DCIT, New Delhi V. M/s. Federal Mogul Automotive Products (India) Pvt. Ltd., New Delhi

ITA 5769/DEL/2011

• Counselvise Citation: 576920114 RSA 2011
• Duration Of Justice: 3 year(s) 2 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 23-03-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 26-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JUDY JAMES SPL DR
• Assessee Lawyers: ARCHIT RASTOGI
• Keywords: Transfer pricing
• Section: 143(3)

Judgement Text

ITA NO. 5769/ DEL/ 2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I , NEW DELHI BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI J.S. REDDY, ACCOUNTANT MEMBER I.T.A. NO. 5769 /DEL/201 1 A.Y. : 200 3 - 0 4 DY. COMMISSIONER OF INCOME TAX, CIRCLE - 11(1), NEW DELHI ROOM NO. 312, CR BUILDING, NEW DELHI VS. M/S FEDERAL MOGUL AUTOMOTIVE PRODUCTS (INDIA) PVT. LTD., R - 6, GREATER KAILASH=I, NEW DELHI 110 048 (PAN: AAACF4128M) (APPELLANT) (RESPONDENT) DEPARTMENT BY : SH. JUDY JAMES, SPL. COUNSEL/DR ASSESSEE BY : SH. HIMANSHU SINHA, ADV. & ANIL GUPTA, CA & ARCHIT RASTOGI, CA DATE OF HEARING : 23 - 3 - 201 5 DATE OF ORDER : 2 5 - 3 - 201 5 ORDER PER H.S. SIDHU : J M TH IS APPEAL BY THE REVENUE IS D IRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS ) - X X , NEW DELHI DATED 31 . 1 0 .201 1 P ERTAINING TO ASSESSMENT YEAR 2003 - 04, ON THE FOLLOWING GROUNDS: - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. ITA NO. 5769/ DEL/ 2011 2 1,87,53,644/ - MADE ON ACCOUNT OF ADJUSTMENT OF ARM S LENGTH PRICE. 2. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARING. 2. THE BRIEF FACTS IN THIS CASE ARE THAT THE ASSESSEE IS A 100% SUBSIDIA RY OF FEDERAL MOGUL PTY. LTD., AUSTRALIA. FEDERAL MOGUL CORPORATION US, IS THE PARENT COMPANY OF THE GROUP. THE ASSESSEE IS IN THE AUTOMOBILE ANCILLARY BUSINESS. THE ASSESSEE IS ENGAGED IN MANUFACTURING THE GROUP S POPULAR LINE OF CHAMPION SPARK PLUGS AND UNDERTAKES MARKETING AND DISTRIBUTION OPERATION FOR A WIDE RANGE OF GROUP PRODUCTS INCLUDING WIPER BLADES, GLOW PUGS, IGNITION COILS, OIL SEALS ETC. THE MANUFACTURING FACILITY OF THE COMPANY IS LOCATED AT BHIWADI. DURING THE YEAR THE ASSESSEE HAS IMP ORTED RAW MATERIALS, SEMI FINISHED GOODS AND FINISHED GOODS FROM ITS AES. THE RETURN OF INCOME WAS FILED ON 2.12.2003 DECLARING A NIL INCOME AFTER SETTING OFF BROUGHT FORWARDS BUSINESS LOSS OF RS. 3,32,034/ - . ORDER U/S. 143(3) WAS PASSED ON 17.3.2006 MAKING VARIOUS ADJUSTMENTS ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS AND ALSO ON ACCOUNT OF VARIOUS CORPORATE TAX ADJUSTMENTS. 3. AGAINST THE ASSESSMENT ORDER DATED 17.3.2006, ASSESSEE APPEALED BEFORE THE LD. CIT(A), WHO VIDE HIS IMPUGNED ORDER DATE D 31.10.2011 HAS PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. ITA NO. 5769/ DEL/ 2011 3 4. AGGRIEVED WITH THE ORDER OF THE LD. CIT(A), REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 5. AFTER HEARING THE RIVAL CONTENTIONS, WE FIND THAT LD. CIT(A) HAS HELD AS UNDER: - 4.6 ASSESSEE DID NOT CREATE ANY PROVISION OF STOCK OBSOLESCE / NON MOVING INVENTORY DURING THE PREVIOUS YEARS (I.E. AY 2001 - 02 AND AY 2002 - 03) AND SUBSEQUENT YEAR (I.E. A.Y. 2004 - 05). FURTHER, AN ANALYSIS OF STOCK OBSOLESCENCE TO SALES RATIO FOR THE COMPARAB LES COMPANIES (AS PROVIDED BY THE APPELLANT) IS REPRODUCED BELOW: - NAME OF THE COMPANY OBSOLETE INVENTORY (A) SALES (B) RATIO (A/B)% ESCORTS PISTONS LTD. (MERGED) NA NA NA GREAVES LTD. - 5,929,900,000 - KIRLOSKAR OIL ENGINEERS LTD. 88,884 8,664,356 1.03% PRICISION PIPES & PROFILES CO. LTD. - 640,292,906 - RANE BRAKE LININGS LTD. - 1,419,267 - SHARDA MOTOR INDS LTD. - 1,119,081,864 - SONA SOMIC LEMFORDER COMPONENTS LTD. - 281,417,651 - VICTOR GASKETS INDIA LTD. - 309,523,000 - APPELLANT 25,306,608 281,827,439 8.98% ITA NO. 5769/ DEL/ 2011 4 AS CAN BE OBSERVED FROM THE ABOVE, NONE OF THE COMPARABLE COMPANIES, EXCEPT KIRLOSKAR OIL ENGINES LTD., HAS ANY PROVISION FOR STOCK OBSOLESCE / NON MOVING INVENTORY. FURTHER, FOR KIRLOSKAR OIL ENGINES LTD., THE PR OVISION FOR STOCK OBSOLESCE / NON MOVING INVENTORY IS ONLY 1.03% OF SALES AS AGAINST A SIMILAR PROVISION OF 8.98% FOR THE APPELLANT. IF PROVISION OF STOCK OBSOLESCE / NON MOVING INVENTORY IS CONSIDERED AS NON OPERATING EXPENSE FOR THE COMPARABLE COMPANIE S AND THE APPELLANT, THEN THE ANALYSIS IS AS FOLLOWS: - NAME OF THE COMPANY (AS PER TPO S ORDER) OPERATING MARGIN, AS PER TPO S ORDER PROVISION FOR STOCK OBSOLESCENCE REVISED OPERATING MARGIN A B C = A+B ESCORTS PISTONS LTD. (MERGED) - 2.62% - 2.62% GREAVES LTD. 0.14% 0.14% KIRLOSKAR OIL ENGINEERS LTD. 10.52% 1.03% 11.55% PRECISION PIPES & PROFILES CO. LTD. 16.48% 16.48% RANE BRAKE LININGS LTD. 15.54% 15.54% SHARDA MOTOR INDS LTD. 15.57% 15.57% SONA SOMIC LEMFORDER COMPONENTS LTD. 2.88% 2.88% VICTOR GASKETS INDIA LTD. 5.78% 5.78% APPELLANT 8.04% 1.03% 8.17% ITA NO. 5769/ DEL/ 2011 5 BASED ON THE ABOVE, ARITHMETIC MEAN OF THE REVISED MARGIN OF THE COMPARABLE COMPANIES AFTER CONSIDERING PROVISION OF STOCK OBSOLESCE / NON MOVING INVENTORY AS NON OPERATING IS 8.17%. AS PER THE TPO S ORDER, THE OPERATING MARGIN OF THE APPELLANT AFTER UNDERTAKING SIMILAR ANALYSIS IS 10.85% BASED ON THE PARAGRAPHS ABOVE, IT IS CLEARLY EVIDENT THAT THE PROVISION FOR STOCK OBSOLESCENE AMOUNTING TO RS. 25,306,608/ - WAS ABNORMAL AND EXTRAORDINARY IN NATURE, AND THE SAME IS REQUIRED TO BE EXCLUDED FROM THE COST BASE OF THE APPELLANT FOR COM PUTING THE OPERATING MARGINS OF THE APPELLANT BEFORE COMPARING THE SAID MARGIN WITH MARGIN OF THE COMPARABLE UNCONTROLLED COMPANIES. THESE ITEMS ARE OCCURRING IN ONLY ONE COMPARABLE AND THEREFORE, THE MARGIN OF THAT COMPARABLE ALSO NEEDS TO BE RE - WORKED OUT. HALL MARK OF COMPARABILITY ANALYSIS IS DO THE SAME TREATMENT TO BOTH SIDES OF THE EQUATION; ON THE ONE HAND IT IS THE TESTED PARTY I.E. ASSESSEE AND ON THE OTHER HAND IT IS THE COMPARABLES. AS CAN BE SEEN FROM THE CALCULATION ABOVE, MARGIN OF THE AS SESSEE IS ABOVE THAT OF THE COMPARABLES. THEREFORE, THE AO IS DIRECTED TO DELETE THE ADDITIONS MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. ITA NO. 5769/ DEL/ 2011 6 SINCE THE ASSESSEE S ALP IS ABOVE THE MARGIN OF THE COMPARABLES PROVISO TO SECTION 92C(2) IS NOT APPLICABLE IN THIS CASE. 5.1. FROM THE ABOVE FINDING OF THE LD. CIT(A), WE FIND NO INFIRMITY IN THE SAME. THE ASSESSEE IN THIS CASE HAS CREATED A PROVISION FOR OBSOLETE STOCKS. ADMITTEDLY, SUCH THE PROVISION FOR OBSOLESCE STOCK HAS NOT BEEN MADE BY ANY OF THE COMP ANIES, WHICH ARE TAKEN AS COMPARABLES AS PER THE TPO S ORDER , E XCEPT FOR KIRSOLKAR OIL ENGINES LTD. WHERE THE PROVISION FOR STOCK OBSOLESCE / NON MOVING INVENTORY IS ONLY 1.03% OF SALES AS AGAINST THE PROVISION FOR STOCK OBSOLESCE OR NON MOVING INVEN TORY MADE BY THE ASSESSEE AT 8.98%. THERE IS NO DISPUTE THAT SUCH A PROVISION FOR STOCK OBSOLESCE AND NON MOVING INVENTORY I S AN EXTRAORDINARY TIME. LD. CIT(A), HAS RIGHTLY MADE SUITABLE ADJUSTMENTS BY ELIMINATING THE SAID PROVISION FROM THE FINAN CIAL STATEMENTS OF THE ASSESSEE AND THEREAFTER ARRIVING AT THE OPERATION MARGIN FOR THE PURPOSE OF COMPARABILITY AND BENCHMARKING WITH THE OTHER COMPARABLES COMPANIES. ASSESSEE HAS RIGHTLY RELIED UPON THE ORDER OF THE ITAT I BENCH, NEW DELHI IN ITA N O. 903/DEL/2010 (A.Y. 2004 - 05) IN THE CASE OF DCIT VS. M/S ARIBA INDIA PVT. LTD. AND C.O. NO. 130DEL/2010 (IN ITA NO. 903/DEL/2010) A.Y. 2004 - 05 IN THE CASE OF M/S ARIBA INDIA PVT. LTD. VS. DCIT VIDE COMMON ORDER DATED 19.2.2015 FOR THE PROPOSITION THAT , WHEREVER EXTRAORDINARY ITEMS FORM PART OF THE COMPARABLES, THEN THE SUITABLE ADJUSTMENTS SHOULD BE MADE FOR THE PURPOSE OF COMPARABILITY. 5.2 IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS AND PRECEDENT, WE DO NOT FIND ANY INFIRMITY IN THE WELL R EASONED ORDER PASSED BY THE LD. CIT(A) ON THE ISSUE IN DISPUTE , HENCE, WE UPHOLD THE SAME BY DISMISSING THE APPEAL FILED BY THE REVENUE. ITA NO. 5769/ DEL/ 2011 7 6. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE O PEN C OURT ON 2 5 / 3 /2 0 1 5 . S D / - S D / - [ J.S. REDDY ] [ H.S. SIDHU ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATE 2 5 / 3 /201 5 SRBHATNAGAR COPY FORWARDED TO: - 1. APPELLANT - 2. RESPONDENT - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES ITA NO. 5769/ DEL/ 2011 8