PENNZOIL QUAKER STATE INDIA LTD, MUMBAI V. DCIT RG 1(2), MUMBAI

ITA 8885/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8227 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 19-07-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 20-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Keywords: Transfer pricing; Principle of natural justice; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C , MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER ITA NO. 8885/MUM/2010 ASSESSMENT YEAR : 2006-07 PENNZOIL QUAKER STATE INDIA LIMITED; 401-403 POWAI PLAZA, HIRANANDANI BUSINESS PARK MUMBAI-400 012. PAN NO. AAACP 7143 C DY. COMMISSIONER OF INCOME TAX , RANGE 1(2), 535/537 AAYAKAR BHAVAN M.K. MARG MUMBAI-400 020. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI M.P. LOHIA RESPONDENT BY : SHRI AJEET KUMAR JAIN DATE OF HEARING : 19.7.2012 DATE OF PRONOUNCEMENT : 03.08.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF AO DATED 30.9.2010 PASSED IN PURSUANCE OF DIRECTION UNDER S ECTION 144C ISSUED BY THE DISPUTE RESOLUTION PANEL-II. THE ASSESSEE I N THIS APPEAL HAS RAISED SEVERAL GROUNDS WHICH RELATE TO THE TRANSFER P RICING ADJUSTMENT MADE BY AO AS PER DIRECTION OF DRP, PRINCIP LE OF NATURAL JUSTICE AND LEVY OF INTEREST UNDER SECTION 234B. IN ADD ITION, THE ASSESSEE VIDE LETTER DATED 29.3.2012 ALSO FILED ADDITION AL GROUND ITA NO. 8885/M/10 A.Y. 06-07 2 BEFORE THE TRIBUNAL IN WHICH THE TNMM METHOD FOLLOW ED BY AO FOR COMPUTING TRANSFER PRICING ADJUSTMENT WAS CHALLENGED. T HEREAFTER THE ASSESSEE AGAIN FILED A LETTER DATED 7.5.2012 RAISING AN OTHER ADDITIONAL GROUND REGARDING COMPUTATION OF TRANSFER PRICING ADJ USTMENT BY AO IN RELATION TO THE TOTAL PURCHASES INSTEAD OF CONSIDERING ON LY PURCHASES FROM ASSOCIATE ENTERPRISES. 2. AT THE TIME OF HEARING OF THE APPEAL BEFORE THE TRIBUNAL, THE LD. AR FOR THE ASSESSEE DID NOT PRESS ANY OF THE GROUNDS RAISED IN THE MEMORANDUM OF APPEAL. THE ADDITIONAL GROUND RAISED V IDE LETTER DATED 29.3.2012 WAS ALSO NOT PRESSED. THE LD. AR PRESSED ONLY T HE GROUND RAISED IN THE LETTER DATED 7.5.2012 REGARDING COMPUTA TION OF ADJUSTMENT WITH RESPECT TO TOTAL PURCHASES AND NOT LIMIT ING THE SAME TO THE PURCHASES FROM ASSOCIATE ENTERPRISES. WE, THEREFORE , DISMISS THE GROUNDS/ADDITIONAL GROUNDS RAISED BY THE ASSESSEE AS N OT PRESSED EXCEPT THE GROUND RELATING TO CLAIM OF COMPUTATION OF ADJUSTMENT WITH RESPECT TO PURCHASES FROM ASSOCIATE ENTERPRISES AND NOT WITH RESPECT TO TOTAL PURCHASES. 3. BEFORE WE PROCEED TO DEAL WITH THE GROUND RELATIN G TO THE COMPUTATION OF TRANSFER PRICING ADJUSTMENT, IT WILL BE APPROPRIATE TO GIVE A BRIEF BACKGROUND OF THE CASE. THE ASSESSEE WHO WAS ENGAGED IN THE BUSINESS OF PROCESSING, PROCUREMENT AND SALE OF LUBRICA NT OIL, ITA NO. 8885/M/10 A.Y. 06-07 3 GREASES AND COOLANTS AND OTHER CAR PRODUCTS, HAD ENTERED INTO SEVERAL INTERNATIONAL TRANSACTIONS WHICH INCLUDED IMPORT OF BA SE OIL OF RS.10,40,94,103/- AND IMPORT OF ADDITIVES FOR RS.5,40, 03,872/- FROM ASSOCIATE ENTERPRISES. SINCE THE ASSESSEE HAD MADE TRANSACTI ONS WITH ASSOCIATE ENTERPRISES, THE AO HAD REFERRED THE ISSUE OF C OMPUTATION OF ARMS-LENGTH-PRICE TO THE TRANSFER PRICING OFFICER (TPO) UNDER SECTION 92CA. THE ASSESSEE HAD CONDUCTED A TRANSFER PRICING STUDY A ND SELECTED SIX COMPARABLES WHICH HAD YIELDED AVERAGE OPERAT ING MARGIN OF 3.56% AGAINST MARGIN OF 7.54% DECLARED BY THE ASSESSE E ON THE TRANSACTIONS WITH ASSOCIATE ENTERPRISES. THEREFORE, AS PER T HE ASSESSEE, NO ADJUSTMENT WAS REQUIRED TO BE MADE. THE TPO, HOWEVER, CONDUCTED HIS OWN STUDY OF PROWESS DATABASE FOR IDENTIFICA TION OF COMPARABLES AND SELECTED EIGHT COMPARABLES WHICH GAVE AN AVERAGE MARGIN OF 4.8%. BASED ON THE ORDER OF TPO, THE AO PR EPARED A DRAFT ORDER FOR MAKING THE TRANSFER PRICING ADJUSTMENT TO W HICH ASSESSEE FILED BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE DRP AFTER HEARING THE OBJECTIONS OF THE ASSESSEE, DIRECTED THE TPO TO INCLUDE THREE MORE COMPARABLE FOR COMPUTING TRANSFER PRICING ADJUSTMENT AS M ENTIONED BELOW:- I) BALMER LAWRIE & CO. LTD. II) GULF OIL CORPORATION LTD. III) VALCOLINE CUMMINS ITA NO. 8885/M/10 A.Y. 06-07 4 3.1 THE AO, THEREFORE, COMPUTED TRANSFER PRICING ADJUST MENT BASED ON 11 VARIABLES INCLUDING THREE SUGGESTED BY DRP WHICH GAVE AN AVERAGE PROFIT MARGIN OF 4.22% AS PER DETAILS BELOW :- S.NO. NAME OF THE COMPANY SALES OPERATIN G COST PBIT PBIT AS A % OF SALES PBIT AS A % OF COST 1. INDIAN ADDITIVES LTD. 148.52 149.73 (1.21) (0.81) (0.81) 2. NANDAN PETROCHEM LTD. 39.72 38.51 1.21 3.05 3.14 3. PANAMA PETROCHEM LTD. 109.30 100.68 8.62 7.89 8.56 4. SAGAR PETROLEUM S LTD. 3.91 3.63 0.28 7.16 7.71 5. SAH PETROLEUM S 133.32 125.46 7.86 5.90 6.26 6. SAVITA OIL TECHNOLOG IES LTD. 688.98 646.22 42.76 6.21 6.62 7. TIDE WATER OIL CO. (INDIA) LTD. 304.74 295.02 9.72 3.19 3.29 8. UNIVERSAL PETROCHEM ICALS LTD. 61.56 59.47 2.09 3.40 3.51 9. BALMER LAWRIE & CO. LTD. 5.34 10. GULF OIL CORPORATIO N LTD. 3.78 ITA NO. 8885/M/10 A.Y. 06-07 5 11. VALVOLINE CUMMINS 1.33 AVERAG E 4.22 3.2 THE AO COMPUTED THE TRANSFER PRICING ADJUSTMENT WI TH RESPECT TO GROSS SALES OF RS.119.04 CRORES. THE AO COMPUTED THE OPERAT ING PROFIT BASED ON THE PROFIT MARGIN OF 4.22 % AT RS. 5.02 CRORES AGAINST THE OPERATING PROFIT OF RS. .42 CRORE DECLARED BY THE ASSESSEE . THE AO THUS MADE ADJUSTMENT OF RS.4.60 CRORES IN RELATION TO THE I MPORT OF BASE OIL AND ADDITIVES FOR RS.15.81 CRORES. AGGRIEVED BY THE DECI SION OF AO, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4. BEFORE US, THE LD. AR SUBMITTED THAT THE ASSESSEE WAS N OT RAISING ANY DISPUTE EITHER IN THE MATTER OF THE SELECTION OF CO MPARABLES USED BY THE AO ON THE DIRECTION OF DRP FOR THE PURPOSE OF TRANSFER PRICING STUDY OR ABOUT TNMM METHOD USED FOR THIS PURPOSE BY THE AO. THE LIMITED DISPUTE WAS WHETHER THE AO WAS JUSTIFIED IN COMPUTING THE ADJUSTMENT WITH REFERENCE TO GROSS SALES OF RS.109.04 CROR ES WHEN THE TOTAL PURCHASES FROM ASSOCIATE ENTERPRISES WERE ONLY TO THE TUNE OF RS.15.81 CRORES. IT WAS ARGUED THAT THE ADJUSTMENT HAD T O BE MADE ONLY WITH RESPECT TO TRANSACTIONS WITH RESPECT TO ASSOCIATE E NTERPRISES. RELIANCE FOR THE SAID PROPOSITION WAS PLACED ON THE DECIS ION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DEMAG CRANES NAD C OMPONENTS ITA NO. 8885/M/10 A.Y. 06-07 6 (I) PVT. LTD. VS. DCIT (144 TTJ 320) AND ON THE DECI SION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. STARLIGHT (133 TTJ 425). IT WAS POINTED OUT THAT IN CASE ADJUSTMENT WAS COMPUTED WITH RESPECT TO TRANSACTIONS WITH ASSOCIATE ENTERPRISES, ADDITION COULD BE MADE ONLY TO THE TUNE OF RS.81.00 LACS AS PURCHASES FROM ASSOCIATE ENTE RPRISES CONSTITUTED ONLY 17.65% OF TOTAL PURCHASES. THE LD. DEPA RTMENTAL REPRESENTATIVE ON THE OTHER HAND SUBMITTED THAT THE CLAIM MADE BY THE ASSESSEE REGARDING COMPUTATION OF ADJUSTMENT OF RS.81 .00 LACS REQUIRED VERIFICATION AT THE LEVEL OF AO/TPO. THE LD . AR STATED THAT HE HAD NO OBJECTION TO ANY SUCH VERIFICATION. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED RIVAL CONT ENTIONS CAREFULLY. THE LIMITED DISPUTE RAISED IS REGARDING TR ANSFER PRICING ADJUSTMENT IN RELATION TO INTERNATIONAL TRANSACTIONS E NTERED INTO BY THE ASSESSEE WITH ASSOCIATE ENTERPRISES. THERE IS NO DISPUTE EIT HER REGARDING TNMM METHOD FOLLOWED BY THE AO OR ABOUT V ARIABLES SELECTED FOR COMPUTATION OF TRANSFER PRICING ADJUSTMENT. THE ONLY DISPUTE RAISED BY THE ASSESSEE IS WHETHER THE TRANSFER PRICI NG ADJUSTMENT SHOULD BE COMPUTED WITH RESPECT TO GROSS TURN OVER OF THE ASSESSEE OR SHOULD BE LIMITED TO VOLUME OF TRANSACTION ENT ERED INTO WITH THE ASSOCIATE ENTERPRISES. THE AO HAS COMPUTED THE TRANSFER PRICING ADJUSTMENT WITH RESPECT TO GROSS SALES OF THE ASSESSEE OF RS.119.04 CRORES ON THE BASIS OF ARMS-LENGTH-MARGIN OF 4 .22%. THE ITA NO. 8885/M/10 A.Y. 06-07 7 CASE OF THE ASSESSEE IS THAT TOTAL PURCHASES BY THE ASSESSEE WIT H ASSOCIATE ENTERPRISES IN RELATION TO WHICH TRANSFER PRICING PROVISIONS HAVE BEEN APPLIED WAS ONLY TO THE TUNE OF RS.15.81 CRO RES. THEREFORE, ADJUSTMENT HAS TO BE MADE ONLY WITH RESPECT TO PURCHASE S WITH ASSOCIATE ENTERPRISES. IN OUR VIEW THE CLAIM OF THE ASESSE E IS VERY REASONABLE AS THE ADJUSTMENT HAS TO BE MADE ONLY WITH RESPECT TO TRANSACTIONS WITH ASSOCIATE ENTERPRISES BASED ON ARMS-LENGTH PRICE AND NOT WITH RESPECT TO TOTAL PURCHASES/SALES. THIS VIEW IS SU PPORTED BY SEVERAL DECISIONS OF THE TRIBUNAL, SOME OF WHICH HAVE BEE N REFERRED TO BY THE LD. AR IN PARA-4 EARLIER. WE, THEREFORE, RE STORE THE ISSUE TO THE FILE OF AO/TPO FOR FRESH COMPUTATION OF TRANSFER PRICIN G ADJUSTMENT AFTER NECESSARY EXAMINATION IN THE LIGHT OF THE OBSERVA TIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESEE. 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR ST ATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 3.8.2012. SD/- SD/- (D. MANMOHAN) VICE PRESIDENT (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 3.8.2012. JV. ITA NO. 8885/M/10 A.Y. 06-07 8 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.