ASSISTANT COMMISSIONER OF INCOME TAX, Alwar V. M/S SALATA INX INDIA LIMITED, Alwar

ITA 828/JPR/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2159 (ITAT-JAIPUR)
• Duration Of Justice: 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 09-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VARINDRA MEHTA
• Assessee Lawyers: MOHANISH SAINI
• Keywords: Transfer pricing; International transaction; Question of law; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR JH FOT; IKWY JKO] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM VK;DJ VIHY LA -@ ITA. NO. 828/JP/2017 FU/KZKJ.K O'K Z@ ASSESSMENT YEARS : 2012-13 THE ACIT, CIRCLE-2, ALWAR CUKE VS. M/S SAKATA INX (INDIA) LTD. B-1245-1246, RIICO INDUSTRIAL AREA, BHIWADI, ALWAR LFKK;H YS[KK LA -@THVKBZVKJ LA -@ PAN/GIR NO.: AACCS4797D VIHYKFKHZ@ APPEL LANT IZR;FKHZ@ RESPONDENT VK;DJ VIHY LA-@ ITA. NO. 829/JP/2017 FU/KZKJ.K O'K Z@ ASSESSMENT YEARS : 2013-14 THE ACIT, CIRCLE-2, ALWAR CUKE VS. M/S SAKATA INX (INDIA) LTD. B-1245-1246, RIICO INDUSTRIAL AREA, BHIWADI, ALWAR LFKK;H YS[KK LA -@THVKBZVKJ LA -@ PAN/GIR NO.: AACCS4797D VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT JKTLO DH VKSJ LS @ REVENUE BY : SHRI VARINDRA MEHTA (CIT) FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI MOHANISH SAINI LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 22/01/2018 MN?KKS'K.KK DH RKJH[ K@ DATE OF PRONOUNCEMENT : 29/01/2018 VKNS'K@ ORDER PER: VIKRAM SINGH YADAV, A.M. ITA NO. 828 & 829 /JP/2017 THE ACIT, ALWAR VS. M/S SAKATA INX (INDIA) LTD., ALWAR 2 THESE ARE TWO APPEALS FILED BY THE REVENUE AGAINST TWO SEPARATE ORDERS OF LD. CIT(A)-2 JAIPUR DATED 28.08.2017 FOR ASSESSMENT YEAR 2012-13 & 2013-14 RESPECTIVELY. THE GROUND OF APPEAL TAKEN BY THE REVENUE IN BOTH ITS APPEAL IS AS UNDER:- ITA. NO. 828/JP/2017 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 2,81,87,000/- MADE BY THE AO ON ACCOUNT OF PAYMENT OF ROYALTY TO THE AE WITHOUT APPRECIATION THE MATERIAL FACTS OF THE CASE. ITA. NO. 829/JP/2017 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 2,81,87,000/- MADE BY THE AO ON ACCOUNT OF PAYMENT OF ROYALTY TO THE AE WITHOUT APPRECIATION THE MATERIAL FACTS OF THE CASE. 2. THE FACTS OF CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF PRINTING INKS AND ALLIED PRODUCTS. DURING THE FINANCIAL YEAR 2011-12 RELEVANT TO ASSESSMENT YEAR 2012-13, THE ASSESSEE COMPANY HAS PAID ROYALTY @ 5% OF NET SALES OF OFFSET INK AND ROYALTY @ 3.5% OF NET SALES OF GRAVURE INK TO ITS ASSOCIATED ENTERPRISE, SAKATA INX CORPORATION, JAPAN. THE AGREEMENT WAS SIGNED ON 01.04.2006 IN RESPECT OF PAYMENT OF ROYALTY FOR THE PRODUCTION OFFSET INK AND IN RESPECT OF GRAVURE INK, THE AGREEMENT WAS SIGNED IN 1993 AND THE SAME HAS BEEN EXTENDED FROM TIME TO TIME AND ON 16.05.2011, THE AGREEMENT HAS BEEN EXTENDED FURTHER FOR A PERIOD OF 5 YEARS. THE ITA NO. 828 & 829 /JP/2017 THE ACIT, ALWAR VS. M/S SAKATA INX (INDIA) LTD., ALWAR 3 ASSESSEE HAS NOT SEPARATELY BENCHMARKED THIS TRANSACTION RELATING TO PAYMENT OF ROYALTY AND HAS CONSIDERED THE SAME AS PART OF THE ENTITY LEVEL MARGIN ANALYSIS UNDER TNMM AND AS THE OPERATING PROFIT MARGIN OF THE ASSESSEE AT THE ENTITY LEVEL WAS COMPARABLE TO THE MEAN MARGIN OF THE COMPARABLES, THE ROYALTY PAYMENT WAS CONSIDERED AT ARMS LENGTH AS PER THE TRANSFER PRICING DOCUMENTATION. 3. DURING THE COURSE OF TRANSFER PRICING PROCEEDINGS, THE TRANSFER PRICING OFFICER EVALUATED THE ROYALTY PAYMENT MADE BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES AND FOR THE REASONS GIVEN IN THE TRANSFER PRICING ORDER PASSED UNDER SECTION 92CA(3), THE TPO DETERMINED CUP METHOD, AS AGAINST TNMM METHOD APPLIED BY THE ASSESSEE, AS MOST APPROPRIATE METHOD FOR DETERMINATION OF THE ROYALTY PAYMENT AND THE ARMS LENGTH PRICE OF BOTH THESE ROYALTY TRANSACTIONS WAS DETERMINED AT NIL AS AGAINST RS. 2,81,87,000/- PAID BY THE ASSESSEE TO THE ASSOCIATED ENTERPRISE AND ACCORDINGLY ADJUSTMENT U/S 92CA WAS PROPOSED BY THE TPO WHICH WAS SUBSEQUENTLY INCORPORATED IN THE ASSESSMENT ORDER AND ADJUSTMENT MADE TO THE RETURNED INCOME BY THE AO WHILE PASSING THE ASSESSMENT ORDER UNDER SECTION 143(3) READ WITH SECTION 144C(3) OF THE ACT. 4. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS DELETED THE ADDITION FOLLOWING THE ORDERS PASSED BY THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN THE EARLIER YEARS AS WELL AS THE DECISION OF HONBLE RAJASTHAN HIGH COURT DATED 26.07.2017. ITA NO. 828 & 829 /JP/2017 THE ACIT, ALWAR VS. M/S SAKATA INX (INDIA) LTD., ALWAR 4 5. THE RELEVANT FINDING OF THE LD. CIT(A) IS AT PARA 3 OF HIS ORDER WHICH IS REPRODUCED AS UNDER:- 3.3 I HAVE CONSIDERED THE FACTS OF THE CASE, ASSESSMENT ORDER AND THE WRITTEN SUBMISSIONS OF THE APPELLANT. IN THIS CASE THE ISSUE IS REGARDING ADJUSTMENT OF INR 2,81,87,000/- TO THE TOTAL INCOME OF THE APPELLANT UNDER SECTION 92CA(3) OF THE I.T. ACT, 1961 ON ACCOUNT OF ADJUSTMENT IN ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY BY SAKATA INDIA TO ITS AE. THE APPELLANT COMPANY IS A 100% SUBSIDIARY OF SAKATA INX CORPORATION JAPAN (SAKATA JAPAN) WHICH IS ONE OF THE LARGEST PRODUCER OF PRINTING INK GLOBALLY. DURING THE YEAR THE APPELLANT COMPANY WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING PRINTING INK AND RESINS. THE ASSESSING OFFICER HAD MADE A REFERENCE TO THE TPO TO DETERMINE THE ARMS LENGTH PRICE U/S 92CA(3) OF IT. ACT. FURTHER, ON PERUSAL OF ORDER PASSED U/S 92CA(3) OF I.T. ACT BY TPO-1, JAIPUR IT IS SEEN THAT IN T.P. DOCUMENTATION THE APPELLANT COMPANY HAS CONSIDERED TRANSACTIONAL NET MARGIN METHOD KNOWN AS TNMM AS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT MARGIN AS THE PROFIT LEVEL INDICATOR. IN THE TP DOCUMENTATION OF SAKATA INDIA, IT WAS FOUND THAT SAKATA INDIA OPERATING MARGIN WAS HIGHER THAN THE ARITHMETIC MEAN OF THE NET OPERATING MARGIN OF THE COMPARABLE COMPANIES AND HENCE THE INTERNATIONAL TRANSACTIONS WERE CONSIDERED TO BE AT ARMS LENGTH. HOWEVER, THE TPO/ASSESSING OFFICER MADE AN ADJUSTMENT TO THE ARMS LENGTH VALUE BY REJECTING AND HELD THE ARMS LENGTH VALUE TO BE NIL. THE TPO THUS PROPOSED AN ADJUSTMENT TO THE INTERNATIONAL TRANSACTION OF PAYMENT OF ITA NO. 828 & 829 /JP/2017 THE ACIT, ALWAR VS. M/S SAKATA INX (INDIA) LTD., ALWAR 5 ROYALTY OF AN AMOUNT OF RS. 2,81,87,000/- TO THE TOTAL INCOME OF THE APPELLANT. IT IS SEEN THAT SIMILAR ADJUSTMENTS TO PAYMENT OF ROYALTY BY THE APPELLANT TO ITS AE FOR THE ASSESSMENT YEARS 2007-08, 2008-09, 2009-10 AND 2011-12 HAD ALSO BEEN MADE AND THE CIT(A)-2, JAIPUR VIDE ORDERS DATED 12.1.2012, 05.07.2012, 18.03.2016, 18.03.2016 AND 23.09.2016 RESPECTIVELY, HAD DECIDED THE ISSUE IN FAVOUR OF THE APPELLANT. IN THE PRESENT PROCEEDINGS, THE APPELLANT SUBMITTED THAT THE ISSUE HAD NOW BEEN DECIDED BY THE HONBLE RAJASTHAN HIGH COURT IN D.B. INCOME TAX APPEAL NO. 71/2015 AND D.B. INCOME TAX APPEAL NO. 128/2016. THE RELEVANT PORTION IS REPRODUCED BELOW:- THE ISSUE IS NOW COVERED BY THE DECISION OF THIS COURT IN INCOME TAX APPEAL NO. 72/2015 (CIT ALWAR VS. M/S SAKATA INX (INDIA) LTD. DECIDED ON 18.05.2017, WHERE WHILE DECIDING THE ISSUE, THIS COURT HELD AS UNDER:- 4. COUNSEL FOR THE APPELLANT HAS TAKEN US TO THE ORDER OF THE AO AND CONTENDED THAT COMPARISON WHICH HAS BEEN MADE BY THE AO IN ITS ORDER WHICH IS REPRODUCED AS UNDER:- WITH REGARD (C) FURTHER, MR. KOTANGALE, LEARNED COUNSEL APPEARING FOR THE REVENUE VERY FAIRLY POINTS OUT THAT A SIMILAR ISSUE AS ARISING HEREIN, WAS A SUBJECT MATTER OF CONSIDERATION BY THIS COURT IN INCOME (CIT V. GENERAL ATLANTIC (P.). IN THE ABOVE CASE ALSO THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF ADVISORY COMPARABLE SELECTED BY HIM IN THE CASE OF CARLYLE INDIA ADVISORY (P.) LTD. (SUPRA) TO DETERMINE THE ALP IN THE CASE OF ASSESSEE THEREIN I.E. ITA NO. 828 & 829 /JP/2017 THE ACIT, ALWAR VS. M/S SAKATA INX (INDIA) LTD., ALWAR 6 GENERAL ATLANTIC (P.) LTD. (SUPRA). THE TRIBUNAL ALLOWED THE APPEAL IN GENERAL ATLANTIC (P.) LTD. (SUPRA) BY FOLLOWING ITS DECISION IN CARLYLE INDIA ADVISORY (P.) LTD. (SUPRA) JUST AS THE TRIBUNAL HAS DONE IN THE RESPONDENTS APPEAL BY THE IMPUGNED ORDER; AND (D) ACCORDINGLY, QUESTION (C) DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. THUS NOT ENTERTAINED. 8. THE ISSUES ARE ANSWERED IN FAVOUR OF THE ASSESEE AND AGAINST THE DEPARTMENT. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE HONBLE RAJASTHAN HIGH COURT THE ADDITION MADE IS DELETED. THE GROUND OF APPEAL IS ALLOWED. 6. DURING THE COURSE OF HEARING, BOTH THE PARTIES FAIRLY SUBMITTED THAT THE MATTER IS SQUARELY COVERED BY THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN ASSESSEES OWN CASE IN DB APPEAL NO. 71/JP/2015 AND 128/JP/2016 DATED 26.07.2017. 7. THE SUBSTANTIAL QUESTIONS OF LAW FOR CONSIDERATION BEFORE THE HONBLE HIGH COURT WERE AS FOLLOWS: INCOME TAX APPEAL NO. 71/2015: (I) WHETHER THE TRIBUNAL WAS LEGALLY JUSTIFIED IN DELETING THE ADDITION OF RS. 1,02,91,000/- MADE ON ACCOUNT OF ADJUSTMENT OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ON PAYMENT OF ROYALTY BY ITA NO. 828 & 829 /JP/2017 THE ACIT, ALWAR VS. M/S SAKATA INX (INDIA) LTD., ALWAR 7 ASSESSEE TO ITS ASSOCIATED ENTERPRISE, FROM THE INCOME OF THE ASSESSEE U/S 92C? (II) WHETHER THE TRIBUNAL WAS LEGALLY JUSTIFIED IN HOLDING THE WORKING OF OPERATING MARGIN AT 5.18% AS AGAINST 7.85% MADE BY THE TPO AND ALSO HOLDING NON-APPLICABILITY OF THE CUP METHOD WITHOUT ANY JUSTIFICATION AND REASONS? INCOME TAX APPEAL NO. 128/2016: (I) WHETHER THE TRIBUNAL WAS LEGALLY JUSTIFIED IN UPHOLDING THE NON- APPLICABILITITY CUP METHOD AND DELETING THE ADDITION OF ADJUSTMENT OF RS. 1,49,99,000/- MADE ON ACCOUNT OF ADJUSTMENT OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ON PAYMENT OF ROYALTY BY ASSESSEE U/S 92C? (II) WHETHER THE TRIBUNAL WAS LEGALLY JUSTIFIED IN DELETING THE ADDITION OF RS. 1,49,99,000/- BY HOLDING THAT THE COMPARABLE UNCONTROLLED PRICE METHOD (CUP) WAS NOT APPLICABLE? THE HONBLE HIGH COURT WHILE DISPOSING OFF THE ABOVE SUBSTANTIAL QUESTIONS OF LAWS HELD AS FOLLOWS: 4. THE ISSUE IS NOW COVERED BY THE DECISION OF THIS COURT IN INCOME TAX APPEAL NO. 72/2015 (CIT ALWAR VS. M/S SAKATA INX (INDIA) LTD. DECIDED ON 18.05.2017). 5. IN VIEW OF THE ABOVE, BOTH THE ISSUES ARE ANSWERED IN FAVOUR OF ASSESSEE AGAINST THE DEPARTMENT. 6. THE APPEALS STAND DISMISSED. A COPY OF THIS JUDGMENT BE PLACED IN EACH FILE. ITA NO. 828 & 829 /JP/2017 THE ACIT, ALWAR VS. M/S SAKATA INX (INDIA) LTD., ALWAR 8 8. UNDISPUTEDLY, THERE ARE NO CHANGES IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE ROYALTY HAS BEEN PAID UNDER THE SAME AGREEMENTS AS IN THE PAST YEARS. IN LIGHT OF THE SAME, RESPECTFULLY FOLLOWING THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN ASSESSEES OWN CASE, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 9. SIMILARLY, IN ITA. NO. 829/JP/2017 FOR AY 2013-14 WHERE THE FACTS AND CIRCUMSTANCES ARE STATED TO BE SIMILAR, RESPECTFULLY FOLLOWING THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN ASSESSEES OWN CASE, THE APPEAL FILED BY THE REVENUE IS DISMISSED. IN THE RESULT, BOTH THE APPEALS FILED BY THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29/01/2018. SD/- SD/- FOT; IKWY JKO FOE FLAG ;KNO (VIJAY PAL RAO) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 29/01/2018 * GANESH KR. VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- THE ACIT, ALWAR 2. IZR;FKHZ@ THE RESPONDENT- M/S SAKATA INX (INDIA) LTD., ALWAR 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDR@ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR. 6. XKMZ QKBZY@ GUARD FILE { ITA NO. 828 & 829/JP/2017} ITA NO. 828 & 829 /JP/2017 THE ACIT, ALWAR VS. M/S SAKATA INX (INDIA) LTD., ALWAR 9 VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR