POWERFUL INDIA P.LTD, MUMBAI V. DCIT 8(2), MUMBAI

ITA 7086/MUM/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0718 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 5 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 08-05-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 27-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS MALATHI SRIDHARAN
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 92B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.7086/MUM/2012 (ASSESSMENT YEAR 2008-09) POWERTEL INDIA PRIVATE LIMITED, C/O. UNIT NO.94/95, SDF-III, SEEPZ-SEZ, ANDHERI (EAST), MUMBAI 400 096 PAN:AABCP 4490K ...... APPELLANT VS. THE DCIT 8(2), AAYKAR BHAVAN,M.K.ROAD, MUMBAI -400 020 .... RESPONDE NT APPELLANT BY : SHRI RAMESH S. IYE R RESPONDENT BY : MRS. MALATHI SRID HARAN DATE OF HEARING : 08/05/2017 DATE OF PRONOUNCEMENT : 17/05/2017 ORDER PER G.S.PANNU,A.M: THE CAPTIONED APPEAL FILED BY THE ASSESSEE PERT AINING TO ASSESSMENT YEAR 2008-09 IS DIRECTED AGAINST AN ORDER PASSED BY DCIT- 8(2), (IN SHORT THE ASSESSING OFFICER ) PASSED UNDER SECTION 143(3) R.W .S. 144C(13) OF THE INCOME TAX ACT, 1961 ( IN SHORT THE ACT) DATED 11/09/2012 , WHICH IS IN CONFORMITY WITH THE DIRECTION OF THE DISPUTE RESOLUTION PANNEL -1, MUMBAI ( IN SHORT THE DRP) DATED 31/07/2012. 2. IN THIS APPEAL, ALTHOUGH ASSESSEE HAS RAISED MUL TIPLE GROUNDS OF APPEAL, BUT THE SOLITARY GRIEVANCE IS WITH REGARD T O AN ADDITION MADE BY THE 2 ITA NO.7086/MUM/2012 (ASSESSMENT YEAR 2008-09) ASSESSING OFFICER ON ACCOUNT OF THE TRANSFER PRICIN G ADJUSTMENT OF RS.2,41,15,386/-. 3. IN BRIEF, THE RELEVANT FACTS ARE THAT THE APPELL ANT IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS, INTER- ALIA, ENGAGED IN THE BUSINESS OF MANUFACTURING OF MAGNETIC INDUCTOR AND TRANSFORMERS. FOR THE ASSESSMENT YEAR UNDER CONSI DERATION, IT FILED A RETURN OF INCOME DECLARING A LOSS OF RS.98,12,00,900/-, WH ICH WAS SUBJECT TO SCRUTINY ASSESSMENT, WHEREBY THE TOTAL INCOME HAS BEEN ASSES SED AT RS.1,44,00,650/-. IN THE ASSESSMENT SO FINALIZED, A MAJOR ADDITION OF RS.2,41,15,386/- HAS BEEN MADE, WHICH IS ON ACCOUNT OF DETERMINATION OF ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESS EE WITH ITS ASSOCIATED ENTERPRISE M/S.CHEROKEE INTERNATIONAL LLC, USA. NO TABLY, ASSESSEE IS A SUBSIDIARY OF M/S. CHEROKEE INTERNATIONAL LLC, USA AND IT HAS UNDERTAKEN ITS ENTIRE BUSINESS WITH ITS ASSOCIATED ENTERPRISE. TH E TOTAL TURNOVER OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION AT RS.6 ,60,09,364/- IS ON ACCOUNT OF SALES MADE TO ITS ASSOCIATED ENTERPRISE. THE ASS ESSEE IS UNDERTAKING ITS MANUFACTURING OPERATIONS AT ITS EOU LOCATED IN SEEP Z. THE FACTUAL MATRIX BROUGHT OUT BY THE LOWER AUTHORITIES REVEAL THAT TH E OVERSEAS ASSOCIATED ENTERPRISE PROVIDES TO THE ASSESSEE RAW MATERIALS F REE OF COST AND AFTER UNDERTAKING THE MANUFACTURING ACTIVITY, THE FINISHE D GOODS ARE EXPORTED BACK TO THE ASSOCIATED ENTERPRISE. AT THE TIME OF HEARI NG, THE LD.REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT ALMOST 95% OF THE REQUIREMENT OF RAW MATERIALS COMES TO THE ASSESSEE FREE OF COST FROM I TS ASSOCIATED ENTERPRISE. THE BALANCES OF THE RAW MATERIAL IS QUITE INSIGNIFI CANT AND IT IS PROCURED BY THE ASSESSEE ON ITS OWN. THE LD.REPRESENTATIVE FOR THE ASSESSEE ALSO POINTED 3 ITA NO.7086/MUM/2012 (ASSESSMENT YEAR 2008-09) OUT THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY HAD DETERMINED THE PRICE CHARGEABLE FOR ITS SERVICES FR OM ASSOCIATED ENTERPRISE ON THE BASIS OF ESTIMATED COST PLUS 6% MARK-UP ON T HE SAME. IT IS POINTED OUT THAT EVEN IN THE EARLIER YEARS, THE BASIS IS SIMILA R. SINCE THE TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPR ISE FELL WITHIN THE DEFINITION OF INTERNATIONAL TRANSACTION AS PER SE CTION 92B OF THE ACT, THE ASSESSING OFFICER HAD REFERRED THE MATTER FOR DETER MINATION OF ITS ARM'S LENGTH PRICE TO THE TRANSFER PRICING OFFICER. THE T RANSFER PRICING OFFICER NOTICED THAT ASSESSEE HAD DECLARED LOSS OF RS.1,14, 80,070/- IN ITS OPERATIONS, WHICH WAS QUITE UNJUSTIFIED. THE TRANSFER PRICING OFFICER WAS OF THE OPINION THAT THE LOSS IS BECAUSE OF UNDER PRICING OF SERVI CES RENDERED TO THE ASSOCIATED ENTERPRISE. THE TRANSFER PRICING OFFICE R ALSO OBSERVED THAT THE PRICE DETERMINED FOR THE SERVICES WAS NOT RELATED T O ACTUAL COSTS INCURRED BY THE ASSESSEE BUT WAS BASED ON ESTIMATED COSTS, W HICH WERE NOT REVISED FOR A CONSIDERABLE PERIOD OF THE YEAR UNDER CONSIDERATI ON. ACCORDINGLY, THE TRANSFER PRICING OFFICER ADOPTED THE AVERAGE MARGIN OF THE FOUR COMPARABLES SELECTED AND COMPARING IT WITH ASSESSEES MARGIN OF (-)17.42%, DETERMINED AN ADJUSTMENT OF RS.2,41,15,386/- FOR THE PURPOSES OF ARRIVING AT ARM'S LENGTH PRICE. THE FINAL ASSESSMENT ORDER MADE BY T HE ASSESSING OFFICER IS BASED ON THE AFORESAID DETERMINATION OF ARM'S LENGT H PRICE AS OBJECTIONS RAISED BY THE ASSESSEE BEFORE THE DRP HAVE ALSO BEE N DISMISSED VIDE ORDER DATED 31/07/2012. 4. BEFORE US, THE LD.REPRESENTATIVE FOR THE ASSESSE E VEHEMENTLY POINTED OUT THAT THE BUSINESS OF THE ASSESSEE WAS HIT DUE T O UNAVOIDABLE MARKET CONDITIONS AND THAT IN ANY CASE, IN THE NEXT YEAR I T HAS CLOSED DOWN ITS 4 ITA NO.7086/MUM/2012 (ASSESSMENT YEAR 2008-09) BUSINESS. THE LD.REPRESENTATIVE FOR THE ASSESSEE P OINTED OUT THAT UNDER- PRICING OF THE SERVICES WAS NOT THE REASONS FOR THE LOSSES, BUT THE LOSSES HAVE BEEN SUSTAINED ON ACCOUNT OF ADVERSE MARKET CONDITI ON. THE LD.REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THA T THE MARGIN OF THE COMPARABLES WHICH HAVE BEEN ADOPTED IS NOT COMPARAB LE OF THE ASSESSEES MARGIN INASMUCH AS, ASSESSEE RECEIVES MAJORITY OF I TS RAW MATERIAL FROM THE PARENT COMPANY, WHICH DOES NOT BELONG TO THE ASSESS EE. ON THE OTHER HAND, THE COMPARABLES ARE CONCERNS WHICH ARE FULL-FLEDGED MANUFACTURERS, WHEREAS THE ASSESSEE IS A MANUFACTURER ONLY WORKING FOR ITS ASSOCIATED ENTERPRISE. IT HAS ALSO BEEN POINTED OUT THAT THE PRICING OF THE P RODUCT, WHICH IS DETERMINED ON THE BASIS OF ESTIMATED COST PLUS 6% M ARK-UP, HAS BEEN ACCEPTED IN THE PAST IN THE ASSESSMENT YEAR 2007-0 8 AND, THEREFORE, THERE WAS NO JUSTIFICATION FOR REJECTING THE SAME IN THI S YEAR AND MAKING THE IMPUGNED ADDITION. 5. ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENTATI VE POINTED OUT THAT THE FOUR COMPARABLES ADOPTED BY THE TRANSFER PRICIN G OFFICER ARE THE COMPARABLES WHICH HAVE BEEN SELECTED BY THE ASSESSE E IN ITS TRANSFER PRICING STUDY EXCEPT TO THE EXTENT THAT THE DATA USED BY T HE TRANSFER PRICING OFFICER WAS FOR THE INSTANT YEAR, WHEREAS THE ASSESSEE HAD USED THE EARLIER YEARS DATA OF THE COMPARABLES IN ITS TRANSFER PRICING STU DY. IN SUM AND SUBSTANCE, SHE HAS DEFENDED THE DETERMINATION OF ARM'S LENGTH PRICE MADE BY THE TRANSFER PRICING OFFICER. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. FACTUALLY SPEAKING, INSTANT IS A CASE WHERE ASSESSEE IS A CAP TIVE MANUFACTURER, UNDERTAKING ITS ACTIVITIES ONLY FOR ITS ASSOCIATED ENTERPRISE BASED ON 95% OF 5 ITA NO.7086/MUM/2012 (ASSESSMENT YEAR 2008-09) RAW MATERIAL SUPPLIED TO IT FREE OF COST, WHEREAS T HE COMPARABLES THAT HAVE BEEN SELECTED ARE INDEPENDENT MANUFACTURERS, IN WHO SE CASE RISKS OF BUSINESS ARE MORE PRONOUNCED, AN ASPECT WHICH MERIT S APPROPRIATE ADJUSTMENT. ANOTHER PECULIAR FEATURE IS THE FACT T HAT THE EXPENDITURE INCURRED BY THE ASSESSEE, INTER-ALIA, INCLUDES GOOD S/RAW MATERIAL RECEIVED FROM ITS ASSOCIATED ENTERPRISE FREE OF COST. THIRD LY, THE PRICING OF THE PRODUCTS IS MADE BY THE ASSESSEE ON THE BASIS OF ES TIMATED COST PLUS PROFIT MARGIN OF 6%, A FORMULA WHICH IS SIMILAR TO THAT AD OPTED IN ASSESSMENT YEAR 2007-08. THE ORDER OF THE TRANSFER PRICING OFFICER REVEALS THAT THE PRIMARY REASON FOR HIM TO MAKE THE ADDITION WAS THE FACT T HAT ACCORDING TO HIM THERE WAS UNDER-PRICING OF SERVICES BY THE ASSESSEE. FOR THIS, THE TRANSFER PRICING OFFICER NOTICED THAT THE ESTIMATED COST DETERMINED BY THE ASSESSEE WAS NOT REVISED FOR A CONSIDERABLE PERIOD OF TIME DURING TH E YEAR UNDER CONSIDERATION, WHEREAS AN INDEPENDENT PARTY WOULD R EVISE ITS PRICE AS SOON AS IT IS FOUND THAT IT IS NOT PROFITABLE. IN OUR CONSIDERED OPINION, NOTWITHSTANDING THE AFORESAID FEATURE, WHAT IS OF E SSENCE IS TO ESTABLISH THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION S BASED ON A METHODOLOGY AND MECHANISM PROVIDED UNDER THE ACT. IN THAT REGA RD, WE FIND THAT THE TRANSFER PRICING OFFICER HAS DISCUSSED IN PARA -3 O F HIS ORDER SEARCH CRITERIA ADOPTED BY THE ASSESSEE ITSELF, WHICH REVEALED FOUR COMPARABLES. THE TRANSFER PRICING OFFICER ADOPTED THE VERY SAME SET OF COMPARABLES BUT BASED ON THE DATA FOR THE CURRENT FINANCIAL YEAR, AN ASP ECT ON WHICH THERE CAN BE NO DISPUTE. SO HOWEVER, IT IS QUITE EVIDENT THAT S OME OF THE SEARCH CRITERIA AT QUALITATIVE LEVEL, WHICH WAS REQUIRED TO BE APPLIED , HAS NOT BEEN DONE AT ALL. NOTABLY, ASSESSEE ASSERTED BEFORE THE TRANSFER PRIC ING OFFICER DIFFERENCE IN THE RISK PERCEPTION VIS-A-VIS THE COMPARABLES; ANO THER ASPECT WHICH WAS 6 ITA NO.7086/MUM/2012 (ASSESSMENT YEAR 2008-09) ASSERTED BY THE ASSESSEE WAS THE ABSENCE OF PROFIT ELEMENT ON THE RAW MATERIAL COST BECAUSE 95% OF THE RAW MATERIAL WAS FREE OF COST IN THE HANDS OF THE ASSESSEE COMPANY, WHEREAS THE SAME WAS NOT T HE POSITION IN THE CASE OF COMPARABLES. ANOTHER ASPECT WHICH HAS BEEN ASS ERTED BY THE ASSESSEE WAS THAT THE BASIS OF PRICING THE PRODUCTS UNDERTAK EN BY THE ASSESSEE IN THIS YEAR WAS THE SAME, WHICH HAS BEEN ACCEPTABLE TO BE AN ARM'S LENGTH PRICE IN THE EARLIER YEAR. REFERRING TO SUCH FORMULA, THE L D. REPRESENTATIVE FOR THE ASSESSEE SUBMITTED AT THE TIME OF HEARING THAT IN A GROUP CONCERN, THE ASSESSING OFFICER/TRANSFER PRICING OFFICER HAD ITSE LF ACCEPTED SUCH A FORMULA AS REFLECTIVE OF THE ARM'S LENGTH PRICE. BE THAT A S IT MAY, IN OUR VIEW, ALL THESE ASPECTS HAVE NOT BEEN APPROPRIATELY ADDRESSED BY TH E LOWER AUTHORITIES, AND THE SAME DESERVE TO BE CONSIDERED ON THEIR MERITS. THEREFORE, IN THIS BACKGROUND, WE DEEM IT FIT AND PROPER TO SET-ASIDE THE ORDER OF THE LOWER AUTHORITIES AND RESTORE THE MATTER BACK TO THE FILE OF ASSESSING OFFICER/TRANSFER PRICING OFFICER FOR REDETERMINATIO N OF THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY TH E ASSESSEE WITH ITS ASSOCIATED ENTERPRISE, IN ACCORDANCE WITH LAW. NEE DLESS TO MENTION, ASSESSEE SHALL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD BEFORE A FRESH ASSESSMENT ON THIS ASPECT IS MADE. 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 17/05/2017 SD/- SD/- (PAWAN SINGH ) (G.S. PANNU) JUDICIAL MEMBER ACCOCUNTANT MEMBER MUMBAI, DATED 17/05/2017 7 ITA NO.7086/MUM/2012 (ASSESSMENT YEAR 2008-09) VM , SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT , 2. THE RESPONDENT. 3. THE CIT(A)- 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI