ACIT 10(3), MUMBAI V. CHEMTEX GLOBAL ENGINEERS P. LTD, MUMBAI

ITA 3590/MUM/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3428 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 14-03-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 06-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: MANOJ PUR OHIT
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Wholly owned subsidiary
• Section: 92C; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'K' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI P.M. JAGTAP, ACCOUNTANT MEMBER ITA NO. 3590/MUM/2010 (ASSESSMENT YEAR: 2004-05) ACIT, RANGE 10(3) M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. ROOM NO. 451, 4TH FLOOR CHEMTEX HOUSE, HIRANANDANI GARDEN AAYAKAR BHAVAN, M.K. ROAD VS. MAIN STREET, POWAI, MUMBAI 400076 MUMBAI 400020 PAN - AACCC4458P APPELLANT RESPONDENT APPELLANT BY: SHRI AJEET KUMAR JAIN RESPONDENT BY: S/SHRI FARROKH IRANI & MANOJ PUROHIT DATE OF HEARING: 14.03.2013 DATE OF PRONOUNCEMENT: 12.06.2013 O R D E R PER D. MANMOHAN, V.P. THIS IS AN APPEAL FILED AT THE INSTANCE OF THE REVE NUE AND IT PERTAINS TO A.Y. 2004-05. 2. TRANSFER PRICING ADJUSTMENT MADE BY THE AO, IN THE LIGHT OF THE ORDER OF THE TPO, HAVING BEEN SET ASIDE BY THE LEARNED CI T(A), REVENUE IS IN APPEAL BEFORE US WHEREIN IT WAS CONTENDED THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN EXCLUDING RITES LIMITED AS A COMPARABLE CASE A ND HE ERRED IN HOLDING THAT THERE WAS NO CASE FOR ADJUSTMENT TO ARMS LENG TH PRICE. 3. FACTS NECESSARY FOR DISPOSAL OF THE APPEAL ARE STAT ED IN BRIEF. THE ASSESSEE COMPANY I.E., CHEMTEX GLOBAL ENGINEERS PVT . LTD. (HEREINAFTER REFERRED TO AS CGPL) IS A 100% SUBSIDIARY OF CHEMTEX ENGINEE RING OF INDIA LTD. (CEIL) AND IT WAS SPECIALISING IN CARRYING OUT BASIC AND D ETAILED ENGINEERING WORKS, BASED ON THE PROCESS KNOW-HOW PROVIDED BY THE LICEN SORS FOR LARGE MAN MADE FIBER, CHEMICAL AND PETROCHEMICAL PLANTS. THE CEIL, IN TURN, IS OWNED BY CHEMTEX INTERNATIONAL INC., USA (CII) AND AMERICAN INVESTMENT INC., USA. CII WAS AGROUP COMPANY OF MITSUBUSHI CORPORATION, TOKYO . ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 2 4. DURING THE FINANCIAL YEAR UNDER CONSIDERATION THE A SSESSEE COMPANY PROVIDED ENGINEERING CONSULTANCY SERVICES TO CII. T HE BUSINESS OPERATIONS OF THE ASSESSEE COMPANY WERE ANALYSED BY TAKING THE AS SESSEE AS TESTED PARTY, SINCE, IN THE FINANCIAL YEAR RELEVANT TO A. Y. 2004-05, THE ASSESSEE COMPANY PROVIDED ENGINEERING CONSULTANCY SERVICES T O CII WHICH IS AN ASSOCIATE ENTERPRISE (AE) OF ASSESSEE COMPANY. ACCO RDING TO THE ASSESSEE THE PRICE CHARGED WAS AT ARMS LENGTH. 5. IN ITS TRANSFER PRICING REPORT IT HAS ANALYSED THE TRANSACTIONS WITH THE HELP OF TRANSACTIONAL NET MARGIN METHOD (TNMM) AS A PRIMARY METHOD. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASS ESSEE COMPANY HAS ALSO COMPARED THE RATES CHARGED TO AE VIS--VIS THI RD PARTY (NON-AE) AND BENCHMARKED THE PRICE BY APPLYING CUP METHODOLOGY I N SUPPORT OF THE INTERNATIONAL TRANSACTIONS. VIDE LETTER DATED 18 TH AUGUST, 2006 IT WAS SUBMITTED THAT THE ASSESSEE CHARGED FEES AT HOURLY BASIS FROM THE AE AND ALSO STATED THAT THE COMPANY HAD ALSO ENTERED INTO A CONTRACT WITH THIRD PARTY AND THE AVERAGE HOURLY RATE CHARGED FROM THE THIRD PARTY WORKS OUT AT ` 331/- WHICH IS LOWER COMPARED TO THE FEES CHARGED F ROM THE AE I.E. ` 488/-. AGAIN, VIDE LETTER DATED 25 TH AUGUST, 2006 THE ASSESSEE FURNISHED FIGURES TO COMPARE THE FEES CHARGED FROM AE WITH THAT OF THE F EES CHARGED FROM NON-AE COMPANY TO HIGHLIGHT THAT EVEN BY APPLYING THE METH ODOLOGY OF CUP THERE IS NO CASE FOR MAKING ANY TRANSFER PRICING ADJUSTMENT. PAGE 57 TO 70 OF THE PAPER BOOK HIGHLIGHTS THAT THE ASSESSEE BENCHMARKED ITS INTERNATIONAL TRANSACTIONS BY APPLYING THE METHODOLOGY OF TNMM AN D TAKING THE BERRY RATIO AS PROFIT LEVEL INDICATOR (I.E. OR/OE). THE C OMPANY SUBMITTED THAT THERE IS NO CASE FOR MAKING ANY ADJUSTMENT, SINCE I T IS WITHIN THE SAFE HARBOUR LIMIT OF PLUS OR MINUS 5%. PAGES 129 TO 132 OF THE PAPER BOOK HIGHLIGHTS THAT THE PROFIT BEFORE TAX IN THE CASE O F THE ASSESSEE COMPANY REFLECTS A NET OPERATIONS MARGIN OF 4.65% (AT PAGE 132 4.80%), BUT IN ORDER TO APPLY THE CORRECT PROCEDURE, ONE TIME EXTRAORDIN ARY EXPENSES, DEBITED TO THE P & L ACCOUNT, SHOULD BE EXCLUDED SINCE IT RESU LTS IN COMPRESSING THE PROFITABILITY RATE. IF ONE EXCLUDES THE ONE TIME EX PENDITURE THE RESULTANT NET PROFIT FOR THE YEAR WOULD YIELD A NET OPERATING MAR GIN OF 9.41% AND IN ORDER TO COMPARE THE PROFIT MARGIN OF THE ASSESSEE WITH T HE OTHER COMPARABLE ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 3 COMPANIES CASES THE NON-RECURRING EXPENSES AND INC OME HAS TO BE EXCLUDED. IT CAN THUS BEEN SEEN THAT THE ASSESSEE C OMPANY BENCHMARKED ITS INTERNATIONAL TRANSACTIONS BY APPLYING THE TNMM MET HODOLOGY AND ALSO SUPPORTED IT BY CUP METHODOLOGY, BY TAKING INTO CON SIDERATION THE RATES CHARGED FROM THIRD PARTY. 6. IT MAY BE NOTICED HERE THAT THE ASSESSEE USED PROWE SS DATABASE TO IDENTIFY THE COMPARABLES AND IN TURN IT HAS IDENTIF IED 18 COMPANIES AS COMPARABLES. NATURE OF ACTIVITY, TURNOVER, QUALITAT IVE ANALYSIS, ETC. WERE TAKEN FOR IDENTIFYING THE COMPARABLES. IN SHORT, FU NCTIONS, ASSETS & RISKS (FAR) ANALYSIS WAS DONE TO IDENTIFY AND SHORTLIST C OMPARABLES. RULE 10B(4) OF THE IT RULES PROVIDES THAT TWO YEARS DATA, PRIOR TO THE RELEVANT FINANCIAL YEAR, SHOULD ORDINARILY BE TAKEN INTO CONSIDERATION . ASSESSEE COMPANY PROVIDED TWO YEARS DATA FOR MOST OF THE COMPANIES. HOWEVER, THE TPO OPTED TO TAKE ONLY 10 COMPARABLES AND IN THE PLACE OF BAL ANCE EIGHT COMPARABLES THE TPO SOUGHT TO TAKE FOUR FRESH COMPARABLES AND U PON HEARING THE OBJECTIONS OF THE ASSESSEE HE DROPPED THREE COMPANI ES BUT SOUGHT TO INCLUDE RITES LTD. AS A COMPARABLE AND, ACCORDING TO THE TP O, BY TAKING 11 COMPARABLES, INCLUDING RITES LTD., THE ASSESSEES C ASE DO NOT FALL IN THE SAFE HARBOUR LIMIT AND ACCORDINGLY THE ARMS LENGTH PRIC E OF THE INTERNATIONAL TRANSACTION OF THE ASSESSEE HAS BEEN COMPUTED AT ` 15,41,49,544/- AND AN AMOUNT OF ` 1,19,59,656/- WAS ADDED TO ASSESSEES INCOME AND DI RECTED THE AO ACCORDINGLY. IN THE OPINION OF THE TPO THE AVERA GE OPERATING PROFIT MARGIN OF THE COMPARABLE CASE WORKS OUT TO 13.88% A S AGAINST ASSESSEES MARGIN OF ABOUT 5%. 7. THOUGH SEVERAL OBJECTIONS WERE RAISED BEFORE THE AO CHALLENGING THE METHODOLOGY FOLLOWED BY THE TPO, THE AO PROCEEDED T O COMPLETE THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT BY MAKIN G AN ADJUSTMENT OF ` 1,19,59,656/- TO THE INCOME DECLARED BY THE ASSESSE E. THE MAIN CASE OF THE ASSESSEE BEFORE THE AO WAS THAT THE LEARNED TPO HAS NOT FOLLOWED THE PRINCIPLES OF NATURAL JUSTICE WHILE REJECTING THE C OMPARABLE COMPANIES LISTED OUT BY THE ASSESSEE COMPANY AND HE HAS ALSO WRONGLY TAKEN RITES LTD. AS A COMPARABLE CASE. ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 4 8. AGGRIEVED, ASSESSEE CONTENDED BEFORE THE FIRST APPE LLATE AUTHORITY THAT THE AO ERRED IN MAKING A REFERENCE TO THE TPO AND A LSO CONTENDED THAT THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE ARE AT AR MS LENGTH AND HENCE NO ADJUSTMENT IS CALLED FOR IN THE CIRCUMSTANCES OF TH E CASE. WE ARE CONCERNED HEREIN WITH THE ADJUSTMENT MADE BY THE AO AND HENCE THE FACTS HIGHLIGHTED BEFORE THE CIT(A) VIS--VIS THE METHODOLOGY FOLLOWE D BY THE ASSESSEE, TO SUPPORT THAT THE INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH, IS HIGHLIGHTED HEREIN. 9. THE CASE OF THE ASSESSEE IS THAT AS PER THE TRANSFE R PRICING STUDY REPORT THE ASSESSEE FURNISHED DETAILED ANALYSIS TO HIGHLIGHT THAT THE MOST APPROPRIATE METHOD IN THE CASE OF THE ASSESSEE IS T NMM AND THE MOST APPROPRIATE PROFIT LEVEL INDICATOR IS THE BERRY R ATIO. THE BERRY RATIO IS DEFINED AS THE RATIO OF OPERATING REVENUE TO OPERAT ING EXPENSES WHEREAS THE TPO HAS TAKEN INTO CONSIDERATION THE OPERATING PROF IT AND OPERATING COST. IT WAS ALSO SUBMITTED THAT IN ADDITION TO BENCHMARKING ITS TRANSACTIONS UNDER TNMM METHOD THE COMPANY SUPPORTED ITS TRANSACTIONS BY FURNISHING THE INTERNAL CUP INFORMATION AND HIGHLIGHTED THAT EVE N AS PER THE CUP METHOD THE TRANSACTIONS WITH THE AE ARE AT ARMS LENGTH. I T WAS ALSO HIGHLIGHTED THAT IN THE PECULIAR CIRCUMSTANCES OF THE CASE THE TAX A UTHORITIES OUGHT NOT TO HAVE TAKEN INTO CONSIDERATION THE ONE TIME EXTRAORD INARY EXPENSES AS PART OF THE PROFIT. 10. A LETTER DATED 28.11.2006 WAS REFERRED TO BEFORE TH E CIT(A) TO SUBMIT THAT IF ONE TIME EXPENDITURE IS DEDUCTED THE RESULT ANT NET PROFIT FOR THE YEAR GIVES A NET OPERATING MARGIN OF 9.41%. IT WAS ALSO SUBMITTED THAT THE ORDER PASSED UNDER SECTION 92CA OF THE ACT DOES NOT CONTR ADICT THE CLAIM OF THE ASSESSEE TO THE EFFECT THAT THE CORRECT BERRY RATIO IS 1.09 RATHER THAN 1.05 SHOWN EARLIER AND IF 1.09 IS TAKEN INTO CONSIDERATI ON IT IS DEFINITELY A BETTER RESULT AND HENCE NO ADJUSTMENT IS CALLED FOR. THE M ETHODOLOGY FOLLOWED IN COMPUTATION OF THE BERRY RATIO WAS ALSO CHALLENGED BY THE ASSESSEE APART FROM CLAIMING THAT THE TAX AUTHORITIES HAVE TAKEN I NTO CONSIDERATION ONLY 11 COMPANIES I.E., 10 COMPANIES OUT OF THE 18 COMPARAB LES GIVEN BY THE ASSESSEE AND RITES LTD. AND ON SUCH BASIS THE PROFI T MARGIN IS WORKED OUT AT 13.8%; WHILE NOT TAKING INTO CONSIDERATION SEVERAL COMPARABLES FURNISHED ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 5 BY THE ASSESSEE NO PROPER OPPORTUNITY WAS GIVEN TO THE ASSESSEE AND THE AO HAS ALSO NOT AFFORDED AN OPPORTUNITY BEFORE REJECTI NG THE PLEA OF THE ASSESSEE ABOUT APPLICATION OF INTERNAL CUP METHOD. 11. IN THE GROUNDS OF APPEAL FILED BEFORE THE CIT(A) IT WAS HIGHLIGHTED THAT THE ASSESSEE HAS GIVEN ITS FAR ANALYSIS TO HIGHLIGH T AS TO WHY 18 COMPARABLES ARE CHOSEN BUT THE AO HAS NOT GIVEN ANY REASON AS TO WHY THE CHOSEN COMPARABLES CANNOT BE TAKEN INTO CONSIDERATI ON. IT WAS ALSO HIGHLIGHTED THAT AS PER THE PROVISIONS OF SECTION 9 2C(2) OF THE I.T. ACT, WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPRO PRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHME TICAL MEAN OF SUCH PRICES OR A PRICE WHICH VARIES FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. BY ADOPTING THAT FORMULA THE ARITHMETICAL MEAN OF THE BERRY RATIO OF THE COMPARA BLE CASES GIVEN BY THE ASSESSEE WORKS OUT TO 1.06 WHEREAS THE BERRY RATIO OF THE ASSESSEE WORKED TO 1.05 BEFORE ADJUSTING NON-OPERATIONAL/EXTRAORDINARY EXPENSES AND THUS IT IS COMPARABLE WITH THE AVERAGE OF THE BERRY RATIO OF T HE INDEPENDENT COMPARABLE SERVICE COMPANIES. THEREFORE, THE FEES C HARGED BY THE ASSESSEE HAS TO BE TREATED AS REASONABLE AND THE PRICE CHARG ED IS IN TUNE WITH THE ARMS LENGTH PRINCIPLE. IT WAS ALSO HIGHLIGHTED THA T SELECTION OF MULTIPLE YEAR FINANCIAL DATA FOR THE COMPARABLES IS IN TUNE WITH RULE 10B(4) OF THE IT RULES. 12. WITH REGARD TO INCLUSION OF RITES LTD. AS A COMPARA BLE CASE THE ASSESSEE COMPANY SUBMITTED THAT IT IS A MULTI-DISCI PLINARY CONSULTANCY ORGANISATION IN THE FILED OF TRANSPORTATION, INFRAS TRUCTURE AND RELATED TECHNOLOGIES. SINCE IT PROVIDES AN ARRAY OF SERVICE S UNDER A SINGLE ROOF, AND BEING A GOVERNMENT OF INDIA ENTERPRISE, IT IS NOT C OMPARABLE WITH THE SERVICES RENDERED BY THE ASSESSEE COMPANY. IN FACT FOREIGN CONTRACTS EXECUTED BY RITES LIMITED ARE WITH THE GOVERNMENTS OF SEVERAL COUNTRIES SUCH AS SUDAN, MYANMAR, U.K. ETC. AND NOT WITH INDE PENDENT PRIVATE PARTIES. THEREFORE, THE CONTRACTS OF RITES LIMITED HAVE GOVERNMENT SUPPORT AND THERE IS AN IMPLICIT GUARANTEE PROVIDED BY THE GOVERNMENT OF INDIA AND IT IS NOT AFFECTED BY THE MARKET FORCES/NEGOTIATION S. FUNCTIONAL PROFILE AND RISK PROFILE IS NOT SIMILAR TO THE ASSESSEE SINCE I T IS A GOVERNMENT ENTERPRISE ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 6 AND IT MOSTLY EXECUTES CONTRACTS FOR GOVERNMENT ENT ERPRISES ONLY, APART FROM THE FACT THAT THE FIXED ASSET BASE OF THE ASSESSEE COMPANY IS VERY MINIMAL AS COMPARED TO RITES HEAVY INVESTMENTS AND, LOOKED AT FROM ANY ANGLE, IT IS NOT COMPARABLE. IF RITES LIMITED IS NOT TAKEN INTO CONS IDERATION THE INTERNATIONAL TRANSACTION OF THE ASSESSEE COMPANY IS AT ARMS LEN GTH AND HENCE NO ADJUSTMENT WOULD BE CALLED FOR. 13. THE LEARNED CIT(A) OBSERVED THAT THE ASSESSEE HAD E NTERED INTO SIMILAR TRANSACTIONS/AGREEMENTS WITH UNRELATED THIRD PARTIE S NAMELY, GARDEN SILK AND RELIANCE HAZIRA PROJECT. THE AVERAGE HOURLY RAT E CHARGED TO THE THIRD PARTY WAS ABOUT ` 331/- WHICH WAS LOWER COMPARED TO THE CHARGES OF ` 488/- COLLECTED FROM THE AE. THEREFORE, THE INTERNATIONAL TRANSACTIONS WERE HELD TO BE AT ARMS LENGTH DUE TO AVAILABILITY OF COMPARABL E UNCONTROLLED PRICE (BY APPLYING INTERNAL CUP METHOD). SINCE THIS INFORMATI ON WAS PROVIDED BEFORE THE TPO AS WELL AS BEFORE THE AO, ACCORDING TO THE LEARNED CIT(A) THE SAME OUGHT TO HAVE BEEN CONSIDERED DURING THE COURSE OF ASSESSMENT PROCEEDINGS SINCE THE COMPARABLE AVERAGE HOURLY RATE CHARGED BY THE ASSESSEE FROM ITS AE WAS MORE THAN THE CHARGES COLLECTED FROM THE THI RD PARTY; IT CANNOT BE STATED THAT IT HAS UNDER CHARGED ITS AE, IF THE PRI CE IS BENCHMARKED UNDER INTERNAL CUP METHOD (COMPARING THE FEE CHARGED FROM AE TO THE FEE COLLECTED FROM THE THIRD PARTY). IT WAS ALSO HIGHLIGHTED THAT IN THE EARLIER YEARS ALSO THE ASSESSEE WAS SUBJECTED TO TRANSFER PRICING SCRU TINY OF SAME AE TRANSACTIONS BUT NO ADJUSTMENT WAS MADE. 14. THE LEARNED CIT(A) HAS ALSO NOTICED THAT AS PER RUL E 10B OF THE IT RULES THE PROFIT MARGIN ARISING IN COMPARABLE UNCON TROLLED TRANSACTIONS CAN BE ADJUSTED TO TAKE INTO CONSIDERATION THE DIFFEREN CE, IF ANY, SUCH AS THE SPECIFIC CHARACTERS OF THE TRANSACTION, FUNCTIONS P ERFORMED AND ASSETS EMPLOYED BY THE COMPARABLE COMPANIES. HE ALSO NOTIC ED THAT USE OF NET MARGIN CAN POTENTIALLY INTRODUCE A GREATER ELEMENT OF VOLATILITY BECAUSE THE NET MARGIN CAN BE INFLUENCED BY SOME FACTORS THAT M AY NOT HAVE AN EFFECT ON THE GROSS MARGIN AND PRICES BECAUSE OF THE POTENTIA L FOR VARIATION OF OPERATING EXPENSES ACROSS ENTERPRISES. IN THIS REGA RD HE OBSERVED THAT THE EXTRAORDINARY EXPENSES HIGHLIGHTED BY THE ASSESSEE SHOULD NOT FIGURE IN THE OPERATING EXPENSES AND IF SUCH ADJUSTMENT IS MADE B EFORE DETERMINING THE ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 7 ALP, THE TNMM METHOD EMPLOYED BY THE ASSESSEE WOULD OFFER A PRACTICAL SOLUTION; FURTHER IF THE ABOVE MENTIONED MATERIAL D IFFERENCE ON ACCOUNT OF EXTRAORDINARY EXPENSES IS ADJUSTED BY REMOVING TH EM FROM OPERATING EXPENSES ON PLI OF THE ASSESSEE THEN ITS BERRY RATI O COMES TO 1.10 AND THE OPERATING PROFIT ON OPERATING COST COMES TO 10.40% WHICH IS HIGHER THAN THE BERRY RATIO OF 1.06 AND OPERATING PROFIT TO OPERATI NG COST OF 5.73% OF THE COMPARABLES. HE THUS CONCLUDED THAT THE ASSESSEES INTERNATIONAL TRANSACTION IS AT ARMS LENGTH. 15. WITH REGARD TO INCLUSION OF RITES LIMITED AS COMPAR ABLE, FOR BENCH MARKING, THE LEARNED CIT(A) WAS OF THE VIEW THAT TH ERE IS A DIFFERENCE IN THE ACTIVITY OF RITES LIMITED AND HENCE IT CANNOT BE CO NSIDERED AS COMPARABLE WITH THE ASSESSEE COMPANY. IN THIS REGARD HE OBSERV ED THAT IT IS A PART OF THE GOVERNMENT ENTERPRISE AND WAS ASSURED OF OBTAINING CONTRACTS THROUGH RAILWAYS. THIS IS A BASIC DIFFERENCE. IN ADDITION T HERETO RITES LIMITED WAS CARRYING ON DIFFERENT FUNCTIONS IN DIFFERENCE ECONO MIC SECTIONS AND MARKETS AND NATURALLY HAS VERY HIGH LEVEL OF PROFITABILITY AND HENCE IT CANNOT BE TAKEN AS COMPARABLE. IF RITES LIMITED IS EXCLUDED F ROM COMPARABLES THE ASSESSEES TRANSACTION WOULD BE AT ARMS LENGTH. HE , THEREFORE, DELETED THE ADDITION. 16. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US. THE LEAR NED D.R. SUBMITTED THAT THE ASSESSEE HAVING BENCHMARKED ITS INTERNATIO NAL TRANSACTION BY APPLYING THE METHODOLOGY PRESCRIBED UNDER TNMM THER E IS NO NEED FOR THE TPO OR FOR THE AO TO APPLY ANOTHER METHOD TO BENCHM ARK ASSESSEES TRANSACTIONS. ADVERTING OUR ATTENTION TO PAGE 143 O F THE PAPER BOOK THE LEARNED D.R. SUBMITTED THAT THE ASSESSEE BENCHMARKE D ITS TRANSACTION BY APPLYING TNMM, WITH THE HELP OF BERRY RATIO AS PROF IT LEVEL INDICATOR I.E. OPERATING INCOME/OPERATING EXPENSES. HE ALSO REFERR ED TO THE TRANSFER PRICING REPORT FILED BY THE ASSESSEE AND, IN PARTIC ULAR, ADVERTED OUR ATTENTION TO PAGES 52, 53 AND 57 OF THE PAPER BOOK TO SUBMIT THAT THOUGH THE CBDT AND OECD GUIDELINES RECOGNISE FIVE ARMS L ENGTH PRICING METHODS I.E., CUP, RPM, CPM, TNMM AND PSM, THE ASSESSEE HAV ING MADE AN ANALYTICAL STUDY OF THE SUITABLE COMPARABLES IT HAD CATEGORICALLY MENTIONED IN ITS STUDY REPORT THAT IN THE ABSENCE OF INTERNAL AND EXTERNAL COMPARABLES, ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 8 CUP METHOD CANNOT BE REGARDED AS THE MOST APPROPRIA TE METHOD AND IN ITS ULTIMATE ANALYSIS IT BENCHMARKED ITS TRANSACTION BY APPLYING TNMM SINCE ASSESSEE COMPANY IS ENGAGED IN RENDERING CONSULTANC Y SERVICES OVERSEAS EXCLUSIVELY TO CII. IN THIS REGARD HE ALSO REFERRED TO PAGE 34 AND 50 OF THE PAPER BOOK TO SUBMIT THAT THE ASSESSEE HAD TAKEN IN TO CONSIDERATION THE NATURE OF SERVICES RENDERED BY IT TO ITS AE WHILE C OMING TO THE CONCLUSION THAT TNMM IS THE MOST APPROPRIATE METHOD. THEREFORE , THE ASSESSEE CANNOT, AT A LATER STAGE, REQUEST THE AO/TPO TO APPLY ANOTH ER METHOD AS THE MOST APPROPRIATE METHOD. 17. HE ALSO ADVERTED OUR ATTENTION TO PAGE 70 AND 71 OF THE PAPER BOOK TO SUBMIT THAT WHILE SELECTING THE PROFIT LEVEL INDICA TOR THE ASSESSEE ADOPTED BERRY RATIO AS THE MOST APPROPRIATE PLI WHICH IS DE FINED AS THE RATIO OF OPERATING REVENUE TO OPERATING EXPENSES WHEREAS RUL E 10B(C))I) PROVIDED THAT PROFIT LEVEL INDICATOR SHOULD BE WITH REFERENC E TO THE COST OR SALES OF ASSETS. ON THE CONTRARY, IN BERRY RATIO, PROFIT IS NOT TAKEN INTO CONSIDERATION SINCE ONLY OPERATING REVENUE AND OPERATING EXPENSES ARE TAKEN INTO ACCOUNT. THEREFORE, THE PLI ADOPTED BY THE ASSESSEE IS NOT I N ACCORDANCE WITH THE RULES PRESCRIBED UNDER THE IT RULES. 18. HE ALSO ADVERTED OUR ATTENTION TO PAGES 127 AND 129 OF THE PAPER BOOK TO SUBMIT THAT AS PER BERRY RATIO IT WORKS OUT TO 1 .05 AND OPERATING PROFIT AND OPERATING COST ALSO COMES TO 11.17% ONLY ON ACC OUNT OF THE FACT THAT EXTRAORDINARY EXPENSES CLAIMED BY THE ASSESSEE WERE REDUCED FROM THE COST, AS OTHERWISE IT WILL BE 5.04%. HE ALSO ADVERTED OUR ATTENTION TO PAGES 130 AND 195 OF THE PAPER BOOK TO SUBMIT THAT EXCLUSION OF EXTRAORDINARY EXPENSES WAS THE MAIN BASIS UPON WHICH THE LEARNED CIT(A) ARRIVED AT A CONCLUSION THAT THE PROFIT MARGIN DECLARED BY THE A SSESSEE IS WITHIN THE SAFE HARBOUR LIMIT. HOWEVER, THE LEARNED CIT(A) HAS NOT GIVEN ANY CLEAR CUT FINDING AS TO WHY THIS EXPENDITURE HAS TO BE EXCLUD ED. HE THUS SUBMITTED THAT THE CIT(A) ERRED IN ACCEPTING THE PLEA OF THE ASSESSEE WITH REGARD TO EXCLUSION OF EXTRAORDINARY EXPENSES FROM THE COST. 19. WITH REGARD TO THE NEW COMPARABLE ADOPTED BY THE TP O I.E., INCLUDING RITES LIMITED IN THE LIST OF COMPARABLE COMPANIES, THE LEARNED D.R. ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 9 SUBMITTED THAT THE TPO HAS HIGHLIGHTED THE NATURE O F ACTIVITIES OF RITES LIMITED TO BRING HOME THE POINT THAT MAIN COMPONENT OF THE BUSINESS OF RITES LIMITED WAS SERVICE CONTRACT AND EVEN THE RIT ES LIMITED WAS HAVING INDEPENDENT BUSINESS; THEREFORE, THERE WAS NO REASO N TO EXCLUDE RITES LIMITED FROM THE LIST OF COMPARABLES. 20. HE FURTHER CONTENDED THAT THE ASSESSEE HAS NOT BENC HMARKED ITS INTERNATIONAL TRANSACTION UNDER CUP METHOD AT THE T IME OF FILING THE TRANSFER PRICING STUDY REPORT AND HENCE IT IS NOT E NTITLED TO MAKE A FRESH CLAIM AT A LATER STAGE. THE CASE OF THE LEARNED D.R . IS THAT IN THE STUDY REPORT THE ASSESSEE COMPANY STATED THAT IT HAD NO INTERNAL OR EXTERNAL COMPARABLES SO AS TO ADOPT CUP METHOD BUT AT A LATER POINT OF T IME THE COMPANY SOUGHT TO FURNISH DATA WITH REGARD TO INTERNAL COMPARABLES AND HENCE THE TPO AS WELL AS THE AO WERE JUSTIFIED IN REJECTING THE FRES H CONTENTION OF THE ASSESSEE. UNDER THESE CIRCUMSTANCES THE LEARNED CIT (A) OUGHT NOT HAVE ACCEPTED THE NEW PLEA I.E. APPLICATION OF CUP DATA FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION. HE THUS STRONGLY RELIED UPON THE ORDER PASSED BY THE AO. 21. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSE SSEE SUBMITTED THAT THOUGH IN THE TRANSFER PRICING STUDY REPORT TH E ASSESSEE BENCHMARKED ITS INTERNATIONAL TRANSACTION UNDER TNMM METHOD, TH E COMPANY REFERRED TO INTERNAL COMPARABLES TO SUPPORT THAT EVEN UNDER CUP METHOD THE TRANSACTION IS AT ARMS LENGTH. IN THIS REGARD THE LEARNED COUNSEL FOR THE ASSESSEE ADVERTED OUR ATTENTION TO PAGE 124 AND 125 OF THE PAPER BOOK TO SUBMIT THAT ALL THE DETAILS WITH REGARD TO THE TRAN SACTION WITH THE NON-AE COMPANY WERE FURNISHED BEFORE THE TPO AND HENCE NO FRESH FACTS WERE FURNISHED BEFORE THE LEARNED CIT(A). IT ALSO ADVERT ED OUR ATTENTION TO SEVERAL LETTERS ADDRESSED TO THE TPO TO HIGHLIGHT THAT ALL THE DETAILS WERE AVAILABLE BEFORE THE TPO AND HENCE IT IS INCUMBENT UPON THE T PO AS WELL AS THE AO TO TAKE INTO CONSIDERATION THE CUP DATA TO EXAMINE AS TO WHETHER THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE ARE AT A RMS LENGTH. HE ADVERTED OUR ATTENTION TO THE ORDER PASSED BY THE LEARNED CI T(A) TO SUBMIT THAT BASED ON THE FEES CHARGED FROM NON-AE COMPANIES THE INTER NATIONAL TRANSACTIONS ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 10 WITH THE AE ARE AT ARMS LENGTH AND HENCE IT WAS HE LD TO BE NOT A FIT CASE FOR MAKING ANY ADJUSTMENT. 22. WITH REGARD TO EXCLUSION OF EXTRAORDINARY EXPENSES FROM THE COST/OPERATING EXPENSES THE LEARNED COUNSEL SUBMITT ED THAT THIS ISSUE WAS SPECIFICALLY RAISED BEFORE THE TPO (PAGE 130 OF THE PAPER BOOK) BUT THE TPO DID NOT QUESTION AS TO HOW THESE ARE NOT EXTRAORDIN ARY EXPENSES. THE TPO HAD PROCEEDED TO ADOPT THE RATIO OF OPERATING PROFI T TO OPERATING EXPENSES AS PLI BUT THE MOST IMPORTANT FACTOR THAT NEEDED TO BE KEPT IN MIND WAS THAT THE COST THAT NEEDS TO BE TAKEN FOR COMPUTING THE PROFIT MUST BE IDENTICAL BOTH IN ASSESSEES CASE AS WELL AS IN THE COMPARABL E CASES. THE EXTRAORDINARY EXPENSES ARE ONE TIME EXPENDITURE WHI CH ARE NOT COMMONLY FOUND IN OTHER COMPARABLE CASES; WHERE A SPECIFIC I SSUE WAS RAISED BEFORE THE TPO AS WELL AS BEFORE THE AO, IN THE ABSENCE OF ANY MATERIAL TO REJECT THE PLEA OF THE ASSESSEE, THE TPO OUGHT TO HAVE ACCEPTE D THE CONTENTION OF THE ASSESSEE INSTEAD OF MERELY REJECTING THE SAME THAT TOO WITHOUT CALLING UPON THE ASSESSEE TO FURNISH FURTHER INFORMATION IN THAT REGARD IF HE IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE. IT WAS AL SO HIGHLIGHTED THAT THE ASSESSEE GAVE DUE EXPLANATION (PAGE 194 OF THE PAPE R BOOK) AS TO WHY SUCH EXTRAORDINARY EXPENSES SHOULD BE EXCLUDED FROM THE COST AND THE LEARNED CIT(A), HAVING APPRECIATED THE CONTENTION OF THE AS SESSEE, ACCEPTED THE PLEA AND REWORKED OUT THE RATIO BY EXCLUDING THE EXTRAOR DINARY EXPENSES FROM THE COST. HE, THEREFORE, CONTENDED THAT IF THE EXTRAORD INARY EXPENSES ARE EXCLUDED THEN THE TRANSACTION OF THE ASSESSEE WOULD BE AT ARMS LENGTH IN COMPARISON TO THE COMPARABLE CASES. 23. WITH REGARD TO APPLICATION OF BERRY RATIO THE LEARN ED COUNSEL SUBMITTED THAT EVEN THE LEARNED D.R. HAS NOT RAISED ANY SERIO US OBJECTION WITH REGARD TO APPLICATION OF SUCH METHODOLOGY AND HENCE DETAIL ED ARGUMENTS ARE NOT NECESSARY IN THAT REGARD. AT ANY RATE THE LEARNED C IT(A) HAVING EXCLUDED THE EXTRAORDINARY EXPENDITURE FROM THE COST AND THE DAT A OF RITES LIMITED FROM COMPARABLE CASES, THE TRANSACTION OF THE ASSESSEE W ITH THE AE IS AT ARMS LENGTH AND HENCE THE ORDER OF THE LEARNED CIT(A) IS IN ACCORDANCE WITH LAW. HE ALSO EXPLAINED THAT THE NATURE OF ACTIVITIES OF RITES LIMITED IS DIFFERENT AND HENCE THE SAME CANNOT BE TAKEN INTO CONSIDERATI ON IN THE LIST OF ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 11 COMPARABLE CASES. THE LEARNED COUNSEL ALSO RELIED U PON THE ORDER OF THE ITAT K BENCH MUMBAI IN THE CASE OF M/S. THYSSEN K RUPP INDUSTRIES INDIA P. LTD. (PAGE 24 OF ITA NO. 6460/MUM/2012 DATED 27. 02.2013) TO SUBMIT THAT PROFIT MOTIVE IS NOT RELEVANT CONSIDERATION IN THE CASE OF GOVERNMENT UNDERTAKINGS AND THAT IS ONE OF THE FACTORS TO BE T AKEN INTO CONSIDERATION WHILE CONSIDERING AS TO WHETHER IT CAN BE CONSIDERE D AS A COMPARABLE CASE OR NOT. HE THUS RELIED UPON THE ORDER PASSED BY THE LEARNED CIT(A). 24. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. IN OUR CONSIDERED OPINION THE ORDER PASSED BY THE LEARNED CIT(A) DOES NOT CALL FOR ANY INTERFERENCE FOR THE FOLLOWIN G REASONS. ACCORDING TO THE TPO OPERATING MARGIN ON OPERATING COST IN THE CASE OF COMPARABLE COMPANIES WORKS OUT TO 13.88% AS AGAINST 5% IN THE CASE OF THE ASSESSEE COMPANY WHEREAS, IN ORDER TO ARRIVE AT THE COST, TH E ONE TIME EXTRAORDINARY EXPENSES, WHICH ARE NOT STANDARD EXPENSES FOR EARNI NG INCOME, OUGHT NOT HAVE BEEN TAKEN INTO CONSIDERATION AND, THEREFORE, THE LEARNED CIT(A) WAS JUSTIFIED IN REDUCING THE EXTRAORDINARY EXPENSES FO R THE PURPOSE OF ARRIVING AT THE COST AND BY ADOPTING SUCH COST AS THE BASIS, THE RATE OF PROFIT DECLARED BY THE ASSESSEE WOULD BE AT ARMS LENGTH AND HENCE THERE IS NO NEED FOR MAKING ANY ADJUSTMENT. 25. EVEN WITH REGARD TO THE COMPARABLE COMPANIES WHICH ARE TAKEN INTO CONSIDERATION BY THE AO/TPO THE LEARNED CIT(A) HAS CORRECTLY HELD THAT RITES LIMITED IS A GOVERNMENT OF INDIA ENTERPRISE A ND CONSIDERING THE NATURE OF THE CONTRACTS AND THE IMPLICIT GUARANTEE PROVIDED BY THE GOVERNMENT OF INDIA, ETC. RITES LIMITED CANNOT BE T AKEN AS A COMPARABLE CASE AND HENCE THE LEARNED CIT(A) WAS JUSTIFIED IN EXCLUDING THE SAME. 26. FURTHER, THE ACT DOES NOT PROVIDE THAT AN ASSESSEE HAS TO CHOOSE A PARTICULAR METHOD FOR BENCHMARKING ITS TRANSACTIONS . EVEN IF A PARTICULAR METHOD IS CHOSEN AT THE TIME OF FURNISHING IT STUDY REPORT THE COMPANY CAN ALWAYS SUPPORT ITS TRANSACTIONS WITH ANOTHER METHOD . IN THE INSTANT CASE ALL THE DETAILS WERE FURNISHED BEFORE THE TPO AND THE A O TO HIGHLIGHT THAT THE AVERAGE HOURLY RATE CHARGED TO THE THIRD PARTIES WE RE LOWER COMPARED TO THE AE AND HENCE THE INTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH. EVEN AT ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 12 THIS STAGE THE LEARNED D.R. COULD NOT PLACE ANY MAT ERIAL ON RECORD TO JUSTIFY THAT THE ASSESSEE IS PRECLUDED FROM TAKING SUPPORT FROM ANY OTHER METHOD FOR BENCHMARKING ITS TRANSACTIONS. IN OTHER WORDS, THE INCOME TAX ACT DOES NOT PRECLUDE THE ASSESSEE FROM BENCHMARKING ITS TRA NSACTIONS WITH THE HELP OF ANY OTHER METHOD OTHER THAN THE ONE WHICH IS TAK EN FOR CONSIDERATION IN ITS STUDY REPORT. 27. FOR THE PURPOSE OF SUB-SECTION (1) OF SECTION 92C O F THE ACT THE MOST APPROPRIATE METHOD HAS TO BE SELECTED BY THE A O. RULE 10C ALSO PROVIDES THAT MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR INTERNATIONAL TRANSACTION. IN OTHER WORDS, THE AO/T PO HAS TO EXERCISE THEIR JUDICIAL DISCRETION IN CONSIDERING AS TO WHET HER THE METHOD/METHODS ADOPTED BY THE ASSESSEE IS SUITABLE TO THE FACTS OF THE CASE AND IF, IN THEIR OPINION, THE METHOD FOLLOWED BY THE ASSESSEE IS NOT SUITABLE, THE AO/TPO HAS TO GIVE SHOW CAUSE NOTICE TO THE ASSESSEE BEFORE ADOPTING AN APPROPRIATE METHOD. ORDINARILY, IN SERVICE CONTRACTS, CUP METHOD IS MORE SUITABLE, WHERE AN ASSESSEE ENTE RS INTO AGREEMENT WITH UNRELATED THIRD PARTIES ON SIMILAR LINES AS TH AT OF AE. WHEN SUCH FACTS ARE AVAILABLE, THE AO/TPO HAS TO GIVE THEIR R EASONS BEFORE REJECTION OF THE DATA FURNISHED BY THE ASSESSEE. 28. WITH REGARD TO THE BERRY RATIO TAKEN AS THE PLI THE LEARNED D.R. HAS NOT RAISED ANY SERIOUS OBJECTION WITH REGARD TO THE ASSESSEES PLEA AND HENCE IT IS NOT NECESSARY FOR US TO DELVE ON THIS I SSUE. IN FACT IF THE EXTRAORDINARY EXPENSES ARE ADJUSTED, BY REDUCING EX TRAORDINARY EXPENSES FROM OPERATING EXPENSES, ITS BERRY RATIO COMES TO 1 .10 AND THE OPERATING PROFIT ON OPERATING COST COMES TO 10.40% WHICH IS H IGHER THAN THE BERRY RATIO AND OPERATING PROFIT OF THE COMPARABLES. THUS EVEN FROM THAT ANGLE THE ASSESSEES TRANSACTIONS ARE AT ARMS LENGTH. 29. UNDER THESE CIRCUMSTANCES WE ARE OF THE FIRM VIEW T HAT THE ORDER PASSED BY THE LEARNED CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. WE, THEREFORE, UPHOLD THE ORDER OF THE CIT(A) AND DISMI SS THE APPEAL FILED BY THE REVENUE. ITA NO. 3590/MUM/2010 M/S. CHEMTEX GLOBAL ENGINEERS P. LTD. 13 30. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DISMI SSED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH JUNE, 2013. SD/- SD/- (P.M. JAGTAP) (D. MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI, DATED: 12 TH JUNE, 2013 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 15, MUMBAI 4. THE CIT 10, MUMBAI CITY 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.