DCIT RG 8(3), MUMBAI V. T.TWO INTERNATIONAL P LTD, MUMBAI

ITA 7331/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3661 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 08-05-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 02-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; International transaction

Judgement Text

ITA NO. 7331/MUM/2011 T.TWO INTERNA TIONAL P LTD. MUMBAI IN THE INCOME TAX APPELLATE TRIBUNAL 'K' BENCH, MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.7331 /MUM/2011 (ASSESSMENT YEAR; - 2007-08) DCIT 8(3), ROOM NO. 217, AAYAKAR BHAVAN, M.K. MARG, MUMBAI 400 020. VS. T. TWO INTERNATIONAL P. LTD. UNIT NO. GJ-7 SDF VII, SEEPZ SEZ ANDHERI (E) MUMBAI 400 096 PAN: AABCT 1038K APPELLANT RESPONDENT DEPARTMENT BY: SHRI MOHIT JAIN ASSESSEE BY: SHRI RAJESH AGARWAL DATE OF HEARING: 8/5/2013 DATE OF PRONOUNCEMENT: 8/5/2013 O R D E R PER RAJENDRA SINGH, A.M. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 17.8.2011OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. THE ONLY DISPUTE RAISED IN THIS APPEAL IS REGARDING DELETION OF THE TRANSFER PRICING (TP) ADJUSTMENT MADE BY AO AMOUNTING TO RS. 8,96,69,219/ - 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE WHO WAS EN GAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF JEWELLERY AND DIAMONDS HAD MADE TOTAL SALES OF RS. 71, 33, 23,889/- TO THE ASS OCIATE ENTERPRISE (AE) AND SIMILAR NON AE SALES WERE TO THE TUNE OF RS. 4. 96 CRORE. SINCE THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION S THE AO REFERRED THE ISSUE FOR DETERMINATION OF TRANSFER PRICING ADJ USTMENT TO THE TPO, WHO ASKED THE ASSESSEE TO SUBMIT THE TRANSFER PRICI NG REPORT IN THE MATTER. THE ASSESSEE SUBMITTED THAT IT HAD MADE SAL ES TO BOTH AE AND NON AE PARTIES. IT WAS POINTED OUT THAT THE NET MAR GIN ON OPERATING ITA NO. 7331/MUM/2011 T.TWO INTERNA TIONAL P LTD. MUMBAI COST IN RESPECT OF SALES TO AE WAS 6.75% AND IN CAS E OF NON AE SALES, THE SAME WAS 4.23%, THEREFORE THE MARGIN IN CASE OF NON AE SALES BEING MORE NO ADJUSTMENT WAS REQUIRED TO BE MADE. 2.1 THE TPO, HOWEVER, CONDUCTED HIS OWN STUDY AND S ELECTED HIS OWN COMPARABLES AND FOUND THAT ARITHMETIC MEAN MARG IN OF THE COMPARABLES IN THE SAME BUSINESS ON OPERATING COST WAS 7.78%. TPO NOTED THAT THE TOTAL SALES SHOWN BY THE ASSEESSEE W AS RS. 213 CRORE ON WHICH OPERATING PROFIT WAS SHOWN AT RS. 3.43 %. HE, THEREFORE, DEDUCTED THE OPERATING MARGIN FROM SALES TO ARRIVE AT THE TOTAL COST OF SALES AT RS. 206 CRORE. THE TPO THEN COMPUTED ARMS LENGTH PROFIT AT THE RATE OF 7.78% WHICH GAVE THE FIGURE OF 16.04 CR ORE. THE EXTRA PROFIT OF RS. 8.96 CRORE (16.04-7.07CRORE) WAS ADDED TO TH E AE SALES TO ARRIVE AT THE ARMS LENGTH PRICE OF AE SALES AT RS. 80.23 C RORE. SINCE, THE ARMS LENGTH PRICE WAS BEYOND THE 5% RANGE OF THE AE SALE S, THE AO MADE TRANSFER PRICING ADJUSTMENT OF RS. 8, 96,69,219/- B EING THE DIFFERENCE BETWEEN THE ARMS LENGTH PRICE AND ACTUAL SALES PRIC E OF THE AE. 3 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBM ITTED BEFORE CIT (A), THAT THE ASSESEE HAD MADE SIMILAR SALES TO NON AE PARTIES AT RS. 4.96 CRORE ON WHICH THE MARGIN OF OPERATING COS T WAS 4.23% AGAINST THE MARGIN OF 6.75% ON OPERATING COST IN CA SE OF THE AE SALES. THEREFORE, USING THE INTERNAL TNMM METHOD, THE MARG IN IN CASE OF THE AE SALES WAS MORE AND, THEREFORE, NO ADJUSTMENT WAS REQUIRED TO BE MADE. IT WAS ALSO POINTED OUT THAT THE TPO HAD MADE ADJUSTMENT ON THE BASIS OF OPERATING PROFIT COMPUTED WITH RESPECT TO ENTIRE OPERATING COST USING THE PLI OF 7.78% WHICH WAS NOT CORRECT. IT WAS SUBMITTED THAT ADJUSTMENT COULD BE MADE ONLY IN RESPECT OF OP ERATING COST IN RELATION TO THE AE SALES. IT WAS ARGUED THAT EVEN U SING THE PLI OF 7.78% NO ADJUSTMENT IS REQUIRED TO BE MADE IF THE ARMS LE NGTH PRICE OF AE ITA NO. 7331/MUM/2011 T.TWO INTERNA TIONAL P LTD. MUMBAI SALES WAS COMPUTED CORRECTLY WITH RESPECT TO OPERAT ING COST OF THE AE SALES AS OPERATING MARGIN IN CASE OF AE SALES WAS 6 .75% WHICH WAS WITHIN THE 5% RANGE OF MEAN MARGINS OF THE COMPARAB LES AT 7.78%. 3.1 CIT(A) AGREED WITH THE SUBMISSIONS MADE BY THE ASSESSEE AND HELD THAT NO ADJUSTMENT WAS REQUIRED TO BE MADE EVE N WITH RESPECT TO THE COMPARABLES SELECTED BY THE TPO AS THE MARGIN O F THE ASSESSEE WAS WITHIN THE 5% RANGE OF MEAN MARGIN OF COMPARABLES. CIT (A) ACCORDINGLY DIRECTED THE AO TO DELETE THE ADDITION AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE TRIBUNAL. 4 . BEFORE US, THE LEARNED AR FOR THE ASSESSEE REITERAT ED THE SUBMISSIONS MADE BEFORE CIT(A) WHEREAS THE LEARNED CIT(DR) PLACED RELIANCE ON THE ORDERS OF AO/TPO. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING TP ADJUSTMENT MADE BY AO IN RELATION TO THE SALES MADE BY THE AE TO ASSOC IATE ENTERPRISE. THE ASSESSEE HAD TOTAL SALES OF RS. 2,13,30,58,331/- OU T OF WHICH EXPORT TO THE AES WAS RS. 71.26 CRORE. SIMILAR EXPORT SALES IN RESPECT OF NON AE PARTIES WERE 4.96 CRORE. THE OPERATING MARGIN IN CA SE OF AE SALES WAS 6.75% COMPARED TO MARGIN OF 4.23 % IN CASE OF NON A E EXPORT SALES. THIS CLEARLY SHOWS THAT THE MARGIN OF THE ASSESSEE IN RELATION TO THE AE SALES WAS MORE THAN THE MARGIN IN CASE OF SIMILAR S ALES TO NON AES. THUS, APPLYING THE INTERNAL TNMM METHOD NO ADJUSTME NT IS REQUIRED TO BE MADE. EVEN WITH RESPECT TO THE COMPARABLES SELEC TED BY THE ASSESSEE, IT IS FOUND THAT MEAN MARGIN ON OPERATING COST WAS 7.78% WHICH IS WITHIN THE 5% RANGE OF THE OPERATING MARGI N OF 6.75% IN CASE OF THE AE SALES. THEREFORE, EVEN APPLYING THE TNMM METHOD BASED ON ITA NO. 7331/MUM/2011 T.TWO INTERNA TIONAL P LTD. MUMBAI THE COMPARABLES SELECTED BY THE TPO, NO ADJUSTMENT IS REQUIRED TO BE MADE. THE ADJUSTMENT HAS BEEN MADE BY THE TPO/AO BE CAUSE OF THE WRONG COMPUTATION MADE WITH RESPECT TO TOTAL OPERAT ING COST WHEREAS THE ADJUSTMENT HAS TO BE CALCULATED ONLY WITH RESPE CT TO THE OPERATING COST IN RELATION TO THE AE SALES. THEREFORE, CONSI DERING THE FACTS AND CIRCUMSTANCES OF THE CASE WE SEE NO INFIRMITY IN TH E ORDER OF CIT (A) DELETING THE ADDITION MADE BY AO. THE ORDER OF CIT (A) IS ACCORDINGLY UPHELD. 5. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON TODAY I.E. 8 TH MAY, 2013. SD/- SD/- (AMIT SHUKLA ) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 8 TH MAY, 2013. COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI.