Indian Additives Ltd, V. DCIT,

ITA 610/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7789 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 01-02-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 15-03-2016
• Court: TRIBUNAL
• Department Lawyers: R DURAI
• Assessee Lawyers: M VISWANATHANCA
• Keywords: Business income; Depreciation; Transfer pricing; International transaction

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , ! ' ! # . $ % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.2579/MDS./2016 / ASSESSMENT YEAR : 2009-10 M/S.INDIAN ADDITIVES LTD ., EXPRESS HIGHWAY, MANALI, CHENNAI 600 068. VS. THE DCIT, COMPANY CIRCLE II(3), CHENNAI 600 034. [PAN AAACI 1445 G ] ( () / APPELLANT) ( *+() /RESPONDENT) ./ I.T.A.NO.610/MDS./2016 / ASSESSMENT YEAR : 2010-11 M/S.INDIAN ADDITIVES LTD ., EXPRESS HIGHWAY, MANALI, CHENNAI 600 068. VS. THE DCIT, CORPORATE CIRCLE 2(2), CHENNAI 600 034. [PAN AAACI 1445 G ] ( () / APPELLANT) ( *+() /RESPONDENT) / APPELLANT BY : MR.M.VISWANATHAN,C.A /RESPONDENT BY : MR.R.DURAI PANDIAN, JCIT,DR / DATE OF HEARING : 01 - 0 2 - 201 7 / DATE OF PRONOUNCEMENT : 17 - 02 - 2017 ITA NO.610, 2579/16 :- 2 -: , / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE TWO APPEALS ARE FILED BY THE ASSESSEE, AGGRI EVED BY THE DIFFERENT ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-6, CHENNAI DATED 2009-10 AND 27.01.2016 P ERTAINING TO ASSESSMENT YEARS 2009-10 AND 2010-11 RESPECTIVELY. SINCE ISSUES INVOLVED IN THESE TWO APPEALS ARE COMMON IN NATURE, THESE APPEALS ARE CLUBBED TOGETHER, HEARD TOGETHER, DISPO SED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE COMMON GROUND IN THESE TWO APPEALS IS WITH R EGARD TO DOWNWARD ADJUSTMENT TO TRANSFER PRICING (TP) - ` 4,58,00,000/- (A.Y. 2009-10) AND ` 3,83,93,740/-(A.Y.2010-11). 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS ORONITES JOINT VENTURE BETWEEN M/S. CHENNAI PETROL EUM CORPORATION LTD., AND M/S.CHEVRON ORONITE COMPANY L LC USA. THE ASSESSEE IS ENGAGED IN THE MANUFACTURE AND SALE OF LUBE ADDITIVES. FOR THESE TWO ASSESSMENT YEARS, THERE WA S DOWNWARD ADJUSTMENTS BY TPO TO TRANSFER PRICING (TP) - ` 4,58,00,000/- (A.Y. ITA NO.610, 2579/16 :- 3 -: 2009-10) AND ` 3,83,93,740/-(A.Y.2010-11) IN RESPECT OF INTERNATIONAL TRANSACTION WITH ITS AE BY FOLLOWING TNMM METHOD AND BENCH MARKING THE FINANCIALS OF M/S.LUBRIZOL IN DIA PVT. LTD., WHICH IS ALSO IN THE BUSINESS OF MANUFACTURING AUTO MOBILE ADDITIVES, LIKE THE ASSESSEES COMPANY. THE ASSESS EE COMPANY HAD AGITATED AGAINST NON-CONSIDERATION OF FOLLOWIN G THREE ADJUSTMENTS IN THESE TWO ASSESSMENT YEARS:- (I) ADJUSTMENT ON ACCOUNT OF LUBE OIL/BASE OIL/M INERAL OIL PRICE (II) ADJUSTMENT FOR ZINC TOLLING FEE (III) ADJUSTMENT FOR TRANSPORTATION COST 4. BEFORE US, LD.A.R SUBMITTED THAT M/S.LUBRIZOL I NDIA PVT. LTD., WAS ESTABLISHED IN THE YEAR 1966 WHILE THE ASSESSE E WAS FOUNDED IN 1989 AND COMMERCIAL OPERATION STARTED IN 1992. THUS, THIS COMPARISION, LUBRIZOL HAS BUILT A STRONG CAPIT AL BASE AND IS ALSO CASH RICH, IS NOT PROPER. DUE TO ITS SIZE AND VOLUME OF THE TRANSACTIONS RELATING TO THE SALES, IT CANNOT BE CO MPARED WITH THE ASSESSEES COMPANY. IT WAS SUBMITTED BEFORE US THAT NET WORTH OF LUBRIZOL BEING MORE THAN 3 TIMES THE NET WORTH OF T HE ASSESSEE IT IS INCOMPARABLE WITH THE ASSESSEE. IT IS ALSO SUB MITTED THAT ITA NO.610, 2579/16 :- 4 -: LUBRIZOL HAS DIVERSIFIED PRODUCT MIX AND HAS ITS PR ESENCE NOT ONLY IN THE AUTOMOBILE LUBRICANT MARKET BT ALSO IN INDUS TRIAL LUBRICANTS (MANUFACTURING/MARKETING) SUCH AS HYDRAULIC, INDUST RIAL GEAR OIL, METAL WORKING, TURBINE OILS, HEAT TRANSFER & OTHER SPECIALTIES WHERE THE MARGINS ARE HIGHER THAN THOSE SEEN IN AUT OMOTIVE ADDITIVES (WHERE WE PREDOMINANTLY OPERATE). THESE P RODUCTS ARE PROPRIETARY IN NATURE AND LUBRIZOL ENJOYS A MONOPOL Y IN THIS SEGMENT AND ENJOY HIGHER MARGIN. FURTHER, WITHIN AU TOMOTIVE SEGMENT TOO, LUBRIZOL MARKET AUTOMOTIVE GEAR OIL AD DITIVES, AUTOMATIC TRANSMISSION FLUIDS DELIVER SIGNIFICANTLY BETTER MARGINS. 4.1 FURTHER, IT WAS SUBMITTED THAT THERE IS ALSO A POSSIBILITY THAT FOR EXPORTS, LUBRIZOL PRICES/MARGIN LEVELS WAS COMP ARATIVELY HIGH: IN 2009-10, LUBRIZOL EXPORTS CONSTITUTED APPROX. 14 % OF THEIR SALES TURNOVER. WHILE ASSESSEES EXPORT SALES CONST ITUTED LESS THAN ONE PERCENT OF THE TOTAL TURNOVER. 4.2 FURTHER THE FINANCIALS OF LUBRIZOL WAS NOT IN THE PUBLIC DOMAIN AND THEREFORE CANNOT BE OBTAINED FOR COMPARI SON. EVEN ASSUMING BUT NOT ADMITTING IF THE LUBRIZOL IS COMPA RED WITH THE ITA NO.610, 2579/16 :- 5 -: ASSESSEE COMPANY, THEN THE FOLLOWING ADJUSTMENTS HA S TO BE GIVEN WHILE COMPUTING PLI. ADJUSTMENTS ON ACCOUNT OF LUBE OIL/BASE OIL/ MINER AL OIL PRICE: THE LD.A.R SUBMITTED THAT THE COST OF PROCUREMENT O F LUBE OIL OR MINERAL OIL WHICH IS ONE OF THE MAJOR RAW MA TERIAL USED IN THE ADDITIVE PACKAGE IS HIGHER IN THE CASE OF ASSES SEE AS COMPARED TO THE SELECTED COMPANY (LUBRIZOL). IT IS EVIDENT FROM THE ANNUAL REPORT OF BOTH THE COMPANIES VIDE SCHEDU LE 18 NOTES TO B/S AND P/E VIDE POINT 8B OF LUBRIZOL INDIA LTD FINANCIALS OF THE RELEVANT PREVIOUS YEAR IS AVAILABLE IN PAGE NO 17 A ND REFER PAGE NO.38 OF IAL FINANCIALS VIDE POINT 16 OF SCHEDULE T O B/S OF IAL FINANCIALS THAT THE COST OF PROCUREMENT BY IAL WAS MORE BY ABOUT RS.6629/MT WHICH NEEDS TO BE ADJUSTED IN THE COMPUT ATION OF OPERATING PROFIT OF THE ASSESSEE. THE DIFFERENCE IN PROCUREMENT COST IS DUE TO THE FACT THAT LUBRIZOL INDIA IS A JV PROMOTED BY INDIAN OIL CORPORATION (IOCL) AND LUBRIZOL CORPORAT ION, USA. IOCL HAVE GIVEN BETTER DISCOUNT IN LUBE OIL PRICE / MT TO LUBRIZOL WHICH IS EVIDENT FROM THE ANNUAL REPORT. THE COMPUT ATION OF ADJUSTMENTS IS AVAILABLE FROM PAGE 42 TO 46. THE SA ME HAS ALREADY SUBMITTED DURING THE COURSE OF HEARING. ITA NO.610, 2579/16 :- 6 -: TOLLING FEE FOR ZINC 4.4 FURTHER, LD.A.R SUBMITTED THAT LUBRIZOL HAS A BETTER BACKWARD INTEGRATION SYSTEM (FOR E.G. THEY TOLL THE IR OWN ZINC AND VISCOSITY INDEX IMPROVERS ARE SOLUBILIZED IN HOUSE) . WHEREAS, THE ASSESSEE COMPANY DOES NOT POSSESS THE MANUFACTURING FACILITY FOR MAKING ZINC. HENCE IT HAS ENTERED INTO SUB-CONT RACTING AGREEMENT UNITED PROSPEROUS LIMITED IN GUJARAT FOR MAKING ZINC. THEREFORE THE COST OF ZINC IN THE CASE OF IAL AND L UBRIZOL CANNOT BE COMPARED ONE TO ONE. 4.5 ACCORDING TO LD.A.R, NECESSARY ADJUSTMENTS HAS TO BE DONE TO REFLECT THE COST WHICH IAL WOULD HAVE INCURRED H AD MANUFACTURING ACTIVITY BEEN CARRIED OUT BY THE ASSE SSEE COMPANY RATHER THAN SUBCONTRACTING COST WHICH IS HIGHER THA N THE IN HOUSE MANUFACTURING COST. SINCE THE IN HOUSE MANUFACTURIN G COST OF ZINC IN LUBRIZOL IS NOT AVAILABLE, THE IN HOUSE MAN UFACTURING COST OF RS.9021.73/MT OF PHENATE (SEMI FINISHED GOOD- A SIMILAR PRODUCT TO ZIWC) (REFER PAGE NO.42 TO 46) IN ASSESS EE IS CONSIDERED AS THE BASE FOR ARRIVING AT THE IN HOUSE MANUFACTURING COST OF ZINC (SEMI FINISHED GOODS). HE SUBMITTED TH AT THE QUANTITY OF ZINC PROCURED FROM TOILER FOR THE FY 20 09-10 IS 2614.25 MT. THE AVERAGE COST OF PROCUREMENT FROM TH E TOILER IS ITA NO.610, 2579/16 :- 7 -: RS.28,919 /MT. THE DIFFERENCE COST OF RS.17979/MT ( BEING RS.28,919/ MT MINUS 9021.73/ MT) WHICH IAL HAS INCU RRED EXCESS AS COMPARED TO THE IN HOUSE MANUFACTURING CO ST OF RS.9021.73/MT HAS TO BE ADJUSTED IN THE COMPUTATION OF OPERATING PROFIT OF THE ASSESSEE COMPANY. ADDITIONA LLY IAL HAS INCURRED RS.3500/MT FOR TRANSPORTATION OF ZINC FROM GUJARAT TO CHENNAI AND THE SAME HAS ALSO TO BE ADJUSTED TO ARR IVE AT THE COMPARABLE COST OF ZINC. HE DREW OUR ATTENTION TO THE AGREEMENT COPY BETWEEN IAL AND UPL, PLACED AT PAGE NO. 47 TO 56 OF PAPER BOOK). 4.6 ACCORDING TO AR, FRIEGHT COST ON SALES IS AN OTHER SIGNIFICANT REASON FOR LOW COST IN LUBRIZOL BEING T HE PROXIMITY OF LUBRIZOL INDIA PLANT TO SUPPLIERS AND CUSTOMERS. IT IS TO BE NOTED THAT THE PLANT OF LUBRIZOL INDIA IS SITUATED AT MUM BAI WHERE THE STATE RUN OIL MARKETING COMPANIES AND MOST OF THE C USTOMERS ARE LOCATED WHICH REDUCED THE COST OF TRANSPORTATION IN LUBRIZOL. THE ASSESSEE CATERS TO THE NEEDS OF BOTH LOCAL AND INT ERSTATE CUSTOMERS. PREDOMINANTLY THE ASSESSEE HAS SOLD 223 17 MT OF LUBRICANTS OUT OF TOTAL SALES QUANTITY OF 24053 MT. IN RESPECT OF CERTAIN INTERSTATE SALES, THE TRANSPORTATION COST I S BORNE BY THE END ITA NO.610, 2579/16 :- 8 -: CUSTOMERS. THEREFORE ONLY THOSE INTERSTATE SALES WH ERE THE TRANSPORTATION COST IS BORNE THE ASSESSEE COMPANY N EEDS ADJUSTMENT TO REFLECT TRANSPORTATION COST HAD THE S ALES BEEN MADE LOCALLY. ACCORDING TO LD.A.R, THE ADJUSTMENTS ON A CCOUNT OF INTER- STATE TRANSPORTATION COST AND RE-COMPUTING THE PLI OF IAL AND LUBRIZOL CONSIDERING THE ADJUSTMENTS WERE TO BE CON SIDERED WHICH WAS FURNISHED IN THE PAPER BOOK AT PAGE-5 VIZ: ( A) MINERAL OIL/ BASE OIL (B) ZINC PROCUREMENT (C) TRANSPORTATION COST 5. ON THE OTHER HAND, LD.D.R SUBMITTED THAT THE A SSESSEE COMPANY HAS NOT CONTESTED THE FACT THAT M/S. LUBRIZ OL INDIA PVT. LTD. IS IN THE SAME LINE OF BUSINESS AND IS COMPARA BLE. BEFORE THE TPO, IT HAS ALSO BEEN SUBMITTED THAT LUBRIZOL IS A COMPARABLE COMPANY. HOWEVER, THE SELECTIVE CHERRY PICKING BY T HE APPELLANT COMPANY ASKING FOR ADJUSTMENTS IN MINERAL OIL PRICE , ZINC TOLLING AND TRANSPORTATION IS NOT TENABLE FOR THE REASONS T HAT ADJUSTMENTS CANNOT ONLY BE RESTRICTED TO IT ITEMS ADVERSE TO TH E ASSESSEE COMPANY. THE ASSESSING OFFICER HAS RIGHTLY POINTED OUT EVEN THOUGH THE TURNOVER THIS OF ASSESSEE COMPANY AND T HE COMPARABLE IS IN THE RATIO OF 1:2, THE DEPRECIATION IN THE CASE OF ITA NO.610, 2579/16 :- 9 -: THE ASSESSEE WAS ONLY RS. 1.95 CRORES, WHEREAS THE DEPRECIATION IN THE CASE OF THE COMPARABLE IS RS.9. 13 CRORES (REALLY 4.5 TIMES). IN THE WORKING FOR ADJUSTMENT S UBMITTED BY THE ASSESSEE COMPANY, IT HAS MERELY BEEN MENTIONED THA T. THE COST OF ZINC PROCUREMENT FOR THE APPELLANT IS HIGHER DUE TO TRANSPORTATION FROM GUJARAT TO CHENNAI. SIMILARLY, IT HAS BEEN MENTIONED THAT ADJUSTMENT FOR TRANSPORTATION IS REQ UIRED AS QUANTITY OF SALES TO OUTSTATION CUSTOMERS IS SUBSTA NTIAL. NO CROSS COMPARISON WITH THE COMPARABLE HAS BEEN MADE. HOW D OES THE ASSESSEE -COMPANY ASSUME THAT ALL THE SALES OF COMP ARABLES ARE IN ITS OWN STATION, AND THAT IT DOES NOT INCUR SIGN IFICANT TRANSPORTATION COST? GIVEN THE FACT THAT THE TURNOV ER OF THE COMPARABLE IS SIGNIFICANTLY MORE THAN THE ASE, IN T HE ABSENCE OF ANY CREDIBLE DATA ANALYSIS VIS--VIS THE COMPARABLE , THE CONTENTIONS MADE BY THE ASSESSEE COMPANY, IN ITS G ROUNDS OF APPEAL IS NOT ACCEPTABLE AND TO BE DISMISSED. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ACCORDING TO LD.A.R, LUBRIZOL IS PROCURING RAW MATERIALS AT LOWER COST AS LUBRIZOL IS A JV PROMOTED BY M/S.INDI AN OIL CORPORATION ( IOCL)., AND M/S.CHEVRON ORONITE COMPA NY LLC ITA NO.610, 2579/16 :- 10 - : USA. IOCL HAS GIVEN BETTER DISCOUNT IN LUBE OIL PRI CE/MT TO LUBRIZOL, WHICH IS NOT AVAILABLE TO THE ASSESSEE. IN OUR OPINION, IF IT IS REFLECTED IN THE FINANCIAL STATEMENT OF LUBRI ZOL, IT IS APPROPRIATE TO GIVE CREDIT TO THE SAME AND COMPUTATION OF T.P A DJUSTMENTS THEREAFTER WHILE DETERMINING THE ALP. ACCORDINGLY W E REMIT THE ISSUE TO THE FILE OF AO FOR RECONSIDERATION AND GIV E PROPER ADJUSTMENTS ON ACCOUNT OF RAW MATERIALS COST OF LUB RIZOL AND MINERAL OIL. THIS ISSUE IS REMITTED TO THE FILE OF AO FOR FRESH CONSIDERATION. 6.1 REGARDING TOLLING FEE FOR ZINC, IT WAS SUBMITT ED THAT LUBRIZOL TOLL HAD THEIR OWN ZINC AND ON OTHER HAND, THE ASSESSEE ENTERED INTO SUB CONTRACT AGREEMENT WITH UPL LTD. I N GUJARAT FOR MAKING ZINC. THEREFORE THE COST OF ZINC IN THE CASE OF ASSESSEE IS HIGHER COMPARED TO THE COST INCURRED BY THE LUBRIZO L TOWARDS THE ZINC. IN OUR OPINION, IF THE DETAILS OF COST OF PRO CUREMENT OF ZINC BY TOLLING, THE SAME BY LUBRIZOL IS AVAILABLE AND IF T HE AO FINDS THAT THE COST PRICE OF THE ZINC INCURRED BY THE LUBRIZOL IS LESSER AS COMPARED TO THE ASSESSEES CASE, THEN THE SUITABLE ADJUSTMENTS TO BE MADE WHILE DETERMINING THE ALP. ACCORDINGLY, THIS ISSUE IS ALSO REMITTED TO THE FILE OF AO FOR FRESH CONSIDERA TION. IT IS ITA NO.610, 2579/16 :- 11 - : NEEDLESS TO SAY THAT OPPORTUNITY OF HEARING TO BE G IVEN TO ASSESSEE BY AO/TPO BEFORE DECIDING THE ABOVE ISSUE S. 6.2 REGARDING TRANSPORTATION COST, IT IS SUBMITTED THAT THE ASSESSEE INCURRED ADDITIONAL COST FOR TRANSPORTATIO N FROM GUJARAT TO CHENNAI WHEREAS THE COST OF TRANSPORTATION IN CA SE OF LUBRIZOL IS LESS. HOWEVER, WE FIND THAT THE ASSESSEE HAS NOT ABLE TO ESTABLISH THAT THE COST OF TRANSPORTATION IN CASE O F LUBRIZOL IS LESSER THAN THE ASSESSEE AND LUBRIZOL IS SELLING IT S GOODS ONLY IN LOCAL AND THUS ARGUMENTS OF ASSESSEE CANNOT BE UPHE LD. THIS GROUND IS REJECTED. 7. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSE E ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 17 TH FEBRUARY, 2017, AT CHENNAI. SD/ - SD/ - ! ' # . $ %& ' ( DUVVURU RL REDDY ) ) % / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER () / CHENNAI *+ / DATED: 17 TH FEBRUARY, 2017. K S SUNDARAM +,-- ./-0/ / COPY TO: - 1 . / APPELLANT 3. - 1-!' / CIT(A) 5. /23- 4 / DR 2. / RESPONDENT 4. - 1 / CIT 6. 3&-5 / GF