R. Stahl Pvt. Ltd., Kancheepuram V. DCIT, CHENNAI

ITA 2745/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4856 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 06-03-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 22-09-2016
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATTU PEERYA
• Keywords: Transfer pricing; Working capital adjustments

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , ! ' ! # . $ % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.2745/MDS./2016 / ASSESSMENT YEAR : 2012-13 M/S.R.STAHL PRIVATE LIMITED, PLOT NO.5,MALROSAPURAM MAIN ROAD, SENGUDRAM INDUSTRIAL AREA, SINGAPERUMAL KOIL, MALROSAPURAM POST, KANCHEEPURAM DIST.- 603 204 VS. THE DCIT, CORPORATE CIRCLE-5(2), 4 TH FLOOR, M G ROAD, CHENNAI 600 03E4. [PAN AAACB2538 F ] ( () / APPELLANT) ( *+() /RESPONDENT) / APPELLANT BY : MR.SRIRAM SESHADRI, C.A /RESPONDENT BY : MR.PATHLAVATTU PEERYA, CIT D.R / DATE OF HEARING : 06 - 03 - 201 7 / DATE OF PRONOUNCEMENT : 19 - 04 - 2017 , / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL IS FILED BY THE ASSESSEE DIRECTED AGAIN ST THE ASSESSMENT ORDER DATED 21.07.2016 PASSED U/S.143(3) R.W.S. 92CA R.W.S144C(1) OF THE ACT AND THE DIRECTIONS OF THE DRP PASSED U/S.144C(5) OF THE ACT ON 28.06.2016 FOR THE ASSESSMENT YEAR 2012-13. ITA NO.2745/16 :- 2 -: 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS F OR OUR ADJUDICATION. 1. THE IA. AO, LD. DRP AND LD. TPO HAVE ERRED IN FI NALIZING AN ORDER OF ASSESSMENT WHICH IS AGAINST THE PRINCIPLES OF NATUR AL JUSTICE, VIOLATIVE OF PROVISIONS OF THE ACT, DEVOID OF MERITS, WITHOUT APPRECIATING THE FACT INVOLVED, WITHOUT APPRECIATING THE DOCUMENTS S UBMITTED IN PROPER LIGHT, WITHOUT CONDUCTING ADEQUATE INQUIRIES AND AS SUCH IS WITHOUT JURISDICTION. 2. THE IA. TPO HAS FINALIZED HIS ORDER WITH IMPROPE R ADJUSTMENTS, AS A RESULT OF MISAPPLYING THE LAW PERTAINING TO TP AND BY ADOPTING FAULTY PROCESSES/METHODOLOGIES TO FINALIZE THE ADJUSTMENT, SUCH AS BUT NOT LIMITED TO, APPLYING FILTERS, FUNCTIONAL ANALYSIS, SELECTION OF COMPARABLE COMPANIES, COMPUTATION OF PROFIT MARGINS OF APPELLANT AND COMPARABLE COMPANIES AND UNDERTAKING ECONOMIC A DJUSTMENTS. 3. THE LD. AO, LD. DRP AND LD. TPO HAVE ERRED IN NO T GRANTING THE ADJUSTMENT FOR DIFFERENCES IN WORKING CAPITAL LEVEL S BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES. A. THE LD. DRP HAS INCORRECTLY REASONED THAT THE CO MPUTATION OF THE WORKING CAPITAL ADJUSTMENT SUBMITTED BY THE APPELLA NT DURING THE PROCEEDINGS BEFORE THE IA. DRP WAS AN ADDITIONAL EV IDENCE AND THAT THE APPELLANT HAD NOT EXPLAINED AS TO WHY IT WAS NO T SUBMITTED BEFORE THE TPO; AND B. THE LD. DRP HAS ERRED IN NOT CONSIDERING THAT TH E APPELLANT HAD PROVIDED THE MARGINS OF THE COMPARABLE COMPANIES AF TER CONSIDERING THE WORKING CAPITAL ADJUSTMENT IN THE TP DOCUMENTAT ION ITSELF, WHICH WAS SUBMITTED BEFORE THE TA. TPO 4. THE LD. AO, LD. DRP AND LD. TPO HAVE ERRED IN NO T CONSIDERING THE RECOVERY OF ADVANCES WRITTEN OFF AS AN OPERATING IT EM IN COMPUTING THE OPERATING PROFITS FOR BENCHMARKING. 5. THE LCL. AO, LD. DRP AND LD. TPO HAVE ERRED IN R EJECTING COMPANIES, WHICH OTHERWISE QUALIFY AS COMPARABLE TO THE APPELL ANTS ACTIVITIES FOR TRANSFER PRICING BENCHMARKING PURPOSES. 6. THE LD. AO, LD. DRP AND LD. TPO HAVE ERRED IN AP PLYING THE COMPARABILITY CRITERION INCONSISTENTLY FOR DIFFEREN T COMPANIES AND ERRED IN CONSIDERING COMPANIES AS COMPARABLE, EVEN WHEN THEY FAIL THE COMPARABILITY CRITERION. ITA NO.2745/16 :- 3 -: 7. THE LD. AO, LD. DRP AND LD. TPO HAVE ERRED IN NO T ALLOWING AN ADJUSTMENT IN RESPECT OF THE EXTRAORDINARY FOREIGN EXCHANGE LOSS SUFFERED BY THE APPELLANT AS AGAINST THE COMPARABLE COMPANIES. 8. THE IA. AO ERRED IN RAISING A TAX DEMAND ON THE APPELLANT WITHOUT ADJUSTING THE CARRY-FORWARD THE APPELLANT ELIGIBLE FOR SET-OFF. 3. GROUND NOS.1 & 2 ARE TOO GENERAL, DO NOT REQUIR E ADJUDICATION. 3.1 AT THE TIME OF HEARING, THE LD. A.R OF THE ASS ESSEE DID NOT PRESS GROUND NOS.5 & 8. ACCORDINGLY, GROUND N OS. 5 & 8 ARE DISMISSED AS NOT PRESSED. 4. GROUND NO.3 IS WITH REGARD TO NON-GRANTING THE ADJUSTMENT FOR DIFFERENCES IN WORKING CAPITAL LEVEL S. BEFORE THE DRP, THE ASSESSEE SOUGHT FOR WORKING CAPITAL ADJUST MENT, WHICH WAS REJECTED BY THE DRP ON THE REASON THAT CALCULAT ION OF WORKING CAPITAL ADJUSTMENTS BETWEEN THE ASSESSEE AND THE CO MPARABLE COMPANIES IS NOT PROVIDED TO TPO. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THERE IS A POSI TIVE WORKING CAPITAL AS SEEN FROM THE BALANCE SHEET SUBMITTED BY THE ASSESSEE. ACCORDINGLY, WE REMIT THE ISSUE TO THE F ILE OF AO TO GRANT SUITABLE WORKING CAPITAL ADJUSTMENTS AFTER MA KING PROPER TP STUDY. HENCE, THIS GROUND IS ALLOWED FOR STATISTICA L PURPOSES. ITA NO.2745/16 :- 4 -: 6. GROUND NO.4 IS WITH REGARD TO NOT CONSIDERING T HE RECOVERY OF ADVANCES WRITTEN OFF AS AN OPERATING IT EM IN COMPUTING THE OPERATING PROFITS FOR BENCHMARKING TR ANSACTIONS. 7. THE SIMILAR ISSUE CAME BEFORE CO-ORDINATE BENCH OF BANGALORE TRIBUNAL IN THE CASE OF M/S.LOGICA PRIVAT E LTD. VS. ACIT IN ITA NO.1129/BANG/2011 VIDE ORDER DATED 28.0 4.2013 WHEREIN HELD THAT:- 8. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT A SUM OF RS.4,27,16,385 WAS REVERSAL OF EXPENSES AND THESE HAD TO BE REDUCED FROM THE OPERATING AND OTHER EXPENSES . IN THIS REGARD, THE LD .COUNSEL FOR THE ASSESSEE POINTED OU T THAT WHILE MAKING THE ADJUSTMENT TO THE ALP, THE AO TOOK THE O PERATING COST AT RS.219,19,46,556 AND FURTHER ADDED A SUM OF RS.4,27,16,385 WHICH WAS REVERSAL OF EXPENSES RECEI VED. HE THEREFORE ARRIVED AT AN OPERATING COST OF RS.223,46 ,62,941. IT WAS POINTED OUT BY HIM THAT THE CORRECT OPERATING P ROFIT TO TOTAL COST OF THE ASSESSEE SHOULD HAVE BEEN WORKED OUT IN THE FOLLOWING MANNER:- 9. IN THIS REGARD, THE LD. COUNSEL POINTED OUT THAT WHILE COMPUTING THE ARM'S LENGTH PRICE, THE TPO ADDED THE PROVISION AMOUNT OF RS.4,27,16,385/- TO THE OPERATING COST OF ITA NO.2745/16 :- 5 -: RS.219,19,46,556/-. ALSO WHILE COMPUTING THE TRANSF ER PRICING ADJUSTMENT, THE TPO ADDED THE AMOUNT OF PROVISION T O THE OPERATING REVENUE OF RS.234,26,60,885/- ( PAGE 493 OF THE PAPER BOOK). THE TRIBUNAL IN THE CASE OF SONY INDIA PRIVA TE LTD. REPORTED IN (2009) 315 ITR (80) 150 (DEL.) (PARAS 1 46 TO 149) HELD THAT PROVISIONS WRITTEN BACK SHOULD NOT BE EXC LUDED FROM THE P & L ACCOUNT WHEN COMPUTING THE OPERATING PROF IT. THE LD. COUNSEL FOR THE ASSESSEE ITA NO.1129/BANG/2011 THER EFORE SUBMITTED THAT ITS NET MARGIN SHOULD BE TAKEN AS 9% AND NOT 6.88% AS COMPUTED BY THE TPO. SIMILARLY, THE ADDITI ONS MADE BY THE TPO TO THE OPERATING COST WHILE COMPUTING THE A RM'S LENGTH PRICE AND TO THE OPERATING REVENUE WHEN COMPUTING T HE ADJUSTMENT IS ERRONEOUS. THEREFORE IN COMPUTING THE ARM'S LENGTH PRICE AS WELL AS ANY ADJUSTMENT, THE ASSESSE E'S OPERATING REVENUE WOULD STILL BE RS.234,26,60,885/- AND OPERA TING COST WOULD BE RS.214,92,30,171/-. 10. TO THE ABOVE SUBMISSIONS, THE LD. DR COULD NOT MAKE ANY COUNTER SUBMISSIONS. 11. WE ARE OF THE VIEW THAT THE SUBMISSIONS MADE BY THE LD. COUNSEL FOR THE ASSESSEE HAVE TO BE ACCEPTED AND TH E OPERATING PROFIT TO THE TOTAL COST OF THE ASSESSEE SHOULD BE ADOPTED AT 9% ON THE BASIS OF THE ASSESSEE'S OPERATING REVENUE AN D OPERATING COST AS GIVEN IN THE ABOVE CHART. ITA NO.2745/16 :- 6 -: ACCORDINGLY, WE REMIT THE ISSUE TO THE FILE OF AO F OR THE PURPOSE OF EXCLUDING RECOVERY OF ADVANCE WRITTEN OFF FROM OPER ATING PROFIT AND TO COMPARE ALP. HENCE, THIS GROUND RAISED BY TH E ASSESSEE IS ALLOWED. 8. GROUND NO.7 IS WITH REGARD TO NOT ALLOWING AN A DJUSTMENT IN RESPECT OF THE EXTRAORDINARY FOREIGN EXCHANGE LO SS SUFFERED BY THE APPELLANT AS AGAINST THE COMPARABLE COMPANIES. 9. THE SIMILAR ISSUE CAME BEFORE CO-ORDINATE BENCH OF CHENNAI TRIBUNAL IN THE CASE OF M/S.MOTONIC INDIA A UTOMOTIVE (P.) LTD. VS. ACIT IN ITA NO.749/BANG/2014 VIDE ORDER DA TED 17.08.2016 WHEREIN HELD THAT:- 8. THE NEXT GROUND IS WITH REGARD TO VARIATION IN EXCHANGE RATE ADJUSTMENT WHILE DETERMINING THE ALP. ACCORDING TO THE LD. AR, THE ASSESSEE ENTERED INTO CONTRACT IN ADVERSE PRICE S FIXED ON THE PREVAILING EXCHANGE RATE AND DUE TO FLUCTUATION IN EXCHANGE RATE, THERE IS LOSS AND THAT EXCHANGE FLUCTUATION TO BE C ONSIDERED WHILE DETERMINING THE ALP. 9. WE FIND FORCE IN THE ARGUMENT OF THE LD. AR. IT IS NORMAL THAT EXCHANGE RATE IS SUBJECT TO FLUCTUATION DUE TO ECON OMIC ITA NO.2745/16 :- 7 -: CONDITIONS. WHILE DETERMINING THE ALP, ONE HAS TO C ONSIDER THESE FACTORS, MORE SO, OUR VIEW IS FORTIFIED BY THE DECI SION OF THE TRIBUNAL IN THE CASES OF HONDA TRADING CORP. INDIA PVT. LTD. V. ACIT IN ITA NO.5297/DEL/2011 FOR THE ASSESSMENT YEA R 2007-08 AND DHL EXPRESS (INDIA) PVT. LTD. V. ACIT IN ITA NO.7360/MUM/2010 FOR THE ASSESSMENT YEAR 2006-07. ACCORDINGLY, WE DIRECT THE TPO TO PROVIDE CONSIDERA BLE EXCHANGE FLUCTUATION ADJUSTMENT WHILE DETERMINING THE ALP. A CCORDINGLY, THIS ISSUE IS REMITTED TO THE FILE OF THE TPO FOR D ETERMINING THE ALP AFTER CONSIDERING THE ABOVE THREE COMPONENTS I. E. CUSTOMS DUTY ADJUSTMENT, AIR FREIGHT ADJUSTMENT AND FOREIGN EXCHANGE FLUCTUATION ADJUSTMENT. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, THIS IS SUE IS REMITTED TO THE FILE OF AO FOR CONSIDERING THE SAME AFRESH IN T HE LIGHT OF ABOVE ORDER OF TRIBUNAL. 10. THE NEXT GROUND NO.6 IS WITH REGARD TO APPLYIN G THE COMPARABILITY CRITERION INCONSISTENTLY FOR DIFFEREN T COMPANIES AND ERRED IN CONSIDERING COMPANIES AS COMPARABLE, EVEN WHEN THEY FAIL THE COMPARABILITY CRITERION. ITA NO.2745/16 :- 8 -: 11. BEFORE US, LD.A.R SPECIFICALLY ARGUED WITH REF ERENCE TO COMPARABLE IN THE CASE OF M/S.NITIN FIRE PROTECTION INDUSTRIES LTD. (NFPIL). ACCORDING TO LD.A.R, THIS CANNOT BE COMPA RED TO THE ASSESSEES CASE. HE SUBMITTED THAT M/S.NITIN FIRE PROTECTION INDUSTRIES LTD. IS PRIMARILY ENGAGED IN PROJECT REL ATED ACTIVITIES AND ALSO SECONDLY ENGAGED IN FIRE PROTECTION AND DETECT ION EQUIPMENTS SALE. THE LD.A.R DREW OUR ATTENTION TO T HE PAPER BOOK AT PAGE NO.282 TO SHOW THAT THE ASSESSEE ENGAGED I N PRIMARILY PROJECT RELATED ACTIVITIES, TURNOVER IS ` 137.54 CRORES AND FIRE PROTECTION AND DETECTION EQUIPMENTS IS ` 23.48 CRORES, TOTALING TO ` 161.03 CRORES SO AS TO DEMONSTRATE THE NATURE OF A CTIVITIES OF THAT ASSESSEE. 12. ACCORDING TO LD.D.R, THE SALES DETAILS ARE NO T MADE AVAILABLE TO TPO. HENCE, IT WAS COMPARED WITH THE A SSESSEES CASE. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE FIND FORCE IN THE ARGUMENT OF LD.D.R THA T THE SALES DETAILS ARE NOT MADE AVAILABLE TO TPO. HENCE, THE T PO CONSIDERED IT AS COMPARED TO THE ASSESSEES CASE. I N THE CASE OF ITA NO.2745/16 :- 9 -: M/S.NITIN FIRE PROTECTION INDUSTRIES LTD., THE MAJO R INCOME IS INCLUDED FROM PROJECT RELATED ACTIVITY. IT CANNOT BE COMPARED TO THE ASSESSEES CASE. ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE THE M/S.NITIN FIRE PROTECTION INDUSTRIES LTD. FROM THE COMPARABLES AND DECIDE ACCORDINGLY. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON APRIL, 2017, AT CHENN AI. SD/ - SD/ - ! ' # . $ %& ' ( DUVVURU RL REDDY ) ) % / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER () / CHENNAI *+ / DATED: 19 TH APRIL, 2017. K S SUNDARAM +,-- ./-0/ / COPY TO: - 1 . / APPELLANT 3. - 1-!' / CIT(A) 5. /23- 4 / DR 2. / RESPONDENT 4. - 1 / CIT 6. 3&-5 / GF