Deputy Commissioner of Income-tax, V. M/s. Hogonas India Ltd., Pune

ITA 474/PUN/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 9123 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 11 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 18-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DIVYA BAJPAI
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 142(1)

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO.474/PUN/2016 / ASSESSMENT YEAR : 2011-12 THE DY.COMMISSIONER OF INCOME TAX, CIRCLE-11, PUNE. . / APPELLANT V/S M/S. HOGONAS INDIA LTD., GANGA COMMERCE, 4 NORTH MAIN ROAD, KOREGAON PARK, PUNE 411 001. PAN : AAACH5156K. . / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK. REVENUE BY : SMT. DIVYA BAJPAI, CIT. / ORDER PER ANIL CHATURVEDI, AM : 1. THIS APPEAL FILED BY THE REVENUE IS EMANATING OUT OF T HE ORDER OF DY. COMMISSIONER OF INCOME TAX, PUNE DT.18.01.2016 FOR A.Y. 2011-12 PASSED U/S 143(3) R.W.S. 144C(13) OF THE ACT. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON R ECORD ARE AS UNDER :- ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE B USINESS OF MANUFACTURING AND SALE OF IRON AND FERROUS POWDER. ASSES SEE ELECTRONICALLY FILED ITS RETURN OF INCOME FOR A.Y. 2011-12 ON 29.11.2011 DECLARING TOTAL INCOME OF RS.29,45,71,143/-. NOTICE U/S / DATE OF HEARING : 06.03.2018 / DATE OF PRONOUNCEMENT: 16.03.2018 2 143(2) OF THE ACT WAS ISSUED ON 21.09.2012 AND SERVED ON THE ASSESSEE ON 29.09.2012. SUBSEQUENTLY, NOTICE U/S 142(1) OF THE ACT ALONG WITH DETAILED QUESTIONNAIRE DT.03.07.2013 WAS ISSUED A ND SERVED ON THE ASSESSEE. IT WAS NOTICED THAT ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS WHICH WERE MORE THAN RS.15 CR ORES. ACCORDINGLY, A REFERENCE U/S 92CA(3) OF THE ACT WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) FOR COMPUTATION OF ARMS LENGT H PRICE (ALP) IN RELATION TO THE INTERNATIONAL TRANSACTIONS DETAILED IN AUDIT REPORT AND FORM NO.3CEB THAT WERE FILED BY ASSESSEE. THEREAFTER, ORDER U/S 92CA(3) OF THE ACT WAS PASSED BY JCIT (TPO) V IDE ORDER DT.18.12.2014 WHEREIN AN ADDITION OF RS.1,08,58,056/- WAS P ROPOSED FOR THE REASON THAT THE INTERNATIONAL RATE OF RETURN AT TRIBUTABLE TO MARKET FUNCTIONS OF THE COMPANY COMES TO RS.1,79,66,580/- AS AGAINST THE SALES COMMISSION RECEIVED BY THE COMPANY FROM ITS ASSOCIATED ENTERPRISES OF ONLY RS.71,08,444/-. ACCORDINGLY NET ADDITION WAS WORKED OUT AT RS.1,08,58,056/-. THEREAFTER, A DRAFT ASSESSMENT ORDER DT.16.03.2015 WAS PASSED U/S 143(3) R. W.S. 144(C)(1) OF THE ACT, WHEREIN THE ADJUSTMENT OF RS.1,08,58,056/ - AS SUGGESTED BY TPO WAS INCORPORATED AND SERVED ON THE ASSESSEE. THE ASSESSEE FILED ITS OBJECTIONS BEFORE DISPUTE RESOLUTION PANE L (DRP). THE DRP VIDE ORDER DT.18.01.2016 DIRECTED THE AO NOT TO MAKE THE ADDITIONS IN VIEW OF THE HONBLE ITATS DECISION IN ASSESSE ES OWN CASE FOR A.Y. 2007-08 AND 2008-09 AND DRPS DIRECTION ON IDENTICAL FACTS IN A.Y. 2010-11. THEREAFTER, AN ORDER WAS PASSED U/S 144(3) R.W.S. 144C(13) DT.18.01.2016 AND THE TOTAL INCOME WAS DET ERMINED AT RS.29,54,71,143/- BEING THE SAME AS FILED BY THE ASSESSE E WHEREIN FOLLOWING THE DIRECTIONS OF DRP, NO ADJUSTMENT OF RS.1,08,58,056 /- TO THE INTERNATIONAL TRANSACTIONS WAS MADE WITH RESPECT TO RECEIPT OF SALES COMMISSION. AGGRIEVED BY THE AFORESAID ORDER, REVEN UE IS NOW 3 IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS : A) ON THE ISSUE OF INTERNAL COMPARABILITY I) THE HON'BLE DRP HAS ERRED ON FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW, WHEN IT IMPLICITLY REJECTED THE DI RECT METHOD OF COMPARABLE UNCONTROLLED PRICE UNDER RULE 10B(1)(A), WHEREIN THE INTERNAL THIRD PARTY ARMS' LENGTH RATES WERE WORKED OUT BY THE TPO FOR THE COMPARISON WITH THE INTERNATIONAL TRANS ACTION OF THE RECEIPT OF COMMISSIONS & IT PREFERRED TRANSACTION N ET MARGIN METHOD UNDER RULE 10B(1)(E), INDIRECT METHOD WHILE EVALUATING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACT ION. II) THE HON'BLE DRP HAS ERRED ON FACTS AND CIRCUMSTAN CES OF THE CASE AND IN LAW, BY REJECTING THE CUP, A DIRECT MET HOD OF WORKING OUT THE ARM'S LENGTH OF THE INTERNATIONAL T RANSACTION AND UNCONTROLLED TRANSACTION, WHICH PROVIDE FOR INS TANT COMPARISON OF THE PRICES OF THE PRODUCTS/SERVICES A ND BY FOLLOWING THE TNMM WHEREIN NET MARGINS ARE USED FOR SUCH COMPARISON. III) THE HON'BLE DRP HAS ERRED ON FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW, IN REJECTING THE INTERNAL COMPARAB ILITY, WHEN THE TPO HAS SPECIFICALLY COMPARED THE COMMISSION RAT ES BASED ON THIRD PARTY SALES I.E., SALES BY THE ASSESSEE TO THIRD PARITY IN INDIA AND SALES BY THE AE TO THIRD PARTIES IN TERRI TORY OF INDIA AND OTHER ASIAN REGIONS (EVEN IF THE COMMISSION REC EIVED FROM AE CONSIDERED AS CONTROLLED TRANSACTION, THE SALE B Y THE ASSESSEE COMPANY TO THE DOMESTIC PARTIES IN INDIA I S ESSENTIALLY THIRD PARTY SALE AND PERFECTLY SUITABLE FOR COMPARI SON. IV) THE HON'BLE DRP HAS ERRED ON FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW, IN IMPLYING THAT ONLY AN UNCONTROL LED TRANSACTION CAN BE USED FOR THE BENCHMARKING WHEN T HERE ARE NO LIMITS IDENTIFIED IN THE I.T.ACT 1961 FOR SUCH A CAT EGORIZATION OF THE INTERNATIONAL TRANSACTION IN TERMS OF RULE 10A( A). V) THE HON'BLE DRP HAS ERRED ON FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW, WHEN THE OECD GUIDELINE IN PARA 1. 70 CLEARLY SUGGESTS THAT, AN ATTEMPT SHOULD BE MADE TO REACH A REASONABLE ACCOMMODATION KEEPING IN MIND THE IMPREC ISION OF THE VARIOUS METHODS AND THE PREFERENCE FOR HIGHER D EGREES OF COMPARABILITY AND A MORE DIRECT AND CLOSER RELATION SHIP TO THE TRANSACTION'. B) ON THE ISSUE OF ADJUSTMENT OF RISK I) THE HON'BLE DRP HAS ERRED ON FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW, IN ALLOWING ADJUSTMENT FOR THE RIS K WHEN THE ASSESSEE COMPANY HAS NOT UNDERTAKEN FUNDAMENTAL STE P OF QUANTIFICATION OF RISKS EITHER IN ITS TRANSFER PRIC ING DOCUMENTATION OR BEFORE ANY OF THE APPELLATE AUTHOR ITIES, TO ALLOW FOR SUCH RISK ADJUSTMENT BETWEEN THE STANDALONE INTERNATIONAL TRANSACTION OF RECEIPT OF COMMISSION (ASSESSEE COMPANY HAS AGGREGATED THE RECEIPT OF COMMISSION AND TRADING ACTIVITY WHICH HAVE TOTALLY DIFFERENT FAR) AND THE COMPARABLE UNCONTROLLED TRANSACTIONS AS REQUIRED UNDER THE RULE 10B(1)(A)(II). 4 II) THE HON'BLE DRP HAS ERRED ON FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW, IN ALLOWING ADJUSTMENT FOR THE RIS K WHEN THE ASSESSEE COMPANY HAVE FAILED TO DEMONSTRATE BEFORE ANY OF THE APPELLATE AUTHORITIES, THAT SUCH IDENTIFIED DIFFERE NCES AS PER THE RULE10B(1)(A)(II) WOULD MATERIALLY AFFECT THE PRICE OF THE PRODUCT/SERVICES IN THE OPEN MARKET. III) THE HON'BLE DRP HAS ERRED ON FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW, IN ALLOWING ADJUSTMENT FOR THE RIS K WHEN THE ASSESSEE COMPANY HAS COMPLETELY DISREGARDED THE COMPARABILITY BETWEEN THE INTERNAL SEGMENTS (CONTRO LLED AND UNCONTROLLED TRANSACTIONS) AS ENSHRINED IN THE RULE 10B(2)(A) TO (D). IV) THE HON'BLE DRP HAS ERRED ON FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW, IN ALLOWING ADJUSTMENT FOR THE RIS K WHEN PERUSAL OF THE WRITTEN AGREEMENT SIGNED BETWEEN THE AE AND THE ASSESSEE COMPANY CLEARLY SHOWS THAT IT HAS BORNE' S UBSTANTIALLY MORE RISKS AS COMPARED TO WHAT IT HAS PRESENTED IN THE TP DOCUMENTATION. (THE AGREEMENT FOR COMMISSION AND TH E TP DOCUMENTATION CLEARLY SHOWS THAT THE ASSESSEE UNDER TAKES FAR MORE FUNCTIONS, UTILISES MUCH MORE ASSETS AND CONSE QUENTLY HAS HIGHER RISK WHEN IT DOES MARKETING FUNCTION FOR THE AE). V) THE HON'BLE DRP HAS ERRED ON FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW, IN ALLOWING ADJUSTMENT FOR THE RIS K WHEN THE OECD GUIDELINES IN PARA 3.27 CLEARLY SUGGESTS THAT THE INTERNAL COMPARABLES HAVE A MORE DIRECT AND CLOSER RELATIONS HIP TO THE TRANSACTION UNDER REVIEW THAN EXTERNAL COMPARABLES. 3. BEFORE US, LD.D.R. SUPPORTED THE ORDER OF LOWER AUTHORIT IES. ON THE OTHER HAND, LD.A.R. SUBMITTED THAT IDENTICAL ADDITIO NS WERE PROPOSED IN A.YS. 2006-07, 2007-08 AND 2008-09 AND THE HONBLE ITAT HAS REVERSED THE ACTION OF AO / TPO IN MAKING TH E ADJUSTMENTS. HE FURTHER SUBMITTED THAT FOR A.Y. 2010-11, D RP IN ASSESSEES OWN CASE HAS HELD THAT AO / TPO WAS NOT C ORRECT IN MAKING SIMILAR UPWARD ADJUSTMENT TO THE INTERNATIONAL TRAN SACTION OF RECEIPT OF SALES COMMISSION AND THAT NO APPEAL HAS BEEN P REFERRED BY THE REVENUE THOUGH REVENUE HAD RIGHT TO FILE THE APPEAL . HE THEREFORE SUBMITTED THAT DRP HAS RIGHTLY HELD THAT THE AO/TPO WAS NOT CORRECT IN MAKING ADJUSTMENT TO THE INTERNATIONAL TR ANSACTIONS OF RECEIPT OF SALES COMMISSION. HE THUS SUPPORTED THE ORDER OF DRP. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPEC T TO DELETING 5 THE UPWARD ADJUSTMENT OF RS.1,08,58,056/- TOWARDS RECEIPT OF SALES COMMISSION. WE FIND THAT DRP WHILE DECIDING THE ISSUE HAS NO TED THAT NO ADJUSTMENT WAS REQUIRED AND DIRECTED THE AO N OT TO MAKE THE ADDITION MAINLY FOR THE REASON THAT IDENTICAL ISSUE AROSE IN ASSESSEES OWN CASE IN A.YS. 2006-07, 2007-08 AND 2008-09 AND THE HONBLE PUNE BENCH OF THE TRIBUNAL IN THOSE YEARS HAD DECIDED T HE ISSUE IN FAVOUR OF THE ASSESSEE AND HAD REVERSED THE ACTION OF AO / TPO. IT WAS FURTHER NOTED BY DRP THAT IN ASSESSEES OWN CASE FOR A.Y. 2010- 11, DRP HELD THAT AO / TPO WAS NOT CORRECT IN MAKING S IMILAR ADJUSTMENT TO INTERNATIONAL TRANSACTIONS WITH RESPECT T O COMMISSION AND THUS DIRECTED THE AO NOT TO MAKE ANY ADDITION. BE FORE US, REVENUE HAS NOT POINTED OUT ANY DISTINGUISHING FEATURE IN THE FACTS OF THE YEAR UNDER CONSIDERATION AND THAT OF EARLIER YEARS A ND NOR HAS POINTED OUT ANY FALLACY IN THE FINDINGS OF DRP. FURTHER N O MATERIAL HAS BEEN PLACED ON RECORD TO DEMONSTRATE THAT THE OR DER OF THE TRIBUNAL FOR EARLIER YEARS IN ASSESSEES OWN CASE HAS BEE N SET ASIDE BY HIGHER JUDICIAL FORUM. IN SUCH A SITUATION, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF DRP. THUS, THE GROUNDS OF REVENUE ARE DISMISSED. 5. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON 16 TH MARCH, 2018. SD/- SD/- ( SUSHMA CHOWLA ) ( ANIL CHATURVEDI ) / JUDICIAL MEMBER ! / ACCOUNTANT MEMBER PUNE; DATED : 16 TH MARCH, 2018. YAMINI 6 '#$%&'&$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. CIT(APPEALS)-13, PUNE / CIT(A) CONCERNED 4. CIT(IT/TP), PUNE / CIT CONCERNED. 5. '#$ %%&',) &', / DR, ITAT, A PUNE; 6. $,-./ GUARD FILE. / BY ORDER , // TRUE COPY // // /01%2&3 / SR. PRIVATE SECRETARY ) &', / ITAT, PUNE