Weatherford Drilling & Production Services (India) Pvt.Ltd., Baroda V. The Dy. CIT.,Circle-2(1)(2), Baroda

ITA 561/AHD/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 0587 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 16-06-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 13-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHESH SHAH
• Assessee Lawyers: HIMANSHU BHANDARI
• Keywords: Related party transaction; Transfer pricing; Retrospective amendment
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH BEFORE: S H RI PRAMOD KUMAR , ACCOUNTANT MEMBER AND SHR I S. S. GODARA , JUDICIAL MEMBER WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PRIVATE LIMITED BLOCK NO. 74, MUKUTNAGAR - SOKHADA ROAD, MANJUSAR, SAVLI, VADODARA - 391775 PAN: AAACW4068M (APPELLANT) VS THE DCIT, CIRCLE - 2(1)(2), BARODA (RESPONDENT) REV ENUE BY : S H RI MAHESH SHAH , SR. D . R. ASSESSEE BY: S H RI HIMANSHU BHANDARI , A.R. DATE OF HEARING : 16 - 06 - 2 016 DATE OF PRONOUNCEMENT : 07 - 09 - 2 016 / O RDER P ER : S. S. GODARA , JUDICIAL MEMBER : - THIS ASSESSEE S APPEAL FOR A.Y. 2010 - 11 , AR IS ES FROM ORDER OF THE DCIT, CIRCLE - 2(1)(2), BARODA DATED 23 - 01 - 2015 , IN PROCEEDINGS I T A NO . 561 A HD/20 15 A S SESSMENT YEAR 2010 - 11 I.T.A NO. 561 / AHD/20 15 A.Y. 2010 - 11 PAGE NO WEATHERFORD DRILLING & PRODUCTION VS. DCIT 2 UNDER SECTION 143(3) R.W.S. 92CA R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961; I N SHORT THE ACT . 2. THE ASSESSEE RAISES THREE SUBSTANTIVE GROUNDS IN THE INSTANT APPEAL INTER ALIA PLEADING THEREIN THAT THE AUTHORITIES BELOW HAVE ERRED IN MAKING THE IMPUGNED TRANSFER PRICING ADJUSTMENT OF RS. 6,80,66,000/ - AFTER DETERMINING ARM S LE NGTH PRICE IN QUESTION OF ITS GOODS SOLD TO ASSOCIATE ENTERPRISES, IN NOT GRANTING 5 TOLERANCE MARGIN AS A STANDARD DEDUCTION AND IN DISALLOWING A SUM OF RS. 13,65,460/ - UNDER SECTION 40(A)(IA) OF THE ACT ON ACCOUNT OF ITS FAILURE IN NOT DEDUCTING TDS ON THE ALLEGED EXPENDITURE INCURRED; RESPECTIVELY. WE FIND QUA THE SECOND SUBSTANTIVE GROUND THAT A SPECIAL BENCH OF THIS TRIBUNAL IN M/S. IHG SERVICES IT SERVICES INDIA PVT. LTD VS. ITO ITA 5890/AHD/2010 DECIDED ON 30 - 04 - 2013 HAS ALREADY DECLINED THE VERY P LEA THEREBY NOT TREATING THE IMPUGNED 5 TOLERANCE MARGIN AS A STANDARD DEDUCTION IN VIEW OF THE RETROSPECTIVE AMENDMENT IN SECTION 92C(2) 2 ND PROVISION W.E.F. 01 - 04 - 2002. THIS GROUND IS ACCORDINGLY REJECTED. THE LAST GROUND HEREINABOVE IS NOT PRESSED IN THE COURSE OF HEARIN G. THIS LEAVES US WITH THE SOL E SURVIVING ISSUE OF CORRECTNESS OF THE IMPUGNED TRANSFER PRICING ADJUSTMENT OF RS. 6, 80,66,000/ - UNDER CHALLENGE. 3. THE ASSESSEE COMPANY SERVICES AND MANUFACTURES OIL FIELD EQUIPMENTS. IT FILED RETU RN ON 31 - 10 - 2010 STATING INCOME OF RS. 1,74,58,340/ - . THE SAME WAS PROCESSED. THE ASSESSING OFFICER TOOK UP SCRUTINY THEREAFTER. I.T.A NO. 561 / AHD/20 15 A.Y. 2010 - 11 PAGE NO WEATHERFORD DRILLING & PRODUCTION VS. DCIT 3 4. THIS ASSESSEE IS A SUBSIDIARY OF M/S WEATHERFORD/LAMB INC HOLDING ITS 99% STAKE. IT OPERATED IN MANUFACTURING AND IN W E A THERFORD ENGINEERING SUPPORT DIVISION (WESS) SET UP IN NOV, 2006 IN ORDER TO SUPPORT MAINTENANCE AND DEVELOPMENT OF SOFTWARE DEVELOPED BY WE A THERFORD FOR BEING USED IN VARIOUS UPSTREAM OIL AND GAS SEGMENT. THE INSTANT ADJUDICATION PERTAINS TO MANUFACTUR ING DIVISION ONLY. THE ASSESSEE HAD IMPORTED RAW MATERIAL FROM ITS ASSOCIATE ENTERPRISES AND EXPORTED THEM FINISHED GOODS. IT ADOPTED THE TRANSACTION NET MARGIN METHOD (TNMM) IN THIS MANUFACTURING SEGMENT TO ADOPT RETURN ON SALES (PBIT/SALES) AS THE PROF IT LEVEL INDICATOR (PLI HEREAFTER). THE ASSESSEE FURTHER EMPLOYED ITSELF AS A TESTED PARTY TO DECLARE PLI @ 4.9% AS AGAINST MEAN PLI OF ITS COMPARABLES COMING TO THAT @ 8.4% I.E. WITHIN 5 MARGIN. ITS OPERATING COST IN THE IMPUGNED TRANSACTIONS READS A F IGURE OF RS. 2147.62 LACS. THE ASSESSING OFFICER MADE SECTION 92CA(1) REFERENCE TO THE TRANSFER PRICE OFFICER (TPO) TO ASCERTAIN ARM S LENGTH PRICE THEREOF. 5. THE TPO TOOK UP CONSEQUENTIAL PROCEEDINGS. HE FIRST REJECTED ASSESSEE S TRANSFER PRICING D OCUMENTATION AFTER ISSUING NECESSARY SHOW CAUSE. THE TPO THEREAFTER SEARCHED FOR COMPARABLES IN THE CATEGORY OF VALVES, INDUSTRIAL VALVES AND OTHER VALVES AS FOLLOWED BY OTHER FILTERS OF SALES TURNOVER EXCEEDING RS. 1 CRORE, MANUFACTURING/SALES EXCEEDING 90%, EXPORT FILTER OF MORE THAN 25%, RELATED PARTY TRANSACTIONS OF LESS THAN 25% ETC. HE FINALLY ARRIVED AT THREE COMPARABLE ENTITIES M/S. GTN ENGINEERING LTD, KAR MOBILES I.T.A NO. 561 / AHD/20 15 A.Y. 2010 - 11 PAGE NO WEATHERFORD DRILLING & PRODUCTION VS. DCIT 4 LTD AND RAM ENGINEERING VALVES LTD. HAVING RESPECTIVE PLIS OF 36.07%, 10.47% AND 11 .73%; AVERAGING TO 19.43%. THE TPO ACCORDINGLY DETERMINED ASSESSEE S ARM S LENGTH PRICE OF RS. 2564.90 LACS INSTEAD OF ACTUAL SALES AMOUNT OF RS. 2241.61 LACS THEREBY PROPOSING THE IMPUGNED TRANSFER PRICING ADJUSTMENT OF RS. 3,23,39,000/ - VIDE ORDER DATED 07 - 01 - 2014. THE ASSESSING OFFICER FRAMED DRAFT ASSESSMENT ON 11.03 - 2014. THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL DRP . THIS PANEL REJECTED ITS OBJECTIONS MAINLY CHALLENGING SEARCH DATA BASE OF ENTITIES ENGAGED IN VALVE CA TEGORIES AFORESAID. THE ASSESSING OFFICER HAS ACCORDINGLY FRAMED THE IMPUGNED ASSESSMENT ON 23 - 01 - 2015. 6. THE ASSESSEE S MAIN SUBSTANTIVE ARGUMENT BEFORE US IS THAT THE TPO HAS ERRED IN ADOPTING SEARCH METHOD OF VALVES, INDUSTRIAL VALVES AND OTHER VA LVES RESULTING IN SELECTION OF THE ABOVE THREE COMPARABLES AVERAGING PLI @ 19.43 IN QUESTION. LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTS TPO S ACTION UNDER CHALLENGE. 7. WE HAVE HEARD BOTH THE PARTIES . IT EMANATES FROM THE CASE FILE THAT THE A UTHORITIES BELOW ADOPTED THE VERY SELECTION METHOD USING KEYWORDS VALVES, INDUSTRIAL VALVES AND OTHER VALVES FOR SELECTING COMPARABLES IN IMMEDIATE PRECEDING ASSESSMENT YEAR 2009 - 10 FOR DETERMINING ARM S LENGTH PRICE OF ASSESSEE S SIMILAR TRANSACTIONS. IT FILED ITA 828/AHD/2014 BEFORE THIS TRIBUNAL. A CO - ORDINATE BENCH IN ITS ORDER DATED 30 - 06 - 2015 REMITTED BACK THE VERY ISSUE TO THE TPO BY OBSERVING AS UNDER: - I.T.A NO. 561 / AHD/20 15 A.Y. 2010 - 11 PAGE NO WEATHERFORD DRILLING & PRODUCTION VS. DCIT 5 5.2. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE RIVAL CONTENTIONS, FACTS OF THE PRESEN T CASE AND MATERIAL AVAILABLE ON RECORD. THE UNDISPUTED FACTS REMAIN THAT THE TRANSFER PRICING OFFICER AS WEL L AS A DRP HAVE REJECTED THE TRANSFER PRICING STUDY CONDUCTED BY THE ASSESSEE AND COMPATIBLES ADOPTED FOR COMPUTING THE AIM'S LEN GTH PRICE. THE TPO CARRIED OUT HIS O WN STUDY RESTRICTING THE STUDY T O A SINGLE FINA NCIAL YEAR AS PER THE RULE OF 10B(4 ) OF THE INCOME TAX. RULES, 1962 (HEREINAFTER REFERRED TO AS 'THE RULES). THE TPO ALSO REJECTED THE COMPARABL ES ON THE BASIS T HAT THE PUMPS ARID VALVES CANN OT BE COMPARED. HOWEVER, WHILE CONDUCTING THE TRANSFER PRICING STUDY, THE AO COMPARED THE ASSESSEE WITH I NDUSTRIES WHICH WERE ENGAGED IN THE MANUFACTURING OF VALVE S. DURING THE COURSE OF HEARING, IT WAS POINTED OUT BY THE L D. COUNSEL FOR THE ASSESSEE THAT THE VALVES THAT ARE SO UGHT T O BE COMPARED BY THE TPO ARE FUNCTIONALLY DIFFERENT, ENTIRELY A DIFFERENT PRODUCT, ALTHOUGH IT IS NAMED AS VALVE. ALTHOUGH, IT IS TRUE THAT THE METHOD ADOPTED IS TNMM, UNDER THIS METHOD THE PRODUCT IS BROADLY COMPARED. HOWE VE R, IN THE PRESENT EASE, THE T PO HAS SOUGHT TO COMPARE THE VALVES WHICH IS A CONS UMER PRODUCT WITH THE INDUSTRIAL PRODUCT OF THE TESTED PARTY, WHICH IN OUR VIEW, WOULD NOT GIVE A TRUE PICTURE OF THE PRO DUCT. 8. LEARNED AUTHORIZED REPRESENTATIVE REITERATE S ASSESSEE S STAND INDICATING DIFFERENCE BETWEEN ITS VALVES AND THE ABOVE THREE CATEGORIES AS USED FOR SEARCHING DATA BASE IN QUESTION. THE REVENUE FAILS TO POINT OUT ANY EXCEPTION IN THE RELEVANT FACTS OF THE TWO ASSESSMENT YEARS VIS - - VIS THE ISSUE IN Q UESTION. WE ACCORDINGLY DRAW SUPPORT FROM CO - ORDINATE BENCH DECISION HEREINABOVE TO REMIT THIS FIRST SUBSTANTIVE GROUND BACK TO THE TPO FOR ADJUDICATION AFRESH AS PER LAW AFTER AFFORDING ADEQUATE OPPORTUNITY TO THE ASSESSEE. THIS ISSUE IS SET ASIDE TO TH E FILE OF THE TPO. I.T.A NO. 561 / AHD/20 15 A.Y. 2010 - 11 PAGE NO WEATHERFORD DRILLING & PRODUCTION VS. DCIT 6 9. THIS ASSESSEE S APPEAL SUCCEEDS FOR STATISTICAL PURPOSES. ORDER PR ONOUNCED IN THE OPEN C OURT ON 07 - 09 - 201 6 SD/ - SD/ - ( PRAMOD KUMAR ) ( S. S. GODARA ) ACCOUNTANT MEMBER JUDIC IAL MEMBER AHMEDABAD : DATED 07 /09 /2016 AK / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,