATION AND BENCHMARKING WAS POSSIBLE,THAT THE TPO WAS JUSTIFIED IN REJECTING ENTITY LEVEL BENCHMARKING,THAT THE TPO HA D USED THE IDENTICAL KEY WORDS FOR FINDING 2093/MUM/14-PPG COATING 4 OUT A SET OF FOUR COMPARABLE FOR THE BENCHMARKING A T THE ENTITY LEVEL OF TRANSACTIONS, THAT THERE WAS NO VALUE ADDITION AT THE LEVEL OF THE ASS ESSEE,THAT THE RPM WAS THE MOST APPROPRIATE METHOD TO BENCHMARK INTERNATIONAL TRANS ACTION RELATING TO PURCHASE AND SALE OF FINISHED GOODS,THAT THE ASSESSEE HAD ADOPTED EX-POS T APPROACH,THAT IT COULD NOT CONSTRAIN THE TPO TO USE THE DATA THAT WAS AVAILABLE AT THE TIME OF TP STUDY.REFERRING TO THE PROVISIONS OF SECTION 92CA R.W.S.92C(3)OF THE ACT,IT WAS HELD THA T THOSE SECTIONS EMPOWERED THE TPO TO DETERMINE THE ALP ON THE BASIS OF SUCH MATERIAL WHI CH WAS AVAILABLE TO HIM, THAT NON AVAILABILITY OF DATA AT THE TIME OF TP STUDY COULD BE A REASON FOR NOT CONSIDERING IT FOR THE STUDY,THAT IT COULD NOT ACT AS A BAR ON USE OF THE DATA SUBSEQUENTLY BY THE TPO IF THE SAME WAS AVAILABLE,THAT EVERY SELECTED COMPARABLE HAD TO STA ND THE TEST OF FAR ANALYSIS,THAT THE TPO HAD USED CONTEMPORANEOUS DATA OF THE ASSESSEE TO BE NCH MARK THE TRANSACTIONS.FINALLY, THE DRP UPHELD THE ORDER OF THE TPO. 4. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)MADE THE SAME SUBMISSIONS THAT WERE ADVANCED BEFORE THE DRP.HE FURTHER STATED THAT THE GROSS MARGIN EARNED BY THE ASSESSEE WAS 28.45%(PG-390 OF THE PB),THAT THE TPO HAD ARRIVED A T THE AVERAGE OF 31.68%, THAT EVEN IF CORRECTNESS OF THE METHOD ADOPTED WAS NOT CHALLENGE D THE ASSESSEE HELD WITHIN THE RANGE OF +/- 5%.THE DEPARTMENTAL REPRESENTATIVE (DR) SUPPO RTED THE ORDER OF DRP. 5. WE FIND THAT DURING THE YEAR UNDER CONSIDERATION,TH E ASSESSEE HAD ENTERED INTO FOUR INTERNATIONAL TRANSACTION I.E.PURCHASE OF FINISHED GOODS(RS.3.19CRORES),SALE OF FINISHED GOODS (RS79.22 LAKHS),PURCHASE OF SAP LICENSE(RS.47.80LAK HS)AND EXPENSES INCURRED (RS.60,364/-), THAT IT HAD BENCHMARKED THE TRANSACTION APPLYING TN MM ON AN AGGREGATE BASIS, THAT THE ASSESSEE HAD SELECTED 4 COMPARABLE COMPANIES UNDER TNMM,THAT THE ARITHMETIC MEAN WAS 2.82%,THAT THE PLI OF THE ASSESSEE WORKED OUT AT 1. 12%,THAT AVAILING THE BENEFIT OF 5% THE ASSESSEE HAD CLAIMED THAT INTERNATIONAL TRANSACTION ENTERED INTO WERE AT ARMS LENGTH, THAT THE TPO HAD HELD THAT TRANSACTIONS RELATED WITH PURCHAS E AND SALE OF FINISHED GOODS WERE TO BE BENCHMARKED SEPARATELY,THAT THE TPO USED RPM FOR DE TERMINING THE ALP OF THE TRANSACT - IONS,THAT IN THE EARLIER YEARS THE ASSESSEE HAD BEN CHMARKED THE INTERNATIONAL TRANSACTIONS ON AN AGGREGATE BASIS ADOPTING TNMM FOR EARLIER YEARS AND THE AO HAD ACCEPTED THE METHOD, FOR THE PURPOSE OF BENCHMARKING,THAT THE TPO HAD CO NSIDERED EIGHT COMPARABLES AS THE FINAL SET,THAT THE ASSESSEE HAD SUBMITTED A CHART AND HAD CLAIMED THAT CORRECT GROSS MARGIN OF COMPARABLE COMPANIES SHOULD HAVE BEEN 19.35% INSTE AD OF 31.68%, THAT THE GROSS MARGIN OF THE ASSESSEE WAS 28.45% .WE FIND THAT THE ASSESSEE HAD FILED AN APPLICATION U/S. 154 OF THE ACT,BEFORE THE TPO TO RECTIFY THE MISTAKES IN HIS O RDER, THAT SAME WAS NEVER DISPOSED OFF.IT IS OBSERVED THAT THE TPO HAD COMPUTED GP MARGIN @31.6% , THAT THE ASSESSEE GROUP MARGIN WAS AT 28.45%.WE FIND THAT THERE IS A DIFFERENCE IN THE GP MARGINS REPORTED BY THE TPO AND COMPUTED BY THE ASSESSEE IN THE CASES OF HINDUSTAN PETROLEUM CORPORATION LTD, INDIA OIL CORPORATION LTD, INDOKEM LTD. JAYSYNTH DYESTUFF (I) LTD AND MAHALAXMI DYES & CHEMICALS. A PERUSAL OF PGNO.892-896 OF PB REVEAL THAT THE GP MARGIN WAS 6.88% 9.6%, 20.67%, 19.71% 6.50% RESPECTIVELY OF THE ABOVE REFERRED FIV E COMPARABLES AS AGAINST THE 64.20%, 48.46%, 22.34%, 20.80% AND 6.12% RESPECTIVELY.THERE IS HUGE VARIATION IN THE GROSS MARGIN OF HPCL AND IOCL.THE TPO HAD TAKEN THE MARGIN OF TH ESE COMPANIES @ 64.20% AND 48. 64%,WHEREAS THE REPORTED MARGIN IS 6.88% AND 9.6%.T HE DRP IGNORED THE ABNORMALLY HIGH MARGIN AND DID NOT CALL FOR A REMAND REPORT FROM TH E TPO.WE ARE UNABLE TO UNDERSTAND THAT AS TO HOW SUCH GLARING MISTAKE WAS ALLOWED TO CONTINUE . THE OBJECT OF THE TP PROVISIONS IS TO MAKE ADJUSTMENT,IF IT IS FOUND THAT THE INTERNATION AL TRANSACTIONS WERE NOT AT ARMS LENGTH.THE PROVISIONS WERE NOT INCORPORATED TO MAKE ADJUSTMENT AT ANY COST AND IGNORING THE BASIC FACTS. IF THE CORRECT FIGURE OF GP MARGIN IS TAKEN IT WORK S OUT TO 19.35%.THE ASSESSEES GROSS MARGIN(28.45%) IS HIGHER THAN THE MARGIN OF 19.35% OF THE COMPARABLES. THEREFORE, IN OUR 2093/MUM/14-PPG COATING 5 OPINION THE TRANSACTION IN QUESTION IS AT ARMS LEN GTH. WE ARE NOT ADJUDICATING THE ISSUE OF TOTAL TURNOVER VERSUS TURNOVER WITH THE AE AND THE RELATED ISSUES.GROUND NO.1 IS DECIDED IN FAVOUR OF THE ASSESSEE. AS A RESULT, APPEAL FI LED BY THE ASSESSEE STANDS ALLOWED. . ORDER PRONOUNCED IN TH E OPEN COURT ON 27 TH APRIL, 2016. 27 , 2016 SD/- SD/- ( . . / C.N. PRASAD ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 27.04.2016. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR K BENCH, ITAT, MUMBAI / , , . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.