M/s. H & M Hennes & Mauritz india Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 5479/DEL/2011

• Counselvise Citation: 547920114 RSA 2011
• Duration Of Justice: 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-05-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 07-02-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 07-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN C I T D R TP
• Assessee Lawyers: MANONEET DALAL; VIJAY IYER
• Keywords: Transfer pricing; Rectification of order; Opportunity of being heard; Application of stay
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI A.N. PAHUJA STAY NO. 179/DEL/11 & ITA NO. 5479/DEL/2011 ASSTT. YR: 2007-08 M/S H&M HENNES & MAURITZ VS. ASSTT. COMMISSIONER OF INDIA PVT. LTD. 3 RD FLOOR, INCOME-TAX, CIRCLE-12(1), 211, OKHLA INDUSTRIAL AREA, PHASE-III, NEW DELHI. NEW DELHI. PAN/GIR NO. AABCH6109F (APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI VIJAY IYER CA & SHRI MANONEET DALAL ADV. DEPARTMENT BY : SHRI PEEYUSH JAIN CIT, DR (TP) O R D E R PER R.P. TOLANI, J.M : THESE ARE ASSESSEES APPEAL AND STAY PETITION AGA INST THE ORDER OF ACIT, CIR. 12(1), NEW DELHI DATED 31-10-2011 PASSED U/S 143(3)/R.W.S. 144C OF THE I.T. ACT, 1961 (PURSUANT TO DRP DIRECTI ONS DATED 8-9-2011), RELATING TO A.Y. 2007-08. 2. WE FIRST TAKE UP ASSESSEES APPEAL. THE ASSESSEE HAS RAISED AS MANY AS 13 GROUNDS OF APPEAL TO CHALLENGE THE ORDER OF TPO/ AO/DRP. HOWEVER, THE EFFECTIVE GROUNDS RAISED ARE AS UNDER: STAY NO. 179 & ITA 5479/DEL/11 M/S H&M HENNES & MAURITZ 2 4. THE TPO/AO/DRP HAVE ERRED IN LAW AND IN FACT BY CONSIDERING SALES/ COMMISSION AGENTS AS COMPARABLE TO THE APPELLANT, WHICH ARE NOT COMPARABLE IN VIEW OF THE FUNCTIONAL PROFILE OF THE APPELLANT. 5. THE LEARNED TPO/AO/DRP HAVE ERRED IN LAW AND IN FACT BY NOT CONSIDERING THE BUSINESS SUPPORT COMPANIES S ELECTED BY THE APPELLANT AS COMPARABLE. 6. THE TPO/AO/DRP HAVE ERRED IN LAW AND IN FACT BY NOT ACCEPTING COMPANIES ENGAGED IN PROCUREMENT ACTIVITI ES PROPOSED BY THE APPELLANT AS COMPARABLE. 7. THE LEARNED DRP HAS ERRED IN LAW AND IN FACT BY ACCEPTING COMPANIES SELECTED BY THE TPO EVEN THOUGH THEY ARE NOT COMPARABLE TO THE APPELLANT ON ACCOUNT OF DIFFE RENCES OTHER THAN FUNCTIONAL COMPARABILITY AS WELL. 8. THE LEARNED DRP HAS ERRED IN LAW AND IN FACT BY INCORRECTLY REJECTING ADDITIONAL SALES AGENT COMPAR ABLES PROPOSED BY THE APPELLANT. 9. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE LEAR NED AO/TPO/DRP HAVE ERRED IN COMPUTATION OF THE OPERATI NG MARGINS OF THE COMPARABLE COMPANIES UNDERTAKEN BY T HE TPO. 10. THE LEARNED TPO/AO HAVE ERRED IN LAW AND IN FAC T BY NOT ALLOWING ECONOMIC ADJUSTMENTS FOR DIFFERENCES ON AC COUNT OF RISKS ASSUMED BY THE APPELLANT VIS--VIS THE COMPAR ABLE COMPANIES. 11. THE DRP/AO/TPO HAS ERRED IN LAW AND IN FACT B Y NOT ALLOWING ECONOMIC ADJUSTMENTS FOR DIFFERENCES ON AC COUNT OF RISKS ASSUMED BY THE APPELLANT VIS--VIS THE COMPAR ABLE COMPANIES. 12. THE LEARNED DRP HAS ERRED IN LAW IN NOT APPLYIN G THE PROVISO TO SECTION 92C OF THE ACT AND HAS FAILED TO ALLOW THE APPELLANT THE BENEFIT OF VARIATION OF 5 PERCENT IN DETERMINING THE ARMS LENGTH PRICE. STAY NO. 179 & ITA 5479/DEL/11 M/S H&M HENNES & MAURITZ 3 3. BRIEF FACTS ARE: THE ASSESSEE COMPANY IS ENGAGED IN PROVIDING SOURCING AND PROCUREMENT SERVICES TO ITS GROUP ENTI TIES LOCATED OUTSIDE INDIA, FOR WHICH IT WAS REMUNERATED ON COST PLUS 12 PERCEN T BASIS, WHICH INCLUDED ALL OPERATING EXPENSES OTHER THAN INCOME-TAX, WEALT H-TAX, FRINGE BENEFIT TAX, INTEREST ETC. 3.1. THE ASSESSEE FILED ITS T.P. REPORT, TAKING TNM M AS THE MOST APPROPRIATE METHOD USING OPERATING PROFIT DIVIDED B Y THE OPERATING COST AS THE PROFIT LEVEL INDICATOR (PLI). FOR IDENTIFICAT ION OF COMPARABLE COMPANIES, ASSESSEE SELECTED FOLLOWING COMPANIES AS ITS COMPARABLES: - ELECTRONICA MACHINE TOOLS LTD. - ICC INTERNATIONAL AGENCIES LTD. (ICC INTERNATIONAL ). - NTPC ELECTRIC SUPPLY CO. LTD. - PRIYA INTERNATIONAL LTD. (PRIYA) - RATAN GLITTERS INDUSTRIES LTD. 3.2. ON THE BASIS OF THESE COMPARABLES AND TNMM MET HOD, ASSESSEE DETERMINED ARMS LENGTH PRICE (ALP). 3.3. TPO ERRONEOUSLY HELD THE ASSESSEE AS A RISK BE ARING AGENT AND REJECTED THE COMPARABLES EXCEPT ICC INTERNATIONAL A ND PRIYA. IT WAS HELD THAT THESE COMPANIES WERE FUNCTIONALLY DIFFERENT FROM AS SESSEE AND THE ADDITIONAL COMPARABLES PROPOSED BY ASSESSEE WERE ALSO REJECTED . THEREAFTER, TPO APPLYING OTHER COMPARABLES TO AVERAGE 25.54% OPO/TC MADE THE ADJUSTMENT. WHILE MAKING SUCH ADJUSTMENT, TPO ALSO MADE ARITHMETICAL ERROR FOR WHICH ASSESSEE FILED APPLICATION FOR RECT IFICATION U/S 154. THE STAY NO. 179 & ITA 5479/DEL/11 M/S H&M HENNES & MAURITZ 4 RECTIFICATION EFFECT GIVEN BY TPO HAS NOT BEEN APPL IED BY AO WHILE MAKING THE FINAL ORDER, WHICH IS ANOTHER GROUND OF THE AP PEAL. 3.4. ASSESSEE APPLIED DRP FOR SUITABLE ADJUSTMENTS ON THE ORDER OF TPO AND RAISED FOLLOWING OBJECTIONS: (I) THAT THE COMPARABLES ADOPTED BY THE TPO WERE FUNCTI ONALLY DIFFERENT FROM THE PROFILE OF THE ASSESSEE. (II) THE RISK PROFILE OF COMMISSION AGENTS ADOPTED BY TP O DIFFERED SIGNIFICANTLY