HUNTSMAN ADVANCED MATERIALS (INDIA) P. LTD, MUMBAI V. DCIT RG 8(2), MUMBAI

ITA 8237/MUM/2010

• Counselvise Citation: 823719914 RSA 2010
• Duration Of Justice: 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 11-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 26-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GOLI SRINIWAS RAO
• Assessee Lawyers: ARVIND S SONDE
• Keywords: Related party transaction; Transfer pricing
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H, MUMBAI BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER. I.T.A. NO. 8237/MUM/2010. ASSESSMENT YEAR : 2006-07. M/S HUNTSMAN ADVANCED MATERIALS DY. COMMISSIONER OF (INDIA) PVT. LTD., VS. INCOME TAX, 5 TH FLOOR, BUILDING NO. 10, RANGE-8(2), SOLITAIRE CORPORATE PARK, MUMBAI. 167, GURU HARGOVINDJI MARG, CHAKLA, ANDHERI (EAST) MUMBAI 400069. PAN : AABCH 3909H. APPELLANT. RESPONDE NT. APPELLANT BY : SHRI ARVIND S. SONDE. RESPONDENT BY : SHRI GOLI SRINIWAS RAO. DATE OF HEARING : 11-08-2011 DATE OF PRONOUNCEMENT : 30-09-2011. O R D E R. PER P.M. JAGTAP, A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER PASSED U/S 143(3) READ WITH SECTION 144C(13) WHEREBY ADDITION OF RS.8,56,37,000/- HAS BEEN MADE TO THE TOTAL INCOME OF THE ASSESSEE BY WAY OF TRANSFER PRICING ADJUSTMENT. 2. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY IN CORPORATED IN INDIA. IT BELONGS TO HUNTSMAN GROUP. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 24-11-2006 DECLARING TOTAL INCOM E OF RS.13,63,48,479/-. IN THE 2 ITA NO.8237/MUM/2010 ASSESSMENT YEAR : 2006-07 SAID YEAR, THE ASSESSEE HAD ENTERED INTO CROSS BORD ER TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES EXCEEDING RS.15 CRORES. A REFERENCE, TH EREFORE, WAS MADE BY THE AO TO THE TRANSFER PRICING OFFICER (TPO) TO ASCERTAIN THE ARMS LENGTH PRICE. THE TPO FOUND THAT THE ASSESSEE COMPANY HAD IMPORTED FINISH ED GOODS FROM ITS ASSOCIATED ENTERPRISES FOR RESALE IN INDIA AND IN THE TRANSFER PRICING REPORT, IT HAD SLICED IN THE PROFIT & LOSS ACCOUNT INTO MANUFACTURING AND TRADIN G AND FURTHER INTO RELATED AND UNRELATED TRANSACTIONS FOR THE PURPOSE OF BENCHMARK ING. FOR THE PURPOSE OF SLICING, THE ASSESSEE HAD MADE ALLOCATION OF EXPENSES UNDER THE DIFFERENT HEADS AMONG MANUFACTURING AND TRADING SEGMENT MAINLY ON THE BAS IS OF TURNOVER. UNDER THE TRADING SEGMENT, GROSS MARGIN RATIO WAS TAKEN FOR T HE PURPOSE OF BENCH- MARKING AND SINCE IT WAS WORKED OUT AT 6.64% AS AGAINST THE GROSS PROFIT MARGIN OF 7.19% SHOWN IN THE COMPARABLES, THE IMPORTS WERE CLAIMED TO BE AT ARMS LENGTH PRICE BY RELYING ON THE 5% SAFE HARBOR RULE. FROM THE ALLOCA TION OF EXPENSES MADE BY THE ASSESSEE, IT WAS NOTICED BY THE TPO THAT ADVERTISEM ENT AND SALES PROMOTION EXPENSES WERE ENTIRELY ALLOCATED BY THE ASSESSEE TO THE MANUFACTURING SEGMENT AND THERE WAS NO ALLOCATION OF THE ADVERTISEMENT AND SA LES PROMOTION EXPENSES MADE TO TRADING SEGMENT. THIS ALLOCATION MADE BY THE ASSESS EE WAS NOT FOUND ACCEPTABLE BY THE TPO. ACCORDING TO HIM, THE TURNOVER OF THE ASSE SSEE UNDER THE MANUFACTURING WAS ONLY ABOUT 1/10 TH OF THE TOTAL TURNOVER AND ITS MAIN AREA OF WORK WA S ACTUALLY TRADING AND INDENTING. HE HELD THAT THE ADVERTISEME NT AND SALES PROMOTION EXPENSES, THEREFORE, SHOULD HAVE BEEN ALLOCATED AMO NG THE MANUFACTURING AND TRADING SEGMENT ON THE BASIS OF TURNOVER AND AFTER MAKING SUCH ALLOCATION, HE FOUND THAT THE OPERATING PROFIT OF THE ASSESSEE IN THE TRADING SEGMENT WAS NEGATIVE AT 0.24%. 3. THE TPO THEN PROCEEDED TO SELECT 12 COMPARABLES BY APPLYING DIFFERENT CRITERIAS AND AFTER EXCLUDING 8 OF THE SAID COMPARA BLES BY APPLYING DIFFERENT FILTERS, 3 ITA NO.8237/MUM/2010 ASSESSMENT YEAR : 2006-07 HE FINALLY SELECTED 4 COMPARABLES, NAMELY, PH TRADI NG LTD., HIRAN ORGOCHEM LTD., INDOKEM LTD. AND NIKHIL ADECINS LTD. SINCE THE ARIT HMETIC MEAN OF THE OPERATING PROFIT MARGINS OF THE SAID COMPARABLES AS WORKED OU T BY THE TPO AT 2.76% WAS HIGHER THAN THE MARGIN OF (-) 0.24% WORKED OUT BY H IM IN THE CASE OF THE ASSESSEE, ADJUSTMENT OF RS.8,56,37,000/- WAS PROPOSED BY HIM BY APPLYING THE OPERATING MARGIN PROFIT OF 2.76% TO THE ENTIRE TRADING TURNOV ER OF THE ASSESSEE AMOUNTING TO RS.285.22 CRORES. HE ALSO REJECTED THE BENEFIT OF + /- 5% SOUGHT BY THE ASSESSEE IN RESPECT OF ADJUSTMENT IN TERMS OF PROVISO TO SECTIO N 92C(4) HOLDING THAT THE OPTION UNDER THE SAID PROVISO WAS AVAILABLE TO THE ASSESSE E ONLY IN THE CASE WHERE VARIATION IN PRICE IS UPTO 5% AS FOUND FROM ARITHM ETIC MEAN. 4. RELYING ON THE TPOS REPORT PROPOSING THE TRANS FER PRICING ADJUSTMENT, A DRAFT ASSESSMENT ORDER U/S 143(3) WAS PASSED BY THE AO ON 23-11-2009 PROPOSING TO ASSESS THE TOTAL INCOME OF THE ASSESSEE AT RS.22 ,19,55,480/-. THE ASSESSEE FILED ITS OBJECTION AGAINST THE SAID DRAFT ORDER BEFORE T HE DISPUTE RESOLUTION PANEL (DRP). THE FIRST OBJECTION RAISED BY THE ASSESSEE A BOUT THE TNMM METHOD APPLIED BY THE TPO AS AGAINST RESALE PRICE METHOD ADOPTED B Y THE ASSESSEE WAS FOUND TO BE NOT SUSTAINABLE BY THE DRP HOLDING THAT IN THE ABSE NCE OF SEPARATE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE FOR EACH ACTIVIT Y, RESALE PRICE METHOD COULD NOT BE APPLIED PROPERLY. AS REGARDS THE OTHER OBJECTION OF THE ASSESSEE TO THE ALLOCATION OF ADVERTISEMENT AND SALES PROMOTION EXPENSES MADE BY THE TPO AMONG TRADING SEGMENT, THE SAME WAS FOUND TO BE WITHOUT ANY SOUND BASIS BY THE DRP HOLDING THAT IN THE ABSENCE OF SEPARATE BOOKS OF ACCOUNT MA INTAINED FOR EACH ACTIVITY, IT WAS NOT PROPER FOR THE ASSESSEE TO CLAIM THAT ENTIRE AD VERTISEMENT AND PUBLICITY EXPENSES WERE RELATED ONLY TO THE MANUFACTURING ACT IVITY. IT WAS HELD BY THE DRP THAT THE ALLOCATION OF ADVERTISEMENT AND PUBLICITY EXPENSES MADE BY THE TPO AMONG MANUFACTURING AND TRADING SEGMENT ON THE BASI S OF TURNOVER WAS FAIR AND 4 ITA NO.8237/MUM/2010 ASSESSMENT YEAR : 2006-07 PROPER AND NO INTERFERENCE THEREIN WAS CALLED FOR. AS REGARDS THE OBJECTION OF THE ASSESSEE TO THE SELECTION OF COMPARABLES MADE BY TH E TPO ON THE GROUND THAT ONE OF THEM HAD TRANSACTIONS WITH RELATED PARTY, THE DR P HELD THAT THE COMPARABLES SELECTED BY TPO WERE PROPER FOR ARRIVING AT A CORRE CT COMPARABLE MARGIN. THE DRP ALSO DID NOT FIND ANY MERIT IN THE OBJECTION OF THE ASSESSEE FOR TPO NOT ALLOWING THE BENEFIT OF +/- 5% FACTOR HOLDING THA T THE ADJUSTMENT PROPOSED BY THE TPO WAS BEYOND THE LIMIT OF +/- 5%. THE DRP THUS O VERRULED ALL THE OBJECTIONS RAISED BY THE ASSESSEE VIDE ITS ORDER DATED 15-07-2 010 PASSED U/S 144C(5) AND ACCORDINGLY THE ASSESSMENT WAS FINALIZED BY THE AO BY AN ORDER DATED 06-09-2010 PASSED U/S 143(3) READ WITH SECTION 144C(13) MAKING ADDITION OF RS.8,56,37,000/- TO THE TOTAL INCOME OF THE ASSESSEE BY WAY OF TRANS FER PRICING ADJUSTMENT U/S 92CA(3). AGGRIEVED BY THE SAME, THE ASSESSEE HAS PR EFERRED THIS APPEAL BEFORE THE TRIBUNAL. 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE LEARNED COUNSEL FOR THE ASS ESSEE HAS PUT FORTH FIVE PROPOSITIONS WHILE CHALLENGING THE ADDITION MADE BY WAY OF TRANSFER PRICING ADJUSTMENT TO THE TOTAL INCOME OF THE ASSESSEE AND WE NOW PROCEED TO CONSIDER AND DECIDE THE SAME ONE BY ONE AFTER TAKING INTO CONSID ERATION THE SUBMISSIONS OF BOTH THE SIDES AS WELL AS MATERIAL AVAILABLE ON RECORD. 6. THE FIRST PROPOSITION RAISED BY THE LEARNED COUN SEL FOR THE ASSESSEE IS THAT ONE OF THE SELECTED COMPARABLES, NAMELY, INDOKEM LT D. HAD SUBSTANTIAL RELATED TRANSACTIONS AND THE SAME, THEREFORE, OUGHT TO BE E XCLUDED AS A COMPARABLE FOR THE PURPOSE OF TRANSFER PRICING ANALYSIS. HE HAS TAKEN US THROUGH THE RELEVANT PORTION OF ANNUAL REPORT OF THE SAID COMPANY PLACED AT PAGE NOS. 527, 534, 539 AND 540 OF HIS PAPER BOOK TO SHOW THAT THE SAID COMPANY HAD SU BSTANTIAL RELATED PARTY TRANSACTIONS EFFECTED IN THE RELEVANT YEAR. THE LEA RNED DR HAS ACCEPTED IN PRINCIPLE 5 ITA NO.8237/MUM/2010 ASSESSMENT YEAR : 2006-07 THE PROPOSITION THAT A PARTY HAVING SUBSTANTIAL REL ATED PARTY TRANSACTIONS SHOULD BE EXCLUDED AS A COMPARABLE. HE, HOWEVER, HAS SUBMITTE D THAT IT IS NOT VERY CLEAR FROM THE RELEVANT PORTION OF ANNUAL REPORT OF M/S INDOKE M LTD. REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE AS TO WHAT EXACTLY IS THE QUANTUM OF RELATED PARTY TRANSACTIONS AND THE EXACT RATIO THEREOF IN THE TOT AL TRANSACTIONS OF THE SAID COMPANY. HE HAS URGED THAT THIS MATTER MAY, THEREFO RE, BE SENT BACK TO THE AO FOR VERIFYING THE STAND OF THE ASSESSEE. AS REGARDS THE OTHER PROPOSITION ARGUED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT ALLOCATION OF ADVERTISEMENT AND SALES PROMOTION EXPENSES AMONG MANUFACTURING AND TRADING SEGMENT MADE BY THE TPO IN THE RATIO OF TURNOVER IS NOT PROPER AND THE SAME SHOULD BE ALLOCATED ONLY TO MANUFACTURING ACTIVITY AS DONE BY THE ASSESSEE, THE LEARNED DR HAS SUBMITTED THAT ALL THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE IN SUPPORT OF THIS PROPOSITION ARE ALSO REQUIRED TO BE CONSIDERED BY T HE AO/TPO AS THE SAME APPEARS TO HAVE NOT BEEN DONE EARLIER. 7. AS REGARDS THE THIRD PROPOSITION OF THE LEARNED COUNSEL FOR THE ASSESSEE SEEKING BENEFIT OF STANDARD DEDUCTION OF PLUS OR MI NUS 5%, IT IS OBSERVED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE VARIOUS DECISIONS OF THE TRIBUNAL AND RESPECTFULLY FOLLOWING THE RATIO LAID DOWN IN THE SAID DECISIONS, WE HOLD THAT THE ASSESSEE IS ENTITLED TO THE BENEFIT O F STANDARD DEDUCTION OF 5% IN THE MATTER OF MAKING TRANSFER PRICING ADJUSTMENT. WE AL SO FIND THAT THE PROPOSITION SOUGHT TO BE PUT FORTH BY THE LEARNED COUNSEL FOR T HE ASSESSEE CLAIMING THAT ADJUSTMENT FOR ARMS LENGTH PRICE SHOULD BE MADE ONL Y IN RESPECT OF TRANSACTIONS WITH ASSOCIATED ENTERPRISES INSTEAD OF THE ENTIRE T URNOVER OF TRADING SEGMENT MADE BY THE TPO/AO IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE VARIOUS DECISIONS OF THE TRIBUNAL AND RESPECTFULLY FOLLOWIN G THE RATIO LAID DOWN IN THESE DECISIONS, WE HOLD THAT THE ADJUSTMENT FOR ARMS LEN GTH PRICE, IF ANY, SHOULD BE 6 ITA NO.8237/MUM/2010 ASSESSMENT YEAR : 2006-07 MADE ONLY IN RESPECT OF TRANSACTIONS WITH ASSOCIATE D ENTERPRISES AND NOT IN RESPECT OF ENTIRE TRADING TRANSACTIONS OF THE ASSESSEE AS D ONE BY THE TPO/AO. 8. AS REGARDS THE LAST PROPOSITION THAT WHILE WORKI NG OUT THE OPERATING PROFIT TO SALES MARGIN, ACCURATE FIGURES AS PER THE ANNUAL AC COUNTS OF THE CONCERNED COMPARABLES, NAMELY, PH TRADING LTD. AND HIRAN ORGO CHEM LTD. SHOULD BE TAKEN, THE LEARNED COUNSEL FOR THE ASSESSEE HAS TAKEN US T HROUGH THE RELEVANT PORTION OF ANNUAL ACCOUNTS OF THE SAID COMPARABLE COMPANIES PL ACED AT PAGE NO. 379, 380, 596 AND 657 OF HIS PAPER BOOK TO POINT OUT THE MIST AKES COMMITTED BY THE TPO IN THE WORKING MADE FOR DETERMINING THE OPERATING PROF IT TO SALES MARGIN OF THE SAID COMPARABLES. ALTHOUGH THE LEARNED DR HAS AGREED THA T APPARENTLY THERE ARE SUCH MISTAKES, HE HAS URGED THAT THIS MATTER MAY BE SENT BACK TO THE TPO/AO FOR VERIFYING THE STAND OF THE ASSESSEE THAT THERE ARE SOME MISTAKES INADVERTENTLY COMMITTED BY THE TPO WHILE WORKING OUT THE OPERATIN G PROFIT MARGIN OF THE COMPARABLE COMPANIES. 9. AT THE TIME OF HEARING BEFORE US, THE LEARNED CO UNSEL FOR THE ASSESSEE HAS PREPARED AND FURNISHED A WORKING SHOWING THE TRANSF ER PRICING ADJUSTMENT THAT IS REQUIRED TO BE MADE IN DIFFERENT SCENARIOS DEPENDIN G ON ACCEPTANCE OF PROPOSITIONS PUT-FORTH BY HIM. AS POINTED OUT BY HIM ON THE BAS IS OF THE SAID WORKING, THE TRANSFER PRICING ADJUSTMENT THAT IS REQUIRED TO BE MADE IN DIFFERENT SCENARIOS IS LYING WITHIN THE SAFE HARBOR OF PLUS AND MINUS 5% ADJUSTMENT. ACCORDING TO HIM, THERE IS THUS NO ADDITION THAT IS REQUIRED TO BE MA DE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN ANY SITUATION. IN THIS REGARD WE MAY NOTE THAT WE HAVE ALREADY DEALT WITH DIFFERENT PROPOSITIONS PUT FORWARD BY THE LEAR NED COUNSEL FOR THE ASSESSEE AND HAS ACCEPTED MOST OF THEM IN PRINCIPLE. WE, HOWEVER , FIND MERIT IN THE CONTENTION OF THE LEARNED DR THAT FACTS RELATING TO SOME OF T HE PROPOSITIONS PUT FORTH BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE REQUIRED TO BE VERIFIED AT THE AO/TPO LEVEL. 7 ITA NO.8237/MUM/2010 ASSESSMENT YEAR : 2006-07 EVEN THE WORKING PREPARED AND FURNISHED BY THE ASSE SSEE SHOWING THE QUANTUM OF TRANSFER PRICING ADJUSTMENT THAT IS REQUIRED TO BE MADE IN DIFFERENT SCENARIOS DEPENDING ON THE ACCEPTANCE OF DIFFERENT PROPOSITIO NS, IN OUR OPINION, REQUIRES VERIFICATION AT AO/TPO LEVEL ESPECIALLY KEEPING IN VIEW THE FACT THAT SOME OF THE ISSUES RELATING TO THE PROPOSITIONS HAVE BEEN RESTO RED BY US TO THE FILE OF THE AO/TPO FOR VERIFICATION. WE, THEREFORE, SET ASIDE T HE IMPUGNED ORDER PASSED U/S 143(3) READ WITH SECTION 144C(13) AND RESTORE THE M ATTER TO THE FILE OF THE AO FOR DECIDING THE MATTER RELATING TO TRANSFER PRICING AD JUSTMENT AFRESH AFTER TAKING INTO CONSIDERATION THE PROPOSITIONS PUT FORTH BY THE LEA RNED COUNSEL FOR THE ASSESSEE AND THE DECISION RENDERED BY US THEREON, AFTER MAKING N ECESSARY VERIFICATION. NEEDLESS TO OBSERVE THAT THE AO SHALL AFFORD SUFFICIENT OPPO RTUNITY TO THE ASSESSEE OF BEING HEARD IN THE MATTER. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TR EATED AS ALLOWED AS INDICATED ABOVE. ORDER PRONOUNCED ON THIS 30 TH DAY OF SEPT., 2011. SD/- SD/- (R.S. PADVEKAR) (P.M. J AGTAP) JUDICIAL MEMBER. ACCO UNTANT MEMBER MUMBAI, DATED: 30 TH SEPT., 2011. COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, H-BENCH. (TRUE COPY ) BY ORDER ASSTT. REGISTRAR, WAKODE ITAT, MUMBAI BENCHES, MUMBAI.