UPM KYMMENE INDIA P.LTD, MUMBAI V. DCIT 1(3)(2), MUMBAI

ITA 545/MUM/2017

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9377 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 24-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MALATHI SRIDHARAN
• Assessee Lawyers: SHRI MADHUR AGARWAL
• Keywords: Transfer pricing
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE S/ SHRI B.R. BASKARAN (AM) & RAMLAL NEGI (JM) I.T.A. NO. 545 /MUM/20 17 (ASSESSMENT YEAR 20 12 - 13 ) UPM - KYMMENE INDIA PVT. LTD. A - WING, 208/209 2 ND FLOOR, WESTERN EDGE - II WESTERN EXPRESS HIGHWAY BORIVALI (EAST) MUMBAI - 400 066. PAN : AAACU8545R VS. DCIT - CIRCLE 1(3)(2) AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400020. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY SHRI SHRI MADHUR AGARWAL DEPARTMENT BY S MT. MALATHI SRIDHARAN DATE OF HEARING 0 4 . 7 . 201 7 DATE OF PRONOUNCEMENT 27 . 9 . 201 7 O R D E R PER B.R. BASKARAN (AM) : - THE APP E AL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE ASSESSING OFFICER U/S. 143(3) READ WITH SECTION 144C(13) OF THE I.T. ACT. THE ASSESSEE IS AGGRIEVED B Y THE DECISION OF DISPUTE RESOLUTION PANEL (DRP) IN SUSTAINING THE ADJUSTMENT PROPOSED BY TRANSFER PRICING OFFICER (TPO) TO THE EXTENT OF ` 232.77 LAKHS. 2. THE ASSESSEE - HEREIN IS A WHOLLY OWNED INDIAN SUBSIDIARY OF UPM - KYMMENE CORPORATION, FINLAND. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DISTRIBUTION OF ITS PARENTS COMPANY S ( HEREIN REFERRED TO AS ASSOCIATED ENTERPRISE OR AE ) FILMIC AND PAPER PRODUCTS (SELF ADHESIVE PRODUCTS) . IT MAINLY IMPORT PAPERS AND PLASTIC FILMS FROM ITS ASSOCIATE D ENTERPRIS E IN JUMBO ROLLS AND SLITS THESE JUMBO ROLLS INTO DIFFERENT SIZES AND DISTRIBUTES THEM TO ITS CUSTOMERS. AS PER THE AGREEMENT ENTERED BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISE , IT IS ENTITLED TO A PROTECTIVE MARGIN OF 4% IN CASE OF ITS DISTRIBUTIO N ACTIVITY AND 1% IN CASE OF ITS INDENTING AGENT ACTIVITY. DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAD CARRIED ON DISTRIBUTION ACTIVITY I.E. IT UPM - KYMMENE INDIA PVT. LTD. 2 HAS IMPORTED ADHE SIVE TAPES IN JUMBO ROLLS, SLIT TH O SE JUMBO ROLLS IN DIFFERENT SIZES AND DISTRIBUTED IT T O ITS CUSTOMERS. IN THE TRANSFER PRICING STUDY, THE ASSESSEE CLAIMED ITSELF TO BE A DISTRIBUTOR WITH LIMITED RISK IN INDIA. IT ADOPTED TNNM METHOD FOR BENCHMARKING ITS IMPORT TRANSACTIONS. THE ASSESSEE USED OP/SALES AS THE PLI. THE ASSESSEE HAD DECLARED PROFIT AT 3.16% . IT SELECTED 4 COMPARABLES WHI CH GIVE AN AVERAGE PLI OF 0.39%, THE D ETAILS THEREOF ARE GIVEN BELOW: - SR.NO. NAME OF COMPANY OP/SALES 1 ARMS PAPER LTD. 1.82% 2 DHANALAXMI ROTO SPINNERS LTD. 4.66% 3 JMG CORPORATION LTD. - 7.46% 4 NEERAJ P APER MARKETING LTD. 2.45% AVERAGE 0.39% ACCORDINGLY IT CONTENDED THAT ITS IMPORT TRANSACTIONS WERE AT ARMS LENGTH. THE 3. THE TRANSFER PRICING OFFICER ( TPO ) DID NOT ACCEPT THE CLAIM OF THE ASSESSEE T HAT IT IS A LIMITED RISK DISTRIBUTOR , AS HE NOTICED THAT THE ASSESSEE IS EXPOSED TO ALL TYPES OF BUSINESS RISKS . FURTHER THE TPO HELD THAT THE ACTIVITY OF SLITTING JUMBO ROLLS RESULTS IN VALUE ADDITION. TPO ALSO NOTICED THAT THE ASSESSEE HAS OBTAINED FACTORY LICENSE, PAID EXCISE DUTY AND CARRIED ON OPERATIONS OF VALUE ADDITION THROUGH PLANT AND MACHINERY. ACCORDINGLY, TPO HELD THAT THE ASS ESSEE IS CARRYING ON MANUFACTURING ACTIVITY . EVEN THOUGH, THE ASSESSEE CONTENDED THAT ITS ACTIVITY WAS NOT CONSIDERED TO BE A MANUFACTURING ACTIVITY UNDER EX CISE LAW, TPO DID NOT ACCEPT THE SAME. THE TPO FURTHER NOTICED THAT THE ASSESSEE WAS GETTING A MARGIN OF 1% IN CASE OF INDENTING ACTIVITY, WHEREIN THE ASSESSEE DOES NOT TAKE ANY RISK, THE GOODS DO NOT REACH ITS FACTORY AND IT ALSO DOES NOT CARRY ON ANY VAL UE ADDITION . HOWEVER, I N THE CASE OF DISTRIBUTION ACTIVITY (WHICH WAS CONSIDERED BY THE TPO AS MANUFACTURING ACTIVITY), THE ASSESSEE WAS GETTING 4% I.E. THE ASSESSEE WAS GETTING EXCESS MARGIN OF 3% FOR THE VALUE ADDITION . THE TPO NOTICED THAT 4 COMPARABLE S SELECTED BY THE ASSESSEE ARE CARRYING ON TRADING ACTIVIT IES , WHICH THE TPO CONSIDERED TO BE AKIN TO INDENTING ACTIVITY. OUT OF FOUR COMPARABLES, TPO REJECTED TWO UPM - KYMMENE INDIA PVT. LTD. 3 COMPARABLE S, VIZ., M/S ARMS PAPER LTD. AND M/S JMG CORPORATION LTD. THE R EMAINING TWO COMPAR ABLE S, VIZ., M/S DHANALAXMI ROTO SPINNERS LTD. AND M/S NEERAJ PAPER MARKETING LTD. WERE ACCEPTED BY THE TPO. THE AVERAGE PLI OF BOTH THESE COMPARABLES WORKED OUT TO 3.6%. SINCE TPO CONSIDERED THE TRADING ACTIVIT IES CARRIED ON BY THE COMPARABLE S AS AKIN TO INDENTING ACTIVITY AND SINCE THE ASSESSEE WAS GETTING ADDITIONAL MARGIN OF 3% IN CASE OF DISTRIBUTION ACTIVITY, TPO ADOPTED PLI OF 6.6% (3.6%+ 3%) FOR THE ASSESSEE . 4 . THE O PERATING EXPENSES REPORTED BY THE ASSESSEE INCLUDED EXPENSES OF ` 104.15 LAKHS R ELATING TO PAPER SEGMENT . THOUGH THE ASSESSEE FURNISH ED SEGMENTAL FIGURES, I.E., OPERATIONS PERTAINING TO SELF ADHESIVE LABEL SEGMENT AND PAPER S EGMENT, YET THE TPO DID NOT RECOGNIZE THE SEGMENTAL REPORTS ON THE REASONING THAT THEY WERE NOT AUDITED. ACCORDINGLY HE CONSIDERED THE ABOVE SAID EXPENSES OF ` 104.15 LAKHS AS PART OF SELF ADHESIVE LABEL SEGMENT AND ACCORDINGLY PROCEEDED TO EXAMINE THE ISSUE AT ENTITY LEVEL . 5 . SINCE THE ASSESSEE WAS GIVEN PROTECTIVE MARGIN OF 4%, THE TPO TOOK THE VIEW THAT THE AE IS DETERMINING THE SELLING PRICE OF PRODUCTS SOLD TO THE ASSESSEE BY FIXING THE PROFIT FIRST AND THEN DETERMINING THE COST OF MATERIALS, UNDER REVERSE MECHANISM . A CCORDING LY THE TPO TOOK THE VIEW THAT THE PROFIT OF THE ASSESSEE ACTUALLY DETERM INES THE COST OF IMPORT TO THE ASSESSEE AND NOT THE REVERSE. ACCORDINGLY THE TPO TOOK THE VIEW THAT THE EXTRA PROFIT , IF ANY, THAT ACCRUES TO THE ASSESSEE IS BEING PASSED ON TO THE AE UNDER THE ABOVE SAID REVERSE MECHANISM METHOD. THE ASSESSEE HAD SHOWN T HE OPERATING COST OF RS.6738.83 LAKHS (INCLUDING THAT OF PAPER DIVISION) AND OPERATING INCOME OF RS.6851.12 LAKHS. SINCE THE TPO HAS DETERMINED THE MARGIN AT 6.6%, HE TOOK THE OPERATING COST AT 93.40% OF THE REVENUE AND ACCORDINGLY ARRIVED AT A OPERATING COST AT RS.6398.95 LAKHS. THE DIFFERENCE BETWEEN THE COST SHOWN BY THE ASSESSEE AND THAT DETERMINED BY THE ASSESSING OFFICER WORKED OUT TO ` 339.88 LAKHS. THE RATIO OF TRANSACTION VALUE OF IMPORTS ON THE OPERATING COST WORKED OUT TO 77.91% AND ACCORDINGL Y HE PROPOSED ADJUSTMENT OF ` 264.81 LAKHS , WHICH WAS CALCULATED AT 77.91 % OF DIFFERENCE COST OF ` 339.88 LAKHS. UPM - KYMMENE INDIA PVT. LTD. 4 ACCORDINGLY, THE TPO WORKED OUT THE ADJUSTMENTS TO BE MADE TO THE EXCESS IMPORT OF MATERIAL AT ` 264.81 LAKHS. 6 . THE LD D.R.P CONF IRMED THE ORDER OF TPO IN HOLDING THAT THE ACTIVITY CARRIED ON BY THE ASSESSEE IS A MANUFACTURING ACTIVITY. THE LD DRP DIRECTED INCLUSION OF M/S ARMS PAPER LTD AS A COMPARABLE. HOWEVER, IT CONFIRMED THE REJECTION OF M/S JMG CORPORATION LTD. THOUGH, THE LD DRP DID NOT DISCUSS ANYTHING ABOUT THE ADDITION OF 3% TO THE MARGIN, YET IT APPEARS THAT THE LD DRP HAS UPHELD THE SAME ALSO. SIMILARLY IT DID NOT EXPRESS ITS VIEW ON CONSIDERATION OF EXPENSES AT ENTITY LEVEL WITHOUT EXCLUDING EXPENSES PERTAINING TO PAP ER SEGMENT. 7. THE FIRST GRIEVANCE OF THE ASSESSEE IS ABOUT NON - EXCLUSION OF EXPENSES RELATING TO PAPER SEGMENT. THE LD A.R SUBMITTED THAT THE ASSESSEE HAS QUANTIFIED THE EXPENSES FROM OUT OF AUDITED ACCOUNTS AND HAD DISALLOWED THE SAME WHILE COM PUTING TOTAL INCOME AND ACCORDINGLY ARRIVED AT TOTAL INCOME OF RS.322.84 LAKHS. HE SUBMITTED THAT THE AO HAS ACCEPTED THE SAME AND MADE ADDITION TO THE TOTAL INCOME RETURNED BY THE ASSESSEE. ACCORDINGLY HE SUBMITTED THAT THE ASSESSEE DID NOT CLAIM THE EX PENSES RELATING TO PAPER SEGMENT AMOUNTING TO RS.104.15 LAKHS AS DEDUCTION AT ALL AND HENCE THE TAX AUTHORITIES ARE NOT JUSTIFIED IN INCLUDING THE SAME WHILE DETERMINING ARMS LENGTH PRICE OF IMPORT TRANSACTIONS. 8. THE LD D.R SUBMITTED THAT THE SEGMEN TAL REPORTS WERE NOT AUDITED AND HENCE IT WAS RIGHTLY REJECTED BY TPO. 9. HOWEVER, WE FIND MERIT IN THE CONTENTIONS OF THE ASSESSEE. WE NOTICE FROM THE STATEMENT OF TOTAL INCOME PLACED IN THE PAPER BOOK THAT THE ASSESSEE HAS DISALLOWED THE ABOVE SAID EXPENSES RELATING TO PAPER SEGMENT, WHILE ARRIVING AT THE RETURNED INCOME, I.E., IT HAS QUANTIFI ED THE EXPENSES FROM THE AUDITED FIGURES AND DISALLOWED THE SAME . THE ASSESSEE DISALLOWED THE SAME ON THE REASONING THAT THE PAPER FACTORY DID NOT COMMENCE PR ODUCTION DURING THE INSTANT YEAR. WE NOTICE THAT THE AO HAS ACCEPTED THE SAME, MEANING THEREBY, UPM - KYMMENE INDIA PVT. LTD. 5 HE DID NOT MAKE ANY ADJUSTMENT THERETO EITHER BY WAY OF ENHANCING THE SAID DISALLOWANCE OR REDUCING IT. WHEN THE AO HAS ACCEPTED THE SEGMENTAL FIGURES REPORTE D BY THE ASSESSEE FOR ARRIVING AT THE TOTAL INCOME, IN OUR VIEW, IT MAY BE RIGHT TO PRESUME THAT THE SAID SEGMENTAL FIGURES ARE NOT RELIABLE. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY THE TAX AUTHORITIES ON THIS ISSUE AND DIRECT THAT THE EXPENSES PERTA INING TO PAPER SEGMENT AMOUNTING TO RS.104.15 LAKHS BE EXCLUDED FOR THE PURPOSE OF DETERMINING ALP OF TRANSACTIONS WITH AE. 10. THE NEXT ISSUE CONTESTED BY THE ASSESSEE IS ABOUT THE NATURE OF ACTIVITIES CARRIED ON BY IT, I.E., WHETHER IT IS A DISTRIB UTOR/TRADING TRANSACTION OR MANUFACTURING ACTIVITY. ACCORDING TO THE ASSESSEE, THE OPERATIONS CARRIED ON BY IT BY WAY OF SLITTING THE JUMBO ROLL INTO SMALLER ROLLS AND REPACKING IT WOULD NOT AMOUNT TO MANUFACTURING ACTIVITY. FURTHER, IT CLAIMS TO BE A DI STRIBUTOR WITH LIMITED RISK. THE SAID CLAIMS OF THE ASSESSEE HAVE BEEN REJECTED BY THE TAX AUTHORITIES. 11. WE NOTICE THAT THE ASSESSEE HAS PURCHASED PLANT AND MACHINERY AND INSTALLED THE SAME IN A FACTORY DULY DE TERMINING THE INSTALLED CAPACITY AND ALSO REPORTING ACTUAL PRODUCTION. IT IS ALSO DISCLOSING WASTAGE WHILE PRODUCING SMALLER ROLLS, PAID EXCISE DUTY AND ALSO INCURRED EXPENSES ON POWER AND FUEL. IT HAS OBTAINED LICENSE UNDER THE FACTORY ACT. THE LD DRP HAS TAKEN SUPPORT OF THE DECISION RE NDERED BY HONBLE DELHI HIGH COURT IN THE CASE OF NORTHERN STRIP LTD & ANOTHER VS. ITO, WHEREIN IT WAS HELD THAT CUTTING AND SLITTING OF POLYESTER FILMS WAS A MANUFACTURING ACTIVITY. WE NOTICE THAT THE HONBLE SUPREME COURT HAS ALSO TAKEN AN IDENTICAL VIE W IN THE CASE OF M/S INDIAN CINE AGENCIES VS. CIT (CIVIL APPEAL NO.3649 3650 OF 2003 DATED 12.11.2008). IN VIEW OF THE ABOVE DISCUSSIONS, WE ARE OF THE VIEW THAT THE ACTIVITY CARRIED ON BY THE ASSESSEE IN SLITTING THE JUMBO ROLLS INTO SMALL SIZES SHOULD BE CONSIDERED AS MANUFACTURING ACTIVITY AND ACCORDINGLY UPHOLD THE VIEW TAKEN BY THE TAX AUTHORITIES ON THIS ISSUE. UPM - KYMMENE INDIA PVT. LTD. 6 12. WE NOTICE THAT THE ASSESSEE HAS CONSIDERED IT SELF TO BE A DISTRIBUTOR AND ACCORDINGLY IT HAS SELECTED COMPARABLES, WHICH ARE ENGA GED IN TRADING ACTIVITY. HOWEVER, WE HAVE AGREED WITH THE VIEW TAKEN BY THE TPO THAT THE ACTIVITIES OF THE ASSESSEE RESULTS IN MANUFACTURING ACTIVITY. HENCE THE COMPARABLES SELECTED BY THE ASSESSEE WOULD FAIL IN FUNCTIONALITY TEST. WE FURTHER NOTICE THAT THE TPO, AFTER HAVING HELD THAT THE ASSESSEE IS ENGAGED INTO MANUFACTURING ACTIVITY, HAS CHOSEN TO INCREASE THE MARGIN BY 3% TO THE AVERAGE MARGIN REPORTED BY THE COMPARABLES ENGAGED INTO TRADING. ACCORDING TO TPO, THE SAME WOULD GIVE RESULTS OF CARRYING ON MANUFACTURING ACTIVITY. FURTHER THE TPO HAS TAKEN THE VIEW THAT THE TRADING ACTIVITIES ARE AKIN TO INDENTING AGENCY ACTIVITIES. IN OUR VIEW, THE METHODOLOGY ADOPTED BY THE TPO WAS NOT REALISTI C. IN OUR VIEW, THE COMPANIES ENGAGED IN TRADING ACTIVITIE S CANNOT BE EQUATED WITH AN INDENTING AGENT BECAUSE OF RISK PROFILES ATTACHED TO EACH OF THE ACTIVITY . FURTHER THE PRESUMPTION DRAWN BY THE TPO THAT THE INCREASE OF MARGIN BY 3% WOULD BRING OUT THE RESULT FOR MANUFACTURING ACTIVITY ALSO DOES NOT APPEAR TO BE CORRECT , SINCE IT DOES NOT CONSIDER THE RISKS ATTACHED TO MANUFACTURING ACTIVITY . FURTHER THE ASSESSEE CLAIMS THAT THE ENHANCED MARGIN OF 3% IS A PROTECTIVE MEASURE ADOPTED BY THE AE TO ENSURE PROFITS TO THE ASSESSEE. HENCE, IT CANNOT BE SAID THAT TH ERE WILL ALWAYS BE AN ADDITIONAL MARGIN OF 3% IN CASE OF MANUFACTURING ACTIVITY VIS - - VIS TRADING ACTIVITY. FURTHER THE TPO HAS PRESUMED THAT THE COST OF IMPORT IS DETERMINED BY REVERSE MECHANISM BY DETERMINING THE PROFITS FIRST. THE TPO HAS NOT SUBSTANT IATED THE SAME ON THE BASIS OF RECORD. ACCORDINGLY WE ARE NOT ABLE TO AGREE WITH THE THEORY OF TPO IN ARRIVING AT THE COST OF IMPORT BY REVERSE MECHANISM AND ACCORDINGLY MAKING ADJUSTMENTS. 13. THUS, WE ARE NOT IN AGREEMENT WITH THE APPROACH ADOPTED B Y THE ASSESSEE AS WELL AS THE TPO IN BENCHMARKING THE IMPORT TRANSACTIONS. THE PROPER COURSE, IN OUR VIEW, SHOULD BE TO SELECT COMPARABLES WHICH ARE ENGAGED IN SIMILAR ACTIVITIES OF CONVERTING JUMBO ROLLS INTO SMALLER SIZED ROLLS. ACCORDINGLY WE ARE OF T HE VIEW THAT THIS MATTER REQUIRES FRESH EXERCISE AND EXAMINATION. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY THE TAX AUTHORITIES UPM - KYMMENE INDIA PVT. LTD. 7 ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO. THE ASSESSEE IS DIRECTED TO BENCHMARK THE TRANSACTIONS AFRESH BY SELECTING COMPARABLE WHICH ARE ENGAGED IN SIMILAR ACTIVITIES AND FURNISH THE SAME TO THE AO AND THE ASSESSING OFFICER SHALL DEAL WITH THE SAME IN ACCORDANCE WITH THE LAW. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR S TATISTICAL PURPOSES. ORDER HAS BE EN PRONOUNCED IN THE COURT ON 27 .9 .201 7. SD/ - SD/ - (RAMLAL NEGI ) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 27 / 9 / 20 1 7 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// ( DY./ASSTT. REGISTRAR) PS ITAT, MUMBAI