WELSPUN ZUCCHI TEXTILE LTD, MUMBAI V. DCIT 2(3), MUMBAI

ITA 7371/MUM/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75763 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 17-02-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 28-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: MOURYA PRATAP
• Keywords: Business income; Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI .. , ; BEFORE SHRI P.M. JAGTAP, AM AND SHRI VIVEK VARMA, J M ./ I.T.A. NO.6823 /MUM/2011 ( / ASSESSMENT YEAR : 2006-2007 ASSTT. COMMISSIONER OF INCOME TAX 2(3), ROOM NO. 556, 5 TH FLOOR, AAYAKAR BHAVAN, MUMBAI 20. / VS. M/S WELSPUN ZUCCHI TEXTILES LTD., TRADE WORLD, B WING, 9 TH FLOOR, KAMLAMILLS COMPOUND, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI 400 013. . / PAN : AAACW2067L ( # / APPELLANT ) .. ( $%# / RESPONDENT ) ./ I.T.A. NO.7371/MUM/2010 ( / ASSESSMENT YEAR : 2006-2007 M/S WELSPUN ZUCCHI TEXTILES LTD., TRADE WORLD, B WING, 9 TH FLOOR, KAMLAMILLS COMPOUND, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI 400 013. / VS. ASSTT. COMMISSIONER OF INCOME TAX 2(3), ROOM NO. 556, 5 TH FLOOR, AAYAKAR BHAVAN, MUMBAI 20. ./ PAN : AAACW2067L ( # / APPELLANT ) .. ( $%# / RESPONDENT ) ASSESSEE BY SHRI MOURYA PRATAP REVENUE BY : SHRI AJEET KUMAR JAIN ) * / DATE OF HEARING : 17-2-14 ) * / DATE OF PRONOUNCEMENT : 28-2-14 [ ITA 6823/M/11 & 7371/M/10 2 / O R D E R PER P.M. JAGTAP, A.M . : .. , THESE TWO APPEALS, ONE FILED BY THE ASSESSEE BEING ITA NO. 7371/MUM/2010 AND THE OTHER FILED BY THE REVENUE BE ING ITA NO. 6823/MUM/2011, ARE CROSS APPEALS FOR A.Y. 2006-07. 2. THE ISSUE INVOLVED IN GROUND NO. 1 OF ASSESSEES APPEAL RELATES TO THE ADDITION OF RS. 1,61,00,696/- MADE BY THE A.O. TO T HE TOTAL INCOME OF THE ASSESSEE BY WAY OF TRANSFER PRICING ADJUSTMENT IN R ESPECT OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS AE IN VOLVING EXPORT OF BATHROBES. 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS A JOINT VENTURE BETWEEN INDIAN PROMOTERS (MAJOR BEING WELSPUN INDIA LTD.) AND VICCNZO ZUCCHI S.P.A., ITALY. IT IS ENGAGED IN THE BUSINES S OF MANUFACTURE AND EXPORT OF BATHROBES. THE RETURN OF INCOME FOR THE YEAR UN DER CONSIDERATION WAS FILED BY IT ON 31-10-2007 DECLARING TOTAL INCOME OF RS. 1 ,30,65,646/-. IN THE SAID YEAR, THE ASSESSEE HAD EXPORTED BATHROBES TO ITS AE LOCATED IN ITALY FOR AN AMOUNT OF RS. 18,55,51,843/-. IN THE TP STUDY REPOR T FILED BY THE ASSESSEE, THESE INTERNATIONAL TRANSACTIONS WERE BENCH MARKED BY THE ASSESSEE BY FOLLOWING CUP METHOD. IT WAS STATED THAT 85.52% OF THE TOTAL SALES OF THE ASSESSEE WERE TO ITS AE WHILE THE REMAINING SALE/EX PORT WERE MADE TO NON- AES. IT WAS STATED THAT THE EXPORT TO NON-AE WAS M AINLY COMPRISING OF EXPORT OF BATHROBES TO MAIN KNITTING INC. U.S.A AT A UNIT PRICE OF US $ 6.55 WHILE THE SALE PRICE CHARGED BY THE ASSESSEE FOR EXPORT OF BA THROBES TO ITS AE IN ITALY WAS US $ 8.42. IT WAS CLAIMED THAT THE PRICE CHARGE D BY THE ASSESSEE TO ITS AE FOR EXPORT OF BATHROBES WAS MORE THAN THE PRICE CHA RGED FOR SIMILAR BATHROBES ITA 6823/M/11 & 7371/M/10 3 TO ITS NON-AE AND THE SAME THEREFORE WAS AT ARMS L ENGTH. THIS CLAIM OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE TPO. ACCOR DING TO HIM, THE ASSESSEE HAD COMPARED THE AVERAGE PRICE OF BATHROBE S EXPORTED TO ITS AE LOCATED IN ITALY WITH THE AVERAGE PRICE OF BATHROBE S EXPORTED TO THE NON-AE LOCATED IN USA. HE HELD THAT BOTH THESE MARKETS WE RE DIFFERENT AND EVEN THE COMPARISON MADE BY THE ASSESSEE BY TAKING AVERAGE P RICE OF BATHROBES WAS NOT PROPER. HE THEREFORE REJECTED THE CUP METHOD FO LLOWED BY THE ASSESSEE FOR BENCH MARKING AND PROCEEDED TO BENCH MARK THE TRANS ACTIONS OF THE ASSESSEE COMPANY WITH ITS AE BY FOLLOWING TNMM AS THE MOST A PPROPRIATE METHOD WITH OPERATING PROFIT TO TOTAL COST (OP/TC) AS THE PRICE LEVEL INDICATOR (PLI). IN THIS REGARD, HE MADE A SEARCH ON CAPITALINE DATABAS E AND SELECTED SEVEN ENTITIES ENGAGED IN THE MANUFACTURE OF TERRY TOWELS AS COMPARABLES. SINCE THE AVERAGE PROFIT MARGIN OF THESE SEVEN COMPARABLE S WORKED OUT AT 15.32% BY TAKING ARITHMETIC MEAN WAS MORE THAN THE PROFIT MARGIN OF 8.65% EARNED BY THE ASSESSEE, THE TPO ADOPTED THE AVERAGE PROFIT MARGIN OF 15.32% OF THE COMPARABLES AS THE ARMS LENGTH MARGIN. IN THIS REG ARD, HE REJECTED THE CONTENTION OF THE ASSESSEE THAT THE DEPB BENEFIT FR OM EXPORTS SHOULD ALSO BE TAKEN INTO CONSIDERATION AS THE PART OF SALE PROCEE DS TO DETERMINE ITS PROFIT MARGIN. ACCORDINGLY, APPLYING THE AVERAGE PROFIT MA RGIN OF 15.32% OF THE COMPARABLED TO THE TOTAL COST OF THE ASSESSEE RELAT ED TO ITS EXPORTS TO AE, THE ARMS LENGTH VALUE OF THE EXPORTS OF BATHROBES OF T HE ASSESSEE TO ITS AE WAS DETERMINED BY THE TPO AT RS. 20,16,52,539/- AS AGA INST THE VALUE OF RS. 18,55,51,843/- CHARGED BY THE ASSESSEE AND THE DIFF ERENCE OF RS. 1,61,00,696/- WAS TREATED AS TP ADJUSTMENT REQUIRED TO BE MADE IN THE CASE OF THE ASSESSEE. 4. IN THE DRAFT ASSESSMENT ORDER, THE A.O. PROPOSED TO MAKE THE ADDITION ON ACCOUNT OF TP ADJUSTMENT IN RESPECT OF THE INTER NATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS AE INVOLVING EXPORT O F BATHROBES AS DETERMINED BY THE TPO. ON RECEIPT OF THE DRAFT ASSESSMENT ORD ER, THE ASSESSEE COMPANY ITA 6823/M/11 & 7371/M/10 4 RAISED ITS OBJECTION BEFORE THE DRP. THE DRP, HOWEV ER, DID NOT FIND THE OBJECTIONS RAISED BY THE ASSESSEE TO BE SUSTAINABLE KEEPING IN VIEW THAT A SIMILAR ISSUE INVOLVING THE TP ADJUSTMENT MADE BY T HE A.O. AND CONFIRMED BY THE LD. CIT(A) WAS PENDING BEFORE THE TRIBUNAL IN A SSESSEES OWN CASE FOR A.Y. 2005-06. ACCORDINGLY, THE A.O. WAS DIRECTED BY THE DRP TO PASS THE FINAL ASSESSMENT ORDER MAKING THEREIN THE ADDITION ON ACC OUNT OF TP ADJUSTMENT AS PROPOSED IN THE DRAFT ASSESSMENT ORDER. THE A.O. THEREAFTER PASSED A FINAL ASSESSMENT ORDER U/S 143(3) R.W.S. 144-C OF THE INC OME TAX ACT, 1961 VIDE AN ORDER DATED 30-9-2010. 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERV ED THAT A SIMILAR ADDITION MADE BY THE A.O. ON ACCOUNT OF TP ADJUSTMENT IN ASS ESSEES OWN CASE FOR A.Y. 2005-06 WAS DELETED BY THE LD. CIT(A) AND THE TRIBU NAL VIDE ITS ORDER DTD. 11-1-2013 PASSED IN ITA NO. 898/MUM/2010 UPHELD THE ORDER OF THE LD. CIT(A) DELETING THE SAID ADDITION FOR THE FOLLOWING REASONS GIVEN IN PARA 17:- 17. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT THE DEPB BE NEFIT WAS NOT TAKEN INTO CONSIDERATION BY THE AO/TPO FOR THE PURPOSE OF WORKING OUT THE PROFIT MARGIN OF THE ASSESSEE WHEREAS SUCH BENEFIT WAS TAKEN INTO ACCOUNT IN THE COMPARABLE CASES WHILE WORKING OUT T HEIR PROFIT MARGIN AS FOUND BY THE LEARNED CIT(APPEALS). BEFORE US, NO THING HAS BEEN BROUGHT ON RECORD TO CONTROVERT OR REBUT THIS FINDI NG RECORDED BY THE LEARNED CIT(APPEALS) AND THIS BEING SO, WE FIND NO JUSTIFIABLE REASON TO INTERFERE WITH THE DECISION OF THE LEARNED CIT(APPE ALS) THAT THE DEPB BENEFIT RECEIVED DURING THE YEAR UNDER CONSIDERATIO N SHOULD BE CONSIDERED AS PART OF THE TURNOVER OF THE ASSESSEE FOR WORKING OUT THE PROFIT MARGIN TO MAKE THE COMPARISON OF LIKE TO LIK E AND SIMILAR TO SIMILAR. SINCE THE PROFIT MARGIN OF THE ASSESSEE AF TER TAKING INTO CONSIDERATION THE DEPB BENEFIT AS PART OF ITS TURNO VER COMES TO 12.30% AS AGAINST THE AVERAGE NET PROFIT MARGIN OF 13.05% OF THE COMPARABLES WHICH IS WITHIN THE SAFE LIMIT OF 5%, WE FIND OURSE LVES IN AGREEMENT WITH THE LEARNED CIT(APPEALS) THAT NO TP ADJUSTMENT IN RESPECT OF TRANSACTIONS MADE WITH THE ASSOCIATED ENTERPRISES W AS REQUIRED TO BE MADE IN THE CASE OF THE ASSESSEE. WE, THEREFORE, UP HOLD THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) DELETING THE ADDI TION MADE BY THE AO BY WAY OF TP ADJUSTMENT AND DISMISS THE APPEAL OF T HE REVENUE. ITA 6823/M/11 & 7371/M/10 5 RESPECTFULLY FOLLOWING THE ORDER OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2005-06 (SUPRA), WE RE STORE THE SIMILAR ISSUE INVOLVED IN THE YEAR UNDER CONSIDERATION TO THE FIL E OF THE A.O. WITH A DIRECTION TO RECOMPUTE THE PROFIT MARGIN OF THE ASSESSEE COMP ANY AFTER TAKING INTO CONSIDERATION THE DEPB BENEFIT AS A PART OF ITS TUR NOVER AND TO DELETE THE ADDITION MADE BY WAY OF TP ADJUSTMENT IF THE DIFFER ENCE BETWEEN THE PROFIT MARGIN SO COMPUTED AND THE AVERAGE PROFIT MARGIN OF THE COMPARABLES IS FOUND TO BE WITHIN THE SAFE HARBOR LIMIT OF 5% AS C LAIMED BY THE ASSESSEE. GROUND NO. 1 OF THE ASSESSEES APPEAL IS ACCORDINGL Y TREATED AS ALLOWED. 6. AS REGARDS THE OTHER GROUNDS RAISED BY THE ASSES SEE IN ITS APPEAL AS WELL AS ALL THE GROUNDS RAISED IN THE REVENUES APP EAL, IT IS OBSERVED THAT THE ISSUES TAKEN THEREIN ARE ARISING FROM THE ORDER OF THE LD. CIT(A)-6, MUMBAI DTD. 21-7-2011 WHEREBY HE DISPOSED OF THE APPEAL FI LED BY THE ASSESSEE AGAINST THE FINAL ORDER PASSED BY THE A.O. ON 30-9- 2010 U/S 143(3) OF THE ACT AS PER THE DIRECTIONS ISSUED BY THE DRP U/S 144-C O F THE ACT. 7. AT THE TIME OF HEARING BEFORE US, THE LD. D.R. H AS RAISED A PRELIMINARY OBJECTION THAT THE ORDER PASSED BY THE A.O. U/S 143 (3) OF THE ACT AS PER THE DIRECTION OF THE DISPUTE RESOLUTION PANEL WAS NOT A N APPEALABLE ORDER BEFORE THE LD. CIT(A) AND THE LD. CIT(A) THUS HAD NO POWER TO ENTERTAIN AND DISPOSE OF THE APPEAL FILED BY THE ASSESSEE AGAINST THE SAID O RDER. HE HAS CONTENDED THAT THE IMPUGNED ORDER PASSED BY THE LD. CIT(A) DISPOSI NG OF THE APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER PASSED BY THE A.O. U /S 143(3) OF THE ACT IN PURSUANCE OF THE DIRECTIONS OF THE DRP THUS IS LIAB LE TO BE QUASHED. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS NO T RAISED ANY MATERIAL CONTENTION TO MEET THIS PRELIMINARY OBJECTION RAISE D BY THE LD. D.R. 8. AFTER CONSIDERING THE RIVAL SUBMISSION AND PERUS ING THE RELEVANT MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE ORDE R OF ASSESSMENT PASSED U/S ITA 6823/M/11 & 7371/M/10 6 143(3) OF THE ACT IN PURSUANCE OF THE DIRECTIONS OF THE DRP IS NOT CONSIDERED AS AN ORDER APPEALABLE BEFORE THE LD. CIT(A) W.E.F. 1-10-2009 AS PER THE AMENDMENT MADE IN THE RELEVANT PROVISIONS OF SECTIO N 246-A OF THE ACT BY THE FINANCE (NO.2) ACT, 2009. THE APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER PASSED BY THE A.O. U/S 143(3) OF THE ACT ON 30-9-20 10 IN PURSUANCE OF THE DIRECTIONS OF THE DRP THUS WAS NOT MAINTAINABLE BEF ORE THE LD. CIT(A) AND THE LD. CIT(A) CLEARLY EXCEEDED HIS JURISDICTION IN ENT ERTAINING AND DISPOSING OF THE SAID APPEAL FILED BY THE ASSESSEE. WE, THEREFORE, H OLD THAT THE IMPUGNED ORDER OF THE LD. CIT(A) DISPOSING OF THE APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER PASSED BY THE A.O. U/S 143(3) IN PURSUANCE OF THE D IRECTIONS OF THE DRP IS NOT VALID IN THE EYE OF LAW AND THE SAME IS LIABLE TO BE CANCELLED. WE ORDER ACCORDINGLY. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TRE ATED AS PARTLY ALLOWED WHILE THE APPEAL OF THE REVENUE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH FEB. 2014. . ) 0 1 28-2-2014 ) SD/- SD/- (VIVEK VARMA) (P.M. JAGTAP ) JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; 1 DATED 28-2-2014 [ .../ RK , SR. PS ITA 6823/M/11 & 7371/M/10 7 ' #%& '& / COPY OF THE ORDER FORWARDED TO : 1. # / THE APPELLANT 2. $%# / THE RESPONDENT. 3. 4 () / THE CIT(A)CONCERNED, MUMBAI. 4. 4 / CIT CONCERNED, MUMBAI 5. $8 , * 8 , / DR, ITAT, MUMBAI K BENCH 6. / GUARD FILE. / BY ORDER, % $ //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI