DCIT, New Delhi V. M/s Exxon Mobil Gas (India) Pvt. Ltd., New Delhi

ITA 417/DEL/2011

• Counselvise Citation: 41720114 RSA 2011
• Duration Of Justice: 3 year(s) 9 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 11-11-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 24-01-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: YOGESH KUMAR VERMA
• Assessee Lawyers: MUKESH BUTANI
• Keywords: Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SMT. DIVA SINGH, JM ITA NO.417/DEL/2011 ASSESSMENT YEAR : 2004-05 DCIT, CIRCLE 11(1), ROOM NO.312, CR BUILDING, NEW DELHI. VS. EXXON MOBIL GAS (INDIA) PVT. LTD., SUITE NO.36, THE IMPERIAL, JANPATH, NEW DELHI. PAN : AABCE1792K ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI MUKESH BUTANI, ADVOCATE DEPARTMENT BY : S HRI YOGESH KUMAR VERMA, CIT,DR ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE REVENUE ARISES OUT OF THE ORDER PASSED BY THE CIT(A) 29.11.2010 IN RELATION TO THE ASSESSMENT YEAR 2004-05. 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE DELETION OF ADDITION OF `45,41,519/- ON ACCOUNT OF TRANSFER PRI CING ADJUSTMENT. ITA NO.417/DEL/2011 2 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT E XXON MOBIL IS A MULTI-NATIONAL GROUP OF COMPANIES ENGAGED IN OIL AN D GAS INDUSTRY. IT CONDUCTS BUSINESS IN ALMOST 200 COUNTR IES. ITS MAJOR BUSINESS IS TO DISCOVER, ACCESS, DEVELOP, REFINE AN D MARKET OIL AND GAS RESOURCES. THE ASSESSEE, AN INDIAN COMPANY, IS PART OF THIS GROUP, WHICH CONDUCTS MARKET SURVEY ACTIVITIES AND RENDERS RELATED ADVISORY SERVICES TO ITS ASSOCIATED ENTERPR ISES (AES). FOUR INTERNATIONAL TRANSACTIONS WERE REPORTED BY THE ASS ESSEE IN ITS FORM NO.3CEB. THE ONLY INTERNATIONAL TRANSACTION D ISPUTED IN THE PRESENT APPEAL IS CONDUCTING MARKET SURVEY ACTIVI TIES AND RELATED ADVISORY SERVICES FOR WHICH THE ASSESSEE W AS PAID `4,89,60,262/-. THE OTHER THREE INTERNATIONAL TRAN SACTIONS WERE ACCEPTED BY THE TPO AT ARMS LENGTH PRICE (ALP). T HE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS T HE MOST APPROPRIATE METHOD, WITH PROFIT LEVEL INDICATOR (PL I) OF OPERATING PROFIT TO TOTAL COST (OP/TC), TO DEMONSTRATE THAT THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH PRICE. TWELVE CO MPANIES WERE SELECTED BY THE ASSESSEE AS COMPARABLE. BY ADOPTIN G THE MULTIPLE-YEAR DATA OF THESE COMPANIES, THE ASSESSEE COMPUTED THEIR AVERAGE OPERATING PROFIT MARGIN AT 4.46% AND, ACCORDINGLY, ITA NO.417/DEL/2011 3 SHOWED THAT ITS INTERNATIONAL TRANSACTION WAS AT AL P. THE TPO REJECTED THE USE OF MULTIPLE-YEAR DATA AND RESORTED TO THE CURRENT YEAR DATA ALONE. IN DOING SO, HE NOTICED THAT ONLY EIGHT COMPANIES WERE LEFT OUT OF THOSE TWELVE CHOSEN BY T HE ASSESSEE BECAUSE THE CURRENT YEAR DATA OF THE REMAINING FOUR COMPANIES WAS NOT AVAILABLE. THE TPO COMPUTED AVERAGE OF OP/ TC MARGIN OF THESE EIGHT COMPANIES FOR THE FINANCIAL YEAR 2003-0 4, AT 17.96%. BY APPLYING THIS PROFIT MARGIN, A TRANSFER PRICING ADJUSTMENT OF `45,41,519/- WAS PROPOSED, WHICH AMOUNT WAS ADDED B Y THE AO IN THE ASSESSMENT ORDER. 4. AT THIS JUNCTURE, IT IS PERTINENT TO MENTIO N THAT THERE IS NO DISPUTE ON ANY ASPECT OF THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OTHER THAN THE CALCULATION OF OP /TC MARGIN OF ENGINEERS INDIA LTD. (EIL), ONE OF THE COMPANIES CH OSEN BY THE ASSESSEE AS COMPARABLE IN ITS TRANSFER PRICING STUD Y BY SHOWING ITS MARGIN OF 37.41% FOR THE CURRENT YEAR, WHICH ST OOD ADOPTED BY THE TPO AS SUCH WITHOUT ANY ALTERATION. 5. THE ASSESSEE FILED A RECTIFICATION APPLICATIO N BEFORE THE TPO, URGING THAT THE CORRECT OP/TC MARGIN OF EIL WAS 6.9 8% AND THE ITA NO.417/DEL/2011 4 SAME BE TAKEN. THE TPO REJECTED THIS CONTENTION ON THE GROUND THAT THE ASSESSEE HAD ITSELF WORKED OUT THE PROFIT MARGIN OF EIL AT 37.41% FOR THE CURRENT YEAR. THE SAME ISSUE WAS ES POUSED BEFORE THE LD. CIT(A), ARGUING THAT THE OP/TC OF EI L SHOULD BE TAKEN AT 6.98%, AS WAS DEMONSTRATED BY THE ASSESSEE THROUGH ANNEXURE-I FILED ALONG WITH RECTIFICATION APPLICATI ON. THE LD. CIT(A) CONCURRED WITH THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSESSEE AND ORDERED FOR THE ADOPTION OF OP/TC OF E IL AT 6.98%. AFTER CONSIDERING THE FACT THAT THE RESULTANT AVERA GE MARGIN OF THE EIGHT COMPANIES, WITH NEW MARGIN OF EIL AT 6.98%, CAME WITHIN (+)/(-) 5% RANGE, HE ORDERED FOR THE DELETION OF TH E ADDITION. THE REVENUE IS AGGRIEVED AGAINST THE DELETION OF THIS A DDITION TO THE EXTENT AS AFORESTATED. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. SHORN OF UNNECESSARY F ACTUAL DETAILS, IT IS NOTICED THAT THE CORE OF THE CONTROVERSY BEFO RE US IS THE CALCULATION OF OP/TC OF EIL. THERE IS NO DISPUTE O N THE FACT THAT THE EIL HAS BEEN TAKEN AS A COMPARABLE COMPANY ON E NTITY LEVEL AND NOT ON A SEGMENT LEVEL. SIMPLY PUT, THE ISSUE BEFORE US IS CABINED TO THE EXTENT OF CALCULATION OF CORRECT OP/ TC OF EIL FOR THE ITA NO.417/DEL/2011 5 PURPOSES OF INCLUSION IN AND EX CONSEQUENTI AVERAGING THE SAME IN RESPECT OF THE EIGHT COMPARABLE COMPANIES. WE W ANT TO CLARIFY THAT THE ACTION OF THE TPO IN USING THE CURRENT YEA R DATA OF COMPARABLES, AS AGAINST THE MULTIPLE-YEAR DATA INIT IALLY CHOSEN BY THE ASSESSEE, IS NOT AGITATED ON BEHALF OF THE ASSE SSEE. FROM THE MULTIPLE YEAR DATA OF OP/TC OF EIL, IT CAN BE SEEN THAT THE ASSESSEE HAD ITSELF SHOWN THE MARGIN FOR THE CURREN T YEAR AT 37.41% IN ITS TP STUDY AND THE SAME FIGURE WAS ADOP TED BY THE TPO IN ITS ORDER. NOW, THE ASSESSEE IS PUTTING FOR TH AN ARGUMENT THAT THIS PROFIT PERCENTAGE IS NOT CORRECT. 7. IN PRINCIPLE, WE FIND NO REASON TO RESTRICT T HE RIGHT OF THE ASSESSEE TO ASSAIL THE CORRECTNESS OF THE FIGURES S UBMITTED IN ITS TP STUDY. IF A FIGURE WAS WRONGLY TAKEN BY THE ASS ESSEE INADVERTENTLY, THERE SHOULD BE NO DISQUALIFICATION TO LATER ON CONTENDING THAT IT SHOULD BE SUBSTITUTED WITH A COR RECT FIGURE. THE APPROPRIATENESS OF SUCH A CONTENTION, IF MADE, NEE DS TO BE JUDGED AT THE END OF THE REVENUE, WITHOUT REJECTING IT AT THE OUTSET. PRECISELY, THIS IS THE ARGUMENT WHICH WAS RAISED BY THE ASSESSEE BEFORE THE TPO IN RECTIFICATION PROCEEDING S ASSERTING THAT THE OP/TC OF EIL AT ENTITY LEVEL SHOULD BE COR RECTLY TAKEN AT ITA NO.417/DEL/2011 6 6.98% INSTEAD OF 37.41% SHOWN IN ITS TP STUDY. THE LD. CIT(A), WAS ALBEIT RIGHT IN ACCEPTING THIS ARGUMENT FOR EV ALUATION, BUT APPEARS TO HAVE BEEN SWAYED BY THE DELINEATION OF T HE CORRECTNESS OF THIS FIGURE, WITHOUT EITHER INDEPEND ENTLY PROPERLY EXAMINING THE SAME AT HIS END OR OBTAINING A REMAND REPORT FROM THE AO/TPO ON THIS ASPECT OF THE MATTER. AN ANALYS IS OF THE PROFIT & LOSS ACCOUNT OF EIL, WHICH IS AVAILABLE ON PAGE 2 85 OF THE PAPER BOOK, IN CONJUNCTION WITH SUCH CALCULATION GIVEN TH ROUGH ANNEXURE-1 ON PAGE 109 OF THE PAPER BOOK, DIVULGES SOME APPARENT INCONSISTENCIES. IT CAN BE SEEN THAT THE A MOUNT OF OTHER INCOMES HAS BEEN TAKEN IN THE ANNEXURE-I AT `174.64 LACS, WHEREAS THE ACTUAL AMOUNT OF OTHER INCOME IN THE PROFIT & LOSS ACCOUNT OF THIS COMPANY STANDS AT `4,809.63 LACS. ON BEING QUESTIONED FROM THE LD. AR ABOUT THE REASONS FOR TH E DIFFERENCE IN SUCH FIGURES, WHICH ULTIMATELY CULMINATED INTO THE OVERALL DIFFERENCE IN THE CALCULATION OF OP/TC, THE LD. AR SUBMITTED THAT THE FIGURE GIVEN IN THE PROFIT & LOSS ACCOUNT CONTA INS BOTH OPERATING AND NON-OPERATING INCOMES, WHEREAS THE CA LCULATION UNDER TNMM CALLS FOR THE ADOPTION OF OPERATING INCO ME. IT WAS SUBMITTED THAT OUT OF THE TOTAL OTHER INCOME OF ` 4,809.63 LAC, ITA NO.417/DEL/2011 7 THE OPERATING OTHER INCOME WAS `174.64 LAC, WHICH WAS TAKEN UP FOR CALCULATION. WE HAVE PERUSED THE DETAILS OF OTHER INCOME GIVEN ON PAGE 293 OF THE PAPER BOOK, BEING SCHEDULE -G TO THE ANNUAL ACCOUNTS OF EIL. ONE OF THE ITEMS CONTAINED IN THIS SCHEDULE IS MISCELLANEOUS INCOME AMOUNTING TO `17 3.54 LAC, WHICH, IN THE OPINION OF THE LD. AR CONSTITUTED THE LONE OPERATING INCOME THAT WAS INCLUDED IN THE CALCULATION OF OP/T C AT 6.98%. WE AGREE WITH THE CONTENTION OF THE LD. AR THAT TNM M CONTEMPLATES THE TAKING OF OPERATING PROFIT TO A SU ITABLE BASE AND IN THIS PROCESS THE ITEMS OF NON-OPERATING INCOME A RE LIABLE TO BE EXCLUDED. AT THIS STAGE, ONE NEEDS TO APPRECIATE TH E DIFFERENCE BETWEEN THE OPERATING PROFIT AND NET PROFIT. WHEREA S, OPERATING PROFIT IS EXCESS OF OPERATING REVENUE OVER OPERATIN G COSTS, NET PROFIT ENCOMPASSES THE EFFECT OF BOTH THE STREAMS, VIZ., OPERATING AND NON-OPERATING. REVERING TO THE OPERATING PROFIT , IT REPRESENTS THE DIFFERENCE BETWEEN THE OPERATING INCOME AND OPE RATING EXPENSE. THE ARGUMENT OF THE LD. AR FOR ADOPTION OF OPERATING INCOME, ALSO EXTENDS WITH FULL VIGOR TO THE EXPENS E SIDE. IN OTHER WORDS, NOT ONLY THE NON-OPERATING ITEMS OF INCOME A RE REQUIRED TO BE EXCLUDED, BUT THE ITEMS OF NON-OPERATING EXPENSE SHOULD ALSO ITA NO.417/DEL/2011 8 BE EXPELLED FROM THE CALCULATION OF THE OPERATING P ROFIT OF A COMPANY. IGNORING THE ITEMS OF NON-OPERATING INCOME WITHOUT SIMULTANEOUSLY REDUCING THE ITEMS OF NON-OPERATING EXPENSE, GIVES A DISTORTED FIGURE OF OPERATING PROFIT. 8. COMING BACK TO THE FACTS OF THE INSTANT CASE , WE FIND THAT THE MAJOR ITEM OF OTHER INCOME IS INTEREST INCOME AGG REGATING TO `3,776.65 LAC, WHICH RIGHTLY DESERVES EXCLUSION FRO M THE OPERATING PROFIT. WHEN WE COMPARE OTHER FIGURES FR OM THE PROFIT & LOSS ACCOUNT OF EIL AND THE ANNEXURE-I, IT COMES TO LIGHT THAT THE FIGURES OF ALL THE EXPENSES TALLY. TO PUT IT S IMPLY, THE ASSESSEE TOOK ALL THE EXPENSES, INCLUDING THE NON-O PERATING EXPENSES, IN THE CALCULATION OF OPERATING PROFIT OF EIL. IT IS BUT NATURAL THAT IF THE ITEMS OF NON-OPERATING INCOME A RE TO BE EXCLUDED FROM THE COMPUTATION OF OPERATING PROFIT, THEN THE ITEMS OF NON-OPERATING EXPENSE SHOULD ALSO BE EXCLUDED. ONE-SIDED EXERCISE HAS BEEN DONE WITH THE OBVIOUS REASON TO B RING DOWN THE OP/TC OF EIL AT 6.98%. PRIMA FACIE , IT APPEARS FROM PAGE 295, BEING SCHEDULE-H CONTAINING DETAILS OF CORPORATE C OST, THAT IT INCLUDES BANK CHARGES TO THE TUNE OF `172.79 LAC. IT IS MANIFEST THAT THE BANK INTEREST EXPENDITURE, LIKE BANK INTER EST INCOME, ALSO ITA NO.417/DEL/2011 9 ASSUMES THE SAME CHARACTER OF NON-OPERATING NATURE. IT IS NOT TOO FAR TO SEEK THE REASONS FOR THE OMISSION OF SUCH CO ST FROM THE TOTAL OPERATING COSTS. SIMILARLY, THERE CAN BE OTHE R NON-OPERATING EXPENSES AS WELL, FINDING THEIR PLACE IN THE DETAIL S OF TOTAL EXPENSES INCURRED BY EIL, WHICH HAVE NOT BEEN EXCLU DED BY THE ASSESSEE. THE NET EFFECT OF THE EXERCISE CARRIED OU T BY THE ASSESSEE IN CALCULATING OP/TC OF EIL AT 6.98% BY T AKING THE FIGURE OF OPERATING INCOME ON ONE HAND AND TOTAL EXPENSES (BOTH OPERATING AND NON-OPERATING) ON THE OTHER IS PATENT LY MISLEADING, INASMUCH AS THE FIGURE OF PROFIT SO COMPUTED IS NEI THER OPERATING PROFIT NOR NET PROFIT. IT LIES SOMEWHERE BETWEEN T HE TWO AS IT HAS BECOME EXCESS OF OPERATING INCOME OVER TOTAL EXPENS ES (BOTH OPERATING AND NON-OPERATING). IN OUR CONSIDERED OPI NION, THE VIEW CANVASSED BY THE LD. CIT(A) IN ACCEPTING THE CORREC TNESS OF THE ASSESSEES CALCULATION OF OP/TC OF EIL AT 6.98% AT ITS FACE VALUE, CANNOT BE SUSTAINED BECAUSE OF THE APPARENT FLAWS A S DISCUSSED ABOVE. UNDER THESE CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND REMIT THE MATTER TO THE FIL E OF THE AO/TPO FOR A CORRECT DE NOVO DETERMINATION OF THE OP/TC OF EIL. AFTER DOING THIS EXERCISE, THE TPO WILL COMPUTE ALP OF TH E INTERNATIONAL ITA NO.417/DEL/2011 10 TRANSACTION AS PER LAW. NEEDLESS TO SAY, THE ASSESS EE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING. 9. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 13.11.201 4. SD/- SD/- [ DIVA SINGH ] [ R.S. SYAL ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 13 TH NOVEMBER, 2014. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.