Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI D. KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER
PER VIKAS AWASTHY, JM :
This appeal by the assessee is directed against the assessment order dated 20-01-2015 for the assessment year 2010-11 passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2 ITA No. 220/PUN/2015, A.Y. 2010-11
The brief facts of the case as emanating from records are: The assessee company is engaged in manufacturing of ethanol based Perfumes, Deodorants and Rollons. The assessee company is set up in India by its parent company based in Dubai. The assessee is a 100% export oriented unit. The majority of international transactions of assessee company are with its Associated Enterprise (AE) based in UAE. A miniscule share of its international transactions is with non-AE in Tanzania. During the period relevant to the assessment year under appeal, the assessee had export turnover from export of perfumes Rs.15,49,58,693/-. The assessee applied CUP to benchmark its international transactions. Reference was made to Transfer Pricing Officer (TPO) u/s. 92CA(1) of the Act. The TPO after examining the international transactions proposed upward adjustment of Rs.1,72,22,004/- to the Arm’s Length Price (ALP) declared by the assessee.
Aggrieved against the order of TPO dated 30-12-2013, the assessee filed objections before the Dispute Resolution Panel (DRP). The assessee inter alia objected the adjustments made by TPO on the ground that the assessee is having substantial transaction with AE i.e. 88% and has only miniscule transactions are with non-AE. Therefore, the transactions with non-AE and AE cannot be compared. The assessee sought adjustment on account of geographical differences, volumes of transactions, financial risk and long term relation. The DRP rejected the contentions of the assessee and upheld the findings of TPO vide directions dated 26-12-2014. The Assessing Officer vide impugned order made addition of Rs.1,72,22,004/- on account of transfer pricing adjustment as confirmed by the DRP. Now, the assessee is in appeal before the Tribunal assailing the assessment order on following grounds :
3 ITA No. 220/PUN/2015, A.Y. 2010-11
“1. The learned CIT/DRP, Pune erred in confirming the total income of the assessee at Rs.1,76,27,574/- as against returned income of Rs.4,05,568/- . 2. The learned CIT/DRP, Pune has erred in making an upward adjustment amounting to Rs.1,72,22,004/- on account of lower price charged to A.E. Company in respect of "Perfume Bottles" (Manufactured Finished Goods) as compared to Independent Enterprise. 2.1 In arriving at the above conclusion the learned CIT/DRP erred in not accepting the long term relation between the assessee & the AE company. 2.2 The learned CIT/DRP Pune has erred in not considering the volume/quantity factor Le not appreciating the fact that the quantity sold to the AE is more than 12 times that of the quantity sold to theIE. 2.3 The learned CIT/DRP, Pune has erred in not giving effect to the credit risk and the financial risk involved in the transaction with IE as compared to the AE. 2.4 The learned CIT/DRP, Pune has erred in not considering the Economic Circumstances of the parties namely the dependency on AE for survival of business, competitive nature of the market and burden of loan on the assessee. 3. Appellant craves leave to add, alter, amend, modify or delete above grounds of appeal, if necessary.”
Shri R.M. Rajapurkar appearing on behalf of the assessee submitted that the assessee is primarily exporting perfumes, deodorants etc. to its parent company in Dubai. The assessee has very small share of transactions with non-AE based in Tanzania. Hence, the transactions with AE and non-AE cannot be considered at par. The ld. AR submitted that the TPO made adjustment in respect of various varieties of perfumes exported in different sizes/packs by the assessee. However, the assessee is restricting his submissions only in respect of one product i.e. “15 ML Smart Collection”.
4 ITA No. 220/PUN/2015, A.Y. 2010-11
3.1 The ld. AR submitted chart giving details of rate charged by the assessee to its AE and non-AE, difference in rate at which the same product is supplied to AE and non-AE, quantity supplied, etc. The same is reproduced here-in-below : Product Rate Rate Difference Quantity Quantity Total Amount charged charged to per item supplied supplied to charged less to AE ($) Non AE ($) in ($) (%) to AE Non AE to AE in $ 15 ml 0.40 0.48 0.08 39,43,296 38,016 315,463.68 Smart (20%) Collection
The ld. AR submitted that a perusal of chart would show that the transaction with non-AE is insignificant as compared to transactions with AE. Therefore, one of transaction should not be considered for CUP. The ld. AR submitted that the business of assessee is entirely dependent on its parent company i.e. M/s. Natural Fragrances LLC based in Dubai.
3.2 To substantiate high volume of international transactions with AE the ld. AR furnished a chart giving details of sales made to AE and Non-AE in the last three years : Financial Total Sales Sales to AE % of Sales Sales to % of Sales to Year in Rs. (NF) in Rs. to AE with Non-AE in Non-AE with Total Sales Rs. Total Sales 2007-08 121,378,043 76,731,471 63% 44,607,835 37% 2008-09 257,148,552 208,838,961 81% 48,157,616 19% 2009-10 175,399,376 154,958,693 88% 20,292,351 12%
The ld. AR submitted that a perusal of chart would clearly establish that majority of business comes from AE and thus there is strong case for discount on account of : i. Quantity discount.
5 ITA No. 220/PUN/2015, A.Y. 2010-11
ii. Long term relation discount.
3.3 To support his submissions the ld. AR placed reliance on the following decisions : i. Atul Ltd. Vs. ACIT, 26 taxmann.com 300 (Ahd.-Trib.); ii. DCIT Vs. American Mega Trends India (P.) Ltd., (Chennai-Trib.); iii. Trimex Industries (P.) Ltd. Vs. ACIT, 25 taxmann.com 19 (Chennai- Trib.); iv. ACIT Vs. Dufon Laboratories, 39 SOT 59 (Mum.-Trib.); v. M/s. Intervet India Private Limited, 2010-TIOL-240 (Mum.-Trib.); vi. DCIT Vs. Colour Chem Ltd., 43 taxmann.com 254 (Mumbai-Trib.).
3.4 The ld. AR further contended that non-AE with whom assessee is having very small share of international transactions is located altogether in a different geographical location, having different parameters and market competition, demand and customers preferences, etc. Hence, there can be no comparison between the international transactions with AE and non-AE. The ld. AR finally submitted that no addition should be made in respect of product i.e. “15 ML Smart Collection”. The Revenue has not rebutted assessee’s contentions of long term relation between the assessee and its Dubai based AE and insignificant transactions with non-AE.
On the other hand Shri Rajeev Kumar representing the Department vehemently defended the assessment order. The ld. DR submitted that it is an undisputed fact that the assessee has exported its products to non-AE as well as AE. The adjustments on account of volume discount, long term relation discount etc. or geographical difference is mere hypothetical thesis. The assessee is not entitled to any of the adjustments as claimed.
6 ITA No. 220/PUN/2015, A.Y. 2010-11
The ld. DR prayed for rejecting assessee’s contentions and prayed for upholding the impugned order.
We have heard the submissions made by representative of rival sides and have perused the orders of authorities below. Though, in the grounds of appeal, the assessee has assailed entire transfer pricing adjustments, however, while making submissions the ld. AR restricted his submissions only in respect of one item i.e. “15 ML Smart Collection”. The ld. AR of assessee has made three fold submissions for deleting the upward adjustment in respect of international transactions with its AE viz. quantity discount, long term relations and geographical difference.
The contention of assessee is that substantial international transactions of assessee are with AE at Dubai i.e. more than 88%. The volume of international transactions with non-AE based in Tanzania is comparatively very small. To substantiate the volume of transactions the assessee has furnished details of transactions with AE and non-AE in the past 3 years. The quantum of transactions with AE and non-AE has not been rebutted by the Revenue. A perusal of comparative analysis of rates charged by the assessee from AE and non-AE in respect of “15 ML Smart Collection” would show that there is variation of 20% in the rate charged from AE i.e. $0.40 vis-à-vis non-AE i.e. $0.48. The quantity supplied by the assessee to AE during the period relevant to the assessment year 2010-11 was 39,43,296 bottles as against 38,016, 15 ml bottles to non-AE. The ld. AR has placed heavy reliance on the decision rendered in the case of Atul Ltd. Vs. ACIT (supra) to contend that due allowance should be made for long term relations and supply of large volumes. The relevant
7 ITA No. 220/PUN/2015, A.Y. 2010-11
extract of the findings of Tribunal in allowing quantity discount is reproduced here-in-below : “5.19.2 The assessee has claimed an another adjustment, namely „quantity discount‟ in the range of 2% to 5%. The assessee has furnished it‟s calculation of comparative data of A.E. and Non-AE on pages 95 to 105 of the paper book. There are few products , the sales of them to the A.E. was stated to higher. Likewise we have also perused the Annexure attached by the T.P.O. We want to give a direction that there should be similarity in the calculation of adjustment. Both the sides are expected to adopt an identical methodology for the calculation. On an enquiry it was informed that the T.P.O. has made the adjustment on the A.E. price. Therefore the assessee is also expected to make the same basis of calculation. Both of them has the liberty to make different adjustment but the base figures ought to be the same otherwise the calculation shall become more complex, as much as that there shall be no meeting point of those calculations . From the Annexure of the T.P.O. it is noticed that there were adjustments of Quantity discount ranging from 2% to 5%, but the comparative difference in adjustment is not understandable. As far as the merit of this adjustment is concerned , we are of the view that it is a common market practice that the bulkpurchasers are generally given some discount. If the A.Es have been given sale-price discount due to the high quantity of purchases then the assessee is required to place on record the commercial policy of the assessee-company, whether based upon some agreement or resolution. The assessee is also expected to demonstrate with supporting evidence the basis of applying 2% adjustment and in some cases it was found to be 5% adjustment. A natural question has also come up that whether such discount in sale price had also been granted by the assessee to Non-A.E. on bulk purchases. However, we are of the view that the T.P.O was not justified in rejecting that claim which is otherwise prevalent in the market and can be said to be a common market practice. But before claiming this adjustment the assessee must be fair in not claiming this adjustment on such sale transaction to A.Es. which are apparently lower than the sales to Non-A.E. Rather bulk- purchases by the A.Es. are only required to be taken into account for this adjustment. We direct accordingly.”
We further find that Chennai Bench of Tribunal in the case of Trimex Industries (P.) Ltd. Vs. ACIT (supra) has approved difference in rates to AE and non-AE on account of difference in quantity supplied. The relevant extract of the findings of the Tribunal on this issue are reproduced here-in- below : “24. Then what is the method of comparison adopted by the TPO? This is apparent in the case of Bentonite Lumps. The TPO has adjusted the price reflected in the sale of 40 MT Bentonite Lumps made to non AE. The TPO summarily rejected the sale price reflected in the case of a sale of 23500 MT made to its AE. Is it fair to say that the export price of 23500 MT would be
8 ITA No. 220/PUN/2015, A.Y. 2010-11
exactly that of a sale of 40 MT? In every trade, the volume of the consignment is a very important factor. It is to be seen that almost the entire sales of the assessee are made to AE at Dubai. Therefore, the price offered to its Dubai AE will be influenced by volume, frequency and other vital aspects of the trade. The sale of 40 MT made to non AE was an occasional sale, where the assessee was not constrained by such considerations as applicable in the case of its AE. Therefore, it is evident that the TPO has erred in comparing the mountain with a mole hill.”
Thus, in view of undisputed fact that the assessee had substantial international transactions with AE and very small part of international transactions are with non-AE and the case laws discussed above, we are of considered view that due regard has to be given for the difference in quantity supplied before making adjustment in ALP of the exports made to AE.
The assessee is promoted by its parent AE based in Dubai as 100% EOU. The substantial international transactions of assessee are with its AE. Thus, the business of assessee is largely dependent on the orders received from its AE based in Dubai. The transactions with non-AE based in Tanzania are a very small chunk of total international turnover. The contention of the assessee is that to maintain long term relation and continuous exports the assessee has to offer discount to its AE. We find some merit in the submissions of the assessee. The high volume of exports to AE vis-à-vis exports to non-AE will have variation in the rates. The difference in rates can be on account of quantity discount or to maintain long lasting business relations. Thus, in the facts of the case we are of considered opinion that benefit of quantity discount should be allowed to the assessee. Our this view find support from decision rendered in the case of Atul Ltd. Vs. ACIT (supra). The Mumbai Bench in the case of Dy.
9 ITA No. 220/PUN/2015, A.Y. 2010-11
Commissioner of Income Tax Vs. Colour Chem Ltd. (supra) has also approved the concept of volume discount.
We deem it appropriate to restore this issue back to the file of TPO/AO to grant benefit of volume discount to the assessee in respect of its sale of perfumes to AE at discounted rate. We make it clear that the TPO/AO shall restrict the benefit of quantity discount in respect of single product i.e. “15 ML Smart Collection” agitated by assessee before us.
In the result, the appeal of assessee is partly allowed for statistical purpose in the terms aforesaid.
Order pronounced on Wednesday, the 31st day of July, 2019.
Sd/- Sd/- (डी. करुणाकरा राव/D. Karunakara Rao) (ववकास अवस्थी / Vikas Awasthy) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 31st July, 2019. RK आदेश की प्रयिलऱवऩ अग्रेवषि / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The Dispute Resolution Panel, Pune 4. The DIT (TP/IT), Pune ववभागीय प्रयतयनधध, आयकर अऩीऱीय अधधकरण, “ए” बेंच, 5. ऩुणे / DR, ITAT, “A” Bench, Pune. गाडड फ़ाइऱ / Guard File. 6. //सत्यावऩत प्रयत // True Copy// आदेशानुसार / BY ORDER,
यनजी सधचव / Private Secretary, आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune