ITO 8(2)(3), MUMBAI V. METTLER TOLEDO (I) P. LTD, MUMBAI

ITA 8485/MUM/2010

• Counselvise Citation: 848519914 RSA 2010
• Duration Of Justice: 2 year(s) 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 26-11-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 06-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K SHIVRAM
• Assessee Lawyers: O P SINGH; AJIT KU MAR JAIN
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Bad and doubtful debts

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI - K BENCH. . . , , BEFORE S/SH. I.P. BANSAL,JUDICIAL MEMBER & RAJENDRA ,ACCOUNTANT MEMBER /. ITA NO.8485/MUM/2010 , ! ! ! ! / ASSESSMENT YEAR-2005-06 D.C.I.T CIR 8(2) ROOM NO. 216-A, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI. VS METTLER TOLEDO (I) P. LTD. AMAR HILL SAKI VIHAR ROAD, POWAI MUMBAI-400072 PAN:AABCM0779A ( '# / APPELLANT) ( $%'# / RESPONDENT) &' &' &' &' ( ( ( ( / ASSESSEE BY : SHRI O.P. SINGH & SHRI AJIT KUMAR JAIN ) ( / REVENUE BY : SHRI K. SHIVRAM ) )) ) '* '* '* '* / DATE OF HEARING : 26-11-2013 +,! ) '* / DATE OF PRONOUNCEMENT : 29-11-2013 , 1961 ) )) ) 254 )1( '-' '-' '-' '-' . . . . ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM CHALLENGING THE ORDER DATED 27.09.2010 OF THE CIT(A )-15, MUMBAI ASSESSING OFFICER (AO) HAD FILED FOLLOWING GROUNDS OF APPEAL: 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADJUSTMENT OF RS. 82,52,119/- MADE U/S.92CA(3) OF THE I.T.ACT WITHOUT APPRECIATING THE FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN TAKING AVERY INDIA AS THE ONLY CASE COMPARABLE WITH THE AS SESSEE IGNORING THE OTHER TWO COMPARABLE CASES ADOPTED BY THE TPO. 3.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED NOT CONSIDERING THE TPOS REASONS FOR REJECTING THE OTH ER TWO COMPARABLES SELECTED BY THE ASSESSEE. 2. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. CI T(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE AO BE RESTORED. 3. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUNDS OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF IMPORTI NG, ASSEMBLING AND DISTRIBUTION OF WEIGHING MACHINES,FILED ITS RETURN OF INCOME ON 31.10.2005 D ECLARING NIL INCOME.DURING THE ASSESSMENT PROCEEDINGS,AO FOUND THAT ASSESSEE HAD REPORTED FOL LOWING INTERNATIONAL TRANSACTIONS FOR THE YEAR UNDER CONSIDERATION: 2 ITA NO. 8485/MUM/2010 METTLER TOLEDO (I) P. LTD. SN. PARTICULARS AMOUNT METHOD ADOPTED AY 2004-05 1 PURCHASE OF COMPONENTS 5.08 CRS TNMM 4.87 CRS 2 PURCHASE OF TRADING GOODS 0.40 CRS TNMM 1.29 CRS 3 COMMISSION INCOME 0.78 CRS TNMM 0.22 CRS 4 MARKETING SUPPORT SERVICE(RE-INVOICED INCOME) 1.6 0 CRS TNMM - 5 REIMBURSEMENT (RECEIVED) 0.01 CRS TNMM - 6 REIMBURSEMENT OF INCENTIVES (PAID) 0.01 CRS TNMM - 7 ALLOCATION OF HUB CHARGES 0.09 CRS TNMM - 8 CORPORATE SUPPORT SERVICES PAID 0.14 CRS TNMM - 9 REIMBURSEMENT MADE (PAID) 0.17 CRS TNMM - TOTAL 8.28 CRS 6.38 CRS 10 LOAN RECEIVED (BROUGHT FORWARD ONLY) 13.05 CRS CUP - HE MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) TO DETERMINE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION.TPO ISSUED A NOTIC E U/S. 92CA(2) OF THE ACT TO THE ASSESSEE AND DIRECTED IT TO MAKE SUBMISSIONS TO SUPPORT THE ALP COMPUTED BY IT.AFTER CONSIDERING THE SUBMISS -IONS OF THE ASSESSEE WITH REGARD TO INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATE ENTERPRISE (AE), TPO HELD THAT ASSESSEE HAD PURCHASED RAW-MATERIAL/C OMPONENTS WORTH RS.8.08 CRORES FROM THE ASSESSEE, THAT IT HAD ALSO PURCHASED TRADING GOODS WORTH RS.40 LACS,THAT IT HAD ADOPTED TNMM METHOD,THAT EIGHT COMPANIES WERE IDENTIFIED AS COMP ARABLE,THAT THE OPERATING PROFIT (TWO SALES) MARGIN OF THE ASSESSEE WAS AT 5.22% AS AGAINST THE COMPARABLES OF 4.83% AS CLAIMED BY THE ASSESSEE.HE RE-WORKED THE OPERATING MARGINS OF THE ABOVE COMPARABLES AND THE ASSESSEE COMPANY AS UNDER: SN NAME OF THE COMPANY SALES TOTAL COST OP.PROFIT OP/TC % OP/SA LES % ASSESSEE* 29.72 28.17 1.55 5.50 5.09 COMPARABLES: 1 ADDISON & CO. LTD. 115.87 109.65 6.22 5.67 5.37 2 AVERY INDIA LTD. 74.15 68.59 5.56 8.11 7.50 3 GANSONS LTD. 39 37.05 1.95 5.26 5.00 4 L G BALAKRISHNAN & BROS. LTD. 409.03 373.37 35.66 9.55 8.72 5 MONOZYME INDIA LTD. 9.82 8.94 0.88 9.84 8.96 6 RAJASTHAN UDYOG & TOOLS LTD. 42.66 40.75 1.91 4.69 4.84 7 ROLCON ENGINEERING CO. LTD. 19.57 18.94 0.63 3.33 3.22 8 T A L MANUFACTURING SOLUTIONS LTD. 88.81 84.16 4.65 5.53 5.24 ARITHMETICAL MEAN 6.50 6.06 WHILE WORKING THE OPERATING MARGIN OF THE ASSESSEE, THE FOREIGN EXCHANGE FLUCTUATION GAIN IS EXCLUDED FROM THE SALES. HE FURTHER FOUND THAT FOR THE AY 2004-2005 THREE CO MPARABLES WERE ADOPTED BY THE DEPARTMENT AS AGAINST ONLY ONE COMPARABLE,AVERY INDIA LTD (AIL),S ELECTED BY THE ASSESSEE.REFERRING TO THE TRANSFER PRICING ORDER FOR THE AY 2004-05,TPO HELD THAT SAME COMPARABLES WERE TO BE ADOPTED FOR THE YEAR UNDER CONSIDERATION IN ADDITION TO THE LIS T OF COMPARABLES SELECTED BY THE ASSESSEE. HE DETERMINED THE ARITHMETIC MEAN AS UNDER: SN NAME OF THE COMPANY SALES TOTAL COST OP.PROFIT OP/TC % OP/SALES % ASSESSEE* 29.72 28.17 1.55 5.50 5.09 COMPARABLES: 1 ADDISON & CO. LTD. 115.87 109.65 6.22 5.67 5.37 2 AVERY INDIA LTD. 74.15 68.59 5.56 8.11 7.50 3 GANSONS LTD. 39 37.05 1.95 5.26 5.00 3 ITA NO. 8485/MUM/2010 METTLER TOLEDO (I) P. LTD. 4 L G BALAKRISHNAN & BROS. LTD. 409.03 373.37 35.66 9.55 8.72 5 MONOZYME INDIA LTD. 9.82 8.94 0.88 9.84 8.96 6 RAJASTHAN UDYOG & TOOLS LTD. 42.66 40.75 1.91 4.69 4.84 7 ROLCON ENGINEERING CO. LTD. 19.57 18.94 0.63 3.33 3.22 8 T A L MANUFACTURING SOLUTIONS LTD. 88.81 84.16 4.65 5.53 5.24 9 FLEX ENGINEERING LTD. (MERGED) 59.16 49.99 9.17 18.34 15.50 10 MANUGRAPH INDIA LTD. 282.92 237.09 45.83 19.33 16.20 ARITHMETICAL MEAN 8.97 8.02 WHILE WORKING THE OPERATING MARGIN OF THE ASSESSEE, THE FOREIGN EXCHANGE FLUCTUATION GAIN IS EXCLUDED FROM THE SALES. HE HELD THAT THE ARITHMETIC MEAN OF OPERATING PROFI T MARGIN OF THE COMPARABLES WAS HIGHER THAN THE MARGIN SHOWN BY THE ASSESSEE,THAT ALP OF THE TR ANSACTIONS HAD TO BE RE-WORKED APPLYING THE SAFE HARBOR LIMITS.FINALLY,HE CALCULATED ALP AS UND ER: SL. NO. PARTICULARS AMOUNT (RS.) 1 INTERNATIONAL TRANSACTION (IMPORTS FROM AES) 5,48 ,13,219 2 SALES 29,72,34,902 3 DESIRED PROFITS @ 8.02% ON SALES 2,38,38,239 4 ACTUAL PROFITS 1,55,86,120 5 ADJUSTMENT (304) 82,52,119 6 ARMS LENGTH PRICE FOR IMPORTS (1-5) 4,65,61,100 AS HE HAD DETERMINED THE PRICE FOR INTERNATIONAL TR ANSACTION AT RS. 4.65 CRORES AS AGAINST 5.48 CRORES,SO,HE HELD THAT AN ADJUSTMENT OF RS. 82.52 L ACS WAS TO BE MADE IN THE CASE OF THE ASSESSEE. 2.1. AFTER RECEIVING THE RECOMMENDATION OF THE TPO, AO I SSUED A SHOW CAUSE NOTICE TO THE ASSESSEE AND ASKED HIM TO EXPLAIN AS TO WHY THE ADJ USTMENT/ADDITION SHOULD NOT BE MADE TO ITS TOTAL INCOME.AFTER CONSIDERING THE SUBMISSIONS OF T HE ASSESSEE,HE MADE AN ADDITION/ADJUSTMENT ON ACCOUNT OF ALP,AMOUNTING TO RS. 82,52,119/-OF THE I NTERNATIONAL TRANSACTION,TO THE TOTAL INCOME OF THE ASSESSEE. 2.2. ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY (FAA).AFTER CONSIDERING THE TPOS ORDER,ASSESSMENT-ORDER,THE WRITTEN SUBMISSION S AND ORAL ARGUMENTS OF THE ASSESSEE,HE HELD THAT THE TPO HAD NOT DISPUTED THE AMOUNT OF THE INT ERNATIONAL TRANSACTIONS AND THE TNMM METHOD APPLIED FOR JUSTIFYING THE ARMS LENGTH NATURE OF T HE TRANSACTION-IN-QUESTION,THAT ALTHOUGH BOTH THE ASSESSEE AND THE TPO HAD AGREED TO EIGHT COMPARABLE S YET THE OPERATING MARGINS OF THE SAID COMPARABLES WERE DIFFERENT,THAT THE ASSESSEE HAD CA RRIED OUT DETAILED TRANSFER PRICING STUDY JUSTIF -YING THE ALP OF THE INTERNATIONAL TRANSACTIONS WIT H ITS AES BY CONSIDERING THE VARIOUS FACTORS, PARTICULARLY A COMPARATIVE ANALYSIS OF THE FUNCTION S PERFORMED BY THE ASSESSEE-COMPANY AS AGAINST FUNCTIONS PERFORMED BY THE HOST OF COMPANIES,THAT I N ADDITION THE FUNCTIONAL COMPARABLITY THE ASSESSEE HAD APPLIED QUANTITATIVE FILTERS LIKE TURN OVER,COMPANIES HAVING NEGATIVE NET WORTH ETC. WITH A VIEW TO ESTABLISH COMPARABILITY WITH REFEREN CE TO ASSETS EMPLOYED AND RISKS ASSUMED,THAT THE TPO HAD NOT PROVIDED DETAILED PARAMETERS(LIKE T REATMENT OF NON-OPERATING INCOMES AND EXPEN -SES)FOR ARRIVING AT THE OPERATING SALES,OPERATING COST AND OPERATING MARGINS OF THE COMPARABLES AND HENCE CARRIED OUT ITS SCRUTINY IN A OPAQUE MANN ER,THAT THE TPO HAD FAILED TO ISSUE SHOW CAUSE NOTICE TO THE ASSESSEE FOR REJECTING THE MARGINS OF THE ASSESSEE AND ADOPTING TWO ADDITIONAL COMPA -RABLES,FLEX ENGINEERING LTD. ( FEL)AND(MANUGRAPH INDIA LTD.)MIL,AGAINST THE MANDAT E OF LAW.IN THIS REGARD HE RELIED UPON THE CASES OF MOSER BAER INDIA LTD.(316ITR1)AND MARUTI SUZUKI INDIA LTD.(WP 6876/2008/ -DELHI.) HE FURTHER HELD THAT THE TPO HAD SELECTED TWO ADDIT IONAL COMPARABLES AND HAD MADE REFERENCE TO THE ASSESSMENT ORDER FOR THE AY.2004-2005.IN THIS C ONTEXT, HE REFERRED TO HIS ORDER FOR THE AY.2004-05 WHEREIN HE HAD HELD THAT COMPARABLES ADO PTED BY THE AO COULD NOT BE APPLIED TO THE CASE UNDER CONSIDERATION,THAT FEL AND MIL WERE ENGA GED IN DIFFERENT LINE OF BUSINESS THAN THAT OF 4 ITA NO. 8485/MUM/2010 METTLER TOLEDO (I) P. LTD. THE ASSESSEE,THAT IN THE CASE OF FEL THE SUBSTANTIA L INCOME WAS FROM JOB WORK RELATING TO DOMESTIC AND EXPORT OIL AND GAS SECTOR IN WHICH THE ASSESSEE WAS NOT ENGAGED,THAT AIL WAS OPERATING EXACTLY IN THE SAME INDUSTRY(WEIGHING SCALES/MACHIN ES),THAT TO EXPAND THE SET OF COMPARABLES AND BROADEN THE SEARCH CRITERIA FOR BENCHMARKING IT HAD SELECTED TOTAL EIGHT COMPARABLES AND THE SAID COMPARABLE WERE ACCEPTED BY THE AO,THAT THERE WAS A BSENCE OF ANY WORKINGS WITH REGARD TO OPERATING MARGINS RELIED UPON BY THE TPO,THAT THE A SSESSEE COULD NOT VERIFY THE CORRECTNESS IN THE SAID MARGINS, THAT THE TPO HAD NOT CONSIDERED VARIO US FACTORS LIKE PROVISION WRITTEN BACK AND BAD DEBTS RECOVERED,BAD-DEBTS AND PROVISION FOR DOUBTFU L DEBTS,ADVANCES WRITTEN OFF AND DEFERRED EXPENSES WRITTEN OFF,THAT THESE FACTORS WERE OPERAT ING IN NATURE,THAT THE OPERATING MARGIN OF AIL ARRIVED AT 1.65%,BASED ON THE AUDITED FINANCIAL STA TEMENTS,WAS CORRECT AND IT WAS LOWER THAN THE OPERATING MARGIN OF 5.22%OF THE ASSESSEE,THAT IF TH E OPERATING MARGIN OF ALL OTHER SEVEN COMPARAB -LES(EXCLUDING FEL AND MIL)WERE CONSIDERED AS PER T HE ORDER OF THE TPO AND THE OPERATING MARGIN OF AIL WAS CONSIDERED AT1.65% IT WAS EVIDENT THAT AVERAGE OPERATING MARGIN OF 5.33% OF THE SAID COMPARABLES WAS WITHIN THE +/-5% OF THE MA RGINS/TRANSACTIONS OF THE ASSESSEE, THAT THE INTERNATIONAL TRANSACTIONS,ENTERED IN TO BY THE ASS ESSEE,WERE AT ALP AND NO TP ADJUSTMENT WAS REQ -UIRED.FINALLY,HE DELETED THE ADDITION,AMOUNTING TO RS.82.52 LAKHS,MADE BY THE AO. 2.3. BEFORE US,DEPARTMENTAL REPRESENTATIVE(DR) SUBMITTED THAT FAA HAD WRONGLY REJECTED TWO COMPARABLES, THE MEAN MARGIN APPROVED BY THE FAA WA S FACTUALLY INCORRECT,THAT IN EARLIER YEAR ALSO MEAN WAS ARRIVED BY CONSIDERING THE RESULTS OF FEL AND MIL.AUTHORISED REPRESENTATIVE(AR) SUBMITTED THAT THE ASSESSEE HAD ASCERTAINED EIGHT C OMPARABLES WITH AVERAGE OPERATING MARGIN OF 4.83%,THAT ASSESSEES OPERATING MARGIN WAS 5.22%,TH AT BECAUSE OF THAT REASON TRANSACTIONS WERE REGARDED AS ARMS LENGTH,THAT TPO HAD REWORKED THE MARGINS OF THE COMPARABLES BY ADDING TWO MORE COMPARABLE I.E.FEL AND MIL,THAT THE TPO HAD DE TERMINED NET MARGIN @ 8.02%,THAT TPO HAD NOT CITED ANY REASON/GROUND NOR HAD ADDUCED ANY EVIDENCE TO PROVE THAT THE METHOD BENCHMARKING ADOPTED BY THE ASSESSEE WAS FLAWED,THA T TPO HAD NOT GIVEN ANY WORKING FOR ARRIVING AT THE OPERATING MARGIN OF AIL.HE RELIED U PON THE JUDGMENT DELIVERED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF KARLYLE INDIA ADVI SORS PVT. LTD.(357ITR 582)WHEREIN THE DECISION OF MUMBAI TRIBUNAL DELIVERED IN THE CASE O F ASSESSEE,KARLYLE INDIA ADVISORS PVT. LTD., WAS CONFIRMED. 2.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT WHILE FINALISING THE ALP,TPO HAD ADDED TWO NEW COMPARABLE S I.E.FEL AND MIL TO THE EIGHT COMPARABL -ES ADOPTED BY THE ASSESSEE,THAT BECAUSE OF THE IN CLUSION OF THE SAID TWO COMPANIES VARIATION IN OPERATING MARGIN AROSE,THAT THE OPERATING MARGIN WA S WITHIN THE RANGE OF 5% OF THE ARITHMETIC MEAN OF THE OPERATING MARGIN OF THE COMPARABLE COMP ANIES.WE FIND THAT TPO HAD NOT GIVEN ANY REASON AS TO WHY HE WAS INCLUDING FEL AND MEL IN TH E LIST OF COMPARABLES.HE DID NOT GIVE ANY NOTICE TO THE ASSESSEE FOR INCLUSION OF TWO NEW VAR IABLES.BASIC PRINCIPLES OF NATURAL JUSTICE DEMAND AND EXPECT THAT ASSESSEES SHOULD BE HEARD,BE FORE FASTENING TAX-LIABILITY TO THEM.IT IS NOT KNOWN AS HOW DID THE TPO ARRIVE AT THE CONCLUSION T HAT FEL AND MEL COULD BE COMPARED WITH THE OTHER COMPANIES FOR ARRIVING AT OPERATING MARGI N.SIMILARLY,IT IS ALSO NOT KNOWN AS WHETHER BOTH THE COMPANIES WERE IN THE SAME LINE OF BUSINES S OR NOT.IF THE TPO HAD SOME DEFINITE INFORMATION,HE SHOULD HAVE BROUGHT IT ON RECORD AND SHOULD HAVE CONFRONTED THE ASSESSEE WITH IT.IT WOULD HAVE GIVEN A CHANCE TO THE ASSESSEE TO DEFEND ITSELF.BY NOT AFFORDING AN OPPORTUNITY TO THE ASSESSEE,TPO HAD TAKEN A UNILATERAL DECISION AND SU CH DECISIONS CANNOT BE ENDORSED.TPO HAD NOT FOUND ANY DEFECT IN TP STUDY CARRIED OUT BY THE ASS ESSEE.SECONDLY,TPO HAD NOT DISCUSSED THE REASON FOR NOT ACCEPTING THE OPERATING MARGINS OF A IL,THOUGH THE SAID COMPANY WAS IN THE SAME BUSINESS.IF THE AVERAGE OPERATING MARGIN SHOWN BY T HE ASSESSEE IS COMPARED WITH AIL,IT IS CLEAR THAT SAME WAS WITHIN THE +/-5% OF THE MARGINS/TRANS ACTIONS AND WAS ALLOWABLE AS PER THE RULES.WE FIND THAT WHILE CONSIDERING THE BASIC DATA OF AIL H AD IGNORED VITAL FACTORS THAT HAVE BEEN HIGHLIGHTED BY THE FAA IN HIS ORDER.IN OUR OPINION, FAA HAD CORRECTLY HELD THAT INTERNATIONAL TRANSACTIONS ENTERED IN TO BY THE ASSESSEE WERE AT ARMS LENGTH AND THAT NO ADJUSTMENT WAS REQUIRED.SO, CONFIRMING HIS ORDER WE DECIDE THE EFF ECTIVE GROUND OF APPEAL AGAINST THE AO. 5 ITA NO. 8485/MUM/2010 METTLER TOLEDO (I) P. LTD. AS A RESULT,APPEAL FILED BY THE AO STA NDS DISMISSED. & / & / & / & / &' &' &' &' * * * * 0 0 0 0 1 1 1 1 2 2 2 2 ) )) ) ' ' ' ' 34 3434 34 . ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH NOVEMBER,2013. . ) +,! 5 29 , 2013 , ) - . SD/- SD/- ( . . , / I.P.BANSAL ) ( / RAJENDRA) / JUDICIAL MEMBER /ACCOUNTANT MEMBER [ / MUMBAI, 6 /DATE: 29.11.2013 SK . . . . ) )) ) $'7 $'7 $'7 $'7 8 7!' 8 7!' 8 7!' 8 7!' / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / '# 2. RESPONDENT / $%'# 3. THE CONCERNED CIT(A)/ 9 : , 4. THE CONCERNED CIT / 9 : 5. DR K BENCH, ITAT, MUMBAI / 7;- $' . , . . . 6. GUARD FILE/ - < %7' $' //TRUE COPY// . / BY ORDER, = / 3 DY./ASST. REGISTRAR , /ITAT, MUMBAI