Appeal details
Counselvise Citation
[2016] 131 COUNSELVISE.COM (IT) 9713 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 11 month(s) 29 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
27-12-2016
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I
Next Hearing Date
28-09-2016
Assessment Year
2007-2008
Appeal Filed On
29-12-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD I BENCH AHMEDABAD BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER, AND SHRI S. S. GODARA, JUDICIAL MEMBER. ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ASSESSMENT YEARS: 2007-08 & 2008-09) ERHARDT+LEIMER (INDIA) PRIVATE LIMITED, SURVEY NO. 252/1, 252/2, SARKHEJ-BAVLA HIGHWAY, SANAND, AHMEDABAD - 382220 APPELLANT VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-4, AHMEDABAD RESPONDENT PAN: AAACE2657G / BY ASSESSEE : SHRI SANJAY R. SHAH, A.R. / BY REVENUE : SHRI M. P. SINGH, CIT. D.R. /DATE OF HEARING : 29.09.2016 /DATE OF PRONOUNCEMENT : 27.12.2016 ORDER PER S. S. GODARA, JUDICIAL MEMBER THESE TWO ASSESSEES APPEALS FOR ASSESSMENT YEARS 2 007-08 & 2008-09, ARISE AGAINST ACIT, CIRCLE-4, AHMEDABADS ASSESSMEN T ORDERS DATED 28.10.2011 & 25.10.2012; RESPECTIVELY, IN PROCEEDI NGS UNDER SECTION 143(3) R.W.S. 144(C) OF THE INCOME TAX ACT, 1961; IN SHOR T THE ACT. ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ERHARDT+LE IMER (INDIA) PVT. LTD. VS. ACIT) A.YS. 2007-08 & 2008-09 - 2 - WE PROCEED ASSESSMENT YEAR-WISE FOR THE SAKE OF CON VENIENCE AND BREVITY. 2. WE COME TO FORMER ASSESSMENT YEAR 2007-08 INVOLV ING ITA NO.3298/AHD/2011. ASSESSEES FIRST SUBSTANTIVE GRO UND PLEADED THEREIN ASSAILS CORRECTNESS OF TRANSFER PRICING ADJUSTMENT OF RS.23,542,136/- IN RESPECT OF IMPORT OF COMPONENTS AS PROPOSED BY THE TRANSFER PRICING OFFICER AND UPHELD BEFORE THE DISPUTE RESOLUTION PANEL. LE ARNED COUNSEL SUBMITS THAT THE ABOVE ADJUSTMENT AMOUNT INVOLVED HAS ALSO BEEN SUBJECTED TO SECTION 154 RECTIFICATION PROCEEDINGS ON 14.12.2010 AND 09. 03.2012. WE APPRECIATE THIS FAIR SUBMISSION AND OBSERVE THAT OUR ADJUDICAT ION IN THE SUCCEEDING PARAGRAPH ARE CONFINED TO BOTH THE PARTIES ARGUMEN TS IN PRINCIPLE ONLY. 3. WE ADVERT TO THE RELEVANT FACTS NOW. THE ASSESS EE COMPANY MANUFACTURES WEB FEEDING GUIDING EQUIPMENTS ALONG W ITH ELECTRICAL/ELECTRONIC CONTROL PANEL. IT PURCHASED COMPONENTS WORTH RS.4,18,92,723/- FROM ITS ASSOCIATE ENTERPRISES. T HE ASSESSEE WOULD ADOPT THE TRANSACTION NET MARGIN METHOD (TNMM) TO BENCHMARK I TS ABOVE IMPORT TRANSACTIONS TO BE HAVING PLI OF 4.22% (AS PER THE TRANSFER PRICING OFFICERS ORDER DATED 19.10.2008). IT HAD CHOSEN FIFTEEN COM PARABLE COMPANIES I.E. M/S. AHMEDABAD VICTORIA IRON WORKS LTD., NICHROME I NDIA, ROLLATAINER, SCHRADER DUNCAN LTD., SEASONS TEXTILES LTD., LIPPY SYSTEMS LTD., AUSTIN ENGINEERING, EPC INDUSTRIES, FORBES AQUAMALL LTD., JBM INDUSTRIES LTD., JAI BHARAT EXHAUST SYSTEMS LTD., KRYPTON INDUSTRIES LTD ., MIVIN ENGINEERING TECHNOLOGIES PVT. LTD. AND M/S. ULTRA DYTECH LTD.. THE TRANSFER PRICING OFFICER EXCLUDED TWO OF THEM I.E. M/S. ROLLATAINER AND M/S. EPC INDUSTRIES ONLY ON THE GROUND THAT THEY HAD BEEN MAKING LOSSES SINCE 2002 AND PAST ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ERHARDT+LE IMER (INDIA) PVT. LTD. VS. ACIT) A.YS. 2007-08 & 2008-09 - 3 - THREE YEARS; RESPECTIVELY AFTER DECLINING ASSESSEE S VERY STRONG OBJECTIONS AGAINST THE SAID EXCLUSION. 4. WE PROCEED FURTHER TO NOTICE THAT THE TRANSFER P RICING OFFICER THEREAFTER ADOPTED PROFIT LEVEL INDICATOR OF PBIT ( PROFITS BEFORE INTEREST AND TAX)/SALES AFTER REJECTING ASSESSEES PLEA TO RATHE R TAKE ITS PROFIT LEVEL INDICATOR AS PBDIT (PROFITS BEFORE DEPRECIATION, INTEREST AN D TAX)/SALES SINCE IT HAD MADE ADDITIONS IN FIXED ASSETS OF RS.1435.98 LACS I N ITS NEW PLANT OVER AND ABOVE THE WRITTEN DOWN VALUE OF RS.341.51 LACS OF T HE ASSETS ALREADY SHOWN IN THE BALANCE SHEET AS PERTAINING TO ODHAV PLANT. THE TRANSFER PRICING OFFICER DECLINED ASSESSEES INSTANT OBJECTION AS WE LL. HE QUOTED RULE 10B(1)(E) TO OBSERVE THAT IT WAS NEVER STIPULATED I N THE ABOVE SAID RULE TO ADOPT SUCH A COURSE OF ACTION. HE ACCORDINGLY ADOP TED AVERAGE PLI OF THE REMAINING THIRTEEN COMPARABLES @ 9.98% AS AGAINST 4 .22% TO PROPOSE CONSEQUENTIAL ADJUSTMENT OF RS.2,07,60,681/-. THE ASSESSING OFFICER FRAMED DRAFT ASSESSMENT ON 20.12.2010 MAKING CONSEQUENTIAL ADJUSTMENT. THE ASSESSEE FILED OBJECTION BEFORE THE DISPUTE RESOLUT ION PANEL INTER ALIA PLEADING THEREIN THAT THE TRANSFER PRICING OFFICER HAD ERRED IN REJECTING THE ABOVE TWO LOSS MAKING ENTITIES FROM THE ARRAY OF CO MPARABLES AND ALSO THAT HE HAD WRONGLY ADOPTED PROFIT LEVEL INDICATOR OF PBIT / SALES INSTEAD OF PBDIT/SALES (SUPRA). THE ASSESSEE WOULD FURTHER FI LE A FRESH LIST OF COMPARABLES. THE DISPUTE RESOLUTION PANEL ISSUED I TS DIRECTIONS ON 29.08.2012 UPHOLDING TRANSFER PRICING OFFICERS ACT ION ON THE FIRST TWO ISSUES. IT WOULD HOWEVER DIRECT THE TRANSFER PRICI NG OFFICER TO WORK OUT AVERAGE PLI IN VIEW OF FOURTEEN COMPARABLES I.E. TW ELVE ALREADY GIVEN IN TRANSFER PRICING OFFICERS ORDER FOLLOWED BY FOUR N EW ENTITIES INCLUDED BEFORE THE DRP PROCEEDINGS. WE DEEM IT APPROPRIATE TO REPRODUCE DRPS FOLLOWING DIRECTIONS AS UNDER: ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ERHARDT+LE IMER (INDIA) PVT. LTD. VS. ACIT) A.YS. 2007-08 & 2008-09 - 4 - 1. THE ASSESSEES OBJECTIONS AGAINST REJECTION OF LOSS MAKING COMPARABLES ARE REJECTED. 