DOW AGROSCIENCES INDIA P.LTD, MUMBAI V. DCIT CIR 14(1)(2), MUMBAI

ITA 4729/MUM/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 1776 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-06-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2007-2008
• Appeal Filed On: 14-07-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANISH K AMAJIA
• Assessee Lawyers: HEMEN CHANDANIYA
• Keywords: Transfer pricing; Income from undisclosed sources; Opportunity of being heard; Wholly owned subsidiary; Capital expenditure; Set aside
• Section: 68; 92

Judgement Text

T HE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA ( A M) & SHRI AMARJIT SINGH ( J M) I.T.A. NO. 4729 /MUM/ 201 6 (ASSESSMENT YEAR 20 07 - 08 ) DOW AGROSCIENCES PVT. LTD. GODREJ IT PARK - P2 1 ST FLOOR, BLOCK B, 02 LBS ROAD GODREJ BUSINES S DISTRICT, PIROJESHANAGAR VIKHROLI (WEST) , MUMBAI - 79. PAN : AAACD3813H V S . DCIT CIRCLE - 14(1)(2) AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY SHRI M.P. LOHIA & SHRI HEMEN CHANDANIYA DEPARTMENT BY SHRI MANISH K AMAJIA DATE OF HEARING 3.6 . 201 9 DATE OF PRONOUNCEMENT 6 . 6 . 201 9 O R D E R PER SHAMIM YAHYA (AM) : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST ORDER OF LEARNED CIT - A DATED 8.2 2016 AND PERTAINS TO ASSESSMENT YEAR 2007 08. 2. VARIOUS GROUND S HAVE BEEN RAISED BY THE ASSESSEE, BUT THEY ROTATE AROUND FOLLOWING THREE ISSUES , A S AGREED BY THE LEARNED COUNSEL OF THE ASSESSEE . T HE FIRST ISSUE RAISED IS THAT CIT - A ERRED IN CONSIDERING THE LEASE PAYMENTS AMOUNTING TO RUPEES 33, 3 2, 789 MADE TO IBM A S CAPITAL EXPENDITURE . 3. A T THE OUTSET ON THIS ISSUE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT ON THIS ISSUE THE ITAT IN ASSESSEES OWN CASE BY ORDER DATED 20/9/16 FOR ASSESSMENT YEAR 2005 06, 2006 07 AND 2008 09 HAD REMITTED THE MATTER TO THE FILE OF ASSESSING OFFICER BY FOLLOWING OBSERVATIONS : - 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. AS SUBMITTED BY LEARNED AR, THE COORDINATE BENCH OF THE TRIBUNAL HAS CONSIDERED THE ISSUE AND RESTORED THE SAME TO THE FILE OF THE ASSESSING DOW AGROSCIENCES PVT. LTD. 2 O FFICER WITH THE DIRECTION TO EXAMINE THE LEASE AGREEMENT IN ORDER TO ASCERTAIN AS TO WHETHER LEASE AGREEMENT ENTERED BY THE ASSESSEE IS IN THE NATURE OF FINANCIAL LEASE OR OPERATING LEASE. IN THE INSTANT CASE ALSO THE LEASE AGREEMENT WAS NOT EXAMINED BY TH E TAX AUTHORITIES. PROPER EXAMINATION WILL THROW LIGHT ABOUT THE NATURE OF LEASE, WHICH WOULD DECIDE THE MANNER OF TREATMENT OF LEASE RENTAL. ACCORDINGLY, CONSISTENT WITH THE VIEW TAKEN IN THE CASE OF DOW CHEMICAL INTERNATIONAL PVT. LTD. (SUPRA), WE SET AS IDE THE ORDER PASSED BY LEARNED CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THE LEASE AGREEMENT IN ORDER TO ASCERTAIN THE NATURE OF LEASE AND TAKE APPROPRIATE DECISION IN ACCORDANCE WITH LAW, AFTER AFFORDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 3. U PON CAREFUL CONSIDERATION SINCE FACTS ARE IDENTICAL WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH SIMILAR DIRECTIONS AS ABOVE. 4. ANOTHER ISSUE RAISED IS THAT LEARN ED CIT - A ERRED IN TREATING ADVANCES AMOUNTING TO RUPEES 85, 09, 167 FROM CUSTOMERS AS INCOME FROM UNDISCLOSED SOURCES UNDER SECTION 68 OF THE ACT . 5. O N THIS ISSUE ALSO LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ISSUE IS ALREADY DECIDED BY THE ITA T IN THE AFORESAID ORDER AS UNDER : - 10. WE HAVE HEARD THE PARTIES ON THIS ISSUE. IT IS THE CONTENTION OF THE ASSESSEE THAT THE ADVANCES HAVE BEEN RECEIVED FROM ITS REGULAR CUSTOMERS THROUGH BANKING CHANNELS AND THE SAME HAS BEEN ADJUSTED AGAINST SUBSEQUEN T SALES MADE TO THOSE CUSTOMERS IN MOST OF THE CASES. THE ASSESSEE HAS ALSO SUBMITTED THAT DUE TO HIGH VOLUME OF CUSTOMERS, IT COULD NOT OBTAIN CONFIRMATION LETTERS FROM ALL THE PARTIES. FURTHER LD A.R SUBMITTED THAT THE ASSESSEE CANNOT ALSO ENFORCE THE CU STOMERS TO FURNISH THEIR PAN. WE NOTICE THAT LEARNED DRP HAS DIRECTED THE ASSESSING OFFICER TO DELETE THE ADDITION , IF THE ADVANCES HAVE BEEN ADJUSTED AGAINST SUBSEQUENT SALES MADE TO THE PARTIES. WE ARE OF THE VIEW THAT THE DIRECTION GIVEN BY LEARNED DRP IS REASONABLE ONE. AT THE SAME TIME, THERE IS MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE ASSESSEE CANNOT ENFORCE ITS CUSTOMERS TO FURNISH THEIR PAN. HOWEVER, IF ADVANCES HAVE BEEN ADJUSTED AGAINST SUBSEQUENT SALES, IT WOULD BE REASONABLE TO ACCEPT T HE GENUINENESS OF THE ADVANCES SINCE THEY HAVE BEEN RECEIVED FROM REGULAR CUSTOMERS WHO WERE NOT RELATED PARTIES OF THE ASSESSEE. ACCORDINGLY WE DIRECT THE AO TO DELETE THE ADDITION, IF THE ADVANCES HAVE BEEN ADJUSTED AGAINST THE SUBSEQUENT SALES. FOR THA T PURPOSE, THE ASSESSEE IS DIRECTED TO FURNISH A CHART SHOWING ADJUSTMENT OF DEPOSITS AGAINST SUBSEQUENT SALES. WE NOTICE FROM THE ORDERS PASSED FOR AY 2006 - 07 AND 2008 - 09, THE AO HAS SUSTAINED A PORTION OF ADVANCES, PRESUMABLY ON THE REASONING DOW AGROSCIENCES PVT. LTD. 3 THAT THEY HAVE NOT BEEN ADJUSTED AGAINST THE SUBSEQUENT SALES. WE NOTICE THAT THE ASSESSEE HAD SHOWN BEFORE THE DRP THAT A SUM OF RS.10.00 LAKHS RECEIVED AS ADVANCE WAS RETURNED BACK AND HENCE THE DRP HAS DIRECTED THE AO TO DELETE THE SAME. HENCE, IN CASE THE ADVAN CES HAVE NOT BEEN ADJUSTED AGAINST SUBSEQUENT SALES, WE ARE OF THE VIEW THAT THE ASSESSEE SHOULD BE PROVIDED WITH AN OPPORTUNITY TO EXPLAIN THE REASONS, WHICH SHALL BE EXAMINED BY THE ASSESSING OFFICER IN ACCORDANCE WITH THE LAW. ACCORDINGLY WE SET ASIDE THE ADDITIONS CONFIRMED BY LD CIT(A) IN AY 2005 - 06 AND THE ORDERS PASSED BY THE AO IN OTHER TWO YEARS AND RESTORE THEM TO THE FILE OF THE AO FOR EXAMINING THEM AFRESH IN THE LIGHT OF DISCUSSIONS MADE SUPRA. 6. R ESPECTFULLY FOLLOWING THE PRECEDENT AS AFORE SAID WE REMIT THIS ISSUE ALSO TO THE FILE OF ASSESSING OFFICER WITH SIMILAR DIRECTIONS AS ABOVE . 7. LAST ISSUE RAISED IS THAT LEARNED CIT - A ERRED IN MAKING ADJUSTMENT UNDER SECTION 92 CA(3) OF THE ACT ON ACCOUNT OF ADJUSTMENT IN ARMS - LENGTH PRICE OF INT ERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY IN WANTING TO RUPEES 30,88,617 / - . 8. ON THIS ISSUE ALSO LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT IDENTICAL ISSUE WAS CONSIDERED BY THE ITAT IN ITS AFORESAID ORDER AS UNDER : - 13. WE HAVE HEARD THE PARTIE S ON THIS ISSUE. WE NOTICE THAT THE IDENTICAL ISSUE WAS CONSIDERED BY THE COORDINATE BENCH IN ASSESSEES OWN CASE FOR A.Y. 2004 - 05 (SUPRA) AND THE SAME HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. FOR THE SAKE OF CONVENIENCE WE EXTRACT BELOW RELEVANT OBSER VATIONS MADE BY THE COORDINATE BENCH FOR A.Y. 2004 - 05: - 7.1 IN ORDER TO APPRECIATE THE AFORESAID, THE FOLLOWING DISCUSSION IS RELEVANT. THE ROYALTY PAID BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE I.E. DOW NETHERLANDS HAS BEEN APPROVED BY THE SECRETARIAT OF INDUSTRIAL APPROVAL (SIA), MINISTRY OF INDUSTRY(GOVERNMENT OF INDIA) VIDE COMMUNICATION DATED 07/09/1996 AND ALSO BY THE RESERVE BANK OF INDIA DATED 11/03/1997. BEFORE US, A REFERENCE HAS ALSO BEEN MADE TO PAPER BOOK, WHEREIN THE AFORESAID COMMUNICATIO NS HAVE BEEN PLACED AS ALSO A COMMUNICATION SIA DATED 22/1/ 1997, WHICH IS IN CONTINUATION TO ITS EARLIER APPROVAL DATED 17/09/1996. IN TERMS OF SUCH APPROVALS, ASSESSEE IS PERMITTED TO PAY ITS FOREIGN COLLABORATOR I.E. DOW NETHERLANDS, ROYALTY @ 5% ON DOME STIC SALES AND 8% ON EXPORT SALES. IN THIS BACKGROUND, BEFORE THE TPO ASSESSEE ASSERTED THAT SINCE ROYALTY WAS PAID IN TERMS OF THE APPROVALS BY THE CENTRAL GOVERNMENT, THE PAYMENT OF ROYALTY WAS AT ARM'S LENGTH RATE. IN OTHER WORDS, THE RATE OF DOW AGROSCIENCES PVT. LTD. 4 ROYALTY AP PROVED BY THE CENTRAL GOVERNMENT WAS USED AS A RELIABLE DATA FOR BENCHMARKING THE TRANSACTION OF PAYMENT OF ROYALTY. IN THIS MANNER, ASSESSEE ADOPTED THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AS THE MOST APPROPRIATE METHOD TO BENCHMARK ITS INTERNATI ONAL TRANSACTION OF ROYALTY AND THE RATE APPROVED BY THE CENTRAL GOVERNMENT WAS USED AS A RELIABLE CUP DATA. SIMILAR WAS THE POSITION TAKEN BY THE ASSESSEE IN ASSESSMENT YEAR 2003 - 04. APART THERE - FROM, ASSESSEE HAD ALSO CANVASSED THAT EVEN AFTER APPLICATIO N OF THE TRANSACTIONAL NET MARGIN METHOD (TNMM) TO TEST THE ARM'S LENGTH NATURE OF ITS TRANSACTION OF PAYMENT OF ROYALTY, NO ADJUSTMENT WAS NECESSITATED. BE THAT AS IT MAY, THE TPO NOTED THAT ANOTHER ASSOCIATE ENTERPRISE OF THE ASSESSEE NAMELY, UK KING LYN NS PLANT (IN SHORT 'DOW UK') WAS ALSO PAYING ROYALTY TO DOW NETHERLANDS, WHICH WAS AT LOWER RATES. BASED ON THE ABOVE, THE TPO DETERMINED THAT THE ROYALTY PAID BY DOW UK WAS A COMPARABLE TRANSACTION AND ACCORDINGLY DETERMINED THE ARM'S LENGTH ROYALTY PAYME NT AT 3% FOR DOMESTIC AS WELL AS 5% FOR GROSS EXPORT SALE, WHICH WERE THE RATES AT WHICH ROYALTY WAS PAID BY DOW UK TO DOW NETHERLANDS. IN ASSESSMENT YEAR 2003 - 04 AS ALSO IN THE INSTANT ASSESSMENT YEAR, ASSESSEE HAD CHALLENGED THE AFORESAID ACTION OF THE T RANSFER PRICING OFFICER. FIRSTLY, IT WAS CANVASSED THAT THE RATE OF ROYALTY PAYMENTS HAVING BEEN APPROVED BY THE GOVERNMENT OF INDIA, SUCH RATES CONSTITUTE A VALID CUP DATA AND NO FURTHER ADJUSTMENT WAS REQUIRED TO THE STATED VALUE OF THE ROYALTIES PAID. S ECONDLY, LD. REPRESENTATIVE FOR THE ASSESSEE ALSO POINTED OUT THAT THE COMPARABLE TRANSACTION ADOPTED BY THE TRANSFER PRICING OFFICER I.E. PAYMENT OF ROYALTY BY DOW UK TO DOW NETHERLANDS WAS A WRONG APPROACH INASMUCH AS COMPARISON COULD BE MADE ONLY WITH A N UNCONTROLLED TRANSACTION, WHEREAS IN THE CASE OF DOW UK AND DOW NETHERLANDS, BOTH WERE ASSOCIATE ENTERPRISES AND, THEREFORE, PAYMENT OF ROYALTY BY DOW UK TO DOW NETHERLANDS WAS A CONTROLLED TRANSACTION AND ACCORDINGLY, THE SAME COULD NOT BE CONSIDERED A S A VALID CUP DATA. IN SO FAR AS THE LATTER PLEA OF ADOPTION OF CONTROLLED TRANSACTION WAS CONCERNED, THE CIT(A) IN ASSESSMENT YEAR 2002 - 03 HAS ACCEPTED THE PLEA OF THE ASSESSEE. HOWEVER, WITH REGARD TO THE PLEA OF THE ASSESSEE BASED ON THE RATE OF ROYALTY APPROVED BY THE CENTRAL GOVERNMENT IS CONCERNED, THE CIT(A) REJECTED THE SAME AS ACCORDING TO HIM, SUCH RATES COULD NOT BE CONSIDERED AS VALID CUP DATA. THE CIT(A) HAD HOWEVER, ALLOWED RELIEF BY BENCHMARKING ROYALTY PAYMENT UNDER THE TNMM WHEREBY, THE MAR GINS FROM THE MANUFACTURING ACTIVITIES OF THE ASSESSEE WERE FOUND TO BE FAVOURABLE VIS - - VIS THOSE OF THE COMPARABLES CONCERNS. THE TRIBUNAL IN ASSESSMENT YEAR 2003 - 04 UPHELD THE ULTIMATE CONCLUSION OF THE CIT(A) TO DELETE THE ADDITION ON THE GROUND THAT T HE BASIS ON WHICH THE ROYALTY WAS PAID BY THE DOW UK TO DOW NETHERLANDS WAS DIFFERENT THAN THAT WAS PAID BY ASSESSEE TO DOW NETHERLANDS IN AS MUCH AS DOW UK WAS PAYING ROYALTY AS A PERCENTAGE OF GROSS SALES, WHEREAS ASSESSEE WAS PAYING ROYALTY AT NET SALES , IN ACCORDANCE WITH FOREIGN EXCHANGE CONTROL REGULATIONS. THE TRIBUNAL FOUND THAT IF THE ROYALTY PAYABLE WAS CALCULATED BY ADOPTING THE SAME DOW AGROSCIENCES PVT. LTD. 5 BASIS, THEN THE ROYALTY BEING PAID BY DOW UK WAS HIGHER THAN WHAT HAS BEEN PAID BY ASSESSEE COMPANY TO DOW NETHERL ANDS AND, THUS, THE ROYALTY PAID BY THE ASSESSEE WAS AT AN ARM'S LENGTH RATE, AND NO ADJUSTMENT WAS REQUIRED. ON THIS BASIS, THE TRIBUNAL AFFIRMED THE ORDER OF THE CIT(A) DELETING THE ADDITION IN ASSESSMENT YEAR 2003 - 04. 7.2 NOW IN THE PRESENT YEAR, THE CA SE OF THE ASSESSEE IS THAT THE PLEA THAT RATE OF ROYALTY' APPROVED BY THE CENTRAL GOVERNMENT AS ALSO BY THE RESERVE BANK OF INDIA CONSTITUTES A VALID CUP DATA HAS BEEN AFFIRMED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. SGS INDIA PVT. LTD., I TA NO.1807 OF 2013 DATED 18/11/2015. IN THIS CONTEXT, THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT BEFORE THE HON'BLE HIGH COURT, THE REVENUE HAD RELIED UPON PRESS NOTE NO.9 (2000 SERIES) ISSUED BY CENTRAL GOVERNMENT FOR ADOPTING THE RATES OF R OYALTY PRESCRIBED THEREIN FOR BENCHMARKING ROYALTY PAYABLE. IN THIS CONTEXT, REFERENCE WAS MADE TO PARA 8 OF THE ORDER OF THE HON'BLE HIGH COURT, WHEREIN CLAUSE(IV) OF THE PRESS NOTE WAS SPECIFICALLY NOTED, WHICH PROVIDED FOR PAYMENT OF ROYALTY UPTO 8% ON EXPORT SALES AND 5% ON DOMESTIC SALES. THE LD. REPRESENTATIVE FOR THE ASSESSEE EXPLAINED THAT THOUGH CLAUSE (IV) OF PRESS NOTE NO.9 (2000 SERIES) CONSIDERED BY THE HON'BLE HIGH COURT RELATED TO PAYMENT OF ROYALTY BY A WHOLLY OWNED SUBSIDIARY TO ITS OFFSHOR E PARENT COMPANY, BUT SIMILAR TREATMENT HAS BEEN EXTENDED EVEN TO OTHER ENTITIES ALSO VIDE A.P.(DIR SERIES) CIRCULAR NO.5 DATED 21/7/2003 ISSUED BY RESERVE BANK OF INDIA, EXCHANGE CONTROL DEPARTMENT, CENTRAL OFFICE, MUMBAI, A COPY OF WHICH HAS BEEN PLACED ON RECORD. THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT BEFORE THE HON'BLE HIGH COURT, REVENUE STATED THE PRESS NOTE NO9 (2000 SERIES) DATED 8/9/2000 WAS APPLICABLE TO EXAMINE THE REASONABLENESS OF THE ROYALTY PAID WHILE COMPUTING THE ARM'S LEN GTH PRICE. 7.3 ON THE BASIS OF AFORESAID IT IS CANVASSED THAT THE ROYALTIES PAID BY THE ASSESSEE ARE IN TERMS OF THE APPROVAL GRANTED BY SIA AS ALSO IN TERMS OF CIRCULAR NO.5 DATED 21/7/2003(SUPRA) OF THE RESERVE BANK OF INDIA AND, THEREFORE THE ROYALTY PA ID @ 8% ON EXPORT SAND 5% ON DOMESTIC SALES ARE TO BE CONSIDERED AT ARMS LENGTH RATE. 7.4 ALTHOUGH THE LEARNED DEPARTMENTAL REPRESENTATIVE DID NOT DISPUTE THE FACTUAL MATRIX, BUT HE HAS MERELY RELIED UPON THE ORDER OF THE TPO IN SUPPORT OF THE CASE OF THE REVENUE. 7.5 IN OUR CONSIDERED OPINION, FOLLOWING THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF SGS INDIA LTD. (SUPRA), THE PAYMENT OF ROYALTY BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES, DOW NETHERLANDS @ 5% ON DOMESTIC SALES AND 8% ON EXPO RT SALES IS LIABLE TO BE CONSIDERED AS AT AN ARMS LENGTH RATE IN VIEW OF THE CIRCULAR NO. 5 DATED 21/7/2003 (SUPRA). THEREFORE, THE ADDITION MADE BY THE ASSESSING OFFICER ON THIS COUNT IS UNSUSTAINABLE. IN THE ULTIMATE ANALYSIS, WE UPHOLD THE ACTION OF TH E CIT(A) IN DELETING THE ADDITION, ALBEIT, ON A DIFFERENT GROUND. DOW AGROSCIENCES PVT. LTD. 6 14. CONSISTENT WITH THE VIEW TAKEN IN AY 2004 - 05, WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 9. UP ON CAREFUL CONSIDERATION O F THE ABOVE ISSUE WE NOTE THAT THE ISSUE HAS ALREADY BEEN DECIDED BY THE ITAT IN ASSESSEES OWN CASE AS ABOVE AND I T IS NOT THE CASE OF THE REVENUE THAT HONOURABLE JURISDICTIONAL HIGH COURT HAS REVERSED THE ABOVE DECISION . ACCORDINGLY WE FOLLOW THE ABOVE P RECEDENT AND SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND DECIDE THE ISSUE IN FAVOUR OF ASSESSEE 10. I N THE RESULT THE ASSESSEES APPEAL STANDS PARTLY ALLOWED AS ABOVE ORDER HAS BE EN PRONOUNCED IN THE COURT ON 6 . 6 . 201 9 . SD/ - SD/ - (AMARJIT SINGH ) (SH A MIM YAHYA ) J U DICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 6 / 6 / 20 1 9 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// ( ASSISTANT REGISTRAR ) PS ITAT, MUMBAI