Hoganas India Ltd., Pune V. Asst. Comm. of Income-tax, Pune

ITA 39/PUN/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1961 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 09-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER, AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA.NO.39/PN/2012 (ASSESSMENT YEAR : 2005-06) HOGANAS INDIA PVT.LTD. GANGA COMMERCE, 4 NORTH MAIN ROAD, KOREGAON PARK, PUNE PAN NO. AAACH 5156K .. APPELLANT VS. ACIT CIRCLE1(2),PUNE. .. RESPONDENT ASSESSEE BY : SRI NIKHIL PATHAK RESPONDENT BY : SRI AJIT KORDE DATE OF HEARING : 13-03-2013 DATE OF PRONOUNCEMENT : 21-03-2013 ORDER R.S. PADVEKAR, JM : THIS APPEAL IS FILED BY THE ASSESSEE CHALLENGING T HE IMPUGNED ORDER OF THE LD.CIT(A)-I, PUNE DATED 04-08-2011 FOR THE ASSESSMENT YEAR 2005-06. 2. THE ASSESSEE HAS TAKEN THE MULTIPLE GROUNDS BUT THE EFFECTIVE GROUNDS ARE AS UNDER : 1. ON THE FACTS OF THE CASE AND IN LAW, THE LEARNE D COMMISSIONER OF INCOME TAX (APPEALS) - I ERRED IN C ONFIRMING THAT AN ADDITION OF RS.13,53,898/- HAS TO BE MADE T O THE INTERNATIONAL TRANSACTION OF RECEIPT OF SALES COMMI SSION BY THE APPELLANT COMPANY OF RS.17,97,800/-FROM ITS AE FOR ARRIVING AT THE ARM'S LENGTH PRICE OF THIS INTERNATIONAL TRANSA CTION. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - I ERRED IN NOT APPRECIATING THAT THE TRANSACTION OF R ECEIPT OF SALES COMMISSION AND IMPORT OF TRADED GOODS BY THE APPELL ANT COMPANY WERE CLOSELY LINKED TRANSACTIONS AND THAT F OR THE PURPOSE OF BENCHMARKING, THE ABOVE TRANSACTIONS WER E TO BE AGGREGATED UNDER THE SEGMENT 'DISTRIBUTION ACTIVITY ' IN ACCORDANCE WITH THE PROVISIONS OF RULE 10A(D). 2 3. WITHOUT PREJUDICE TO GROUND NO. 2, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I ERRED IN NOT APPRECIATING THAT US $ 30 PER METRIC TON WAS THE AR M'S LENGTH PRICE OF THE AFORESAID INTERNATIONAL TRANSACTION. 4. WITHOUT PREJUDICE TO ABOVE, IF THE LEARNED COMMI SSIONER OF INCOME TAX (APPEALS)-I WAS OF THE VIEW THAT FROM FA R ANALYSIS, THE FUNCTIONS UNDERTAKEN, RISKS ASSUMED AND ASSETS UTILISED FOR EARNING COMMISSION ON SALES WERE SIMILAR TO THOSE W HICH THE COMPANY UNDERTAKES FOR THE MARKETING FUNCTIONS OF I TS OWN MANUFACTURED PRODUCTS, THE PANEL SHOULD HAVE AGGREG ATED THE TRANSACTION OF RECEIPT OF SALES COMMISSION FROM AE WITH THE OTHER INTERNATIONAL TRANSACTIONS OF THE MANUFACTURI NG SEGMENT WHICH WERE ACCEPTED BY THE TPO AT ARM'S LENGTH PRIC E AS PER TNMM. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -I ERRED IN NOT APPRECIATING THAT THE LEARNED TPO ERRE D IN WORKING OUT THE ARM'S LENGTH PERCENTAGE OF THE COMMISSION R ECEIVED FROM THE APPELLANT COMPANY'S AE @ 2.84% INSTEAD OF @ 0.67% BEING THE CORRECT PERCENTAGE AND CONSIDERING THE FA CT THAT THE SALES COMMISSION RECEIVED BY THE APPELLANT COMPANY WORKED OUT TO 1.62% OF THE ACTUAL SALES PRICE, NO UPWARD ADJUS TMENT / ADDITION WAS WARRANTED ON THE FACTS OF THE CASE. 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -I ERRED IN NOT APPRECIATING THAT ON THE FACTS OF THE CASE A ND IN LAW, THE BENEFIT OF OPTION AVAILABLE TO THE APPELLANT UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT AND AS PER CBDT'S CIRCULA R NO. 12 OF 2001 DATED AUGUST 23, 2001 OF ADOPTING AS ARM'S LEN GTH PRICE, A PRICE WHICH VARIES BY NOT MORE THAN 5% FROM THE ARM 'S LENGTH PRICE OUGHT TO BE GRANTED AND THAT THE UPWARD ADDIT ION HAD TO BE MADE IN RESPECT OF THE BALANCE AMOUNT, IF ANY. 3. THE ONLY ISSUE IN CONTROVERSY IS IN RESPECT OF A DJUSTMENT MADE BY THE TRANSFER PRICING OFFICER (TPO) AND CONFIRMED BY THE DISPUTE RESOLUTION PANEL, PUNE (DRP) IN RESPECT OF COMMISSI ON RECEIVED BY THE ASSESSEE-COMPANY FROM ITS PARENT COMPANY AND THE SA ID ADJUSTMENT IS MADE BY THE TPO UNDER SECTION 92 CA(3) OF THE INCOM E-TAX ACT, 1961. 4. THE ASSESSEE IS IN THE MANUFACTURING, DISTRIBUTI ON AND MARKETING OF IRON AND FERROUS POWDERS IN INDIA. THE ASSESSEE FILED THE RETURN OF INCOME DECLARING A TOTAL INCOME OF RS.7,16,94,880/- FOR THE ASSESSMENT YEAR 2005-06. AS THE ASSESSEE HAS REPOR TED THE INTERNATIONAL TRANSACTIONS WITH AE I.E. ASSOCIATED ENTERPRISES, A REFERENCE WAS MADE BY THE ASSESSING OFFICER UNDER S ECTION 92CA(1) OF THE ACT TO THE TPO FOR DETERMINATION OF ARMS LENGT H PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE IN ITS AUDIT REPORT. 3 THE ASSESSEE HAS ADOPTED TNMM METHOD FOR DETERMININ G THE ALP. APART FROM INTERNATIONAL TRANSACTIONS RELATING TO P URCHASE OF IRON POWDER FOR MANUFACTURING, PURCHASE OF TRADING MATER IALS, EXPORT OF IRON POWDERS, PURCHASE OF CONSUMABLES AND SPARES, T HE ASSESSEE ALSO UNDERTOOK INTERNATIONAL TRANSACTIONS RELATING TO PR OVISION OF MARKET SERVICES TO ITS PARENT COMPANY, FOR WHICH IT HAS RE CEIVED COMMISSION. THE ISSUE IN CONTROVERSY BEFORE US IS IN RESPECT OF THE COMMISSION RECEIVED BY THE ASSESSEE, TO WHICH ADJUSTMENT HAS B EEN MADE BY THE TPO LEADING TO AN ADDITION OF RS.13,53,898/-. 5. THE ASSESSEE WAS PAID COMMISSION OF RS.17,97,800 /- BY HOGANAS AB SWEDEN. THE SALES ACHIEVED BY HOGANAS A B SWEDEN STOOD AT RS.11,12,89,402/- AND THE COMMISSION RECEI VED BY THE ASSESSEE IS AT RS.17,97,800/- WHICH WORKS TO 1.62% OF THE CORRESPONDING SALES ACHIEVED BY HOGANAS AB SWEDEN I N INDIA. THE TPO HAS NOTED THAT THE COMMISSION RECEIVED BY THE A SSESSEE WAS NOT ON THE STANDARD RATE. THE ASSESSEE RECEIVED COMMIS SION OF $ 30 PER MT OF THE PRODUCT SOLD OF ITS AE IN INDIA, IRRESPEC TIVE OF THE SALE PRICE OF THE PRODUCT OR THE TYPE OF THE PRODUCT. THE TPO OBSERVED THAT THE ASSESSEE UNDERTAKES SIMILAR MARKETING FUNCTIONS, AS SUMES SIMILAR RISK AND EMPLOYS SIMILAR ASSETS FOR ITS OWN MARKETING FU NCTIONS FOR THE PRODUCTS MANUFACTURED BY IT AND AS IN RESPECT OF EA RNING OF SALES COMMISSION. THE TPO OBSERVED THAT FOR THE PURPOSE OF BENCHMARKING TRANSACTION RELATING TO RECEIPT OF SALES COMMISSION , THERE IS AN INTERNAL COMPARABLE AVAILABLE WHICH IS THE PROFIT ATTRIBUTAB LE TO THE MARKETING FUNCTIONS OF THE ASSESSEE FOR THE PRODUCTS MANUFACT URED BY IT I.E. THE INTERNAL RATE OF RETURN ATTRIBUTABLE TO THE MARKETI NG FUNCTIONS OF THE ASSESSEE IS COMPARABLE TO THE FUNCTIONS UNDERTAKEN FOR EARNING THE SALES COMMISSION. AS NOTED BY THE TPO, THE SALES C OMMISSION RECEIVED BY THE ASSESSEE BY CONDUCTING INTERNAL RAT E OF RETURN ATTRIBUTABLE TO THE MARKETING FUNCTIONS OF THE COMP ANY WORKED OUT TO 2.84% AND THEREFORE THE TPO ASKED THE ASSESSEE WHY THE SAID RATE SHOULD NOT BE ADOPTED IN PLACE OF 1.62% WORKED OUT AGAINST THE SALES OF THE HOGANAS AB SWEDEN. THE ASSESSEE RESISTED TH E ACTION OF THE TPO BY SUBMITTING THAT THE NET PROFIT EARNED BY THE ASSESSEE IS NOT ONLY THE RESULT OF THE FUNCTIONS PERFORMED UNDER TH E FACTORY OVERHEADS AND THE SADA EXPENSES, BUT ALSO RESULT OF THE FUNCT IONS PERFORMED UNDER THE HEAD RAW MATERIAL COST AND ACCORDINGLY WHILE ATTRIBUTING 4 THE NET PROFIT OF SADA EXPENSES, SUCH PROFIT SHOULD ALSO BE ATTRIBUTED TOWARDS THE COST OF RAW MATERIALS. THE TPO DID NOT AGREE WITH THE WORKING MADE BY THE ASSESSEE. THE TPO SUGGESTED TH E ADDITION OF RS.13,53,898 TO ARRIVE AT ARMS LENGTH PRICE (ALP) WHICH WAS CONFIRMED BY THE DRP. 6. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD . THE LEARNED COUNSEL SUBMITS THAT THE IDENTICAL ISSUE HAS COME F OR THE CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2006-07, APPEAL BEING ITA NO.1463/PN/10 ORDER DATED 11-01-20 13. THE LEARNED COUNSEL FILED A COPY OF THE ORDER WHICH IS PLACED ON RECORD. THE LD. D.R. FAIRLY CONCEDED THAT THE ISSUE IS COVE RED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE. IT IS SEEN THAT IN THE A.Y. 2006-07 THE TRIBUNAL HAS OCCASION TO EXAMINE THE IS SUE IN CONTROVERSY. THE OPERATIVE PART OF THE TRIBUNALS ORDER IS AS UNDER : 8. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PART IES AND PERUSED THE RECORD. THE SHORT CONTROVERSY IN THIS APPEAL IS IN RESPECT OF THE COMMISSION RECEIVED BY THE ASSESSEE FROM ITS PARENT COMPANY I.E. HOGANAS AB SWEDEN. AS PER THE AGREEMENT WITH HOGANAS AB SWEDEN, THE SALES DIRECTLY MADE BY THE PARENT COMPANY IN INDIA AND OTHER ASIA REGION, THE ASSESSE E HAS TO RECEIVE COMMISSION @ $ 30 PER MT. THE ASSESSEE-COM PANY WORKED OUT THE PROFIT LEVEL INDICATOR AS OPERATING PROFIT OR OPERATING REVENUE OF THE AFORESAID DISTRIBUTION ACT IVITY AT 15.37% AND ACCORDING TO THE ASSESSEE THE ARITHMETIC MEAN O F THE PROFIT LEVEL INDICATOR OF THE COMPARABLE TRADING COMPANIES WAS AT 1.96% ONLY. WHILE FILING THE WORKING BEFORE THE TP O AS WELL AS THE DRP, THE ASSESSEE AGGREGATED THE SALES OF THE M ANUFACTURED GOODS AND TRADED GOODS AND ACCORDINGLY WORKED OUT T HE PERCENTAGE OF SADA. THE CORE ISSUE BEFORE US IS WH ETHER COMMISSION @ $ 30 PER MT RECEIVED BY THE ASSESSEE F ROM ITS AE, ITS PARENT COMPANY IS AT ALP. THE PRINCIPLES FOR D ETERMINING THE ALP ARE WELL SETTLED BY DIFFERENT JUDICIAL PRONOUNC EMENTS. WHAT IS TO BE CONSIDERED WHILE ADOPTING THE COMPARABLE A RE THE FUNCTIONS PERFORMED, CAPITAL UTILIZED AND RISKS ASS UMED. IT IS PERTINENT TO NOTE HERE THAT THE DRP AS WELL AS TPO HAS NOT QUESTIONED THE NATURE OF THE FUNCTIONS TO BE PERFOR MED BY THE PARENT COMPANY. THE ASSESSEES CLAIM IS THAT THERE IS A MINIMAL RISK AND NO COST IS INVOLVED FOR ACQUIRING THE BUSI NESS BY THE PARENT COMPANY, FOR WHICH ASSESSEE IS PAID COMMISSI ON. THE SALE PRICE OF THE PRODUCT IS NOT CONSIDERED BUT WEI GHT IS CONSIDERED. THE ASSESSEE RECEIVED COMMISSION OF RS.14,41,555/- WHICH WORKED OUT TO 1.49% TO THE SAL ES ACHIEVED BY THE PARENT COMPANY I.E. HOGANAS AB SWEDEN. IN O UR OPINION, THE BENCHMARKING ADOPTED BY THE TPO AS WELL AS THE DRP TREATING THE ASSESSEE ITSELF AS A COMPARABLE IS NOT CORRECT. ADMITTEDLY THE ASSESSEE IS INVOLVED IN THE MANUFACT URING ACTIVITY ALSO AND MARKETING ITS OWN PRODUCTS I.E. IRON POWDE R. APART FROM 5 THAT, THE ASSESSEE IS IMPORTING IRON PRODUCT AND MA RKETING THE SAME THAT IS A TRADING ACTIVITY. NOTHING HAS BEEN BROUGHT OUT ON RECORD BY THE DRP AS WELL AS THE TPO THAT THE ASSES SEE HAS TO INCUR COST FOR THE SALES ACHIEVED BY THE PARENT COM PANY AS IN THE CASE OF ITS OWN MARKETING. THE LD. COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT NO RISK IS INVOLVED. HENCE, HOW THE ASSESSEE CAN BE TREATED AS INTERNAL COMPARABLE AS THE BENCHMARKI NG. IN OUR OPINION, THE APPROACH OF THE TPO AS WELL AS THE DRP IS NOT CORRECT. IT IS SEEN THAT THE RISK INVOLVED AND ASS ET EMPLOYED BY THE ASSESSEE-COMPANY COMPARED TO ITS OWN MARKETING WITH THAT OF THE MARKETING OF THE PARENT COMPANY, OF WHICH CO MMISSION IS PAID, IS UNMATCHED. MOREOVER, MINIMUM RISK IS INVO LVED AS THE ASSESSEE IS NOT DIRECTLY INVOLVED IN ANY OF THE SAL E TRANSACTIONS BY THE PARENT COMPANY. IT APPEARS THAT THE COMMISS ION IS PAID BY THE PARENT COMPANY TO ITS SUBSIDIARIES IN THE AS IA REGION TO COMPENSATE LOSS OF PROFIT WHEN DIRECT SALES ARE MAD E. IN OUR OPINION, THE BENCHMARKING DONE BY THE TPO AS WELL A S THE DRP IS NOT CORRECT, AS THE PARAMETERS OF THE RISK AND THE ASSETS INVOLVED ARE NOT MATCHING. WE, THEREFORE, DELETE THE ADDITI ON MADE BY THE TPO ON THE DIRECTIONS OF THE DRP AND ALLOW THE APPEAL FILED BY THE ASSESSEE. 9. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. 7. AS THE FACTS ARE IDENTICAL IN THIS YEAR WE FIND NO REASON TO TAKE A DIFFERENT VIEW. WE ACCORDINGLY DELETE THE ADDITION MADE BY THE ASSESSING OFFICER TO THE EXTENT OF RS.13,53,898/-. 8. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 21 ST DAY OF MARCH, 2013. SD/- SD/- ( G.S.PANNU ) ( R.S. P ADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMB ER SATISH PUNE, DATED THE 21 ST MARCH 2013. COPY OF THE ORDER IS FORWARDED TO: 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-I, PUNE 4. THE CIT-I, PUNE 5. THE DR B BENCH, PUNE. 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUN E.