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Income Tax Appellate Tribunal, BENCH “J”, MUMBAI
Before: SHRI SHAMIM YAHYA & SHRI PAWAN SINGH
O R D E R PER PAWAN SINGH, JUDICIAL MEMEBR : 1. This appeal by assessee is directed against the assessment order dated 27- 10.2017 passed u/s 143(3) read with section (r.w.s.) 144C (13) of Income tax Act (Act), passed in pursuance of direction of dispute resolution penal (DRP) dated 01.09.2017 for assessment year 2013-14. The assessee has raised the following grounds of appeal:- (1) General ground challenging the Transfer Pricing adjustment of ₹1,92,11,925/- consequential to non-consideration/acceptance of arms length analyses. (2) Non-consideration of comparability analyses as documented in the transfer pricing study report. (3) Non-consideration of contemporaneous data.
Ampacet (Thailand) Company Ltd (4) Use of single year data. (5) Non-consideration of combined transaction approach. (6) Erred in considering foreign exchange difference is operating in nature. (7) Erred in rejecting the basis of allocation key of common cost as provided by the appellant for computation of segmental margins (without prejudice). Without prejudice ground 5 above, erred in rejecting the gross margin ratio as well as an alternate approach of gross turnover ratio (total underlying turnover) as an appropriate allocation key for allocating common cost for computation of segmental margins and inappropriately considering incommensurate base of actual trading turnover and the actual commission income for allocation of common cost. (8) Inappropriate segment of Priya International Ltd is considered for the purpose of analyses (without prejudice) Without prejudice ground 5 above, for the purpose of computation of operating margin of comparable company (viz; Priya international Ltd), the operating margin shall be computed considering only “trading chemicals” segment enlisted of considering both, ‘indenting commission segment’ as well as ‘chemical trading segment’. (9) Adjustment on account of import duty. (10) Erroneous levy of interest under section 234B of the Act. (11) Initiation of penalty under section 271(1)(c) of the Act..
Brief facts of the case are that assessee company engaged in the business of import of master batches from its associated enterprises in Thailand for distribution in India. The assessee also received commission for the order secured by it for the products of its associated enterprises (AE). The assessee filed its return of income for assessment year 2012-13 declaring income of ₹ 1,04,07,970/-. Along with the return the assessee furnished report in Form 3CEB and reported following international transaction with its AE.
Ampacet (Thailand) Company Ltd Name of AE Name of transaction amount in Rupees Ampacet Thailand Co purchase of trading goods 13,51,03,842/- Ltd Ampacet Corporation purchase of trading goods 1,25,84,262/- Ampacet Specially the Sale of trading goods 1,26,028/- product private limited Ampacet Australia sale of trading goods 21,453/- private limited Ampacet Thailand commission income 2,25,68,759/- Total 17,04,04,344/-
Consequent upon reporting of international transaction the assessing officer made a reference to the transfer pricing officer (TPO) for computation of arms length price (ALP) of the international transaction reported by the assessee. The assessee adopted transactional net margin method (TNMM) as appropriate method for benchmarking its transaction by considering operating profit/sales as profit level indicator (PLI). The assessee has shown its PLI at 9.05%. While computing the PLI for assessee as well as comparable the assessee considered foreign exchange variation as non- operating item. The assessee selected 6 comparable companies and provided multiple year as well as single year data of comparables. The multiple year margin of comparable was 5.07% and single year margin was 5.38%. The PLI of comparable companies in multiple and single year is as under; 3
Ampacet (Thailand) Company Ltd S.No. Comparable Companies Multiyear data % Single year data % 1 Black Rose Industries Ltd (seg) 4.31% 5.76% 2 Pesticides and Breweries Ltd 0.17% 0.24% 3 Priya International Ltd (seg) 9.78% 13.22% 4 Priya Ltd (seg) 7.53% 8.89% 5 Vipul Dyes 5.55% 4.39% 6 Nikhil Adhesive Ltd 3.09% 0.77% Asthmatic Mean 5.07% 5.38%
The assessee claimed that the margin of assessee is higher than the arithmetic mean of multiyear as well as single year margin. The TPO asked the assessee to furnish segment wise account for trading and commission income along with allocation key. The assessee furnished the required details vide reply dated 9th September 2016. The assessee in its without prejudice submissions, vide submissions dated 14th October 2016 also furnished explanation the rationale for taking gross margin ration rather than turnover ratio as appropriate allocation key citing that relative revenue of trading and commission segment could not be deemed to represent the respective consumption of commissions expenses to these segment on account of substantial presence of cost of goods sold in trading activity which is absent in commission activity and common cost should ideally be split in gross profit ratio and not in the ration of sales. The TPO disregarded 4 Ampacet (Thailand) Company Ltd the segmental profitability statement and propose to consider segmental profitability based on actual trading turnover as well as actual commission income on the basis of statement in P& L Account as base for allocation for common cost.
The TPO while making benchmarking not considered the foreign exchange variation as a non-operating item. The TPO in its report recommended adjustment of ₹ 2,00,34,286/- with regard to international transaction of import of finished goods for resale and sale of finished goods. On receipt of report of TPO the assessing officer past draft assessment order under section 143(3) rws 144C(3) on 27th October 2017. The copy of draft assessment was served upon the assessee. The assessee exercised its option for filing of objection before dispute regulation panel (DRP). The DRP after considering the objection of the assessee directed the assessing officer to consider the foreign exchange difference is operating in nature while computing margin of comparable company and use of correct operating margin of comparable company and recompute the correct transfer pricing adjustment. Accordingly the assessing officer/TPO considered the foreign exchange fluctuation as operating in nature and the adjustment was reduced to ₹ 1,92,11,925/-. Further, aggrieved the assessee has filed present appeal before us. 5
Ampacet (Thailand) Company Ltd 6. We have heard the submission of the learned authorised representative (AR) for the assessee and the learned department representative (DR) for the revenue and perused the material available on record. At the outset of hearing the learned AR of the assessee submits that he is not pressing Ground No. 1 to 6 and that those grounds may be dismissed as not pressed.
Considering the submission of learned AR of the assessee ground No. 1 to 6 are dismissed as not pressed.
Ground No. 7 relates to rejection of allocation key of common test as provided by assessee for computation of segmental margins. The TPO rejected the gross margin ratio as an appropriate allocation key for allocating common cost while computing segmental margin. Though, assessee submitted segmental margin considering gross turnover as the basis for allocation of common cost as an alternative approach. The learned AR of the assessee submitted an alternative analysis of segmental working by allocating the common expenses based on gross turnover ratio (i.e. ratio of gross underlying turnover resulting from trading in commission activities) as allocation key. The ld. AR for the assessee furnished the competitive chart of common distribution expenses and submits that if correct allocation of common distribution expenses is accepted, the transaction of assessee would meet the arms length test. 6
Ampacet (Thailand) Company Ltd 8. On the other hand the learned DR for the revenue supported the order of lower authorities. The learned DR further submit that in case the allocation of common distribution expenses is considered, in such eventually kill the matter may be restored to the file of TPO/verification.
We have considered the submission of the parties and perused the material of label on record. We have noted that while making benchmarking the TPO rejected gross margin ratio as an appropriate allocation key for allocating common cost while computing segmental margin. Now, before us the assessee has furnished allocation of common distribution expenses therefore, we deem it appropriate to restore the issue to the file of AO/TPO to examine the allocation of key of common cost based on underlying turnover for both trading in commission activities and pass the order afresh in accordance with law. In the result this ground of appeal
is allowed for statistical purpose.
10. Ground No. 8 relates to alleged inappropriate segment of Priya International Ltd. The learned AR for the assessee submits that based on the annual report of this comparable company, the assessee considered this company as a comparable to its distribution activity which includes trading and commission activities. The assessee considered intending business and trading business of this comparable to assessee’s distribution activities. On 7
Ampacet (Thailand) Company Ltd the aforesaid approach, the assessee computed operating margin of this comparable on segmental basis by considering the result of intending and trading segment together and consider the same for benchmarking its international transaction pertaining to its distribution activity. TPO accepted this comparable with the assessee. However, TPO rejected the combined approach of benchmarking transaction pertaining to trading in commission activities together. The learned AR submits that TPO considered separate approach of benchmarking wherein the operating margin of assessee from trading segment compared with the average of operating margin of comparable companies. The approach of TPO was confirmed by DRP. The TPO should have taken the segmental revenue of trading alone in case of this comparable. He has wrongly taken the entity level i.e. both trading in commission segment. The learned AR prayed that benchmarking of this comparable be made only with respect to trading segment of the assessee, accordingly the AO/TPO be directed to consider only the trading segment of this comparable for analyses.
On the other hand the learned DR for the revenue supported the order of lower authorities.
We have considered the submission about the parties and perused the records carefully. We have noted that the TPO rejected the combined 8
Ampacet (Thailand) Company Ltd approach of benchmarking transaction pertaining to trading in commission activities together. The DRP affirmed the action of TPO on combined approach of benchmarking. Before us the learned AR of the assessee submits that for benchmarking of this comparable is only with respect to trading segment of the assessee and sought appropriate direction to TPO/AO. We find convincing force in the submission of learned AR of the assessee and direct the TPO to consider only trading segment of this comparable company for benchmarking with respect to trading segment of the assessee. Accordingly, the TPO is directed to consider only trading segment of this comparable company for benchmarking with respect to trading segment of the assessee. In the result this ground of appeal is also allowed for statistical purpose.
13. Ground No. 9 relates to computing operating margin of assessee without granting relief by factoring adjustment on account of import duties paid by assessee. We have noted that the assessee has raised this ground of appeal for the first time before the Tribunal.
14. In support of this ground the learned AR of the assessee that assessee’s primary business for relevant financial year is that of import of master batches from its AE for distribution in India. The business model of assessee is based on arrangement that imports will specifically be made from its head 9
Ampacet (Thailand) Company Ltd office and the same will further be sold in Indian markets. There is huge difference in the quantum of import made by the assessee and comparable companies. While the assessee’s total import is 78.54% of the total purchases and average ratio of imports by comparable company his 34.99% of total purchases. The learned AR submits that it has resulted in a higher incidence of import duty by assessee .and accordingly increased cost directly affecting the margins of assessee. In order to being a parity in comparision of the operating margins of the assessee with that of comparable assessee, the assessee claimed an adjustment on account of higher custom duty paid in respect of import of trading goods. The learned AR of the assessee prayed for appropriate direction to the assessing officer/TPO.
On the other hand the learned AR for the revenue so much that the assessee has not raised such pleas before the lower authorities therefore the assessee cannot raise this pleas at this stage.
We have considered the submission about the parties and find that the assessee has raised this submission for the first time by way of grounds of appeal before the Tribunal. Therefore we admit the plea of assessee and restore the issue to the file of TPO/AO to consider the plea of the assessee in accordance with law. In the result this ground of appeal is allowed for 10
Ampacet (Thailand) Company Ltd sceptical purpose. Needless to order that before passing the order the TPO/AO shall grant opportunity of hearing to the assessee. The assessee is also directed to provide full information and the evidences before the TPO/AO. 17. Ground No. 10 is consequential and ground No. 11 is premature thus needs no adjudication. 18. In the result appeal of the assessee is partly allowed.
Order pronounced in the open court on 21.04.2020.