ACIT, New Delhi V. M/s. Canon India Pvt. Ltd, Gurgaon

ITA 3957/DEL/2009

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7587 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 27-10-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 23-09-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: MUKESH BHUTANI VISHAL KALRA; SWETA KASHYAP
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I NEW DELHI) BEFORE SHRI I.C. SUDHIR AND SHRI PRASHANT MAHARISHI ITA NO. 3957 /DEL/2009 ASSESSMENT YEAR: 200 2 - 0 3 ACIT, VS. CANON INDIA PVT. LTD., CIRCLE 3(1), 2 ND FLOOR, TOWER A & B, NEW DELHI. CYBER GREEN, DLF PHASE - II, GURGAON (PAN: AAAC A4175D ) (APPELLANT) (RESPONDENT) ASSESSEE BY: S /S HRI MUKESH BHUTANI , VISHAL KALRA, ADV. & MS. SWETA KASHYAP, CA DEPARTM ENT BY: SHRI AMRENDRA KUMAR , CIT( DR ) DATE OF HEARING : 15 . 0 3 .201 6 DATE OF PRONOUNCEMENT: 11 : 0 6 .201 6 ORDER PER I.C. SUDHIR : JUDICI AL MEMBER THE ONLY GRIEVANCE OF THE REVENUE IN THE PRESENT APPEAL IS AGAINST THE ACTION OF THE LEARNED CIT(APPEALS) IN REJECTING THE COMPARABLES ON THE GROUND OF RELATED PARTIES TRANSACTION. 2. BESIDES, THE REVENUE HAS ALSO MOVED AN APPLICATION FOR RAIS ING THE FOLLOWING ADDITIONAL GROUNDS: 1. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LAW IN ALLOWING RELIEF TO THE ASSESSEE ON THE ISSUES (WHETHER TPO WAS RIGHT IN USING THE COMPARABLES COMPANIES HAVING RELATED PARTY TRANSACTION), EVEN 2 THOUGH THIS ISSU E WAS NOT RAISED IN THE GROUNDS OF APPEAL FILED BY THE ASSESSEE BEFORE LEARNED CIT(APPEALS). 2. THE LEARNED CIT(APPEALS) HAS ERRED ON FACTS AND LAW IN ALLOWING RELIEF ON THE ABOVE ISSUE IN VIOLATION OF RULE 46A(1) AND RULE 46A(3) AS THE ASSESSING OFFICER W AS NEVER GIVEN AN OPPORTUNITY TO EXAMINE NEW EVIDENCE PRODUCED BY THE ASSESSEE BEFORE LEARNED CIT(APPEALS). 3. IN SUPPORT OF THE ABOVE APPLICATION, THE LEARNED CIT(DR) SUBMITTED THAT THE ISSUES RAISED IN THE ABOVE ADDITIONAL GROUNDS ARE LEGAL IN NATURE AND ADJUDICATION OF THE SAME DO NEED CONSIDERATION OF FRESH MATERIAL OUTSIDE THE RECORD. 4. THE LEARNED AR ON THE OTHER HAND OPPOSED THE APPLICATION WITH THE SUBMISSION THAT THE ISSUES RAISED IN THE ADDITIONAL GROUNDS ARE GENERAL IN NATURE WHICH ARE FUL LY COVERED IN THE GROUND RAISED IN THE APPEAL. 5. CONSIDERING THE ABOVE SUBMISSIONS, WE FIND THAT THE ISSUES RAISED IN THE ABOVE ARE LEGAL IN NATURE, ADJUDICATION OF WHICH DOES NOT NEED CONSIDERATION OF MATERIAL OUTSIDE THE RECORD, HENCE, THE SAME ARE ALLOWED FOR OUR ADJUDICATION. SINCE THE ISSUES RAISED IN THE ADDITIONAL GROUND AND THAT 3 RAISED IN THE GROUND OF THE APPEAL ARE INTER - CONNECTED, ALL THESE GROUNDS WILL BE DEALT WITH SIMULTANEOUSLY. 6 . HEARD AND CONSIDERED THE ARGUMENTS ADVANCED BY THE PARTIES IN VIEW OF ORDERS OF THE AUTHORITIES BELOW, MATERIAL AVAILABLE ON RECORD AND THE DECISIONS RELIED UPON. 7 . THE RELEVANT FACTS ARE THAT DURING THE YEAR , THE ASSESSING OFFICER NOTED FOLLOWING INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE : S.NO. INTERNATIONAL TRANSACTIONS METHOD VALUE (RS.) 1 IMPO RT OF FINISHED GOODS FOR RESALE TRANSACTIONAL NET MARGIN METHOD. 65,27,78,386 2 PROVISION OF SOFTWARE DEV. SERVICES. TRANSACTIONAL NET MARGIN METHOD. 8,73,35,633 3 PROVISION OF LOGISTICS SUPP ORT SERVICES TRANSACTIONAL NET MARGIN METHOD. 14,29,18,785 8 . THE ASSESSING OFFICER INVOKING THE PROVISIONS UNDER SEC. 92CA(1) OF THE ACT REFERRED THE MATTER TO THE LEARNED TPO FOR COMPUTATION OF ARMS LENGTH PRICE IN RESPECT OF THE ABOVE INTERNATIONAL TRANSACTION. THE LEARNED TPO CAME TO THE CONCLUSION THAT THE INTERNATIONAL TRANSACTION AT SR. NO. 2 AND 3 ABOVE, PERTAINING TO PROVISIONS OF SOFTWARE DEVELOPMENT SERVICES AND PROVISIONS OF LOGISTIC SERVICES SATISFIED THE ARMS LENGTH STANDARDS. THE 4 LEARNED TPO, HOWEVER, CONCLUDED THAT THE TRANSACTIONS RELATING TO IMPORT OF GOODS FOR RESALE DID NOT SATISFY THE ARMS LENGTH STANDARD. ACCORDINGLY, ARMS LENGTH RATE WAS COMPUTED BY USING THE RESALE PRICE METHOD (RPM) AND THE TRANSFER PRICING ADJUSTMENT WAS WORK ED OUT AT RS.6,75,59,378. THE ASSESSEE WENT IN APPEAL RAISING SEVERAL ISSUES INCLUDING THE ISSUE AS TO WHETHER TPO WAS RIGHT IN USING THE COMPARABLES COMPANIES HAVING RELATED PARTY TRANSACTION, THE ISSUE RAISED IN THE PRESENT APPEAL BEFORE US. THE LEARNED CIT(APPEALS) AFTER DISCUSSING CASES OF THE PARTIES HELD THAT GESTETNER (INDIA) LTD. AND RICOH INDIA LTD. CANNOT BE TAKEN AS A VALID COMPARABLES COMPANIES FOR THE PURPOSE OF COMPARABILITY ANALYSIS AND THEREFORE THE ONLY COMPARABLE COMPANY WHICH WOULD LEFT I S KILBURN OFFICE AUTOMATION LTD. THIS ACTION OF THE LEARNED CIT(APPEALS) HAS BEEN QUESTIONED BEFORE US. 9. IN SUPPORT OF THE GROUNDS, THE LEARNED CIT(DR) HAS PLACED RELIANCE ON THE ORDER OF THE LEARNED TPO/A.O. 10. THE LEARNED AR ON THE OTHER HAND TR IED TO JUSTIFY THE FIRST APPELLATE ORDER WITH THIS FURTHER SUBMISSION THAT THE LEARNED CIT(APPEALS) HAS HELD THE GESTETNER (INDIA) LTD. AND RICOH INDIA LTD. AS NOT VALID COMPARABLE 5 COMPANIES FOR THE PURPOSE OF COMPARABILITY ANALYSIS IN VIEW OF THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SONY INDIA (P) LTD. 114 ITD 448 (DEL.) . THE LEARNED AR ALSO PLACED RELIANCE ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. JINDAL SAW PIPES LTD. REPORTED IN 328 ITR 338 (DELHI). THE L EARNED AR REITERATED SUBMISSIONS MADE ON ITS BEHALF BEFORE THE LEARNED CIT(APPEALS) ON THE ISSUE OF USING THE COMPARABLE COMPANIES HAVING RELATED PARTY TRANSACTION. HE REFERRED RULE 10B TO SUPPORT HIS CONTENTION THAT WHILE APPLYING RESALE PRICE METHOD ( RPM ) , THE CONTROLLED TRANSACTION OF THE ASSESSEE CAN BE COMPARED ONLY TO UNCONTROLLED TRANSACTION. 11. HAVING GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW, WE FIND THAT THE LEARNED TPO HAD TAKEN GESTETNER (INDIA) LTD., KILBURN OFFICE AUTOMATION LTD. AND RICOH INDIA LTD. HAVING AVERAGE RESALE MARGIN ON TRADING OF PHOTOCOPIES AT 37.74% AS COMPARABLES FOR THE PURPOSE OF COMPARABILITY. THE SAME WAS QUESTIONED BEFORE THE LEARNED CIT(APPEALS) AND THE LEARNED CIT(APPEALS) AFTER CONSIDERING SUBMISSIONS OF TH E PARTIES . THE LEARNED CIT(APPEALS) HAS HELD THAT GESTETNER (INDIA) LTD. AND RICOH INDIA LTD. HAVE RELATED PARTY TRANSACTION TO THE TUNE OF 47.44% AND 41.45% RESPECTIVELY, HENCE, KEEPING IN VIEW THE DECISION OF DELHI BENCHES OF THE 6 ITAT IN THE CASE OF SONY INDIA (P) LTD. (SUPRA), THE SAID TWO PARTIES CANNOT BE TAKEN AS A VALID COMPARABLE COMPANIES FOR THE PURPOSE OF COMPARABILITY ANALYSIS. HE HAS, THEREFORE, UPHELD THE ACTION OF THE LEARNED TPO IN TAKING KILLBURN OFFICE AUTOMATION LTD. HAVING RESALE MARGIN ON TRADING OF PHOTOCOPIES AT 24.34% AS A VALID COMPARABLE. SINCE MARGIN OF THE ASSESSEE IN THE PHOTOCOPIER FAX MACHINE SEGMENT WAS TO THE TUNE OF 29.1% WHICH MORE THAN THE KILLBURNS MARGIN OF 24.34% HENCE HE HELD THAT ASSESSEES TRANSACTION IN THE PHOTOC OPY OF SEGMENTS IS ALSO AT ARMS LENGTH. WHILE COMING TO THIS CONCLUSION, WE FIND THAT THE LEARNED CIT(APPEALS) HAS CONSIDERED THE DETAILED COMPUTATION OF RELATED PARTY TRANSACTION OF COMPARABLE COMPANIES SUBMITTED BY THE ASSESSEE BEFORE HIM BY SUBMISSION DATED 28.7.2009. THE DETAILS OF PURCHASE OF FINISHED GOODS COMPARABLES FROM ITS RELATED PARTY AS A PERCENTAGE OF TOTAL PURCHASES WERE SUMMARIZED BEFORE THE LEARNED CIT(APPEALS) WITH THIS SUBMISSION THAT CLOSE ANALYSIS OF THE TRADING SEGMENT OF GESTETNER IN DIA AND RICOH INDIA REVEALED THAT MORE THAN MAJORITY OF ITS TRADING GOODS ARE PURCHASED FROM ITS ASSOCIATED ENTERPRISES OUTSIDE INDIA, THUS, PROFITABILITY OF SUCH A COMPANY CANNOT BE CONSTRUED TO BE AS PROFIT EARNED IN THE COURSE OF UNCONTROLLED TRANSACTIO N. T HUS, IT WAS SUBMITTED THAT FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTION OF THE ASSESSEE IN A RELATION TO ITS 7 DISTRIBUTION SEGMENT, COMPANIES LIKE RECOH INDIA LTD. GESTETNER INDIA LTD., WHERE QUANTUM OF CONTROL LED TRANSACTION ARE VERY HIGH AS A PERCENTAGE OF SALES CANNOT BE CONSIDERED. TAKING SUPPORT OF THE DECISION OF DELHI BENCH OF THE ITAT IN THE CASE OF SONY INDIA (P) LTD. VS. DCIT (SUPRA), THE LEARNED CIT(APPEALS) HAS ACCEPTED THE ABOVE CONTENTION OF THE AS SESSEE THAT GESTETNER INDIA LTD. AND RICOH INDIA LTD. CANNOT BE TAKEN AS A VALID COMPARABLE COMPANIES. IN THE CASE OF SONY INDIA (P) LTD. VS. DCIT (SUPRA), THE ACTION OF THE TPO IN REJECTING COMPARABLES ON THE BASIS THAT THOSE COMPANIES WERE HAVING CONTROL LED TRANSACTION WITH RELATED PARTIES. THE ITAT HELD THAT FOR WORKING OUT MEAN OPERATING PROFIT, TPO WAS WRONG IN REJECTING THOSE COMPARABLES COMPANIES HAVING CONTROLLED TRANSACTIONS WITH RELATED PARTIES AS THESE COMPANIES SATISFIED SCREENING CRITERIA (FILT ERS) ADOPTED BY THE TPO AND MORE OVER, ASSESSEE HAD GIVEN PERCENTAGE OF TRANSACTION WITH RELATED PARTIES SHOWING THAT IT WAS NOT SO HIGH AS TO EXCLUDE THEM FROM LIST OF COMPARABLES. IT WAS FURTHER HELD THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED IF ITS REL ATED PARTY TRANSACTION DOES NOT EXCEEDS 10% TO 15% OF TOTAL REVENUE WITH ABOVE LIMIT, TRANSACTIONS CANNOT BE HELD TO BE SIGNIFICANT TO INFLUENCE PROFITABILITY OF COMPARABLES, FOR PURPOSE OF COMPARISON, WHAT IS TO BE JUDGED IS IMPACT OF RELATED PARTY TRANSA CTION VIS - - 8 VIS SALES AND NOT PROFIT SINCE PROFIT OF AN ENTERPRISE IS INFLUENCED BY LARGE NUMBER OF OTHER FACTORS. 12. WE, HOWEVER, FIND THAT WHILE ACCEPTING THE SUBMISSIONS DATED 28.7.2009 OF THE ASSESSEE ON THE ISSUE OF USING THE COMPARABLE COMPANIES HAVING RELATED PARTY TRANSACTIONS BY THE TPO, THE LEARNED CIT(APPEALS) HAS NOT GOT VERIFIED FROM THE LEARNED TPO THE DETAILS OF COMPUTATION OF RELATED PARTY TRANSACTION OF COMPARABLE COMPANIES AS WELL AS THE DETAILS OF PURCHASE OF FINISHED GOODS BY COMPAR ABLES FROM ITS RELATED PARTIES AS A PERCENTAGE OF TOTAL PURCHASES SUMMARIZED BEFORE HIM FOR THE FIRST TIME . TO THIS EXTENT, WE AGREE WITH THE LEARNED CIT(DR) THAT THERE IS SUBSTANCE IN THE ISSUE RAISED IN THE ADDITIONAL GROUND NO.2 REGARDING VIOLATION OF R ULE 46A OF THE I.T. RULES AND HENCE, ALLOW THIS GROUND. 13. IN RESULT, WE SET ASIDE THE MATTER TO THE FILE OF THE LEARNED TPO TO VERIFY THE CORRECTNESS OF THE ABOVE SUBMISSIONS DATED 28.7.2009 OF THE ASSESSEE, REPRODUCE AT PAGE NOS. 35 AND 36 OF THE FIR ST APPELLATE ORDER VIDE PARA NO.10.3.5 AND IF HE FINDS THAT THE ABOVE SUBMISSIONS OF THE ASSESSEE ARE NOT CORRECT THEN DECIDE THE ISSUE AFRESH AFTER AFFORDING OPPORTUNITY OF BEING 9 HEARD TO THE ASSESSEE. SINCE GROUNDS ARE INTER - CONNECTED, IN RESULT THESE AR E ALLOWED FOR STATISTICAL PURPOSES. 14. IN RESULT, THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11 . 0 6 . 201 6 S D/ - SD/ - ( PRASHANT MAHARISHI ) ( I.C. S UDHIR ) AC COUNTANT MEMBER JUDICIAL MEMBER DATED: 11 / 0 6 /201 6 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR 10 DATE DRAFT DICTATED DIRECTLY ON COMPUTER 11 . 0 6 .201 6 DRAFT PLACED BEFORE AUTHOR 11 . 0 6 .2016 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 11 .06 .2016 APPROVED DRAFT COMES TO THE SR.PS/PS 11 . 0 6 .2016 KEPT FOR PRONOUNCE MENT ON 11 .0 6 .2016 FILE SENT TO THE BENCH CLERK 11 . 0 6 .2016 DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.