PETROCHEM MIDDLE EAST INDIA P.LTD, MUMBAI V. DCIT 8(2), MUMBAI

ITA 2255/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3860 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 17-03-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 03-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: HARSH R SHAH PRATIK PODDAR; KARISHMA R PHATA
• Keywords: Transfer pricing; International transaction; Notional interest

Judgement Text

, ,, , INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , . . , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND C.N. PRA SAD,JUDICIAL MEMBER ./I.T.A./2255/MUM/2014, /ASSESSMENT YEAR: 2009-10 M/S. PETROCHEM MIDDLE EAST INDIA PVT. LTD.201, BWING BUSINESS SQUARE,ANDHERI KURLA ROAD, ANDHERI (E),MUMBAI-400 093. PAN: AADCP 9811 G VS. DY. CIT-8(2) AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400020. ./I.T.A./2070/MUM/2014, /ASSESSMENT YEAR: 2009-10 DY. CIT-8(2) M.K. ROAD, MUMBAI-20 VS. M/S. PETROCHEM MIDDLE EAST INDIA PVT.LTD.ANDHERI (E),MUMBAI-093. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI N.K. CHAND ASSESSEE BY: S/SHRI HARSH R. SHAH, PRATIK PODDAR & MS. KARISHMA R. PHATARPHEKAR / DATE OF HEARING: 20.04.2016 / 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 . 31.01.2014 OF THE ASSESSING OFFICER(AO)PASSED IN PURSUANCE OF THE DIRECTIONS OF THE DISPUTE RESOLUTI ON PANEL(DRP)DT.23.12. 2013, THE ASSESSEE HAS FILED THE PRESENT APPEAL RAISING T WO EFFECTIVE GROUNDS OF APPEAL. THE AO HAS ALSO FILED AN APPEAL FOR THE YEAR UNDER CONSIDERATION.ASSESSEE- COMPANY,ENGAGED IN THE BUSINESS OF TRADING OF PETRO CHEMICALS,FILED ITS RETURN OF INCOME,DECLARING INCOME OF RS.37.20 CRORES.THE AO C OMPLETED THE ASSESSMENT,ON 28.02.2001,U/S.143(3)R.W.S.144C(13)OF THE ACT,DETER MINING THE INCOME OF THE ASSESSEE AT RS.2,09,15,37,490/-. 2. FIRST GROUND OF APPEAL IS ABOUT ADDITION MADE ON AC COUNT OF UNDERVALUATION OF EQUITY SHARES CONSIDERED AS DEEMED LOAN AND INTERES T COMPUTED THEREON. AT THE TIME OF HEARING BEFORE US,REPRESENTATIVES OF BOTH T HE SIDES AGREED THAT THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUD GMENT OF THE HONBLE JURISDICTIONAL HIGH COURT, DELIVERED IN THE CASE OF VODAFONE INDIA SERVICES PVT. LTD.(369 ITR511).WE FIND THAT THE HONBLE COURT HAS HELD IN THE CASE OF VODAFONE THAT THE ISSUE OF SHARES AT A PREMIUM BY THE PETITI ONERS TO ITS NON -RESIDENT HOLDING 2255 & 2070/M/14-PETROCHEMMEIPL 2 COMPANY DOES NOT GIVE RISE TO ANY INTERNATIONAL TRA NSACTION, THAT IN SUCH A CASE APPLICATION OF THE PROVISIONS OF CHAPTER X OF THE A CT WOULD NOT ARISE. RESPECTFULLY,FOLLOWING THE ABOVE JUDGMENT OF THE H ONBLE BOMBAY HIGH COURT,WE DECIDE GROUND NO.1 IN FAVOUR OF THE ASSESS EE. 3. SECOND GROUND OF APPEAL AS ABOUT ADDITION MADE ON A CCOUNT OF REJECTION OF COMPARABLE UNCONTROLLED PRICE(CUP)IN RESPECT OF THE INTERNATIONAL TRANSACTIONS ENTERED IN TO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES(AES).DURING THE ASSESSMENT PROCEEDINGS,THE AO MADE A REFERENCE TO T HE TRANSFER PRICING OFFICER (TPO)TO DETERMINE THE ARMS LENGTH PRICE(ALP)OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE.DURING THE TP PROCEEDINGS,THE TPO F OUND THAT THE ASSESSEE HAS USED CUP METHOD TO JUSTIFY THE ALP,THAT IT HAS USED DATA WHICH PROVIDED COMPARABLE RATES FOR THE IMPORTED PRODUCTS,THAT WHE RE THE DATA WAS NOT AVAILABLE FOR THE DATE OF IMPORT OF GOODS,IT HAD USED THE DAT E OF NEAREST DATE,THAT IN CASE OF MULTIPLE TRANSACTIONS ON THE SAME DAY FOR VARIOUS Q UANTITIES IT HAD TAKEN AN AVERAGE (ARITHMETIC MEAN)OF ALL RATES TO ARRIVE AT THE ALP RATE,THAT IT HAD USED THE DATE OF THE PLACE FROM WHERE THE GOODS WERE IMPORTED,THAT I T HAD ENTERED IN TO 245 INTERNATIONAL TRANSACTIONS.OUT OF THE TOTAL TRANSAC TIONS,THE TPO ACCEPTED THE ALP OF 238 CASES.FOR REMAINING SEVEN TRANSACTIONS,HE MA DE ADJUSTMENTS.AFTER RECEIVING THE ORDER OF THE TPO,THE AO ISSUED A DRAFT ORDER TO THE ASSESSEE.IT FILED OBJECTIONS BEFORE THE DRP FOR EACH TRANSACTIONS.THE DRP DELETE D THE ADDITION IN RESPECT OF ONE TRANSACTION.HOWEVER, ADJUSTMENT MADE BY THE TPO FOR THE REMAINING SIX TRANSACTIONS WERE UPHELD. FIRST OF THEM WAS TRANSACTION NO.1.THE ASSESSEE HAD IMPORTED 4.98 LAKH KGS.OF SOVESSO100 @ RS.43. 09 PRE KG.AS THE COMPARABLE DAT A OF 05.05.2008 WAS NOT AVAILABLE,SO,THE ASSESSEE USED THE DATA OF 01.08.2 008.THE RATE CHARGED BY THE AE. (RS.43.09 PER KG)WAS LOWER THAN THE RATES PREVAILIN G ON THE FIRST AUGUST,2008,(RS. 58.58)THE ASSESSEE CLAIMED THAT THE TRANSACTION WAS AT ALP.HOWEVER,THE TPO CHOSE TO USE THE DATA OF 02.03.2009 AND HELD THAT O N THAT DATE RATE OF SOVESSO100 WAS RS. 27.54 PER KG,THAT THE TRANSACTION WAS NOT A T ARMS LENGTH.THE DRP HELD THAT BEYOND THE NEARNESS OF DATE THE ASSESSEE HAD N OT MENTIONED AS TO HOW THE TRANSACTION WAS OTHEREWISE COMPARABLE IN TERMS OF V OLUME OR ANY OTHER DETAILS,THAT IN ABSENCE OF SUCH DETAILS THE METHOD ADOPTED BY TH E TPO HAD TO BE UPHELD. 3.1. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR) ARGUED THAT THE DRP ITSELF HAD UPHELD THE NEAREST DATE APPROACH ADOPTED BY THE ASS ESSEE,THAT THE DATE CHOSEN BY IT WAS 88 DAYS FROM THE ACTUAL TRANSACTION THAT TPOS CUP DATE WAS 301 DAYS FROM ACTUAL DATE,THAT ON 01.08.2008 THE RATE FOR ALL QUA NTITIES WAS SAME,THAT VOLUME HAD 2255 & 2070/M/14-PETROCHEMMEIPL 3 NO IMPACT ON RATE. DEPARTMENTAL REPRESENTATIVE (DR) SUPPORTED THE ORDERS OF THE TPO AND DRP. 3.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE RATE OF SOVESSO100,PREVALENT ON 01.0 8.2008,FOR THE QUANTITIES RANGING FROM 1.05 LAKH KGS. TO 8.3 LAKH KGS.WAS SAME I.E.RS .58.88 PER KG.,THAT THE VOLUMES PICKED UP BY THE ASSESSEE WERE COMPARABLE T O THE TRANSACTION OF 4.98 KGS.,THAT THE AO HAD CHERRY-PICKED THE LOWEST RATE OF RS.27.54 PER KG. FOR MAKING ADJUSTMENTS,THAT THE COMPARISON OF THE VOLUME DATA ADOPTED BY THE AO AND THE TPO CLEARLY PROVE THAT VOLUME HAD ANY IMPACT ON THE PRICE,THAT THE DRP HAD HEAVILY RELIED UPON THE VOLUME THEORY.IN THESE CIRC UMSTANCES WE ARE OF THE OPINION THAT THE DATA BASED ON NEARNESS OF THE DATE WAS A J USTIFIABLE AND REASONABLE DATA TO DECIDE THE ALP OF THE TRANSACTION.SECONDLY, WE FIND THAT TPO HIMSELF HAD ACCEPTED THE CUP DATED 01/08/2008 FOR THE TRANSACTI ON ENTERED IN TO BY THE ASSESSEE ON 24.06.2008,THAT THE QUANTITY INVOLVED I N THE TRANSACTION WAS 5 LAKH KGS.(PG.92 OF THE PAPER BOOK).IN THESE CIRCUMSTANCE S,WE ARE OF THE OPINION,THAT THE DATA OF NEAREST DATE HAS TO BE TAKEN AS VALID C OMPARABLE. CONSIDERING THESE PECULIAR FACTS, WE ARE OF THE OPINION THAT THE DECI SION OF THE DRP CANNOT BE ENDORSED. 4. SECOND TRANSACTION IS OF PURCHASE OF 19.54 LAKH KG S.OF TOLUENE @RS.47.86 PER KG.THE MATERIAL WAS PURCHASED ON 05.06.2008.AS THE DATA FOR THAT DAY WAS NOT AVAILABLE THE ASSESSEE USED AVERAGE RATE OF CUP DA TA OF 29.05.2008.HOWEVER,THE TPO TOOK THE LOWEST RATES FROM THE DATA USED BY THE ASSESSEE AND HELD THAT THERE WERE SIX TRANSACTIONS RANGING FROM 75000KG.TO 5 LAK HS KGS.,THAT PRICE RANGE VARIED FROM RS.44.18 TO RS. 55.91,THAT THE ASSESSEE HAD PU RCHASED HUGE QUANTITY THAT SUCH BULK PURCHASE WOULD HAVE RESULTED IN LOWER PURCHASE PRICE,THAT THE ASSESSEE HAD EXTRAPOLATED THE PRICE TO FIT ITSELF IN TO 5% BAND ,THAT THE DATA FIELD WAS MATHEMATICALLY UNREASONABLE.THE DRP UPHELD THE ORDE R OF THE TPO. 4.1 .BEFORE US,THE AR ARGUED THAT VOLUME OF THE TRANSAC TIONS DID NOT IMPACT THE RATES,THAT TREND DID NOT INDICATE THAT VOLUMES AFFE CTED THE RATES,THAT THE TPO HAD CHERRY PICKED THE RATE,THAT THE TPO WAS NOT CONSIST ENT IN SELECTING THE COMPARABLES.DR SUPPORTED THE ORDER OF THE DRP. 4.2. WE HAVE CONSIDERED THE MATERIAL AVAILABLE ON RECORD .WE FIND THAT THE ASSESSEE HAD TAKEN THE AVERAGE PRICE OF THE TRANSACTIONS ENT ERED INTO ON 29.05.2008,THAT THE TPO HAD PICKED UP THE LOWEST RATE . IN OUR OPINION PICKING UP OF A CONVENIENT OR FAVOURABLE DATA IS NOT A PROPER METHOD TO DETERMINE THE ALP.AS PER THE PROVISIONS OF SECTION 92C(2)OF THE ACT AN ARITHMETIC MEAN OF T HE PRICES HAS TO BE ADOPTED AS 2255 & 2070/M/14-PETROCHEMMEIPL 4 THE ALP WHEN MORE THAN ONE COMPARABLE PRICE IS AVAI LABLE.IN THE CASE UNDER CONSIDERATION THE ASSESSEE HAD ADOPTED THE ARITHMET IC MEAN,WHICH ACCORDING TO US,WAS A JUSTIFIABLE STEP CONSIDERING THE PECULIAR FACTS OF THE CASE.WE FIND THAT THE TPO HIMSELF HAD USED AVERAGE OF THREE TRANSACTIONS FOR BENCHMARKING THE TRANSACTION OF MONO ETHYLENE GLYCOL.CONSIDERING ALL THESE FACTS WE HOLD THAT THE APPROACH OF THE TPO AND THE DRP WAS NOT AS PER THE PROVISIONS OF THE ACT. 5 .NEXT TRANSACTION IS ABOUT IMPORT OF 1 LAKH KGS.OF MALEIC ANHYDRIDE.THE ASSESSEE HAD PURCHASED THE GOODS@ RS.76.55 PER KG.IT ARRIVED AT THE AVERAGE RATE OF RS.76.88 PER KG.AS THE CUP RATE.THE TPO ADOPTED THE RATE OF RS.68.76 PER KG.WHICH WAS THE LOWEST RATE OF ALL THE TRANSACTION S OF 01. 08.2008.THE DRP UPHELD THE ORDER OF THE TPO HOLDING THAT THE ASSESS EE HAD MENTIONED THAT AVERAGE TAKEN BY IT CONSIDERED THE VOLUME TO TRANSACTIONS A LSO. 5.1. BEFORE US,THE AR STATED VOLUME OF THE PRODUCT DID N OT IMPACT THE RATES OF THE PRODUCTS,THAT AVERAGE OF ALL THE QUANTITIES OF THE DAY WERE IGNORED,THAT THE ASSESSEE HAD TAKEN THE ARITHMETICAL MEAN OF THE PRICE AS ALP .DR RELIED UPON THE ORDER OF THE TPO. 5.2. WE FIND THAT THE ASSESSEE HAD TAKEN THE AVERAGE PRI CE FOR DETERMINING THE ALP,WHEREAS THE TPO HAD TAKEN THE LOWEST PRICE.AS H ELD EARLIER THE PRACTICE OF CHERRY PICKING SHOULD BE AVOIDED WHILE INVOKING THE PROVISIONS OF CHAPTER X OF THE ACT.FROM THE DATE IT IS CLEAR THAT 1.20 LAKH KG S. GOODS WERE PURCHASED @ RS.78.43 RS.PER KG.SIMILARLY, 41,000KGS.GOODS WERE PURCHASED @RS.76.28 PER KG.WE ALSO FIND THAT THE TPO HAD ACCEPTED THE ASSES SEES CUP DT.30.7.2008 WHILE DETERMINING THE ALP OF TRANSACTION DT.29.7.08 FOR A TRANSACTION OF ONE LAKH KGS. (PG-92 OF THE PB).CONSIDERING THESE FACTS WE FIND T HAT THE ASSESSEE HAD IMPORTED THE MATERIAL AT THE RATE WHICH FITS WITHIN THE 5% RANGE OF THE CUP RATE.THE TRANSACTION IS AT ARMS LENGTH. 6. THE NEXT TRANSACTION PERTAINS TO MOSSTANOL L .THE A SSESSEE HAD IMPORTED 4 LAKH KGS OF MOSSTANOL L ON 16.12.08 @RS.15.13 PER KG.THE TPO COMPARED MOSSTANOL L WITH ETHYL ALCOHOL (PG107 OF THE PB) AS THE TPO HAD MADE THE ADJUSTMENT MADE ON WRONG COMPARABLES, THE ADDITION MADE BY HIM IS DELETED. 7. NOW WE WOULD TAKE THE IMPORT OF MONO ETHYLENE GLYCO L (MEL) . ON 27.1.09 THE ASSESSEE HAD IMPORTED 9.91 LAKHS KGS OF MRL @ RS.25 .87 PER KG. AS THE COMPARABLE DATE FOR THAT DATE WAS NOT AVAILABLE IT USED THE DATA OF 31.1.2009. AS AGAINST THE RATE OF RS.26.71 PER KG THE TPO TOOK TH E AVERAGE OF RS.21.74 PER KG 2255 & 2070/M/14-PETROCHEMMEIPL 5 BASED ON THE DATA OF 23.1.2008.THE DRP FOLLOWING IT S ORDER FOR THE EARLIER TRANSACTION UPHELD THE ORDER OF THE TPO. 7.1. BEFORE US, THE AR CONTENDED THAT THE ASSESSEE HAD U SED CUP DATED 30.1.2009, THAT THE TPO HAD USED 23.1.2009, BUT THE DATE USED BY THE TPO WAS FURTHER AWAY THAN THE CUP WHICH THE ASSESSEE HAD USED. THE DR SU PPORTED THE ORDER OF THE DR. 7.2. WE FIND THAT THE ASSESSEE HAD IMPORTED MEL ON 27.1 .2009 @ RS.25.87 PER KG, THAT THE CUP RATE AS ON 30.1.2009 WAS RS.26.71 PER KG, THAT THE RATE ADOPTED BY THE ASSESSEE FITS WITHIN THE 5% OF THE CUP RA NGE.IN OUR OPINION THE DATE CHOSEN BY THE ASSESSEE WAS MORE APPROPRIATE THAN T HE DATE ADOPTED BY THE TPO. THE DRP ITSELF HAD HELD THAT NEAREST CUP DATA SHOUL D BE CONSIDERED.IN THE CASE UNDER CONSIDERATION THE ASSESSEE HAD ADOPTED THE D ATA OF 30 TH JANUARY WHICH WAS THE NEAREST DATE FOR THE TRANSACTION IN QUESTION.TH EREFORE, IN OUR OPINION ADJUSTMENT MADE BY THE TPO WAS NOT PROPER. 8. NOW WE WOULD TAKE TRANSACTION NO.6 .THE ASSESSEE H AD PURCHASED 4 LAKH KGS OF TOLUENE @RS.26.38 PER KG.SINCE THE COMPARABLE DATA FOR 12.2.2009 WAS NOT AVAILABLE THE ASSESSEE USED THE DATA OF 16.2.2009 (RS.26.83 PER KG).THE TPO CHOSE TO USE DATA FOR 31.1.2009 (RS.24.10 PER KG.). THE DRP UPHELD THE ORDER OF THE TPO REFERRING TO THE EARLIER TRANSACTIONS. 8.1 BEFORE US, THE AR MADE SAME SUBMISSIONS MADE FOR TH E EARLIER YEAR AND STATED THAT IT HAD IMPORTED THE GOODS AT A LOWER RATE, THA T THE TRANSACTION HAD TO BE CONSIDERED AT ALP. WE FIND THAT THE DATE CHOSEN BY THE ASSESSEE IS NEA R TO THE DATE OF TRANSACTION, THAT THE TPO HAD NOT CHOSEN THE TRANSACTION OF 18.2.2009 WHERE 4 LAKHS KGS OF TOULENE WAS IMPORTED @ RS.29.31 PER KG(PG-106 OF THE PB) .C ONSIDERING THE ABOVE FACTS WE ARE OF THE OPINION THAT ADJUSTMENT MADE BY THE T PO CANNOT BE SUSTAINED. IN SHORT,ALL THE ADDITIONS MADE BY THE TPO (FOR SIX TRANSACTIONS) ARE DIRECTED TO BE DELETED.GROUND NO.2 IS DECIDED IN FAVOUR OF THE ASS ESSEE. ITA 2070/MUM/2014 9. THE EFFECTIVE GROUND OF APPEAL IS ABOUT DELETION OF NOTIONAL INTEREST AMOUNTING TO RS.60.20 LAKHS ON SHORTFALL IN PREMIUM ON ACCOUN T OF ISSUE OF SHARES. 9.1. BEFORE US, THE DR AND THE AR STATED THAT ISSUE NOW STANDS COVERED AGAINST THE AO BY THE JUDGMENTS OF VODAFONE INDIA PVT. LTD. (S UPRA) AND SHELL INDIA MARKETS 2255 & 2070/M/14-PETROCHEMMEIPL 6 (P) LTD.(369 ITR 516) OF THE HON'BLE BOMBAY HIGH CO URT.WE FIND THAT IN THE CASE SHELL INDIA MARKETS (P) LTD. (SUPRA), THE HONBLE C OURT HAS HELD UNDER :- THEREFORE, FOLLOWING THE AFORESAID DECISION WE SET ASIDE THE ORDER DATED 30 JANUARY 2013 OF THE TPO TO THE EXTENT IT HOLDS THAT ALP OF ISSUE OF EQUITY SHARES IS RS.183.44 PER SHARE AS AGAINST RS.10 PER SHARE AS DECLARED BY THE PETIT IONER AND CONSEQUENT DEEMED INTEREST BROUGHT TO TAX ON THE AMOUNT NOT RECEIVED WHEN BENC HMARKED TO THE ALP. ACCORDINGLY, WE SET ASIDE THE DRAFT ASSESSMENT ORDER DATED 30 MARCH 2013 TO THE EXTENT IT SEEKS TO BRING TO TAX THE ALP OF THE SHARE ISSUED BY THE PETITIONER T O ITS NON RESIDENT AES AND ALSO DEEMED INTEREST WHICH IS SOUGHT TO BE BROUGHT TO TAX ON TH E GROUND OF NON RECEIPT OF THE CONSIDERATION EQUIVALENT TO THE ALP BY THE PETITION ER ON ISSUE OF EQUITY SHARES. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENTS OF THE H ON'BLE JURISDICTIONAL HIGH COURT, WE DECIDE THE EFFECTIVE GROUND OF APPEAL AGA INST THE AO. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS AL LOWED AND THE APPEAL OF THE AO STANDS DISMISSED. . ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH APRIL, 2016. 27 , 2016 SD/- S D/- ( . . / 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.