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

ITA 7961/MUM/2011

• Counselvise Citation: 796119914 RSA 2011
• Duration Of Justice: 1 year(s) 8 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 07-08-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 25-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MITESH SHAH
• Assessee Lawyers: AJIT KU MAR JAIN
• Keywords: Transfer pricing; Speculation loss

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K MUMBAI . . , / !' , # $ % BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER . / ITA NO. 7961/MUM/2011 ' ' ' ' / ASSESSMENT YEAR 2007-08 THE DCIT-2(3), ROOM NO.556, AAYKAR BHAVAN, MK ROAD, MUMBAI - 400 020 / VS. M/S.WELSPUN ZUCCHI TEXTILES LTD., TRADE WORLD, E- WING, 9 TH FLOOR, KAMLA MILLS COMPOUND, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI - 400 013. ( # ./ )* ./ PAN/GIR NO. : AAACW 2067L ( (+ / APPELLANT ) .. ( ,-(+ / RESPONDENT ) ASSESSEE BY: SHRI AJIT KUMAR JAIN REVENUE BY : SHRI MITESH SHAH . /# / DATE OF HEARING : 07/08/2013 01' . /# / DATE OF PRONOUNCEMENT : 07/08/2013 2 / O R D E R PER I.P.BANSAL, J.M: THIS IS AN APPEAL FILED BY THE REVENUE. IT IS DIRE CTED AGAINST THE ORDER PASSED BY LD. CIT(A)-15, MUMBAI DATED 21/09/2011 FOR THE ASSESSMENT YEAR 2007-08. THE GROUNDS OF APPEAL READ AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN ALLOWING RELIEF TO THE ASSESSEE TO THE EXTENT IMPUGNED IN THE GROUNDS ENUMERATED BELOW: . / ITA NO. 7961/MUM/2011 ' ' ' ' / ASSESSMENT YEAR 2007-08 2 THE ORDER OF THE CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 1.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN INCLUDING EXPORT INCENTIVES IN EXPORT SALES TO DETE RMINE THE PROFIT MARGIN OF THE ASSESSEE FOR MAKING COMPARABLES UNDER THE TNMM METH OD FOR THE PURPOSE OF ADJUSTMENT IN DETERMINING ARMS LENGTH PRICE U/S. 9 2CA OF THE I.T. ACT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE ON THE LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS INSPITE OF THE FACT THAT THE ASSESSEE FAILED TO ESTABLISH THAT THE AFORESAID LOSS WAS ON ACCOUNT OF HEDGING IN FOREIGN EXCHANGE AND FAILED TO ADDUCE ANY EVIDENCE TO SUBSTANTIATE ITS CLAIM. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE DECISION OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE AO RESTORED. 2. IT WAS POINTED BY LD.A.R THAT GROUND NO.1 IS C OVERED IN FAVOUR OF THE ASSESSEE BY THE EARLIER DECISION OF THE TRIBUNAL DA TED 11/1/2013 IN ITA NO.6539/MUM/09 AND 898/MUM/2010 FOR A.Y 2005-06 , COPY OF WHICH HAS BEEN FILED IN THE PAPER BOOK AT PAGES 154 TO 168 . LD. DR DID NOT OBJECT SUCH SUBMISSION OF LD. A.R OF THE ASSESSEE. THE RELEVAN T PORTION OF THE AFOREMENTIONED ORDER OF THE TRIBUNAL WHEREBY THE I SSUE HAS BEEN CONCLUDED IN FAVOUR OF THE ASSESSEE IS AS FOLLOWS: 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND A LSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS REGARDS THE ADOPTIO N OF MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTI ONS WITH AES IN THE ASSESSEES CASE, IT IS OBSERVED THAT CUP NO DOUBT I S THE MOST APPROPRIATE METHOD FOR SUCH BENCHMARKING PROVIDED THE COMPARABL E PRICES OF SIMILAR PRODUCTS OR ALMOST SIMILAR PRODUCTS IN CASE OF UNCO NTROLLED TRANSACTIONS ARE AVAILABLE. THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS REGARD HAS CONTENDED THAT SIMILAR PRODUCTS AS SUPPLIED TO ASSO CIATED ENTERPRISES VIZ, BATHROBES WERE ALSO SUPPLIED BY THE ASSESSEE TO NON -AES AND, THEREFORE, INTERNAL CUP WAS VERY MUCH AVAILABLE. IT IS, HOWEVE R, OBSERVED THAT A WIDE VARIETY OF BATHROBES WERE MANUFACTURED AND EXP ORTED BY THE ASSESSEE TO AES AS WELL AS NON-AES AND THE INFORMAT ION OBTAINED BY THE LEARNED DR FROM THE WEBSITE OF THE ASSESSEE AND PLA CED ON RECORD BEFORE US SHOWS THAT THERE WERE DIFFERENT TYPES OF BATHROB ES MANUFACTURED AND EXPORTED BY THE ASSESSEE SUCH AS, KIMONO, HOOD, SHA WL, LUXURY, HOTELS, KIDS, ZIPPER ETC. EVEN THESE PRODUCTS WERE FURTHER DIVIDED INTO SUB TYPES SUCH AS KIMONO PIECE DYED AND KIMONO PIECE DYED VEL OUR, HOOD PIECE DYED AND HOOD YAM DYED RIBBED, HOOD WITH EMBROIDERY AND KIMONO WITH EMBROIDERY ETC. IN THE COMPARABLE ANALYSIS DON E BY APPLYING CUP METHOD, THE ASSESSEE HAD NOT DONE THE COMPARISON BE TWEEN THE PRICE OF EACH TYPE OF BATHROBES BUT THE AVERAGE PRICE OF ALL THE BATHROBES SUPPLIED TO THE AES AND NON-AES WAS TAKEN. IN OUR OPINION, S UCH AVERAGE PRICE . / ITA NO. 7961/MUM/2011 ' ' ' ' / ASSESSMENT YEAR 2007-08 3 WHICH IS LIKELY TO BE VARIED DEPENDING ON THE TYPE OF BATHROBES SUPPLIED AS WELL AS PRODUCT MIX OF DIFFERENT TYPES OF BATHROBES CANNOT BE TAKEN AS COMPARABLE UNCONTROLLED PRICE (CUP) FOR THE PURPOSE OF TRANSFER PRICING EXERCISE SINCE THE SAID PRICE CANNOT BE TAKEN AS PR ICE OF THE SIMILAR PRODUCTS SUPPLIED BY THE ASSESSEE TO AES AND NON-AE S. AS ALREADY OBSERVED, SUCH AVERAGE PRICE OF BATHROBES IS LIKELY TO VARY IN A WIDE RANGE DEPENDING ON THE TYPE OF BATHROBES SUPPLIED AND THE IR PRODUCT MIX AND IN THE ABSENCE OF EXACT DATA MADE AVAILABLE BY THE ASS ESSEE TO COMPARE THE PRICES OF SIMILAR PRODUCTS SUPPLIED TO AES AND NON- AES, CUP CANNOT BE APPLIED AS MOST APPROPRIATE METHOD FOR THE TRANSFER PRICING EXERCISE. MOREOVER, THERE WAS ALSO A DIFFERENCE IN GEOGRAPHIC AL LOCATION AND SIZE OF THE MARKETS ALSO IN AS MUCH AS THE AES OF THE ASSES SEE WERE IN ITALY WHEREAS THE NON-AES I.E. WAL MART WAS BASED IN USA HAVING MUCH BIGGER MARKET THAN ITALY. WE, THEREFORE, FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) CONFIRMING THE ACTION OF T HE AO IN REJECTING THE CUP METHOD FOR BENCHMARKING AND APPLYING THE TNMM A ND UPHOLDING THE SAME, WE DISMISS THE APPEAL OF THE ASSESSEE. 16. AS REGARDS THE ISSUE RAISED IN THE REVENUES AP PEAL CHALLENGING THE RELIEF ALLOWED BY THE LEARNED CIT(APPEALS) BY DELET ING THE ADDITION MADE BY THE AO BY WAY OF TP ADJUSTMENT APPLYING TNMM, TH E LEARNED DR AT THE TIME OF HEARING BEFORE US HAS STRONGLY RELIED ON TH E ORDER OF THE AO/TPO IN SUPPORT OF REVENUES CASE. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS RELIED ON THE ORDER OF THE LEARNED CIT(APPEALS) SUBMITTING THAT THE DEPB BENEFIT WAS RIGHTLY CONSIDERED BY HIM FOR THE PURPOSE OF WORKING OUT THE PROFIT MARGIN OF THE ASSESSEE FOR C OMPARABILITY ANALYSIS AS THE SAME WAS ALSO TAKEN INTO ACCOUNT IN WORKING OUT THE PROFIT MARGINS OF THE COMPARABLE CASES. 17. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING 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 WORK ING OUT THE PROFIT MARGIN OF THE ASSESSEE WHEREAS SUCH BENEFIT WAS TAK EN INTO ACCOUNT IN THE COMPARABLE CASES WHILE WORKING OUT THEIR PROFIT MARGIN AS FOUND BY THE LEARNED CIT(APPEALS). BEFORE US, NOTHING HAS BE EN BROUGHT ON RECORD TO CONTROVERT OR REBUT THIS FINDING RECORDED BY THE LE ARNED CIT(APPEALS) AND THIS BEING SO, WE FIND NO JUSTIFIABLE REASON TO INT ERFERE WITH THE DECISION OF THE LEARNED CIT(APPEALS) THAT THE DEPB BENEFIT RECE IVED DURING THE YEAR UNDER CONSIDERATION SHOULD BE CONSIDERED AS PART OF THE TURNOVER OF THE ASSESSEE FOR WORKING OUT THE PROFIT MARGIN TO MAKE THE COMPARISON OF LIKE TO LIKE AND SIMILAR TO SIMILAR. SINCE THE PROFIT MA RGIN OF THE ASSESSEE AFTER TAKING INTO CONSIDERATION THE DEPB BENEFIT AS PART OF ITS TURNOVER 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%, W E FIND OURSELVES IN AGREEMENT WITH THE LEARNED CIT(APPEALS) THAT NO TP ADJUSTMENT IN RESPECT OF TRANSACTIONS MADE WITH THE ASSOCIATED ENTERPRISE S WAS REQUIRED TO BE MADE IN THE CASE OF THE ASSESSEE. WE, THEREFORE, UP HOLD THE IMPUGNED ORDER OF THE LEARNED C1T(APPEALS) DELETING THE ADDI TION MADE BY THE AO BY WAY OF TP ADJUSTMENT AND DISMISS THE APPEAL OF THE REVENUE. . / ITA NO. 7961/MUM/2011 ' ' ' ' / ASSESSMENT YEAR 2007-08 4 3. SINCE IT IS NOT THE CASE OF REVENUE THAT FACT S AND CIRCUMSTANCES OF THE PRESENT CASE ARE DIFFERENT FROM THE FACTS OF THE AFOREMENTIONED CASE DECIDED BY THE TRIBUNAL IN RESPECT OF ASSESSMENT YEAR 2005- 06 AND ALSO THAT THERE IS NO DIFFERENCE IN THE ISSUE WHICH WAS DECIDED, THERE FORE, RESPECTFULLY FOLLOWING THE AFOREMENTIONED ORDER, WE DISMISS THIS GROUND OF THE REVENUE. 4. APROPOS GROUND NO.2, THE AO DISALLOWED A SUM OF RS.25,75,804/- WHICH WAS CLAIMED BY THE ASSESSEE UNDER THE HEAD LOSS ON FOREIGN EXCHANGE FLUCTUATION (NET). IN VIEW OF NO EXPLANATION FURN ISHED BY THE ASSESSEE IN RESPONSE TO THE SHOW CAUSE ISSUED BY THE AO THE AM OUNT HAS BEEN DISALLOWED. AGGRIEVED, ASSESSEE FILED APPEAL BEFORE LD. CIT(A). 5. BEFORE LD. CIT(A) IT WAS SUBMITTED THAT AN EXPL ANATION WAS FILED BEFORE AO VIDE LETTER DATED 20/9/2010 IN REFERENCE TO THE NOTICE DATED 9/9/2010, WHEREIN AS PER PARA -2 OF THE LETTER EXPLANATION RE GARDING FOREIGN EXCHANGE FLUCTUATION LOSS WAS FILED. IT MAY BE MENTIONED HE RE THAT THE CONTENTS OF THE SAID LETTER RELEVANT TO THE ISSUE HAS BEEN REPRODUC ED IN THE ORDER OF LD. CIT(A). ALONG WITH SAID EXPLANATION THE ASSESSEE ALSO FIL ED A CHART IN WHICH DETAILS OF EXPORT REGISTERED FROM 1/4/2006 TO MARCH, 2007 W AS SUBMITTED AND AS PER LAST COLUMN FOREIGN EXCHANGE DIFFERENCE WAS WORKED OUT AT RS.25,75,804/-. FROM THE COPY OF THE LETTER SUBMITTED BY THE ASSES SEE BEFORE LD. CIT(A), LD. CIT(A) HAS RETURNED A FINDING THAT THE SAID LETTER BEARS THE SEAL OF AOS OFFICE, WHICH IS DATED 20/09/2010. THEREFORE, LD. CIT(A) H AS RETURNED A FINDING THAT IT CANNOT BE ACCEPTED THAT NO EXPLANATION WAS FURNI SHED BY THE ASSESSEE. AFTER NOTING THE CONTENTS OF SUCH LETTER LD. CIT(A) HAS FOUND THAT THE LOSS SHOWN BY THE ASSESSEE IN FOREIGN EXCHANGE RELATED T O THE EXPORT ACTIVITY OF THE ASSESSEE IN WHICH THE INVOICES RAISED ARE ACCOUNTED FOR ON THE DATE OF RAISING SUCH INVOICES AND CORRESPONDING EXCHANGE RATE HAS GIVEN EFFECT TO. FURTHER, AT THE TIME OF . / ITA NO. 7961/MUM/2011 ' ' ' ' / ASSESSMENT YEAR 2007-08 5 RECEIPT OF THE CONSIDERATION TOWARDS SUCH INVOICES IN FOREIGN EXCHANGE, RELEVANT ENTRY IN THE BOOKS OF ACCOUNTS ARE MADE GIVING EFFE CT TO THE EXCHANGE RATE PREVAILING AT THE TIME OF RECEIPT OF SUCH CONSIDERA TION AND THE DIFFERENCE BETWEEN THE TWO IS TAKEN TO THE FOREIGN EXCHANGE F LUCTUATION ACCOUNT. FURTHER, ALL THE OUTSTANDING FOREIGN CURRENCY RECEI VABLES ARE VALUED AT EXCHANGE RATE APPLICABLE AS ON 31 ST MARCH I.E. THE LAST DAY OF THE FINANCIAL YEAR. ACCORDING TO LD. CIT(A) SUCH ACCOUNTING BY THE ASSESSEE IS IN LINE WITH ACCOUNTING STANDARD-11. IT WAS FURTHER FOUND BY LD . CIT(A) THAT IN THE SUBMISSIONS MADE ON 6/9/2011 IT WAS SUBMITTED BY TH E ASSESSEE THAT THERE WAS USUALLY TIME LAG BETWEEN DATED OF INVOICES AND DATE OF REALIZATION OF THE PROCEEDS AND FREQUENCY AND DURING SUCH PERIOD THER E IS USUALLY SOME EXCHANGE FLUCTUATION LOSS ARISING IN THE PROCESS O F CONVERSION OF FOREIGN CURRENCY IS PART OF TRADING ASSET OF THE ASSESSEE A ND IS THEREFORE, TRADE LOSS. SUCH LOSS IS IN RESPECT OF CIRCULATING CAPITAL AND IS, THEREFORE, REVENUE LOSS. IN THIS VIEW OF THE FACTUAL SITUATION, LD. CIT(A) REL YING ON THE FOLLOWING DECISIONS HAS GIVEN RELIEF TO THE ASSESSEE, AGAINST WHICH DEP ARTMENT IS AGGRIEVED, HENCE HAS FILED AFOREMENTIONED GROUND OF APPEAL. 1. SUTLEJ COTTON MILLS VS. CIT,116 ITR 1(SC) 2. CIT VS. HARPRASAD & CO. PVT. LTD., 99 ITR 118, 124- 5(SC) 3. RAMACHANDRA SHIVNARAYAN VS. CIT, 111 ITR 263 , 267 (SC) 4. CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD., 312 ITR 354 (SC) 6. WE HAVE HEARD BOTH PARTIES ON THIS ISSUE AND THE IR CONTENTIONS HAVE CAREFULLY CONSIDERED. THE FACTUAL POSITION FOUND BY THE LD. CIT(A) HAS NOT BEEN DISPUTED BY LD. DR AND THIS ISSUE WAS STATED T O BE COVERED IN FAVOUR OF THE ASSESSEE BY LD. AR AS PER DECISION OF HONBLE J URISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. BADRIDEV GAURIDU PVT. LTD., 261 ITR 256 (BOM), WHEREIN IT HAS BEEN HELD THAT THE ASSESSEE, AN EXPORTER OF THE COTTON, HAVING BOOKED FOREIGN EXCHANGE IN FORWARD MARKET TO HEDGE AGAINST LOSSES, LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FAILURE TO HONOUR CERTA IN CONTRACT WAS NOT . / ITA NO. 7961/MUM/2011 ' ' ' ' / ASSESSMENT YEAR 2007-08 6 SPECULATION LOSS BUT WAS ALLOWABLE AS BUSINESS LE SS. NO CONTRARY DECISION WAS BROUGHT TO OUR NOTICE. THEREFORE, AS THE ISSUE IS COVERED BY THE DECISION OF JURISDICTIONAL HIGH COURT (SUPRA), WE DISMISS THIS GROUND OF THE REVENUE. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 07/08/2013 2 . 01' # 3 45 07 /08/2013 1 . 6 % SD/- SD/ - ( !' / N.K.BILLAIYA ) ( . . / I.P. BANSAL ) # / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 4 DATED 07 /08/2013 2 2 2 2 . .. . ,/78 ,/78 ,/78 ,/78 98'/ 98'/ 98'/ 98'/ / COPY OF THE ORDER FORWARDED TO : 1. (+ / THE APPELLANT 2. ,-(+ / THE RESPONDENT. 3. : ( ) / THE CIT(A)- 4. : / CIT 5. 8;6 ,/ , , / DR, ITAT, MUMBAI 6. 6< = / GUARD FILE. 2 2 2 2 / BY ORDER, -8/ ,/ //TRUE COPY// > >> > / ? ? ? ? ) ) ) ) (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . . ./ VM , SR. PS