GIVAUDAN FLAVOURS (INDIA) P.LTD, MUMBAI V. DCIT 1(3), MUMBAI

ITA 3925/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1876 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 23-01-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 05-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Keywords: Transfer pricing; International transaction; Question of law; Revised return

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH K, MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO.3925/MUM/2012 ASSESSMENT YEAR : 2007-08 GIVAUDAN FLAVOURS (INDIA) PRIVATE LIMITED 401, AKRUTI CENTER POINT, 4 TH FLOOR MIDC CENTRAL ROAD, ANDHERI (E) MUMBAI. PAN NO. AAACL 1013 D VS. DY. COMMISSIONER OF INCOME TAX -1(3) AAYAKAR BHAVAN, M.K. MARG MUMBAI-400 020. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI KANCHUN KAUSHAL AND SHRI ALIASGER RAMPURAWALA RESPONDENT BY : SHRI AJEET KUMAR JAIN AND SHRI PRAVEEN KUMAR DATE OF HEARING : 23.1.2013 DATE OF PRONOUNCEMENT : 30.1.2013 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 19.3.2012 OF CIT(A) FOR THE ASSESSMENT YEAR 20027-08. THE DISPUT ES RAISED BY THE ASSESSEE IN THIS APPEAL RELATE TO TRANSFER PRICING ADJUSTMENT A ND ALLOWABILITY OF CLAIM OF BAD DEBT. ITA NO.3925/M/12 AY : 07-08 2 2. WE FIRST TAKE UP THE ISSUE RELATING TO TRANSFER PRICING (TP) ADJUSTMENT. THE AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH 10 ASSOCIATE ENTERPRISES (AES) WH ICH INCLUDED IMPORT OF RAW MATERIAL AT RS.12.91 CRORES . THE GROSS RECEIPTS OF THE BUSINESS WERE RS.139.48 CRORES AND OPERATING COST BEFORE TAX AT RS.131.64 C RORES GIVING OPERATING MARGIN OF 5.62%. THE AO, THEREFORE, REFERRED THE DETERMINA TION OF ARMS LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTIONS TO TPO. THE TPO ASKED THE ASSESSEE TO SUBMIT INFORMATION IN SUPPORT OF ALP FOR INTERNATIO NAL TRANSACTIONS. THE ASSESSEE CONDUCTED TP STUDY USING TNMM METHOD IN RESPECT OF PURCHASE OF RAW MATERIAL FROM ASSOCIATE ENTERPRISE IN WHICH 12 COMPARABLES W ERE SELECTED WHICH GAVE WEIGHTED AVERAGE MARGIN OF 5.20 %. THE ASSESSEE HAD CONDUCTED STUDY ON THE BASIS OF DATA OF LAST THREE YEARS. THE TPO, THEREFO RE, ASKED THE ASSESSEE TO SUBMIT REPORT ON THE BASIS OF DATA FOR THE FINANCIAL YEAR 2006-07 WHICH WAS SUBMITTED BY THE ASSESSEE GIVING WEIGHTED AVERAGE MARGIN OF 7.97 %. THE ASSESSEE SUBMITTED THAT THE MARGIN DECLARED BY THE ASSESSEE WAS WITHIN 5% RANGE AND, THEREFORE, NO ADJUSTMENT WAS REQUIRED TO BE MADE. 2.1 THE TPO HOWEVER NOTED THAT FOUR OUT OF THE 12 C OMPARABLES SELECTED BY THE ASSESSEE I.E. PEE CEE COSMA SCOPE LTD., HIPOLIN LTD., ADER MULTIPRODUCTS LTD. AND GODREJ INDUSTRIES LTD. WHICH WERE ENGAGED IN THE BUSINESS OF COSMETICS, TOILETRIES, SHAVING CREAM, DETERGENTS AND PERSONAL CARE PRODUCTS WERE NOT COMPARABLE TO THE BUSINESS OF THE ASSESSEE WHICH WA S MANUFACTURE OF PERFUMES AND FRAGRANCES ETC. THE TPO THEREFORE, EXCLUDED THE SE PRODUCTS BUT INCLUDED KHATTRI FRAGRANCES & FLAVOURS LTD. WHICH WAS IN THE SAME BUSINESS. THE ITA NO.3925/M/12 AY : 07-08 3 OBJECTION RAISED BY THE ASSESSEE AGAINST KHATTRI FR AGRANCES AND FLAVOURS ON THE GROUND THAT THE SAME WAS NOT A GOING CONCERN WAS RE JECTED BY THE TPO AFTER OBSERVING THAT THE MANUFACTURING ACTIVITY HAD BEEN SUSPENDED ONLY AT THE FAG END OF THE YEAR AND IN THE PRECEDING FOUR YEARS THE PAR TY HAD BEEN CONSISTENTLY SHOWING OPERATING MARGINS ON 28-30%. THE AO THUS C OMPUTED THE ALP ON THE BASIS OF NINE COMPARABLES WHICH GAVE AVERAGE PROFIT MARGIN OF 13.81%. APPLYING THE SAID MARGIN, THE TPO COMPUTED THE TOTAL EXPENSE S AT THE ENTERPRISE LEVEL OF RS.120.21 CRORES AGAINST THE TOTAL EXPENSES OF RS.1 31.64 CRORES CLAIMED BY THE ASSESSEE. THE DIFFERENCE OF RS.11,42,21,880/- WAS THEREFORE, PROPOSED TO BE ADDED ON ACCOUNT OF TP ADJUSTMENT AS IMPORT OF RAW MATERIAL OF RS.12.91 CRORES WAS BEYOND THE SAFE LABOUR LIMIT OF 5%. THE AO THER EFORE, FOLLOWING REPORT OF TPO AND AFTER GIVING OPPORTUNITY OF HEARING TO THE ASSESSEE MADE ADJUSTMENT OF RS.11,42,21,880/- ON ACCOUNT OF PURCHASES FROM ASSO CIATE ENTERPRISES. 3. IN APPEAL CIT(A) CONFIRMED THE ADJUSTMENT MADE B Y AO. CIT(A) OBSERVED THAT IN ASSESSMENT YEAR 2006-07, THE TP AD JUSTMENT ISSUE HAD BEEN SET ASIDE BY THE TRIBUNAL TO AO WHICH SHOWED THAT THE T RIBUNAL HAD NOT ACCEPTED THE FINDING OF CIT(A) IN ASSESSMENT YEAR 2006-07. CIT( A) THUS CONFIRMED THE ORDER OF AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4. WE HAVE HEARD BOTH PARTIES IN THE MATTER. BOTH T HE PARTIES AGREED THAT THE SAME ISSUE HAS ALREADY BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2006-07 IN ITA NO.4820/M/09 AND THE MATTER HAS BEEN RESTORED TO THE AO. WE FIND THAT IN ASSESSMENT YEAR 2006-07 ALSO, THE AO BASED ON THE ITA NO.3925/M/12 AY : 07-08 4 REPORT OF TPO HAD MADE ADJUSTMENT TO THE ENTIRE PUR CHASES INCLUDING DOMESTIC PURCHASES APPLYING THE ENTERPRISE LEVEL MARGIN. IN APPEAL, CIT(A) DELETED THE ADDITION. IN FURTHER APPEAL, THE TRIBUNAL OBSERVED THAT ENTERPRISE LEVEL PROFIT MARGIN HAD BEEN APPLIED IN RELATION TO INTERNATIONA L TRANSACTIONS WITH AES WHICH WAS NOT CORRECT. THE ASSESSEE HAD ARGUED THAT THE L IMITED ISSUE BEFORE THE TRIBUNAL WAS WHETHER ADJUSTMENT COULD BE MADE TO THE ENTIRE PURCHASES OR TO ONLY THE INTERNATIONAL TRANSACTIONS. THE TRIBUNAL OBSERVED T HAT THOUGH THE ISSUE WHETHER ENTERPRISE LEVEL MARGIN CAN BE APPLIED TO INTERNATI ONAL TRANSACTIONS WAS NOT THERE, THE TRIBUNAL COULD NOT GIVE ITS STAMP OF APPROVAL T O THE METHOD FOLLOWED WHICH WAS PATENTLY ILLEGAL. THE TRIBUNAL HAD POWER TO ENF ORCE CORRECT PROVISIONS OF LAW. THE TRIBUNAL ALSO REFERRED TO THE DECISION OF THE T RIBUNAL IN CASE OF ACIT VS. TEJ DIAM (130 TTJ 570) IN WHICH IT HAS BEEN HELD THAT T NMM METHOD REQUIRED COMPARISON OF NET PROFIT MARGIN REALIZED FROM INTER NATIONAL TRANSACTIONS OR AGGREGATE OF INTERNATIONAL TRANSACTIONS AND NOT COM PARISON OF OPERATING MARGINS OF THE ENTERPRISES. THE TRIBUNAL THEREFORE RESTORED THE ISSUE TO THE FILE OF AO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. THE FACT S THIS YEAR ADMITTEDLY ARE IDENTICAL. THEREFORE WE SET ASIDE THE ORDER OF CIT( A) AND RESTORE THE MATTER BACK TO THE FILE OF AO FOR PASSING A FRESH ORDER IN ACCO RDANCE WITH LAW AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 5. THE SECOND DISPUTE IS REGARDING ALLOWABILITY OF CLAIM OF BAD DEBT AMOUNTING TO RS.40,04,230/-. THE ASSESSEE HAD NOT M ADE CLAIM IN THE RETURN OF INCOME BUT THE CLAIM WAS MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE AO APPARENTLY DID NOT CONSIDER THE CLAIM AS THERE I S NO SPECIFIC MENTION OF THE ITA NO.3925/M/12 AY : 07-08 5 CLAIM IN THE ASSESSMENT ORDER. IN APPEAL, THE ASSES SEE SUBMITTED BEFORE CIT(A) THAT IT HAD WRITTEN OFF AN AMOUNT OF RS.40,04,230/- AS BAD DEBT IN THE BOOKS OF ACCOUNT OF ASSESSMENT YEAR 2007-08 AND INCOME PERTA INING TO THE SAME HAD BEEN TAKEN INTO CONSIDERATION IN THE COMPUTATION OF INCO ME IN THE EARLIER YEARS. IT WAS ALSO SUBMITTED THAT THE AO HAD NOT CONSIDERED THE C LAIM AS CLAIM HAD NOT BEEN MADE IN THE RETURN OF INCOME. IT WAS POINTED OUT TH AT THOUGH THE AO COULD NOT CONSIDER ANY CLAIM OTHERWISE THAN BY WAY OF FILING RETURN PF INCOME IN VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE O F GOETZ INDIA LTD. VS. CIT (157 TAXMAN 1), THE APPELLATE AUTHORITIES HAD POWER TO ENTERTAIN SUCH CLAIM. CIT(A) HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISE D. IT WAS OBSERVED BY HIM THAT THE AO AND CIT(A) HAD CO-TERMINUS JURISDICTION AND THEREFORE, WHAT WAS TRUE AND APPLICABLE TO AO WAS ALSO APPLICABLE TO CIT(A). CIT(A) THEREFORE, UPHELD THE ORDER OF AO AGGRIEVED BY WHICH THE ASSESSEE IS IN A PPEAL BEFORE THE TRIBUNAL. 5.1 WE HAVE HEARD BOTH PARTIES, PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY OF CLAIM OF BAD DEBT NOT MADE IN THE RETURN OF INCOME. THE CLAIM HAD BEEN MADE BEFOR E AO ONLY DURING ASSESSMENT PROCEEDINGS WHICH HAD NOT BEEN ALLOWED FOLLOWING TH E JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF GOETZ INDIA LTD. (SUP RA) IN WHICH IT HAS BEEN HELD THAT ANY CLAIM BEFORE THE AO HAS TO BE MADE BY WAY OF FILING REVISED RETURN IF NOT MADE IN THE ORIGINAL RETURN. CIT(A) HAS THEREFORE, UPHELD THE ORDER OF AO. IT MAY HOWEVER BE NOTED THAT THE JUDGMENT OF THE HON'BLE S UPREME COURT IN THE CASE OF GOETZ (I) LTD. WAS REGARDING CLAIM TO BE MADE BEFOR E THE AO. THE HON'BLE SUPREME COURT IN THE SAID CASE HAVE CLARIFIED THAT THE SAID JUDGMENT WOULD NOT ITA NO.3925/M/12 AY : 07-08 6 APPLY TO THE APPELLATE AUTHORITY WHICH COULD ENTERT AIN THE CLAIM USING THEIR APPELLATE POWERS. FACTS RELATING TO THE CLAIM ARE A LREADY ON RECORD WITH THE AO. WE, THEREFORE, ADMIT THE CLAIM AS A QUESTION OF LAW DOES ARISE ON THE BASIS OF FACTS ON RECORD AS TO WHETHER THE CLAIM COULD BE ALLOWED. SINCE THE FACTUAL ASPECTS REGARDING FULFILLMENT OF CONDITION FOR ALLOWABILITY OF BAD DEBT CLAIM HAVE NOT BEEN EXAMINED, WE RESTORE THE ISSUE TO THE FILE OF AO FO R ADJUDICATING THE SAME AFTER EXAMINATION OF RECORDS AND AFTER ALLOWING OPPORTUNI TY OF HEARING TO THE ASSESSEE. 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30.1. 2013. SD/- SD/- (VIJAY PAL RAO ) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 2013. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.