SULZER PUMPS INDIA LTD, NAVI MUMBAI V. JT CIT (OSD) 10(3), MUMBAI

ITA 7295/MUM/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92620 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 17-11-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 26-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N PADMANABHAN
• Assessee Lawyers: HEENA DOSHI
• Keywords: Transfer pricing; International transaction

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE HONBLE S/SHRI VIJAY PAL RAO ( JM ) , AND B.R.BASKARAN (AM) , . . , ./ I.T .A. NO . 7295/M UM/20 1 0 ( / ASSESSMENT YEAR : 200 3 - 04 ) SULZER PUMPS INDIA LIMITED, 9, MIDC, THANE BELAPUR ROAD, DIGHA, NAVI MUMBAI - 400708 / VS. THE JT. COMMISSIONER OF INCOME TAX - RANGE (OSD) - 10(3), AAYAKAR BHAVAN, M K ROAD, MUMBAI - 400020 ( / APPELLANT ) .. ( / RESPONDENT ) ./ ./PAN/GIR NO. : AAACK2238F / : ASSESSEE BY MS.HEENA DOSHI / REVENUE BY : SHRI N PAD M ANA BHAN / DATE OF HEARING : 2 8 .0 5 . 201 5 / DATE OF PRONOUNCEMENT : 29. 5. 2015 / O R D E R PER B.R.BASKARAN (AM) THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ORDER DATED 25.08.2010 PASSED BY LD CIT(A) - 15 FOR ASSESSMENT YEA R 2003 - 04 CONFIRMING THE ADDITION RELATING TO TRANSFER PRICING ADJUSTMENT OF RS.99,01,330/ - . 2. WE HEARD THE PARTIES AND PERUSED THE RECORD. THE ASSESSEE IS ONE OF THE LEADING PLAYERS IN PUMP INDUSTRY IN INDIA OFFERING WIDE RANGE OF CUSTOMIZED AND CONFIG URED PUMPS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD ENTERED DIFFERENT TYPES OF INTERNATIONAL TRANSACTIONS WITH ITS AE VIZ., PURCHASE OF RAW MATERIALS, SALE OF FINISHED GOODS, PURCHASE OF SOFTWARE LICENCE, PAYMENT OF ROYALTY & TECHNICAL KNOW FEE AND ALSO ITA NO. 7295 /MUM/201 0 2 PAYMENT OF COMMISSION. THE TPO CONSIDERED ALL THE TRANSACTIONS, EXCEPT THE PAYMENT OF ROYALTY & TECHNICAL KNOWHOW FEE, TO BE AT ARMS LENGTH. 3. BEFORE TPO, THE ASSESSEE FOLLOWED TNMM AND ACCORDINGLY FURNISHED SEGMENTAL FINANCIAL INFOR MATION, I.E., ONE SEGMENT HAVING INTERNATIONAL TRANSACTIONS WAS CLASSIFIED AS AE SEGMENT AND THE OTHER SEGMENT WHICH DID NOT HAVE INTERNATIONAL TRANSACTION WAS CLASSIFIED AS NON - AE SEGMENT. THE AE SEGMENT HAD OPERATING PROFIT MARGIN OF 6.19% AND THE NON - AE SEGMENT HAD OPERATING PROFIT MARGIN OF 1.06%. ACCORDINGLY IT WAS CONTENDED THAT THE INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH. THE ASSESSEE HAD PAID ROYALTY @ 8% ON EXPORT SALES AND @ 5% ON DOMESTIC SALES. THE ROYALTY WAS ALLOCATED BETWEEN AE S EGMENT AND NON - AE SEGMENT ON THE BASIS OF ACTUAL SALES. THE TECHNICAL KNOWOW FEE WAS ALLOCATED IN THE RATIO OF ROYALTY PAYMENT. 4. THE TPO TOOK THE VIEW THAT THE PAYMENT OF ROYALTY AND TECHNICAL KNOWHOW FEES IN THE AE SEGMENT CAN BE REGARDED TO HAVE COMPLIED WITH THE ARMS LENGTH REQUIREMENT. HOWEVER, WITH REGARD TO THE PAYMENT OF ROYALTY AND TECHNICAL KNOWHOW FEES IN THE NON - AE SEGMENT, THE TPO TOOK THE VIEW THAT THE ASSESSEE HAS TO INDEPENDENTLY PROVE THAT THE SAME IS ALSO AT ARMS LENGTH. IN RESP ONSE THERETO, THE ASSESSEE FURNISHED FIVE COMPARABLE CASES AND THE AVERAGE MEAN OF THE OPERATING PROFIT MARGIN OF THE FIVE COMPANIES WORKED OUT TO 3.84%. THE TPO ADOPTED THE SAME AS BENCH MARK RATE AND ACCORDINGLY COMPUTED THE PROFIT OF NON - AE SEGMENT B Y APPLYING 3.84% ON THE NON - AE SALES OF RS.35.58 CRORES, WHICH WORKED OUT RS.1.36 CRORES (THERE ARE CERTAIN TYPOGRAPHICAL ERRORS IN TPOS ORDER). THE ASSESSEE HAD REPORTED OPERATING PROFIT OF RS.37.63 CRORES IN THE NON - AE SEGMENT. HENCE THE TPO RECOMMEND ED FOR ADJUSTMENT OF PROFIT BY RS.99,01,330/ - (RS.1,36,64,527 LESS RS.37,63,198/ - ). THE LD CIT(A) ALSO CONFIRMED THE SAME. ITA NO. 7295 /MUM/201 0 3 5. IT CAN BE NOTICED THAT THE TPO HAS PRESUMED THAT THE FALL IN OPERATING PROFIT IN NON - AE SEGMENT IS ONLY ON ACCOUNT OF PAYMEN T OF ROYALTY AND TECHNICAL KNOW FEES AND ACCORDINGLY RECOMMENDED FOR ADDITION OF RS.99.01 LAKHS. THIS APPROACH WOULD WORK OUT CORRECTLY ONLY IF IT IS ESTABLISHED THAT THERE IS NO DIFFERENCE BETWEEN AE SEGMENT AND NON - AE SEGMENT WITH REGARD TO SALES, PUR CHASES, EXPENSES ETC. IN THIS REGARD, FOLLOWING POINTS ARE PERTINENT HERE: - (A) IN THE INSTANT CASE, WE HAVE NOTICED EARLIER THAT THE ASSESSEE IS SELLING DIFFERENT TYPES OF PUMPS BOTH IN THE DOMESTIC MARKET AND INTERNATIONAL MARKET. THE ASSESSEE ITSELF HAS SUBMITTED THAT THE GOODS THAT WERE CONSIDERED IN THE AE SEGMENT MAY NOT BE IDENTICAL TO THAT ONE INCLUDED IN NON - AE SEGMENT. (B) THE ASSESSEE HAS EXPLAINED THE BASIS OF SEGMENTATION AS UNDER: - ALL PRODUCTS SOLD IN WHICH RAW MATERIAL PURCHASED FROM THE AE IS USED OR SALE OF FINISHED GOODS MADE TO AE HAVE BEEN TREATED AS PART OF AE SEGMENT. THE TURNOVER RELATING TO PRODUCTS ON WHICH NO IMPORTED RAW MATERIAL FROM AE IS INVOLVED OR WHICH IS NOT SOLD TO AE HAVE BEEN TAKEN AS NON - AE SEGMENT. IN THIS TY PE OF CLASSIFICATION, THERE IS A POSSIBILITY THAT THE COST OF INDIGENOUS MATERIAL USED FOR PRODUCTION OF PUMPS THAT WERE EXPORTED MIGHT HAVE BEEN INCLUDED IN THE NON - AE SEGMENT, IN WHICH CASE THE OPERATIVE MARGIN OF NON - AE SEGMENT WOULD BOUND TO FALL. ( C) THE ASSESSEE HAS POINTED OUT THAT THE TECHNICAL KNOWHOW FEE HAS BEEN ALLOCATED BETWEEN AE AND NON - AE SEGMENTS, IN THE RATIO OF ROYALTY AMOUNTS ALLOCATED BETWEEN THE TWO SEGMENTS. WE NOTICE THAT THE ASSESSEE ITSELF IS NOT SURE ABOUT THE CORRECTNESS OF THE SAME. (D) THE OPERATIVE MARGIN IS THE CUMULATIVE EFFECT OF DIFFERENT FACTORS, SOME OF WHICH, AS PER COST ACCOUNTING PRINCIPLES, ARE (I) PRODUCT MIX VARIATION, (II) SALES PRICE VARIATION, (III) COST VARIATION, (IV) EXPENSES VARIATION WITH SUB CLASSI FICATION. HOWEVER THE TPO ITA NO. 7295 /MUM/201 0 4 HAS PRESUMED THAT THE OPERATIVE MARGIN HAS GONE DOWN ONLY DUE TO PAYMENT OF ROYALTY AND TECHNICAL KNOWHOW FEES, WHICH DOES NOT APPEAR TO BE CORRECT. (E) THE ASSESSEE HAS PAID THE ROYALTY AND TECHNICAL KNOWHOW FEES AT THE RAT E OF 8% ON EXPORT SALES AND AT 5% ON DOMESTIC SALES. WE NOTICE THAT THE TPO DID NOT EXAMINE THE REASONS FOR THE VARIATION IN THE RATE OF ROYALTY. HOWEVER, THE ROYALTY PAYMENTS MADE IN RESPECT OF EXPORT SALES WERE CONSIDERED TO BE AT ARMS LENGTH. WE NOT ICE THAT THE TPO HAS NOT GIVEN ANY VALID REASON FOR ACCEPTING THE PAYMENT MADE IN RESPECT OF EXPORT SALES, WHEN THE RATE OF ROYALTY FOR EXPORT SALES IS HIGHER THAN THE RATE PAID ON DOMESTIC SALES. 6. THE DISCUSSIONS MADE IN THE FOREGOING PARAGRAPH WO ULD SHOW THAT THERE IS NO CLARITY IN THE APPROACH OF BOTH THE ASSESSEE AS WELL AS THE TPO. FURTHER EXAMINATION OF THE SEGMENTAL FINANCIALS WITHOUT CONSIDERING THE POINTS DISCUSSED ABOVE, IN OUR VIEW, MAY NOT ALSO GIVE ANY RATIONAL RESULT. FURTHER, IT APP EARS THAT THE ASSESSEE HAS ALSO NOT FURNISHED REQUIRED DETAILS IN THIS REGARD. UNDER THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THIS ISSUE REQUIRES FRESH EXAMINATION. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME T O THE FILE OF AO/TPO WITH THE DIRECTION TO EXAMINE THE SAME AFRESH BY DULY CONSIDERING THE POINTS DISCUSSED ABOVE. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. THE ABOVE ORDER WAS PRONOUNCED I N THE OPEN COURT ON 29TH MAY , 2015 . 29TH MAY , 2015 SD SD ( / VIJAY PAL RAO ) ( . . , / B.R. BASKARAN ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI: 29TH MAY, 201 5 . ITA NO. 7295 /MUM/201 0 5 . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - CONCERNED 4. / CIT CONCERNED 5. 6 , , / DR, ITAT, MUMBAI CONCERNED / GUARD FILE. / BY O RDER, TRUE COPY (ASSTT. REGISTRAR) , /ITAT, MUMBAI