DCIT, New Delhi V. M/s Marubeni Itochu Steel India Pvt. Ltd., New Delhi

ITA 6655/DEL/2015

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6708 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2019
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 15-12-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUBHA KANT SAHU SENIOR
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Set aside
• Section: 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.6655/DEL./2015 (ASSESSMENT YEAR : 2011-12) DCIT, CIRCLE 16 (1), VS. M/S. MARUBENI ITOCHU STEE L INDIA PVT. LTD., NEW DELHI. 704, 7 TH FLOOR, MERCANTILE HOUSE, 15, KASTURBA GANDHI MARG, NEW DELHI 110 001. (PAN : AAECM6453G) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU S. SINHA, ADVOCATE SHRI BHUWAN DHOOPAR, ADVOCATE REVENUE BY : SHRI SUBHA KANT SAHU, SENIOR DR DATE OF HEARING : 15.10.2019 DATE OF ORDER : 30.10.2019 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, DCIT, CIRCLE 16 (1), NEW DELHI. (HER EINAFTER REFERRED TO AS THE REVENUE) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.10.2015 PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TP O UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1 961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2011-12 ON THE GROUND S INTER ALIA THAT :- ITA NO.6655/DEL./2015 2 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE DISPUTE RESOLUTION PANEL (DRP) WAS RIGHT IN DISAGREEING WIT H THE DESCRIPTION OF THE ACTIVITY CARRIED OUT BY THE ASSESSEE AS THAT OF BEING AKIN TO TRADING? 2. WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE, THE DISPUTE RESOLUTION PANEL (DRP) WAS RIGHT IN LAW IN REJECTIN G THE PRIMACY OF FUNCTIONS CARRIED OUT BY THE ASSESSEE AND BASING IT S DECISION ON THE GROUND THAT RISKS WERE MINIMAL IN THE CASE OF THE A SSESSEE? 3. WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE, THE DISPUTE RESOLUTION PANEL (DRP) WAS RIGHT IN LAW IN REJECTIN G THE TPO'S ANALYSIS WITHOUT GOING INTO THE AGREEMENTS THE ASSESSEE HAS ENTERED INTO WITH AE BEING THE FINAL FACT FINDING AUTHORITY? 4. WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE, THE DISPUTE RESOLUTION PANEL (DRP) ERRED IN DIRECTING ACCEPTABL E OF A PLI THAT DOES NOT INCLUDE COST OF GOODS AMONG EXPENSES, WHEN ALL THE FUNCTIONS PERFORMED ASSETS UTILIZED AND RISK UNDERTAKEN WERE IN THAT CONTEXT ONLY? 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. MARUBENI ITOCHU STEE L INDIA PVT. LTD. (MIIP) (HEREINAFTER REFERRED TO AS THE TAXPAYER) IS A SERVICE AND TRADING COMPANY AND ALSO PROVIDING LIAISONING SUPPORT SERVI CES TO ITS PARENT AND AFFILIATES FOR PURCHASE AND SALE OF GOODS FROM/IN I NDIA. IT IS WORKING AS COMMUNICATION CHANNEL BETWEEN ITS PARENT/AFFILIATES COMPANIES AND THIRD PARTIES IN INDIA. THE TAXPAYER DURING THE YEAR UND ER ASSESSMENT ENGAGED IN TWO TYPES OF TRANSACTIONS WITH ITS GROUP COMPANI ES VIZ. :- (A) PROVISION OF SUPPORT SERVICES TO ITS GROUP COMPANIE S SERVICE SEGMENT; AND (B) PURCHASE OF STEEL PRODUCTS FROM ITS GROUP COMPANIES FOR THE PURPOSE OF RESALE IN INDIA TRADING SEGMENT. ITA NO.6655/DEL./2015 3 3. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES (AE) AS UNDER:- MARUBENI INDIA COMPARABLES INTERNATIONAL TRANSACTION SEGMENT NAME TRANSFER PRICING METHOD PROFIT LEVEL INDICATOR (PLI) TOTAL VALUE OF TRANSACTIONS (INR) MARGIN ARITHMETIC MEAN IMPORT OF FINISHED GOODS TRADING TNMM OP/SALES 324,256,873 2.17% 0.78% PROVISION OF SUPPORT SERVICES INDENT TNMM OP/VAE 119,080,510 17.19% 12.17% REIMBURSEMENTS PAYABLE 25,111,289 REIMBURSEMENTS RECEIVABLE COST-TO- COST NA NA 4,598,098 NA NA 4. THE TAXPAYER IN ITS TP STUDY APPLIED TRANSACTION AL NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD (MAM) WITH OP/SALES AS PROFIT LEVEL INDICATOR (PLI) FOR TRADING AND OP/VAR FOR SERVICE TRANSACTION TO BENCHMARK ITS INTERNATIONAL TRANSACT IONS. THE TAXPAYER SELECTED 12 COMPARABLES ENGAGED IN DISTRIBUTION OF STEEL PROJECTS WITH AVERAGE OP/SALES AT 0.78% USING MULTIPLE YEAR DATA AS AGAINST ITS OWN OP/SALES AT 2.17% FOR AE TRADING SEGMENTS. IN SERV ICE SEGMENT, THE TAXPAYER CARRIED OUT TP ANALYSIS WITH 7 COMPARABLE COMPANIES ENGAGED IN IDENTICAL SERVICES WITH AVERAGE OP/VAE AT 12.17% USING MULTIPLE YEAR DATA AS AGAINST OP/VAE OF THE TAXPAYER AT 17.19% FO R AE INDENT SEGMENT FOR THE YEAR UNDER ASSESSMENT AND FOUND ITS TRANSAC TION AT ARMS LENGTH. ITA NO.6655/DEL./2015 4 5. TRANSFER PRICING OFFICER (TPO) REJECTED THE TAXP AYERS APPROACH AND BENCHMARKED THE INTERNATIONAL TRANSACTIONS AFRE SH WITH REGARD TO INDENT SEGMENT BY REJECTING TAXPAYERS APPROACH, TH E TPO RECHARACTERIZED THE COMMISSION/SERVICE OF THE TAXPAYER AS TRADING B USINESS ON THE GROUND THAT THE TAXPAYER IS OWNER OF SUPPLY CHAIN MANAGEME NT AND HUMAN INTANGIBLES AND ALSO PROCEEDED TO CONCLUDE THAT COM PENSATION MODEL OF THE TAXPAYER DOES NOT ACCOUNT FOR THE PROFIT ATTRIB UTABLE TO LOCATION SAVINGS AND THEREBY ADDED THE VALUE OF RS.895 CRORE S I.E. VALUE OF THE GOODS ON WHICH THE TAXPAYER HAS EARNED COMMISSION T O THE COST BASE OF SERVICE FEES AND COMMISSION SEGMENT PERTAINING TO A E. TPO BY CONDUCTING A FRESH SEARCH OF THE COMPANIES ENGAGED IN STEEL TRADING ACTIVITIES USED 2.68% AS THE BENCHMARK FOR MAKING THE ENHANCED COST OF THE TAXPAYER AND THEREBY MADE AN ADJUSTMENT OF RS.2 2,51,55,093/- TO THE TOTAL INCOME OF THE TAXPAYER. 6. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY WAY OF FILING OBJECTIONS, WHO HAS PARTLY ALLOWED THE OBJECTIONS N O.3, 5, 6 & 9 BY FOLLOWING THE DECISION IN AY 2010-11. FEELING AGGRI EVED, THE REVENUE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING TH E PRESENT APPEAL. 7. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS RELIED UPON AND ORDERS PASSED BY ITA NO.6655/DEL./2015 5 THE REVENUE AUTHORITIES BELOW IN THE LIGHT OF THE F ACTS AND CIRCUMSTANCES OF THE CASE. 8. AT THE VERY OUTSET, LD. DR FOR THE REVENUE AS WE LL AS LD. AR FOR THE TAXPAYER BROUGHT ON RECORD THE FACT THAT SIMILAR AD JUSTMENT WAS MADE BY THE TPO IN TAXPAYERS OWN CASE FOR AY 2010-11 WHICH WAS SET ASIDE IN APPEAL BY THE TRIBUNAL IN ITA NO.761/DEL/2015 ORDER DATED 24.07.2015 TO THE AO. THE ISSUE INVOLVED IS RE-CHARACTERIZATI ON OF THE BUSINESS OF THE TAXPAYER, BUT LD. DRP BY DISAGREEING WITH THE AO/TP O REJECTED THE CONCLUSION THAT FROM THE EVIDENCE ON RECORD, INTERF ERENCE IN THE NATURE OF THE BUSINESS OF THE TAXPAYER IS NOT REQUIRED AS THE REVENUE CANNOT DICTATE THE BUSINESS MODEL OF THE TAXPAYER AND HELD THAT IT WAS UNWARRANTED ON THE PART OF THE TPO TO MODIFY THE CHARACTER OF THE TAXPAYER IN THE COMMISSION / SERVICE SEGMENT AS TRADING SEGMENT 9. HOWEVER, PERUSAL OF THE DECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE BEARING ITA NO.761/DEL/2015 FOR AY 2010-11 (SUPRA), AT PARA 52 PAGE 45 OF THE ORDER, SHOWS TH AT IT IS APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE CA SE WHICH HAS BEEN CONFIRMED BY THE HONBLE HIGH COURT OF DELHI VIDE ORDER DATED 05.05.2006 IN ITA 129/2016, AVAILABLE ON FILE. COORDINATE BENCH OF THE TRIBUNAL DECIDED THE IDENTICAL ISSUE BY RESTORING T HE MATTER BACK TO THE TPO BY RETURNING FOLLOWING FINDINGS :- ITA NO.6655/DEL./2015 6 52. NEXT ISSUE IS WITH REPORT TO SERVICE FEE SEGM ENT WHICH THE TPO TREATED AS TRADING SEGMENT. AS PER THE ASSESSEE, TH E ASSESSEE IS INVOLVED IN TWO SEGMENTS I.E. TRADING SEGMENT AND SERVICE FEE/C OMMISSION FEE SEGMENT. IN RESPECT TO THE COMPUTATION OF ALP BY THE ASSESSE E REFLECTED FOR TRADING SEGMENT IS NOT DISPUTED BY THE TPO. HOWEVER, IN RES PECT TO THE OTHER SEGMENT WHICH WAS CLAIMED BY THE ASSESSEE AS INCOME FROM SERVICE FEE/COMMISSION FEE SEGMENT, THE TPO, HOWEVER, DISAG REES WITH THE ASSESSEES CONTENTION AND TREATS IT AS INCOME FROM TRADING ACTIVITY. THE SAME ISSUE CROPPED IN MITSUBISHI CORPORATION INDIA PVT. LTD. (SUPRA) WHEREIN THE COORDINATE BENCH FOLLOWING THE ORDER OF THE HONBLE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF M /S LI & FUNG INDIA PVT. LTD VS. CIT (361 ITR 85) HAS UPHELD THE CONTENTION OF THE ASSESSEE THAT IT IS NO LONGER OPEN TO THE REVENUE AUTHORITIES TO RECONS TRUCT THE FINANCIAL STATEMENTS OF THE ASSESSEE BY INCLUDING THE COST OF PRODUCTS INCURRED BY ITS AES, IN RESPECT OF WHICH SERVICES ARE RENDERED, IN ITS RECONSTRUCTED FINANCIAL STATEMENTS AND THEN PUTTING THE HYPOTHETI CAL TRADING PROFITS, SO ARRIVED IN THEIR RECONSTRUCTED FINANCIAL STATEMENTS , TO THE TESTS FOR DETERMINING ARMS LENGTH PRICE. THE COORDINATE BENC H HELD AS FOLLOWS :- SERVICE FEE/ COMMISSION SEGMENT OF ASSESSEES ACTI VITIES 80. COMING TO THE SERVICE FEE/ COMMISSION SEGMENT, WE HAVE NOTED THAT AS REGARDS THE SERVICE FEE/ COMMISSION S EGMENT, THE TPO HAS RE-CHARACTERIZED THE SAME AS TRADING ACTIVITIES AS HE WAS OF THE VIEW THAT THE RIGHT COURSE OF ACTION WILL BE TO TRE AT THE SAME AS EQUIVALENT TO TRADING SEGMENT, BECAUSE WHAT THE ASS ESSEE HAS DISCLOSED AS SERVICE/COMMISSION INCOME IS IN FACT T RADING INCOME. ACCORDINGLY, THE COST OF GOODS SOLD BY THE AES, WHI CH WAS RS.2927,92,05,406, WAS ALSO TO BE INCLUDED IN COST BASE OF THE SERVICE/COMMISSION SEGMENT AND THEN ALP WAS RECOMPU TED. SO FAR AS THIS ASPECT OF THE MATTER IS CONCERNED, THE ISSU E IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY HONBLE JURISDICTIONAL HI GH COURTS DECISION IN THE CASE OF LI & FUNG WHEREIN THEIR LOR DSHIPS HAVE, INTERALIA, OBSERVED AS FOLLOWS: ..THIS COURT IS OF OPINION THAT TO APPLY THE TN MM, THE ASSESSEES NET PROFIT MARGIN REALIZED FROM INTE RNATIONAL TRANSACTIONS HAD TO BE CALCULATED ONLY WITH REFEREN CE TO COST INCURRED BY IT, AND NOT BY ANY OTHER ENTITY, EITHER THIRD PARTY VENDORS OR THE AE. TEXTUALLY, AND WITHIN THE BOUNDS OF THE TEXT MUST THE AO/TPO OPERATE, RULE 10B(1)(E) DOES N OT ENABLE CONSIDERATION OR IMPUTATION OF COST INCURRED BY THIRD PARTIES OR UNRELATED ENTERPRISES TO COMPUTE THE ASS ESSEES NET PROFIT MARGIN FOR APPLICATION OF THE TNMM. RULE 10B(1)(E) RECOGNIZES THAT 'THE NET PROFIT MARGIN RE ALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION EN TERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATI ON TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE ...' (EMPHASIS SUPPLIED) . IT THUS CONTEMPLATES A DETERMINATION OF ALP WITH REFERENCE TO THE ITA NO.6655/DEL./2015 7 RELEVANT FACTORS (COST, ASSETS, SALES ETC.) OF THE ENTERPRISE IN QUESTION, I.E. THE ASSESSEE, AS OPPOSED TO THE AE O R ANY THIRD PARTY. THE TEXTUAL MANDATE, THUS, IS UNAMBIGUOUSLY CLEAR. 40. THE TPOS REASONING TO ENHANCE THE ASSESSEES COST BASE BY CONSIDERING THE COST OF MANUFACTURE AND EXP ORT OF FINISHED GOODS, I.E., READY-MADE GARMENTS BY THE TH IRD PARTY VENDERS (WHICH COST IS CERTAINLY NOT THE COST INCUR RED BY THE ASSESSEE), IS NOWHERE SUPPORTED BY THE TNMM UNDER R ULE 10B(1)(E) OF THE RULES. HAVING DETERMINED THAT (TNM M) TO BE THE MOST APPROPRIATE METHOD, THE ONLY RULES AND NORMS PRESCRIBED IN THAT REGARD COULD HAVE BEEN APPLIED T O DETERMINE WHETHER THE EXERCISE INDICATED BY THE ASS ESSEE YIELDED AN ALP. 81. CLEARLY, THEREFORE, IT IS IMPERMISSIBLE TO MAK E NOTIONAL ADDITIONS IN THE COST BASE AND THUS TAKE INTO ACCOU NT THE COSTS WHICH ARE NOT BORNE BY THE ASSESSEE. IT IS SO OPINED BY H ONBLE JURISDICTIONAL HIGH COURT ON A CAREFUL ANALYSIS OF RULE 10B(1)(E)(I). IT IS, THEREFORE, NO LONGER OPEN TO THE REVENUE AUT HORITIES TO RECONSTRUCT THE FINANCIAL STATEMENTS OF THE ASSESSE E BY INCLUDING THE COST OF PRODUCTS INCURRED BY THE AES, IN RESPECT OF WHICH SERVICES ARE RENDERED, IN ITS RECONSTRUCTED FINANCIAL STATEM ENTS, AND THEN PUTTING THE HYPOTHETICAL TRADING PROFITS, SO ARRIVE D AT IN THESE RECONSTRUCTED FINANCIAL STATEMENTS, TO THE TESTS FO R DETERMINING ARMS LENGTH PRICE. RESPECTFULLY FOLLOWING THE ESTE EMED VIEWS OF THEIR LORDSHIPS, WE HOLD THAT THE ADJUSTMENTS CARRI ED OUT IN THE COST BASE OF ALP COMPUTATION, IN RESPECT OF SERVICE FEE/ COMMISSION SEGMENT, ARE INDEED DEVOID OF LEGALLY SUSTAINABLE M ERITS. WE DIRECT THE ASSESSING OFFICER TO DELETE THESE ADJUSTMENTS. ONCE THIS NOTIONAL ADJUSTMENT IS DELETED, THE ALP DETERMINATION IS TO BE DONE ON THE BASIS OF THE COMMISSION/SERVICE FEES. AS WE HAVE ST ATED EARLIER IN THIS ORDER AS WELL, IN THE COURSE OF PROCEEDINGS BE FORE US, THE ASSESSEE HAS FILED FRESH COMPUTATION OF THE ALP WHI CH ATTEMPTS TO DEMONSTRATE THAT, IF NOTIONAL ADJUSTMENTS MADE BY T HE TPO ARE DELETED, NO ALP ADJUSTMENT WILL BE WARRANTED. HOWEV ER, WE ARE NOT INCLINED TO GO INTO VERIFICATIONS WHICH MUST TAKE P LACE AT THE ASSESSMENT STAGE. 53. RESPECTFULLY FOLLOWING THE RATIO LAID BY THE H ONBLE PREDICTED HIGH COURT IN LI & FUNG OUT THAT OF THE CO-ORDINATE BENC H IN MITSUBISHI (SUPRA) WE DEEM IT APPROPRIATE TO UPHOLD THE GRIEVANCES OF THE ASSESSEE IN PRINCIPLE, AS THE TERMS ABOVE, DELETE THE NOTIONAL ADJUSTMENTS BY TPOS ADOPTING COST BASE OF THE AES IN ASSESSEES ALP DETERMINATION, AN D REMIT THE MATTER TO THE FILE OF THE TPO FOR THE NECESSARY FACTUAL VERIF ICATIONS ON IMPACT OF THIS CORRECTIONS. ACCORDINGLY, THE MATTER STANDS RESTORE D TO THE FILE OF THE TPO IN THIS RESPECT ALSO. ITA NO.6655/DEL./2015 8 10. FOLLOWING THE ORDER PASSED BY THE COORDINATE BE NCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE IN AY 2010-11 (SUPRA) CONFIRMED BY HONBLE HIGH COURT OF DELHI AND ORDER PASSED IN TAXPAYERS OWN CASE IN ITA NO.4581/DEL/2017 IN AY 2013-14 ORDER DATED 27.0 9.2017 , WE ARE OF THE CONSIDERED VIEW THAT THE NOTIONAL ADJUSTMENT MA DE BY THE TPO BY ADOPTING COST BASE OF THE AE IN BENCHMARKING THE IN TERNATIONAL TRANSACTIONS IS NOT SUSTAINABLE AND THE MATTER IS R EQUIRED TO BE RESTORED BACK TO THE TPO/AO FOR FACTUAL VERIFICATION ON IMPA CT OF THIS CORRECTION IN THE SAME MANNER AS DIRECTED BY THE TRIBUNAL IN A YS 2010-11 AND 2013-14 AND TO DECIDE AFRESH AFTER PROVIDING ADEQUA TE OPPORTUNITY OF BEING HEARD TO THE TAXPAYER IN THE LIGHT OF THE DEC ISION RENDERED BY HONBLE DELHI HIGH COURT. CONSEQUENTLY, THE APPEAL FILED BY THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 30 TH DAY OF OCTOBER, 2019. SD/- SD/- (N.K. BILLAIYA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 30 TH DAY OF OCTOBER, 2019 TS ITA NO.6655/DEL./2015 9 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.