Igarashi Motors India Ltd., CHENNAI V. ACIT, CHENNAI

ITA 2257/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2465 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 17-06-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 17-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHAJI P JACOB IRS
• Assessee Lawyers: T BANUSEKAR
• Keywords: Transfer pricing; Principle of natural justice; International transaction
• Section: 92C; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO.2257(MDS)/2012 ASSESSMENT YEAR : 2008-09 M/S. IGARASHI MOTORS INDIA LTD., PLOT NO.B-12 TO B-15, PHASE-II, MEPZ-SEZ, CHENNAI-600 045. PAN AAACC1305R. VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE II(3), CHENNAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI T.BANUSEKAR, FCA RESPONDENT BY : SHRI SHAJI P JACOB, IRS, ADDL.CIT DATE OF HEARING : 17 TH JUNE, 2013 DATE OF PRONOUNCEMENT : 17 TH JUNE, 2013 O R D E R PER DR.O.K.NARAYANAN, VICE PRESIDENT THIS APPEAL FILED BY THE ASSESSEE RELATES TO THE ASSESSMENT YEAR 2008-09. THIS IS A TRANSFER PRICIN G APPEAL. THE APPEAL IS DIRECTED AGAINST THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3), READ WITH SECTION 144C(1) OF THE INCOME- TAX ACT, 1961. - - ITA 2257 OF 2012 2 2. THE GROUNDS RAISED BY THE ASSESSEE IN THE PRESE NT APPEAL READ AS BELOW:- 1. FOR THAT THE ORDER OF THE IS WITHOUT JURISDICTI ON, CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CAS E AND AT ANY RATE IS OPPOSED TO THE PRINCIPLES OF EQU ITY, NATURAL JUSTICE AND FAIR PLAY. 2. FOR THAT THE ASSESSING OFFICER ERRED IN REVISING THE ARMS LENGTH PRICE IN THE CASE OF THE APPELLANT AND CONSEQUENTLY MAKING AN ADDITION OF ` 4,11,00,000/- ON THIS ACCOUNT. 3. FOR THAT THE ASSESSING OFFICER FAILED TO APPRECI ATE THAT WHEN THE ASSOCIATED ENTERPRISE OF THE APPELLAN T HAD ITSELF MADE LOSSES ON ITS INDIAN TRANSACTIONS, IT WAS CLEAR THAT THE APPELLANT HAD NOT TRANSFERRED PR OFITS OUT OF INDIA. 4. FOR THAT WHILE DETERMINING THE ARMS LENGTH PRI CE, THE ASSESSING OFFICER ERRED IN NOT CONSIDERING AVAILABLE INTERNAL COMPARABLES AND INSTEAD RELIED O N EXTERNAL COMPARABLES. 5. FOR THAT WITHOUT PREJUDICE TO THE ABOVE CONTENT ION THAT INTERNAL COMPARABLES SHOULD BE CONSIDERED, THE ASSESSING OFFICER ERRED IN APPLYING THE DIFFERENCE BETWEEN (AGGREGATE PLI OF THE ASSESSE) AND (THE PLI - - ITA 2257 OF 2012 3 OF THE COMPARABLES) TO THE ASSOCIATED ENTERPRISE SALES, INSTEAD OF APPLYING THE DIFFERENCE BETWEEN ( PLI OF THE ASSOCIATED ENTERPRISE TRANSACTIONS) AND (THE PLI OF THE COMPARABLES) TO THE ASSOCIATED ENTERPRISE SALES. 6. FOR THAT WHILE COMPUTING THE PLI OF THE APPELLA NT, THE ASSESSING OFFICER ERRED IN REJECTING THE FOLLOW ING ADJUSTMENTS TO OPERATING COST SOUGHT BY THE APPELLA NT: IMPACT OF HIGHER MATERIAL COSTS IMPACT OF DELAYED INDIGENIZATION IMPACT OF PREMIUM FREIGHT COSTS IMPACT OF THE QUALITY COSTS IMPACT OF THE SELLING EXPENSES OF DOMESTIC PRODUCT IMPACT OF THE EXCHANGE FLUCTUATION IMPACT OF THE PROVISION MADE FOR OUTSTANDING DERIVATIVE CONTRACTS. 7. FOR THAT WITHOUT PREJUDICE TO THE ABOVE, THE ASSESSING OFFICER FURTHER ERRED IN FAILING TO APPRE CIATE THAT THE PROVISION FOR OUTSTANDING DERIVATIVE CONTR ACT WAS ALREADY ADDED BACK IN COMPUTING THE TOTAL INCOM E AND THAT THE PROVISION WAS IN THE NATURE OF FINANCE CHARGES AND THAT THEREFORE THERE WAS A NEED TO ADJU ST THE SAME IN ARRIVING AT THE PLI. 8. FOR THAT CONSEQUENTLY, THE ASSESSING OFFICER E RRED IN COMPUTING THE PLI OF THE APPELLANT COMPANY AT 3.54% INSTEAD OF 3.88% AS COMPUTED BY THE APPELLANT COMPANY. - - ITA 2257 OF 2012 4 9. FOR THAT THE ASSESSING OFFICER ERRED IN NOT ALL OWING ADJUSTMENT OF BROUGHT FORWARD LOSSES. 10. FOR THAT THE ASSESSING OFFICER FAILED TO APPRE CIATE THAT ADJUSTMENT COULD ONLY BE MADE TO THE PROFIT OF THE COMPARABLES AND NOT TO THE PROFIT OF THE APPELLANT. 11. FOR THESE GROUNDS AND SUCH OTHER GROUNDS THAT MAY BE URGED BEFORE OR DURING THE HEARING OF THE APPEAL IT IS MOST HUMBLY PRAYED THAT THE HONBLE TRIBUNAL MAY BE PLEASED TO A) DELETE THE ADDITION OF ` 4,11,00,000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ADJUSTMENT IN ARMS LENGTH PRICE. B) PASS SUCH OTHER ORDERS AS THE HONBLE TRIBUNAL MAY DEEM FIT. 3. IN THE LIGHT OF THE ABOVE GROUNDS, THE VITAL DI SPUTES EXAMINED BY THE TRIBUNAL AT THE TIME OF HEARING ARE TWO-FOLD; THE FIRST ONE RELATING TO THE ARITHMETICS OF COMPUTING THE DIFFERENCE BETWEEN THE PROFIT LEVEL INDICATOR (PLI) OF THE ASS ESSEE AND THE PLI OF THE COMPARABLES, AND THE SECOND ONE BEING TH E NON ADJUSTMENT OF EXTRA-ORDINARY ITEMS IN WORKING OUT T HE PLI OF THE ASSESSEE. - - ITA 2257 OF 2012 5 4. REGARDING THE FIRST ISSUE, THE PLI OF COMPARABL ES IS 2.27%. THIS IS UNDISPUTED. PLI OF THE ASSESSEE WI TH ASSOCIATE ENTERPRISE (AE) IS 1.13%. THIS IS ALSO UNDISPUTED. THEREFORE, THE ADDITION CALLED FOR SHOULD BE TO THE EXTENT OF THE DIFFERENCE BETWEEN THE PLI OF COMPARABLES AND THE PLI OF THE A SSESSEE WITH AE. THIS DIFFERENCE WORKS OUT TO 2.27% MINUS 1.13%, WHICH IS EQUAL TO 1.14%. BUT, THE TRANSFER PRICING OFFIC ER (TPO), ON THE OTHER HAND, HAS WORKED OUT THE DIFFERENCE AT 5. 81%. THE PLI OF THE ASSESSEE-COMPANY AS A WHOLE IS -3.54%. THE ASSESSING OFFICER WORKED OUT THE DIFFERENCE BY ADDING THIS -3 .54% AND THE PLI OF COMPARABLES AT 2.27%. PRIMA FACIE, THE WORK ING OUT MADE IS ERRONEOUS. WHEN THE PLI OF COMPARABLES IS 2.27% AND THE PLI OF THE ASSESSEE WITH AE IS 1.13%, BOTH BEING UN DISPUTED, THE ADDABLE DIFFERENCE SHOULD BE 1.14%. WE ACCEPT THIS CONTENTION OF THE ASSESSEE. 5. WHEN THE DIFFERENCE IS ADOPTED AT 1.14%, THE ADJUSTMENT TO BE MADE WOULD BE ` 1 CRORE. THE AE TURNOVER OF THE ASSESSEE IS ` 87.78 CRORES. 1.14% OF THE ABOVE TURNOVER IS ` 1 CRORE. THIS IS THE AMOUNT TO BE ADJUSTED. BUT, WHILE MAKING THE COMPUTATION, THE AUTHORITIES HAVE ADDED BACK TH E PROVISION - - ITA 2257 OF 2012 6 FOR OUTSTANDING DERIVATIVE CONTRACTS. THIS PROVISI ON IS OF ` 60 LAKHS. IT IS VERY CLEAR FROM THE COMPUTATION OF TH E ASSESSEE THAT THE SAID PROVISION FOR OUTSTANDING DERIVATIVE CONTR ACTS WAS ALREADY ADDED BACK IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. THEREFORE, THE FURTHER ADDITION MADE BY THE ASSESSING OFFICER HAS RESULTED IN DUPLICATION. THE REFORE, THIS ADDITION OF ` 60 LAKHS IS TO BE DELETED. WE ORDER SO. 6. WHEN THE AMOUNT OF ` 60 LAKHS IS DEDUCTED FROM THE ADJUSTMENT OF ` 1 CRORE, THE BALANCE OF ADJUSTMENT IS ` 40 LAKHS. 7. NEXT WE WILL CONSIDER THE GROUND RELATING TO NO N CONSIDERATION OF EXTRA-ORDINARY ITEMS. IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2007-08, THROUGH THEIR ORDER DA TED 31 ST OCTOBER, 2012 PASSED IN ITA NO.12(MDS)/2012, THE IN COME-TAX APPELLATE TRIBUNAL, CHENNAI BENCH-B, CHENNAI HAS CO NSIDERED THE VERY SAME ISSUE. FOR THAT ASSESSMENT YEAR ALSO , THE TPO VIS A VIS THE ASSESSING OFFICER DECLINED TO EXCLUDE EXTRA-ORDINARY ITEMS WHILE COMPUTING THE OPERATING PROFITS OF THE ASSESSEE. IN THIS REGARD THE TRIBUNAL HAS HELD AS FOLLOWS AT PAG ES 9 AND 10 OF THEIR ORDER:- - - ITA 2257 OF 2012 7 16. RULE 10B OF THE INCOME-TAX RULES, 1962 PROVIDES FOR THE DETERMINATION OF ALP UNDER SECTION 92C OF THE INCOME-TAX ACT, 1961. SUB-CLAUSE(E) OF RULE 10B(1) PROVIDES FOR TRANSACTIONAL NET MARGIN METHOD TO DETERMINE THE ALP. THE TNMM EMPLOYED IN THE PRESENT CASE BY THE ASSESSEE HAS BEEN EMPLOYED BY THE TPO. WHEN THE TPO HAS ACCEPTED THE TNMM ADOPTED BY THE ASSESSEE, THE ENTIRE RULES RELATING TO TNMM OUGHT TO HAVE BEEN APPLIED BY THE TPO. THE NET PROFIT MARGIN REALIZED BY THE ENTERPR ISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO CO STS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE. THE RULE HAS PROVIDED FOR TH E DISCRETIONARY USE OF THE COST INPUTS. IT IS IN THI S CONTEXT THAT ONE HAS TO BEAR IN MIND THAT EXTRAORDINARY ITE MS HAVE TO BE EXCLUDED FROM THE NORMAL REALM OF COMPUTATION FOR THE PURPOSE OF COMPARISON. SUB- RULE(3) OF RULE 10B FURTHER PROVIDES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF DIFFERENCES BETWEEN THE TRANSACTIONS BEI NG COMPARED. - - ITA 2257 OF 2012 8 8. IN VIEW OF THE ABOVE, WE HAVE TO SEE THAT THE T PO OUGHT TO HAVE CONSIDERED THE EXTRA-ORDINARY ITEMS W HILE FINALIZING THE ARMS LENGTH PRICE (ALP) COMPUTATION. THEREFOR E, WE ARE OF THE OPINION THAT PROPER WEIGHTAGE HAS TO BE GIVEN F OR ALL THESE EXTRA-ORDINARY ITEMS EXPLAINED BY THE ASSESSEE BEFO RE THE TPO. 9. IN THE LIST OF EXTRA-ORDINARY ITEMS EXPLAINED B Y THE ASSESSEE, THE FREIGHT COMPONENT DISALLOWANCE COMES TO ` 2,10,00,000/-. IN PARAGRAPH ABOVE THE AMOUNT OF A LP ADJUSTMENT REWORKED OUT AT THE FIRST INSTANCE IS ` 40 LAKHS. WHEN THIS SINGLE ITEM OF FREIGHT COMPONENT AMOUNTIN G TO ` 2,10,00,000/- ITSELF IS CONSIDERED, THE SAID AMOUN T OF ` 40 LAKHS WILL BE ABSORBED. THEREFORE, VIRTUALLY SPEAKING, T HERE WILL BE NO OPERATING PROFIT AVAILABLE FOR MAKING ALP ADJUSTMEN T WHEN THE EXTRA-ORDINARY ITEMS ARE GIVEN DUE TREATMENT. THER EFORE, TO MAKE THE MATTER SIMPLE, WE HOLD THAT NOTHING WILL B E REMAINED TO MAKE ANY ADDITION BY WAY OF ALP ADJUSTMENT IN THE P RESENT CASE. THEREFORE, WE DELETE THE ENTIRE ALP ADJUSTME NT MADE BY THE ASSESSING AUTHORITY IN HIS ORDER. 10. WE ALSO FIND THAT THE TP ANALYSIS OF THE ASSES SEE- COMPANY FOR THE ASSESSMENT YEAR 2006-07 HAS RESULTE D IN - - ITA 2257 OF 2012 9 ACCEPTING THE ALP DISCLOSED BY THE ASSESSEE AND NO ADJUSTMENT WAS MADE FOR THAT ASSESSMENT YEAR. FOR THE SUBSEQU ENT ASSESSMENT YEAR 2007-08 ALSO, THE TRIBUNAL HAS ACCE PTED THE CONTENTIONS OF THE ASSESSEE AND HAS MODIFIED THE AD DITIONS MADE BY THE TPO VIS--VIS THE ASSESSING OFFICER. T HE IMPUGNED CASE FOR THE ASSESSMENT YEAR 2008-09 IS TO BE VIEWE D IN THE ABOVE BACKGROUND. 11. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF T HE CASE WE ALLOW THE APPEAL FILED BY THE ASSESSEE. ORDERS PRONOUNCED IN THE OPEN COURT AT THE TIME O F HEARING ON MONDAY, THE 17 TH OF JUNE, 2013 AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED, THE 17 TH JUNE, 2013. V.A.P. COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR 6. GF.