Oren Hydro Carbons Pvt Ltd., CHENNAI V. DCIT, CHENNAI

ITA 532/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8533 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 11-08-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 08-03-2016
• Court: TRIBUNAL
• Department Lawyers: R MOHAN
• Assessee Lawyers: K RAVI
• Keywords: Transfer pricing; International transaction
• Section: 92C; 143(3)

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 532/MDS/2016 / ASSESSMENT YEAR :20 11 - 1 2 M/S. OREN HYDRO CARBONS PVT. LTD., 28/2B SARAVANA STREET, T. NAGAR, CHENNAI 600 017. [PAN: A A A C O3649L ] VS. THE DEPUTY COMMISSIONER OF INCOME TAX , CO MPANY CIR CLE 5(1) , CHENNAI . ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI K. RAVI, ADVOCATE / RESPONDENT BY : S MT. R. MOHAN , CIT / DATE OF HEARING : 1 1 . 0 8 .201 6 / DATE OF P RONOUNCEMENT : 09 . 0 9 .201 6 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER : TH I S APPEAL FILED BY THE ASSESSEE EMANATES AGAINST THE ORDER OF THE ASSESSING OFFICER DATED 11.01.2016 PASSED UNDER SECTION 143(3) R.W.S. 92CA R.W .S. 144C(1) OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT], WHICH IS IN TURN PASSED CONSEQUENT TO THE ORDER OF THE DISPUTE RESOLUTION PANEL 2, BANGALORE DATED 28.12.2015 UNDER SECTION 143(3) R.W.S. 144C OF THE ACT. THE ASSESSEE HAS RAISED THE FOLLOWING GRO UNDS: I.T.A. NO . 532 /M/ 1 6 2 2. UPWARD ADJUSTMENT ON THE ARMS LENGTH PRICE OF ASSOCIATED ENTERPRISE FOR RS.83,50,719/ - A) THE ASSESSING OFFICER AND THE TRANSFER PRICING OFFICER ERRED IN NOT CONSIDERING THE SUBMISSIONS MADE BEFORE THEM WITH RESPECT TO THE TRANSFER PRICING S TUDY SUBMITTED BY THE APPELLANT. B) THE ASSESSING OFFICER AND THE TRANSFER PRICING OFFICER ERRED IN NOT CONSIDERING THE ALTERNATIVE STUDY PROVIDED UNDER TNMM WHEREIN IT IS CLEAR THAT THE ASSESSEE HAS ADOPTED THE ARMS LENGTH PRICE. C) THE DISPUTE RESO LUTION PANEL ERRED M NOT CONSIDERING THE CASE LAWS (JURISDICTIONAL TRIBUNAL) RELIABLE CASHEW CO. [2015] 62 TAXMANN.COM 282 (CHENNAI - TRIB.)(PARA6) AND IHG IT SERVICES (INDIA) (P.) LTD. V. ITO [2013] 144 ITD 16/33 TAXMANN.COM 1 (DELHI) (SB) (PARA 8) SUBMIT TED BEFORE THEM. D) THE ASSESSING OFFICER AND THE TRANSFER PRICING OFFICER ERRED IN NOT CONSIDERING THAT IN ORDER TO BRING CLARITY AND RESOLVING THE CONTROVERSY THE PROVISO WAS SUBSTITUTED BY FINANCE (NO2) ACT, 2009. THE SUBSTITUTED PROVISO NOT ONLY MAD E IT CLEAR THE INTENT THAT 5% TOLERANCE BANK IS NOT A STANDARD DEDUCTION BUT ALSO CHANGED THE BASE OF DETERMINATION OF THE ALLOWABLE BAND, LINKED IT TO TRANSACTION PRICE INSTEAD OF THE EARLIER BASE OF ARITHMETIC MEAN. E) THE ASSESSING OFFICER /TPO ERRED IN THE UPWARD REVISION OF THE ARMS LENGTH PRICE WITHOUT CONSIDERING SECTION 92C WHICH CLEARLY STATES THAT THE MOST APPROPRIATE METHOD REFERRED TO IN SUB SECTION (1) SHALL BE APPLIED FOR DETERMINATION OF ARMS LENGTH PRICE IN THE MANNER PRESCRIBED AND PROVI DED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM'S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AM OUNT NOT EXCEEDING FIVE PER CENT OF SUCH ARITHMETICAL MEAN. F) THE ASSESSING OFFICER ERRED IN NOT CONSIDERING THAT THE APPELLANT IS ENTITLED FOR THE BENEFIT OF 5% TOLERANCE MARGIN FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATI ONAL TRANSACTION AS VARIATION BETWEEN THE ARM'S LENGTH PRICE COMPUTED BY THE TRANSFER PRICING OFFICER AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN WHICH DOES NOT EXCEED 5% OF THE LATTER. G) THE ASSESSING OFFICER AND THE TRANSFER PRICING OFFICER ERRED IN NOT CONSIDERING THAT OUT OF THE TWO CHEMICALS, IN THE CASE OF ONE OF THE CHEMICALS THE APPELLANT WAS ONLY A TRADER AND CONSEQUENTLY THE PRICE WAS NOT DETERMINED BY IT. H) THE ASSESSING OFFICER ERRED IN NOT CONSIDERING T HAT THE SECOND PROVISO TO SECTION 92C(2) IS TO BE READ INDEPENDENTLY OF THE FIRST PROVISO AND THE LEVERAGE OF 5% IS TO BE ALLOWED IN THE CASE OF THE APPELLANT. THAT THE TWO PROVISIONS WERE TO BE READ INDEPENDENTLY WAS LAID DOWN BY THE ORDER OF THE SPECIAL BENCH IN THE CASE OF I.T.A. NO . 532 /M/ 1 6 3 IHG IT SERVICES (INDIA) (P.) LTD. V. ITO [2013] 144 ITD 16/33 TAXMANN.COM 1 (DELHI). 2. AT THE TIME OF HEARING, THE ASSESSEE ONLY PUT ARGUMENTS WITH REFERENCE TO ENTITLEMENT OF BENEFIT OF + 5% TOLERANCE MARGIN FOR THE PURPOSE OF DETE RMINING THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION AS VARIATION BETWEEN THE ARM S LENGTH PRICE COMPUTED BY THE TRANSFER PRICING OFFICER [TPO] AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN WHICH DOES NOT EXCEED 5 % OF THE LATTER, THEREBY MAKING UPWARD ADJUSTMENTS ON THE ARM S LENGTH PRICE AT .83,50,719/ - . 3. FACTS OF THE CASE ARE THAT THE ASSESSEE M/S. OREN HYDROCARBONS PVT. LTD. IS A CLOSELY HELD PRIVATE LIMITED COMPANY AND THE ENTIRE SHARE CAPITAL IS HELD BETWE EN MR. RIZWAN AHMAD, CHAIRMAN & MANAGING DIRECTOR OF THE COMPANY AND MRS. SAYEEDA AHMAD, DIRECTOR OF THE COMPANY. THE COMPANY IS ENGAGED IN THE MANUFACTURING, TRADING AND EXPORT OF SPECIALIZING MUD CHEMICALS USED IN OIL AND GAS EXPLORATION. INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE COMPANY: S.NO. NATURE OF INTERNATIONAL TRANSACTIONS AMOUNT OF INTERNATIONAL TRANSACTIONS METHOD ADOPTED FOR EACH TRANSACTION 1. EXPORT OF FINISHED & TRADING GOODS 45,04,25,383 CUP 2. PURCHASE OF RAW MATERIALS & EQU IPMENTS 37,43,776 3. REIMBURSEMENT OF SHIPMENT EXPENSES 16,94,695 TOTAL .45,58,63,854/ - I.T.A. NO . 532 /M/ 1 6 4 ON VERIFICATION OF THE DETAILS FILED, THE FOLLOWING PRICE VARIATIONS IN THE PRODUCTS SPECIFIED WERE IDENTIFIED AND ASSESSEE HAS ADOPTED INTERNAL CUP FOR ALP DETERMINATION. S. NO . NAME OF THE PRODUCT RATE PER UNIT METRIC TON ADOPTED FOR AE . RATE PER UNIT METRIC TON ADOPTED FOR NON - AE . DIFFERENCE BETWEEN 3&4 . % OF DIFFERENCE OVER 3 PRODUCTS WITH DIFFERENCE MORE THAN 5% DIFFERENCE AMOUNT CALCULATION 1 2 3 4 5 6 7 8 1. ASPHSOL SUPREME 977.80 1,015.27 37.47 3.83% 186976 2. BARITE 1.5 MT JUMBO BAGS 4,320.36 4,400.45 80.90 1.85% 1923320 3. BENTONITE (PROCESSED) 3,301.27 3,432.60 131.33 3.98% 235687 4. BENTONITE (UNPROCESSED) 1,846.84 1,905.37 58,5 3 3.17% 57998 5. POLY ANIONIC CELLULOSE 70,641.92 72,427.87 1,785.95 2.53% 2283107 6. RESINATED LIGNITE 30,890.58 32,468.84 1,578.26 5.11% 5.11% 3647846 7. SODIUM CHLORIDE (SALT) 2,884.20 4,047.57 1,163.37 40.34% 40.34% 8. SODIUM SILICATE 3,481.88 3 ,514.76 32.88 0.94% 15784 TOTAL 8350719 ACCORDINGLY, THE TPO MADE ADDITION OF .83,50,719/ - . THE ASSESSEE CARRIED THE MATTER BEFORE THE DRP FOR ITS DIRECTIONS. THE DRP CONFIRMED THE ORDER OF THE TPO. ACCORDINGLY, THE ASSESSING OFFICER MADE ADDITI ON OF .83,50,719/ - . 4. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LD. AR PLEADED THAT THE LOWER AUTHORITIES CONSIDERED ONLY THE FIRST PROVISO TO SECTION 92C(2) OF THE ACT AND NOT CONSIDERED THE SECOND PROVISO TO THE SECTION 92C(2) OF THE ACT SO AS TO GRANT THE BENEFIT OF + 5% TOLERANCE MARGIN FOR THE PURPOSE OF DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION AS VARIATION BETWEEN THE ALP COMPUTED BY THE TPO AND PRICE AT WHICH INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKE N, WHICH DOES NOT EXCEED 5% EXCEPT IN CASE OF RESINATED LIGNITE AND SODIUM CHLORIDE (SALT). ACCORDING TO HIM, I.T.A. NO . 532 /M/ 1 6 5 ANY ADJUSTMENT TO BE MADE FOR THE PURPOSE OF DETERMINING ALP, ONLY THESE PRODUCTS HAS TO BE CONSIDERED FOR DETERMINING ALP AND NOT OTHER CASES LES S THAN 5%. FOR THIS PURPOSE, HE RELIED ON THE ORDER OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF RELIABLE CASHEW CO. (P) LTD. V. ACIT IN I.T.A. NO. 2237/MDS/2013 DATED 04.09.2015, WHEREIN IT WAS HELD THAT THE SECOND PROVISO TO SECTION 92C(2) OF T HE ACT HAS TO BE READ INDEPENDENTLY AND CANNOT BE READ IN COMBINATION WITH FIRST PROVISO AND THE TPO IS NOT JUSTIFIED IN NOT ALLOWING + 5% TOLERANCE MARGIN WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION AS VARIATION BETWEEN THE ALP WHEN ONCE PR ICE BASED ON A PARTICULAR METHOD OF ALP IS APPLIED. 5. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT ALP HAS TO BE DETERMINED AS PER STATUTORY PROVISIONS AND THEREFORE, THE CONCESSION OF 5% CANNOT BE READ IN THE STATUTE BY INTERP RETATION AS STATED BY THE LD. AR. THIS PROVISO IS APPLICABLE WHERE MORE THAN ONE PRICE IS DETERMINED AND THEREAFTER, THE MEAN OF SUCH PRICE IS TAKEN TO BE ALP. HOWEVER, IF THERE IS ONLY ONE COMPARABLE INSTANCE , THE BENEFIT OF + 5% CANNOT BE GIVEN. HE RELIED ON THE ORDER OF THE DEL HI BENCHES OF THE TRIBUNAL IN THE CASE OF ACIT V. UE TRADE CORPORATION (INDIA) (P) LTD. IN I.T.A. NO. 4405/DEL/2009 DATED 24.12,2010. 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IN THIS C ASE, THE MAIN CONTENTION OF I.T.A. NO . 532 /M/ 1 6 6 THE ASSESSEE S COUNSEL IS THAT THE ASSESSEE IS ENTITLED FOR THE BENEFIT OF + 5 % TOLERANCE MARGIN FOR THE PURPOSE OF DETERMINING THE ALP OF INTERNATIONAL TRANSACTION IN RESPECT OF ITEM EXCEPT RESINATED LIGNITE AND SODIUM CHLORIDE (SALT) AS THE VARIATION BETWEEN THE PRICE COMPUTED BY THE TPO AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN WHICH DOES NOT EXCEED 5% OF THE LATTER. ADMITTEDLY, IN THIS CASE, THE VARIATION BETWEEN THE PRICE CHARGED TO THE AE AND NON - AE ARE LESS THAN 5% IN RESPECT OF ITEMS OTHER THAN ITEM 6 & 7 IN THE TABLE. AS HELD BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF RELIABLE CASHEW CO. (P) LTD. V. ACIT (SUPRA) AS WELL AS BY THE ORDER OF THE SPECIAL BENCH IN THE CASE OF IHG IT SERVICES (INDIA) (P.) LTD. V. ITO [2013] 144 ITD 16, THE SECOND PROVISO TO SECTION 92C(2) OF THE ACT IS TO BE READ INDEPENDENTLY AND FOR CLARITY, WE REPRODUCE THE PROVISO TO SECTION 92C(2) OF THE ACT HEREIN BELOW: COMPUTATION OF ARM S LENGTH PRICE. 92 C. (1) THE ARM S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : (A) COMPARABLE UNCONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTIONAL NET MARGI N METHOD; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. I.T.A. NO . 532 /M/ 1 6 7 (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB - SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARM S LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED : [PROVIDED THAT WHERE MO RE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDIN G FIVE PER CENT OF SUCH ARITHMETICAL MEAN.] IT WAS INTERPRETED BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF IHG IT SERVICES (INDIA) (P.) LTD. (SUPRA), WHERE, THE BENEFIT OF TOLERANCE MARGIN IS AVAILABLE ONLY WHEN VARIATION BETWEEN THE ALP AS DETER MINED UNDER SECTION 92C(1) OF THE ACT AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ALREADY BEEN UNDERTAKEN, WHICH DOES NOT EXCEED THE TOLERANCE MARGIN. BEING SO, IN OUR OPINION, THERE IS MERIT IN THE PLEA OF THE LD. AR. ACCORDINGLY, WE DIRECT THE T PO TO GRANT THE BENEFIT OF ADJUSTMENT OF + 5% VARIATION WHILE COMPUTING THE ALP IN RESPECT OF PRODUCT MENTIONED IN THE TABLE EXCEPT ITEM 6 & 7. THIS APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 7 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY A LLOWED . ORDER PRONOUNCED ON THE 9 TH SEPTEMBER , 201 6 AT CHENNAI. SD/ - SD/ - ( DUVVURU RL REDDY ) JUDICIAL MEMBER ( CHANDRA POOJARI ) ACCOUNTANT MEMBER CHENNAI, DATED, THE 09 . 0 9 .201 6 VM/ - I.T.A. NO . 532 /M/ 1 6 8 / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.