AND ONLY COMPANIES ENGAGED IN PROCURE MENT ACTIVITIES SHOULD BE SELECTED AS COMPARABLES WITH A SSESSEE. (III) THE OPERATING MARGINS OF COMPARABLE COMPANIES ADOPT ED WERE ERRONEOUSLY COMPUTED. (IV) APPROPRIATE ADJUSTMENTS ON DIFFERENCE OF WORKING CA PITAL EMPLOYED BY THE ASSESSEE AND COMPARABLE COMPANIES W AS NOT PROVIDED. (V) THE ECONOMIC ADJUSTMENTS FOR DISCOUNTING ON ACCOUNT OF RISKS ASSUMED BY THE ASSESSEE WERE NOT ALLOWED. (VI) TPO ERRED IN RELYING ON FINANCIAL DATA WHICH WAS NO T AVAILABLE IN THE PUBLIC DOMAIN. (VII) TPO ERRED IN USING SINGLE YEAR DATA FOR DETERMINATI ON OF ALP INSTEAD OF MULTIPLE YEAR DATA WHICH EVENS OUT VARIA TIONS IN INDUSTRY AND PRODUCT CYCLES. (VIII) TPO ERRED IN NOT APPLYING THE PROVISO TO SEC. 92C. 3.5. DRP REJECTED SOME OF THE CONTENTIONS OF THE AS SESSEE WITHOUT JUSTIFICATION. FOLLOWING DIRECTIONS WERE GIVEN TO A O/TPO: STAY NO. 179 & ITA 5479/DEL/11 M/S H&M HENNES & MAURITZ 5 GROUND NO. 8 REGARDING WORKING CAPITAL ADJUSTMENT. ACCORDING TO ASSESSEE SINCE IT WAS BUSY WITH ITS YE AR END AT THE TIME OF ISSUE OF SHOW CAUSE IT HAD ASKED TPO FOR TI ME TO CARRY OUT DETAILED ANALYSIS OF COMPARABLES WITH WORKING C APITAL ADJUSTMENT. THE ASSESSEE HAS NOW FILED DETAILS BEFO RE DRP. DRP HAS CONSIDERED THE DIRECTION OF ITAT ON THIS IS SUE FOR A.Y. 2006-07 AND EXAMINED THE ISSUE IN DETAIL. DRP IS OF THE VIEW THAT TPO DID NOT ALLOW THE ADJUSTMENT IN VIEW OF LACK OF RELIABLE DATA. BEFORE DRP THE ASSESSEE HAS FURNISH ED DATA. SO FAR THE PURPOSE OF PROPER COMPARABILITY DIFFERENCES IN THE PRIES CHARGED BY THE ASSESSEE AND THE COMPARABLES ARISING ON ACCOUNT OF DIFFERENT LEVELS OF WORKING CAPITAL ARE REQUIRED TO BE ELIMINATED. THE OECD GUIDELINES ALSO SUPPORT THIS V IEW. IN A COMPETITIVE ENVIRONMENT THE PRICE SHOULD INCLUDE AN ELEMENT TO REFLECT THE DIFFERENT PAYMENT AND RECEIPT TERMS AND COMPENSATE FOR THE TIMING EFFECT. GUIDELINES FURTHER SAY THAT MAKING A WORKING CAPITAL ADJUSTMENT IS AN ATTEMPT TO ADJUST FOR THE DIFFERENCES IN TIME VALUE OF MONEY BETWEEN THE TEST ED PART7Y AND POTENTIAL COMPARABLES WITH AN ASSUMPTION THAT T HE DIFFERENCE SHOULD BE REFLECTED IN PROFITS. THOUGH G UIDELINES SAY THAT AS A MATER OF ROUTINE SUCH ADJUSTMENT SHOULD N OT BE MADE BUT ALSO STATE THAT THE SAME SHOULD BE RESORTED TO IF IT IMPROVES THE COMPARABILITY. THE PROVISIONS CONTAINED IN RULE 10B(3) ALSO MANDATE ADJUSTMENTS WHEREVER THERE ARE MATERIA L DIFFERENCES IN THE SITUATIONS OF COMPARABLES AND TH E TAXPAYER. THE DIFFERENT BENCHES OF THE ITAT HAVE UPHELD SUCH ADJUSTMENT [VEDARIS TECHNOLOGY ITAT (DEL); SONY INDIA [114 ITD 448(DEL)]. MENTOR GRAPHICS, E. GAIN COMMUNICATION 2 008- TIOL-282-ITAT- PUNE. GLOBAL VENTEDGE 2010-TOP; 24 I TAT DEL; TNT INDIA P. LTD. 2011-TII-39-ITAT-BANG-TP,ETC .]. NOW THAT DATA IS FURNISHED, THE AO/TPO IS THEREFORE DIRECTED TO VERIFY THE SAME AND GRANT WORKING CAPITAL ADJUSTMEN T BASED ON THE OECD FORMULA AND BY TAKING 10.25% AS THE PLR. T HE AFORESAID RATE IS ADOPTED AS THE STATE BANK OF INDI A WHICH IS THE LEADING BANK IN INDIA HAS CHARGED THIS RATE IN THE YEAR UNDER REFERENCE FOR WORKING CAPITAL LOANS. STAY NO. 179 & ITA 5479/DEL/11 M/S H&M HENNES & MAURITZ 6 3.6. AO WHILE FRAMING THE ASSESSMENT DID NOT CARRY OUT THE DIRECTIONS OF THE DRP IN THIS BEHALF. 3.7. IT IS FURTHER PLEADED THAT AO PASSED THE ORDER WITHOUT CONSIDERING THE RECTIFICATION ORDER, SUBSEQUENTLY PASSED BY TPO AND THE DIRECTIONS GIVEN BY DRP. 3.8. LEARNED COUNSEL PLEADS THAT INTEREST OF JUSTIC E WILL BE MET IF THE MATTER IS RESTORED BACK TO THE FILE OF AO TO RECONSIDER TH E ISSUE IN THE LIGHT OF DRP DIRECTIONS AND TPOS RECTIFICATION ORDER. 4. LEARNED DR IS HEARD, WHO SUPPORTED THE ORDER OF AO. 5. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT EMERGES FROM FACT S THAT AO HAS NOT CARRIED OUT THE RECTIFICATION ORDER PASSED BY TPO AND PASSE D THE ASSESSMENT ORDER WITHOUT CARRYING OUT THE DRP DIRECTIONS. IN THE ENT IRETY OF FACTS AND CIRCUMSTANCES, THE ISSUE OF ASSESSEE BEING A NON-RI SK BEARING AGENT HAS TO BE LOOKED INTO ALONG WITH THE SUITABILITY COMPARABLES . CONSEQUENTLY, WE SET ASIDE THE T.P. ADJUSTMENTS BACK TO THE FILE OF AO TO RECONSIDER THE ISSUE OF TRANSFER PRICING IN ACCORDANCE WITH LAW AFTER GIVIN G THE ASSESSEE AN OPPORTUNITY OF BEING HEARD. WE MAY ALSO ADD THAT AT THE TIME OF DICTATION OF THIS ORDER, THE ISSUE OF 92C [(+) (-)] ADJUSTMENT I S PROPOSED TO BE AMENDED WHICH SHALL BE KEPT IN MIND. ACCORDINGLY, ASSESSEE S APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. STAY NO. 179 & ITA 5479/DEL/11 M/S H&M HENNES & MAURITZ 7 6. SINCE WE HAVE SET ASIDE THE ASSESSMENT CONSEQUEN T TO ASSESSEES APPEAL, THE STAY APPLICATION MOVED BY THE ASSESSEE BECOMES INFRUCTUOUS AND IS DISMISSED ACCORDINGLY. 7. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES AND STAY PETITION IS DISMISSED AS HAVING BECOME INFRUCT UOUS. ORDER PRONOUNCED IN OPEN COURT ON 11-05-2012. SD/- SD/- ( A.N. PAHUJA ) ( R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 11-05-2012. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR STAY NO. 179 & ITA 5479/DEL/11 M/S H&M HENNES & MAURITZ 8