ACIT, Alwar V. M/S SAKATA INX (INDIA) LTD., Alwar

ITA 376/JPR/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82805 (ITAT-JAIPUR)
• Duration Of Justice: 2 year(s) 6 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 18-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUBHASH CHANDRA
• Assessee Lawyers: PIYUSH SINGH NITIN NARANG
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Commercial expediency
• Section: 133(6)

Judgement Text

ITA NO. 376/JP/2012 ACIT VS. M/S. SANKATA INX (INDIA) LTD. 1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH, JAIPUR (BEFORE SHRI R.P. TOLANI AND SHRI T.R. ME ENA) ITA NO. 376/JP/2012 ASSESSMENT YEARS : 2007-08 PAN : AACCS 4797 D THE ACIT VS. M/S. SAKATA INX (INDIA) LTD. CIRCLE- 2 1245/1246, RIICO, INDL. AREA ALWAR BHIWADI, ALWAR (APPELLANT) (RESPONDENT) DEPARTMENT BY: SHRI SUBHASH CHANDRA ASSESSEE BY : SHRI PIYUSH SINGH, NITIN NARANG & ANIL GUPTA DATE OF HEARING: 18-09-2014 DATE OF PRONOUNCEMENT: 14 -11-2014 ORDER PER R.P. TOLANI, JM THIS IS AN APPEAL FILED BY THE REVENUE AGAINST TH E ORDER OF THE LD. CIT(A)-II, JAIPUR, DATED 12-01-2012 FOR THE ASSES SMENT YEAR 2007-08 RAISING FOLLOWING GROUND:- THAT THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS O N THE FACTS AND CIRCUMSTANCES OF THE CASE IN DELETING THE ADDIT ION OF RS. 1,02,91,000/- ON ACCOUNT OF ADJUSTMENT OF ARMS LE NGTH PRICE OF THE INTERNATIONAL TRANSACTION ON PAYMENT OF ROYALTY BY SAKATA INX (INDIA) TO ITS ASSOCIATE ENTERPRISES. ITA NO. 376/JP/2012 ACIT VS. M/S. SANKATA INX (INDIA) LTD. 2 2.1 BRIEF FACTS OF THE CASE ARE THAT ASSESSEE I.E. M/S. SAKATA INX (INDIA) LTD. IS A 100% SUBSIDIARY OF SAKATA INX CORPORATION , JAPAN.IT MANUFACTURES PRINTING INKS FOR PACKING AND PRINTING INDUSTRY. TH ERE IS NO CHANGE IN METHOD OF MAINTENANCE OF ACCOUNTS, BUSINESS ACTIVIT IES ETC. OF THE ASSESSEE DURING THE YEAR, AS COMPARED TO THE PRECEDING YEAR. DURING THE YEAR, AO OBSERVED THAT THE ASSESSEE UNDERTOOK THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATES ENTERPRISES. S.N. DESCRIPTION OF TRANSACTION VALUE (IN RS.) 1. IMPORT OF RAW MATERIAL, STORES, SPARES ETC. 12,31,83,956 2. EXPORT OF POLYURETHANE RESIN 1,38,73,000 3. PURCHASE OF CAPITAL GOODS 6,03,520 4. PAYMENT OF ROYALTY 1,02,91,000 5. SHARING OF COST OF EXPATRIATE EMPLOYEES BY AES 55,67,723 A REFERENCE U/S 92CA WAS MADE TO THE TRANSFER PRICI NG OFFICER VIDE LETTER NO. ACIT /CIRCLE- 2/ALW/2009-10/1060 DATED 22-09-20 09 AFTER RECEIVING NECESSARY APPROVAL FROM THE COMMISSIONER OF INCOME TAX, ALWAR VIDE LETTER NO. CIT/ALW/DCIT (HQRS)/2009-10/1616 DATED 4-09-200 9. ADDL. CIT (TRANSFER PRICING OFFICER-1), JAIPUR CONSIDERED THE ARMS LENGTH PRICE OF THE PAYMENT OF ROYALTY BY THE ASSESSEE TO ITS ASSO CIATED ENTERPRISES AT RS. NIL AS AGAINST RS. 1,02,91,000/- DECLARED IN FORM 3 CEB, AFTER MAKING ADJUSTMENT OF RS. 1,02,91,000/-., CONSEQUENTLY THE SAME WAS DISALLOWED BY ITA NO. 376/JP/2012 ACIT VS. M/S. SANKATA INX (INDIA) LTD. 3 AO AND ADDED BACK TO THE INCOME OF THE ASSESSEE. TH US THE AO ADOPTED THE TPOS REASONING APPLYING THE CUP METHOD QUA ROYALTY AMOUNT AND HELD THAT THE ASSESSEE FAILED TO DEMONSTRATE TO SHOW THAT SUB STANTIAL BENEFIT ACCRUED TO IT BY PAYING THIS AMOUNT OF ROYALTY. 2.2 AGGRIEVED, ASSESSEE PREFERRED FIRST APPEAL BEFO RE THE LD. CIT(A), WHO DELETED THE ADDITION BY MAKING DETAILED OBSERVATION S WHICH ARE SUMMED UP AS UNDER:- THE APPELLANT HAD MADE PAYMENT OF ROYALTY TO SAKA TA JAPAN FOR ITS MANUFACTURING OPERATIONS AS THE RELEV ANT TECHNOLOGY WAS PATENTED BY SAKATA JAPAN. SAKATA JAP AN HAD PROVIDED THIS TECHNOLOGY TO SAKATA INDIA FOR PRODUC ING OFFSET AND GRAVURE INK (THE REGISTERED TRADEMARKS OF SAKAT A JAPAN) WHICH WAS BEING USED BY SAKATA INDIA FOR ITS OPERAT IONS IN INDIA. THE SUPPORT PROVIDED BY SAKATA JAPAN FOR TEC HNOLOGY AND PRODUCT RELATED ISSUES CONSISTED OF THE PRODUCT MANUALS WHICH CONTAINED FULL DETAILS ABOUT THE PRODUCTS, TH EIR USAGE AND APPLICATION AND MANUFACTURING PROCESS. THE EMAILS SUPPORTED THE FACT THAT TECHNOLOGICAL ASSISTANCE WAS PROVIDED BY SAKATA JAPAN TO THE APPELLANT. THE APPELLANT HAD DERIVED S IGNIFICANT BENEFIT UNDER THE ROYALTY AGREEMENTS FOR WHICH IT M ADE ROYALTY PAYMENTS TO ITS AE I.E. SAKATA JAPAN. ALMOST EVERY PRODUCT MANUFACTURED BY THE APPELLANT WAS DEVELOPED FROM TE CHNOLOGY SUPPORT PROVIDED BY THE AE AND SAME WOULD NOT HAVE BEEN POSSIBLE WITHOUT THE CONTINUOUS SUPPORT RECEIVED FR OM THE AE. THE RIGHTS TO WHICH THE APPELLANT HAD THE ACCESS AN D THE ONGOING TECHNICAL AND DEVELOPMENT OF NEW PRODUCTS S UPPORT RECEIVED BY THE APPELLANT WERE CLEARLY PROVIDED IN THE AGREEMENTS ENTERED BY THE APPELLANT WITH THE AE. IN SUCH A SCENARIO, ANY FORM OF COST BENEFIT ANALYSIS WAS N EITHER POSSIBLE AND NOR FEASIBLE. EVEN IF A HYPOTHETICAL C OST BENEFIT WAS TO BE PRESENTED, THE BENEFIT WOULD BE THE ENTIR E REVENUE AND PROFITS GENERATED FROM THE BUSINESS OF THE APPE LLANT. THE TECHNOLOGY AND TRADEMARK IN THIS CASE BELONGED TO S AKATA ITA NO. 376/JP/2012 ACIT VS. M/S. SANKATA INX (INDIA) LTD. 4 JAPAN AND THE APPELLANT WAS PROVIDED A RIGHT TO USE THE TECHNOLOGY AND TRADEMARKS FOR ITS OWN OPERATIONS. I N RETURN, THE APPELLANT I.E. SAKATA INDIA PAID ROYALTY TO SAK ATA JAPAN. THUS, IT WAS A PURELY BUSINESS DECISION TAKEN OUT O F COMMERCIAL EXPEDIENCY AND THE AO OR TPO COULD NOT QUESTION THE DECISION OF PRUDENT BUSINESSMAN. 2.3 WHILE HOLDING SO LD. CIT(A) PLACED RELIANCE ON FOLLOWING CASE LAWS: (I) DCIT VS. VINAROM LTD. (108 TTJ 51) (II) DRESSER-RAND INDIA (P) LTD. VS. ADDL. CIT (ITA NO. 8753/MUM/2010). (III) ABHISHEK AUTO INDUSTRIES LTD. VS. DCIT (2010-TII-54 - ITAT- DEL-TP). 2.4 APROPOS APPLICATION OF CUP METHOD, THE LD. CIT( A) HELD THAT APPLICATION OF CUP METHOD BY TPO SUFFERS FROM INHER ENT INCONSISTENCIES BY FOLLOWING OBSERVATIONS. 3.2 FURTHER THE TPO HELD CUP METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINING ARMS LENGTH PRI CE. HOWEVER, THE DETERMINATION OF ALP BY THE TPO USING CUP SUFFERED FROM CERTAIN INHERENT LIMITATIONS. AT THE OUTSET, AS PER RULE 10 B(1)(A)(I), THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICE S PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, WAS TO BE IDENTIFIED. AS PER THE RULE S, THE PRICE CHARGED IN A COMPARABLE UNCONTROLLED TRANSACTION WAS TO BE TAKEN AS AN ALP. RULE 10A OF THE RULES DEFINED THE TERM UNCONTROLLE D TRANSACTION AS A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIAT ED ENTERPRISES, WHETHER RESIDENT OR NON-RESIDENT. HOWEVER, THE TPO IN THE ORDR HAD NOT PROVIDED THE DETAILS OF ROYALTY PAID UNDER UNCO NTROLLED TRANSACTIONS. IN THE ABSENCE OF COMPARABLE DATA FRO M UNCONTROLLED TRANSACTIONS, CUP METHOD COULD NOT BE APPLIED. IN T HIS CONNECTION, RELIANCE IS PLACED ON THE RECENT DECISION OF ITAT DELHI BENCH IN THE CASE OF SONA OKEGAWA PRECISION FORGINGS LTD. VS. AD DL. CIT , RANGE- 9, NEW DELHI (ITA NO. 4781(DEL.)/2010. FURTHER RELI ANCE WAS PLACED ITA NO. 376/JP/2012 ACIT VS. M/S. SANKATA INX (INDIA) LTD. 5 BY THE LD. CIT(A) IN THE CASE OF KIRLOSKAR EBARA PU MPS LTD. VS. DCIT 48 DTR 348. 2.5 WITH THE ABOVE OBSERVATIONS, THE LD. CIT(A) CON CLUDED BY AWARDING RELIEF TO THE ASSESSEE BY FOLLOWING OBSERVATIONS. 3.3 THE APPELLANT ON THE OTHER HAND SELECTED COMPANIES WHICH WERE ENGAGED IN THE MANUFACTURING O F DYES. THESE INCLUDED INDOKEM LTD., JAYSYNTH IMPEX LTD. , LONA INDUSTRIES LTD., METROCHEM INDUSTRIES LTD., METROPO LITAN EXIMCHEM LTD., PHTHALO COLOURS & CHEMICALS (INDIA) LTD. AND SARAF CHEMICALS LTD.. THE TPO HAD NOT QUESTIONED TH E COMPARABILITY OF THESE COMPANIES. THE APPELLANT HAD SELECTED PTHALCO COLORS & CHEMICALS (INDIA) LTD. AND RAINBOW INK & VARNISHING CO. LTD. AS COMPARABLES. THE TPO REJECTE D THESE TWO COMPANIES AS PERSISTENT LOSS MAKERS/ DIMINISHIN G REVENUES. HOWEVER, THE OECD GUIDELINES ALSO SUPPORTED THE FAC T THAT LOSS MAKERS COULD NOT BE REJECTED OUT-RIGHTLY. THE COMPA RABILITY SHOULD ALSO BE JUDGED ON VARIOUS OTHER FACTORS. SIM ILARLY, THE TPO SHOULD HAVE ALSO REJECTED HIGH MARGIN COMPANIES BUT IT WAS NOT DONE. ON THE CONTRARY, THE TPO HAD TAKEN TH ESE HIGH MARGIN COMPANIES. BASED ON THE ABOVE FACTS, THE FIN AL COMPARABLE SET WOULD BE AS FOLLOWS:- S.N. NAME OF THE COMPANY OP/OR FOR F.Y. 2006-07 1. ASAHI SONGON COLORS LTD. 15.43% 2. ATUL LTD. 5.63% 3. CHROMATIC INDIA LTD. 1.80% 4. DIC INDIA LTD. 4.32% 5. DYNAMIC INDUSTRIES LTD. 2.44% 6. INDOKEM LTD. 4.33% 7. JAYSYNTH IMPEX LTD. 5.52% 8. KIRI DYES & CHEMICALS LTD. 9.24% 9. METROCHEM INDUSTRIES LTD. 5.71% 10. METROPOLITAN EXIMCHEM LTD. 13.14% 11. ORGANIC COATING LTD. -0.31% ITA NO. 376/JP/2012 ACIT VS. M/S. SANKATA INX (INDIA) LTD. 6 12. PHTHALO COLOURS & CHEMICALS(INDIA) LTD. -9.19% 13. SARAF CHEMICALS LTD. 9.26% ARITHMATIC MEAN 5.18% THE ARITHMETIC MEAN OF THE OP/OR OF THE COMPARABLE COMPANIES IS 5.18% AFTER CONSIDERING DATA FOR ONLY F.Y. 2006-07. THE OPERATING MARGIN OF THE APPELLANT IS 5.77% AS P ER THE TPOS ORDER. SINCE THE OPERATING MARGIN OF THE APPELLANT IS HIGHER THAN THAT OF THE COMPARABLE COMPANIES UNDER TNMM ANALYSIS, TH E TRANSACTIONS OF THE APPELLANT ARE HELD TO BE AT ARMS LENGTH. I, THEREFORE, DIRECT THE AO TO DELETE THE ADDITION OF RS. 1,02,91,000/- MADE BY HIM. THESE GROUNDS OF APPEAL ARE ALLOWED. 2.6 AGGRIEVED, REVENUE IS BEFORE US. 2.7 THE LD. CIT . DR RELIED ON THE ORDER OF THE AO AND TPO AND CONTENDS THAT CUP METHOD WAS RIGHTLY APPLIED AND FILED THE C OPY OF THE WRITTEN SUBMISSION FROM THE ADIT (INTERNATIONAL TAXATION) C ONTENDING THAT THE LD. CIT(A) ERRED IN :- (I) ASSESSING TOTAL INCOME AT RS. 91,36,830/- AS AG AINST R 5,61,900/- COMPUTED BY THE APPELLANT. (II) MARKING TRANSFER PRICING ADJUSTMENT BY REJECTI NG THE ANALYSIS UNDERTAKEN BY THE APPELLANT TO DETERMINE A LP FOR ITS INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO THE AE. (III) REJECTION OF THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT AND CONDUCTING UNJUSTIFIED FRESH SEARCH C ONDUCTED BY THE LD. TPO. (IV) CONSIDERING THE NON-CONTEMPORANEOUS DATA AND S INGLE YEAR DATA WHILE DETERMINING THE ALP. ITA NO. 376/JP/2012 ACIT VS. M/S. SANKATA INX (INDIA) LTD. 7 (V) INAPPROPRIATE USE OF INFORMATION OBTAINED WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN BY EXERCISING THE POWER U/S 133(6) OF THE ACT WITHOUT ADOPTING CONSISTENT AND TRANSPAR ENT APPROACH. (VI) CONSIDERING DISSIMILAR COMPANIES AS COMPARABLE COMPANIES TO THE APPELLANT FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION. (VII) SELECTING THE COMPANIES HAVING SUPER NORMAL P ROFITS AS COMPARABLES TO THE APPELLANT. (VIII) CONSIDERING THE INCORRECT MARGINS OF COMPANI ES SELECTED BY THE LD. TPO / AO AS COMPARABLES TO THE APPELLANT . (IX) COMPARING FULL-FLEDGED RISK BEARING ENTITIES W ITH THE APPELLANTS CAPTIVE OPERATIONS WITHOUT MAKING ANY R ISK ADJUSTMENT FOR DIFFERENCES BETWEEN THE FUNCTIONAL A ND RISK PROFILE OF COMPARABLE COMPANIES CONSIDERED AS COMPA RABLE VIS- A-VIS THE RISK PROFIT OF THE APPELLANT. (X) COMPUTING THE ALP OF SOFTWARE DEVELOPMENT SERVI CES AS THE MEAN ALP DETERMINED WITHOUT TAKING INTO ACCOUNT THE LOWER 5% VARIATION FROM THE MEANS ALP DETERMINED. 2.8 THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER H ANDS CONTENDS THAT THE LD. CIT(A) AWARDED THE RELIEF BY MAKING CATEGORICAL OBSERVATIONS THAT :- (I) AO / TPO CANNOT QUESTION THE EXPEDIENCY OF BUSI NESS DECISION TAKEN BY ASSESSEE WHICH FOR PAYMENT OF RO YALTY. LOOKING AT THE BENEFITS DERIVED FROM AE PAYMENT OF ROYALTY WAS A PRUDENT BUSINESS DECISION. (II) THE COST BENEFIT TEST AS WORKED OUT BY THE AO WAS BASED ON DISTORTION OF THE FACTS AND ASSESSEE'S VERSION O F BUSINESS BENEFITS BEING BASED ON OBJECTIVE DATA WAS ACCEPTAB LE AND THUS CUP METHOD APPLIED BY THE AO / TPO SUFFERED FROM IN HERENT INCONSISTENCIES AND ON THE BASIS OF TNMM METHOD AND ITA NO. 376/JP/2012 ACIT VS. M/S. SANKATA INX (INDIA) LTD. 8 EXAMINING THE IMPUGNED AE TRANSACTIONS ON TNMM METH OD. THE TRANSACTIONS WERE HELD TO BE ON ARMS LENGTH AS ARITHMETIC MEAN OF THE OP/OR OF THE COMPARABLES COMPANIES AS A DOPTED BY THE LD. CIT(A) WAS 5.18% WHEREAS THE ASSESSEE'S MARGIN CAME TO 5.77% AS PER TPO ORDER. (III) IN ADDITION TO THE CASE LAWS CITED BY THE LD. CIT(A), FURTHER RELIANCE IS PLACED ON FOLLOWING JUDGMENTS. (1) CIT VS. EKL APPLIANCES LTD. (ITA NO. 1068 & 107 0 OF 2011 HON'BLE DELHI HIGH COURT . (2) CIT VS. M/S. CUSHAMAN AND WALKFIELD (INDIA) (P) LTD. (ITA NO. 475/2012 HON'BLE DELHI HIGH COURT ) (3) M/S. TOYOTA KIRLOSKAR MOTOR (P) LTD. VS. ACIT ( ITA NO. 1595/BANG/2012 - ITAT, BANGALORE BENCH) (4) DCIT VS. HITACHI HOME & LIFE SOLUTIONS (INDIA) LTD. (ITA NO. 182/AHD./ 2011, ITA NO. 216/ AHD./ 2011, I TA NO. 1136/ AHD./ 011 AND ITA NO. 184/AHD/2011 ITAT AHEMDABAD BENCH) (5) DCIT VS. M/S. AIR LIQUIDE ENGINEERING INDIA (P) LTD. (ITA NO. 1040/HYD.2011 ITAT HYDERBAD BENCH). 2.9 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN OUR CONSIDERED VIEW THERE I S NO INFIRMITY IN THE ORDER OF LD. CIT(A) IN AS MUCH AS: (I) LD DR COULD NOT JUSTIFY THE APPLICATION OF CUP METHOD TO ARMS LENGTH WORKING. (II) THE PRODUCTS MANUFACTURED BY THE APPELLANT WER E DEVELOPED FROM TECHNOLOGY SUPPORT PROVIDED BY THE AE, IT WOUL D NOT HAVE BEEN POSSIBLE SO WITHOUT THE CONTINUOUS AE SUPPORT. THE RIGHTS OF ACCESS TO THE ONGOING TECHNICAL SUPPORT AND DEVELOPMENT OF NE W PRODUCTS RECEIVED ITA NO. 376/JP/2012 ACIT VS. M/S. SANKATA INX (INDIA) LTD. 9 BY THE APPELLANT WERE CLEARLY PROVIDED IN THE AGREE MENTS ENTERED INTO WITH THE AE. (III) THE COST BENEFIT TEST AS WORKED OUT BY THE TP O WAS NOT BASED ON PROPER APPRECIATION OF THE FACTS AND THUS CUP ME THOD APPLIED BY THE AO / TPO WAS NOT JUSTIFIABLE. (IV) THE JUDICIAL CITATIONS RELIED ON BY LD. CIT(A) AS WELL AS FURTHER JUDGMENTS RELIED ON BY THE ASSESSE INCLUDING HONBL E HIGH COURT IN THE CASE OF DELHI EKL APPLIANCES LTD.(SUPRA) SUPPORT TH E VIEW TAKEN BY LD. CIT(A). IN VIEW OF THE FOREGOING, WE UPHOLD THE ORDER OF LD . CIT(A) AND DISMISS REVENUES APPEAL. 3.0 IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 14 -11-2014 SD/- SD/- (T.R. MEENA) (R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER JAIPUR DATED: 14 TH NOV 2014 *MISHRA COPY FORWARDED TO:- 1. THE ACIT, CIRCLE- 2, ALWAR 2. M/S. SAKATA INX (INDIA) LTD., BHIWADI, ALWAR 3. THE LD. CIT 4. THE LD. CIT(A), JAIPUR BY ORDER 5..THE LD. DR 6.THE GUARD FILE (IT NO. 376JP/2012) AR ITAT, JAIPUR