M/s Marubeni India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 4752/DEL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53480 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 16-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 29-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJ TONDON
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Wholly owned subsidiary
• Section: 143(3); 234B; 2

Judgement Text

ITA NO. 4752/DEL/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 4752/DEL/2010 A.Y. : 2006-07 MARUBENI INDIA PVT. LTD., 5 TH FLOOR, LOTUS TOWER, COMMUNITY CENTRE, NEW FRIENDS COLONY, NEW DELHI (PAN : AAACM6413A) VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE-6(1), NEW DELHI (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSEESSEE BY : SH. RAJESH MALHOTRA, CA DEPARTMENT BY : SH. RAJ TONDON, C.I.T.(D.R.) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE LD. ASSESSING OFFICER DATED 06/9/2010 PASSED U/S 143(3) READ WITH SECTION 144C OF THE IT ACT, 1961. THE SAID ORDER W AS PASSED PURSUANT TO THE DIRECTION OF THE DRP U/S 144C OF THE IT ACT D ATED 16.8.2010. 2. THE GROUNDS RAISED READ AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. DRP ON ERRONEOUS AND INSUFFICIENT GROUNDS HAVE ERR ED IN CONFIRMING AN ADDITION OF ` 8,40,19,097/- IN THE IN COME OF APPELLANT, BY HOLDING THAT ITS INTERNATIONAL TRANSAC TIONS DOES NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. IN ITA NO. 4752/DEL/2010 2 DOING SO THE AUTHORITIES BELOW (I.E. LD. DRP/LD. TPO /LD. ASSESSING OFFICER ) HAVE: 1.1 FAILED TO APPRECIATE THE PROVISION OF THE ACT W HICH PROVIDES THAT ARMS LENGTH PRICE (ALP) HAS TO BE DETERMINED IN RELATION TO INTERNATIONAL TRANSACTION BETWEEN TWO OR MORE ASSOCIATE ENTERPRISES (AES) ONLY, WHEREAS AUTHORITIES BELOW HAVE DETERMINED ALP ON DOMESTIC BUSINESS AND OTHER TRANSACTION (PERTAINING TO NON-AES) ALSO. 1.2 FAILED TO APPRECIATE THE PROVISION OF RULE 10B( 1)(E) OF THE INCOME TAX RULES WHICH PROVIDES THAT TNMM REQUIRE COMPARISONS OF NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR AGGREGATE OF INTERNATIONAL TRANSACTIONS AND NOT THE COMPARISON OF OPERATING MARGIN OF ENTERPRISE. 1.3 FAILED TO APPRECIATE THAT THE APPELLANT IS A SER VICE PROVIDER AND NOT A TRADER AND GROSSLY MISUNDERSTOOD THE BASIC FACTS OF THE BUSINESS OF THE APPELLANT. 1.4 WRONGLY INCLUDED THE COST OF SALES TO THE NON- AE S IN THE DENOMINATOR OF PROFIT LEVEL INDICATOR (PLI), AN D WRONGLY CHANGED THE PROFIT LEVEL INDICATOR (PLI) FR OM OPERATING PROFIT/OPERATING COST (OP/OC) TO OPERATING PROFIT /TOTAL COST (OP/TC). 1.5 WRONGLY REJECTED COMPARABLE DATA OF M/S BASANT R AJ INTERNATIONAL LTD AND M/S CAPITAL TRUST LTD. BEING COMPANIES SELECTED BY THE APPELLANT IN TP DOCUMENTATION. ITA NO. 4752/DEL/2010 3 1.6 WRONGLY INCLUDED COMPARABLE DATA OF M/S ICC INTERNATIONAL AGENCIES LTD AFTER SUBSTITUTING CURRENT YEAR DATA (BEING SINGLE YEAR) AND HAVE IGNORED THAT THE PROFITS EARNED BY THE M/S ICC INTERNATIONAL AGENCIES LTD IN CURRENT YEAR ARE ABNORMAL. 1.7 WRONGLY IGNORED THE BENEFIT OF +/- 5% MENTIONE D IN PROVISO TO SECTION 92C(2) OF THE ACT. THEREFORE ORDER PASSED U/S 143(3) R.W.S. 144C ENHANCING THE INCOME OF RS. 8AO,19,097/- IS WRONG, UNJUSTIFIED AND BAD AT LAW AND THEREFORE IT SHOULD BE QUASHED. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE AUTHORITIES BELOW HAVE GROSSLY ERRED IN DISALLOWIN G A SUM OF ` 5,40,051/- BEING 50% OF THE CLUB EXPENDITURE CLAI MED BY THE ASSESSEE ON THE BASIS OF TREATING THE EXPENDITURE AS PERSON AL IN THE NATURE. DISALLOWANCE IS UNJUSTIFIED AND BAD AT LAW AND IT SHOULD BE QUASHED. 3. THAT THE AUTHORITIES BELOW HAVE ALSO ERRED BOTH IN LAW AND ON FACT IN CONFIRMING THE LEVY OF INTEREST U/S 234B OF T HE ACT. 4. THE APPELLANT CRAVES THE RIGHT TO ADD/ ALTER/ AME ND ALL OR ANY OF THE GROUNDS OF APPEAL ON OR BEFORE THE HEARING OF APPEAL. IT IS THEREFORE RESPECTFULLY PRAYED THAT ADDITION TO THE INCOME AND DISALLOWANCES MADE BY THE AUTHORITIES BELO W BE DELETED AND APPEAL OF THE APPELLANT COMPANY BE ALLO WED. 3. IN THIS CASE T HE ASSESSEE 'MARUBENI INDIA PVT. LTD. (MIPL)' IS A PRIV ATE LIMITED COMPANY, INCORPORATED IN INDIA, IS THE WHOLL Y OWNED SUBSIDIARY (I.E., 100% SUBSIDIARY) OF MARUBENI CORPORATION, JAPAN (MCJ) . MIPL'S OPERATIONS CONSIST OF REPRESENTATION & LIAISON SERVICES TO ITS ASSOCIAT E ENTERPRISES (AES) ITA NO. 4752/DEL/2010 4 AND TRADING IN GOODS. MIPL PROVIDES LIAISON SERVICES TO MARUBENI GROUP COMPANIES WITH REGARD TO INDUSTRIAL, AGRICULTURAL & C ONSUMER GOODS, COMMODITIES & NATURAL RESOURCES; ALSO, IT DEALS IN TRADI NG OF GOODS MAINLY FOR DOMESTIC BUSINESS (RELATING TO NON-AES). 3.1 THE GROSS INCOME AS RECEIVED FROM AES AND OTHER INT ERNATIONAL TRANSACTION DECLARED BY ASSESSEE ARE AS UNDER:- S. NATURE OF INTERNATIONAL VALUE OF TRANSFER PRICING ANALYSIS ADOPTED BY MIPL NO , TRANSACTIONS TRANSACTIONS MIPLS ARMS LENGTH METHOD ) IN RUPEES ( MARGINS MARGINS USED INCOME 1 PROVISION OF AGENCY SUPPORT 20,40,05,606 23.53 - TNMM SERVICES ) ON COST ( 10.71 (PLI=OP/OC) 2. TRADING OF GOODS WITH AES : : ) ON COST ( (BEING SALE OF TENTS FOR PAKISTAN EARTHQUAKE RELIEF & TRACTOR PARTS ( 3.69 SALE I 2,84,11,615 ) ON COST ( SALE II 69,05,230 3,53,16,845 31.55 TNMM (PLI=OP/OC) ) ON COST ( ~ TOTAL (A) 23,93,22,451 21.00 10.71 TNMM ) ON COST ( ) ON COST ( (PLI=OP/OC) OTHER INTERNATIONAL TRANSACTIONS 3. 4. 5. COST ALLOCATION OF SOFTWARE USAGE AND USAGE SERVICES PROVIDED BY AES. REIMBURSEMENT OF EXPENSES BY MIPL TO AES REIMBURSEMENT OF EXPENSES BY AES TO MIPL 52,82,817 6,05,672 2,07,49,897 NO BENCHMARKING REQUIRED NO BENCHMARKING REQUIRED NO BENCHMARKING REQUIRED TOTAL (B) TOTAL (B) TOTAL (B) TOTAL (B) 2,66,38,386 2,66,38,386 2,66,38,386 2,66,38,386 NO BENCHMARKING NO BENCHMARKING NO BENCHMARKING NO BENCHMARKING REQUIRED REQUIRED REQUIRED REQUIRED ITA NO. 4752/DEL/2010 5 3.2 THE LD. TPO U/S. 92CA(3) RECOMPUTED THE ALP INCRE ASED IT TO ` 730,127,442/- AT A MARGIN OF 19.86% CALCULATING IT ON THE FOLLOWING FIGURES:- AMOUNT AMOUNT AMOUNT AMOUNT TOTAL COSTS AS PER THE PROFIT AND LOSS ACCOUNT ` 61,32,51,757/- LESS: MISCELLANEOUS EXPENDITURE WRITTEN OFF ` 41,01,546/- TOTAL COTS CONSIDERED BY THE LD. TOTAL COTS CONSIDERED BY THE LD. TOTAL COTS CONSIDERED BY THE LD. TOTAL COTS CONSIDERED BY THE LD. TPO FOR CALCULATING ALP TPO FOR CALCULATING ALP TPO FOR CALCULATING ALP TPO FOR CALCULATING ALP ` 60,91,50,211/ ` 60,91,50,211/ ` 60,91,50,211/ ` 60,91,50,211/- -- - AMOUNT AMOUNT AMOUNT AMOUNT OPERATING MARGIN IS @ 19.86% ON THE TOTAL COST. HENCE, ALP IS 119.86% OF THE TOTAL COST ` 73,01,27,442/- LESS: REVENUE SHOWN IN PROFIT AND LOSS ACCOUNT ` 64,61,08,345/- ADJUSTMENT IN INCOME ADJUSTMENT IN INCOME ADJUSTMENT IN INCOME ADJUSTMENT IN INCOME ` ` ` ` 8,40,19,097 8,40,19,097 8,40,19,097 8,40,19,097/ // /- -- - 3.3 THE FOLLOWING ADDITIONS WERE CONFIRMED BY THE LD . DRP AGAINST WHICH THE ASSESSEE IS IN THE APPEAL: (I) ADDITION ON ACCOUNT OF INCREASE ALP OF INTERNATIONAL TRANSACTION ` 8,40,19,097/ - (II) DISALLOWANCE OF CLUB EXPENDITURE ` 5,40,051/ - TOTAL TOTAL TOTAL TOTAL ` 8,45,59,148/ ` 8,45,59,148/ ` 8,45,59,148/ ` 8,45,59,148/ - -- - 4. AT THE VERY OUTSET, IT WAS SUBMITTED BY THE LD. COUNSEL OF THE ASSESSEE THAT DRP HAS NOT AT ALL CONSIDERED THE ASSE SSEES ITA NO. 4752/DEL/2010 6 SUBMISSIONS AND PASSED NON-SPEAKING ORDER. IN THIS REGARD, ASSESSEES SUBMISSIONS ARE AS UNDER:- THE LD. DRP HAS BRUSHED ASIDE ALL THOSE SUBMISSIONS WITHOUT CONSIDERING THE DETAIL OBJECTIONS OF THE AS SESSEE, INFACT THE LD. DRP HAS FAILED TO ASCRIBE COGENT AND G ERMANE REASONS FOR REJECTING ASSESSEE'S SEVERAL OBJECTIONS A ND ACCEPTED TPO/S ORDER IN SUMMARY MANNER. AND EVEN THE PRELIMINARY OBJECTIONS OF THE ASSESSEE THAT THE ASSESSEE HAS DOMESTIC BUSINESS (WHICH IS PR INCIPAL BUSINESS) I.E. MAINLY TRADING WITH THE NON ASSOCIAT ES ENTERPRISES, WHICH IS NOT AN INTERNATIONAL TRANSACT ION AND OTHER BUSINESS SEGMENT WHERE INTERNATIONAL TRANSACTI ON HAS TAKEN PLACE (WHICH IS HANDLING BUSINESS) AND WHEREA S THE ARMS LENGTH CALCULATION HAS BEEN MADE BOTH ON DOMES TIC & INTERNATIONAL TRANSACTIONS BY TAKING ENTITY LEVEL MA RGINS OF THE ASSESSEE INTO ACCOUNT WHICH IS NOT PERMISSIBLE UNDER THE LAW. THIS ALSO HAS BEEN DISPOSED OFF IN SUMMARY MANNER. 5. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 6. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND PERUSED THE RECORDS. THE ADMITTED POSITION IS THAT ASSESSEE HAS MADE THE ELABORATE SUBMISSIONS BEFORE THE DRP. THE SUBMISSIO NS INCLUDED VARIOUS FACTUAL AND LEGAL ARGUMENTS AGAINST THE ADD ITION PROPOSED BY THE ASSESSING OFFICER. THE DRP HAS BRUSHED ASIDE TH E ASSESSEES SUBMISSIONS AND DISPOSED OF IN A VERY NON-SPEAKING ORDER. IN THIS ITA NO. 4752/DEL/2010 7 REGARD, WE FIND THAT SECTION 144C ENVISAGES FOLLOW ING ON THE PART OF THE DRP:- (5) THE DISPUTES RESOLUTION PANEL SHALL, IN CASE W HERE ANY OBJECTION IS RECEIVED UNDER SUB-SECTION (2), IS SUE SUCH DIRECTIONS, AS IT THINKS FIT, FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT. (6) THE DISPUTE RESOLUTION PANEL SHALL ISSUE THE DIR ECTIONS REFERRED TO IN SUB-SECTION (5), AFTER CONSIDERING T HE FOLLOWING, NAMELY :- (A) DRAFT ORDER; (B) OBJECTIONS FILED BY THE ASSESSEE; (C) EVIDENCE FURNISHED BY THE ASSESSEE; (D) REPORT, IF ANY, OF THE ASSESSING OFFICER, VALUA TION OFFICER OR TRANSFER PRICING OFFICER OR ANY OTHER AUTHORITY; (E) RECORDS RELATING TO THE DRAFT ORDER; (F) EVIDENCE COLLECTED BY, OR CAUSED TO BE COLLECTE D BY, IT; AND (G) RESULT OF ANY ENQUIRY MADE BY, OR CAUSED TO BE MADE BY, IT. (7) THE DISPUTE RESOLUTION PANEL MAY, BEFORE ISSUING ANY DIRECTIONS REFERRED TO IN SUB-SECTION (5), - (A) MAKE SUCH FURTHER ENQUIRY, AS IT THINKS FIT; OR ITA NO. 4752/DEL/2010 8 (B) CAUSE ANY FURTHER ENQUIRY TO BE MADE BY ANY INCOME TAX AUTHORITY AND REPORT THE RESULT OF THE SAME TO IT. (8) THE DISPUTE RESOLUTION PANEL MAY CONFIRM, REDUCE OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO, HOWEVER, THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIRECTION UNDER SUB-SECTION (5) FUR FURTHER ENQUIRY AND PASSING OF THE ASSESSMENT ORDER. (9) IF THE MEMBERS OF THE DISPUTE RESOLUTION PANEL DIF FER IN OPINION ON ANY POINT, THE POINT SHALL BE DECIDE D ACCORDING TO THE OPINION OF THE MAJORITY OF THE MEMBERS. (10) EVERY DIRECTION ISSUED BY THE DISPUTE RESOLUTIO N PANEL SHALL BE BINDING ON THE ASSESSING OFFICER. (11) NO DIRECTION UNDER SUB-SECTION (5) SHALL BE IS SUED UNLESS AN OPPORTUNITY OF BEING HEARD IS GIVEN TO TH E ASSESSEE AND THE ASSESSING OFFICER ON SUCH DIRECTI ONS WHICH ARE PREJUDICIAL TO THE INTEREST OF THE ASSESSE E OR THE INTEREST OF THE REVENUE, RESPECTIVELY. ITA NO. 4752/DEL/2010 9 (12) NO DIRECTION UNDER SUB-SECTION (5) SHALL BE IS SUED AFTER NINE MONTHS FROM THE END OF THE MONTH IN WHICH THE DRAFT ORDER IS FORWARDED TO THE ELIGIBLE ASSESSEE. (13) UPON RECEIPT OF THE DIRECTIONS ISSUED UNDER SU B- SECTION (5), THE ASSESSING OFFICER SHALL, IN CONFO RMITY WITH THE DIRECTIONS, COMPLETE, NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 153, THE ASSESSMENT WITHOUT PROVIDING ANY FURTHER OPPORTUNIT Y OF BEING HEARD TO THE ASSESSEE, WITHIN ONE MONTH FRO M THE END OF THE MONTH IN WHICH SUCH DIRECTION IS RECEIVED. 