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Income Tax Appellate Tribunal, “K” Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Shri Amarjit Singh (JM)
O R D E R Per Shamim Yahya (AM) : This appeal by the assessee is directed against the order of Assessing Officer for A.Y. 2013-14 pursuant to direction of learned Dispute Resolution Panel dated 24.8.2017.
Various grounds of appeal have been raised by the assessee but the issues pressed and arising in this appeal relate to three issues.
3. First issue is addition of Rs. 2,75,310/- on account of transfer pricing adjustment on rent for office premises paid to associated enterprise (AE).
On this issue it is noted that the assessee has taken on rent office premises from its AE, Sandhills Holdings Limited (Sandhills). The Transfer pricing officer compared rent charged by the AE to another concern [independent third party namely CITECH Engineering India Pvt. Ltd. (CITECH)]. TPO found that rent charged by Sandhills from the assessee was 2 M/s. Lalit Pipes and Pipes Limited Rs. 90.75 per square feet, whereas rent charged from CITECH was Rs. 85 per square feet. Thus, TPO made arm’s length price of the differential rate of Rs. 5.75 per square feet. In its objection before DRP, assessee submitted that facts surrounding the issue were different in as much as assessee gave following chart :- Particulars Sr. Facts in case of the Facts in case of No. Assessee CITEC
Security Deposit — Rs. 11,56,800 2. No. of Parking slots provided 4(free) Charged Separately 3. Electricity charges Reimbursed to Sandhills Borne directly by only at the year end CITEC
4. Tenure of the lease 3 years 5 years 5. Area of premises 3,990 sq. ft. 2,410 sq.ft.
DRP was convinced with the assessee’s submission on account of security deposits. The assessee gave computation of savings on account of notional interest on security deposits. Hence, from the rent charged per square feet in the case of the assessee, assessee sought deduction of Rs. 5.75 per square feet on account of notional interest. This issue was adjudicated by DRP in favour of the assessee. DRP held that assessee has rightly computed adjustment which was required to be made to the CITECH rent @ Rs. 5.75/- per square feet per month. Hence, it held that objection raised by the assessee on this issue is sustained.
On account of other issue in this regard raised by the assessee, DRP inter alia, gave some direction to the TPO. While giving effect to the order of DRP, TPO observed that the assessee was requested to give details and in absence of details, the Assessing Officer sustained adjustment earlier made by him. Against this order, the assessee is in appeal before us.
3 M/s. Lalit Pipes and Pipes Limited
Learned Counsel of the assessee submitted that the DRP has accepted adjustment of Rs. 5.75 per square feet on account of security deposits. Hence, he submitted that the Assessing Officer has clearly erred in not giving effect of this direction. He submitted that the adjustment made by the TPO of the differential rent of Rs. 7.75 per square feet. Hence, learned Counsel submitted that if adjustment of Rs. 7.75 per square feet is allowed on account of security deposits, rent charged compared favourably with the rent charged from other party and hence no disallowance will be required.
Per contra, learned Departmental Representative did not dispute this proposition.
Accordingly upon careful consideration and observing records, we direct the Assessing Officer to give effect to the order of the DRP wherein adjustment on account of rent to the extent of Rs. 5.75 per square feet on account of security deposit has been accepted. Resultantly, this adjustment is directed to be deleted.
Apropos- addition of Rs. 24,34,733/- on account of transfer pricing adjustment on account of transportation charges paid to AE.
On this issue it was noted by the TPO that the assessee has paid Rs. 5,10,85,528/- towards transportation charges. The assessee had transported finished goods i.e. Steel Pipes to fifty routes across the country. Mostly an AE has been used for transportation. In some cases, assessee availed services of third party transporter. The assessee after selecting itself as tested party, benchmark transaction using CUP method as the most appropriate method (MAM). CUP used by the assessee is private quotation obtained from other transporters. TPO accepted that the assessee has tested party as well applicability of CUP method. However, TPO accepted benchmarking done by the assessee only in respect of one route. For remaining routes, TPO did not 4 M/s. Lalit Pipes and Pipes Limited accept assessee’s benchmarking stating that the assessee could not produce details regarding type of vehicle used, terms and conditions with AE, nature of goods transported etc. Thereafter the TPO benchmarked all remaining routes During the year under consideration, the Assessee has paid Rs. 5,10,85,528 towards transportation charges. The assessee has transported finished goods i.e. Steel Pipes to 50 routes across the country. While mostly Lalit Parivahan, a division of Sandhills ("Lalit Parivahan") has been used for transportation, in some cases, the Assessee availed services of a third party transporter for transporting its finished goods. The Assessee, in Form 3CEB reported an amount of Rs. 5,10,85,528 towards payment of transportation charges to Lalit Parivahan. The Assessee, after selecting itself as the tested party benchmarked the transaction using CUP Method as the MAM. The CUP used by the assessee is private quotations obtained from other transporters with reference to such transport, obtained without any tendering process. 4.2 The TPO accepted the Assessee as the tested party as well as the applicability of CUP Method to benchmark the transaction under consideration. However, the benchmarking done by the Assessee was accepted by the TPO only in respect of one route. For the remaining routes, the TPO did not accept the Assessee's benchmarking stating that the Assessee could not produce the details regarding the type of vehicles used, terms and conditions with AE, nature of goods transported, ^etc. Thereafter, the TPO benchmarked all the remaining routes'as under: a. In respect of one route, the CUP in the form of transaction with Associate Road Carriers Ltd was accepted and the transaction was found to be at arms' length. b. In respect of Mangalore route, the CUP transaction with Darcel Logistics Limited was found to be acceptable. The TPO proposed an adjustment of Rs 3,49,160 based on this CUP. TPO benchmarked 34 out of 49 routes by applying the following methodology:
An average rate was computed per route per MT as charged by Lalit Parivahan per MT. This average rate was then compared with the rate charged by Lalit Parivahan per route per MT; - On comparison, an adjustment was made for the difference in this average rate as compared to the actual rate per route per MT. d. For the remaining 15 routes out of 49 routes, the Assessee had entered into one transaction for each route with Lalit Parivahan. The TPO took the amount of addition/ adjustment calculated by him for the above 34 routes and calculated the ratio of the same to the total transaction value between the assessee and Lalit Parivahan. The said percentage was then applied to the transaction value of the remaining 15 routes.
5 M/s. Lalit Pipes and Pipes Limited
Against the above order, assessee objected before learned DRP.
DRP, inter alia, directed the TPO to arrive at arm’s length price per metric ton per km. With reference to some type of vehicle for which independent CUP is available on another route and compared these routes. It further directed for being proper CUP journey should have been taken in the same month. DRP gave other directions and also directed that in absence of availability of such data CUP will not be proper method to use in this case. The assessee is in alternative submitted that comparison using TNMM as most appropriate method. DRP observed that this study was not presented before TPO for examination and has submitted before DRP quite late. DRP has also observed that the turnover of the assessee-company was Rs. 130 crores while turnover of comparable was between Rs. 5 to 30 crores indicating that large companies have not been selected. It further observed that the assessee has identified 20 companies which past related party filter. However, only 10 comparables have been selected without mentioning any reason. Hence, it held that study submitted by the assessee is not found reliable and cannot be accepted. TPO was, inter alia, directed to rework arm’s length price in line with above direction. While giving effect, TPO asked the assessee to submit necessary data and concluded that in absence of necessary data he was retaining adjustment earlier suggested. Against this order assessee is in appeal before us.
Learned Counsel of the assessee submitted that fresh data for route suggested by DRP was not available. Hence, counsel submitted that the assessee cannot be forced to do impossible. Learned counsel submitted that considering absence of necessary data the assessee has taken another comparability analysis as TNMM as most appropriate method. DRP has summarily rejected this. He submitted that as against DRP observation that these comparables have small turnover, matter of fact that they had 6 M/s. Lalit Pipes and Pipes Limited considerable turnover in place of Rs. 5 to 30 crores observed by DRP, these comparables had turnover of Rs. 35 to 50 crores. Further learned counsel submitted that even taking all 20 comparables, comparability analysis on the availability with the rate of assessee.
Per contra, learned Departmental Representative did not factually dispute above submissions.
Upon careful consideration, we find that in absence of necessary data the assessee has submitted another analysis based on TNMM. The assessee submission is cogent and deserves examination. The assessee has claimed that as against observation of DRP that these comparables have turnover of Rs. 5 to 30 crores in fact they had turnover of Rs. 35 to 50 crores. Further, DRP has drawn adverse inference by observing that even after referring to 20 comparables, the assessee has done comparability analysis by referring only 10 comparables. In this regard learned Departmental Representative has submitted that comparability analysis even by taking all 20 comparables would give right charge by the assessee within arm’s length. In view of the aforesaid factual observation, we remit this issue to the file of the TPO. The TPO shall examine TNMM analysis done by the assessee and thereafter decide the issue as per law.
Another issue raised the addition of Rs. 86,61,706/- on account of transfer pricing adjustment on purchase of raw material from AE.
On this issue TPO made an addition of Rs. 86,61,706/- by calculating average rate per metric ton at which raw materials were purchased from AE throughout the year and compared it with average rate at which raw materials were purchased from independent third party.
7 M/s. Lalit Pipes and Pipes Limited
On this issue learned Counsel of the assessee has made an alternative claim which was although not made with DRP by way of grounds of appeal but the same was given in written submission. Since this is an additional ground and legal issue, we admit the same on the touchstone of Hon'ble Apex Court decision in the case of National Thermal Power Co. Ltd. (229 ITR 383 SC). Assessee’s claim is that adjustment has been made u/s. 40A(2) under domestic transfer pricing adjustment u/s. 92BA. Learned counsel submitted that the assessee and its AE have identical taxation rate. For this he produced income tax return computation. Referring to the above learned counsel stated that in such circumstances, issue become tax neutral and hence no adjustment u/s. 40A(2) is warranted. For this proposition, learned counsel referred to the decision of Hon'ble Apex Court in the case of Glaxo Simithkline (236 CTR 311) and Hon'ble Bombay High Court decision in the case of CIT Vs. Indo Southern (310 ITR 30).
19. Per contra, learned Departmental Representative submitted that it was pursuant to observations of Hon'ble Apex Court in the case of Glaxo Smithkline (supra) that section 92BA(1) amended was bringing into account. Hence, learned Departmental Representative submitted that submission of the assessee’s counsel is not tenable.
20. Upon careful consideration, we fail to understand as to how this line of argument supports the case of Revenue. We note that although under 92BA adjustment has been made with reference to 40(2)(a). It has been found by Hon'ble Apex Court that when tax rates are identical, the issue become tax neutral and hence no adjustment in this regard is required. Similar ratio is emanating from Hon'ble Bombay High Court decision in the case of Indo Southern. In which Hon'ble Bombay has referred to CBDT circular which itself mandates that when the assessee and related concerns is in the same tax bracket no adjustment is required.
21. Accordingly in the background of the aforesaid discussion and precedent, we are of the opinion that the assessee deserves to succeed on this ground. Hence, we remit this issue to the file of Assessing Officer. The Assessing Officer shall compare rate of the assessee and its AE and if the same
8 M/s. Lalit Pipes and Pipes Limited is found to the comparable availability, no adjustment is required in this regard.
Order has been pronounced in the Court on 7.6.2019.