The DCIT, Circle-1, Ahmedabad V. AIA Engineering Ltd., Ahmedabad

MA 106/AHD/2012

• Counselvise Citation: [2012] 123 COUNSELVISE.COM (IT) 8541 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 month(s) 22 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 20-07-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 13-07-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 29-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ROOP CHAND
• Keywords: Transfer pricing

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE SHRI, D. K. TYAGI, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER M.A. NO. 106 /AHD/ 201 2 (ARISING OUT OF ITA NO. 580/AHD/2011) ASSESSMENT YEAR :2006-07 THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-1, AHMEDABAD V/S . M/S. AIA ENGINEERING LTD. 115, G.V.M.M. ESTATE, ODHAV ROAD, ODHAV, AHMEDABAD PAN NO. AABCA2777J (APPELLANT) .. (RESPONDENT) BY APPELLANT SHRI ROOPCHAND JCIT D.R. /BY RESPONDENT SHRI TUSHAR P. HEMANI, A.R. /DATE OF HEARING 13.07.2012 /DATE OF PRONOUNCEMENT 20.07.2012 O R D E R PER : A.K. GARODIA, ACCOUNTANT MEMBER THIS M.A. IS FILED BY THE REVENUE CONTENDING THAT T HERE ARE CERTAIN MISTAKES IN THE IMPUGNED TRIBUNAL ORDER DATED 19.01 .2012. THE MISTAKES POINTED OUT BY THE REVENUE IN THE M.A. ARE AS PER P ARA NOS. 1 TO 12 OF THE MISCELLANEOUS APPLICATION WHICH ARE REPRODUCED BELO W: 1. THE SUBMISSIONS OF THE DEPARTMENT HAVE BEEN SUMM ARIZED AT PARA 19 OF THE ORDER. IT IS SEEN THAT WHILE A DETAI LED SUBMISSION WAS MADE ON VARIOUS FACETS OF THE CHARACTERIZATION OF B OTH THE ENTITIES TO THE TRANSACTION, THE ISSUES RAISED BY THE DEPARTMENT HA VE NOT BEEN FACTORED BY THE HON'BLE ITAT WHILE DECIDING THE ISS UE. 2. IT IS SEEN THAT THE ONLY FACT BROUGHT ON RECORD IS THE ISSUE OF LACK OF WAREHOUSING FACILITY, LACK OF INVENTORY AND CRED IT RISK AND SHIPPING OF M.A. NO.106/AHD/12, A.Y.06-07 A/O ITA NO. 580/AHD/2 011 PAGE 2 THE GOODS DIRECTLY TO THE CUSTOMER. THE DEPARTMENT HAD FILED DETAILED WRITTEN SUBMISSIONS ON THE ISSUE. A COPY OF THE SAM E IS ENCLOSED ALONG WITH THIS APPLICATION. THE MAIN CONTENTION RAISED W AS THAT THE DISTRIBUTION AGREEMENT ENTERED INTO BETWEEN THE TWO RELATED PARTIES WAS LIABLE TO QUESTION. THIS WAS SO BECAUSE THE AGR EEMENT DID NOT CONTAIN ANY FORMULA FOR SHARING THE PROFITS BETWEEN THE TWO RELATED PARTIES AND HENCE IT ALLOWED THE PARTIES TO PLAN TH EIR AFFAIRS SO AS TO ENSURE HIGH MARGINS TO THE UAE ENTITY. 3. AT PARA 21, THE HON'BLE ITAT HAS OBSERVED THAT 'WE FIND THAT THIS IS ONE OF THE OBJECTIONS OF THE REVENUE THAT VEGA U AE IS NOT A DISTRIBUTOR BUT MARKET SERVICE PROVIDER AND MERELY ON THIS BASIS, THE TP ANALYSIS CONDUCTED BY THE ASSESSEE HAD BEEN REJECTE D BY THE TPO.' IT HAS FURTHER OBSERVED THAT, 'REGARDING THIS ASPECT THAT AS TO WHETHER VEGA UAE IS A DISTRIBUTOR OR SIMPLY MARKETING SERVICEPROVIDER, WE FIND THAT THE OBJECTION OF THE REVENUE ON THIS ASPECT IS NOT SUSTAINABLE IN VIEW O F THE FACTS OF THE PRESENT CASE BECAUSE WE FIND THAT THE ASSESSEE COMP ANY HAS EXECUTED PROPER DISTRIBUTOR AGREEMENT WITH VEGA UAE AND IT H AS BEEN ADHERED TO ALSO AND SINCE THE OBJECTION OF THE REVENUE THAT VE GA UAE IS NOT BEARING ANY INVENTORY AND CREDIT RISK, WE FIND THAT AS PER THE FACTS OF THE PRESENT CASE, BOTH THESE OBJECTIONS ARE NOT CORRECT AND VEGA UAE IS CARRYING BOTH THE INVENTORY RISK AS WELL AS CREDIT RISK AND THEREFORE, WE HOLD THAT VEGA UAE IS NOT A MARKETING SERVICE PROVI DER IN THE FACTS OF THE PRESENT CASE BUT IT IS A DISTRIBUTOR OF THE ASS ESSEE COMPANY. 4. THE ABOVE OBSERVATION OF THE HON'BLE ITAT IS CR YPTIC, WITHOUT ANY BASIS AND AGAINST THE PROVISIONS OF THE ACT AS WELL AS CURRENT OECD GUIDELINES. AS SUBMITTED IN DETAIL, ANY AGREEMENT B ETWEEN TWO RELATED PARTIES REQUIRES TO BE EXAMINED IN DETAIL BASED ON THE CONDUCT OF THE TWO PARTIES. THE PROPER CHARACTERIZATION OF TWO PAR TIES IS A SIN-QUA-NON DURING A TRANSFER PRICING STUDY AND A STUDY IS LIAB LE TO BE REJECTED IF THE CHARACTERIZATION IS WRONG. M.A. NO.106/AHD/12, A.Y.06-07 A/O ITA NO. 580/AHD/2 011 PAGE 3 5. THE FACT THAT VEGA UAE WAS NOT CARRYING INVENTO RY RISK AND CREDIT RISK WERE ONLY TWO OF THE MANY ISSUES RAISED BY THE REVENUE WHICH HAVE NOT BEEN DISCUSSED. THE MAIN ISSUE WAS THAT TH E AGREEMENT ITSELF WAS A SELF-SERVING DOCUMENT WHICH DID NOT HAVE ANY FORMULA FOR 'TRANSFER OF GOODS' FROM AIA TO VEGA UAE AND HENCE, IT COULD NOT BE RELIED UPON TO CHARACTERIZE THE VEGA'S CORRECT CHAR ACTER. 6. THE FACT THAT AIA WAS DISPATCHING GOODS TO ALL I TS EXPORT CUSTOMERS AND NOT SOME CUSTOMERS HAS NOT BEEN DELIBERATED. 7. THE ITAT HAS FAILED TO ADJUDICATE ON THE RATIONA LE OF ADOPTING AIA AS A TESTED PARTY BY THE ASSESSEE AND WHETHER THIS ACT ION WAS CORRECT OR NOT. THE TESTED PARTY HAS BEEN CHANGED BY THE AO AN D HAS BEEN RAISED BY THE ASSESSEE AS A GROUND OF APPEAL. THE ITAT HAS NOT ADJUDICATED ON THIS ISSUE AND IT IS NOT CLEAR WHETHER THE ACTIO N OF THE AO IN CHANGING THE TESTED PARTY HAS BEEN UPHELD BY THE ITAT OR NOT . 8. AT PARA 21, THE ITAT HAS OBSERVED THAT ONCE VEGA UAE IS TAKEN TO BE A DISTRIBUTOR, ALP HAS TO BE DETERMINED ON THE B ASIS OF PROFIT ON SALE OF GOODS. THIS IS A WRONG PRESUMPTION WHICH HAS BEE N ADOPTED WITHOUT ANY DISCUSSION. FOR A DISTRIBUTOR, THE GENERAL YARD STICK OR PROFIT LEVEL INDICATOR IS RETURN ON COST. IN OECD GUIDELINES, AT PARA 1.47, THE GUIDELINES STATE THAT, '1.47 THE FUNCTIONS CARRIED OUT (TAKING INTO ACCOUN T THE ASSETS USED AND THE RISKS ASSUMED) WILL DETERMINE TO SOME EXTENT THE ALLOCATION OF RISKS BETWEEN THE PARTIES, AND THEREF ORE THE CONDITIONS EACH PARTY WOULD EXPECT IN ARM'S LENGTH TRANSACTIONS. FOR EXAMPLE, WHEN A DISTRIBUTOR TAKES ON RESPONSIBI LITY FOR MARKETING AND ADVERTISING BY RISKING ITS OWN RESOUR CES IN THESE ACTIVITIES, ITS EXPECTED RETURN FROM THE ACTIVITY W OULD USUALLY BE COMMENSURATELY HIGHER AND THE CONDITIONS OF THE TRA NSACTION WOULD BE DIFFERENT FROM WHEN THE DISTRIBUTOR ACTS M ERELY AS AN AGENT, BEING REIMBURSED FOR ITS COSTS AND RECEIVING THE INCOME APPROPRIATE TO THAT ACTIVITY.' M.A. NO.106/AHD/12, A.Y.06-07 A/O ITA NO. 580/AHD/2 011 PAGE 4 9. IT IS AN UNDISPUTED FACT THAT VEGA UAE IS NOT I NCURRING ANY EXPENDITURE ON ADVERTISING NOR HAS DONE ANY SUBSTAN TIVE MARKETING. FURTHER, ADMITTEDLY, THE MAJOR PART OF THE ORDERS A RE REPEAT ORDERS RELATING TO REPLACEMENTS. HENCE, IT IS ONLY APPROPR IATE THAT THE ENTITY IS REIMBURSED FOR ITS COST APPROPRIATELY. WITHOUT PREJ UDICE TO THE FACT THAT THE FUNCTIONS OF VEGA UAE DO NOT EVIDENCE IT TO BE A DISTRIBUTOR AND THAT THE DISTRIBUTOR AGREEMENT IS A SELF SERVING DOCUMEN T, THE ITAT HAS WRONGLY PRESUMED THAT IN ALL CASES OF DISTRIBUTION, AUTOMATICALLY PROFIT LEVEL INDICATOR IS TO BE TAKEN AS MARGIN ON SALES. 10. THE ITAT HAS MERELY COME TO A CONCLUSION THAT THE TP ADJUSTMENTS PROPOSED BY THE AO AND CONFIRMED BY THE DRP ON THE BASIS OF OPERATING COST/OPERATING PROFIT OF VEGA US IS NOT SUSTAINABLE. HOWEVER, THIS DOES NOT VALIDATE THE ACTION OF THE A SSESSEE IN BENCHMARKING THE PROFITS OF VEGA UAE BY JUSTIFYING THE PROFIT MARGIN OF ASSESSEE COMPANY. 11. EITHER THE MATTER SHOULD HAVE BEEN RESTORED TO THE FILE OF THE TPO TO FIND OUT MORE SUITABLE COMPARABLES OR THE HON'BL E ITAT SHOULD HAVE TRIED TO LOCATE A SUITABLE COMPARABLE FROM THE SEAR CH PROCESS CARRIED OUT IN THIS CASE, RATHER THAN DELETING THE PROPOSED ADJUSTMENT. 12. THE ABOVE MISTAKE IS APPARENT FROM RECORDS, TH EREFORE IT IS REQUESTED THAT THE HON'BLE TRIBUNAL MAY RECTIFY THE MISTAKE AND PASS NECESSARY ORDER ACCORDINGLY. 2. IN THE COURSE OF HEARING OF THE M.A., LD. D.R. O F THE REVENUE REITERATED THE SAME CONTENTIONS WHICH ARE RAISED IN THE M.A. AS AGAINST THIS, IT WAS SUBMITTED BY THE LD. A.R. OF THE ASSESSEE THAT THER E IS NO APPARENT MISTAKE IN THE TRIBUNALS ORDER WHICH CAN BE RECTIFIED U/S 254 (2) AND REQUEST OF THE REVENUE IS AMOUNTING TO REVIEW OF THE TRIBUNALS OR DER, WHICH IS NOT PERMISSIBLE U/S 254(2) OF THE IT ACT. M.A. NO.106/AHD/12, A.Y.06-07 A/O ITA NO. 580/AHD/2 011 PAGE 5 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND GON E THROUGH THE IMPUGNED TRIBUNALS ORDER. WE FIND THAT IN PARA NO .21 OF THIS TRIBUNALS ORDER, THIS ASPECT WAS DECIDED BY THE TRIBUNAL ON THIS BAS IS THAT THE OBJECTIONS OF THE REVENUE THAT VEGA UAE IS NOT A DISTRIBUTOR BUT MARK ET SERVICE PROVIDER, IS NOT VALID BECAUSE IT IS NOTED BY THE TRIBUNAL THAT THE ASSESSEE COMPANY HAS EXECUTED PROPER DISTRIBUTION AGREEMENT WITH VEGA UA E AND IT HAS BEEN ADHERED TO ALSO AND SINCE THE OBJECTION OF THE REVE NUE IS NOT CORRECT THAT VEGA UAE IS NOT BEARING ANY INVENTORY AND CREDIT RI SK. THIS FINDING IS GIVEN BY THE TRIBUNAL IN THIS PARA OF THE TRIBUNALS ORDER A FTER EXAMINING THE FACTS OF THE PRESENT CASE. THE FINDING OF THE TRIBUNAL THAT VEG A UAE IS NOT A MARKETING SERVICE PROVIDER BUT IS THE DISTRIBUTOR OF THE ASSE SSEE COMPANY, IS ON THIS BASIS THAT VEGA UAE IS CARRYING BOTH THE INVENTORY RISK AS WELL AS CREDIT RISK. THE OBJECTIONS OF REVENUE IN THE M.A. IS THIS THAT IN ADDITION TO THESE TWO OBJECTIONS THAT VEGA UAE WAS NOT CARRYING INVENTORY RISK AND CREDIT RISK, THERE WERE OTHER OBJECTIONS OF THE REVENUE ALSO AND THE T RIBUNAL HAS NOT DISCUSSED THESE OBJECTIONS. REGARDING OTHER OBJECTIONS, IT I S CONTENDED IN PARA 5 OF THE M.A. THAT THE MAIN ISSUE WAS THE AGREEMENT ITSELF W HICH AS PER REVENUE WAS A SELF-SERVING DOCUMENT BECAUSE IT DID NOT CONTAIN ANY FORMULA FOR TRANSFER OF GOODS FROM THE ASSESSEE COMPANY TO VEGA UAE. IN TH IS REGARD, CLEAR FINDING GIVEN BY THE TRIBUNAL IN THE SAME PARA NO.21 OF THE ORDER THAT ASSESSEE COMPANY HAS ENTERED INTO A VALID AND PROPER DISTRIB UTION AGREEMENT WITH VEGA UAE AND HAD BEEN ADHERED TO ALSO. HENCE, IT IS NOT PROPER TO SAY THAT THIS ISSUE WAS NOT DISCUSSED AND DECIDED. M.A. NO.106/AHD/12, A.Y.06-07 A/O ITA NO. 580/AHD/2 011 PAGE 6 6. CONSIDERING THE FACTS OF THE PRESENT CASE IN ITS ENTIRETY, WE ARE OF THE CONSIDERED OPINION THAT WHATEVER REQUEST IS MADE BY THE REVENUE IN M.A. HAS NOT ESTABLISHED ANY APPARENT MISTAKE IN THE TRIBUNA LS ORDER AND THEREFORE, NO RECTIFICATION IN THIS TRIBUNALS ORDER IS CALLED FO R U/S 254(2) OF THE IT ACT. 8. IN THE RESULT, THE M.A. OF THE REVENUE STANDS DI SMISSED. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE AT CAPTION PAGE. SD/- SD/- (D. K. TYAGI) ( A.K. GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER TRUE COPY S.K.SINHA ! ! ! ! '! '! '! '! / COPY OF ORDER FORWARDED TO:- 1. / APPELLANT 2. / RESPONDENT 3. '(' ) * / CONCERNED CIT 4. *- / CIT (A) 5. !./ ), ) , 12( / DR, ITAT, AHMEDABAD 6. /45 67 / GUARD FILE. BY ORDER/ , 8/ 1 ': ) , 12( ; STRENGTHEN PREPARATION & DELIVERY OF ORDERS IN THE ITAT 1) DATE OF TAKING DICTATION 17.07.2012 2) DIRECT DICTATION BY MEMBER STRAIGHT ON COMPUTER/LAPTOP/DRAGON DICTATE XXX 3) DATE OF TYPING & DRAFT ORDER PLACE BEFORE MEMBER 18.07.2012 4) DATE OF CORRECTION ,, ,, 5) DATE OF FURTHER CORRECTION XXX 6) DATE OF INITIAL SIGN BY MEMBERS 20.07.2012 7) ORDER UPLOADED ON 20.07.2012 8) ORIGINAL DICTATION PAD HAS BEEN ENCLOSED IN THIS FILE YES 9) FINAL ORDER AND 2 ND COPY SEND TO BENCH CLERK ON 20.07.2012 M.A. NO.106/AHD/12, A.Y.06-07 A/O ITA NO. 580/AHD/2 011 PAGE 7