Master Fluid Solutions India P. Ltd., Pune V. Assistant Commissioner of Income-tax, Pune

ITA 354/PUN/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 5013 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 19-12-2019
• Assessment Year: 2011-2012
• Appeal Filed On: 04-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T VIJAYA BHASKAR REDDY
• Keywords: Transfer pricing; International transaction; Cost of acquisition
• Section: 207; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, PUNE BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI S.S. VISWANETHRA RAVI, J UDICIAL MEMBER . / ITA NO . 354 /PUN/201 6 / ASSESSMENT YEAR : 20 1 1 - 12 MASTER FLUID SOLUTIONS INDIA PRIVATE LIMITED, PLOT NO. B - 41, CHAKAN MIDC INDUSTRIAL AREA, PHASE - 2, VILLAGE - BHAMBULI, TAL. - KHED, CHAKAN, PUNE 410501 PAN : AAECM6715B ....... / APPELLANT / V/S. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 9, PUNE / RESPONDENT . / ITA NO.501/PUN/2017 / ASSESSMENT YEAR : 2012 - 13 MASTER FLUID SOLUTIONS INDIA PRIVATE LIMITED, PLOT NO. B - 41, CHAKAN MIDC INDUSTRIAL AREA, PHASE - 2, VILLAGE - BHAMBULI, TAL. - KHED, CHAKAN, PUNE 410501 PAN : AAECM6715B ....... / APPELLANT / V/S. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 9, PUNE / RESPONDENT ASSESSEE BY : SHRI KISHOR PHADKE REVENUE BY : SHRI T. VIJAYA BHASKAR REDDY / DATE OF HEARING : 02 - 01 - 2020 / DATE OF PRONOUNCEMENT : 19 - 0 2 - 20 20 2 ITA NOS. 354/PUN/2016 & 501/PUN/2017, A.YS. 2011 - 12 & 2012 - 13 / ORDER PER S.S. VISWANETHRA RAVI, JM : THESE TWO APPEALS BY THE ASSESSEE AGAINST SEPARATE ASSESSMENT ORDERS DATED 19 - 12 - 2015 AND 30 - 12 - 2016 PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX , CIRCLE - 9, PUNE AND INCOME TAX OFFICER, WARD - 9(4), PUNE FOR ASSESSMENT YEAR S 2011 - 12 AND 2012 - 13 , RESPECTIVELY. 2. SHRI KISHOR PHADKE, THE LD. AR SUBMITS THAT THE ISSUES RAISED IN BOTH THE APPEALS ARE SIMILAR BASING ON SAME IDENTICAL FACTS AND PRAYED TO TAKE UP THE FACTS IN ITA NO. 354/PUN/2016 AS A LEAD CASE. WITH THE CO NSENT OF BOTH THE PARTIES, WE PROCEED TO HEAR BOTH THE APPEALS TOGETHER AND PASS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. WE FIRST TAKE UP THE APPEAL IN ITA NO. 354/PUN/2016 FOR A.Y. 2011 - 12. 4. THE ASSESSEE RAISED AS MANY AS EIGHT GROUNDS AMONGST WHICH THE ONLY EFFECTIVE ISSUE EMANATES FOR ADJUDICATION CHALLENGING THE ACTION OF AO IN MAKING TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF DIFFERENCE OF PURCHASE MATERIAL BETWEEN MCC - USA AND MCC - CHINA IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 5 . HEARD BOTH PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE ASSESSEE IS A PRIVATE LIMITED COMPANY WHICH IS SUBSIDIARY OF M/S. MASTER CHEMICAL HOLDINGS LIMITED SITUATED IN CYPRUS , IN TURN , WHICH IS A SUBSIDIARY OF MASTER CHEMICAL CORPORATION IN C, USA (IN SHORT MCC - USA). THE ASSESSEE REPORTED INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED 3 ITA NOS. 354/PUN/2016 & 501/PUN/2017, A.YS. 2011 - 12 & 2012 - 13 ENTERPRISE (AE ) THAT ARE MCC - USA AND MCC - CHINA INVOLVING IMPORTING OF FINISHED GOODS OR RESALE AND RAW MATERIALS FOR MANUFACTURING IN INDIA SUCH AS CUTTING AND GRINDING FLUIDS, CLEANERS, RUST PREVENTIVES ADDITIVES AND RECYCLING EQUIPMENTS IN FORM NO. 3CEB AND THE SAME WERE REFERRED TO TRANSFER PRICING OFFICER (TPO) FOR DETERMINING FAIR ARMS LENGTH PRICE (ALP) WITH ITS AES. 6. IT IS NOTED THAT THE VALUE OF IN TERNATIONAL TRANSACTIONS WITH ITS AES DETERMINED AT RS.5,46,17,724/ - BY APPLYING TRANSACTIONAL NET MARGIN METHOD (HEREINAFTER REFERRED TO AS THE TNMM) WHICH IS REFLECTING AT PAGE NO. 2 OF TPOS ORDER. IN ORDER TO ARRIVE COMPARABLE MARGIN S , THE ASSESSEE PREFERRED TO TAKE 11 COMPARABLES BASING ON ITS OPERATING PROFIT/OPERATING INCOME IN GROSS PROFIT. IT IS NOTED THAT THE AVERAGE OPERATING PROFIT/OPERATING INCOME SHOWN BY THE ASSESSEE IS AT 2.79% AND GROSS PROFIT AT 35.76%. THE ASSESSEE, MCC - USA IS DEVELOP ING ALL THE PRODUCTS AND CREATING THE BRAND ETC. AND POLICY WAS DECIDED TO CHARGE THE MARK - UP AT A HIGHER PERCENTAGE. THE TPO DID NOT ACCEPT THE SAID CONTENTION OF ASSESSEE AND PROPOSED RS.4,14,326/ - AS ALP OF ASSESSEE INVOLVING THE PURCHASE OF RAW MATERI AL FOR MANUFACTURING AND CONSUMABLES AND IMPORT OF EQUIPMENTS AND TESTING APPARATUS. THE TPO DID NOT CHANGE ABOVE SAID COMPARABLES MARGIN ADOPTED BY THE ASSESSEE BUT HOWEVER ADDED THE DIFFERENCE PAYMENT MADE TO MCC - USA AND MCC - CHINA. WE NOTE THAT THE ASS ESSEE, MCC - USA CHARGED PRICE FROM ASSESSEE AT COST + 20% AND MCC - CHINA CHARGED PRICE AT COST + 5%. 7. THE CONTENTION OF LD. AR IS THAT ONCE OVERALL BENCHMARKING IS ACCEPTED, INDIVIDUAL TRANSACTIONS OUGHT NOT TO BE SCRUTINIZED . WE NOT E THAT THIRD P ARA IN P AGE 4 OF THE TPO O RDER , THAT THE TPO HAS ACCEPTED THE 4 ITA NOS. 354/PUN/2016 & 501/PUN/2017, A.YS. 2011 - 12 & 2012 - 13 BENCHMARKING DONE BY THE ASSESSEE WITH SOME CHANCES I.E. TAKING 5 COMPARABLE COMPANIES AS AGAINST 11 COMPARABLE S. THE TPO ALSO OBSERVED THAT , OP : 0 I RATIO OF THE 5 COMPARABLE PARTIES IS 4.14% AS AGAINST OP : 0 I OF THE ASSESSEE BEING 2.79%. THE LD. AR ARGUED THAT THE DIFFERENCE BETWEEN THE TWO RATIOS ONE IS 1.35%, THE SAME FALLS IN PERMISSIBLE DEVIATION RANGE OF 5% AS STIPULATED IN SECOND PROVISO OF SECTION 92C(2) O F THE ACT. WE FIND T HE OVERALL BENCH MARKING OF THE PURCHASE TRANSACTIONS STANDS ACCEPTED BY THE TPO ON AN OVERALL BASIS. IN OUR OPINION, ONCE THE AGGREGATED TRANSACTIONS OF PURCHASE OF GOODS FROM AE PARTIES STAND ACCEPTED ON AN OVERALL BASIS, THE TPO OU GHT NOT TO HAVE PROCEEDED TO BENCH MARKING OF INDIVIDUAL TRANSACTIONS , INDIVIDUAL BENCHMARKING OF TRANSACTIONS WITH MCC - USA WAS UNCALLED FOR IN THE PRESENT CASE. THE ITAT PUNE BENCHES IN THE CASE OF P N GADGIL JEWELLERS PVT LTD . VS. ACIT IN ITA NO. 1891/PUN/2018 ACCEPTED THE ABOVE CONTENTION VIDE PARAS 8 AND 12 . 8. FURTHER, THE CONTENTION OF LD. AR THAT B ENCHMARKING OF AN AE PARTY WITH ANOTHER AE PARTY IS INCORRECT , ANY AE TRANSACTION IS ALWAYS BENCHMARKED WITH AN UNCONTROLLED TRANSACTION I.E. A TRA NSACTION BETWEEN NON - AE PARTIES . THE TPO HAS BENCH MARKED MCC - USA PRICING WITH MCC - CHINA PRICING, I.E. COMPARING ONE AE WITH ANOTHER AE WHICH IS IN DIRECT CONTRADICTION WITH TP PROVISION AND RULES. I . SKODA AUTO INDIA {P} LTD. VS. ASST. CIT - [2009] 30 SOT 3 19 (PUNE). II . TEC N IMONT ICB (P) LTD. VS. ADDL CIT - [2012]24 TAXMANN.COM 28 (MUM.)(TM). 9. WE NOTE THAT P ROFITS EARNED ON GOODS PURCHASED FROM MCC - USA HAS PLACED ON RECORD A WORKING OF PROFITS EARNED FROM SALE OF GOODS PURCHASED ARE AT P AGE NO. 27 AND 28 , W HICH SHOWS THAT THE AVERAGE RATE OF THE GOODS 5 ITA NOS. 354/PUN/2016 & 501/PUN/2017, A.YS. 2011 - 12 & 2012 - 13 PURCHASED FROM MCC - USA WAS RS.100 .50 PER UNIT AS AGAINST AVERAGE RATE OF THE SAID GOODS SOLD AT RS. 207 . 7L AND A GROSS MARGIN OVER 100% ON PURCHASE COST WHICH IS FAR MORE THAN GP% FOR THE COMPARABLE MARGINS. AS PER THE NOTE , THE T P AUDITOR REPORT THE ASSESSEE HAS ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINING THE ARM'S LENGTH PRICE. WE FIND FORCE IN THE ARGUMENTS OF LD. AR THAT THE YEAR UNDER CONSIDERATION IS THE GESTATION PERIOD OF THE ASSESS EE FOR ESTABLISHING PRESENCE IN INDIAN MARKET THE ASSOCIATE ENTERPRISE - MCC USA HAS SUPPLIED THE GOODS ON COST PLUS 20% MARGIN AND MCSCL, CHINA AT COST PLUS 5% MARGIN. THE COMPARATIVE PRICES FOR SUPPLY TO OTHER UNRELATED INTERNATIONAL DISTRIBUTORS IS HIGHE R BY 15% TO 20% AS COMPARED TO THE ASSESSEE COMPANY WHICH CLEARLY SHOWS THE AE PARTIES HAVE CHARGED HIGHER PRICES TO UNRELATED INTERNATIONAL PARTIES AS COMPARED TO THE PRICE CHARGED TO THE ASSESSEE AND ALSO FOR THE DISCUSSION MADE BY US IN PARA 6 OF THIS ORDER. THEREFORE, AS DISCUSSED ABOVE AND BY FOLLOWING THE FINDING RENDERED BY THIS TRIBUNAL IN THE CASE OF P.N. GADGIL JEWELLERS PVT. LTD. (SUPRA) THAT WHEN THE MEAN MARGIN COMPUTED BY THE ASSESSEE AND TPO/ ASSESSING OFFICER ARE WITHIN TOLERANCE LEVEL OF 5%, NO ADJUSTMENT IS REQUIRED TO BE MADE. AS DISCUSSED IN PARA 7 OF THIS ORDER, THE TPO DETERMINED OP : 0 I AT 4.14% AND ASSESSEE AT 2.79% , THEREFORE, IT IS CLEAR THAT THE DIFFERENCE IS ONLY OF 1.35%, AND IN OUR OPINION, NO TP ADJUSTMENT IS WARRANTED. THUS, ADDITION MADE BY THE AO IS DELETED. THUS, GROUND NOS. 1 TO 7 RAISED BY THE ASSESSEE ARE ALLOWED. 10. GROUND NO. 8 IS GENERAL IN NATURE, HENCE, REQUIRES NO ADJUDICATION. 11. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWED. 6 ITA NOS. 354/PUN/2016 & 501/PUN/2017, A.YS. 2011 - 12 & 2012 - 13 ITA NO. 501/PUN/2017, (A.Y. 2012 - 13) 1 2 . BOTH THE SIDES ARE UNANIMOUS IN STATING THAT THE FACTS AND THE GROUNDS OF APPEAL EXCEPT THE AMOUNT RAISED IN ITA NO. 501/PUN/2017 IS IDENTICAL TO THE GROUNDS RAISED IN ITA NO. 354/PUN/2016. THUS, IN VIEW OF THE FACT THAT THE ISSUE IN THE APPEAL IS IDENTIC AL AND IS ARISING FROM SAME SET OF FACTS THE FINDINGS GIVEN BY US WHILE ADJUDICATING THE APPEAL IN ITA NO. 354/PUN/2016 WOULD MUTATIS MUTANDIS APPLY TO THE APPEAL IN ITA NO. 501/PUN/2017, AS WELL. ACCORDINGLY, THE APPEAL OF ASSESSEE IS ALLOWED. 1 3. TO SU M UP, BOTH THE APPEALS OF ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH FEBRUARY, 2020 . SD/ - SD/ - (D. KARUNAKARA RAO) (S.S. VISWANETHRA RAVI) ACCOUNTANT MEMBER JUDICIAL MEMBE R / PUNE; / DATED : 19 TH FEBRUARY, 2020 RK / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE DRP 3, MUMBAI 4. THE COMMISSIONER OF INCOME TAX (TP) - 1, MUMBAI 5. , , , / DR, ITAT, C BENCH, PUNE. 6. / GUARD FILE. // // TRU E COPY // / BY ORDER, / PRIVATE SECRETARY, , / ITAT, PUNE