PELICANS AUTOMOTIVE AND PROMOTIONAL PRODUCTS P.LTD, NASHIK V. DCIT 5(2), MUMBAI

ITA 5609/MUM/2014

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 5607 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 3 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2009-2010
• Appeal Filed On: 04-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAMBIT MISHRA
• Keywords: Transfer pricing; International transaction; Tangible material; Competent authority
• Section: 143(3); 5(2); 10B; 143(1); 144C; 143(2); 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER & SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA No. 5609/Mum/2014 (A.Y: 2009-10) Pelicans Automotive and Promotional Products P. Ltd., Gat No. 567/3, Village-Gonde, Mumbai Agra Road, Opp HP Petrol Pump, Igatpui, Nashik – 422 403 Vs. DCIT (IT) – 5(2) Aayakar Bhavan, MK Road, Mumbai – 400020. PAN/GIR No. : AADCP9097Q Appellant .. Respondent Appellant by : Shri. Kishore Patil, AR Respondent by : Shri. Sambit Mishra, DR Date of Hearing 01.11.2021 Date of Pronouncement 16.12.2021 आदेश / O R D E R PER PAVAN KUMAR GADALE JM: The assessee has filed the appeal against the order of the Commissioner of Income Tax (Appeals)-15, Mumbai, passed u/s 143(3) r.w.s 144C and U/sec250 of the Act. At the time of hearing, the Ld. AR submitted that the assessee is not pressing the additional grounds of appeal raised earlier and accordingly the additional grounds of appeal are treated as not pressed and dismissed. ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 2 - The assessee has raised the following grounds of appeal 1. Ground 1: Deduction under section 10B of Rs. 72,63,252/- 1.1 The Learned CIT(A) has erred in directing the Assessing Officer (AO) to dispose off Appellant's application uls.154 on the issue of claim of deduction u/s 10B of the Income Tax Act, 1961 (the Act). 1.2 On the facts and in the circumstances of the case, the Learned CIT(A) ought to have allowed Appellant's claim of deduction u/s 10B, particularly when full facts and documentary evidence for allowance of deduction u/s 10B were placed before him and also before the AO. 1 . Ground 2: Transfer Pricing adjustment of Rs.1,76,28,605/- 2.1 The Learned CIT(A) has erred in confirming the action of the AO/TPO in making adjustment to arm's length price of Rs.1,76,28,605/- in respect of import of raw materials & spares and export of finished goods by summarily rejecting submissions(19 Pages) of the Appellant. 2.2 While doing so, the Learned CIT(A), inter alia, erred in holding that - a. The transactions of purchases (import of raw materials & spares) and sales (export of finished goods) have been properly aggregated by the TPO for determination of arm's length price; b. Not accepting the Custom's valuation for benchmarking arm's length price of import of raw materials & spares; c. Foreign exchange gain/loss is a non-operating income/loss for working out profit level indicator (PLI) and not considering judicial decisions cited. d. No adjustment can be allowed to PLI resulting from ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 3 - worldwide crisis and global recession, abnormally impacting the profit margins of the Appellant during the year; e Export incentives have to be treated as part of operative income. f. Not considering fall in profit of the Appellant for which reasons with working were submitted. 2.3 On the basis of the facts and in the circumstances of the case and in law, the adjustment of Rs.1,76,28,605/- made to the arm's length price in respect of import of raw materials & spares and export of finished goods ought to be deleted. 3. The appellant craves leave to add, alter, modify, amend, delete and / or withdraw any of the ground of appeal. 2. The Brief facts of the case are that, the assessee company is engaged in manufacturing and exporter of PVC fabricate folders of various types and leather fabricated folders such as leather pouches and leather inners as per the specifications given by M/s Pelicans Manufacturing Company Ltd., (PMCL), United Kingdom. Whereas the PMCL is in the business of manufacturing and selling and distribution of leather and man-made merchandise. The assessee has filed the return of income electronically on 27.09.2009 for the A.Y 2008-09 with a total income of Rs.51,290/-.The return of income was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act along with questionnaire was issued. In response to the notice, the Ld. AR of the assessee ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 4 - appeared from time to time and furnished the details and the case was discussed. The A.O on perusal of the financial statements found that the assessee has international transactions with his Associate Enterprises (A.E) therefore the matter was referred to the TPO for determination of Arm’s Length Price (ALP). The TPO on receipt of the directions has called for the information in support of the ALP computed as perform-3CEB, whereas the assessee has submitted the details and documents relating to the international transactions with its AEs and basis of computation of ALP. Whereas in the financial year 2008-09 the assessee reported the following international transactions as per Form – 3CEB as under: “5. During the year under consideration, as submitted in Form 3CEB, the assessee has reported the following international transactions with its one AE M/s Pelicans Manufacturing Co Ltd, UK. Sr. No. Transaction F.Y 2008-09 Method adopted by assessee 1 Import of Raw Material 1,63,606/- CUP 2 Import of Spares for machines 1,69,347/- CUP 3 A) Export of Finished Product (PVC Leather fabricated pouch) 10,66,17,777/- TNMM B) Export of finished product (Two or three fold holder) 5,15,22,205/- ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 5 - Total 15,84,72,935 3. The assessee has applied the CUP method as most appropriate method for import of finished goods and the PLI of the assessee has been worked out at 3%. Since the assessee has adopted the CUP method, the TPO observed that the assessee is dealing in tangible material which are the specific components to be used in manufacturing of PVC and leather related products. Whereas, the assessee has adopted TNMM method for determining ALP for export of finished goods to it’s AE in UK. The assessee company as per TP study has selected four comparables, whereas out of the four comparables only one company updated margin was available and it was accepted as comparable company. The assessee carried the fresh search of comparables as per the letter dated 11.12.2012. Whereas out of the four comparable only two comparables namely i) Crew B.O. S. Products Ltd. ii.) Cheviot International Ltd are accepted. Whereas the PLI of above two comparables using data for the F.Y 2008-09 is calculated as under: Sr NO. Name of the Comparable Company PLI for FY 08-09 (%) 1. Crew B.O.S Products Ltd 12.20 2 Cheviot International Ltd 30.93 Arithmetic Mean of comparables 14.46 ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 6 - PLI of the assessee 3.00 4. The TPO has issued the show cause notice for including the two comparables. Whereas the TPO observed that the assessee PLI is 3% whereas the Arithmetic Mean (AM) of the comparables to be considered is 14.4% which is more than the margin of comparables selected. The TPO dealt on the financial aspects of both the comparables in the order and calculated the average PLI of 14.46%. Finally the TPO has computed the ALP based on the comparables selected and passed the order u/s 92CA(3) of the Act dated 16.01.2013 as under; As the assessee’s profitability is lower, the LP of the assessee is benchmarked against the comparable companies as shown below; Particulars Amount in Rs. Operating Costs 15,38,54,220 Arms Length Mean Margin 14.46% of the operating cost ALP @ 114.46% of operating cost 17,61,01,540 Price charged / operational income 15,84,72,935 Short fall being adjustment u/s 92CA 1,76,28,605 105% of international transaction 16,63,96,582 95% of international transaction 15,05,49,288 Whether the ALP determined falling with (+/-) 5% of international transaction NO Conclusion ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 7 - Hence, an adjustment of Rs. 1,76,28,605/- is made to the value of the international transactions reported by the assessee in Form No. 3CEB 8. It is hereby clarified that this order is only for this assessment year being referred, i.e A.Y 2009-10, relevant to the F.Y 2008-09 and not for subsequent assessment years. 5. In respect of the corporate issue, the assessee has claimed deduction u/s 10B of the Act of Rs. 72,63,252/- and the assessee has submitted FormNo. 56G of the Act. The A.O has called for the additional details.The assessee has filed the details and supported with the judicial decisions in respect of claim of deduction u/s 10B of the Act. Whereas the A.O. found that the assessee has not fulfilled the all the conditions required for claiming u/s 10B of the Act as referred in his assessment order.Finally the A.O relied on the judicial decisions and observed that the assessee has obtained approval under STP Scheme as 100% export orient unit and submissions made by the assessee are out of the context and the A.O denied the deduction u/s 10B of the Act and whereas in respect of transfer pricing operations, the A.O has made addition as per TPO order of Rs. 1,76,28,605/- and disallowance u/s 10B of the Act and determined the total income of Rs. 2,49,43,150/- and passed the order u/s 143(3) r.w.s 144C of the Act dated 26.04.2013. ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 8 - 6. Aggrieved by the order, the assessee has filed an appeal with the CIT(A), whereas the CIT(A) has relied on the observations in the Assesseement order, grounds of appeal, submissions of the assessee and judicial decisions and confirmed the action of the A.O in respect of denial of deduction u/s 10B of the Act and the transfer pricing adjustments and dismissed the assessee appeal. Aggrieved by the CIT(A) order, the assessee has filed an appeal before the Honble Tribunal. 7. At the time of hearing, the Ld. AR has not pressed the additional grounds of appeal and accordingly they are treated as withdrawn and dismissed. In respect of denial of deduction u/s 10B of the Act, the Ld. AR submitted that the CIT(A) has erred in confirming the denial of deduction u/s 10B of the Act irrespective of the fact that the full details have been submitted by the assessee and whereas the assessee was granted deduction from A.Y 2010-11. The Ld. AR submitted the paper book and Hon’ble Gujarat High Court decision and prayed for that the assessee is eligible for deduction u/s 10B of the Act. ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 9 - 8. On the second disputed issue, with respect to transfer pricing adjustment. The Ld. AR submitted the TPO/CIT(A) has erred in holding the adjustment of ALP in respect of import of raw material, spares and export of goods rejecting the submissions of the assessee. The foreign exchange gain/ loss in a non operating income/ loss for working out the PLI and not considered the judicial decisions. Further no adjustments allowed to PLI resulting for worldwide crises and global recessions. Further CIT(A) erred in treating the export incentive as part of the operative income and over looking the working of the assessee and fall in the revenues and prayed for allowing the adjustment to ALP.Contra, the Ld.DR supported the order of the CIT(A) and TPO. 9. We heard the rival submissions and perused the material on record. Prima-facie on the first disputed issue with respect to claim of deduction u/s 10B of the Act which was denied by the A.O on the ground that the assessee was only registered as STPI. We find the submissions of the Ld. AR are duly supported by the judicial decisions and the Ld. AR has referred to page 139 of the paper book, were for the A.Y 2010-11 the A.O in assessment order under 143(3) r.w.s 144C of the Act ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 10 - dated 07.03.2014 has allowed the deduction u/s 10B of the Act as under; “5. Deduction u/s. 10B 5.1 In the e-return of income filed on 18.09.2010, the assessee has claimed deduction u/s 10B of Rs. 3,01,18,801/-. In this regard the assessee has filed copy of Form No. 56G dated 14/09/2010, in which the deduction u/s 10B has been indicated at Rs. 3,01,18,810/-. In view of the Delhi High Court Judgment in the case of M/s. Regency Creations Ltd., dated 17.09.2012, additional was made in A.Y 2009-10. During the assessment proceedings, the assessee could not furnish the approval letter from the competent authority in A.Y 2009-10. During the current assessment proceedings assessee filed following documents in claim of deduction u/s 10B vide letter dated 17.10.2013. a. Copy of Transfer pricing order u/s 92CA. b. Form No. 56G for claiming deduction u/s 10B. c. Copy of the Agenda for meeting of the combined Board of Approval (BOA) d. Copy of Office memorandum of Department of Commerce, Min of Commerce. e. Copy of Minutes of meeting of Board of Approval held on 19.01.2007. f. Copy of Letter of approval dated 06.09.2006. g. copy of letter of permission (LOP) for 3 years. h. Copy of Green Card dated 10.07.2009 showing validity upto 31.03.2012. I. Copy of Green card dated 27.03.2012 showing validity upto 31.03.2017. 5.2 It is important to mention here that during the year under consideration assessee has filed copy of approval letter from the competent authority from director and member secretary, Board of approval for EOU scheme, New Delhi has been furnished dated 12.01.2007 in which it was stated that Board of approval meeting will take place on 19.01.2007. Further assessee has submitted the minuets of the first ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 11 - meeting (2007 series) of the Board of approval for EOU scheme held on 19.01.2007 at Udyog Bhava, New Delhi under the Chairmanship of Commerce, Secretary, Govt of India. 5.3 further, assessee has submitted copy of agenda for the 5th meeting (2006 series) of the combined Board approvals for EOU/SEZ scheme held in No. 2006. On perusal of the copy of Agenda it has been noticed that name of the assessee has been appeared at Sl.No.4. The assessee has submitted that agenda discussed in the meeting on 16.11.2006 was rectified in the Board of Approval Meeting held on 19.01.2007. The details submitted by the assessee further confirmed with Development commissioner, SEEPZ Special Economic Zone, Andheri (E), Mumbai. The Development Commissioner, vide his letter dated. 04.03.2014 has confirmed that in the case of M/s. Pelican Automotive & Promotional Products Pvt Ltd approval was granted for setting up a EOU Scheme under automatic approval Route. He submitted that proposal was placed before Board automatic approval Route. He submitted that proposal was placed before Board of approval in the first meeting on 19.01.2007. He submitted copies of Board of approval agenda and minutes of the meeting. In view of the above, deduction claimed by the assessee u/s 10B is found in order. 10. We find that the assessee was granted deduction u/s 10B of the Act from the A.Y 2010-11 which is evident from the order passed by the A.O. Further, the Hon’ble High Court of Gujarat in the case of PCIT Vs ECI Technology Pvt Ltd [2015] 375 ITR 595 (Guj) has dealt on the similar issue in respect of registrations and the fact of allowing the claim dealt at page 4 Para 5 as under: 5. Heard the learned advocates appearing on behalf of the respective parties at length. At the outset, it is required that the assessee claimed the deduction under Section 10B of the Act claiming 100% EOU. It is an admitted position that there ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 12 - was already a permission/approval granted by the Development Commissioner declaring/approving the assessee as 100% EOU. However, on considering the word, approved by the Board of Approval as mentioned in Section 10B of the Act and at the relevant time there was no ratification of the decision of the Development Commissioner by the Board of Approval, the Assessing Officer denied the deduction under Section 10B of the Act. However, it is required to be noted and it is not in dispute that vide Circular/instruction of the CBDT dated 09/03/2009 it was clarified that the approval granted by the Development Commissioner in the case of Export Oriented Unit set up in an Export Processing Zone will be considered valid, once such an approval is ratified by the Board of Approval for EOU Scheme. In the present case, it is not in dispute that the permission/approval granted by the Development Commissioner has been ratified by the Board of Approval, may be subsequently. The moment the decision/approval of the Development Commissioner is ratified by the Board of Approval it will relate back to the date on which the approval was granted by the Development Commissioner. If that be so, it cannot be said that the assessee was not a Export Oriented Unit, which was entitled to the deduction under Section 10B of the Act. Incidentally it is to be noted that in the subsequent circular No.68 issued by the Export Promotion Council for EOUS & SEZS dated 14/05/2009 it mentions that from 1990 onwards Board of Approval had delegated the power of approval of 100% to the Development Commissioner and, therefore, it can be very well argued and said that the Development Commissioner while granting the approval of 100% EOU exercises delegated powers. In any case and apart from the above when it is found that at the relevant time the Development Commissioner granted the approval of 100% EOU in favour of the assessee-Company, which came to be subsequently ratified by the Board of Approval and as observed hereinabove as such the ratification shall be from the date on which the Development Commissioner granted the approval, both the learned CIT(A) as well as the learned Tribunal have rightly held that the ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 13 - assessee was entitled to deduction under Section 10B of the Act as claimed. We confirm the view taken by both the authorities below holding that the assessee was entitled to 100% EOU as claimed. No substantial question of law arises in the present Tax Appeal. Hence, the present Tax Appeal deserves to be dismissed and is accordingly dismissed. 11. We Considering the facts that the A.O has allowed the claim of deduction for the A.Y 2010-11 and the ratio of the decision of Hon’ble Gujarat High Court direct the Assessing officer to allow the claim of deduction u/s 10B of the Act. 12. On the second disputed issue with respect to transfer pricing adjustment. The Ld. AR submitted that the assessee is in the business of supplying the leather pouches to the Mercedes Benz contract agreement. The assessee has adopted two comparables and the gain on account of foreign exchange fluctuations are considered as operating income. whereas, the TPO has not considered the PLI working and arrived at a margin of 3% after considering foreign exchange gain as non operating income. TheLd.AR relied on the judicial decisions of (i) SapLabs India Private Ltd Vs ACIT (44 SOT 156) (Bang),M/s CSR India Ltd Vs ITO (ITAno 119/Bang/2011) & M/s Brigade Global Services Pvt Ltd VS ITO (ITA No .1494/Hyd/2010.(HYD).Were it was held that the ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 14 - gain/loss on account of foreign exchange is an operating item and should be treated to operating income or operating cost. The TPO has made observations at page 2 and page 8 of the order and the CIT(A) has dealt at Para 5.1 of the order and written submissions. 13. The Ld.AR has relied on the decision of Honble High Court of Delhi in CIT Vs. BC Management Services, Delhi (403 ITR 45) where extraordinary expenditure in respect of unit has to be excluded and referred to the submissions at page 174 of the paper book filed before the TPO. The Ld. AR submitted that the expenses and other claims are correctly adopted by the TPO and incentive cannot be a part of the expenses. The Ld. DR submitted that the export incentives have to be included in the operative income in calculation of ALP. We found that the A.O has not considered these facts with respect to export incentive and whereas the export incentive plays a important role in determining the ALP and we direct the TPO to exclude the export incentive in calculation of the ALP. Whereas in respect of other grounds of appeal no 2.2 which are inter linked as mentioned by the Ld. AR. We are of the opinion that all these operational adjustments are to be considered by the TPO and pass a speaking order. Accordingly, to meet the ends of justice, we restore ITA No. 5609/Mum/2014 Pelicans Automotive and promotional Products P Ltd, Mumbai. - 15 - the transfer pricing adjustments to the file of the TPO to recompute the ALP afresh and the directions as discussed in the above paragraphs and the assessee should be provided adequate opportunity of hearing and shall cooperate in submitting the information and we allow the grounds of appeal of the assessee for statistical purposes. 14. In the result, the assessee appeal is allowed for statistical purposes. Order pronounced in the open court on 16.12.2021. Sd/- Sd/- (S RIFAUR RAHMAN) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 16.12.2021 KRK, PS Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. आ आ / The CIT(A) 4. आ आ ( ) / Concerned CIT 5. ! !" , आ $ %, हमद द / DR, ITAT, Mumbai 6. () * + / Guard file. आदेशानुसार/ BY ORDER, ! //True Copy//