ADDL CIT RG 1(3), MUMBAI V. GIVAUDAN FLAVOURS (INDIA )P. LTD, MUMBAI

ITA 4820/MUM/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8671 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 04-01-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 20-08-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NARENDRA SINGH
• Keywords: Business income; Transfer pricing; International transaction
• Section: 80IB

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER. I.T.A. NO. 4820/MUM/2009. ASSESSMENT YEAR : 2006-07. ASSTT. COMMISSIONER OF INCOME-TAX, M/S GIVAUDAN FLAVOURS (INDIA)P. LTD., 1(3), MUMBAI. VS. (FORMERLY M/S QUEST INTERNATIONAL INDIA PVT. LTD.) 402, AKRUTI CENTRE POINT, MIDC CENTRAL ROAD, ANDHERI (EAST), MUMBAI 400093. PAN AAACL 1013D APPELLANT. RESPONDENT. APPELLANT BY : SHRI NARENDRA SINGH. RESPONDENT BY : SHRI KANCHAN KAUSHA L, SHRI DHANESH B AFNA, MS. SHITAL BAN DEKAR. . O R D E R PER J. SUDHAKAR REDDY, A.M. : THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED AGA INST THE ORDER OF THE IT(APPEALS)-XXXII, MUMBAI DATED 29-05-2009. 2. FACTS IN BRIEF. THE ASSESSEE IS A COMPANY AND IS IN THE BUSINESS O F MANUFACTURE, DISTRIBUTION, MARKETING AND SALE OF FLAVOURS. IT FI LED ITS RETURN OF INCOME 2 ELECTRONICALLY ON 25-11-2006, DECLARING TOTAL INCO ME OF R.2,56,14,300/-. THE AO COMPLETED THE ASSESSMENT ON 31-12-2008, DETERMINING THE INCOME AT RS.23,06,37,110/-. WHILE DOING SO, THE AO MADE THE DISALLOWANCES/ADDITIONS, INTER ALIA, ON ACCOUNT OF : A) CENVAT U/S 145(A). B) DISALLOWANCE U/S 14A. C) ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT U/S 92C(3). DEDUCTION U/S 80IB WAS DISALLOWED. 3. THE FIRST APPELLATE AUTHORITY GRANTED PART RELIE F. REVENUE FILED THIS APPEAL ON THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO MAKE ADJUSTMENTS WITH REFERENCE TO OPENING STOCK, PURCHASE AS WELL AS SAL ES BEFORE CONSIDERING THE ADDITION TO THE CLOSING STOCK ON ACCOUNT OF UNUTILI ZED CENVAT CREDIT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW DEDUCTION U/S 80IB ON THE BASIS OF AUDIT CERTIFICATE IN FORM NO. 10CCB ISSUED BY THE CHARTERED ACCOUNTANT WHO IS NOT THE SAME ONE WHO CARRIED OUT THE STATUTORY AUDIT OF THE ACCOUNTS OF THE ASSESSEE AS PROVIDED U/S 44AB O F THE ACT. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE U/S 14 A TO RS.1,00,000/- IGNORING THE DECISION OF THE ITAT SPECIAL BENCH IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN DELETING THE ADDITION OF RS.4,44,78 ,004/- HOLDING THAT THE ASSESSEES INTERNATIONAL TRANSACTION IS COVERED BY PROVISO TO SEC. 92C(2) AND HENCE, NO ADJUSTMENT IS WARRANTED IN ARMS LENGTH PR ICING. 4. MR. NARENDRA SINGH, THE LEARNED CIT-DR, SUBMITTE D THAT GROUND NO. 1 WHICH IS ON THE ISSUE OF ADDITION TO CLOSING STOCK ON ACCOUNT OF UNUTILIZED 3 CENVAT CREDIT. HE RELIED ON THE ORDER OF THE AO. SI MILARLY, ON THE ISSUE OF DENIAL OF DEDUCTION U/S 80IB, HE RELIED ON THE ORDER OF TH E AO. ON GROUND NO.3, WHICH IS ON DISALLOWANCE U/S 14A, HE SUBMITTED THAT THE ISSU E SHOULD BE SET ASIDE TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN LINE WITH THE J UDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURIN G CO. 234 CTR 1. 5. COMING TO GROUND NO.4, MR. NARENDRA SINGH TOOK T HIS BENCH THROUGH THE ORDER OF THE AO AND SUBMITTED THAT THE ASSESSEE HAS CHOSEN TO ARRIVE AT THE WEIGHTAGE AVERAGE OF THE ENTERPRISE LEVEL PROFITS OF 13 COMPARABLES AND THEN APPLY SUCH ENTERPRISE LEVEL AVERAGE PROFITS TO THE INTERN ATIONAL TRANSACTION TO DEMONSTRATE THAT THE INTERNATIONAL TRANSACTION IS DONE AT THE A RMS LENGTH PRICE. HE SUBMITTED THAT THE ENTIRE SYSTEM ADOPTED BY THE ASSESSEE IS LEGALL Y FOULED AND UNSUSTAINABLE IN LAW. HE SUBMITTED THAT IF THE PROFIT MARGINS ARE AD OPTED AT ENTERPRISE LEVELS, THEN LOGICALLY THAT MARGIN SHOULD BE APPLIED TO THE ENTI RE LOT OF TRANSACTIONS I.E. BOTH DOMESTIC AND INTERNATIONAL TRANSACTIONS AND BY ADOP TING A DEDUCTIVE METHODOLOGY ARRIVED AT THE ALV. NEVERTHELESS HE RELIED ON THE F OLLOWING ORDERS OF THIS BENCH OF THE TRIBUNAL FOR THE PROPOSITION THAT ENTERPRISE LE VEL PROFIT MARGINS CANNOT BE THE BASIS FOR ARRIVING AT THE NET MARGINS OF INTERNATIO NAL TRANSACTION : 1) ACIT VS. TEJ DIAM 130 TTJ 570 (MUM.) 2) DCIT VS. STARLITE 133 TTJ 425 (MUM.). HE VEHEMENTLY CONTENDED THAT THE NET MARGIN EARNED BY THE ASSESSEE ON INTERNATIONAL TRANSACTION, CANNOT BE THE SAME AS TH E NET PROFIT EARNED BY A COMPANY ON ITS ENTIRE ACTIVITIES. HE SUBMITTED THAT THE MET HOD FOLLOWED BY THE ASSESSEE AND APPROVED BY THE CIT(APPEALS) IS NOT A METHOD ALLOWE D UNDER THE RULES OR THE ACT. HE SUBMITTED THAT BY APPLYING ENTERPRISE LEVEL OVE RALL OPERATING MARGINS, TO A SPECIFIC INTERNATIONAL TRANSACTION OR A GROUP OF TR ANSACTION, AND THEN ARRIVE AT THE ALV RESULTS IN DISTORTIONS IN RESULTS. HE TRIED T O DEMONSTRATE HIS PLEA BY REFERRING 4 TO PAGE 13 OF THE CIT(APPEALS) ORDER AND PAGE 16 O F THE ORDER OF THE AO. THE SUM AND SUBSTANCE OF HIS SUBMISSION IS THAT COMPARI SON OF ENTERPRISE LEVEL OPERATING MARGINS, SHOULD NOT BE ALLOWED AS IT IS A GAINST THE ACT AND RULES AND ALTERNATIVELY IF IT IS ALLOWED, THEN THE COMPARISON SHOULD BE OF THE WHOLE ENTERPRISE AND NOT RESTRICTED TO INTERNATIONAL TRANSACTIONS. H E FOUND FAULT WITH THE ORDER OF THE FIRST APPELLATE AUTHORITY. 6. THE LEARNED COUNSEL FOR THE ASSESSEE MR. KANCHAN KAUSHAL, APPEARING ALONG WITH MR. DHANESH BAFNA, ON THE OTHER HAND, SUBMITTE D AS FOLLOWS. 7. ON GROUND NO.1, HE RELIED ON THE ORDER OF THE CI T(APPEALS). ON GROUND NO.2 HE SUBMITTED THAT THE CIT(APPEALS) WAS RIGHT I N HOLDING THAT THE AO WAS WRONG IN DISALLOWING THE DEDUCTION U/S 80IB ON THE SOLE GROUND THAT THE CHARTERED ACCOUNTANT WHO GAVE A CERTIFICATE U/S 44AB IS DIFFE RENT FROM THE CHARTERED ACCOUNTANT WHO HAD ISSUED A CERTIFICATE IN FORM NO. 10CCA FOR CLAIMING DEDUCTION U/S 80IB. HE POINTED OUT THAT THERE IS NO PROVISION IN LAW THAT THE AUDIT OF ACCOUNTS AND THE ISSUE OF CERTIFICATE IN FORM NO .10CCA SHOULD BE DONE BY THE SAME CHARTERED ACCOUNTANT. 8. COMING TO DISALLOWANCE U/S 14A, HE SUBMITTED THA T THE ASSESSEE HAS SUO MOTO DISALLOWED 1% OF THE DIVIDEND EARNED. HE CONTE NDED THAT THERE IS NO DIRECT EXPENDITURE WHATSOEVER, WHICH IS IDENTIFIED FOR EAR NING THE INCOME IN QUESTION. HE SUBMITTED THAT NO LOAN FUNDS WERE USED FOR INVESTME NT NOR ANY ADMINISTRATIVE EXPENDITURE WAS INCURRED FOR MAKING THESE INVESTMEN TS. HE POINTED OUT THAT THE CIT(APPEALS) AT PAGE 7 PARA 4.2 OF HIS ORDER, HAS R ESTRICTED THE DISALLOWANCE TO RS.1 LAKH WHICH IS ABOUT 10% OF THE DIVIDEND EARNED . HE SUBMITTED THAT THIS SHOULD BE HELD AS A REASONABLE DISALLOWANCE ON THE FACTS A ND CIRCUMSTANCES OF THE CASE WHICH IS IN ACCORDANCE WITH THE DECISION OF THE JUR ISDICTIONAL HIGH COURT IN THE 5 CASE OF GODREJ BOYCE MANUFACTURING CO. LTD. (SUPRA) . THUS HE SUBMITS THAT THE ORDER OF THE FIRST APPELLATE AUTHORITY HAS TO BE UP HELD. 9. COMING TO GROUND NO.4, WHICH IS ON THE ISSUE OF ADJUSTMENTS MADE U/S 92C, THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSEES T OTAL PURCHASES ARE RS.116.67 CRORES AND WHEREAS THE PURCHASES FROM ASSOCIATED EN TERPRISE IS JUST RS.8.10 CRORES. HE VEHEMENTLY CONTENDED THAT THERE IS NO DISPUTE WH ATSOEVER IN THE METHOD ADOPTED BY THE ASSESSEE OR THE AO AND THAT THE SHOR T POINT FOR CONSIDERATION IS WHETHER AN ADJUSTMENT CAN BE MADE TO THE ENTIRE PUR CHASES, BOTH DOMESTIC AND INTERNATIONAL TRANSACTIONS. HE FILED THE CALCULATIO N SHEET TO DEMONSTRATE THAT EVEN IF THE MARGIN OF 11.87% AS DETERMINED BY THE AO IS APP LIED TO INTERNATIONAL TRANSACTIONS, THEN ALSO NO ADJUSTMENT IS CALLED FOR U/S 92C. HE RELIED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEJ DIAM (SUPRA) AND SUBMITTED THAT THE BENCH HAS HELD THAT THE ADJUSTME NTS CAN BE MADE ONLY TO INTERNATIONAL TRANSACTIONS AND NOT TO DOMESTIC TRAN SACTIONS. SIMILARLY HE RELIED ON THE DECISION OF I-BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. STARLINE (SUPRA). HE ALSO RELIED ON THE DECISION OF THE DELHI BENCH O F THE TRIBUNAL IN ITA NO. 438/DEL/2008 IN THE CASE OF IL JIN ELECTRONICS (I) (P) LTD. VS. ACIT, ORDER DATED 6 TH NOV., 2009 AND POINTED OUT THAT THE BENCH HAS CLEAR LY HELD THAT APPLYING THE OPERATING PROFIT ON TOTAL SALES IS NOT JUSTIFIED AN D AT BEST IT CAN BE APPLIED TO THE PROPORTIONATE SALES MADE OUT OF RAW MATERIAL IMPORT ED FROM THE ASSOCIATED CONCERN. ON A QUERY FROM THE BENCH, HE SUBMITTED TH AT THE ISSUE WHETHER OPERATING MARGINS AT ENTERPRISE LEVEL CAN BE TAKEN AS THE MAR GINS EARNED ON A TRANSACTION OR A CLASS OF TRANSACTION, IS NOT THE ISSUE WHICH IS IN DISPUTE BEFORE THIS BENCH OF THE TRIBUNAL AND HENCE IT DOES NOT CALL FOR ANY ADJUDIC ATION. HIS CONTENTION IS THAT, A PARTICULAR PROFIT MARGIN, BY WHATEVER METHOD, IS AR RIVED AT BY THE ASSESSEE AND THE AO ARRIVED AT A MARGIN OF 11.87% AND THE ASSESSEES ONLY REQUEST IS THAT THE LAW 6 DOES NOT PERMIT ADJUSTMENTS TO BE MADE TO TRANSACTI ONS WHICH ARE NOT INTERNATIONAL TRANSACTIONS WITH ASSOCIATED CONCERN. 10. THE LEARNED DR, ON THE OTHER HAND, REFUTED THES E ARGUMENTS BY SUBMITTING THAT, AN ADJUSTMENT HAS NOT BEEN MADE BY THE AO ON TRANSACTIONS WHICH ARE NOT INTERNATIONAL TRANSACTIONS WITH AN ASSOCIATED ENTER PRISE BUT HAS ONLY ALLOCATED THE EXPENDITURE BETWEEN THE INTERNATIONAL TRANSACTIONS WITH AN ASSOCIATED ENTERPRISE AND OTHER TRANSACTIONS BASED UPON THE OPERATING MAR GINS AT THE ENTERPRISE LEVEL AND THEREAFTER CAME TO THE CONCLUSION, AS TO WHAT SHOUL D BE THE ARMS LENGTH PRICE OF AN ASSOCIATED ENTERPRISE. HE SUBMITTED THAT WHEN ENTER PRISE LEVEL MARGINS ARE TAKEN, THE ONLY ALTERNATIVE WOULD BE TO ALLOCATE THE PROFI TS AND EXPENSES BETWEEN THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SE AND OTHERS AND THEN ARRIVE AT THE ARMS LENGTH PRICE. HE REPEATED HIS CONTENTION T HAT THESE METHODS ARE NOT APPROVED UNDER THE STATUTE AND HENCE THE ISSUE MAY BE SET ASIDE TO THE FILE OF THE AO IN THE LINE WITH THE DECISION OF THE TRIBUNAL IN THE CASE OF TEJ DIAM (SUPRA). 11. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL OF THE PAPE RS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAW CITED , WE HOLD AS FOLLOWS. 12. ON GROUND NO.1, THE FIRST APPELLATE AUTHORITY A T PARA 2.4 OF HIS ORDER HELD AS FOLLOWS : 2.4 I AGREE WITH THE ABOVE JUDGEMENTS OF HONBLE S UPREME COURT AND MORE SPECIFICALLY IN THE CONTEXT OF PROVISIONS OF S ECTION 145A, WITH THE JUDGEMENT OF HONBLE TRIBUNAL IN THE CASE OF ROHA D YE CHEM LTD., AND HOLD ACCORDINGLY. THE AO IS ACCORDINGLY DIRECTED TO MAKE ADJUSTMENT IN THE VALUES OF OPENING STOCK, PURCHASES AS WELL AS SALES AND COMPUTE THE NET ADDITION OR RELIEF TO THE APPELLANT AS THE CASE MAY BE. WE UPHOLD THESE FINDINGS AND DISMISS GROUND NO. 1. 7 13. COMING TO GROUND NO.2, WE UPHOLD THE FINDING OF THE FIRST APPELLATE AUTHORITY THAT THERE IS NO REQUIREMENT UNDER LAW TH AT THE CHARTERED ACCOUNTANT CERTIFYING THE ACCOUNTS, SHOULD ALSO THE C.A. FOR I SSUING A CERTIFICATE IN FORM NO. 10CCA FOR THE PURPOSE OF CLAIMING DEDUCTION U/S 80I B. THE DEDUCTION CANNOT BE DENIED ON THIS GROUND. THUS WE UPHOLD THE ORDER OF THE CIT(APPEALS) AT PARA 3.6, AND DISMISS GROUND NO.2 OF THE REVENUE. 14. COMING TO GROUND NO.3, WHICH IS ON THE DISALLOW ANCE U/S 14A, THE GRIEVANCE OF THE REVENUE IS THAT THE CIT(APPEALS) HAS NOT FOL LOWED THE DECISION OF THE ITAT, SPECIAL BENCH, IN THE CASE OF DAGA CAPITAL MANAGEME NT P. LTD. THIS DECISION HAS BEEN PARTLY OVERRULED BY THE HONBLE BOMBAY HIGH CO URT IN THE CASE OF GODREJ BOYCE MFG. CO. 234 CTR 1, WHERE IT IS HELD THAT REA SONABLE DISALLOWANCE MAY BE MADE U/S 14A. THE ASSESSEE IN THIS CASE HAS EARNED DIVIDEND OF RS.10,72,170/-. THE ASSESSEE DISALLOWED 1% OF THE CLAIM AS REASONAB LE EXPENSES. THE AO, APPLYING RULE 8D, DISALLOWED RS.30,000,172/-. THE F IRST APPELLATE AUTHORITY RESTRICTED THE DISALLOWANCE TO RS.1,00,000/- WHICH IS ABOUT 10% OF THE DIVIDEND INCOME EARNED. IN OUR CONSIDERED OPINION, THIS IS A REASONABLE DISALLOWANCE. HENCE WE DISMISS GROUND NO.3 OF THE REVENUE. 15. COMING TO GROUND NO.4, BOTH THE ASSESSEE AS WEL L AS THE AO HAVE NOT FOLLOWED THE STATUTORY REQUIREMENTS. THE PROVISIONS OF THE ACT AND RULES HAVE BEEN TOTALLY IGNORED. ENTERPRISE LEVEL OPERATING PR OFITS ARE SOUGHT TO BE IMPOSED AS MARGINS EARNED ON AN INTERNATIONAL TRANSACTION WITH AN ASSOCIATED CONCERN. THIS, IN OUR CONSIDERED OPINION, CANNOT BE APPROVED BY US. THOUGH THE ISSUE IS NOT IN DISPUTE, BETWEEN THE PARTIES, THEN THE SAME IS PATE NTLY ILLEGAL, THE TRIBUNAL CANNOT GIVE ITS STAMP OF APPROVAL FOR THE SAME. IT IS THE DUTY OF THE TRIBUNAL TO ENSURE THAT THE PROVISIONS OF THE ACT AND THE RULES ARE FOLLOWE D AND JUST BECAUSE THE REVENUE AS WELL AS THE ASSESSEE AGREED NOT TO FOLLOW THE AC T AND THE RULES AND DO NOT 8 DISPUTE THE SAME BEFORE THE TRIBUNAL, IT DOES NOT P REVENT THE TRIBUNAL FROM ENFORCING THE LAW. IN ANY EVENT, IN THIS CASE THE L EARNED DR HAS CITED THE DECISIONS I.E. IN THE CASE OF TEJ DIAM (SUPRA) AND STARLINE ( SUPRA) WHEREIN THE TRIBUNAL HELD AS FOLLOWS : TNMM REQUIRES COMPARISON OF NET PROFIT MARGINS REA LIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR AN AGGREGATE O F INTERNATIONAL TRANSACTIONS AND NOT COMPARISON OF OPERATING MARGIN S OF ENTERPRISES. 16. THE MUMBAI L-BENCH OF THE TRIBUNAL, ON SIMILAR ISSUE, IN THE CASE OF DCIT VS. M/S ANKIT DIAMONDS IN ITA NO. 6437/MUM/2005, OR DER DATED 26 TH NOV., 2010, HAS SET ASIDE THE ISSUE TO THE FILE OF THE AO FOR F RESH ADJUDICATION IN ACCORDANCE WITH LAW. RESPECTFULLY FOLLOWING THE SAME, WE SET ASIDE THE ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. T HE ASSESSEE IS DIRECTED TO FILE FRESH TRANSFER PRICING STUDY IN ACCORDANCE WITH LAW . 17. IN THE RESULT, THIS GROUND IS ALLOWED FOR STATI STICAL PURPOSES. 18. IN THE RESULT, THE APPEAL OF THE REVENUE IS AL LOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY , 2011. SD/- SD/- (VIJAY PAL RAO) (J. SU DHAKAR REDDY) JUDICIAL MEMBER. ACCOUNTANT MEMBER MUMBAI, DATED: 28 TH JANUARY, 2011. WAKODE 9 COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, L-BENCH (TRUE COPY) BY ORDER ASSTT. REGISTRA R, ITAT, MUMBAI BENCHES, MUMBAI.