E I DuPont India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 5336/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3551 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 13-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 29-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY PURI
• Assessee Lawyers: VIJAY IYER; MANONEET DALAL CAS
• Keywords: Transfer pricing; International transaction
• Section: 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B NEW DELHI) BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER AND SHRI K.G. BANSAL, ACCOUNTANT MEMBER I.T.A. NO.5336/D/2010 ASSESSMENT YEAR :2006-07 E.I. DUPONT INDIA PVT. LTD., VS. DEPUTY C.I.T., 7 TH FLOOR, TOWER C, DLF CYBER CIRCLE 11(1), GREENS SECTOR-25A, PHASE-3, NEW DELHI GURGAON. PAN NO.AAACE 2462 M (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI VIJAY IYER & MANONEET DALAL, CAS. RESPONDENT BY : SHRI SANJAY PURI, CIT-DR ORDER PER K.G. BANSAL: AM: THE ASSESSEE-COMPANY HAD FILED ITS RETURN ON 28.11.2006 DECLARING TOTAL INCOME OF `12,47,44,908/-. THE RET URN WAS INITIALLY PROCESSED U/S 143(1) ON 25.12.2007 AND THEREAFTER IT W AS PICKED UP FOR ASSESSMENT BY ISSUING STATUTORY NOTICE U/S 143(2) OF THE AC T. IN THE COURSE OF ASSESSMENT, REFERENCE WAS MADE TO TPO 1(2), NEW DELHI, FOR DETERMINING ARMS LENGTH PRICE OF INTERNATIONAL TRAN SACTIONS ENTERED INTO BY THE ASSESSEE WITH THE ASSOCIATED ENTERPRISES (AE FOR SHORT. THE TPO SUGGESTED UPWARD REVISION BY AN AMOUNT OF `18, 22,82,026/-. THIS ADJUSTMENT WAS MADE BY THE ASSESSING OFFICER AND THE TOTAL INCOME WAS DETERMINED AT `30,70,26,936/- IN THE DRAF T ORDER. THE ASSESSEE FILED OBJECTIONS BEFORE THE LEARNED DISPUTE RESOL UTION PANEL, NEW DELHI (DRP FOR SHORT). HOWEVER, THE DRP APPRO VED THE DRAFT ORDER. CONSEQUENTLY, THE ASSESSMENT ORDER WAS PASSED ON 29.09.2010. 5336-2010-EIDI 2 2. COMING TO THE DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS BY THE TPO, IT IS FOUND THA T THE ASSESSEE HAD SELECTED TRANSACTION NET MARGIN METHOD (TNMM FOR SHO RT), WHICH WAS ACCEPTED BY THE TPO. UNDER THIS METHOD, THE PROFIT LEVEL INDICATOR (PLI FOR SHORT) OF OP/OR WAS APPLIED, ABOUT WHICH A LSO THERE IS NO DISPUTE. FOR WORKING OUT THE PLI, THE ASSESSEE HAD USED THE DATA OF THIS AND EARLIER TWO YEARS. HOWEVER, THE TPO USED THE DATA OF CURRENT YEAR ONLY. THERE IS NO DISPUTE IN THIS MATTER ALSO. T HE ASSESSEE HAD SOUGHT ADJUSTMENT IN RESPECT OF IDLE CAPACITY. THE SAM E HAS BEEN REJECTED BY THE TPO. IT IS MENTIONED THAT FROM THE INFORMATION AVAILABLE IN THE NOTES TO ACCOUNTS OF THE ASSESSEE, IT IS NOT ASCERTAINABLE AS TO HOW THE CAPACITY UTILIZATION HAS B EEN WORKED OUT AT 40% IN ONE PARTICULAR PRODUCT AVAUNT. IT IS FURTH ER MENTIONED THAT THE INSTALLED CAPACITY IN THIS SEGMENT HAS NOT BEEN ASCE RTAINED BY THE AUDITORS THEMSELVES, WHICH HAS BEEN ACCEPTED ON THE BASI S OF THE CERTIFICATE OF THE MANAGEMENT. THIS IS A TECHNICAL M ANNER. THIS HAS ALSO NOT BEEN EXPLAINED BY THE ASSESSEE IN THE COURSE OF ASSESSMENT. IT IS ALSO MENTIONED THAT THE DETAILS OF THE QUANTITY PRODUCED AND VALUE THEREOF HAVE NOT BEEN STATED. THE CAPACITY UTILIZAT ION IN THE COMPARABLES FURNISHED BY THE ASSESSEE HAS ALSO NOT BEEN MEN TIONED AND THUS REASONABLE ACCURATE ADJUSTMENT IN THIS REGARD IS NOT FEASIBLE. 3. THE ASSESSEE HAD FURNISHED DATA IN REGARD TO 18 COMPA RABLE CASES. AS MENTIONED EARLIER, THE TPO UTILIZED ONLY CU RRENT YEARS DATA AND WORKED OUT ARITHMETICAL MEAN OF THE PLI AT 7.08 %. THE COMPUTATION HAS BEEN MADE AS UNDER:- TABLE F S.NO. NAME OF THE COMPANY OPERATING MARGIN ON OPERATING REVENUE(%) 1 BASF INDIA LTD. NC 2 BHAGIRADHA CHEMICALS & INDUSTRIAL LTD. 19.13% 3 BHARAT RASAYAN LTD. 4.19% 4 CHEMINOVA INDIA LTD. 7.60% 5 DEVIDAYAL (SALES) LTD. 9.22% 5336-2010-EIDI 3 6 DHANUKA PESTICIDES LTD. 13.30% 7 FICOM ORGANIC LTD. -15.13% 8 GHARDA CHEMICALS LTD. NA 9 GUJARAJ AGROCHEM LTD. 6.59% 10 HIKAL LTD. 14.00% 11 KILPEST INDIA LTD. 7.96% 12 MAHARASHTRA INSECTICIDE LTD. NA 13 NAGARJUNA AGRICHEM LTD. 13.08% 14 NEW CHEM (INDIA) LTD. 4.56% 15 PHYTO CHEM (INDIA) LTD. 13.20% 16 RALLIS INDIA LTD. 5.14% 17 SABREO ORGANICS GUJARAT LTD. 5.82% 18 SUDARSHAN CHEMICALS LTD. -2.45% ARITHMATIC MEAN 7.08% 3.1 THEREAFTER, THE TPO PROCEEDED TO MAKE THE COMPU TATION OF REQUIRED ADJUSTMENT OF `18,22,82,026/-, WHICH HAS BEE N ADOPTED BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER. THE C OMPUTATION IS AS UNDER:- OPERATING INCOME IN CPP SEGMENT ` 2,75,959,718 OPERATING PROFIT `(-)21,144,078 ARMS LENGTH MARGIN @7.08% ` 161,137,948 DIFFERENCE ` 182,282,026 4. THE ORDER PASSED BY THE ASSESSING OFFICER WAS DISPUTED B EFORE THE DRP. THE LEARNED DRP HEARD THE ASSESSEE. THE LEAR NED DRP APPROVED THE DRAFT ORDER WITH THE FOLLOWING REMARKS: - THE MAIN OBJECTION OF THE ASSESSEE IS REGARDING THE NON CONSIDERATION OF CAPACITY UTILIZATION DATA PROVIDED BY THE ASSESSEE TO THE TPO. THE ASSESSEE FILED BEFORE US ECONOMIC ANALYSIS UPDATION REPORT FOR E.I. DUPONT IND IA LIMITED. THE SET OF DATA PROVIDED BY THE ASSESSEE FOR EIGHTEEN COMPANIES ON SEGMENT OF RELATED PRODUCT WAS CAREFULLY GONE THROUGH. IT WAS FOUND THAT OUT OF TH E EIGHTEEN COMPANIES THE CURRENT YEAR DATA OF PRODUCTI ON AND CAPACITY UTILIZATION ARE NOT AVAILABLE FOR THE CURRENT YEAR FOR 12 COMPANIES. THE FIRST DATA WAS SET EXAMINED IN DETAIL. THE DETAILED AUDITED FINANCIAL ACCOUNTS OF EIGHTEEN COMPANIES PROVIDED BY THE ASSESSEE WERE PERUSED IN DRP PROCEEDINGS. ASSESSING OFFICER HAS IN HIS ORDER CONCLUDED AS: 5336-2010-EIDI 4 ON THE BASIS OF ABOVE DISCUSSION AND ANALYSIS MADE, THE CLAIM FOR COMPARABILITY ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION CANNOT BE ALLOWED TO THE ASSESSEE. THE ASSESSEE NOT FURNISHED REASONABLE ACCURATE DATA AS PER REQUIREMENT OF LAW. THE ASSESSEE HAS NOT FURNISHED APPROPRIATE DOCUMENTATION FOR CARRYING OUT ABOVE ADJUSTMENT. THE DATA FROM WHICH CAPACITY UTILIZATIO N ADJUSTMENT CAN BE CARRIED OUT IS NOT AVAILABLE ON REC ORD. THE DATA WITH RESPECT TO THE ABOVE ADJUSTMENT IS NOT ASCERTAINABLE FROM AUDITED FINANCIALS OF THE ASSESSEE. T HE DATA WITH RESPECT TO COMPARABLES REGARDING CAPACITY UTILIZATION IN THE CASE OF COMPARABLES FOR CARRYING O UT REASONABLY ACCURATE ADJUSTMENT AS PER REQUIREMENT OF L AW IS NOT AVAILABLE. MOST IMPORTANTLY, THE RELIABILITY OF THE ADJUST PREFORMED HAS NOT BEEN PROVED BY THE AR OF THE ASSESSEE. THEREFORE, UNSUBSTANTIATED AND INACCURATE AND NOT RELIABLE CLAIM OF ADJUSTMENT ON ACCOUNT OF CAPAC ITY UTILIZATION IN THE CASE OF THE TESTED PARTY AND THE COMPARABLES WITH RESPECT TO THE CPP SEGMENT, IS HEREBY DISALLOWED. 5. AGGRIEVED BY THIS ORDER, THE ASSESSEE IS IN APPEAL BEF ORE US. IT HAS TAKEN UP SIX GROUNDS IN THE APPEAL. IN GROUND NOS. 3, 4 AND 6, THE DETERMINATION OF ARMS LENGTH PRICE AND CHARGING OF INTEREST U/SS 234B AND 234C HAVE BEEN CHALLENGED. IT IS INTER ALIA MEN TIONED THE LEARNED DRP ERRED IN UPHOLDING THE ORDER OF THE ASSESSING OFFIC ER BY DISREGARDING THE DETAILED COMPUTATION OF ADJUSTMENT F OR DIFFERENCE IN CAPACITY UTILIZATION SUBMITTED FROM TIME TO TIME. I T IS FURTHER MENTIONED THAT THE LEARNED DRP ERRED IN NOT CORRECT LY APPLYING THE PROVISION CONTAINED IN SECTION 92C(2) TO ALLOW THE ASSE SSEE AN OPTION FOR USING DOWNWARD VARIATION OF 5% IN DETERMINING AR MS LENGTH PRICE. FOR THE SAKE OF COMPLETENESS, GROUND NOS.3, 4 AND 6, WH ICH ARE SUBSTANTIVE IN NATURE, ARE REPRODUCED BELOW:- 3. THE HONBLE DRP/LD.ASSESSING OFFICER/LD.TPO HAVE ERRED IN LAW AND IN FACTS IN NOT ACCEPTING THE ECONO MIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WI TH THE PROVISION OF THE ACT READ WITH THE INCOME-TAX RU LES, 1962 (THE RULES), FOR DETERMINATION OF THE ARMS LE NGTH 5336-2010-EIDI 5 PRICE IN CONNECTION WITH THE IMPUGNED INTERNATIONAL TRANSACTION. 4.THE HONBLE DRP HAS ERRED IN LAW AND IN FACTS IN NO T CORRECTLY APPLYING THE PROVISION OF SECTION 92C(2) OF THE ACT TO ALLOW THE APPELLANT AN OPTION FOR USING THE DOWNW ARD VARIATION OF 5% WHILE DETERMINING THE ARMS LENGTH P RICE. --------------------------------------------------- ----------------------------- 6.THE HONBLE DRP HAS ERRED IN LAW AND IN FACTS IN AL LOWING THE LEVY OF INTEREST U/SS 234B AND 234C OF THE ACT BY THE ASSESSING OFFICER. 5.1 IN THE COURSE OF HEARING BEFORE US, THE ASSESSEE SOUGH T TO RAISE AN ADDITIONAL GROUND. HOWEVER, THE GROUND WAS NOT P RESSED BY MENTIONING THAT IT IS ONLY A PLEA, WHICH CAN BE TAKE N UP IN THE COURSE OF ARGUMENTS. 6. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITT ED THAT IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING PRODUCTS, WH ICH FIND APPLICATIONS IN FOOD AND NUTRITION, HEALTH CARE, APP ARELS, HOMES AND CONSTRUCTION, ELECTRONICS AND TRANSPORTATION. TRANSFER PRICING ADJUSTMENT HAS BEEN MADE IN RESPECT OF CROP PROTECTION SEGMENT BEING FUNGICIDES, INSECTICIDES AND HERBICIDES. THE ASSESSE E HAD USED TNMM AND PLI OF OPERATING PROFIT/OPERATING REVENUE. THIS HAS BEEN ACCEPTED BY THE AO. HE HAS ALSO ACCEPTED COMPARABLES PROPOSED BY THE ASSESSEE. ON THE BASIS OF THESE COMPARABLES, HE COMPUT ED MEAN PLI AT 7.08%. THE TURN OVER OF THE ASSESSEE IN THIS SEGM ENT IS ABOUT `227 CRORES AGAINST ABOUT `330 CRORES IN THE EARLIER Y EAR. THE MAJOR DECLINED IS IN RESPECT OF AVAUNT, WHOSE SALE DROPPED TO ABOUT `134 CRORES FROM ABOUT `262 CRORES. THE DECLINE IS ON ACCO UNT OF THE FACT THAT THE FARMERS ARE RAPIDLY ADOPTING BT COTTON, WHI CH REQUIRES ONLY A FEW SPRAYS FOR BOLL-WORM CONTROL. IN THIS SEGMENT THE ASSESSEE HAS INSTALLED CAPACITY OF 2625000 UNITS OUT OF WHICH UTIL IZED CAPACITY IS ONLY 1055820 UNITS. THUS, INSTALLED CAPACITY HAS BEEN UTILIZED ONLY TO THE EXTENT OF 40.22%. ON THE OTHER HAND, THE COMPA RABLE CASES ARE UTILIZING 57.08% OF THE INSTALLED CAPACITY. ACCORDI NGLY, THE ASSESSEE 5336-2010-EIDI 6 HAS MADE ADJUSTMENT IN REGARD TO UNDER-UTILIZATION OF THE CAPACITY. THE AO/TPO HAS NOT GRANTED THIS ADJUSTMENT BY MENTIONI NG THAT IT IS NOT ASCERTAINABLE AS TO HOW THE ASSESSEE COMPUTED CAPACIT Y UTILIZATION AT ABOUT 40%. ACCORDINGLY, IT IS URGED THAT THE ASSESSE E MAY BE GRANTED THE BENEFIT OF CAPACITY UNDER-UTILIZATION. 6.1 OUR ATTENTION HAS BEEN DRAWN TOWARDS WRITTEN SUBMI SSIONS FURNISHED TO THE LEARNED DRP DATED 17.08.2010, WHICH HAVE BEEN PLACED IN THE PAPER BOOK BETWEEN PAGES 310 TO 316. IT WAS REPRESENTED THAT AS PER RULE 10B(3), AN UNCONTROLLED TRANSACTION IS COMPARABLE TO INTERNATIONAL TRANSACTION IF (I) NON E OF THE DIFFERENCES BETWEEN THE TRANSACTIONS ARE LIKELY TO MATERIALLY EFF ECT THE PRICE OR THE COST, OR PROFIT ARISING FROM SUCH TRANSACTION IN THE OP EN MARKET; (II) REASONABLY ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINA TE THE MATERIAL EFFECT OF THE DIFFERENCES. IN THE LIGHT OF THIS PROV ISION IT IS SUBMITTED THAT ADJUSTMENT IN RESPECT OF CAPACITY UNDER-UTILIZAT ION IS NECESSARY, AS REASONABLY ACCURATE ADJUSTMENT HAS TO BE MADE IN RESPEC T OF DIFFERENCE BETWEEN CONTROLLED AND UNCONTROLLED TRAN SACTIONS. THIS VIEW FINDS SUPPORT FROM OECD GUIDELINES AND US TRANSFER PRIC ING REGULATIONS. THE VIEW IS ALSO SUPPORTED BY THE DECISION IN THE CASE OF DCIT VS. VERTEX CUSTOMER SERVICES INDIA (P) LIMITED, I .T.A. NO.1506/D/08, GLOBEL VENTEDGE PVT. LIMITED VS. DCIT, (2010) 37 SOT 1, AND SKODA AUTO INDIA (P) LTD. VS. ACIT (2009), 30 SO T 319. THEREFORE, IT IS ARGUED THAT IF REDUCTION IS GRANTED, NO ADJUSTME NT COULD BE MADE TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF ALIGNING IN TERNATIONAL TRANSACTIONS WITH ARMS LENGTH PRICE. 6.2 IN REPLY, THE LEARNED CIT-DR SUBMITTED THAT THE ONLY DISPUTE IN THIS CASE IS REGARDING CAPACITY UNDER-UTILIZATION ADJU STMENT TO BE MADE TO THE PROFIT DECLARED BY THE ASSESSEE IN RESPECT OF CRO P PROTECTION SEGMENT. ACCORDING TO THE ASSESSEE ADJUSTMENT TO THE EXT ENT OF 6.66% HAS TO BE GRANTED FOR MAKING THE CASE OF THE TE STED PARTY COMPARABLE WITH THE UNCONTROLLED COMPARABLES. HE RE FERRED TO THE 5336-2010-EIDI 7 OECD GUIDELINES, WHICH SUGGEST ADJUSTMENTS ON THIS COUNT. HOWEVER, HE RELIED ON THE ORDER OF THE ASSESSING OFFICER IN THIS BEHALF AND ARGUED THAT DATA FOR MAKING REASONABLY ACCURATE ADJUSTMENT H AD NOT BE FURNISHED BEFORE THE LOWER AUTHORITIES. 6.3 IN THE REJOINDER, THE LEARNED COUNSEL SUBMITTED T HAT FIXED COSTS REMAIN THE SAME IRRESPECTIVE OF THE PERCENTAGE OF CAP ACITY UTILIZATION. THEREFORE, THERE IS A NEED TO MAKE ADJUSTMENT IN RESPE CT OF CAPACITY UNDER-UTILIZATION. 7. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIO NS MADE BEFORE US. WE HAVE DESCRIBED THE HISTORY OF THE CASE I N DETAIL SO AS TO PUT THE FACTS IN PERSPECTIVE. THEREFORE, THESE FACTS N EED NOT BE REPEATED HERE. THE ESSENTIAL FEATURES ARE THAT THERE IS NO DISPUTE REGARDING THE MOST APPROPRIATE METHOD OR THE PLI BET WEEN THE PARTIES. THE ASSESSING OFFICER HAS ACCEPTED THE COMPARABLE CASES FU RNISHED BY THE ASSESSEE WITH THE DIFFERENCE THAT HE HAS USED THE DAT A OF THE CURRENT YEAR. NO DISPUTE IS RAISED BEFORE US IN THIS MA TTER, WHICH IS IN ACCORDANCE WITH RULE 10B(4). IT IS A FACT THAT THE TURN OVER OF THE ASSESSEE HAS DECLINED SIGNIFICANTLY IN RESPECT OF THE PROD UCT NAMED AVAUNT. THIS HAS HAPPENED BECAUSE OF UTILIZATION OF BT COTTON SEEDS BY THE FARMERS, WHICH REQUIRE VERY FEW SPRAYS FOR CONT ROLLING BOLL- WORMS. IT IS A MATTER OF FACT THAT FIXED COSTS REMAIN THE SAME EVEN WHEN THERE IS UNDER UTILIZATION OF CAPACITY. THEREF ORE, THE CASE OF THE ASSESSEE AND THE COMPARABLE CASES HAVE TO BE EXAMINED IN RESPECT OF CAPACITY UTILIZATION SO AS TO MAKE THE CONTROLLED AND UNCONTROLLED TRANSACTIONS COMPARABLE. THE ASSESSEE HAD TAKEN UP THIS P OINT BEFORE THE LEARNED DRP AND EVEN BEFORE THE TPO, AS DISCUSSED A BOVE. HOWEVER, REQUISITE ADJUSTMENT HAS NOT BEEN MADE TO THE PLI OF THE ASSESSEE. IN FACT, NO ATTEMPT HAS BEEN MADE BY ANY OF T HE LOWER AUTHORITIES TO WORK OUT THE ADJUSTMENT TO BE MADE ON THIS ISSUE. ON THE OTHER HAND, THE ASSESSEE HAS WORKED OUT ADJUSTED PLI AT 7.04%. NO ARGUMENT HAS BEEN MADE BY THE LEARNED DR AGAINST SU CH 5336-2010-EIDI 8 ADJUSTMENT IN PRINCIPLE. THE ONLY HURDLE IS STATED TO BE THE LACK OF DATA. THIS IS NOT CORRECT AS THE ASSESSEE HAS FURNISHED THE WORKING OF THE ADJUSTMENT. IN VIEW OF THIS, IT WOULD BE APPROPR IATE TO RESTORE THIS MATTER TO THE FILE OF THE ASSESSING OFFICER TO CONSIDER THE MATTER AFRESH AND WORK THE ADJUSTMENT TO BE MADE IN THIS RESPECT BY WAY OF A SPEAKING ORDER TO BE PASSED AFTER HEARING THE ASSESSEE. 7.1 THE QUESTION REGARDING GRANT OF 5% DEDUCTION FRO M THE MAIN PLI OF THE COMPARABLE CASES CAN BE DECIDED BY THE ASSESSING O FFICER AFTER DECIDING THE AFORESAID ISSUE. 8. THE INTEREST CHARGEABLE U/SS 234B, AND 234C MAY ALSO BE WORKED OUT AGAIN AS PER THE TAX PAYABLE COMPUTED AFT ER MAKING THE ASSESSMENT. 9. IN RESULT, THE APPEAL IS TREATED AS PARTLY ALLOWED AS DISCUSSED ABOVE. THIS ORDER WAS PRONOUNCED IN OPEN COURT ON 08.07.2011 . SD/- SD/- ( C.L. SETHI ) ( K.G. BANSA L ) JUDICIAL MEMBER ACCOUNTANT ME MBER DT.08.07.2011. NS COPY FORWARDED TO:- 1. E.I.D. INDIA PRIVATE LIMITED, 7 TH FLOOR, TOWER C, DLF CYBER GREENS, SECTOR 25A, PHASE-3, GURGAON. 2. DEPUTY COMMISSIONER OF INDIA TAX, CIRCLE 11(1), NE W DELHI. 3. THE CIT 4. THE CIT (A), NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DELHI. TRUE COPY BY ORDER (ITAT, NEW DELHI).