JCIT (OSD) 8(1), MUMBAI V. CHEROKEE INDIA P. LTD, MUMBAI

ITA 7737/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84260 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 20-11-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 28-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N PADMANABAN
• Keywords: Business income; Transfer pricing; International transaction

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . . , . , ! BEFORE SHRI I.P. BANSAL, JM AND RAJENDRA, AM ./ I.T.A. NO.7737/MUM/2012 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2008-09 ASSTT. COMMISSIONER OF INCOME TAX 8(1), ROOM NO.260A, 2 ND FLOOR, AAYKAR BHAVAN, MK ROAD, MUMBAI 400 020 ' ' ' ' / VS. M/S.CHEROKEE INDIA PVT. LTD., UNIT NO.95, SDF-III, SEEPZ, ANDHERI (EAST), MUMBAI 400 096. $ ./ % ./ PAN/GIR NO. : AAACG 7043K ( $& / APPELLANT ) .. ( '($& / RESPONDENT ) REVENUE BY: SHRI N. PADMANABAN ASSESSEE BY : SHRI RAMESH S. IYER ' ) *+ / DATE OF HEARING : 20/11/2014 ,-# ) *+ / DATE OF PRONOUNCEMENT : 20/11/2014 . / O R D E R PER I.P.BANSAL,J.M: THIS IS AN APPEAL FILED BY THE REVENUE AND IT IS DIRECTED AGAINST ORDER PASSED BY LD. CIT(A)-15, MUMBAI DATED 22/10/2012 FO R ASSESSMENT YEAR 2008- 09. GROUNDS OF APPEAL READ AS UNDER: 1. ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD. CIT(A) ERRED IN REDUCING THE COST OF GOODS RECEIVED FREE OF COST OF RS.9.1O CRORE, FROM THE TOTAL COST OF GOODS OF RS. 14.76 CRORE AND APPLYING 6% MARK UP ON SUCH REDUCED AMOUNT OF RS.5.66 CRORE, THEREBY ALLOWING THE ASSESSEE RELIEF OF RS.54,60,000/-. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN REDUCING THE COST OF GOODS RECEIVED FREE OF COST OF RS.9.10 CRORE, FROM THE TOTAL COST OF GOODS OF RS.14.76 CRORE AND APPLYING 6% MARK UP ON SUCH REDUCED AMOUNT OF RS.5.66 CRORE, THEREBY ALLOWING THE ASSESSEE RELIEF OF RS.54,60,000, WITHOUT APPRECIATING THE FOLLOWING FACTS THAT: ./ I.T.A. NO.7737/MUM/2012 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2008-09 2 A) THE TOTAL SALES IN THE BALANCE SHEET AND PROFIT AND LOSS OF THE ASSESSEE INCLUDED THE COST OF RAW MATERIAL. HENCE, IF THE COST OF RAW MATERIAL EXCLUDED FROM THE OPERATING EXPENSES OF THE ASSESSEE, SUCH SELECTIVE COST WOULD GIVE DISTORTED RESULTS. ONCE TNMM IS SELECTED AS THE BEST METHOD FOR BENCHM ARKING OF ALP, THE PROFITABILITY OF ENTITY LEVEL HAS TO BE CONSIDERED AS OPERATING PROFIT. B) THE USE OF BERRY RATIO SUGGESTED BY THE LD. CIT( A) IS NOT TENABLE AS BERRY RATIO IS RELIABLE FOR DISTRIBUTORS AND NOT FOR MANUFACTURERS BECAUSE IN THE CASE OF MANUFACTURERS, MUCH OF THE VALUE-ADDED FUNCTIONS IS REFLECTED IN THE COST OF GOODS SOLD. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING, DESIGNING, DEVELOPING AND ASSEMBLING OF POWER SUPPL IES AND RELATED SIM-CUSTOM DESIGN DEVELOPMENT OF POWER SUPPLIES, TRANSFORMERS, TOROIDAL CORES, AND CURRENT TRANSFORMERS CONTROL BOARDS. IT ENTERED INTO FOLLO WING INTERNATIONAL TRANSACTIONS: S.NO. NAME OF THE AE NATURE OF TRANSACTION AMOUNT IN RUPEES FOR A.Y 2008-09 METHOD ADOPTED 1. M/S. CHEROKEE INTERNATIONAL, TUSTIN USA PURCHASE OF RAW MATERIALS 9,09,54,952 TNMM 2. -DO- SALE OF FINISHED GOODS 13,31,66,657 TNMM 3. -DO- PURCHASE OF PLANT AND MACHINERY NIL TNMM TOTAL 22,41,21,609 2.1 WHILE DETERMINING THE ALP THE TPO HAS ADOPTED A MARK UP OF 6% ON THE COST INCURRED BY THE ASSESSEE WHICH INCLUDE PURCHA SE OF RAW MATERIAL OF RS.9,09,54,952/-. THE SAID RAW MATERIAL WAS SUPPLI ED BY THE AE OF THE ASSESSEE FREE OF COST. THUS, TPO CALCULATED THE TP ADJUSTM ENT OF RS.2,33,24,680/- AS PER FOLLOWING CALCULATIONS: ALP MARGIN TO BE EARNED BY THE ASSESSEE 6% ALP OF THE ASSESSEE 106% OF THE EXPENDITURE (RS .14,76,33,337) ARMS LENGTH PRICE 106% X 147633337 15,64,91,337/- PRICE RECEIVED BY THE ASSESSEE 13,31,66,657/- SHORTFALL BEING THE ADJUSTMENT U/S.92CA 2,33,24,680 /- 2.2 THE TP ADJUSTMENT MADE BY THE AO WAS AGITATED I N AN APPEAL FILED BEFORE LD. CIT(A). IT WAS SUBMITTED THAT TREATMENT ADOPTE D BY THE TPO FOR CALCULATING 6% MARK UP ON THE COST IS DIFFERENT FROM THE TREAT MENT ADOPTED BY TPO IN RESPECT OF IMMEDIATE PRECEDING YEAR, WHEREIN WHILE CALCULATING THE COST THE RAW MATERIAL SUPPLIED BY AE FREE OF COST WAS EXCLUDED. LD. CIT(A) AFTER GOING THROUGH ./ I.T.A. NO.7737/MUM/2012 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2008-09 3 THE SUBMISSIONS OF THE ASSESSEE FOUND THAT FOR IMME DIATE PRECEDING YEAR I.E. FOR A.Y 2007-08 TPO WHILE CALCULATING 6% MARK UP HAD EXCLUDED THE VALUE OF PURCHASE OF RAW MATERIAL AND 6% MARK UP WAS CALCULA TED ON THE NET COST OF THE ASSESSEE AFTER EXCLUDING VALUE OF PURCHASE OF RAW M ATERIAL. THUS, LD. CIT(A) HAS ALLOWED THE RELIEF TO THAT EXTENT TO THE ASSESSEE A ND HAS RECALCULATED THE TP ADJUSTMENT AS FOLLOWS: ALP MARGIN TO BE EARNED BY THE ASSESSEE 6% TOTAL COST INCURRED BY THE APPELLANT RS.14,76,33,3 37/- COST OF RAW MATERIAL IMPORTED FREE OF COST(A) RS.9, 10,00,000/- THE COSTS ATTRIBUTABLE TO THE APPELLANT RS.5,66,33, 337/- ARMS LENGTH PRICE OF THE COST ATTRIBUTABLE TO THE A PPELLANT 106% OF RS.5,66,33,337/- (B) RS.6,00,31,337/- TOTAL ARMS LENGTH PRICE (C) = (A) + B RS.15,10,31, 337/- PRICE RECEIVED BY THE ASSESSEE (D) RS.13,31,66,657/ - SHORTFALL BEING THE ADJUSTMENT U/S.92CA (E) = (C) (D) RS.1,78,64,680/- 2.3 IN THE ABOVE MANNER ADJUSTMENT MADE BY THE TPO WAS REDUCED TO RS.1,78,64,680/- FROM RS.2,33,24,680/- BY GIVING RE LIEF OF RS.54,60,000/-. THE DEPARTMENT IS AGGRIEVED AND HAS RAISED AFOREMENTION ED GROUNDS OF APPEAL. 3. LD. DR RELYING UPON THE GROUNDS OF APPEAL SUBMIT TED THAT LD. CIT(A) HAS COMMITTED AN ERROR IN GRANTING RELIEF TO THE ASSESS EE. LD. DR SUBMITTED THAT VALUE OF THE RAW MATERIAL SUPPLIED TO THE ASSESSEE FREE OF COST BY THE AE COULD NOT BE EXCLUDED FOR THE PURPOSE OF 6% MARK UP AND THUS, RELIEF GIVEN BY LD. CIT(A) IS CONTRARY TO LAW AND SHOULD BE SET ASIDE. THE ADJUS TMENT MADE BY THE TPO SHOULD BE UPHELD IN ITS ENTIRETY. 4. ON THE OTHER HAND, LD. AR OF THE ASSESSEE HAS PR ODUCED BEFORE US COPY OF THE TPOS ORDER FOR A.Y 2007-08 WHICH IS DATED 26/1 0/2010. IT WAS SUBMITTED THAT THE APPROACH ADOPTED BY THE TPO IN THE SAID YE AR WAS EXCLUSION OF VALUE OF RAW MATERIAL RECEIVED BY THE ASSESSEE FROM ITS AE W HICH WAS FREE OF COST. IT WAS SUBMITTED THAT THE TPO IN THE SAID YEAR HAS ADOPTED THIS APPROACH AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND BY WAY OF A SPEAKING ORDER. IT WAS FURTHER SUBMITTED BY LD. AR THAT ASSESSEE HAS A CCEPTED THE VIEW POINT TAKEN ./ I.T.A. NO.7737/MUM/2012 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2008-09 4 IN RESPECT OF A.Y 2007-08, THEREFORE, DID NOT FILE ANY APPEAL AGAINST THE IMPUGNED ORDER PASSED BY LD. CIT(A) BY WHICH ADDIT ION OF RS.1,78,64,680/- HAS BEEN UPHELD. THUS, IT WAS SUBMITTED BY LD.AR THAT THE ORDER OF LD.CIT(A) BEING IN ACCORDANCE WITH THE COURSE OF ACTION ADOPTED BY DEPARTMENT IN RESPECT OF IMMEDIATE PRECEDING YEAR, (A.Y. 2007-09) SHOULD BE UPHELD. 5. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENT IONS HAVE CAREFULLY BEEN CONSIDERED. WE HAVE CAREFULLY GONE THROUGH THE ORD ER PASSED BY TPO IN RESPECT OF A.Y 2007-08. LD. CIT(A) HAS CALCULATED THE TP A DJUSTMENT IN ACCORDANCE WITH THE COURSE OF ACTION ADOPTED BY THE DEPARTMENT IN R ESPECT OF IMMEDIATE PRECEDING YEAR I.E. FOR ASSESSMENT YEAR 2007-08. I N OUR VIEW LD. CIT(A) DID NOT COMMIT ANY ERROR IN DETERMINING THE ARMS LENGTH PR ICE. THE IMPUGNED TRANSACTION IS IN ACCORDANCE WITH THE VIEW POINT TA KEN IN RESPECT OF A.Y 2007-08 AS IT IS IN ACCORDANCE WITH THE PRINCIPLE OF CONSIS TENCY, WHICH IS APPLICABLE TO THE INCOME-TAX CASES AS PER DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GOPAL PUROHIT,336 ITR 287(BOM), WHEREIN THE IR LORDSHIPS HAVE HELD THAT THERE OUGHT TO BE UNIFORMITY IN TREATMENT AND CONSI STENCY WHEN THE FACTS AND CIRCUMSTANCES ARE IDENTICAL, PARTICULARLY IN THE CA SE OF THE ASSESSEE. IN THIS CASE ALSO, WHAT LD. CIT(A) HAS DONE IS THAT HE HAS BROUG HT UNIFORMITY IN THE TREATMENT AND CONSISTENCY TO BRING THE TP ADJUSTMENT AT PAR W ITH THE TREATMENT ADOPTED BY THE DEPARTMENT IN RESPECT OF ASSESSMENT YEAR 2007-0 8. FOR THE SAKE OF COMPLETENESS WE MAY MENTION THAT IN A.Y 2007-08 T HE TP ADJUSTMENT OF RS.37,75,579/- WAS COMPUTED AS UNDER: TOTAL COST AS PER PROFIT & LOSS A/C. RS. 18,30,78,087/- LESS: COST OF GOODS RECEIVED FREE OF COST FROM PARENT COMPANY INCLUDED IN COST RS.12,01,51,762/- EXPENSES INCURRED BY ASSESSEE RS.6,29,,26,325 PROFIT CALCULATED @ 6% ON RS.6,29,26,325 RS. 37,75,579/- AS IT CAN BE SEEN FROM THE ABOVE THE TPO IN EARLIER YEAR HAS EXCLUDED A SUM OF RS.12,01,51,762/- BEING COST OF GOODS RECEIVED FREE OF COST FROM PARENT COMPANY WHICH WAS INCLUDED IN COST AND HAS COMPUTED 6% MARG IN ON THE BALANCE COST OF ./ I.T.A. NO.7737/MUM/2012 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2008-09 5 RS.6,29,26,325/-. IN VIEW OF ABOVE DISCUSSION, WE DECLINE TO INTERFERE IN THE RELIEF GRANTED BY LD. CIT(A) AND DEPARTMENTAL APPEAL IS DI SMISSED. 6. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20/11/2014 . . ) ,-# / 0'1 20/11//2014 - ) 2 SD/- SD/- (RAJENDRA) . . (I.P.BANSAL) /ACCOUNTANT MEMBER /JUDICIAL MEMBER MUMBAI; 0' DATED 20/11/2014 . . . . ) )) ) '*3 '*3 '*3 '*3 43#* 43#* 43#* 43#* / COPY OF THE ORDER FORWARDED TO : 1. $& / THE APPELLANT 2. '($& / THE RESPONDENT. 3. 5 ( ) / THE CIT(A)- 4. 5 / CIT 5. 362 '*' , , / DR, ITAT, MUMBAI 6. 27 8 / GUARD FILE. .' .' .' .' / BY ORDER, (3* '* //TRUE COPY// 9 99 9 / : : : : (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . ' . .VM , SR. PS