SC ENVIRO AGRO INDIA P.LTD,MUMBAI vs. ASST CIT 3(3), MUMBAI

This appeal is filed by assessee for A.Y. 2008-09 against the order of the Commissioner of Income-tax (Appeals)-15, Mumbai, dated 24th October, 2013, by which the appeal is filed by the assessee against the assessment order of the learned Dy. Commissioner of Income- tax, 3(3), Mumbai (the learned Assessing Officer) passed on 14th February, 2012 under Section 143(3) of the Income-tax Act, 1961 (the Act) for A.Y. 2008-09 was dismissed.

The assessee is aggrieved with that and has raised following grounds of appeal;-

Fact shows that assessee is a company engaged in the business of manufacturing insecticides and pesticides, technical and its intermediates chemicals. Assessee filed its return of income on 29th September, 2008 at a total income of ₹1,12,35,277/-. The return of the assessee was picked up for scrutiny by issue of notice on 28th August, 2009.

Assessee has entered into three international transactions. Assessee purchased intermediates from its Associated Enterprises of ₹43,47,45,523/- and also paid royalty for use of license amounting to ₹1,89,433/-. In its transfer pricing study report assessee selected only one comparable, aggregated both the above transactions, selected most appropriate method as Transactional Net Margin Method (TNMM) selecting only one comparable whose profit before tax was 3.67% and similar PLI of the assessee was 6.03% and accordingly, submitted that its international transactions of purchase of intermediates and payment of royalty are at Arm’s Length Price. The third international transaction was with reimbursement of

The learned Transfer Pricing Officer rejected the TPSR as it was based only one comparable, carried out further fresh search and issued show cause notice to the assessee. After considering the reply of the assessee, the learned Transfer Pricing Officer selected fifteen comparables whose PLI was computed at 13% and computed the PLI of assessee at 10.13% made an adjustment of ₹1,52,29,587/- on account of purchase of intermediaries.

With respect to the payment of royalty, considering the prior transfer pricing audit orders held that assessee has failed to prove economic justification of royalty paid to its Associated Enterprises Sumitomo Chemicals Company Limited, Japan. The learned Transfer Pricing Officer held that assessee is a contract manufacturer to its Associated Enterprises in Japan and therefore, there is no requirement of payment of royalty. Accordingly, the Arm's Length Price of royalty payment of ₹1,89,433/- was determined at ₹ Nil.

Order under Section 92CA(3) of the Act was passed on 25th October, 2011 making a total adjustment of ₹2,53,19,020/-. Based on this, the learned Assessing Officer passed an assessment order under Section 143(3) of the Income-tax Act, 1961 (the Act) on 14th February, 2012 determining the total income of the assessee of ₹3,65,54,300/-.

Aggrieved by that order assessee preferred the appeal before the learned CIT (A). Assessee also filed fresh search conducted as additional evidence which were rejected by the learned CIT (A). On the merits, he upheld both the adjustment made by the learned Transfer Pricing Officer. Accordingly, assessee aggrieved with that has preferred this appeal.

Before us, the learned Authorized Representative submitted that the learned Transfer Pricing Officer has made an adjustment at the entity level and not on the international transactions. If such addition is

With respect to royalty it was submitted that in the subsequent year the learned Transfer Pricing Officer himself has accepted that the payment of royalty to Sumitomo Japan is at Arm's Length Price.

The learned Departmental Representative fairly agreed that the adjustment should be made only to the extent of international transaction With respect to the Arm's Length Price working of purchase of intermediaries. With respect to the royalty it was submitted that if in the subsequent year the learned Transfer Pricing Officer has held that it to be at Arm's Length Price and there is no change in the facts and circumstance of the case, the matter may be sent to the learned Transfer Pricing Officer to decide the issue in accordance with the law.

We have carefully considered the rival contentions and perused the orders of the lower authorities. With respect to the adjustment proposed by the learned Transfer Pricing Officer and confirmed by the learned CIT (A), we are of the opinion that adjustments should be restricted to the extent of international transactions only. The statement submitted by the assessee shows that if adjustment is made to the international transactions, the assessee falls within the benefit of range of ±5%. In view of this, we direct the learned Assessing Officer to examine the statement of the assessee and if the adjustment to be made an international transaction falls within the range of 5%, addition deserves to be deleted.

It is the claim of the learned Authorized Representative that in subsequent years in TP adjustment the learned Transfer Pricing Officer has accepted Arm's Length Price of the royalty as benchmarked by the assessee. If this fact is correct and there is no change in the facts and circumstances of the case, after examining

Assessee is directed to submit working of adjustment with respect to purchase of intermediaries as well as the TP assessment order when the benchmarking of royalty payment was accepted by the learned Transfer Pricing Officer at Arm's Length Price in subsequent years.

No other arguments were advanced before us.

In view of this with above two directions, we set aside the appeal of the assessee back to the file of the learned Transfer Pricing Officer.

In the result, the appeal of the assessee is allowed for statistical purposes.