7. AS AGAINST THE ABOVE PROVISIONS OF THE ACT HERE THE DRP HAS PASSED A VERY LACONIC ORDER. LD. COUNSEL OF THE AS SESSEE CONTENDED THAT VOLUMINOUS SUBMISSIONS HAVE BEEN MADE BEFORE THE DRP AGAINST THE DRAFT ASSESSMENT ORDER. BUT THE DRP HAS BRUSHED THEM ASIDE WITHOUT PROPERLY CONSIDERING THE ASSESSEES OBJECTI ONS AND THE SUBMISSIONS OF THE ASSESSEE. UNDER THE CIRCUMSTAN CES, IN OUR OPINION, THE DIRECTIONS OF THE DRP ARE TOO LACONIC T O BE LEFT UNCOMMENTED. THE DIRECTIONS GIVEN BY THE DRP ALMOST T ANTAMOUNT TO SUPERVISING THE ASSESSING OFFICERS DRAFT ORDER AN D IN THAT SENSE IT CAN BE EQUATED THAT APPELLATE JURISDICTION BEING EXERCI SED. WE FIND THAT ITA NO. 4752/DEL/2010 10 H ONBLE APEX COURT IN THE CASE M/S SAHARA INDIA (FARMS) VS. C IT & ANR. IN [2008] 300 ITR 403 HAS HELD THAT EVEN AN ADMINI STRATIVE ORDER HAS TO BE CONSISTENT WITH THE RULES OF NATURAL JUSTICE . 8. IN THIS REGARD, WE ALSO NOTE THAT HONBLE JURISD ICTIONAL HIGH COURT IN THE CASE OF VODAFONE ESSAR LTD. VS. DISPUTES RESO LUTION PANEL VIDE ORDER DATED 2.12.2010 THE HONBLE COURT HAS HELD TH AT WHEN A QUASI JUDICIAL AUTHORITY DEALS WITH THE LIS, IT IS OBLIGA TORY ON ITS PART TO ASCRIBE COGENT AND GERMANE REASON AS THE SAME IS A HEART AND SOUL OF THE MATTER AND FURTHER THE SAME ALSO FACILITATES APP RECIATION WHEN THE ORDER IS CALLED IN QUESTION BEFORE THE SUPERIOR FOR UM. ACCORDINGLY, THE HONBLE COURT HAS REMANDED THE MATTER FOR FRESH ADJUD ICATION. 9. UNDER THE CIRCUMSTANCES, IN THE BACKGROUND OF TH E AFORESAID DISCUSSION AND PRECEDENT ABOVE, WE FIND CONSIDERAB LE COGENCY IN THE ASSESSEES COUNSEL SUBMISSION THAT THE ASSESSEES SU BMISSION HAS BEEN BRUSHED ASIDE WITHOUT GIVING PROPER CONSIDERAT ION BY THE DRP. 10. LD. DEPARTMENTAL REPRESENTATIVE COULD NOT CONTRO VERT THIS PROPOSITION. 11. UNDER THE CIRCUMSTANCES, IN OUR CONSIDERED OPI NION, THE ISSUE IS REMITTED TO THE FILES OF THE DRP TO CONSIDER THE ISSU E ONCE AGAIN TO PASS A PROPER AND SPEAKING DIRECTION U/S 144C OF TH E IT ACT. SINCE WE ITA NO. 4752/DEL/2010 11 ARE REMITTING THE MATTER TO THE FILES OF THE DRP FOR P ASSING A FRESH DIRECTION, OTHER ASPECTS OF MERITS OF THE CASE ARE NOT BEING ADJUDICATED. NEEDLESS TO ADD THAT THE ASSESSEE SHOU LD BE GIVEN ADEQUATE OPPORTUNITY OF BEING HEARD. 12. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 16/12/2011. SD/- SD/- [ [[ [A.D. JAIN A.D. JAIN A.D. JAIN A.D. JAIN] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 16/12/2011 SRB COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES