Greenland Exports Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 514/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8485 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 07-09-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 07-03-2016
• Court: TRIBUNAL
• Department Lawyers: DR MILIND MADHUKAR BHUSARI
• Assessee Lawyers: G SITTARAMAN
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , !' . #$#% , & '' ( [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ] ./ I.T.A.NO.514/MDS/2016 / ASSESSMENT YEAR : 2011-12 M/S GREENLAND EXPORTS PVT. LTD 14, SIR THEYAGARAYA ROAD T. NAGAR, CHENNAI 600 017 VS. THE DY. COMMISS IONER OF INCOME TAX CORPORATE CIRCLE 2(1) CHENNAI [PAN AAACG 3488 P] ( )* / APPELLANT) ( +,)* /RESPONDENT) / APPELLANT BY : SHRI G. SITTARAMAN, CA /RESPONDENT BY : DR. MILIND MADHUKAR BHUSARI, CIT / DATE OF HEARING : 07 - 0 9 - 2016 ! / DATE OF PRONOUNCEMENT : 21 - 0 9 - 2016 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER GROUNDS TAKEN BY THE ASSESSEE IN THIS APPEAL AGA INST AN ORDER OF ASSESSMENT PASSED U/S 143(3) OF THE INCOM E-TAX ACT, 1961 (IN SHORT THE ACT) ARE REPRODUCED HEREUNDER: 1. THE AO AND THE DRP ERRED BOTH IN LAW AND FACTS OF THE CASE IN MAKING AN UPWARD ADJUSTMENT OF RS. 1,87,05,079/- TO THE TOTAL INCOME. 2. THE AO AND THE DRP ERRED IN EXCLUDING THE EXPORT INCENTIVE RECEIVED OF RS.1.52 CR AND FOREIGN EXCHANGE GAIN OF RS.0.23 CR IN COMPUTING THE OPERATING INCOME UNDER TNMM. ITA NO.514/16 :- 2 -: 3. THE AO AND THE DRP ERRED IN REJECTING M/S. GARG INDUSTRIES LTD AS A COMPARABLE COMPANY. 4.THE AO AND THE DRP ERRED IN IDENTIFYING M/S. VENU S GARMENTS (INDIA) LTD, A FUNCTIONALLY DIFFERENT COMPANY THAT OF THE APPELLANT AS A COMPARABLE COMPANY. 5. THE AO AND THE DRP FAILED TO APPRECIATE THAT, T HE APPELLANT IS A 100% TRADER EXPORTER AND WHERE AS M/S. VENUS GARM ENTS (INDIA) LTD IS A 100% MANUFACTURER HAVING BOTH EXPORT AND L OCAL SALES. 6. THE APPELLANT THEREFORE PRAYS THAT THE UPWARD ADJUSTMENT OF RS. 1,87,05,079/- TO THE TOTAL INCOME BE DELETED. 2. GROUND NOS. 1 AND 6 ARE GENERAL NEEDING NO ADJUDICA TION. 3. SUPPORTING ITS GROUND NO.2, LD. AR SUBMITTED THAT ASSESSEE WAS A 100% EXPORTER OF TEXTILE GARMENTS. AS PER TH E LD. AR, ASSESSEE HAD FOLLOWED TNM METHOD IN ITS TP STUDY AND WHILE W ORKING OUT THE PROFIT LEVEL INDICATOR(PLI) HAD INCLUDED EXPORT INC ENTIVE, DUTY DRAWBACK AND FOREIGN EXCHANGE GAIN AS OPERATIONAL I NCOME. HOWEVER, AS PER THE LD. AR, TPO HELD SUCH INCOME TO BE NOT D ERIVED FROM CORE BUSINESS ACTIVITY OF THE ASSESSEE. AS PER THE LD. AR, WHEN THE ASSESSEE APPROACHED DRP, IT APPROVED THE TREATMENT GIVEN BY THE TPO CITING FOLLOWING REASONS: (I) DELHI BENCH OF THIS TRIBUNAL IN THE CASE OF G OODYEAR INDIA LTD VS DCIT[2013] 43 ITD 35 HAD HELD EXPORT INCENTIVES TO BE NOT A PART OF OPERATING INCOME. ITA NO.514/16 :- 3 -: (II) FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS HAD NOTHING TO DO WITH THE BUSINESS OPERATIONS OF THE ASSESSEE SI NCE EACH GAIN/LOSS WAS DEPENDENT ON THE RESPECTIVE MANAGEMENT POLICY OF THE COMPANY. 4. NOW, BEFORE US, LD. AR ASSAILING THE ORDERS OF THE AUTHORITIES BELOW SUBMITTED THAT THERE WERE A LOT OF DECISIONS IN FAVOUR OF THE ASSESSEE BY VARIOUS BENCHES OF THE TRIBUNAL, HOLDIN G THAT EXPORT INCENTIVES AND FOREX GAINS WERE OPERATIONAL IN NATU RE. SPECIFIC RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS: (I) DCIT VS WELSPUN ZUCCHI TEXTILES LTD[2014] 61 SOT 680 (MUM) - DUTY DRAWBACK. (II) WELLSPUN ZUCCHI TEXTILES LTD VS ACIT [2013] 83 DTR 293(MUM) - DUTY DRAWBACK. (III) GE HEALTHCARE BIO-SCIENCES LTD VS DDIT[2016] 68 TAXMANN.COM 369 CHENNAI EXCHANGE GAIN (IV) ROLLS-ROYCE INDIA (P) LTD VS DCIT [2016] 133 DTR 14(DELHI) EXCHANGE GAIN (V) CAPITAL IQ INFORMATION SYSTEMS(INDIA) PVT. LTD VS D CIT [2013] 57 SOT 14(HYDERABAD) EXCHANGE GAIN 5. PER CONTRA, LD. DR SUPPORTED THE ORDERS OF THE AUTH ORITIES BELOW. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONT ENTIONS. INSOFAR AS DUTY DRAWBACK AND EXPORT INCENTIVES ARE CONCERNED, THE CASES RELIED ON BY THE LD. AR DO SUPPORT ASSESSEE S CASE. AS FOR THE CASE OF GOODYEAR INDIA LTD (SUPRA) RELIED ON BY THE ASSESSING OFFICER, THE ISSUE WAS WHETHER EXPORT INCENTIVE AND REBATE C OULD BE REDUCED ITA NO.514/16 :- 4 -: FROM COST OF GOODS. WHAT WAS HELD WAS THAST SUCH I NCENTIVES WERE AVAILABLE TO AN ASSESSEE ONLY AFTER THE EXPORTS WE RE MADE AND THEREFORE, COULD NOT GO TO REDUCE THE COST OF GOODS . ON THE OTHER HAND, IN THE CASES RELIED ON BY THE ASSESSEE, IT H AS BEEN UNIFORMLY HELD THAT SUCH INCENTIVES WERE TO BE CONSIDERED AS PART OF OPERATIONAL INCOME UNDER TNM METHOD WHILE WORKING OUT THE MARGI N OF AN ASSESSEE FOR COMPARABILITY. AS FOR EXCHANGE GAINS, THERE IS NO CASE FOR THE REVENUE THAT IT WAS EARNED THROUGH ANY HEDG ING OR SPECULATIVE ACTIVITY. IT IS NOT DISPUTED THAT SUCH GAINS WERE ON ACCOUNT OF TRANSACTIONS RELATED TO THE EXPORTS. HENCE, SUCH GA INS, AS HELD IN THE CASES RELIED ON BY THE LD. AR, HAS TO BE CONSIDERED AS OPERATIONAL IN NATURE. HENCE, WE SET ASIDE THE ORDERS OF THE AUTH ORITIES BELOW ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER/TPO TO REWORK THE RESULTS OF THE ASSESSEE AFTER CONSIDERING HE ABOVE TERMS AS O PERATIONAL IN NATURE. NEEDLESS TO SAY SAME TREATMENT SHALL BE FO LLOWED WHILE WORKING OUT THE AVERAGE PLI OF THE COMPARABLES AS W ELL. ORDERED ACCORDINGLY. GROUND NO.2 OF THE ASSESSEE IS ALLOW ED. 7. ON ITS GROUND NO.3 SEEKING INCLUSION OF M/S GARG IN DUSTRIES LTD, NO ARGUMENTS WERE ADVANCE BY THE LD. AR. IN T HE WRITTEN SUBMISSIONS ALSO NOTHING REGARDING THIS GROUND IS M ENTIONED. ACCORDINGLY, GROUND NO.3 IS DISMISSED AS NOT PRESSE D. ITA NO.514/16 :- 5 -: 8. ADVERTING TO GROUND NOS. 4 AND 5, LD. AR SUBMITTED THAT M/S VENUS GARMENTS LTD (IN SHORT VGL) WAS A MANUFACT URER EXPORTER AND NOT A TRADER EXPORTER. THUS, ACCORDING TO THE LD. AR, SAID COMPANY WAS FUNCTIONALLY DISSIMILAR TO THE ASSESSEE AND HA D TO BE EXCLUDED FROM THE SELECTED COMPARABLES. FURTHER, ACCORDING TO HIM, M/S VGL HAD RELATED PARTY TRANSACTIONS EXCEEDING 25%. 9. PER CONTRA, LD. DR SUPPORTED THE ORDERS OF THE AUTH ORITIES BELOW. FURTHER ACCORDING TO HIM, THE ISSUE OF RPT WAS NEVER RAISED BY THE ASSESSEE BEFORE ANY OF THE LOWER AUTHORITIES. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDERS. IT IS NOT DISPUTED BY THE REVENUE THAT M/S VGL WAS A MANUFACTURER EXPORTER WHEREAS ASSESSEE WAS A TRADING EXPORTER. LOWER AUTHORITIES HAD STILL CONSIDERED IT TO BE A GOOD COMPARABLE ON A PREMISE THAT BOTH WERE IN SAME LINE OF BUSINESS AND EXACT PRODUCT PRO FILE SIMILARITY WAS NOT A CARDINAL REQUIREMENT. IT IS TRUE THAT IN A TNM METHOD MATCHING OF EXACT PRODUCT PROFILE IS NOT ESSENTIAL. IN FACT , THIS IS RARELY POSSIBLE. HOWEVER, THE QUESTION HERE IS NOT MATCHING OF PROFI LE AS SUCH. THERE IS A CARDINAL DIFFERENCE IN METHOD OF PROCURE MENT OF THE GARMENTS FOR SALE. NATURE OF EXPENDITURE AND BUSIN ESS ENVIRONMENT OF A MANUFACTURER IS DIFFERENT FROM THAT OF A TRADER. A GARMENT TRADER CANNOT BE CONSIDERED AS FUNCTIONALLY SIMILAR TO A G ARMENT ITA NO.514/16 :- 6 -: MANUFACTURER. HENCE, IN OUR OPINION, M/S VGL HAD T O BE EXCLUDED FROM THE LIST OF COMPARABLES. ORDERED ACCORDINGLY. GROUND NO.5 OF THE ASSESSEE IS ALLOWED. 11. LD. ASSESSING OFFICER/TPO IS DIRECTED TO REWORK THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS BASE D ON OUR DIRECTION IN PARAS SUPRA. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST SEPTEMBER, 2016, AT CHENNAI. SD/- SD/- ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( !' . #$#% ) (ABRAHAM P. GEORGE) & / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 21 ST SEPTEMBER, 2016 RD &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF