DCIT/ACIT, Circle-6(2), Kolkata, Kolkata V. M/s. Emami Limited, Kolkata

ITA 873/KOL/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 5549 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 1 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-06-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 27-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKKAL DUDHWEWALA ACA
• Assessee Lawyers: SHRI; SANKAR HALDER
• Keywords: Transfer pricing; International transaction

Judgement Text

1 ITA NO. 873/KOL/2017 M/S. EMAMI LIMITED, AYS 2009-10 , C , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOL KATA ( ) BEFORE . . , /AND . , ) [BEFORE SHRI A. T. VARKEY, JM & SHRI M. BALAGANESH , AM] I.T.A. NO. 873/KOL/2017 ASSESSMENT YEAR: 2009-10 DEPUTY COMMISSIONER /ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-6(2), KOLKATA VS. M/S. EMAMI LIMITED (PAN: AAACH7412G) APPELLANT RESPONDENT FOR THE APPELLANT SHRI AKKAL DUDHWEWALA, ACA FOR THE RESPONDENT SHRI SANKAR HALDER, JCIT, SR. D R & SHRI SANJAY PAUL, ADDL. CIT, DR. DATE OF HEARING 04.04.2019 DATE OF PRONOUNCEMENT 03.06.2019 ORDER PER SHRI A.T.VARKEY, JM THISAPPEALOF THE REVENUE ARISES OUT OF ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -22, KOLKATA FOR AY2009-10 DAT ED19.04.2013 2. THE MAIN GRIEVANCE OF THE REVENUE IS AGAINST THE ACTION OF LD. CIT(A) IN DELETING THE UPWARD TRANSFER PRICING ADJUSTMENT OF RS.1,38,74,415/- MADE BY THE TPO IN RESPECT OF THE VALUE OF TOILETRIES SOLD TO THE AES. 3 BRIEF FACTS OF THE CASE AS NOTED BY THE T PO ARE THAT THE ASSESSEE-COMPANY HAD SOLD GOODS TO ITS SUBSIDIARY AES LOCATED IN DUBAI & UK. THE ASSESSEE HAD BENCHMARKED THE SALES BY APPLYING INTERNAL CPM METHOD WHEREIN T HE GROSS MARGINS OF THE PRODUCTS SOLD TO THE AES WAS COMPARED WITH THE GROSS MARGINS OF THE SIMILAR PRODUCTS EXPORTED TO NON-AES. IN THE TPSR IT WAS REPORTED THAT THE GR OSS MARGINS REALIZED FROM SALE OF GOODS TO AES FELL WITHIN THE +/-5% RANGE OF THE MAR GINS REALIZED ON EXPORT OF THE SIMILAR PRODUCTS TO NON-AES AND HENCE IT WAS REPORT ED TO BE AT ARMS LENGTH. IN THE 2 ITA NO. 873/KOL/2017 M/S. EMAMI LIMITED, AYS 2009-10 PROCEEDINGS U/S 92CA(3) THE TPO NOTED THAT THE ASSE SSEE COMPANY HAD ALLOWED SIGNIFICANT CREDIT PERIOD TO ITS AES OF AROUND 180 DAYS IN COMPARISON TO NON-AES WHICH WAS 30 DAYS OR LESS AND THEREFORE ACCORDING TO HIM APPROPRIATE WORKING CAPITAL ADJUSTMENT WAS REQUIRED TO BE CARRIED OUT TO THE GR OSS MARGINS BEFORE COMPARING THE PROFITABILITY OF THE GOODS SOLD TO THE AES AND THE NON-AES. THE TPO THUS SHOW CAUSED THE ASSESSEE TO EXPLAIN AS TO WHY WORKING CAPITAL A DJUSTMENT SHOULD NOT BE MADE TO THE GROSS MARGINS AT THE RATE OF 8% PER ANNUM AND THAT THE ADJUSTED GROSS PROFIT MARGINS (AFTER WORKING CAPITAL ADJUSTMENT) OF THE AES AND N ON-AES BE COMPARED. THE OBJECTIONS PUT FORTH BY THE ASSESSEE IN RESPONSE TO THE SCN WAS DISREGARDED BY THE TPO AND HE PROCEEDED TO MADE THE WORKING CAPITAL ADJUST MENT @ 8% P.A. ON THE SALES VALUE WITH REFERENCE TO THE CREDIT PERIOD GRANTED TO THE AES & NON-AES. ACCORDINGLY HE ARRIVED AT ADJUSTED GROSS MARGIN OF 23% & -22% IN R ESPECT OF THE SALES MADE TO AES I.E. EMAMI DUBAI &EMAMI UK RESPECTIVELY AND CORRESPONDIN G ALP I.E. ADJUSTED GROSS MARGIN OF THE NON-AES WORKED OUT TO 29% AND 20%. OV ERALL THEREFORE, THE TPO COMPUTED TRANSFER PRICING ADJUSTMENT OF RS.1,38,74, 715/-. AGGRIEVED BY THE TPOS ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A). IN THE APPELLATE ORDERTHE LD. CIT(A) NOTED THAT THE COMPUTATION OF THE TRANSF ER PRICING ADJUSTMENT BY THE TPO SUFFERED FROM CALCULATION ERRORS IN AS MUCH AS THE WORKING CAPITAL ADJUSTMENT & THE ADJUSTED GROSS MARGIN WAS WRONGLYMADE WITH REFERENC E TO SALES VALUE INSTEAD OF COST OF GOODS SOLD. THE LD. CIT(A) RE-COMPUTED THE WORKING CAPITAL ADJUSTMENT WITH REFERENCE TO COST OF GOODS SOLD AND THEREAFTER NOTED THAT THE OVERALL ADJUSTED GROSS MARGIN OF AES WAS WITHIN THE PERMITTED RANGE OF +/-5% OF THE ADJU STED GROSS MARGIN OF NON-AES AND THEREFORE HELD THAT THE INTERNATIONAL TRANSACTION W ITH AES WAS AT ARMS LENGTH. THE LD. CIT(A) ACCORDINGLY DELETED THE IMPUGNED TRANSFER PR ICING ADJUSTMENT. BEING AGGRIEVED BY THE ORDER OF LD. CIT(A), THE REVENUE IS NOW IN A PPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y EXAMINED THE FACTS OF THE CASE. THE LD. DR APPEARING ON BEHALF OF THE REVENUE SUPPORTED THE ORDER OF THE TPO. PER CONTRA, THE LD. AR SUBMITTED THAT THE ADJUSTMEN T MADE BY THE TPO SUFFERED FROM SEVERAL APPARENT ERRORS AND INFIRMITIES. IT WAS POI NTED OUT THAT THE WORKING CAPITAL ADJUSTMENT WAS MADE BY THE TPO ON THE PRETEXT THAT SIGNIFICANT CREDIT PERIOD OF 180 3 ITA NO. 873/KOL/2017 M/S. EMAMI LIMITED, AYS 2009-10 DAYS WAS GIVEN TO AES IN COMPARISON TO NON-AES WHIC H WAS 30 DAYS OR LESS. IT WAS SUBMITTED THAT THIS ASSUMPTION WAS FORMED BY THE TP O WITH REFERENCE TO THE PERMITTED CREDIT PERIOD MENTIONED ON THE FACE OF THE INVOICE. THE LD. AR HOWEVER SUBMITTED THAT THE ACTUAL CREDIT PERIOD AVAILED BY THE AE WAS SIGN IFICANTLY LESS AND COMPARATIVE TO THAT OF NON-AES AND HENCE CLAIMED THAT NO WORKING CAPITA L ADJUSTMENT WAS WARRANTED IN THE FIRST PLACE. THE LD. AR ALTERNATIVELY FURTHER SUBMI TTED THAT THE INTEREST RATE OF 8% ADOPTED BY THE TPO FOR MAKING THE WORKING CAPITAL A DJUSTMENT WAS HIGHLY EXCESSIVE. ACCORDING TO THE LD. AR THE TPO OUGHT TO HAVE ADOPT ED THE ACTUAL COST OF FUNDS (BORROWED IN USD) I.E.2.2% INSTEAD OF 8% FOR MAKING THE WORKING CAPITAL ADJUSTMENT. THE LD. AR SUBMITTED A CHART OUTLINING THE REVISED GROSS PROFIT MARGIN OF AES & NON- AES TAKING INTEREST RATE FOR WORKING CAPITAL ADJUST MENT AT THE RATE OF 2.2% AND REFERRING TO THE SAME ARGUED THAT THE GROSS MARGINS OF THE AE S WAS WITHIN PERMISSIBLE RANGE OF +/-5% WITH THE NON-AES. THE LD. AR ALSO RELIED ON T HE ORDER OF THE LD. CIT(A) AND ARGUED THAT UNDER NO CIRCUMSTANCE THE WORKING CAPIT AL ADJUSTMENT AND THE COMPUTATION OF ADJUSTED GROSS MARGIN COULD HAVE BEEN MADE BY TH E TPO WITH REFERENCE TO THE SALES VALUE. IT WAS SUBMITTED THAT THE LD. CIT(A) HAD RIG HTLY RE-COMPUTED THE WORKING CAPITAL ADJUSTMENT AND GROSS MARGINS WITH REFERENCE TO THE VALUE OF COST OF GOODS SOLD AND SINCE THE RE-COMPUTED MARGINS FELL WITHIN THE +/-5% RANGE , IT WAS CLAIMED THAT THE TRANSFER PRICING ADJUSTMENT WAS RIGHTLY DELETED BY THE LD. C IT(A). 5. AFTER GIVING OUR THOUGHTFUL CONSIDERATION TO THE FACTS OF THE CASE AND THE MATERIAL AVAILABLE ON RECORD, WE ARE OF THE CONSIDERED OPINI ON THAT THE WORKING CAPITAL ADJUSTMENT, IF ANY, OUGHT TO HAVE BEEN MADE WITH RE FERENCE TO THE INTERNATIONAL COST OF FUNDS AS OPPOSED TO THE INTEREST RATE CHARGED ON TH E LOANS ADVANCED TO THE AES. THE WORKING CAPITAL ADJUSTMENT IS ESSENTIALLY AN ATTEMP T TO ADJUST THE TIME VALUE OF MONEY WHERE THE PAYMENT SCHEDULES VARY SIGNIFICANTLY. IT PROCEEDS ON THE ASSUMPTION THAT THE ENTITY IS REQUIRED TO BORROW MONEY TO FUND THE TRAN SACTION AND HENCE DUE TO EXTENDED CREDIT TERMS THERE IS A REDUCTION IN CASH SURPLUS D UE TO EXCESS OUTFLOW IN FORM OF INTEREST. THIS ADJUSTMENT THEREFORE IN ESSENCE CAPT URES THE EFFECT OF THE TIME VALUE OF MONEY ON THE PROFITABILITY DUE TO THE TIME GAP BETW EEN THE FUNDING OF THE TRANSACTION UPTO THE TIME WHEN THE PAYMENT IS ACTUALLY REALIZED . IN THE FACTS OF THE PRESENT CASE THE 4 ITA NO. 873/KOL/2017 M/S. EMAMI LIMITED, AYS 2009-10 TPOS PREMISE FOR MAKING THE IMPUGNED ADJUSTMENT IS THAT THE CREDIT PERIOD ALLOWED TO THE AES SIGNIFICANTLY MOVE IN COMPARISON TO NON-AES , WHICH RESULTED IN EXTENDED BLOCKAGE OF WORKING CAPITAL FUNDS. SINCE THE EXPORT S MADE TO THE AES & NON-AES ARE DENOMINATED IN FOREIGN CURRENCY, IT WOULD ONLY BE A PPROPRIATE TO WORK OUT THE WORKING CAPITAL ADJUSTMENT AGAINST THE RELEVANT CURRENCY DE NOMINATED LIBOR RATE. ON THESE FACTS WE ARE OF THE CONSIDERED VIEW THAT WORKING CA PITAL ADJUSTMENT IS REQUIRED TO BE MADE WITH REFERENCE TO THE INTERNATIONAL COST OF BO RROWINGS IN THE HANDS OF THE ASSESSEE. 6. FROM THE FACTS AS AVAILABLE ON RECORD, WE NOTE T HAT THE ASSESSEE HAD MADE BORROWINGS IN FOREIGN CURRENCY, WHICH CARRIED INTER EST RATE OF L+1%. THIS FACT HAS BEEN ACKNOWLEDGED BY THE TPO WHILE BENCHMARKING THE TRAN SACTIONS INVOLVING LOANS ADVANCED TO AES AND IN THE LAST PARAGRAPH THE TPO H AS MENTIONED THAT THE COST OF FUNDS IN THE HANDS OF THE ASSESSEE WAS L+1% I.E. 2.2%. FO R THE REASONS SET OUT ABOVE WE THEREFORE HOLD THE COST OF FUNDS BLOCKED IN WORKING CAPITAL DUE TO THE EXTENDED CREDIT PERIOD GRANTED TO THE AES IN COMPARISON TO THE NON- AES WAS 2.2% AND NOT 8% AS HELD BY THE TPO. 7. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE RE VISED CHART CONTAINING THE COMPUTATION OF GROSS MARGINS OF AES & NON-AES TAKIN G COST OF FUNDS OF 2.2%, WHICH YIELDED THE FOLLOWING RESULTS: PARTICULARS SALES GROSS MARGIN GP (IN % TERMS) INTEREST ADJUSTMENT @ 2.2% REVISED GP (AFTER W/C ADJUSTMENT) REVISED GP (IN % TERMS) AES 2076.28 LACS 546.43 LACS 26% 22.84 LACS [180 DAY CREDIT PERIOD] 523.59 LACS 25% NON-AES 2446.83 LACS 594.87 LACS 24% 7.60 LACS [CREDIT PERIOD - AS PER TPO] 587.27 LACS 24% 8. FROM THE FOREGOING CHART IT IS APPARENT THAT THE MARGIN ENJOYED BY THE ASSESSEE IN RESPECT OF EXPORTS TO AES COMPARES FAVORABLY AND IT IS WITHIN THE PERMISSIBLE LIMIT OF +/-5%. IN THE CIRCUMSTANCES THEREFORE IF THE AUTHOR ITIES BELOW HAD ADOPTED THE MOST APPROPRIATE RATE OF INTEREST I.E. 2.2%, BEING THE C OST OF FUNDS BORROWED INTERNATIONALLY 5 ITA NO. 873/KOL/2017 M/S. EMAMI LIMITED, AYS 2009-10 THEN APPARENTLY THERE WAS NO CASE FOR THE TPO TO RE COMMEND ANY UPWARD ADJUSTMENT. WE THEREFORE FIND MERIT IN THE SUBMISSIONS OF THE L D. AR THAT APPLYING THE FIRST PRINCIPLES, TRANSFER PRICING ADJUSTMENT MADE BY TH E TPO ON ACCOUNT OF WORKING CAPITAL ADJUSTMENT WAS FACTUALLY UNWARRANTED. 9. WE ALSO FIND THAT THE LD. CIT(A) THOUGH FOUND PR IMA FACIE MERIT IN THE FOREGOING CONCLUSIONS HE DID NOT DEAL WITH THESE SUBMISSIONS IN GREATER DETAIL BECAUSE ON THE BASIS OF ANALYSIS OF FACTS BEFORE HIM HE FOUND MORE FOR CE IN THE ASSESSEES CONTENTION THAT THE TPO WHILE MAKING WORKING CAPITAL ADJUSTMENT HAD ADOPTED SALE PRICE AS THE BASE WHEREAS UNDER CPM METHOD THE TPO OUGHT TO HAVE WORK ED OUT THE DIFFERENTIAL MARGIN BY TAKING COST OF GOODS EXPORTED AS THE BASE. TAK ING INTO CONSIDERATION THE COST OF GOODS EXPORTED AS THE BASE AND MAKING APPROPRIATE W ORKING CAPITAL ADJUSTMENT IN RELATION TO THE COST OF GOODS EXPORTED, THE LD. CIT (A) FOUND THAT MARGINS ENJOYED BY THE ASSESSEE IN EXPORTS TO AES AND NON-AES WAS WITHIN T HE PERMISSIBLE RANGE OF +/-5% AND IN THAT VIEW OF THE MATTER THE LD. CIT(A) FOUND THE ADJUSTMENT RECOMMENDED BY THE TPO IN THE ORDER U/S 92CA(3) TO BE UNTENABLE. AT TH E TIME OF HEARING THE LD. DR WAS UNABLE TO CONTROVERT THE LD. CIT(A)S WORKING, MADE WITH REFERENCE TO BASE OF COST OF GOODS EXPORTED AND AS SUCH HE WAS UNABLE TO SHOW AN Y SPECIFIC INFIRMITY OR ERROR IN THE LD. CIT(A)S FINDINGS. WE THEREFORE SEE NO REASON T O INTERFERE WITH THE ORDER OF THE LD. CIT(A). MORE SO WHEN THE INTEREST RATE TO BE ADOPTE D FOR MAKING THE APPROPRIATE COMPARISON IS HELD TO BE 2.2% I.E. THE ACTUAL COST OF FOREIGN BORROWINGS MADE BY THE ASSESSEE THEN THE ADJUSTMENT MADE BY THE TPO IS FOU ND TO BE FACTUALLY UNSUSTAINABLE AS DEMONSTRATED IN THE FOREGOING CHART. FOR THE REASON S SET OUT IN THE FOREGOING THEREFORE WE UPHOLD THE ORDER OF THE LD. CIT(A) AND DISMISS T HE GROUNDS TAKEN BY THE REVENUE. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 03 /06/ 2019. SD/- SD/- (M. BALAGNESH) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 3 RD JUNE, 2019 JD.(SR.P.S.) 6 ITA NO. 873/KOL/2017 M/S. EMAMI LIMITED, AYS 2009-10 COPY OF THE ORDER FORWARDED TO: 1 APPELLANT DCIT/ACIT, CIRCLE-6(2), KOLKATA. 2 RESPONDENT M/S. EMAMI LIMITED, 687, EMAMI TOWER, ANANDAPUR, E.M. BYPASS, KOLKATA-700 107. 3 4 5 CIT(A)-22, KOLKATA. (SENT THROUGH E-MAIL) CIT , KOLKATA DR, KOLKATA BENCHES, KOLKATA (SENT THROUGH E-MAIL) / TRUE COPY, BY ORDER, ASSISTANT REGISTRAR