SC ENVIRO AGRO INDIA P.LTD, MUMBAI V. ASST CIT 3(3), MUMBAI

ITA 258/MUM/2014

AI Insights

The case involves SC Enviro Agro India Pvt. Ltd., which appealed against the order of the Commissioner of Income-tax (Appeals)-15, Mumbai, concerning the assessment order passed by the Deputy Commissioner of Income-tax under Section 143(3) of the Income-tax Act, 1961 for the assessment year 2008-09. The primary contention was regarding the adjustments made by the Transfer Pricing Officer (TPO) to the international transactions of the assessee, specifically the purchase of intermediaries and royalty payments to its associated enterprise, Sumitomo Chemicals Company Ltd., Japan. The TPO had rejected the assessee's transfer pricing study report, which was based on a single comparable, and made adjustments after selecting fifteen comparables. The CIT(A) upheld these adjustments, leading to the present appeal.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299674 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s) 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: J
• Next Hearing Date: 23-03-2023
• Assessment Year: 2008-2009
• Appeal Filed On: 08-01-2014
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Set aside
• Section: 2; 92C; 143(3); 92; 92F; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI SANDEEP SINGH KARHAIL, JM ITA No. 258/Mum/2014 (Assessment Year:2008-09) M/ s SC En v ir o Ag r o I n d i a P vt . L t d . 33 rd , 3 rd F l o o r , Ma k e r Ch a m b e r s VI , 2 2 0 N a r im a n Po in t , Mu m b a i-4 0 0 0 2 1 Vs. Asst. Commissioner of Income Tax, Circle 3(3) Rm. No.609, 6 th Floor, Aaykar Bhavan Mumbai-400 020 (Appellant) (Respondent) PAN No. AAFCS6405F Assessee by : Shri Madhur Agrawal, AR Revenue by : Shri B.K. Bagchi, Sr. AR Date of hearing: 24.03.2023 Date of pronouncement : 27.03.2023 O R D E R PER PRASHANT MAHARISHI, AM: 01. This appeal is filed by assessee for A.Y. 2008-09 against the order of the Commissioner of Income-tax (Appeals)-15, Mumbai, dated 24 th October, 2013, by which the appeal is filed by the assessee against the assessment order of the learned Dy. Commissioner of Income- tax, 3(3), Mumbai (the learned Assessing Officer) passed on 14 th February, 2012 under Section 143(3) of the Income-tax Act, 1961 (the Act) for A.Y. 2008-09 was dismissed. 02. The assessee is aggrieved with that and has raised following grounds of appeal;- “Each of the grounds of appeal is independent and without prejudice to the other. Page | 2 ITA No. 258/Mum/2014 SC Enviro Agro India P. Ltd; A.Y. 08-09 1. The Learned Commissioner of Income Tax (Appeals) ['Ld. CITIA)'] grossly erred, in facts and in law, in rejecting the appellants application of additional evidence under Rule 46A which pertained to fresh search process conducted by appellant following the filters/ criterion adopted by the Learned Transfer Pricing Officer ("Ld.TPO), as the set of comparable companies selected by Ld.TPO did not include various companies which ought to have been selected by Ld.TPO. 2. The Ld.CIT(A) grossly erred, in facts and in law, in confirming the addition of Rs. 2,53.19.020/- made by the Ld. TPO x 92CA of Income-tax Act, 1961 (ITA) in respect of appellant's international transaction of purchase of intermediates from its associated enterprise (AE) Sumitomo Chemicals Company Ltd. 2.1. The Ld.CIT(A) failed to appreciate that the price at which intermediates are purchased from Associated Enterprise is at arms length price and no further adjustment is called for u/s 92 of ITA. 2.2. The Ld.CIT(A) grossly erred, in facts and in law, by upholding the companies selected by the Ld.TPO as functionally comparable to the appellant. 2.3. The Ld.CIT(A) grossly erred, in facts and in law, by upholding the computation of operating profit margin of comparable companies made by Ld.TPO, despite the fact that the operating profit margin computation done by Ld. TPO includes various non- operating income and non- operating expenditure. 2.4. The Ld.CIT(A) grossly erred, in facts and in law, by not rejecting the following three (3) companies selected by Ld.TPO as comparable, despite the fact that these three companies are having substantial related party transactions (i.e. related party Page | 3 ITA No. 258/Mum/2014 SC Enviro Agro India P. Ltd; A.Y. 08-09 transactions > 25%). Ld.CIT (A) ought to have rejected following three companies having substantial related party transactions: i. Monsanto India Ltd. ii. United Phosphorus Ltd. iii. Syngenta India Ltd 3. The Ld. CIT (A) grossly erred, in facts and in law, in not adjudicating the appellant's ground of appeal regarding royalty payment. 3.1. The Ld. CIT (A) grossly erred, in facts and in law, by not adjudicating the appellant's ground of appeal regarding determination of arms length price of royalty payment of Rs. 1,00,89,433/- at NIL by Ld.TPO, despite the fact that the Ld.TPO, while making transfer pricing adjustment of Rs. 2,53,19,020/- had categorically made a reference in his order to his finding that arms length price of royalty paid to AE is NIL. 3.2. The Ld.CIT(A) grossly erred, in facts and in law, in concluding that Ld.TPO has not made any separate addition in respect of international transaction of royalty payment whereas the finding of Ld.TPO in his order u/s 92CA of ITA are otherwise. 3.3. Ld.CIT (A) grossly erred in facts and in law, in not allowing the appellant's claim that royalty of Rs. 1,00,89,433/ paid to associated enterprise at 5% is arms length and hence no transfer pricing adjustment is warranted u/s 92 of ITA in this regard. Page | 4 ITA No. 258/Mum/2014 SC Enviro Agro India P. Ltd; A.Y. 08-09 3.4. The Ld.CIT (A) grossly erred, in fact and in law, in not appreciating that the Ld.TPO erred in holding that appellant is a 'Contract Manufacturer. 3.5. The Ld.CIT(A) grossly erred, in facts and in law, in not appreciating that the Ld.TPO has not adopted any particular prescribed method for determination of arm's length price of royalty as per provisions of Section 92C of ITA and hence determination of arms length price of royalty at NIL by Ld.TPO is not in accordance with provision of Sec 92 to 92F of ITA and thus not sustainable in law. 4. The appellant craves leave to add, alter, amend or delete all or any of the ground or sub-ground of appeal before or during the course of hearing.” 03. Fact shows that assessee is a company engaged in the business of manufacturing insecticides and pesticides, technical and its intermediates chemicals. Assessee filed its return of income on 29 th September, 2008 at a total income of ₹1,12,35,277/-. The return of the assessee was picked up for scrutiny by issue of notice on 28 th August, 2009. 04. Assessee has entered into three international transactions. Assessee purchased intermediates from its Associated Enterprises of ₹43,47,45,523/- and also paid royalty for use of license amounting to ₹1,89,433/-. In its transfer pricing study report assessee selected only one comparable, aggregated both the above transactions, selected most appropriate method as Transactional Net Margin Method (TNMM) selecting only one comparable whose profit before tax was 3.67% and similar PLI of the assessee was 6.03% and accordingly, submitted that its international transactions of purchase of intermediates and payment of royalty are at Arm’s Length Price. The third international transaction was with reimbursement of Page | 5 ITA No. 258/Mum/2014 SC Enviro Agro India P. Ltd; A.Y. 08-09 expenses amounting to ₹15,31,767/-, adopting Comparable Uncontrolled Price (CUP) method stated to be at Arm's Length Price. 05. The learned Transfer Pricing Officer rejected the TPSR as it was based only one comparable, carried out further fresh search and issued show cause notice to the assessee. After considering the reply of the assessee, the learned Transfer Pricing Officer selected fifteen comparables whose PLI was computed at 13% and computed the PLI of assessee at 10.13% made an adjustment of ₹1,52,29,587/- on account of purchase of intermediaries. 06. With respect to the payment of royalty, considering the prior transfer pricing audit orders held that assessee has failed to prove economic justification of royalty paid to its Associated Enterprises Sumitomo Chemicals Company Limited, Japan. The learned Transfer Pricing Officer held that assessee is a contract manufacturer to its Associated Enterprises in Japan and therefore, there is no requirement of payment of royalty. Accordingly, the Arm's Length Price of royalty payment of ₹1,89,433/- was determined at ₹ Nil. 07. Order under Section 92CA(3) of the Act was passed on 25th October, 2011 making a total adjustment of ₹2,53,19,020/-. Based on this, the learned Assessing Officer passed an assessment order under Section 143(3) of the Income-tax Act, 1961 (the Act) on 14th February, 2012 determining the total income of the assessee of ₹3,65,54,300/-. 08. Aggrieved by that order assessee preferred the appeal before the learned CIT (A). Assessee also filed fresh search conducted as additional evidence which were rejected by the learned CIT (A). On the merits, he upheld both the adjustment made by the learned Transfer Pricing Officer. Accordingly, assessee aggrieved with that has preferred this appeal. 09. Before us, the learned Authorized Representative submitted that the learned Transfer Pricing Officer has made an adjustment at the entity level and not on the international transactions. If such addition is Page | 6 ITA No. 258/Mum/2014 SC Enviro Agro India P. Ltd; A.Y. 08-09 restricted to the international transactions only the adjustment would fall within the benefit +- 5% of 92CA (2) of the Act. Therefore, the purchase price of numerous intermediaries of ₹43,47,046/- would fall within the margin of ±5%. 010. With respect to royalty it was submitted that in the subsequent year the learned Transfer Pricing Officer himself has accepted that the payment of royalty to Sumitomo Japan is at Arm's Length Price. 011. The learned Departmental Representative fairly agreed that the adjustment should be made only to the extent of international transaction With respect to the Arm's Length Price working of purchase of intermediaries. With respect to the royalty it was submitted that if in the subsequent year the learned Transfer Pricing Officer has held that it to be at Arm's Length Price and there is no change in the facts and circumstance of the case, the matter may be sent to the learned Transfer Pricing Officer to decide the issue in accordance with the law. 012. We have carefully considered the rival contentions and perused the orders of the lower authorities. With respect to the adjustment proposed by the learned Transfer Pricing Officer and confirmed by the learned CIT (A), we are of the opinion that adjustments should be restricted to the extent of international transactions only. The statement submitted by the assessee shows that if adjustment is made to the international transactions, the assessee falls within the benefit of range of ±5%. In view of this, we direct the learned Assessing Officer to examine the statement of the assessee and if the adjustment to be made an international transaction falls within the range of 5%, addition deserves to be deleted. 013. It is the claim of the learned Authorized Representative that in subsequent years in TP adjustment the learned Transfer Pricing Officer has accepted Arm's Length Price of the royalty as benchmarked by the assessee. If this fact is correct and there is no change in the facts and circumstances of the case, after examining Page | 7 ITA No. 258/Mum/2014 SC Enviro Agro India P. Ltd; A.Y. 08-09 the learned Transfer Pricing Officer is directed to decide the issue afresh. 014. Assessee is directed to submit working of adjustment with respect to purchase of intermediaries as well as the TP assessment order when the benchmarking of royalty payment was accepted by the learned Transfer Pricing Officer at Arm's Length Price in subsequent years. 015. No other arguments were advanced before us. 016. In view of this with above two directions, we set aside the appeal of the assessee back to the file of the learned Transfer Pricing Officer. 017. In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 27.03.2023. Sd/- Sd/- (SANDEEP SINGH KARHAIL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 27.03. 2023 Sudip Sarkar, Sr.PS Page | 8 ITA No. 258/Mum/2014 SC Enviro Agro India P. Ltd; A.Y. 08-09 Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai