The DCIT, Circle-4, Baroda V. M/s. Weatheford Drilling and Production Servies(India) Pvt.Ltd., Baroda

ITA 3007/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89226 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-04-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 10-04-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 02-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ROOP CHAND
• Assessee Lawyers: DHANESH BABNA
• Keywords: Related party transaction; Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMEDABAD , BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER. ITA. NO. 3007/AHD/2011 (ASSESSMENT YEAR:2007-08) DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4, BARODA APPELLANT VS. M/S. WEATHERFORD DRILLING AND PRODUCTION SERVICES (INDIA) PVT. LTD., BLOCK NO.74, MUKUT NAGAR, SOKHADA ROAD, MANJUSAR, BARODA RESPONDENT PAN: AAACW4068M /BY APPELLANT : SHRI ROOPCHAND, SR. D.R. /BY RESPONDENT : SHRI DHANESH BABNA, A.R. !' /DATE OF HEARING : 10.04.2015 #$% !' /DATE OF PRONOUNCEMENT : 22.04.2015 I.T.A. NO. 3007/A/11 FOR A.YS. 07-08) (DCIT VS. M/S . WEATHERFORD DRILLING AND PRODUCTION SERVICES (INDIA ) PVT. LTD.) PAGE 2 ORDER PER SHAILENDRA KUMAR YADAV, J.M: THIS APPEAL HAS BEEN FILED BY REVENUE AGAINST THE O RDER OF COMMISSIONER OF INCOME TAX (APPEALS)-III, BARODA, D ATED 14.09.2011 FOR A.Y. 2007-08 ON THE FOLLOWING GROUND S: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE METHOD ADOPTED BY THE ASSESSING OFFICER TO DETERMIN E ARMS LENGTH PRICE IS NOT CORRECT AND IS IN VIOLATI ON OF THE TRANSFER PRICING REGULATION AS EXISTING IN INDI A DESPITE THE FACT THAT THE ASSESSEE HAS WORLDWIDE MONOPOLY IN THE MANUFACTURING OF OIL FIELD EQUIPMEN TS AND NOT COMPARABLE WITH OTHER CONCERNS, THEREFORE, THE ACTUAL PROFIT CAN BE CALCULATED ON THE BASIS OF COMPARING THE GROSS PROFIT OF SUBSEQUENT YEARS OF T HE ASSESSEE ITSELF. 2. ASSESSEE IS ENGAGED MANUFACTURING AND SERVICING OF OIL FIELD EQUIPMENT, PRIMARILY DOWN HOLE EQUIPMENT, TOO L APPARATUS, INSTRUMENT AND ALLIED PRODUCT INCLUDING DRILLING EQUIPMENTS, GAS WELL INSTALLATION TOOLS AND SPECIAL IZED EQUIPMENT USED IN OIL FILED INDUSTRY FOR DRILLING A ND COMPLETION OF OIL WELLS. ONLY ISSUE BEFORE US RELATES TO ADDI TION OF RS.85,31,198/- ON ACCOUNT OF TRANSFER PRICING ADJUS TMENT. ASSESSING OFFICER MADE ADJUSTMENT OF RS.85,31,198/- . HE NOTICED THAT ASSESSEE HAD SUO MOTO MADE TRANSFER PR ICING ADJUSTMENT AT RS.1,42,98,923/-. FOR THIS, ASSESSEE HAD TAKEN, THE PROFIT AT 9.65% AS A BENCHMARK ON THE BASIS OF WHICH TRANSFER PRICE ADJUSTMENT HAS BEEN MADE. ASSESSING OFFICER I.T.A. NO. 3007/A/11 FOR A.YS. 07-08) (DCIT VS. M/S . WEATHERFORD DRILLING AND PRODUCTION SERVICES (INDIA ) PVT. LTD.) PAGE 3 ALSO NOTICED THAT ASSESSEE HAD SHOWN GROSS PROFIT R ATIO OF 5.52% IN THE CURRENT ASSESSMENT YEAR WHEREAS IN THE SUBSEQUENT YEARS I.E. A.Y. 2008-09 AND 2009-10, ASS ESSEE HAD SHOWN GROSS PROFIT @ 28.84% AND 30.46% RESPECTIVELY . ON THIS BASIS, ASSESSING OFFICER ISSUED SHOW CAUSE NOTICE AS TO WHY AVERAGE GROSS PROFIT RATIO IN THE SUBSEQUENT TWO YE ARS SHOULD NOT BE TAKEN AS GROSS PROFIT RATIO OF THE CURRENT Y EAR FOR MAKING TRANSFER PRICE ADJUSTMENT. IN THIS REGARD, STAND OF ASSESSEE HAS BEEN THAT BENCHMARK NUMBER PROVIDED BY IT IS NOT AN ARBITRARY NUMBER AND IS BASED ON A STRUCTURED SEARCH PROCESS CONDUCTED ON DATA BASES VIZ. PROWESS AND CAPITALINE PLUS DURING THE YEAR UNDER CONSIDERATION. THIS SEARCH PR OCESS WAS CLEARLY REFLECTED IN TRANSFER PRICING STUDY MAINTAI NED BY THE COMPANY FOR CAPTIONED YEAR. ASSESSEE SUBMITTED THA T MARGIN OF 9.65% REFLECTS THE MEAN OF OPERATING MARGINS (NO T GROSS MARGIN) EARNED BY COMPARABLE COMPANIES, OVER A PERI OD OF TIME AS ALLOWABLE UNDER THE INDIAN TRANSFER PRICING REGU LATIONS. ASSESSEE MADE OTHER LEGAL AND FACTUAL SUBMISSIONS T O DEFINE IT BUT ASSESSING OFFICER DID NOT ACCEPT THE CONTENTION OF ASSESSEE AND MADE ADDITION OF RS.85,31,198/- ON ACCOUNT OF T RANSFER PRICING ADJUSTMENTS BY OBSERVING AS UNDER: I HAVE CONSIDERED THE SUBMISSION OF THE ASSESSEE. THE WHOLE SALES HAVE BEEN MADE TO ITS PARENT COMPANY WEATHERFORD, USA AS STATED BY THE ASSESSEE. THE ASS ESSEE HAS MONOPOLY IN THE WHOLE WORLD IN THE MANUFACTURIN G OF OIL FILED EQUIPMENTS AND ITS SERVICES. THEREFORE, THERE IS NOT COMPARABLE CASE. THE ASSESSEE ON ITS OWN DECIDED TH E BENCH MARK PROFIT. ON BEING FURTHER ASKED, THE ASSE SSEE HAS SUBMITTED THE SEARCH PROCESS. IN THIS SEARCH PROCES S, IT IS I.T.A. NO. 3007/A/11 FOR A.YS. 07-08) (DCIT VS. M/S . WEATHERFORD DRILLING AND PRODUCTION SERVICES (INDIA ) PVT. LTD.) PAGE 4 NOTED THAT THE ASSESSEE HAS CONDUCTED THIS PROCESS THROUGH PROWESS AND CAPITALINE PLUS DATABASE. THE SEARCH FO R SEGMENTAL DATA WAS CONDUCTED IN 9801 COMPANIES AVAI LABLE IN PROWESS AND 13087 COMPANIES OF CAPITALINE. THE A SSESSEE HAS SELECTED THE COMPANIES WHICH WERE ESSENTIALLY E NGAGED IN MANUFACTURING OF PUMPS AND VALVES. AT THE END OF THE ABOVE DESCRIBED SEARCH PROCESS, THE COMPANY WAS LEF T WITH ONE COMPARABLE COMPANY SEGMENT. FROM THIS ONE SEGME NT, THE TOTAL COMPARABLE COMPANY WAS 14. FROM THE ABOVE 14, COMPANIES ASSESSEE HAS ELIMINATED COMPANIES HAVING RELATED PARTY TRANSACTION WHICH HAVE AN IMPACT OF T HE OPERATING PROFIT. FINALLY, THE ASSESSEE HAS LEFT WI TH 5 COMPARABLE COMPANIES. ON THE ABOVE FIVE, TO DETERMI NE THE ARM'S LENGTH RESULT, THE ASSESSEE HAS TAKEN ARITHME TIC MEAN OF MARGIN OF COMPARABLE COMPANIES AND APPLIED THE S AME TO THE APPROPRIATE WAYS OF THE ASSESSEE. SR. NO. NAME OF THE COMPANY DATA SOURCE AVERAGE PLI 1 CENLUB INDUSTRIES P 10.28% 2 DHP INDIA LTD, P 13.80% 3 ROTO PUMPS LTD. P 8. 78% 4 JHONSON PUMPS (INDIA) LTD. C 12.91% 5 MAZDA LTD. SEG-P 2.46% 9.65% IT IS NOTED THAT THE SEARCH PROCESS DONE IS NOT ON ANY SCIENTIFIC METHOD. THE COMPARABLE COMPANIES ON WHIC H THE ASSESSEE HAS BASED ITS STUDY ARE NOT IN THE SAME BU SINESS OF THE ASSESSEE. IT IS NOTED THAT THE COMPARABLE CO MPANIES ARE ENGAGED IN THE BUSINESS OF MANUFACTURING OF PUM PS WHICH IS NOT AT ALL THE BUSINESS OF THE ASSESSEE. I T IS ALSO STATED BY THE ASSESSEE THAT IT HAS THE MONOPOLY IN WORLD WIDE IN THE MANUFACTURING OF OIL FIELD EQUIPMENTS A ND ITS SERVICES. THEREFORE, IT IS OBVIOUS THAT THERE WILL BE NO COMPARABLE COMPANY MANUFACTURING THE SAME PRODUCT A ND ITS SERVICES. THEREFORE, SEARCH PROCESS ADOPTED BY THE ASSESSEE ON WHICH HE HAS ARBITRARILY ADJUSTED ITS P ROFIT, WHICH IS NOT A CORRECT COMPARISON. IN THE CASE OF T HE I.T.A. NO. 3007/A/11 FOR A.YS. 07-08) (DCIT VS. M/S . WEATHERFORD DRILLING AND PRODUCTION SERVICES (INDIA ) PVT. LTD.) PAGE 5 ASSESSEE, THE ONLY ONE COMPANY WHICH CAN BE COMPARA BLE IS THE ASSESSEE ITSELF. THEREFORE, THE ONLY CORRECT ME THOD FOR ARRIVING AT ACTUAL PROFIT OF THE COMPANY IS COMPARI SON OF GROSS PROFIT OF THE SUBSEQUENT YEARS OF THE ASSESSE E ITSELF. THE ASSESSEE HAS SHOWN GROSS PROFIT RATIO OF 28.84% AND 30.46% IN ASSESSMENT YEARS 2007-2008 AND 2008-2009. THE AVERAGE GROSS PROFIT COMES TO 29.65%. THIS 29.6 5% IS THE CORRECT GROSS PROFIT OF THE ASSESSEE. THE ASSES SEE HAS SHOWN GROSS PROFIT AT 5.52%. THE DIFFERENCE COMES T O 24.13%. THE GROSS PROFIT ACCORDINGLY COMES TO RS.2,28,30,121/-. HOWEVER, THE ASSESSEE HAS ITSELF MADE TRANSFER PRICING ADJUSTMENT AT RS.1,42,98,923/-. TH EREFORE, THE DIFFERENCE OF RS.85,31,198/- IS ADDED TO THE TO TAL INCOME OF THE ASSESSEE. PENALTY PROCEEDINGS U/S 271(1)(C) OF THE INCOME-TAX ACT, 1961.' 2.1 MATTER WAS CARRIED BEFORE THE FIRST APPELLATE A UTHORITY, WHEREIN VARIOUS CONTENTIONS WERE RAISED ON BEHALF O F ASSESSEE AND HAVING CONSIDERED THE SAME, CIT(A) GRANTED RELI EF TO THE ASSESSEE. SAME HAS BEEN OPPOSED BEFORE US ON BEHAL F OF REVENUE INTER ALIA SUBMITTED THAT CIT(A) ERRED IN H OLDING THAT METHOD ADOPTED BY ASSESSING OFFICER TO DETERMINE AR MS LENGTH PRICE IS NOT CORRECT AND IS IN VIOLATION OF TRANSFE R PRICING REGULATION AS EXISTING IN INDIA DESPITE THE FACT TH AT ASSESSEE HAS WORLDWIDE MONOPOLY IN MANUFACTURING OF OIL FIEL D EQUIPMENTS AND NOT COMPARABLE WITH OTHER CONCERNS, THEREFORE, ACTUAL PROFIT CAN BE CALCULATED ON THE B ASIS OF COMPARING THE GROSS PROFIT OF SUBSEQUENT YEARS OF A SSESSEE ITSELF. ACCORDINGLY, REQUESTED TO SET ASIDE THE OR DER OF CIT(A) AND THE ISSUE BE RESTORED THAT OF ASSESSING OFFICER . ON OTHER HAND, LEARNED AUTHORIZED REPRESENTATIVE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND S UBMITTED I.T.A. NO. 3007/A/11 FOR A.YS. 07-08) (DCIT VS. M/S . WEATHERFORD DRILLING AND PRODUCTION SERVICES (INDIA ) PVT. LTD.) PAGE 6 THAT GROSS PROFIT AS TAKEN AT 9.65% IS BASED ON A S TRUCTURED SEARCH PROCESS. GROSS PROFIT RATIO OF F.Y. 2007-08 AND F.Y. 2008-09 COULD NOT BE TAKEN AS GROSS PROFIT RATIO FO R F.Y. 2006- 07 TO DETERMINE THE ARM'S LENGTH MARGIN IS IT WOULD BE INCONSISTENT WITH THE INDIAN TRANSFER PRICING LEGIS LATION. IN DETERMINATION OF ARM'S LENGTH PRICE, THE TRANSFER P RICING OFFICER IS REQUIRED TO ACT WITHIN THE FRAMEWORK PROVIDED IN THE INDIAN TRANSFER PRICING REGULATIONS. AS PER PROVISION OF R ULE 10B(4) OF THE INCOME TAX RULES WHICH READS AS UNDER: 'THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO: PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING M ORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES I N RELATION TO THE TRANSACTIONS BEING COMPARED. ACCORDING TO PROVISIONS OF SECTION RULE 10B(4), THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE DATA REL ATING TO FINANCIAL YEAR IN WHICH INTERNATIONAL TRANSACTION H AS BEEN ENTERED INTO: PROVIDED THAT DATA RELATED TO PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MA Y ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE TO TRANSACTIONS BEING COMPARED. THERE IN NOTHING IN THE PROVISIONS OF RULE 10B(4) THAT DATA OF SUBSEQUE NT YEARS SHOULD BE TAKEN INTO TO DETERMINE ARMS LENGTH PRIC E. IN THIS FACTUAL AND LEGAL BACKGROUND, IT IS EVIDENT THAT ME THOD ADOPTED I.T.A. NO. 3007/A/11 FOR A.YS. 07-08) (DCIT VS. M/S . WEATHERFORD DRILLING AND PRODUCTION SERVICES (INDIA ) PVT. LTD.) PAGE 7 BY ASSESSING OFFICER TO DETERMINE ARMS LENGTH PRIC E IS NOT CORRECT AND NOT IN ACCORDANCE WITH TRANSFER PRICING REGULATION AS EXISTING IN INDIA. ACCORDINGLY, ADDITION MADE B Y ASSESSING OFFICER BY WAY OF TRANSFER PRICING ADJUSTMENT ON TH IS ACCOUNT WAS RIGHTLY DELETED BY CIT(A). THIS REASONED FINDI NG OF CIT(A) NEEDS NO INTERFERENCE FROM OUR SIDE, WE UPHOLD THE SAME. 3. AS A RESULT, APPEAL FILED BY REVENUE IS DISMISSE D. PRONOUNCED IN THE OPEN COURT ON THIS THE 22 ND DAY OF APRIL, 2015. SD/- SD/- (ANIL CHATURVEDI) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMB ER AHMEDABAD: DATED 22/04/2015 TRUE COPY S.K.SINHA & & & & ' ' ' ' ('% ('% ('% ('% / COPY OF ORDER FORWARDED TO:- 1. +, / REVENUE 2. / ASSESSEE 3. // 0 / CONCERNED CIT 4. 0- / CIT (A) 5. '45 , , / DR, ITAT, AHMEDABAD 6. 589 :; / GUARD FILE. BY ORDER / & ,