ARVIVA INDUSTRIES (INDIA) LTD, NAVI MUMBAI V. ACIT C IR 8(1), MUMBAI

ITA 5152/MUM/2009

• Counselvise Citation: 515219914 RSA 2009
• Duration Of Justice: 2 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 12-07-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 09-09-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: C G K NAIR
• Keywords: Transfer pricing; Avoidance of tax
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI A BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER, AND SMT ASHA VIJAYARAGHVAN, JUDICIAL MEMBER ITA NO. 5152/MUM/09 ASSESSMENT YEAR: 2002-0 ARVIVA INDUSTRIES LIMITED ...APPELLANT T/15, MIDC, TALOJA NAVI MUMBAI 410 218 PAN: AAACA5076H VS. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 8(1), MUMBAI 400 020 RESPONDENT APPEARANCES: PRAKASH JOTWANI, FOR THE APPELLANT C G K NAIR, FOR THE RESPONDENT DATE OF RESERVING THE ORDER : SEPTEMBER 06,2011 . DATE OF PRONOUNCING THE ORDER : OCTOBER 21 ___,2011. O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT HA S CALLED INTO QUESTION CORRECTNESS OF ORDER DATED 25 TH AUGUST 2009, PASSED BY THE COMMISSIONER (APPEALS), IN THE MATTER OF ASSESSMENT UNDER SECTIO N 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2002-03. THE SHORT ISSUE THAT WE ARE REQUIRED TO ADJUDICATE IN THIS APPEAL IS WHETHER OR NOT, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER (APPEALS) WAS JUSTIFIED IN CONFIRMING ARMS LENGTH PRICE ADJUSTMENT OF RS 1 1,51,740, MADE BY THE ASSESSING OFFICER, UNDER SECTION 92CA(3) WITH REGAR D TO EXPORTS SALES MADE TO THE AES SITUATED AT PANAMA. I.T.A NO.5152/ MUM/2009 ASSESSMENT YEAR: 2002-03 2 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF, IN TER ALIA, MANUFACTURING AND TRADING IN FABRICS. DURING THE RELEVANT PERIOD , THE ASSESSEE EXPORTED FABRICS TO VARIOUS INDEPENDENT ENTERPRISES TO SEVER AL COUNTRIES, AS ALSO TO ITS ASSOCIATED ENTERPRISES IN UNITED ARAB EMIRATES AND REPUBLIC OF PANAMA. IN THE COURSE OF PROCEEDINGS BEFORE THE TRANSFER PRICI NG OFFICER, TO WHOM A REFERENCE WAS MADE BY THE ASSESSING OFFICER FOR DET ERMINATION OF ARMS LENGTH PRICE, IT WAS NOTED THAT WHILE ASSESSEE HAS SOLD 33,505.46 METERS OF FABRIC DESIGN NO. 52030 @ US $ 1.1592 PER METER TO ITS AE IN PANAMA, 1,100 METERS OF THE SAME FABRIC WAS SOLD TO AN UNRELATED PARTY, I.E. INDEPENDENT ENTERPRISES, IN HONG KONG @ US $ 1.7360 PER METER. WHEN TRANSFER PRICING OFFICER REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO W HY US $ 1.7360 PER METER NOT BE TAKEN AS ARMS LENGTH PRICE, UNDER THE CUP M ETHOD- WHICH ASSESSEE WAS STATED TO BE FOLLOWING, IT WAS SUBMITTED BY THE ASSESSEE THAT THE PRICE CHARGED FOR A SMALL ORDER OF 1,100 METERS OF FABRIC COULD NOT BE COMPARED WITH THE PRICE CHARGED FOR ORDER OF 33,505 METERS. IT WAS ALSO SUBMITTED THAT THE PRICE VARIANCE IS DUE TO SIZE OF THE ORDER AND THE MARKET TERRITORY. THE TRANSFER