TOYODA MICROMATIC MACHINERY INDIA PVT. LTD., NEW DELHI V. DCIT, CIRCLE- 25(2), NEW DELHI

ITA 3834/DEL/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 1730 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2020
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 13-06-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; Principle of natural justice; International transaction
• Section: 271(1)(c); 92C; 144C; 92CA; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 , NEW DELHI BEFORE SH. KULDIP SINGH , JUDICIAL MEMBER AND S H . PRASHANT MAHARISHI, ACCOUNTANT M EMBER (THROUGH VIDEO CONFERENCING) ITA NO. 3834 / DEL/20 1 7 ASSESSMENT YEAR: 20 1 1 - 1 2 TOYODA MICROMATIC MACHINE RY INDIA PRIVATE LIMITED , 7, BARAKHAMBA ROAD, NEW DELHI PAN NO. AADCT0116G VS DCIT CIRCLE 25 (2) NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY SHRI AJIT KORDE ADV SHRI ARUN BHADAURIA, ADV SHRI PRASHANT MEHAR CHANDANI, ADV RESPONDENT BY S H. RAKESH KUMAR, SR. DR DATE OF HEARING: 16/10/2020 DATE OF PRONOUNCEMENT: 10 / 1 2 / 2020 ORDER PER PRASHANT MAHARISHI, AM: 1. THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) 44, NEW DELHI [ THE LD CIT A] DATED 27 TH OF DECEMBER 2016 FOR ASSESSMENT YEAR 2011 12 WHEREIN THE APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 25 (2) NEW DELHI [ THE LD AO] PASSED U/S 143 (3) READ WITH SECTION 144C OF THE INCOME TAX ACT 1961 [ THE ACT] DATED 28 TH OF APRIL 2015, WAS PARTLY ALLOWED. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : - 1. THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS BAD IN LAW AND VOID AB - INITIO AS IT CONFIRMS THE ORDER OF THE ASSESSING OFFICER (AO) WHO HAS FAILED TO RECORD ANY VALID AND SUBSTANTIVE REASONS IN CONCLUDING THAT IT WAS EXPEDIENT AND NECESSARY TO REFER THE MATTER TO THE TRANSFER PRICING OFFICER (TPO) FOR 2 COMPUTATION OF ARMS LENGTH PRICE, AS REQUIR ED UNDER SECTION 92CA(1) OF THE INCOME - TAX ACT, 1961 (ACT). 2. THAT ON FACTS AND IN LAW, THE CIT (A) HAS ERRED IN CONFIRMING THAT LEARNED TPO/AO HAS DISCHARGED HIS STATUTORY ONUS BY ESTABLISHING THAT THE CONDITIONS SPECIFIED IN CLAUSE (A) TO (D) OF SECTI ON 92C (3) OF THE ACT HAVE BEEN SATISFIED BEFORE DISREGARDING THE ARMS LENGTH PRICE DETERMINED BY THE APPELLANT AND PROCEEDING TO DETERMINE THE ARMS LENGTH PRICE HIMSELF. 3. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LAW BY TREATING THE EXPATRIATE COST AS PART OF THE EXPENSE WHILE PROVIDING FOR THE COMPUTATION OF THE PROFIT LEVEL INDICATOR (PLI) FOR RESALE PRICE METHOD (RPM) WHICH IS IN VIOLATION OF THE RULE 10B(1)(B) OF THE INCOME - TAX RULES 1962 (RULES). 4. THE LEARNED CIT(A) DID NOT PROVIDE THE AP PELLANT AN OPPORTUNITY TO PUT FORTH ARGUMENTS AGAINST THE APPROACH ADOPTED BY THE CIT(A) IN INCLUDING THE EXPATRIATE COST AS PART OF COST OF GOODS SOLD WHILE COMPUTING GROSS PROFIT MARGIN, THEREBY, VIOLATING THE PRINCIPLE OF NATURAL JUSTICE. 5. THE LEARNED CIT(A) HAS ERRED IN APPROPRIATING THE ENTIRE EXPATRIATE COST ONLY TO THE TRADING BUSINESS OF THE APPELLANT WITHOUT CONSIDERING THAT THE APPELLANT HAS OTHER BUSINESS ACTIVITIES AS WELL. 6. THE LEARNED AO HAS ERRED ON FACTS AND IN LAW IN INITIATING THE PENA LTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 3. BRIEF FACTS OF THE CASE SHOWS THAT ASSESSEE IS A COMPANY PRIMARILY ENGAGED IN THE BUSINESS OF DISTRIBUTION IN PROVIDING DELIVERY AND/OR INSTALLATION SERVICES OF THE MACHINES TOOLS AND ASSESSEE SOLD IT D IRECTLY OR THROUGH THIRD PARTIES TO THE CUSTOMERS. ASSESSEE COMPANY IS JOINTLY OWNED BY A JAPANESE AND AN INDIAN COMPANY. IT FILED ITS RETURN OF INCOME DECLARING A TOTAL LOSS OF 22,932,000 ON 24/11/2011. 4. AS THE ASSESSEE HAS ENTERED INTO CERTAIN INTERNAT IONAL TRANSACTIONS , THE LEARNED ASSESSING OFFICER REFERRED THE MATTER TO THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, TRANSFER PRICING OFFICER III (1) (1), NEW DELHI [ THE LD TPO] FOR DETERMINATION OF THE ARMS - LENGTH PRICE. THE MAIN INTERNATIONAL TRA NSACTION ENTERED INTO BY THE ASSESSEE IS A PURCHASE OF TRADED GOODS AMOUNTING TO 57,600,378/ . THIS IS BENCHMARKED BY THE ASSESSEE ADOPTING THE RESALE PRICE METHOD . THE ASSESSEE HAS STATED THAT ASSESSEE PURCHASED THE MACHINE TOOLS FROM ITS ASSOCIATED ENTERPRISE AND IT HAS BEEN SOLD FOR 63,128,791/ . HOWEVER THE LEARNED ASSESSING OF FICER FURTHER NOTED THAT ASSESSEE HAS INCURRED 3 SUBSTANTIAL PERSONAL EXPENSES OF RS 2 60,83,480/ OUT OF WHICH SALARIES AND WAGES ARE 25,057,843/ . IT WAS NOTED BY THE LEARNED TRANSFER PRICING OFFICER THAT IF THE ASSESSEE IS PERFORMING ONLY TRADING FUNCTIO NS, THESE EXPENSES WERE NOT JUSTIFIED IN RELATION TO THE TOTAL TURNOVER OF 89,857,542/ . LEARNED TPO FURTHER NOTED CERTAIN EXPENSES AND STATED THAT ASSESSEE IS UNDERTAKING OTHER FUNCTIONS LIKE ADVERTISING, SALES PROMOTION AND HAVING A DISTRIBUTION NETWOR K AND INCURRING OF THESE OTHER COSTS ARE ALSO INDICATE THAT ASSESSEE IS NOT ACTING AS A MERE TRADER BUT TAKING ON SIGNIFICANT OTHER FUNCTIONS ALSO. THEREFORE THE LEARNED TPO ISSUED THE SHOWCAUSE NOTICE TO THE ASSESSEE THAT THE CHOICE OF THE MOST APPROPRIAT E METHOD OF RESALE PRICE METHOD IS NOT A RIGHT CHOICE AND TRANSACTIONAL NET MARGIN METHOD SHOULD HAVE BEEN ADOPTED. BASED ON THIS HE COMPUTED THE OPERATING PROFIT MARGIN OF THE ASSESSEE FOR THE TRADING SEGMENT CONSIDERING THE TRADING SALES OF 63,128,791/ AND REDUCING THERE FROM THE EXPENSES OF COST OF GOODS SOLD IS OF 54,529,022, PERSONAL COST OF RS 1 82,58,436, ADMINISTRATION AND OTHER COST OF RS 1, 71,18,519/ RESULTING INTO THE OPERATING COST OF 89,905,977/ . THUS HE DETERMINED THE OPE RATING LOSS OF RS 1, 67,77,186/ WHICH RESULTED INTO THE OPERATING PROFIT/OPERATING REVENUE MARGIN OF ( - ) 42.42%. HE FURTHER FOUND THAT ASSESSEE HAS SUBMITTED SEVEN COMPARABLE IS WHOSE MARGIN WAS 4.16%. THE ASSESSEE SUBMITTED THAT REJECTION OF THE RESALE PRICE METHOD USED BY THE TAXPAYER IS NOT PROPER AND TRANSACTIONAL NET MARGIN METHOD COULD NOT HAVE BEEN ADOPTED. ASSESSEE SUBMITTED THAT IT IS NOT CARRYING OUT ANY VALUE ADDITION ACTIVITIES. THE LEARNED TRANSFER PRICING OFFICER REJECTED THE ARGUMENT OF THE ASSESSEE AND STATED THAT THE TRANSACTIONAL NET MARGIN METHOD IS THE MOST APPROPRIATE METHOD IN THIS CASE. THE LEARNED TRANSFER PRICING OFFICER HELD THAT RESALE PRICE MARGIN/COST PLUS METHOD IS ACCURATE WHEN IT IS REALISED WITHIN A SHORT TIME OF THE RESELL ERS PURCHASE OF THE GOODS. THE MORE TIME B ETWEEN ORIGINAL PURCHASES AND RESALE , MORE LIKELY THAT MANY FACTOR CHANGES, LIKE CHANGES IN MARKET RATES OF EXCHANGES, IN COST ET C WILL NEED TO BE TAKEN INTO ACCOUNT. HE REFERRED TO THE OECD TRANSFER PRICING GUI DELINES AT PARAGRAPH NUMBER 2.23. HE FURTHER NOTED THAT ASSESSEE HAS INCURRED 4 SUBSTANTIAL PERSON NEL EXPENDITURE OF RS 2 .60 CRORES. IF ASSESSEE IS PERFORMING ONLY TRADING FUNCTIONS THESE WERE NOT JUSTIFIED IN RELATION TO THE TOTAL TURNOVER OF 8.98 CRORES . HE FURTHER NOTED THAT THE ASSESSEE HAS MAINTAINED A HUGE INVENTORY OF RS 2 .23 CRORES AGAINST THE SALE OF 8.98 CRORES. IT HAS ALSO INCURRED FOREIGN EXCHANGE FLUCTUATION LOSS OF 24.31 LAKHS. THUS , HE HELD THAT IN RESALE PRICE METHOD ALL THESE EXPENSE S CANNOT BE CAPTURED AND IT IS NECESSARY TO CONSIDER ALL THESE EXPENSES FOR PROPER COMPARABILITY. HE STATED THAT THE SAME CAN BE CAPTURED ONLY WHEN THE TRANSACTIONAL NET MARGIN METHOD IS USED . H E ALSO NOTED THAT ASSESSEE HAS INCURRED ADVERTISING AND SALES PROMOTION EXPENDITURE OF 36.58 LAKHS WHICH IS A SIGNIFICANT AMOUNT OF EXPENDITURE AND SHOW THAT THE FUNCTION OF THE ASSESSEE IS NOT THAT OF A MERE TREADER BUT SOMETHING MORE. THUS HE SELECTED THE TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD. WITH RESPECT TO THE COMPARABILITY HE ACCEPTED THE FILTER SUGGESTED BY THE ASSESSEE THAT AS ASSESSEE IS A VERY SMALL PLAYER IN THE INDUSTRY IN TERMS OF SALES TURNOVER, TURNOVER FILTER SHALL BE ALLOWED. ACCORDINGLY HE CONSIDERED SEVEN COMPARABLE COMPANIES WHOSE MARGIN WAS COMP UTED AT 4.16% AND COMPARED WITH THE MARGIN OF THE ASSESSEE OF ( - ) 42.42 PERCENTAGE. ACCORDINGLY THE ARMS - LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ON THE OPERATING REVENUE WAS DETERMINED AT RS 6,05,02,633/ AGAINST PRICE CHARGED BY THE ASSESSEE OF 8,99,05,977/ AND THEREAFTER THE ADJUSTMENT WAS PROPOSED AT 29,403,344/ AS PER ORDER U/S 92CA ON 28 TH OF JANUARY 2015. BASED ON THIS THE LEARNED ASSESSING OFFICER PASSED THE DRAFT ASSESSMENT ORDER ON 25 TH OF FEBRUARY 2015 DETERMINING TOTAL INCOME OF T HE ASSESSEE AT 6,471,044/ AGAINST THE RETURN OF INCOME FILED AT THE LOSS OF 22,932,000/ . CONSEQUENTLY THE FINAL ORDER WAS ALSO PASSED U/S 143 (3) READ WITH SECTION 144C (3) OF THE ACT ON 28 TH OF APRIL 2015 AFTER GRANTING THE ADJUSTMENT OF THE LOSS OF RS 7,932,835 AT RS N IL. AGAINST THIS ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) 44, NEW DELHI. HE PASSED AN ORDER ON 27 DECEMBER 2016 WHEREIN AGAINST THE MOST APPROPRIATE METHOD ADOPTED BY THE LEARNED TRANSFER PRICING OFFICER OF THE TRANSACTIONAL NET MARGIN 5 METHOD BUT BY THE ASSESSEE AT RESALE PRICE METHOD HELD BY HIM THAT HE DID NOT APPROVE THE APPLICATION OF TRANSACTIONAL NET MARGIN METHOD WITHOUT ESTABLISHING THAT ASSESSEE IS DOING DEEMED MANUFACTURING OR VALUE ADDIT ION. THUS THE MOST APPROPRIATE METHOD ADOPTED BY THE ASSESSEE WAS UPHELD. WITH RESPECT TO THE MANPOWER COST AMOUNTING TO RS 2 .60 CRORES AGAINST THE TURNOVER OF RS 8.98 CRORES, ASSESSEE SUBMITTED THAT THE APPELLANT HAS EMPLOYED THREE EXPATRIATES EMPLOYEES WHOSE TOTAL EMPLOYEE COST IS ABOVE 1 CRORES AND THEREFORE ASSESSEE JUSTIFIED THAT SUCH SALARY COST IS PREVALENT WIDELY FOLLOWED BY THE WORLDWIDE FOR MNC ENTERPRISES. RATIONAL FOR HAVING EXPATRIATES EMPLOYEES THAT THE CLIENT OF THE APPELLANT IS PREDOMINANTLY JAPANESE COMPANIES SUCH AS TOYO TA MICRO METRIC MACHINERY PRIVATE LIMITED AND OTHERS. HOWEVER THE LEARNED CIT A HELD THAT SUCH EMPLOYEE COST OF THESE EXPATRIATES ARE CLOSELY LINKED WITH THE DISTRIBUTION FUNCTIONS AND IS NOT IN THE ORDINARY SENSE ENGAGED IN DOING ROUTINE JOB. THEREFO RE ACCORDING TO HIM THESE EMPLOYEE S COST SHOULD BE CONSIDERED WHILE COMPUTING THE GROSS PROFIT MARGIN OF THE ASSESSEE. HE DIRECTED THE LEARNED TRANSFER PRICING OFFICER TO SELECT RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD FOR DISTRIBUTION FUNCTION , HOWEVER , WHILE COMPUTING THE PROFIT LEVEL INDICATOR FOR RESALE PRICE METHOD THE EXPENDITURE PAID TO THESE EXPATRIATES IS TO BE TREATED AS THE EXPENSES AND AO/TPO WAS DIRECTED TO RECOMPUTE THE ARMS - LENGTH ADJUSTMENT OF INTERNATIONAL TRANSACTION FOR DIS TRIBUTION FUNCTIONS. THE APPEAL OF THE ASSESSEE WAS PARTLY ALLOWED. THEREFORE ASSESSEE AGGRIEVED WITH THE ORDER OF THE LEARNED TRANSFER PRICING OFFICER HAS PREFERRED THIS APPEAL BEFORE US. 5. SUBSEQUENTLY THE ORDER OF THE LEARNED CIT A ASSESSEE PREFERRED AN APPLICATION U/S 154 OF THE INCOME TAX ACT TO THE ASSESSING OFFICER WHO PASSED AN ORDER DATED 14 JULY 2017 WHEREIN THE ADJUSTMENT WAS REDUCED TO RS. 2 68,56,886/ . THIS ADJUSTMENT HAS RESULTED BECAUSE THE EXPATRIATE EXPENSES OF RS 2 60,83,480 WAS CONSIDERED AS THE DIRECT EXPENSES AND CONSEQUENT GROSS LOSS WAS DETERMINED AT RS 1, 74,83,711 AND CONSEQUENTLY THE MARGIN OF THE ASSESSEE OF GROSS LOSS WAS 27.70% AGAINST THE PROFIT MARGIN OF THE COMPARABLE COMPANY AT 12.25%. 6 6. AS PER GROUND NUMBER 3 5 THE ASSESSEE IS AGGRIEVED WITH THE COMPUTATION OF THE PROFIT LEVEL INDICATOR A S DIRECTED BY THE LEARNED CIT A. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED BEFORE US THE JOB PROFILE OF THREE EXPATRIATES EMPLOYEES AND STATED THAT COST OF THESE EMPLOYEES CANNOT BE RED UCED WHILE COMPUTING THE PROFIT LEVEL INDICATOR WHEN RESALE PRICE METHOD IS TO BE APPLIED. IT WAS STATED THAT MR HIDEO MATSUKO HAS THE JOB REQUIREMENT OF AFTER SALE SUPPORT TO THE MACHINE USERS IN INDIA AND ALSO PROVIDING TRAINING TO CUSTOMERS AND LOCAL ST AFF OVER TROUBLESHOOTING, APPLICATION AND MAINTENANCE OF SPECIAL - PURPOSE CYLINDRICAL AND CRANKSHAFT MACHINES. IT IS ALSO FOR COORDINATION WITH JAPAN FOR WARRANTY PARTS, TECHNICAL SUPPORT AND ARRANGEMENT FOR DRAWINGS AS AND WHEN REQUIRED. THE RATIONAL FOR R ECRUITING SUCH AS PERSON WAS THAT THE MACHINES THAT WERE SUPPLIED, SKILLS FOR THESE MACHINES WERE NOT AVAILABLE IN INDIA AND THEREFORE HE WAS RECRUITED AS HE WAS HAVING A VAST EXPERIENCE AND SUPERIOR CAPABILITIES. WITH RESPECT TO THE JOB PROFILE OF MR Y HIBI, IT WAS STATED THAT HIS JOB PROFILE IS FOR SUPPORT TO SALES OPERATIONS LIKE PLANNING, ORGANISING, SCHEDULING, RESOURCE MANAGEMENT, IMPLEMENTATION OF SALE SYSTEM, INTERACTION WITH CUSTOMERS IN INDIA, COORDINATION WITH JAPAN AND TO IMPORT SALES TRAINING TO LOCAL STAFF AND PERFORM ALL OTHER ASSOCIATE ASSIGNMENT FOR SMOOTH SALES FLOW. WITH RESPECT TO THE JOB PROFILE OF MR MAMAROU NAGASAWA IT WAS STATED THAT HE IS APPOINTED AS A V ICE PRESIDENT OF THE COMPANY FOR A PERIOD OF THREE YEARS. THEREFORE IT WAS STATED THAT ALL THESE EMPLOYEES ARE NOT AT ALL ARE PART OF THE COST FOR COMPUTING THE PLI UNDER RESALE PRICE METHOD. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTED THE ORDER OF THE LEARNED TPO AND CIT A. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTION AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. IT IS A FACT THAT THE LEARNED ASSESSING OFFICER HAS NOT CHALL ENGED THE ORDER OF THE LEARNED CIT A STATING THAT RESAL E PRICE METHOD IS THE MOST APPROPRIATE METHOD AS ASSESSEE DOES NOT ENGAGE IN ANY DEEMED MANUFACTURING OR FURTHER VALUE ADDITION. IT IS ALSO THE METHOD SELECTED BY ASSESSEE AS MAM. THERFORE ONLY ISSUE IS HOW TO 7 COMPUTE PLI WHEN RSP METHOD IS APPLIED IN THIS PECULIAR CASE. ACCORDING TO THE PROVISIONS OF RULE 10 B FOR THE DETERMINATION OF THE ARMS - LENGTH PRICE U/S 92C, THE RESALE PRICE METHOD COMPUTATION SHALL BE DETERMINED ACCORDING TO SUBRULE (1) (B) OF THE INCOME TAX RULES. MOSTLY LOOKING AT THE PROFI LE OF THE EXPATRIATES PROVIDED BY THE LD AR, IT IS APPARENT THAT EITHER THOSE ARE FOR PROVIDING WARRANTY SERVICES OR AFTER SALES SERVICES. WHEN THE GOODS ARE SOLD ALL THE PRICE OF THESES ITEMS/ SERVICES ARE ALREADY EMBEDDED IN THE SALES PRICE. THEREFORE NATURALLY WHEN SALES PRICE CONSISTS OF PRICE FOR WARRANTY AND AFTER SALES SERVICES, WHICH ARE PROMISED AT THE TIME OF SALES, NATURALLY CORRESPONDING EXPENSES ARE ALSO TO BE CONSIDERED WHILE COMPUTING THE MARGIN OF THE ASSESSEE. AFTER SALE SUPPORT SERVICES , TRAINING TO CUSTOMERS AND LOCAL STAFF FOR TROUBLESHOOTING AND SERVICE COORDINATION EXPENSES ARE THUS, REQUIRED TO BE INCLUDED FOR DETERMINING THE GROSS PROFIT MARGIN IN RESALE PRICE METHOD. IN VIEW OF THIS, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF TH E LD TPO AND CIT (A). ACCORDINGLY GROUND NO 3 TO 5 OF THE APPEAL ARE DISMISSED. 9. GROUND NO 1 AND 2 ARE GENERALLY IN NATURE AND GROUND NO 6 AGAINST INITIATION OF PENALTY IS PREMATURE AND HENCE THOSE GROUNDS ARE DISMISSED. 10. ACCORDINGLY APPEAL OF THE ASSESS EE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 /1 2 /2020. - SD/ - - SD/ - ( KULDIP SINGH ) (PRASHANT MAHARISHI ) JUDICIAL MEMBER ACCOUNTANT MEMBER * AK KEOT * DATE: 10 . 1 2 . 2020 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDE NT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI