AUDCO INDIA LIMITED, MUMBAI V. ADDL.CIT., RANGE-2(1), MUMBAI

ITA 6165/MUM/2011

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1008 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 3 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2005-2006
• Appeal Filed On: 06-09-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T ROUMUAN PAITE
• Assessee Lawyers: HEMEN CHANDARIYA ARS
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Rule 8D
• Section: 92E; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K, BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI C.N. PRASAD, JM ITA NO. 6165/MUM/2011 ( ASSESSMENT YEAR: 2005-06) AUDCO INDIA LIMITED, TAXATION DEPARTMENT, L&T HOUSE, N.M. MARG, BALLARD ESTATE, MUMBAI- 400001. VS. ADDL.C.I.T., RANGE-2(1), AAYAKAR BHAVAN, M.K. MARG, MUMBAI-400020. PAN/GIR NO. AAACA 9647 E (APPELLANT ) .. (RESPONDENT ) ITA NO. 6989/MUM/2011 ( ASSESSMENT YEAR: 2007-08) AUDCO INDIA LIMITED, TAXATION DEPARTMENT, L&T HOUSE, N.M. MARG, BALLARD ESTATE, MUMBAI- 400001. VS. ADDL.C.I.T., RANGE-2(1), AAYAKAR BHAVAN, M.K. MARG, MUMBAI-400020. PAN/GIR NO. AAACA 9647 E (APPELLANT ) .. (RESPONDENT ) ITA NO. 1579/MUM/2013 ( ASSESSMENT YEAR: 2008-09) AUDCO INDIA LIMITED, TAXATION DEPARTMENT, L&T HOUSE, N.M. MARG, BALLARD ESTATE, MUMBAI- 400001. VS. ADDL.C.I.T., RANGE-2(1), AAYAKAR BHAVAN, M.K. MARG, MUMBAI-400020. PAN/GIR NO. AAACA 9647 E (APPELLANT ) .. (RESPONDENT ) ASSESSEE BY SHRI RAJAN R VORA & SHRI HEMEN CHANDARIYA (ARS) REVENUE BY SHRI T. ROUMUAN PAITE (SR.DR) DATE OF HEARING 17/12/2019 DATE OF PRONOUNCEMENT 17/12/2019 ITA NO. 6165/MUM/2011 AUDCO INDIA LTD. VS ADDL.CIT & 2 ORS. 2 / O R D E R PER: R.C. SHARMA, A.M. THESE ARE THE APPEALS FILED BY THE ASSESSEE AGAINS T THE SEPARATE ORDERS/DIRECTIONS OF THE LD. CIT(A)-15/DISPUTES RES OLUTION PANEL-I (DRP), MUMBAI DATED 29/06/2011, 19/07/2011 AND 20/12/2012 FOR THE A.YS. 2005-06, 2007-08 AND 2008-09 RESPECTIVELY IN THE M ATTER OF ORDER PASSED U/S 143(3)/144C(5) OF THE INCOME TAX ACT, 19 61 (IN SHORT, THE ACT). 2. THE GRIEVANCE OF THE ASSESSEE IN ALL THE YEARS A RE COMMON, THEREFORE, ALL THE APPEALS WERE CLUBBED AND HEARD T OGETHER AND ARE BEING DECIDED BY THIS CONSOLIDATED ORDER. 3. AT THE OUTSET, THE LD AR OF THE ASSESSEE PLACED ON RECORD THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2004-05 WHEREIN FIRST THREE ISSUES RAISED IN THESE APPEALS HAVE BEEN DECI DED IN FAVOUR OF THE ASSESSEE. 4. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND CAR EFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. FACTS IN BRIEF ARE THAT THE ASSESSEE IS A 50:50 JOINT VENTURE BETWEEN LARSEN & TOUBRO LTD. INDIA AND AUDCO LTD. UK AND IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF INDUSTRIAL VALVES. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE A.Y. 2005-06 ON 26 TH OCTOBER, 2005 DECLARING TOTAL INCOME AT INR ITA NO. 6165/MUM/2011 AUDCO INDIA LTD. VS ADDL.CIT & 2 ORS. 3 49,07,24,600/-. THE ASSESSEE ALSO FILED AN ACCOUNTA NTS REPORT IN FORM 3CEB [IN ACCORDANCE WITH SECTION 92E OF THE ACT) RE PORTING, INTER ALIA, THE PARTICULARS OF ITS INTERNATIONAL TRANSACTIONS W ITH AES. THE A.O. INITIATED SCRUTINY ASSESSMENT PROCEEDINGS U/S 143(2 ) OF THE ACT AND ALSO REFERRED THE CASE TO THE TPO. DURING THE ASSESSMENT PROCEEDINGS, FOLLOWING TRANSFER PRICING ADJUSTMENTS ON EXPORT OF VALVES TO AES WERE MADE: 1. EXPORT OF VALVES OF FLOWSERVE SULPHUR SPRINGS, U SA (FLOWSERVE USA) AND FLOWSERVE SOUTH AFRICA (FLOWSERVE SA). 2. EXPORT OF VALVES TO LARSEN AND TOUBRO LLC (L&T L LC). 5. THE FIRST COMMON GRIEVANCE IN ALL THE THREE APPE ALS RELATE TO ADDITION MADE ON ACCOUNT OF VALVES TO FLOWSERVE USA . FACTS IN BRIEF ARE THAT THE ASSESSEE HAS EXPORTED CERTAIN PRODUCTS TO ITS ASSOCIATE ENTERPRISES (AE) NAMELY FLOWSERVE USA, FLOWSERVE SO UTH AFRICA AND L&T LLC. WHILE PASSING ORDER U/S 92CA(3) OF THE ACT, TH E A.O. MADE ADJUSTMENT TO THE TRANSFER PRICE AND HE HAS NOT ACC EPTED THE LOSS INCURRED BY THE ASSESSEE/LOWER MARGIN EARNED IN THE COURSE OF EXPORT SO MADE. THIS ISSUE WAS BEFORE THE TRIBUNAL IN THE A.Y . 2004-05 IN ITA NO. 71/MUM/2011 AND THE TRIBUNAL VIDE ITS ORDER DATED 1 6/12/2015 HAVE OBSERVED THAT THE PRICE CHARGED FOR A TRANSACTION B ETWEEN CLOSELY RELATED PARTIES (CONTROLLED TRANSACTIONS), HAVE TO BE COMPA RED WITH PRICE ITA NO. 6165/MUM/2011 AUDCO INDIA LTD. VS ADDL.CIT & 2 ORS. 4 CHARGED FOR SIMILAR TRANSACTION BETWEEN UNRELATED P ARTIES. THE TRIBUNAL HAVE FURTHER OBSERVED AS UNDER: IN OUR VIEW, ASSESSEES DECISION TO SELL PRODUCTS TO FLOW SERVE SULPHUR SPRING, USA, IS A PURE BUSINESS DECISION WHICH THE ASSESSEE ONLY CAN TAKE AND THE DEPARTMENTAL AUTHORITIES CANNOT STEP I NTO THE SHOE OF ASSESEE TO QUESTION SUCH A DECISION. IF DOR THE PUR POSE OF PENETRATING THE USA MARKET AND CAPACITY UTILIZATION, THE ASSESS EE TOOK A DECISION TO SELL ITS PRODUCT TO FLOW SERVE SULPHUR SPRING, U SA, THE SAME CANNOT BE CALLED INTO QUESTION. FURTHER, THE LEARNED COUNS EL FOR THE ASSESSEE THROUGH CHART SUBMITTED BEFORE US HAS DEMONSTRATED THAT IN THE SUBSEQUENT YEARS, THE MARGIN IN RELATION TO TRANSAC TIONS WITH FLOW SERVE, USA, HAS INCREASED AND IN FACT THE ASSESSEE HAS SHOWN PROFIT ON SUCH TRANSACTION. SIMILARLY, HE ALSO DEMONSTRATE D THAT THE SALE TO AE IN USA HAS INCREASED THE CAPACITY UTILIZATION. 6. THE TRIBUNAL HAVE FURTHER OBSERVED THAT AS FAR A S CAPACITY UTILIZATION IS CONCERNED, ASSESSEE COULD NOT HAVE S OLD PRODUCTS TO GROUP ENTITIES IN OTHER COUNTRIES MORE THAN THEIR REQUIRE MENT. IT IS ALSO A FACT THAT ASSESSEE CAN SELL THE FINISHED VALVES AND KIT FORMS WITH SPECIFIC DESIGN, QUALITY, ETC. ONLY TO GROUP ENTITIES. UNDER THESE CIRCUMSTANCES, ASSESSEES DECISION TO SELL FINISHED VALVES AND KIT FORMS TO FLOWSERVE SULPHUR SPRINGS, USA IS UNDERSTANDABLE. 7. IN VIEW OF THE ABOVE DISCUSSION, THE TRIBUNAL HE LD THAT NO ADJUSTMENT IS REQUIRED TO BE MADE AT ARMS LENGTH P RICE (ALP). THIS DECISION OF THE TRIBUNAL IN ASSESEES OWN CASE FOR THE A.Y. 2004-05 HAS ALREADY BEEN UPHELD BY THE HONBLE JURISDICTIONAL H IGH COURT VIDE THEIR ITA NO. 6165/MUM/2011 AUDCO INDIA LTD. VS ADDL.CIT & 2 ORS. 5 ORDER DATED 06/03/2019. THE LD SR.DR HAS FAIRLY AGR EED THAT THIS ISSUE IS COVERED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2004-05. RESPECTFULLY FOLLOWING THE ORDER OF THE TR IBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2004-05, WE DO NOT FIND ANY J USTIFICATION FOR THE ADJUSTMENT SO MADE BY THE A.O. IN THE A.Y. 2005-06, 2007-08 AND 2008- 09 RESPECTIVELY. 8. THE NEXT GROUND IN THE APPEAL FOR THE A.Y. 2005- 06, THE ASSESSEE HAS ALLEGED SIMILAR ADDITION OF RS. 36,257/- MADE I N RESPECT OF EXPORT OF VALVES TO FLOWSERVE SOUTH AFRICA. FOLLOWING THE SAM E REASONING GIVEN HEREINABOVE AND RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2004-05, NO ADDITI ON IS WARRANTED. 9. THE NEXT GROUND OF APPEAL RELATES TO ADDITION MA DE IN A.Y. 2005- 06 IN RESPECT OF EXPORT OF VALVES TO L&T LLC. THIS ISSUE IS ALSO COVERED BY THE DECISION OF THE TRIBUNAL FOR THE A.Y. 2002-0 3. WHILE DECIDING APPEAL FOR THE A.Y. 2004-05, THE TRIBUNAL HAVE OBSE RVED THAT FACTS OF THE PRESENT CASE BEING IDENTICAL TO A.Y. 2002-03, THE D ECISION OF THE TRIBUNAL IN THE A.Y. 2002-03 WILL APPLY. EVEN OTHERWISE ALSO , IN TERMS WITH THE DEFINITION OF THE WORD TRANSACTION ALL CLOSELY LI NKED TRANSACTIONS HAVE TO BE AGGREGATED FOR DETERMINING THE ARMS LENGTH PRIC E AND A SELECTIVE APPROACH BY PICKING UP ONLY A FEW TRANSACTIONS CANN OT BE ADOPTED. ITA NO. 6165/MUM/2011 AUDCO INDIA LTD. VS ADDL.CIT & 2 ORS. 6 10. IN ADDITION TO THE ORDER OF THE TRIBUNAL, THE L D AR HAS RELIED ON FOLLOWING JUDICIAL PRONOUNCEMENTS: 1. DEVELOPMENT BANK OF SIINGAPORE (155 TTJ 265) 2. COLOUR CHEM LTD. (ITA NO. 2606/MUM/2011 DATED 11 FEBRUARY 2014 (MUMBAI ITAT). 3. ADANI WILMER LIMITED (ITA NO. 240 OF 2014 DATED 7 APRIL 2014 (GUJ) 4. PETROCHEM MIDDLE EAST INDIA PVT. LTD. (ITA NO. 2070/MUM/2014 DATED 27 APRIL 2016 (MUMBAI ITAT). 11. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNA L IN ASSESSEES OWN CASE, WE DIRECT THE A.O. TO WORK OUT ADJUSTMENT IN TERMS OF DIRECTION GIVEN BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR TH E A.Y.2002-03 AND 2004-05. WE DIRECT ACCORDINGLY. 12. THE 4 TH GROUND IN THE APPEAL FOR THE A.Y. 2005-06 AD 2007- 08 RELATES TO DISALLOWANCE U/S 14A OF THE ACT. THE A.O . HAS WORKED OUT DISALLOWANCE U/S 14A OF THE ACT AS PER RULE 8D OF T HE IT RULES, 1962, WE FOUND THAT AS PER VARIOUS RULINGS OF MUMBAI ITAT FO R THE YEARS PRIOR TO A.Y. 2008-09, IT HAS BEEN HELD THAT 5% OF THE EXEMP T INCOME EARNED SHOULD CONSTITUTE TO BE SUFFICIENT DISALLOWANCE FOR THE PURPOSE OF SECTION 14A OF THE ACT. FOR THIS PURPOSE, RELIANCE MAY BE P LACED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: 1. VIKABH SECURITIES P LTD. (35 CCH 350) 2. DARASHAW & COMPANY P LTD. (ITA NO. 225/MUM/2011) ITA NO. 6165/MUM/2011 AUDCO INDIA LTD. VS ADDL.CIT & 2 ORS. 7 3. ALOK INDUSTRIES LTD. (ITA NO. 6575/MUM/2010). 13. IN VIEW OF THE ABOVE JUDICIAL PRONOUNCEMENTS, W E DIRECT THE A.O. TO RESTRICT THE ADDITION TO THE EXTENT OF 5% OF THE EXEMPT INCOME IN THE A.Y. 2005-06 AND 2007-08. 14. IN THE RESULT, ALL THESE THREE APPEALS OF THE A SSESSEE ARE ALLOWED IN PART, IN TERMS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH DECEMBER, 2019. SD/- (C.N. PRASAD) SD/- (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; DATED 17/12/2019 *RANJAN COPY OF THE ORDER FORWARDED TO : BY ORDER, (ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//