PRICING OFFICER THEN POINTED OUT AS TO WHY THE RATE OF RS 72 PER METER, ON WHICH HE HAS SOLD THE SAME FABRIC IN THE DOMESTIC MARKET, NOT BE ADOPTED AS AN ARMS LENGTH PRICE, IT WAS SUBMITTED BY THE ASSESSEE THAT THE ADJUSTMENTS ARE REQUIRED TO BE MADE IN THIS PRICE F OR EXPORT INCENTIVES AS ALSO FOR DISCOUNTS, SALES PROMOTION, ADVERTISEMENT EXPEN SES, BROKERAGE, SALES COMMISSION. IT WAS CONTENDED THAT WHEN ALL THESE AD JUSTMENTS ARE DULY ACCOUNTED FOR, THE PRICE REALIZED PER METER FOR DOM ESTIC SALES WORKS OUT TO RS 56.71 PER METER WHICH IS MUCH LESS THAN THE PRICE C HARGED TO THE ASSOCIATED ENTERPRISES. THE TRANSFER PRICING OFFICER REJECTED THIS LINE OF REASONING AS WELL. IN DOING SO, HE OBSERVED THAT WHAT IS SOLD IN THE DOMESTIC MARKET IS THE SURPLUS OF THE EXPORT GOODS, BECAUSE OF THE ASSESSE ES POLICY OF MANUFACTURING 10% HIGHER QUANTITY THAN THE QUANTITY OF THE ORDER RECEIVED SO AS TO MEET ANY UNFORESEEN CONTINGENCY, IT COULD NOT BE SAID THAT ANY I.T.A NO.5152/ MUM/2009 ASSESSMENT YEAR: 2002-03 3 MARKETING OR SALES PROMOTION EXPENSES WERE INCURRED FOR THESE FABRICS. IT WAS ALSO NOTED THAT SINCE DOMESTIC SALES OF SUCH FA BRIC IS IN SMALL QUANTITIES, SUCH SALES DOES NOT REALLY FETCH THE ACTUAL MARKET PRICE. IT WAS ALSO NOTED THAT AS AGAINST THE TAG PRICE OF RS 99 PER METER, THE AS SESSEE IS ACTUALLY SELLING THE FABRIC AT RS 72 PER METER. THE TRANSFER PRICING OF FICER, ACCORDINGLY, ADOPTED THE ARMS LENGTH PRICE AT RS 72 PER METER, WHICH, A S PER HIS CALCULATIONS, WORKED OUT TO US $ 1.5157 AT THE RELEVANT POINT OF TIME. AN ALP ADJUSTMENT WAS, ON THIS BASIS, MADE TO THE SALE OF FABRIC DESI GN NO. 52030 MADE TO ASSESSEES PANAMA BASED AE. THE TRANSFER PRICING OF FICER THEN TOOK NOTE OF THE FACT WHILE THE ASSESSEE HAS EXPORTED TWO LOTS O F 13,696.75 METERS AND 13,701.35 METERS OF FABRIC DESIGN # 55555 TO ITS PA NAMA BASED AE @ US$ 1.2139 AND US $ 1.2295 RESPECTIVELY, WHEREAS THE AS SESSEE HAS SOLD THE SAME TO AN INDEPENDENT PARTY IN MEXICO FOR A PRICE OF US $ 1.4791 PER METER. THE ASSESSEES CONTENTION TO THE EFFECT THAT (I) THE SA LE TO AE WAS ON 150 DAYS DA BASIS, WHICH HAD HIGHER CREDIT PERIOD, AND THAT (II ) THE MEXICO AND PANAMA WERE ALTOGETHER DIFFERENT MARKET, WERE REJECTED BY OBSERVING THAT THE CONTENTIONS ARE NOT EXPLAINED FULLY AND ALSO THE E FFECT OF SUCH DIFFERENCES IN SALES TERMS, IF ANY, IS ALSO NOT WORKED OUT AND D UE TO THIS (ABOVE STATED REASONS) NO ADJUSTMENT IS CONSIDERED NECESSARY TO THE PRICE OF UNCONTROLLED TRANSACTION, FOR COMPARING THE SAME WITH THE CONTRO LLED TRANSACTION. AS REGARDS THE SALE OF FABRIC DESIGN # 55023, EVEN AS THE TRANSFER PRICING OFFICER ACCEPTED THE SALE OF THE SAME TO DUBAI BASED AES @ US $ 1.6697 BY NOTING THAT THE ASSESSEE HAS SOLD THE FABRIC TO ANOTHER DU BAI BASED INDEPENDENT PARTY @ US $ 1.6768 PER METER, HE ADOPTED THE ALP @ US $ 1.888 PER METER FOR EXPORTS TO PANAMA, AS AGAINST SALES MADE BY THE ASSESSEE @ US $ 1.6295 PER METER, ON THE GROUND THAT THE ASSESSEE HAS NO SPECIFIC EXPLANATION. AS REGARDS EXPORTS OF FABRIC DESIGN # 50001, THE TRANS FER PRICING OFFICER NOTED THAT WHILE THE ASSESSEE HAS SOLD THE SAME TO ITS PA NAMA BASED AE @ US $ 2.0016 PER METER, THE ASSESSEE HAS ALSO SOLD THE SA ME TO UNRELATED PARTIES @ US $ 2.1902. THE ASSESSEES EXPLANATION THAT THE SA ME DESIGN IS SOLD TO A SPAIN BASED INDEPENDENT ENTERPRISE @ US $ 1.90 PER METER AND TO A HONG I.T.A NO.5152/ MUM/2009 ASSESSMENT YEAR: 2002-03 4 KONG BASED INDEPENDENT ENTERPRISE @ US $2.38 PER ME TER, WHEREAS THE RATE OF US $ 2.1902 IS PICKED UP ON THE BASIS OF EXPORTS TO DEVELOPED MARKETS ONLY WAS SIMPLY BRUSHED ASIDE. ACCORDINGLY, ALP WAS ADOP TED @ US $ 2.1902 PER METER, AND THE DIFFERENCE WAS ADDED TO ASSESSEES I NCOME. AGGRIEVED, INTER ALIA, BY THE ADDITIONS AS A RESULT OF THE ABOVE ALP ADJUSTMENTS, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. INTERESTINGLY, THE CIT(A) OBSERVED THAT NO COMPARAB LES WERE PRODUCED WITH RESPECT TO TRANSACTIONS WITH PANAMA BASED AE, EVEN AS THE SAME ITEMS WHICH WERE EXPORTED TO PANAMA WERE ALSO EXPORTED TO OTHER COUNTRIES, AND ADDED THAT IT IS ALSO WELL KNOWN THAT PANAMA IS A LOW TA X JURISDICTION AND SOMETIMES REFERRED TO AS TAX HEAVEN AND AS SUCH, MOTIVE OF SHIFTING PROFITS TO PANAMA COULD NOT BE RULED OUT. ON THE BASIS OF THIS REASONING, LEARNED CIT(A) CONCLUDED THAT THE SPECIAL PROVISIONS RELAT ING TO AVOIDANCE OF TAX IS APPLICABLE SO FAR AS IT APPLIES TO SALES TO AE AT P ANAMA AND THAT THE AO WAS JUST IN MAKING ADJUSTMENT ON THE PRICE IN DEALING W ITH PANAMA. ACCORDINGLY, HE CONFIRMED THE ALP ADJUSTMENT ONLY TO THE EXTENT THE SAME WAS MADE FOR EXPORTS TO ASSESSEES AE IN PANAMA. THE ASSESSEE IS AGGRIEVED AND IS IN APPEAL BEFORE US. 3. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 4. WE ARE UNABLE TO SEE ANY MERITS IN THE APPROACH ADOPTED BY THE LEARNED CIT(A) BY SINGLING OUT ASSESSEES TRANSACTIONS WITH PANAMA BASED AES AND SUSTAINING THE ALP ADJUSTMENTS IN RESPECT OF THE S AME. WHETHER AN AE IS A TAX HEAVEN OR NOT, EVEN IF THAT BE SO, THIS FACT HA S NO BEARING SO FAR AS METHOD OF APPLICATION OF ALP DETERMINATION IS CONCERNED. T HE ONLY DIFFERENCE SITUS OF AN ENTERPRISE IN A TAX HEAVEN CAN MAKE IS WITH REGA RD TO ITS TREATMENT AS AN AE, IN THE ABSENCE OF USUAL TRANSPARENCY ABOUT TRUE OWNERSHIP, AND EVEN SUCH A TREATMENT MUST HAVE AN ENABLING PROVISION IN THE TRANSFER PRICING LEGISLATION. IN OTHER WORDS, ON A CONCEPTUAL NOTE, AN ENTERPRISE BEING LOCATED I.T.A NO.5152/ MUM/2009 ASSESSMENT YEAR: 2002-03 5 IN A TAX HEAVEN CAN AT THE MOST BRING SUCH AN ENTER PRISE WITHIN SCRUTINY OF TRANSACTIONS TAKING PLACE AT THE ARMS LENGTH PRICE , AND NOT BEYOND THAT. LEARNED CIT(A)S APPROACH IS DEVOID OF ANY LEGAL BA SIS AND PLAINLY CONTRARY TO THE SCHEME OF THE TRANSFER PRICE PROVISIONS. 5. ON MERITS OF THE ALP ADJUSTMENTS, WE FIND THAT, SO FAR DESIGN # 52030 IS CONCERNED, THERE CANNOT INDEED BE ANY RATIONALE IN COMPARING DOMESTIC INVOICE PRICE OF THE GOODS WITH EXPORT INVOICE PRIC E OF THE GOODS WITHOUT TAKING INTO ACCOUNT NEITHER THE EXPORT INCENTIVES W HICH FORM PART OF THE NET REALIZATION ON ACCOUNT OF EXPORTS NOR FOR THE EXPEN SES, SUCH AS DISCOUNTS AND DOMESTIC SALES PROMOTION EXPENSES, WHICH ARE INCURR ED SOLELY FOR THE PURPOSES OF DOMESTIC SALES. THE TRANSFER PRICING OF FICER WAS CLEARLY IN ERROR IN NOT TAKING INTO ACCOUNT THESE FACTORS WHILE COMP ARING THE PRICES IN DOMESTIC UNCONTROLLED TRANSACTIONS AND INTERNATIONA L CONTROLLED TRANSACTIONS. WE HAVE ALSO NOTED THAT, ACCORDING TO THE ASSESSEE, ONCE THESE FACTORS ARE DULY ACCOUNTED FOR, THE AE PRICES WILL BE LESS THAN PRICES IN TRANSACTIONS WITH UNCONTROLLED ENTERPRISES , AND THAT ASPECT HAS NOT BEEN DISPUTED BY THE AUTHORITIES BELOW. WE HAVE ALSO NOTED THAT THE TRA NSFER PRICING OFFICER HAS ACCEPTED THAT THE ASSESSEE HAS SOLD FABRIC DESIGN # 55023 TO AN INDEPENDENT ENTERPRISE IN UAE @ US $ 1.67 PER METER, AND YET SA LES TO PANAMA BASED AE, WHICH IS SURELY A MUCH SMALLER AND NEWER MARKET FO R THE ASSESSEE, @ US $ 1.62 PER METER ( WHICH IS LESS THAN 3% VARIATION IN PRICE) HAS BEEN REJECTED AT NOT AN ARMS LENGTH PRICE. THIS ACTION IS ALSO THEREFORE UNSUSTAINABLE IN LAW. AS REGARDS EXPORTS OF DESIGN # 50001 AT US $ 2.06 PER METER, WE HAVE NOTED, AS OBSERVED BY THE TPO IN THE ORDER ITSELF, THAT THE ASSESSEE HAS SOLD THE SAME FABRIC TO AN INDEPENDENT ENTERPRISE IN SPA IN AT US $ 1.90 PER METER. WE HAVE ALSO NOTED THAT THE CREDIT TERMS ARE DIFFER ENT AND GEOGRAPHICAL LOCATION OF THE MARKET, AND NATURE OF THE MARKET, I S DIFFERENT. THE PRICE CHARGED TO THE PANAMA BASED AE, WHICH AS WE HAVE NO TED EARLIER, IS EVEN A SMALLER AND NEWER MARKET, AT US $ 2.06 PER METER CA NNOT BE SAID TO BE NOT AN ARMS LENGTH PRICE. THE PRICE CHARGED IN INTRA AE TRANSACTIONS IS CLEARLY MORE I.T.A NO.5152/ MUM/2009 ASSESSMENT YEAR: 2002-03 6 THAN PRICE CHARGED IN INDEPENDENT TRANSACTIONS. ALL THE THREE ALP ADJUSTMENTS SUSTAINED BY THE CIT(A), FOR THIS REASON ALSO AS WELL AS BEARING IN MIND ENTIRETY OF THE CASE, ARE NOT LEGALLY CORRECT. 6. FOR THE REASONS SET OUT ABOVE, WE UPHOLD THE GRI EVANCE OF THE ASSESSEE AND VACATE THE IMPUGNED ALP ADJUSTMENTS AS SUSTAINE D IN APPEAL BY THE CIT(A). THE IMPUGNED ALP ADJUSTMENTS STAND DELETED. 7. IN THE RESULT, THE APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT TODAY ON 21 ST DAY OF OCTOBER, 2011. SD/- SD/- (ASHA VIJAYARAGHAVAN ) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; 21 ST _ DAY OF OCTOBER , 2011 . COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER , MUMBAI 4. DEPARTMENTAL REPRESENTATIVE, BENCH, MUMBAI 5. GUARD FILE TRUE COPY BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI