PHOENIX MECANO (INDIA) LTD, MUMBAI V. DCIT 8(2), MUMBAI

ITA 7646/MUM/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56150 (ITAT-MUMBAI)
• Duration Of Justice: 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 11-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUBACHAN RAM
• Assessee Lawyers: ZEEL JAMBUWALA; S UNIL M LALA SHRI DEVANG SHAH
• Keywords: Transfer pricing; International transaction; Corroborative evidences

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F , MUMBAI BEFORE SHIRI R. S. PADVEKAR, J.M. AND SHRI RAJENDRA SINGH, A.M. ITA NO. : 7646/MUM/2011 ASSESSMENT YEAR : 2007-08 M/S. PHOENIX MECANO (INDIA) LIMITED 306, MAROL BHAVAN, MAKWANA ROAD, ANDHERI(E), MUMBAI-400 059. PAN NO: AAACP 2452 L VS. OFFICE OF THE D.C.I.T. RANGE 8(2), AAYAKAR BHAVAN, ROOM NO.216(A), M.K. MARG, MUMBAI-400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S UNIL M. LALA , SHRI DEVANG SHAH & SHRI ZEEL JAMBUWALA RESPONDENT BY : SHRI S UBACHAN RAM DATE OF HEARING : 0 7 .1 2 .2011 DATE OF PRONOUNCEMENT : 23.12.2011 ORDER PER RAJENDRA SINGH (AM) : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 12.12.2010 OF THE AO PASSED IN PURSUANCE OF DIRECTI ON OF DRP. THE DISPUTE RAISED BY THE ASSESSEE RELATES TO THE ADDIT IONS ON ACCOUNT OF GP RATE AND TRANSFER PRICING ADJUSTMENT. 2. THE FACTS IN BRIEF ARE THAT THE AO DURING THE AS SESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD DONE INTERN ATIONAL ITA NO : 7646/MUM/2011 M/S. PHOENIX MECANO (INDIA) LIMITED 2 TRANSACTIONS WITH ASSOCIATED ENTERPRISES. THE MATTE R WAS, THEREFORE, REFERRED TO THE TRANSFER PRICING OFFICER (TPO), WHO FOLLOWING THE TNMM METHOD, COMPUTED THE TRANSFER PRICING ADJUSTMENT OF `. 8,52,70,976/-. THE ASSESSEE RAISED OBJECTION BEFORE THE DRP REGARD ING THE TP ADJUSTMENTS, BUT THE SAME WAS REJECTED AND THE ADJU STMENT PROPOSED BY THE AO ON THE BASIS OF ORDER OF TPO WAS UPHELD. THE AO, THEREFORE, IN THE FINAL ORDER DATED 21.02.2010 MADE ADDITION O F `. 8,52,70,976/-, ON ACCOUNT OF TP ADJUSTMENTS. THE AO ALSO NOTED THA T THE ASSESSEE FOR THE RELEVANT YEAR HAD DECLARED GP RATE OF 21.33 % COMPARED TO 26.63% IN THE IMMEDIATE PRECEDING YEAR. THE ASSESSE E GAVE THE FOLLOWING EXPLANATION FOR THE FALL IN GP RATE :- A) PHOENIX MECANO INDIA LIMITED HAD SET UP DIE CAS TING PLANT IN 2006 WHICH RESULTED INTO INCREASE IN EXPOR T SALE BY 133% OVER PREVIOUS YEAR WHICH IN TURN RESULTED IN I NCREASE IN EXPENSES MAINLY IN MATERIAL COST/MANUFACTURING/ ADMINISTRATIVE/FINANCIAL EXPENSES. B) THE GROSS PROFIT RATIO OF THE ASSESSEE HAS REDUC ED IN A.Y. 2007-08 AS COMPARED TO A.Y. 2006-07 BY APPROXIMATELY 5% WAS DUE TO CHANGE IN THE PROPORTIO N OF TRADING AND MANUFACTURING ACTIVITY. C) THE GROSS PROFIT RATIO HAS REDUCED DUE TO INCREA SE IN MATERIAL COST BY APPROX 2% AND MANUFACTURING EXPENS ES BY APPROX 3%. D) THE INCREASE IN THE MATERIAL COST IS DUE TO FLUC TUATION IN EXCHANGE RATE OF EUROS. E) THE MAJOR HEAD CONTRIBUTING TO INCREASE IN MANUFACTURING COST IS POWER AND FUEL, LABOUR AND WA GES, CONSUMABLES. THE ASSESSEE HAS TAKEN A NEW CONNECTIO N FROM THE ELECTRICITY BOARD, POWER AND FUEL HAD INCR EASED DUE TO LOW CAPACITY UTILIZATION AND FIXED COST REMA INING THE SAME. THE ABOVE FACTORS HAVE RESULTED IN INCREASE I N EXPENSES AND LOW CAPACITY UTILIZATION. ITA NO : 7646/MUM/2011 M/S. PHOENIX MECANO (INDIA) LIMITED 3 3. THE AO, HOWEVER, OBSERVED THAT THE EXPLANATION G IVEN BY THE ASSESSEE WAS NOT SUPPORTED BY CONCRETE EVIDENCE. IT WAS ALSO OBSERVED BY HIM THAT BECAUSE OF INCREASE IN SALES, PROFIT SHOULD HAVE BEEN HIGHER. HE DID NOT ACCEPT THE PLEA THAT FALL I N GP RATE WAS DUE TO THE MANUFACTURING ACTIVITY. THE PLEA OF INCREASE IN MATERIAL COST, MANUFACTURING EXPENSES AS WELL AS FOREIGN EXCHANGE FLUCTUATIONS WAS ALSO NOT ACCEPTED. IT WAS ALSO OBSERVED BY HIM THAT ASSESSEE HAD REDUCED THE PROFITS BY MANIPULATING TRANSACTIONS WI TH THE ASSOCIATE ENTERPRISES (AE). THE AO, THEREFORE, REJECTED THE B OOKS OF ACCOUNTS AND ADOPTED THE G.P. RATE AS THAT OF THE PRECEDING YEAR, WHICH RESULTED INTO AN ADDITION OF `. 81,13,911/- TO THE TOTAL INCOME. AGGRIEVED BY THE DECISION OF THE AO, THE ASSESSEE I S IN APPEAL BEFORE THE TRIBUNAL. 4. BEFORE US, THE LD. AR FOR THE ASSESSEE ARGUED TH AT REJECTION OF ACCOUNTS BY THE AO WAS NOT JUSTIFIED, AS THERE WERE NO DEFECTS POINTED OUT IN THE BOOKS OF ACCOUNTS. THE AO HAD ALSO NOT P ROVIDED SPECIFIC OPPORTUNITY TO SUBSTANTIATE THE CLAIM OF INCREASE I N MATERIAL COST AND MANUFACTURING EXPENSES AND THE EFFECT OF FOREIGN EX CHANGE FLUCTUATION ON THE MATERIAL COST. IN ANY CASE, IT WAS SUBMITTED THAT THERE BEING NO DEFECTS IN THE BOOKS OF ACCOUNTS, NO ADDITION COULD BE MADE ON ACCOUNT OF GP RATE. AS REGARDS, THE TP ADJUSTMENTS, THE LD. AR DID NOT DISPUTE THE TNMM METHOD FOLLOWED BY THE AO. HE, HOWEVER, OBJECTED TO THE TP ADJUSTMENT IN RESPECT OF THE ENT IRE SALES, WHEREAS IT SHOULD HAVE BEEN ONLY WITH RESPECT TO THE INTERNATI ONAL TRANSACTIONS WITH THE AE. HE PLACED RELIANCE ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. M/S. STARLITE (40 SOT 421) AND SEVERAL OTHER DECISIONS OF TRIBUNAL IN SUPPORT OF T HE SAID PROPOSITION. THE LD. AR, REFERRING TO THE DECISION OF MUMBAI BEN CH OF THE TRIBUNAL IN CASE OF EMERSONS PROCESS MANAGEMENT INDIA PVT. L TD. VS. ADD CIT ITA NO : 7646/MUM/2011 M/S. PHOENIX MECANO (INDIA) LIMITED 4 (2011-TII-102-ITAT-MUM-TP) ALSO ARGUED THAT IN THE PRE 01.10.2009 POSITION, THE ADJUSTMENT OF 5% WAS TO BE ALLOWED TO THE ASSESSEE, EVEN IN THE CASES WHERE DIFFERENCES IN VALUE OF INTERNAT IONAL TRANSACTIONS AND ITS ALP WAS MORE THAN 5%. IT WAS ALSO SUBMITTED THAT MAKING ADDITION TO IT ON ACCOUNT OF GP RATE AND TP ADJUSTM ENT, HAS RESULTED INTO DOUBLE ADDITION. IT WAS, ACCORDINGLY, REQUESTE D THAT THE ADDITION MADE BY THE AO SHOULD BE DELETED AND THE MATTER MAY BE REFERRED BACK TO THE AO FOR FRESH COMPUTATION OF INCOME, IN THE LIGHT OF DECISIONS OF TRIBUNAL MENTIONED ABOVE. THE LD. DR O N THE OTHER HAND, PLACED RELIANCE ON THE ORDER OF THE AO. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING THE ADDITION ON ACCOUNT OF GP RATE AND TP ADJUSTMENT MADE BY THE AO . IN MAKING TP ADJUSTMENT, THE AO HAS FOLLOWED THE TNMM METHOD, AB OUT WHICH THERE IS NO DISPUTE. THE DISPUTE RAISED IS ONLY ABO UT NOT GIVING THE BENEFIT OF 5% ADJUSTMENT AND MAKING THE ADJUSTMENTS IN RELATION TO THE ENTIRE SALES AND NOT LIMITING TO THE TRANSACTIO NS WITH THE AE. THE ADJUSTMENTS ON ACCOUNT OF TRANSFER PRICING ARE TO B E RESTRICTED ONLY TO THE INTERNATIONAL TRANSACTIONS WITH THE AE, AND NOT TO THE ENTIRE TURNOVER OF THE ASSESSEE AS HELD BY THE MUMBAI BENC H OF THE TRIBUNAL IN CASE OF DCIT VS. M/S. STARLITE (SUPRA) AND IN SE VERAL OTHER CASES. SIMILARLY, IN THE PRE 01.10.2009 POSITION, THE BENE FIT OF 5% IS TO BE ALLOWED TO THE ASSESSEE, EVEN IN CASES WHERE DIFFER ENCE IN VALUE OF INTERNATIONAL TRANSACTIONS AND ITS ALP IS MORE THAN 5% AS HELD BY THE TRIBUNAL IN CASE OF EMERSONS PROCESS MANAGEMENT IND IA PVT. LTD. VS. ADD CIT (SUPRA) AND IN OTHER CASES. THE COMPUTATION MADE BY THE AO IS, THEREFORE, REQUIRED TO BE REWORKED. AS REGARDS THE GP RATE, THE AO MADE THE ADDITION ONLY ON THE GROUND THAT THE GP RA TE HAD FALLEN COMPARED TO THE PREVIOUS YEAR AND THAT THE EXPLANAT ION GIVEN BY THE ITA NO : 7646/MUM/2011 M/S. PHOENIX MECANO (INDIA) LIMITED 5 ASSESSEE WAS NOT SUBSTANTIATED BY EVIDENCE. THE AO HAS NOT POINTED OUT ANY DEFECTS IN THE BOOKS OF ACCOUNTS. IN OUR VI EW, IN THE ABSENCE OF ANY DEFECTS, BOOKS OF ACCOUNTS CANNOT BE REJECTE D. IN RELATION TO INTERNATIONAL TRANSACTIONS WITH THE AE, THERE IS PR OVISION FOR SEPARATE TP ADJUSTMENTS, AND MERELY BECAUSE THERE IS TP ADJU STMENT, ENTIRE BOOKS CANNOT BE REJECTED IN THE ABSENCE OF ANY DEFE CTS. WE ALSO NOTE THAT THE ASSESSEE HAD EXPLAINED THE FALL IN GP RATE DUE TO INCREASE IN MATERIAL COST AND IN MANUFACTURING EXPENSES AND DUE TO IMPACT OF FOREIGN EXCHANGE FLUCTUATIONS. THE AO HAS WRITTEN T HAT THE ASSESSEE COULD NOT FILE SUPPORTING EVIDENCES. HOWEVER, WE FI ND THAT IT IS NOT CLEAR FROM THE ASSESSMENT ORDER, WHETHER THE AO CAL LED FOR ANY EVIDENCE IN SUPPORT OF INCREASE IN MATERIAL COST AN D MANUFACTURING EXPENSES. FURTHER, WHILE COMPUTING THE GP RATE FOR THE YEAR, FOR THE PURPOSE OF COMPARISON WITH THE EARLIER YEAR, THE AO HAD NOT MADE ANY ALLOWANCE FOR TP ADJUSTMENTS, WHICH WOULD ALSO HAVE IMPACT ON THE GP RATE AND, THEREFORE, MAKING THE ADDITIONS ON BOT H THE COUNTS WOULD RESULT IN DOUBLE ADDITION. THE MATTER, IN OUR VIEW, REQUIRES FRESH EXAMINATION. WE, THEREFORE, SET ASIDE THE ORD ER OF THE AO AND RESTORE THE MATTER BACK TO HIM FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESS EE. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON THIS 23 RD DAY OF DECEMBER, 2011. SD/- S D/ - ( R. S. PADVEKAR ) ( RAJENDRA SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT: 23.12.2011 ITA NO : 7646/MUM/2011 M/S. PHOENIX MECANO (INDIA) LIMITED 6 COPY FORWARDED TO : 1. THE APPELLANT, 2. THE RESPONDENT, 3. THE C.I.T. 4. CIT (A) 5. THE DR, F - BENCH, ITAT, MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ROSHANI