2. OUT OF THE 13 COMPARABLES ACCEPTED BY THE TPO M/ S KRYPTON INDUSTRIES LTD. SHOULD BE DELETED, THE ASSESSEES OBJECTIONS A GAINST THE REST OF THE COMPARABLES ARE REJECTED. 3. OUT OF THE NEW COMPARABLES PROPOSED BY THE ASSE SSEE THE ABOVE MENTIONED FOUR COMPARABLES BE INCLUDED IN THE FINAL SET OF CO MPARABLES. 4. THE TPO SHOULD WORK OUT AVERAGE PLI ADOPTING PBI T OF THE 16 COMPARABLES (12 FROM THE SET IN THE DRAFT ASSESSMEN T ORDER AND 4 AS MENTIONED ABOVE FROM ASSESEE'S NEW SET). 5. THE ASSESSEE'S ARGUMENTS FOR ADOPTING PBDIT AS P LI ARE REJECTED. 6. THE ASSESEE'S OBJECTIONS REGARDING 5% STANDARD D EDUCTION ARE ALSO REJECTED. 7. THE ASSESSEE'S OBJECTIONS REGARDING ADJUSTMENT I N RESPECT OF THE COMMISSION INCOME ARE REJECTED. THE ASSESSING OFFICER HAS ACCORDINGLY FRAMED THE I MPUGNED ASSESSMENT MAKING THE ABOVE TRANSFER PRICING ADJUST MENT FORMING SUBJECT MATTER OF ADJUDICATION BEFORE US. 5. WE HAVE HEARD BOTH SIDES. CASE FILE PERUSED. T HE ASSESSEES ARGUMENTS ARE TWO FOLDED. FIRST ONE IS THAT THE AU THORITIES BELOW HAVE ERRED IN EXCLUDING THE ABOVE TWO LOSS MAKING ENTITIES FRO M THE ARRAY OF COMPARABLES. THE REVENUE STRONGLY SUPPORTS THE IMP UGNED EXCLUSION. WE FIND THAT NEITHER THE TRANSFER PRICING OFFICER NOR THE DISPUTE RESOLUTION PANEL HAVE LOOKED INTO THE FAR ANALYSIS OF THE ABOV E TWO ENTITIES M/S. ROLLATAINER AND EPC INDUSTRIES AS THE SAME HAVE BEE N SUMMARILY REJECTED IN VIEW OF THEIR CONSISTENT LOSSES SINCE 2002 AND LAST THREE ASSESSMENT YEARS. WE REPEAT THAT THE IMPUGNED ASSESSMENT YEAR IS 2007 -08. WE QUOTE RULE 10B(4) HEREIN TO OBSERVE THAT THE DATA RELEVANT FOR A TIME PERIOD OF NOT MORE THAN TWO YEARS PRIOR TO THE FINANCIAL YEAR INVOLVED MAY BE CONSIDERED ONLY IF IT REVEALS ANY INFLUENCE THEREOF IN SUCH FINANCIAL YEA R INVOLVED. THE AUTHORITIES ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ERHARDT+LE IMER (INDIA) PVT. LTD. VS. ACIT) A.YS. 2007-08 & 2008-09 - 5 - BELOW HAVE NOWHERE UNDER TAKEN SUCH AN EXERCISE. W E ALSO FIND THAT THIS TRIBUNALS SPECIAL BENCH DECISION IN DCIT VS. QUARK SYSTEMS PVT. LTD. (2010) 132 TTJ 001 (SB) HAS ALREADY REJECTED SUCH AN APPRO ACH AFTER CONCLUDING THAT CONSISTENT LOSS MAKING ENTITIES CANNOT BE PER SE EX CLUDED MERELY IN VIEW OF THE NEGATIVE INCOME FIGURES THEREOF. WE DRAW SUPPO RT THEREFROM TO DIRECT THE TRANSFER PRICING OFFICER TO REDO THE ENTIRE EXERCIS E AFRESH REGARDING THESE TWO ENTITIES AS PER LAW AFTER AFFORDING ADEQUATE OPPORT UNITY OF HEARING TO THE ASSESSEE. 6. LEARNED COUNSELS SECOND ARGUMENT SEEKS TO REJEC T THE LOWER AUTHORITIES ACTION TAKING PROFIT LEVEL INDICATOR O F PBIT / SALES INSTEAD OF PBDIT/SALES (SUPRA). THERE IS NO DISPUTE THAT THE ASSESSEE HAS IN FACT INCREASED ITS FIXED ASSETS/PLANT AND MACHINERY TO T HE TUNE OF RS.1435.98 LACS IN THE IMPUGNED ASSESSMENT YEAR HELD ELIGIBLE FOR D EPRECIATION. ITS ENDEAVOR IN THE INSTANT CASE IS TO EXCLUDE CORRESPONDING DEP RECIATION FOR THE PURPOSE OF DETERMINING THE PROFIT LEVEL INDICATOR WHICH ADMITT EDLY HAS NOT FOUND FAVOUR FROM THE LOWER AUTHORITIES. WE REITERATE FIRST OF ALL THAT THE RELEVANT METHOD USED HEREIN IS THE TRANSACTIONAL NET MARGIN METHOD WHICH IS AN INDIRECT METHOD WHEREIN THE PROFIT LEVEL INDICATOR IS TAKEN AFTER STATING NET FIGURE OF PROFITS. WE OBSERVE IN THE ABOVE STATED FACTS THAT THERE CAN HARDLY BE ANY DISPUTE ABOUT ASSESSEES NET PROFITS TO HAVE SEEN A DECLINE IN VIEW OF ITS DEPRECIATION CLAIM ARISING FROM THE ABOVE FIXED ASS ETS OF RS.1435.98 LACS PERTAINING TO THE IMPUGNED ASSESSMENT YEAR. WE NOT ICE IN THESE FACTS THAT THIS TRIBUNAL IN M/S. BA CONTINUUM INDIA PVT. LTD. VS. ACIT ITA NO.1154/HYD/2011 DATED 24.10.2013 HOLDS THAT SUCH A DEPRECIATION HAS TO BE EXCLUDED BEFORE COMPUTING THE CORRESPONDING PROFIT LEVEL INDICATOR. WE ACCORDINGLY DIRECT THE TRANSFER PRICING OFFICER IN THESE PECULIAR FACTS TO EXCLUDE ASSESSEES CORRESPONDING DEPRECIATION CLAIM FOR THE PURPOSE OF THE ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ERHARDT+LE IMER (INDIA) PVT. LTD. VS. ACIT) A.YS. 2007-08 & 2008-09 - 6 - PROFIT LEVEL INDICATOR IN QUESTION. THIS ASSESSEE S ARGUMENT ALSO SUCCEEDS. WE ACCORDINGLY REMIT THIS FORMER ISSUE OF TRANSFER PRICING ADJUSTMENT ADDITION IN RESPECT OF IMPORT OF COMPONENTS BACK TO THE FILE OF THE TRANSFER PRICING OFFICER FOR AFRESH ADJUDICATION AS PER LAW AS INDICATED HEREINABOVE. 7. THE ASSESSEES NEXT SUBSTANTIVE GROUND CHALLENGE S CORRECTNESS OF TRANSFER PRICING ADJUSTMENT OF RS.6,52,435/- IN RES PECT OF ITS COMMISSION INCOME. IT HAD DERIVED COMMISSION INCOME FROM ITS GERMAN AND ITALIAN ASSOCIATE ENTERPRISES HAVING PROFIT LEVEL INDICATOR S @ 12.45% AND 8.52% AFTER ADOPTING THE COMPARABLE UNCONTROLLED PRICE (CUP) ME THOD. THE TRANSFER PRICING OFFICER NOTICED THE ASSESSEE TO HAVE EARNED SIMILAR COMMISSION INCOME FROM A GERMAN ENTERPRISE INVOLVING PLI @ 12. 13%. HE ACCORDINGLY REJECTED ASSESSEES EXPLANATION STATING VARIOUS KEY FACTORS OF VOLUME OF BUSINESS TRANSACTIONS, MARKET PRESENCE AND GEOGRAPH ICAL FACTORS TO MAKE THE IMPUGNED ADJUSTMENT AFTER TAKING PLI @ 12.13% RESUL TING IN THE ADDITION IN QUESTION. THE DISPUTE RESOLUTION PANEL UPHOLDS THE SAME. 8. HEARD BOTH SIDES. THE ASSESSEE IS UNABLE TO DIS PUTE THE FACT THAT IT HAD ALREADY ADOPTED CUP METHOD WHEREIN THE GERMAN NON A SSOCIATE ENTERPRISE HAD PAID IT COMMISSION INCOME OF 12.13% AS AGAINST 8.52% OBTAINED FROM ITS ITALIAN ASSOCIATE ENTERPRISE. LEARNED COUNSEL RAIS ES A TECHNICAL PLEA THAT THE DRPS FINDINGS AT PAGE 16 OBSERVE THAT ASSESSEES G ERMAN ASSOCIATE ENTERPRISE COULD NOT BE TAKEN AS A COMPARABLE IN CU P METHOD. HE HOWEVER FAILS TO DISPUTE THAT THE OTHER GERMAN ENTITY WHO I S NOT ASSESSEES ASSOCIATE ENTERPRISE IS A VALID COMPARABLE UNDER CUP METHOD H AVING PLI @ 12.13%. WE THUS FIND NO REASON TO INTERFERE WITH THE IMPUGN ED TRANSFER PRICING ADJUSTMENT PERTAINING TO ASSESSEES COMMISSION INCO ME. ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ERHARDT+LE IMER (INDIA) PVT. LTD. VS. ACIT) A.YS. 2007-08 & 2008-09 - 7 - 9. THE ASSESSEES THIRD SUBSTANTIVE GROUND SEEKS BE NEFIT OF 5% TOLERANCE MARGIN IN THE ABOVE TRANSFER PRICING ADJUSTMENTS. LD. DEPARTMENTAL REPRESENTATIVE SUBMITS THAT IT IS ESSENTIALLY A COM PUTATION ISSUE. HE INVITES OUR ATTENTION TO THE FACT THAT WE HAVE ALREADY REMI TTED THE ABOVE SUBSTANTIVE ISSUES BACK TO THE FILE OF THE TRANSFER PRICING OFF ICER. WE ACCORDINGLY DIRECT THAT THIS ASSESSEES PLEA SEEKING 5% TOLERANCE MAR GIN WOULD BE CONSIDERED AT THE TIME OF FINAL COMPUTATION. THIS ASSESSEES APPEAL ITA NO.3298/AHD/2011 IS PARTLY ACCEPTED FOR STATISTICAL PURPOSES. 10. WE NOW COME TO ASSESSMENT YEAR 2008-09 INVOLVIN G ITA NO.2880/AHD/2012. THE ASSESSEES FIRST SUBSTANTIVE GROUND SEEKS TO DELETE TRANSFER PRICING ADJUSTMENT OF RS.75,33,672/- IN RE SPECT OF IMPORT OF COMPONENTS AS MADE BY THE LOWER AUTHORITIES. 11. THE ASSESSEES ONLY SUBSTANTIVE ARGUMENT RAISED IN THE COURSE OF HEARING IS THAT THE AUTHORITIES BELOW HAVE NOT GRAN TED IT CAPACITY UNDERUTILIZATION BENEFIT IN RESPECT OF THE ABOVE IM PORT OF COMPONENT TRANSACTIONS. WE NOTICE AT THIS STAGE THAT THE REL EVANT FACTS PERTAINING TO THE INSTANT ISSUE ARE IN A NARROW COMPASS. THE ASSESSE E PLEADED BEFORE THE TRANSFER PRICING OFFICER THAT IT HAD SET UP NEW INS TALLED CAPACITY OF MANUFACTURING OF 11520 MACHINES AS AGAINST THE CONS EQUENTIAL PRODUCTION OF 4133 SETS THEREOF ONLY. IT SOUGHT TO SEEK UNDERUTI LIZATION ADJUSTMENT SINCE IT COULD MANUFACTURE ONLY 35% OF THE INSTALLED CAPACIT Y LEAVING BEHIND 65% AS UNUTILIZED. THE TRANSFER PRICING OFFICER AS WELL A S THE DISPUTE RESOLUTION PANEL DECLINED THIS RELIEF ON THE GROUND THAT SUCH A COURSE OF ACTION OF MAKING ADJUSTMENT IN THE HANDS OF COMPARABLE ENTITI ES IS NOWHERE PROVIDED IN THE ACT OR THE RULES FRAMED THEREUNDER. ALL THI S RESULTED IN THE IMPUGNED TRANSFER PRICING ADJUSTMENT ADDITION BEING MADE IN ASSESSEES HANDS. ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ERHARDT+LE IMER (INDIA) PVT. LTD. VS. ACIT) A.YS. 2007-08 & 2008-09 - 8 - 12. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO R IVAL CONTENTIONS. THERE IS ADMITTEDLY NO DISPUTE ABOUT THE FACT THAT ASSESSEES 65% MANUFACTURING CAPACITY HAS REMAINED IDLE IN THE IMP UGNED ASSESSMENT YEAR. IT ADOPTED THE TRANSACTION NET MARGIN METHOD (TNMM) TO BENCHMARK ITS ABOVE PURCHASED TRANSACTION. THERE IS FURTHER NO I SSUE BETWEEN THE PARTIES THAT THE ABOVE TERM CAPACITY UTILIZATION IS A FACTO R AFFECTING NET PROFIT MARGINS SINCE IT RESULTS IN HIGHER PER UNIT COST QUA THE U TILIZED CAPACITY WHICH IN TURN LOWERS DOWN THE PROFITS IN QUESTION AT A TRANSACTIO NAL OR UNIT LEVEL. LD. DEPARTMENTAL REPRESENTATIVE AT THIS STAGE VEHEMENTL Y ARGUED THAT SUCH AN ADJUSTMENT IN THE HANDS OF COMPARABLE ENTITIES IS N OWHERE PROVIDED EITHER IN THE ACT OR RULES. THIS ARGUMENT FAILS TO IMPRESS U S. WE FIND THAT A CO- ORDINATE BENCH DECISION IN DCIT VS. EDAG ENGINEERS & DESIGN INDIA PVT. LTD. ITA NO.549/DEL/2011 DECIDED ON 13.10.2014 QUOT ES RULE 10B (1)(E)(3) TO BE PROVIDING FOR ADJUSTMENTS FOR VARIATION WHICH COULD MATERIALLY AFFECT THE NET PROFIT MARGINS IN CASE OF COMPARABLE UNCONT ROLLED TRANSACTIONS. LD. DEPARTMENTAL REPRESENTATIVE SEEKS TO DRAW A DISTINC TION THAT THE SAID CASE LAW DEALS WITH CUP METHOD AS AGAINST TNMM EMPLOYED IN THE INSTANT CASE. WE FIND THAT RULE 10B(E)(III) HEREINABOVE IS REGARD ING TNMM METHOD ONLY PROVIDING FOR VARIOUS ADJUSTMENTS ON ACCOUNT OF THE CONTEMPORANEOUS FACTORS MATERIALLY AFFECTING THE NET PROFITS. THE ABOVE CO -ORDINATE BENCH THEREAFTER CONCLUDES THAT SUCH CAPACITY UNDER UTILIZATION ADJU STMENTS HAVE TO BE MADE ONLY IN THE HANDS OF COMPARABLE ENTITIES INSTEAD OF THAT IN CASE OF TESTED PARTY ITSELF. WE THUS ACCEPT ASSESSEES INSTANT ARGUMENT IN PRINCIPLE AND DIRECT THE TRANSFER PRICING OFFICER TO PROCEED AFRESH AS INDIC ATED HEREINABOVE AFTER AFFORDING ADEQUATE OPPORTUNITY OF HEARING TO THE AS SESSEE. 13. LEARNED COUNSELS NEXT PLEA IS THAT THE ASSESSE E HAS PURCHASED THE COMPONENT IN QUESTION FROM ITS ASSOCIATE ENTERPRISE S AMOUNTING TO ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ERHARDT+LE IMER (INDIA) PVT. LTD. VS. ACIT) A.YS. 2007-08 & 2008-09 - 9 - RS.4,64,91,857/- AS PER PAGES NOS. 5 TO 7 OF THE AS SESSMENT ORDER AS AGAINST ITS TOTAL PURCHASES OF RS.19,22,49,647/-. THE ASSE SSEES CONTENTION ACCORDINGLY IS THAT HONBLE BOMBAY HIGH COURT IN [2 016] 65 TAXMANN.COM 155 (BOM.) CIT VS. RATILAL BECHARLAL HOLDS THAT A T RANSFER PRICING ADJUSTMENT AS PER PROVISIONS OF THE ACT IS TO BE RESTRICTED TO THE EXTENT OF INTERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISES INSTEAD OF THE ENTIRE TURN OVER. SHRI SHAH ACCORDINGLY SEEKS NECESSARY DIRECTIONS TO THE TRANSFER PRICING OFFICER TO RESTRICT THE IMPUGNED ADJUSTMENT QUA ASSESSEES INT ERNATIONAL TRANSACTIONAL ONLY. LD. DEPARTMENTAL REPRESENTATIVE FAILS TO DIS PUTE THIS LEGAL PREPOSITION. WE THUS DIRECT THE TRANSFER PRICING AUTHORITY TO CO NFINE THE IMPUGNED ADJUSTMENTS TO THE EXTENT OF ASSESSEES INTERNATION AL TRANSACTIONS ONLY IN CONSEQUENTIAL PROCEEDINGS. THE ASSESSEES FIRST SU BSTANTIVE GROUND IS ACCORDINGLY ACCEPTED FOR STATISTICAL PURPOSES. 14. THE ASSESSEES SECOND SUBSTANTIVE GROUND SEEKS TO BELIEVE THE LOWER AUTHORITIES ACTION MAKING TRANSFER PRICING ADJUSTME NT IN RESPECT OF SALE OF CLOTH GUIDERS FOR RS.26.97LACS TO ITS ASSOCIATE ENT ERPRISES. THERE IS NO DISPUTE THAT IT HAD SOLD CLOTH GUIDERS NO. KF 2020 AND KF 2 060 NUMBERING 600 & 35 INVOLVING ADJUSTED PER UNIT PRICE OF RS.26180/- AND RS.57849/- AS AGAINST THOSE NUMBERING 30 & 3 SOLD TO THIRD PARTIES INVOLV ING ADJUSTED PER UNIT PRICE OF RS.26071/- & RS.56762/-; RESPECTIVELY. IT HAD U SED CUP METHOD IN BENCHMARKING THE ABOVE TRANSACTIONS. THE TRANSFER PRICING OFFICER PROCEEDED TO MAKE THE IMPUGNED ADJUSTMENT AFTER NOT ICING THE ABOVE DIFFERENCE IN THE SALE PRICE INVOLVING ASSESSEES A SSOCIATE ENTERPRISES AND THIRD PARTY CUSTOMERS. THE DRP UPHOLDS THE SAME AS INDICATED IN THE INSTANT GROUND. 15. LD. COUNSEL REPRESENTING ASSESSEE INVITES OUR A TTENTION TO THE FACT THAT IT HAD SOLD 600 & 35 UNITS OF CLOTH GUIDERS TO ASSOCIA TE ENTERPRISE AS AGAINST 30 ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ERHARDT+LE IMER (INDIA) PVT. LTD. VS. ACIT) A.YS. 2007-08 & 2008-09 - 10 - & 3 UNITS TO THE THIRD PARTIES. HIS SUBMISSION IS THAT THE IMPUGNED DIFFERENCE BETWEEN SALE PRICE AS INDICATED IN PRECEDING PARAGR APH HAS ARISEN BECAUSE OF HUGE DIFFERENCE IN VOLUME OF BUSINESS WHICH DOES NO T INCLUDE WRITTEN CONTRACTS ALL THE TIME. THE ASSESSEE FURTHER SEEKS TO HIGHLIGHT THE FACT THAT IT HAS TO OFFER SPECIAL DISCOUNTED PRICES TO ASSOCIATE ENTERPRISES WHO HAPPEN TO BE PURCHASER OF HUGE QUANTITY AS PER ANNEXURE 4 ATT ACHED WITH FORM 35A. 16. THE ASSESSEES NEXT ARGUMENT IS THAT IT HAS TO PROVIDE WARRANTIES TO LOCAL PURCHASERS AS CALCULATED AT THE RATE OF RS.60 8/- WHICH IS NOT THE CASE WITH RESPECT TO ITS ASSOCIATE ENTERPRISES. LEARNED COUNSEL ACCORDINGLY SUBMITS THAT THE LOWER AUTHORITIES OUGHT TO HAVE INCLUDED T HE ABOVE TWO FACTORS FOR THE PURPOSE OF MAKING ADJUSTMENTS BEFORE ARRIVING AT TH E ALP ADJUSTMENT IN QUESTION. 17. LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPOR TED THE LOWER AUTHORITIES ACTION. HE HOWEVER FAILS TO REBUT THE FACT THAT THE ASSESSEES BULK SALES TO ITS ASSOCIATE ENTERPRISES ARE MUCH VOLUMIN OUS AS COMPARED TO THIRD PARTIES. THE SAID GAP IS TO THE TUNE OF 1/20 TH IN CASE OF FORMER VARIETY OF CLOTH GUIDER AND ALMOST 1/10 TH IN LATTER CATEGORY (SUPRA). THE REVENUE FURTHER I S UNABLE TO DISPUTE THE FACT THAT ASSESSEE HAS BEEN P ROVIDING WARRANTY COST TO ITS LOCAL PURCHASERS WHICH HAS FURTHER SHRUNK ITS PROFI T MARGINS IN QUESTION. WE THUS PRIMA FACIE AGREE WITH ASSESSEES ABOVE TWO AR GUMENTS IN PRINCIPLE AND LEAVE IT OPEN FOR THE LD. TRANSFER PRICING OFFICER TO MAKE APPROPRIATE ADJUSTMENTS AS PER LAW AFTER AFFORDING ADEQUATE OPP ORTUNITY OF HEARING IN CONSEQUENTIAL PROCEEDINGS. THE ASSESSEES LATTER S UBSTANTIVE GROUND IS REMITTED BACK TO THE TRANSFER PRICING OFFICER ACCOR DINGLY. 18. BOTH THE LEARNED REPRESENTATIVES POINT OUT THAT ASSESSEES THIRD SUBSTANTIVE GROUND SEEKING 5% TOLERANCE MARGIN IN ALP DETERMINATION IS ITA NOS. 3298/AHD/2011 & 2880/AHD/2012 (ERHARDT+LE IMER (INDIA) PVT. LTD. VS. ACIT) A.YS. 2007-08 & 2008-09 - 11 - IDENTICAL TO THAT RAISED IN PRECEDING ASSESSMENT YE AR FORMING PART OF THIS ORDER ITSELF. WE FIND THAT WE HAVE ALREADY HELD THE SAME TO BE CONSEQUENTIAL IN NATURE TO BE DECIDED AT THE TIME OF FINAL COMPUTATI ON. THIS SUBSTANTIVE GROUND ALSO FOLLOWS SUIT ACCORDINGLY. ITA NO.2880/ AHD/2012 IS ACCEPTED FOR STATISTICAL PURPOSES. 19. THE ASSESSEES FORMER APPEAL ITA NO.3298/AHD/20 11 IS PARTLY ACCEPTED FOR STATISTICAL PURPOSES AND LATTER APPEAL ITA NO.2880/AHD/2012 IS ACCEPTED FOR STATISTICAL PURPOSES. [PRONOUNCED IN THE OPEN COURT ON THIS THE 27 TH DAY OF DECEMBER, 2016.] SD/- SD/- (PRAMOD KUMAR) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL ME MBER AHMEDABAD: DATED 27/12/2016 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- / REVENUE 2 / ASSESSEE ! / CONCERNED CIT 4 !- / CIT (A) ( )*+ ,--. . /0 / DR, ITAT, AHMEDABAD 1 +23 / GUARD FILE. BY ORDER / . // . /0
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