DCIT, New Delhi V. M/s. W.Diamant India Ltd., New Delhi

ITA 5993/DEL/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 3181 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: H
• Assessment Year: 2009-2010
• Appeal Filed On: 05-11-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

ITA NO.5993/DEL/2014 DCIT VS. W DIAMANT INDIA LTD ASSESSMENT YEAR: 2009-10 PAGE 1 OF 4 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI I-2 BENCH, NEW DELHI [CORAM: PRAMOD KUMAR AM AND SUDHANSHU SRIVASTAVA JM ] ITA NO. 5993/DEL/2014 ASSESSMENT YEAR: 2009-10 DCIT, CIRCLE-18(1), NEW DELHI ................ .................APPELLANT VS W. DIAMANT INDIA LTD. ..........RESPONDENT 13, ABDUL FAZAL ROAD, BENGALI MARKET, NEW DELHI-110001 [PAN : AAACW 0184 G] APPEARANCES BY SANJAY KUMAR YADAV, FOR THE APPELLANT RAJIV SAXENA, FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : MAY 22, 2018 DATE OF PRONOUNCING THE ORDER : AUGUST 21, 2018 O R D E R PER PRAMOD KUMAR, AM: 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HAS CHALLENGED CORRECTNESS OF THE ORDER DATED 6 TH AUGUST 2014 PASSED BY THE LEARNED CIT(A), IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2009-10. 2. THE GRIEVANCES RAISED BY THE ASSESSEE ARE AS FOL LOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN RESTRICTING THE ADJUSTMENT OF RS. 1,71 ,62,986/- TO RS. 83,05,263/- ON ACCOUNT OF INTERNATIONAL TRANSACTION RELATED TO IMP ORT OF RAW MATERIAL CONSIDERING THE PERCENTAGE OF RAW MATERIAL CONSUMED BY THE APPE LLANT FOR THE EXPORT TO THE AE AT 68.78% WITHOUT PROPER BASIS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT (A) HAD ERRED IN DELETING AN ADDITION OF RS. 3,04,51,07 1/- MADE BY THE AO ON ACCOUNT OF INTERNATIONAL TRANSACTION RELATED TO EXPORT OF FINI SHED GOODS. ITA NO.5993/DEL/2014 DCIT VS. W DIAMANT INDIA LTD ASSESSMENT YEAR: 2009-10 PAGE 2 OF 4 3. BRIEFLY STATED, THE RELEVANT MATERIAL FACTS ARE LIKE THIS. THE ASSESSEE BEFORE US IS A WHOLLY OWNED SUBSIDIARY OF WHEELABRATOR ALLEVARD SA S FRANCE, AND IS ENGAGED IN THE BUSINESS OF MANUFACTURING DIAMOND TOOLS AND TRADING IN ABRASIVES. THE ASSESSEE IMPORTS ABRASIVES, AS ALSO CERTAIN RAW MATERIALS FOR MANUFA CTURE OF DIAMOND CUTTING TOOLS, FROM ITS AFORESAID AE AND THE ASSESSEE ALSO EXPORTS DIAMOND CUTTING TOOLS TO, AMONGST OTHERS, ITS AE. THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE, WITH ITS AES, INCLUDED IMPORT OF FINISHED GOODS FOR RESALE (RS 6,58,28,416), IMPORT OF RAW MATERIAL (RS 6,12,50,720) AND EXPORT OF FINISHED GOODS (RS 5,06,87,527). DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE ASCERTAINMENT OF ARMS LENGTH PRICE OF ITS INTRA AE TRANSACTIONS WAS REFERRED TO THE TRANSFER PRICING OFFICER. SO FAR AS ALP OF THE EXPORTS TO A E WAS CONCERNED, THE TPO NOTED, BASED ON THE COMPUTATIONS SET OUT AT PAGE 12 OF THE TPOS ORDER, THAT THE OP/SALES MARGIN OF THE ASSESSEE IS -59.46%. THE TPO ADOPTED DIES AND TOOLS LTD AND RAPICUT CARBIDES LTD AS COMPARABLES, FOR APPLYING TNMM, WHICH SHOWED OP/SAL ES AT 6.58% AND 12.92% AND OP/TC AT 7.01% AND 11.44% RESPECTIVELY. THE AVERAGE OP/SALES WAS THUS COMPUTED AT 9.75%, AND OP/TC WAS COMPUTED AT 9.22%. IT WAS IN T HIS BACKDROP AND ADOPTED OP/TC AT 9.22% AS ARMS LENGTH MARGIN THAT, AS AGAINST EXPOR TS OF RS 5,06,87,527 SHOWN BY THE ASSESSEE THE ALP OF EXPORTS, BY ADDING 9.22% TO TH E COST BASE OF RS 7,42,88,893, WAS COMPUTED AT RS 8,11,38,328. AN ALP ADJUSTMENT OF RS 3,04,51,071 WAS ACCORDINGLY MADE BY THE TPO. SO FAR AS THE BENCHMARKING OF IMPORTS FROM AES WAS CONCERNED, THE TPO NOTED THE CASE OF THE ASSESSEE THAT SUCH BENCHMARKING IS SUBS UMED IN THE ALP DETERMINATION OF THE EXPORTS BUT REJECTED THE SAME ON THE GROUND THAT SI NCE ASSESSEE HAS SIGNIFICANT EXPORTS TO NON AES AS WELL, SUCH AN ALP ADJUSTMENTS AFFECTS THE TR ANSACTIONS NOT ONLY WITH AES BUT ALSO NON AES. THE ASSESSEE DID ATTEMPT TO JUSTIFY THE PRICES PAID FOR IMPORTS ON THE BASIS OF INTERNAL CUP INPUTS BUT THE APPLICATION OF CUP WAS REJECTED ON THE GROUND OF LACK OF STRICT COMPARABILITY. THE TPO THUS ADOPTED OP/SALES AT 9.7 5% AS VALID TNMM BASIS, AND ACCORDINGLY MADE AN ADJUSTMENT OF RS 1,71,62,946. O N THIS BASIS, THE TOTAL ADJUSTMENT OF RS 4,76,14,017 (I.E. RS 1,71,62,946 PLUS RS 3,04,51,07 1) WAS RECOMMENDED BY THE TPO WHICH IS WHAT WAS ADOPTED BY THE ASSESSING OFFICER. AGGRIEVE D, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). LEARNED CIT(A) DELETED THE ADJUS TMENT OF RS 3,04,51,071, IN RESPECT OF EXPORTS, BY OBSERVING THAT AFTER ALLOCATING THE EXPENSES ON THE BASIS OF ACTUA L EXPENDITURE, THE APPELLANT HAS SHOWN THAT ITS MARGI N IN RESPECT OF AE SEGMENT (OP/TC) IS 9.53% WHEREAS THE AVERAGE MARGIN (OP/TC) OF THE COMPARABLE CASES IS 9.22% AND SINCE THE MARGIN OF APPELLANT FALLS WITHIN THE RANG E OF + 5%, AS PROVIDED IN PROVISO TO SECTION 92C(2) OF THE INCOME TAX ACT, THE AO/TPO IS DIRECTED TO DELETE THE TP ADJUSTMENT OF RS 3,04,51,071 IN RESPECT TO THE EXPO RTS TO THE AE . AS REGARDS THE ALP ADJUSTMENT OF RS 1,71,62,946 IN RESPECT OF IMPORTS FROM THE AE, THE CIT(A) RESTRICTED THE SAID ALP ADJUSTMENT TO RS 83,05,263 BY OBSERVING AS FOLLOWS: 5.3 THE APPELLANT HAS STATED THAT THE APPELLANT COM PANY HAD SUBMITTED THE COST SHEET BEFORE THE TPO SHOWING THE EXPENSES ACTUALLY INCURR ED TOWARDS A PARTICULAR SEGMENT. THE TPO BENCHMARKED THE INTERNATIONAL TRANSACTION R ELATED TO THE IMPORT OF RAW MATERIALS IN THE RATIO OF TURNOVER WITHOUT CONSIDER ING THE COST SHEET. THE APPELLANT HAS STATED THAT THE PURCHASES HAS TO BE ALLOCATED O N ACTAULS AND SHOULD NOT BE SEGREGATED ON THE BASIS OF TURNOVER. THE PERCENTAGE OF RAW MATERIALS CONSUMED BY THE APPELLANT TO THE EXPORT TO AE'S IS 68.78% (VALUE IN RS. 42,127,962) AND IT HAS ALREADY BEEN BENCHMARKED. THE RAW MATERIALS OF RS. 19.122.7 57/- BEING 31.22% OF THE TOTAL RAW MATERIALS REMAIN TO BE BENCHMARKED. WHILE BENCH MARKING THE IMPORT OF RAW MATERIALS, THE TPO HAS TREATED THE TECHNICAL KNOWHO W AS OPERATING EXPENSES AND ITA NO.5993/DEL/2014 DCIT VS. W DIAMANT INDIA LTD ASSESSMENT YEAR: 2009-10 PAGE 3 OF 4 APPLIED THE MARGIN OF -59.46% AND COMPUTED THE RESU LTANT SALE AT RS.24,798,359. THE TPO HAS COMPUTED THE ADJUSTMENT FOR THE IMPORT OF R AW MATERIALS IN THE FOLLOWING MANNER; 'THE OPERATING LOSS IS RS. 14,745,105. USIN G THIS AS A BASE THE ALP IS CALCULATED AS UNDER OPERATING PROFIT @ 9.75% : RS. 2,417,840 OPERATING PROFIT SHOWN :(RS.L4,745,106 ARM'S LENGTH VALUE OF PURCHASES (BENCHMARKED HERE) : RS.22,380,518 VALUE SHOWN (BENCHMARKED HERE) : RS.39,543 ,464 ADJUSTMENT U/S 92 CA : RS. 17,162,946 I HAVE ALREADY HELD THAT THE TECHNICAL KNOWHOW SHOU LD BE TREATED AS NON-OPERATING EXPENSES AND THE COST OF RAW MATERIALS SHOULD BE AL LOCATED ON THE BASIS OF ACTUALS. THE PERCENTAGE OF RAW MATERIALS CONSUMED BY THE APP ELLANT FOR THE EXPORT TO AE'S IS 68.78%. THUS THE RAW MATERIALS OF RS. 42,127,962/ R ELATED TO EXPORTS BASED ON ACTUALS HAVE BEEN ALREADY BENCHMARKED. THE IMPORT O F RAW MATERIALS AMOUNTING TO RS. 19,122,757/- HAS NOT BEEN BENCHMARKED. AS PER T HE COMPUTATION FILED BY THE APPELLANT, THE OVERALL OPERATING LOSS IS RS 4,95,80 ,411/- AND THE TOTAL TURNOVER IS RS 13,28,39,971/. TREATING THE TECHNICAL KNOWHOW FEE A S NON-OPERATING EXPENSES, THE REVISED MARGIN (OP/SALES) IS COMPUTED AT -37.32% IN STEAD OF -59.46% AND THE RESULTANT SALE IS COMPUTED AT RS 1,19,86,144/- INST EAD OF RS.2,47,98,359/- AS COMPUTED BY THE TPO. USING THIS AS A BASE, THE ALP IS RECOMPUTED AS UNDER: AVERAGE MARGIN OF THE COMPARABLES (OP/SALES) : 9. 75% OPERATING PROFIT @9.75% : RS 11,68,650/- ARM'S LENGTH VALUE OF PURCHASES : RS 1,08,17,4 94/- VALUE SHOWN THE IMPORT OF RAW MATERIALS : RS 1,9 1,22,757/- DIFFERENCE : RS 83,05,263/- ACCORDINGLY, THE ADDITION ON ACCOUNT OF BENCHMARKIN G THE IMPORT OF RAW MATERIALS FROM AE IS RESTRICTED TO RS 83,05,263/- INSTEAD OF RS.1,71,62,986/-. THUS THE APPELLANT GETS A RELIEF OF RS. 88,57,723/-. 4. THE ASSESSING OFFICER IS AGGRIEVED BY THE RELIEF SO GRANTED BY THE CIT(A) AND IS IN APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 6. WE FIND THAT, AS FAIRLY ACCEPTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE SPECIFIC COMPUTATIONS AND COST SHEETS BASED ON WHICH THE CIT (A) HAS GRANTED BY THE IMPUGNED RELIEF IN RESPECT OF ALP ADJUSTMENTS ON EXPORT SALES AND R AW MATERIAL IMPORTS HAVE NOT BEEN PRODUCED BEFORE US. IN ANY EVENT, THERE IS NO MATE RIAL ON RECORD TO EVEN SUGGEST THAT THE CIT(A) HAD CONFRONTED THE AO/TPO WITH THESE COMPUT ATIONS FILED BY THE ASSESSEE AND THAT THE AO/TPO HAD ANY OPPORTUNITY TO BE HEARD IN RESPE CT OF THE SAME. WHEN WE POINTED OUT THIS POSITION TO THE LEARNED COUNSEL, HE DID NOT DI SPUTE THIS POSITION BUT SUGGESTED THAT THE MATTER MAY BE ADJOURNED FOR SOME MORE TIME SO AS TO ENABLE HIM TO OBTAIN THE REQUISITE DOCUMENTS FROM THE ASSESSEE. WE HAVE NOTED THAT THI S MATTER HAS BEEN ADJOURNED ON QUITE A FEW OCCASIONS, AT THE REQUEST OF THE ASSESSEE, AND, IN OUR CONSIDERED VIEW, NO USEFUL PURPOSE WILL BE SERVED BY KEEPING IT PENDING FURTHER. THE ASSESSEE HAS AT THE TIME OF LAST HEARING A ITA NO.5993/DEL/2014 DCIT VS. W DIAMANT INDIA LTD ASSESSMENT YEAR: 2009-10 PAGE 4 OF 4 DETAILED PAPER-BOOK BUT HE COULD NOT POINT OUT SPEC IFIC DOCUMENT DEALING WITH, BEYOND ON SOME VAGUE GENERALITIES, OUR QUESTION ON THE COMPUT ATIONS AND THE EXPLANATIONS FOR VARIATIONS BETWEEN THE COMPUTATIONS OF THE TPO VIS--VIS THE C OMPUTATION BY THE ASSESSEE. LEARNED CIT(A) HAS CLEARLY PROCEEDED TO GIVE HIS DECISION O N THE BASIS OF CERTAIN COST SHEETS AND COMPUTATIONS BUT THEN NOT ONLY THESE COMPUTATIONS W ERE REQUIRED TO BE EXAMINED AND THE VARIATIONS IN THE COMPUTATIONS SHOULD HAVE BEEN RE ASONABLY PROBED, ALL THE MATERIAL SHOULD HAVE BEEN CONFRONTED TO THE AO/TPO. LEARNED COUNSEL HAS LAID LOT OF EMPHASIS ON THE FACT THAT SO FAR AS TREATMENT FOR PAYMENT TO KNOW HOW IS CONCERNED, WHICH WAS TREATED AS AN OPERATING COST BY THE TPO, IS CONCERNED, THE CIT(A) HAS ALREADY HELD THAT THIS IS A CAPITAL COST AND ONLY DEPRECIATION IN RESPECT OF THE SAME IS TO BE ALLOWED- A FINDING AGAINST WHICH THE ASSESSING OFFICER IS NOT IN APPEAL, THE MATTER REST S AT THAT. THIS, HOWEVER, IS NOT ENTIRELY CORRECT INASMUCH AS, EVEN AFTER MAKING THIS ADJUSTM ENT, THE ALP ADJUSTMENT, EVEN IF NOT IN ENTIRETY, WILL SURVIVE BECAUSE OF THE VARIATIONS IN ALLOCATION OF EXPENSES. WHAT HAS BEEN SAID TO BE ALLOCATION OF EXPENSES ON THE BASIS OF ACTUAL , IS NOT, NOR THE EVIDENCES IN SUPPORT THEREFORE, ARE BEFORE US. WHEN THE VERY BASIS ON WH ICH THE IMPUGNED RELIEF IS GRANTED, WHICH WAS NEVER CONFRONTED TO THE AO/TPO AT THE FIRST APP ELLATE STAGE ANYWAY, IS NOT AVAILABLE ON RECORD, WE HAVE NO CHOICE BUT TO REMIT THE MATTER T O THE FILE OF THE CIT(A) FOR FRESH ADJUDICATION AFTER CONFRONTING ALL SUCH MATERIAL, B ASED ON WHICH HE TAKES HIS JUDICIAL CALL, TO THE AO/TPO AND CALLING FOR THE REMAND REPORT ON THE SAME. OF COURSE, AS LEARNED COUNSEL RIGHTLY POINTS OUT, SO FAR AS THE PAYMENTS FOR KNOW HOW BEING TREATED AS OPERATION COST IS CONCERNED, THAT HAS BEEN DECIDED IN FAVOUR OF THE A SSESSEE, AND THAT MATTER RESTS THERE. THERE ARE, HOWEVER, OTHER ADJUSTMENTS AS WELL- AS WE HAVE POINTED OUT. WE, THEREFORE, DIRECT THE CIT(A) TO DECIDE THE MATTER AFRESH IN THE LIGHT OF OUR ABOVE OBSERVATIONS. WHILE DOING SO, HE WILL GIVE DUE AND REASONABLE OPPORTUNITY TO BOTH TH E PARTIES, DECIDE THE MATTER IN ACCORDANCE WITH THE LAW AND BY WAY OF A SPEAKING ORDER DEALING WITH VARIATIONS IN THE COMPUTATIONS OF THE ASSESSEE VIS--VIS THAT OF THE TPO. ORDERED, AC CORDINGLY. 7. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON THE 2 1 ST DAY OF AUGUST, 2018 SD/XX SD/XX SUDHANSHU SRIVASTAVA PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NEW DELHI, DATED THE 21ST DAY OF AUGUST, 2018 COPIES TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI