S.B. & T INTERNATIONAL LTD, MUMBAI V. DCIT CIR 11(2)(1), MUMBAI

ITA 51/MUM/2017

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1950 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 04-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: UODHALRAJ SINGH
• Assessee Lawyers: DR P DANIEL
• Keywords: Transfer pricing; Earning of tax free income; Rule 8D
• Section: 143(3); 14A; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR, VICE PRESIDENT, AND SHRI SAKTIJIT DEY , JUDICIAL MEMBER IT (TP) A NO. 51 / MUM ./201 7 ( ASSESSMENT YEAR : 20 12 13 ) M/S. S.B. & T. INTERNATIONAL LTD. 9, YUSUF BUILDING ROOM NO.15, 1 ST FLOOR A.R. STREET, PYDHONIE MUMBAI 400 003 PAN AAACS7275C . APPELLANT V/S DY . COMMISSIONER OF INCOME TAX CIRCLE 11(2)( 1 ), MUMBAI . RESPONDENT ASSESSEE BY : DR. P. DANIEL REVENUE BY : SHRI UODHALRAJ SINGH DATE OF HEARING 05 . 11 .2019 DATE OF ORDER 26.11.2019 O R D E R PER SAKTIJIT DEY, J.M. T HE CAPTIONED APPEAL BY THE ASSESSEE ARISES OUT OF THE FINAL ASSESSMENT ORDER DATED 22 ND NOVEMBER 2016, PASSED UNDER SECTION 143(3) R/W SECTION 144C(13) OF THE INCOME TAX ACT, 1961 (FOR SHORT 'THE ACT' ) FOR THE ASSESSMENT YEAR 2012 13, IN PURSUANCE TO THE DIRECTIONS OF LEARNED DISPUTE RESOLUTION PANEL 2 (DRP), MUMBAI. 2 M/S. S.B. & T. INTERNATIONAL LTD. 2. I N TOTAL, THE ASSESSEE HAS RAISED FIVE GROUNDS OF APPEAL. GROUNDS NO.1 AND 2, BEING GENERAL IN NATURE, DO NOT REQUIRE SPECIFIC ADJUDICATION. 3. AS REGARDS GROUND NO.5, DR. P. DANIEL, THE LEANED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS INSTRUCTED HIM NOT TO PRESS T HIS GROUND. HENCE, THIS GROUND IS DISMISSED. 4. IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED THE ADDITION OF ` 17,62,963, ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT RELATING TO SALE OF GOODS TO THE OVE RSEAS ASSOCIATED ENTERPRISES (AE ). 5. BRIEF FACTS ARE, THE AS SESSEE , AN INDIAN COMPANY , IS ENGAGED IN THE BUSINESS OF PROCUREMENT OF RAW MATERIALS LIKE DIAMOND, GOLD, COLOUR STONE, SILVER AND PLATINUM FROM LOCAL MARKET AND AFTER PROCESSING THEM, EXPORTS GOLD STUDDED JEWELLERY TO ITS A ES AS WELL AS OTHERS. BESIDES TH E ABOVE, THE ASSESSEE ALSO TRADES IN CUT AND POLISHED DIAMOND PROCURED MAINLY FROM INDIGENOUS SOURCE. AS STATED BY THE ASSESSING OFFICER, TRADING IN DIAMOND ACCOUNT S FOR MORE THAN 87% OF THE TOTAL TURNOVER OF THE COMPANY FOR THE YEAR UNDER CONSIDERATION. D URING THE TRANSFER PRICING PROCEEDINGS, THE TRANSFER PRICING OFFICER NOTI CED THAT THE ASSESSEE HAS BENCH MARKED THE INTERNATIONAL T RANSACTION RELATING TO EXPORT OF CU T AND POLISHED DIAMOND TO THE A ES BY ADOPTING COST PLUS METHOD (CPM) AS THE MOST APPROPRIAT E METHOD. 3 M/S. S.B. & T. INTERNATIONAL LTD. THE REVENUE EARNED FROM THIS TRANSACTION WAS SHOWN AT ` 66,35,648. THE TRANSFER PRICING OFFICER OBSERVED , THE ASSESSEE HAS NEITHER BENCH MARKED THE TRANSACTION NOR MADE ANY TRANSFER PRICING STUDY REPORT ON THE PLEA THAT THE TRANSACTION AMOUNT IS B ELOW ` 1 CRORE. SINCE , THE ASSESSEE HAD NOT BENCH MARKED THE TRANSACTION, THE TRANSFER PRICING OFFICER CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY TRANSACTIONAL NET MARGIN METHOD (TN MM) SHOULD NOT BE USED TO BENCH MARK THE TRANSACTION. FURTHER, THE TRAN SFER PRICING OFFICER ALSO FORWARDED A LIST OF COMPARABLES SELECTED BY HIM. AS OBSERVED BY THE TRANSFER PRICING OFFICER, THE ASSESSEE NEITHER OBJECTED TO APPLICABILITY OF EXTERNAL TNMM NOR THE SET OF COMPARABLES SELECTED FOR BENCH MARKING THE TRANSACTION WIT H THE A ES. THUS, THE TRANSFER PRICING OFFICER APPLIED THE ARITHMETIC MEAN OF 3.52% OF THE NINE COMPARABLES SELECTED BY HIM TO THE OPERATING COST AND DETERMINE D THE ARM'S LENGTH PRICE OF THE SALES EFFECTED TO THE A ES AT ` 83,98,610, A S AGAINST THE REVENUE EARNED BY THE ASSESSEE OF ` 66,35,648. THE RESULTANT SHORTFALL OF ` 17,62,962, WAS PROPOSED AS UPWARD ADJUSTMENT TO THE ARM'S LENGTH PRIC E OF THE TRANSACTION WITH THE A ES. ON THE BASIS OF ADJUSTMENT PROPOSED BY THE TRANSFER PRICING OF FICER, THE ASSESSING OFFICER COMPLETED THE ASSESSMENT BY ADDING THE AMOUNT OF ` 17,62,962, TO THE INCOME OF THE ASSESSEE. THE ASSESSEE CHALLENGED 4 M/S. S.B. & T. INTERNATIONAL LTD. THE AFORESAID ADDITION BEFORE LEARNED DRP. HOWEVER, LEARNED DRP ALSO UPHELD THE ADJUSTMENT MADE BY THE TRANSFE R PRICING OFFICER. 6. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THE ASSESSEE HAS ALSO ENTERED INTO SIMILAR TRANSACTION WITH NON AES/ UNRELATED PARTIES . THEREFORE, SUCH TRANSACTIONS WITH NON AES/ UNRELATED PARTIES SHOULD BE APP LIED AS INTERNAL TNMM FOR B ENCH MARKING THE TRANSACTION. HE SUBMITTED , WHILE DECIDING IDENTICAL ISSUE IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2011 12, THE TRIBUNAL HAS ACCEPTED INTERNAL TNMM AS THE M OST APPROPRIATE METHOD TO BENCH MARK THE EXPORT OF CU T AND POLISHED DIAMOND TO THE A ES. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELYING UPON THE OBSERVATIONS OF THE TRANSFER PRICING OFFICER AND LEARNED DRP SUBMITTED , SINCE THE ASSESSEE DID NOT OBJECT TO EITHER APPLICABILITY OF EXTERNAL TNMM AS THE MOST APPROPRIATE METHOD AS WELL AS THE SET OF COMPARABLES SELECTED BY THE TRANSFER PRICING OFFICER , THE TRANSFER PRICING OFFICER HAD NO OTHER OPTION BUT TO DETERMINE THE ARM'S LENGTH PRICE BY APPLYING EXTERNAL TNMM AS WELL AS THE COMPARABLE S SELECTED BY HIM. HE SUBMITTED , NEITHER BEFORE LEA RNED DRP NOR BEFORE THE TRIBUNAL, THE ASSESSEE HAS FUR NISHED ANY RELEVANT INFORMATION/ DATA TO JUSTIFY APPLICABILITY OF INTERNAL TNMM. 5 M/S. S.B. & T. INTERNATIONAL LTD. 8. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE DISPUTE BEFORE US IS WITH REGARD TO THE ADJU STMENT MADE TOWARDS ARM'S LENGTH PRICE OF THE EXPORT OF CU T AND POLISHED DIAMOND TO THE A ES AMOUNTING TO ` 66,35,648. IT IS NOTICED , THOUGH , IN PARA 7 OF THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT, THE TRANSFER PRICING OFFICER HAS SPECIFICALLY MENTI ONED THAT AS PER AUDIT REPORT IN FORM NO.3CEB, THE ASSESSEE HAS BENCH MARKED THIS PART ICULAR TRANSACTION APPLYING CPM, HOWEVER, IN SUBSEQUENT PARAGRAPHS HE HAS OBSERVED THAT THE ASSESSEE HAS NEITHER MADE ANY TRANSFER PRICING STUDY REPORT NOR BENCHMARKED THE TRANSACTION ON THE PLEA THAT THE TRANSACTION AMOUNT IS BELOW ` 1 CRORE. FURTHER, THE TRANSFER PRICING OFFICER HAS ALLEGED THAT WHEN CALLE D UPON TO OFFER HIS EXPLANATION/ SUBMISSIONS WITH REGARD TO THE APPLICABILITY OF EXTERNAL TNMM AS WELL AS THE COMPARABL E S SELECTED FOR THAT PURPOSE, THE ASSESSEE DID NOT OBJECT TO IT AND IN THIS CONTEXT, THE TRANSFER PRICING OFFICER HAS REFERRED TO THE ORDER SHEET ENTRY DATED 8 TH OCTOBER 2015. EVEN , LEARNED DRP WHILE DEALING WITH THE OBJ ECTION S ON THIS PARTICULAR ISSUE HAS OBSERVED THAT APART F ROM REFERRING TO RULE 10B(1)(C) AND SUBMITTING THAT UNAUDITED SEGMENTAL ACCOUNT CAN BE RELIED UPON FOR COMPARING PROFITABILITY OF CONTROLLED TRANSACTION WITH UNCONTROLLED TRANSACTION , THE ASSESSEE HAS NOT ADVANCED ANY SPECIFIC ARGUMEN T AGAINST APPLICABILITY OF EXTERNAL TNMM AS WELL AS THE COMPARABLES 6 M/S. S.B. & T. INTERNATIONAL LTD. SELECTED BY THE TRANSFER PRICING OFFICER. THUS, FROM THE AFORESAID FACTS, IT APPEARS THAT THE ASSESSEE HAS NOT FURNISHED ADEQUA TE MATERIAL/ DATA TO JUSTIFY ITS CLAIM OF APPLICABILITY OF INT ERNAL TNMM AS THE MOST APPROPRIATE METHOD EITHER BEFORE THE TRANSFER PRICING OFFICER OR EVEN BEFORE LEARNED DRP. NO DOUBT, WHILE DEALING WITH SIMILAR ISSUE OF ADJUSTMENT MADE TO THE ARM'S LENGTH PRICE OF E XPORT OF STUDDED JEWELLERY TO THE A ES IN THE ASSESS MENT YEAR 2011 12, THE TRIBUNAL IN ITA NO.5189/MUM./2015, DATED 3 RD MAY 2017, HAS HELD THAT INTERNAL TNMM IS THE M OST APPROPRIATE METHOD TO BENCH MARK THE SUBJECT TRANSACTION. HOWEVER , ON A CAREFUL PERUSAL OF THE ORDER PASSED BY THE TRIBUNAL, IT IS OBSERVED THAT IN THE SAID CASE, THE ASSESSEE HAD APPLIED INTERNAL TNMM AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ARM'S LENGTH PRICE OF THE EXPORT TRANSACTION. FURTHER, THE ASSESSEE HAD ALSO FURN ISHED THE RELEVANT INFORMATION/ DATA RELATING TO THE NON AE TRANS ACTIONS WHICH WERE CONSIDERED FOR INTERNAL TNMM. EVEN , THE ASSESSEE HAD FURNISHED THE SEGMENTA L COST ALLOCATION BETWEEN THE AE AND NON AE TRANSACTION S . THUS, AS COULD BE SEEN FROM THE FACTS ON REC ORD, IN ASSESSMENT YEAR 2011 12 THE ASSESSEE D ID FURNISH RELEVANT INFORMATION/DATA IN SUPPORT OF ITS BENCH MARKING APPLYING INTERNAL TNMM. WHEREAS, IN THE FACTS OF THE PRESENT CASE, NO SUCH FACTUAL INFORMATION WAS FURNISHED BY THE ASSESSEE TO SUPPORT THE APPLICABILITY OF INTERNAL TNMM. AT LEAST, NO SUC H FACTUAL I NFORMATION OR DETAIL IS 7 M/S. S.B. & T. INTERNATIONAL LTD. FORTHCOMING EITHER FROM THE ORDERS OF THE REVENUE AUTHORITIES OR HAVE BEEN SUBMITTED BEFORE US BY THE ASSESSEE. IN VIEW OF THE AFORESAID FACTUAL POSITION, AT THIS JUNCTURE , WE CANNOT DIRECT THE ASSESSING OFFICER TO APPLY INTERNAL TN MM BY ACCEPTING THE PLEA OF THE ASSESSEE. IN OUR CONSIDERED OPINION, ASSESSEES CLAIM OF APPLICABILITY OF INTERNAL TNMM HAS TO BE ESTABLISHED BY FURNISHING RELEVANT INFORMATION/ DATA RELATING TO BOTH AE AND NON A E TRANSACTIONS WHICH, AS IT APPEARS, HAS NOT BEEN FURNISHED BEFORE THE DEPARTMENTAL AUTHORITIES. THEREFORE, WE THINK IT APPROPRIATE TO RESTORE THE ISSUE TO THE ASSESSIN G OFFICER/ TRANSFER PRICING OFFICER TO CONSIDER ASSESSEES CLAIM OF INTERNAL TNMM AS THE M OST APPROPRIATE METHOD TO BENCHMARK THE EXPO RT OF DIAMOND TO A ES. IN CASE, THE ASSESSEE IS ABLE TO JUSTIFY THE APPLICABILITY OF INTERNAL TNMM TH R OUGH AUTHENTIC DATA RELATING TO BOTH AE AND NON A E SEGMENT S , THERE SHOULD NOT BE ANY HINDRANCE IN APPLYING INTERNAL TNMM TO BENCH MARK THE SUBJECT TRANSACTI ON AS WAS DIRECTED BY THE TRIBUNAL WHILE DECIDING ASSESSEES APPEAL IN THE ASSESSMENT YEAR 2011 12 CITED SUPRA. ACCORDINGLY, THE ISSUE IS RESTORED BACK TO TH E FILE OF THE ASSESSING OFFICER/ TRANSFER PRICING OFFICER FOR DE NOVO ADJUDICATION AFTER DUE OPPORTU NITY O F BEING HEARD TO THE ASSESSEE . GROUND RAISED IS ALLOWED FOR STATISTICAL PURPOSES. 9. IN GROUND NO.4, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF ` 79,50,776, MADE UNDER SECTION 14A R/W RULE 8D. 8 M/S. S.B. & T. INTERNATIONAL LTD. 10. BRIEF FACTS ARE, DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT AS ON 31 ST MARCH 2012, THE ASSESSEES INVESTMENT IN EXEMPT INCOME YIELDING ASSET STOOD AT ` 25,73,35,000. NOTICING THE ABOVE, HE CALLED UPON THE ASSESSEE TO EXPLAIN WHY EXPENDITURE ATTRIBUTABLE TO INVESTMENT MADE IN EXEMP T INCOME YIELDING ASSET SHOULD NOT BE DISALLOWED UNDER SECTION 14A R/W RULE 8D. IN RESPONSE, IT WAS SUBMITTED BY THE ASSESSEE THAT SINCE IT DID NOT RECEIVE ANY EXEMPT INCOME DURING THE YEAR UNDER CONSIDERATION, NO DISALLOWANCE UNDER SECTION 14A OF THE ACT CAN BE MADE. HOWEVER, REJECTING THE EXPLANATION OF THE ASSESSEE, THE ASSESSING OFFICER PROCEEDED TO COMPUTE THE DISALLOWANCE UNDER SECTION 14A OF THE ACT BY APPLYING THE METHOD PRESCRIBED IN RULE 8D, WHICH WORKED OUT TO ` 79,50,776. THE DISALLOWANCE MADE B Y THE ASSESSING OFFICER WAS UPHELD BY LEARNED DRP. 11. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , SINCE THE ASSESSEE HAD NOT EARNED ANY EXEMPT INCOME DURING THE YEAR, THE PROVISIONS OF SECTION 14A R/W RULE 8D WOULD NOT BE APPLICABLE. IN SUPPORT OF SUCH CONTENTION, HE RELIED UPON THE FOLLOWING DECISIONS: I) CHEMINVEST LTD. V/S CIT, [2015] 378 ITR 33 (DEL.); AND II) PCIT V/S BALLARPUR INDUSTRIES LTD. , ITA NO.51/2016, DATED 13.10.2016 (BOM.). 9 M/S. S.B. & T. INTERNATIONAL LTD. 12. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE OBSERVATIONS OF THE ASSESSING OFFICER AND THE DRP. 13. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. FROM THE STAGE OF ASSESSMENT PROCEEDINGS ITSELF, THE ASSESSEE HAD OBJECTED TO APPLICABILITY OF SECTION 14A OF THE ACT ON THE PLEA THAT IT HAD N OT EARNED ANY EXEMPT INCOME DURING THE YEAR UNDER CONSIDERATION. THE AFORESAID CONTENTION OF THE ASSESSEE HAS REMAINED UNCONTROVERTED. NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE REVENUE TO SUGGEST THAT THE ASSESSEE HAD EARNED ANY EXEMPT INCOME DURING TH E YEAR UNDER CONSIDERATION. NOW, IT IS FAIRLY WELL SETTLED THAT IF ANY PARTICULAR ASSESSMENT YEAR NO EXEMPT INCOME HAS BEEN EARNED, NO DISALLOWANCE UNDER SECTION 14A OF THE ACT CAN BE MADE. EVEN , THE HON'BLE JURISDICTIONAL HIGH COURT IN CASE OF BALLARPUR I NDUSTRIES LTD. (SUPRA) HAS EXPRESSED THE AFORESAID VIEW. THAT BEING THE CASE, THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT CANNOT BE SUSTAINED. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE DISALLOWANCE OF ` 79,50,776. THIS GROUND IS A LLOWED. 14. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 26.11.2019 SD/ - PRAMOD KUMAR VICE PRESIDENT SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, D ATED: 26.11.2019 10 M/S. S.B. & T. INTERNATIONAL LTD. COPY OF THE ORDER FORWARDED TO : (1) THE ASSESSEE; (2) THE REVENUE; (3) THE CIT(A); (4) THE CIT, MUMBAI CITY CONCERNED; (5) THE DR, ITAT, MUMBAI; (6) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY ASSISTANT REGISTRAR ITAT, MUMBAI