DCIT, Coimbatore V. M/s. Rieter - LMW Machinery Ltd., Coimbatore

ITA 2253/CHNY/2016

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 6228 (ITAT-CHENNAI)
• Duration Of Justice: 6 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2004-2005
• Appeal Filed On: 27-07-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 143(3); 10B

Judgement Text

आयकर अपीलीय अिधकरण’डी’ ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, CHENNAI माननीय-ीमहावीर िसंह, उपा34एवं माननीय -ी मनोज कु मार अ9वाल ,लेखा सद< के सम4। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपीलसं./ ITA No.2253/Chny/2016 (िनधाDरणवषD / Assessment Year: 2004-05) DCIT Corporate Circle -1, 63-A, Race Course RoadCoimbatore. बनाम / Vs. M/s. Lakshmi Machine Works Ltd. (successor of LMW Machinery Ltd.-previously known as Reiter LMW Machinery Ltd.) Sulur Railway Feeder Road, Muthugoundenpudur,Coimbatore – 641 406. थायीलेखासं./जीआइआरसं./P AN /GI R No. AABCR-0309-M (अ पीलाथ /Appellant) : ( थ / Respondent) अपीलाथ कीओरसे/ Appellant by : Shri D. Hema Bhupal (JCIT) –Ld. DR थ कीओरसे/Respondent by : Shri R. Vijayaraghavan (Advocate) – Ld. AR सुनवाईकीतारीख/ Date of Hearing : 29.06.2022 घोषणाकीतारीख / Date of Pronouncement : 17-08-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by Revenue for Assessment Year (AY) 2004-05 arises out of the order of learned Commissioner of Income Tax (Appeals)-1, Coimbatore [CIT(A)] dated 23-03-2016 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 29-12-2006.The grounds taken by the Revenue read as under: ITA No. 2253/Chny/2016 - 2 - 1. The order of the Id. CIT(A), Coimbatore is against the facts and circumstances of the case and is erroneous by law. 2. The learned CIT(A)-1, Coimbatore erred in holding that since there were no transfer pricing adjustments for the Asst. year 2005-06, 2006-07 and 2007-08 even though the assessee was in the same line of business, the adjustments for the Asst. Year 2004-05 is also not called for. 3. The learned CIT(A) failed to note that that there is no estoppel in taxation matters and the officer is not bound by the method followed in the earlier years or subsequent years. Each and every Asst. Year is independent and is not dependent on earlier years proceedings. 4. The learned CIT(A) failed to note that the decision of the Karnataka High Court in the case of CIT Vs. Yokogawa India Ltd., reported in (2012) 341 ITR 385which has been relied upon has not been accepted by the Department and a SLP has been filed before the Hon'ble Supreme Court, which is still pending. 5. For these and other grounds that may be adduced at the time of hearing, the order of the learned CIT(A) may be cancelled and that of Assessing Officer be restored. 2. The assessee has filed petition for name change of the assessee which has been found in order. The Registry has noted a delay of 16 days in the appeal, the condonation of which has been sought by the Revenue. Considering the period of delay, we condone the delay and admit the appeal for adjudication on merits. Having heard rival submissions and after perusal of case records, our adjudication would be as under. Proceedings before lower authorities 3.1 The assessee being resident corporate assessee stated to be engaged in manufacturing of textile machine parts was assessed u/s. 143(3) of the Act on 29.12.2006. The assessee is a Joint venture company with MFR Switzerland and is a 100% export-oriented unit. The assessee is engaged in manufacturing of ring frame assemblies. The production processes are carried out in Switzerland. The entire products are sold by the assessee to joint venture company MFR, ITA No. 2253/Chny/2016 - 3 - Switzerland.Accordingly, a reference was made to Ld. Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP). 3.2 The assessee made sale of Rs.77.34 Crores which was benchmarked using cost plus method (CPM). However, rejecting the method, Ld. TPO applied Transactional Net Margin Method (TNMM) to benchmark these transactions. The Profit Level Indicator (PLI) of the assessee was worked out at 5.72% as against average PLI of 12.98% reflected by two comparable entities and accordingly, an adjustment of Rs.609.44 Lacs was proposed by Ld. TPO. Another adjustment of Rs.35.55 Lacs was made for import of raw material since it was held that the price paid by the assessee was higher than the cost from original supplier. Therefore, rejecting Resale Price Method (RPM) as adopted by the assessee, Ld. TPO benchmarked the same using Comparable Uncontrolled Price (CUP) method and accordingly, proposed this adjustment. Both the adjustments were incorporated in the assessment order which were subject matter of challenge before Ld. CIT(A). 3.3 During appellate proceedings, the assessee, inter-alia, submitted that it as a focused contract manufacturer only on the basis of know-how design supplied by MFR and do not perform any marketing functions. It is prevented from undertaking any similar contract with any other person. Therefore, CPM would be most appropriate method as accepted by Ld. TPO in AYs 2003-04, 2005-06 to 2007-08 on identical set of facts. It was further submitted that character of the assessee remained the same and profit margins were commensurate with other years. The assessee also assailed the application of TNMM and comparability analysis done by Ld. TPO therein. ITA No. 2253/Chny/2016 - 4 - 3.4 Regarding benchmarking of purchase of raw material, it was submitted that the assessee did not re-sell these components to any third parties and the components were utilized for manufacturing of goods exclusively for sale as finished goods to Associated Enterprises (AE) by adding its own margin and therefore, RPM would be most appropriate method (MAM). 3.5 It was further submitted by the assessee that computation of ALP was connected with the profits of 100% EOU which is exempt u/s 10B of the Act and therefore, the adjustment would be tax neutral as held by Hon’ble Karnataka High Court in CIT V/s Yokogawa India Ltd. (341 ITR 385). 3.6 The aforesaid submissions found favor with Ld. CIT(A) who deleted the adjustment on account of purchase of raw material on the ground that the assessee did not sell the products outside. Therefore, comparison of price of raw material sold by the AE to other parties could not be the basis of adjustment. 3.7 RegardingTransferAdjustment (TP) on sale of finished goods, it was noted that the assessee was a contract manufacturer and therefore, the margins would be lower in comparison to regular manufacturer / exporter. The risk was entirely borne by overseas entities. The comparable entities as selected by Ld. TPO could not be held comparable due to difference in functions. Since the assessee is 100% EOU and claim exemption u/s 10B, there would be no incentive to shift profits outside India. Also, no such adjustment was made by Ld. TPO for AYs 2005-06 to 2007-08. Therefore, the proposed adjustments were deleted. Aggrieved, the revenue is in further appeal before us. ITA No. 2253/Chny/2016 - 5 - Our findings and Adjudication 4. We find that the assessee is 100% EOU and its profits are exempt. The entire products are sold to joint venture entities outside. In such a case, there would be no incentive for the assessee to shift its profits outside India. Further, the assessee is a contract manufacturer and do not carry out marketing functions. The entire risk is borne by the Associated Entities. The sale transactions have been benchmarked using cost plus method (CPM) which would be Most Appropriate Method considering the functions of the assessee. It is also undisputed fact that similar methodology as adopted by the assessee in other years has been accepted by Ld. TPO. Therefore, TNMM method could not be applied to the case of the assessee. The issue has rightly been adjudicated by Ld. CIT(A) in the impugned order. 5. The second adjustment of Rs.35.55 Lacs was made for import of raw material. It was alleged that the price paid by the assessee was higher than the cost from original supplier. Therefore, Resale Price Method (RPM) as adopted by the assessee was rejected and Comparable Uncontrolled Price (CUP) method was adopted to arrive at this adjustment. However, it could be seen that the assessee did not re- sell the components thus purchased to any third parties and the components were utilized for manufacturing of goods exclusively for sale as finished goods to Associated Enterprises (AE) by adding its own margin. In such a case, RPM method was to be accepted and comparison of price of raw material sold by the AE to other parties could not be the basis of adjustment. On this score also, no infirmity could be found in the impugned order. ITA No. 2253/Chny/2016 - 6 - 6. In the result, the appeal stands dismissed. Order pronounced on 17 th August, 2022. Sd/- (MAHAVIR SINGH) उपा34 /VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद< / ACCOUNTANT MEMBER चे.ई/ Chennai; िदनांक/ Dated : 17-08-2022 JPV JPVJPV JPV आदेशकीXितिलिपअ9ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकरआयु (अपील)/CIT(A) 4. आयकरआयु /CIT 5. िवभागीय ितिनिध/DR6. गाड फाईल/GF