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Income Tax Appellate Tribunal, DELHI ‘I-2’ BENCH, NEW DELHI
By way of this appeal, the Assessing Officer has challenged correctness of the order dated 6th August 2014 passed by the learned CIT(A), in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2009-10.
The grievances raised by the assessee are as follows:
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the adjustment of Rs. 1,71,62,986/- to Rs. 83,05,263/- on account of International Transaction related to import of raw material considering the percentage of Raw Material consumed by the appellant for the export to the AE at 68.78% without proper basis.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) had erred in deleting an addition of Rs. 3,04,51,071/- made by the AO on account of International Transaction related to Export of Finished goods.”
DCIT Vs. W Diamant India Ltd Assessment year: 2009-10 Page 2 of 4 3. Briefly stated, the relevant material facts are like this. The assessee before us is a wholly owned subsidiary of Wheelabrator Allevard SAS France, and is engaged in the business of manufacturing diamond tools and trading in abrasives. The assessee imports abrasives, as also certain raw materials for manufacture of diamond cutting tools, from its aforesaid AE and the assessee also exports diamond cutting tools to, amongst others, its AE. The international transactions entered into by the assessee, with its AEs, included import of finished goods for resale (Rs 6,58,28,416), import of raw material (Rs 6,12,50,720) and export of finished goods (Rs 5,06,87,527). During the course of assessment proceedings, the ascertainment of arm’s length price of its intra AE transactions was referred to the Transfer Pricing Officer. So far as ALP of the exports to AE was concerned, The TPO noted, based on the computations set out at page 12 of the TPO’s order, that the OP/Sales margin of the assessee is -59.46%. The TPO adopted Dies and Tools Ltd and Rapicut Carbides Ltd as comparables, for applying TNMM, which showed OP/Sales at 6.58% and 12.92% and OP/TC at 7.01% and 11.44% respectively. The average OP/Sales was thus computed at 9.75%, and OP/TC was computed at 9.22%. It was in this backdrop and adopted OP/TC at 9.22% as arm’s length margin that, as against exports of Rs 5,06,87,527 shown by the assessee the ALP of exports, by adding 9.22% to the cost base of Rs 7,42,88,893, was computed at Rs 8,11,38,328. An ALP adjustment of Rs 3,04,51,071 was accordingly made by the TPO. So far as the benchmarking of imports from AEs was concerned, the TPO noted the case of the assessee that such benchmarking is subsumed in the ALP determination of the exports but rejected the same on the ground that since assessee has significant exports to non AEs as well, such an ALP adjustments affects the transactions not only with AEs but also non AEs. The assessee did attempt to justify the prices paid for imports on the basis of internal CUP inputs but the application of CUP was rejected on the ground of lack of strict comparability. The TPO thus adopted OP/Sales at 9.75% as valid TNMM basis, and accordingly made an adjustment of Rs 1,71,62,946. On this basis, the total adjustment of Rs 4,76,14,017 (i.e. Rs 1,71,62,946 plus Rs 3,04,51,071) was recommended by the TPO which is what was adopted by the Assessing Officer. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) deleted the adjustment of Rs 3,04,51,071, in respect of exports, by observing that “after allocating the expenses on the basis of actual expenditure, the appellant has shown that its margin in respect of AE segment (OP/TC) is 9.53% whereas the average margin (OP/TC) of the comparable cases is 9.22%” and “since the margin of appellant falls within the range of + 5%, as provided in proviso to Section 92C(2) of the Income Tax Act, the AO/TPO is directed to delete the TP adjustment of Rs 3,04,51,071 in respect to the exports to the AE”. As regards the ALP adjustment of Rs 1,71,62,946 in respect of imports from the AE, the CIT(A) restricted the said ALP adjustment to Rs 83,05,263 by observing as follows: 5.3 The appellant has stated that the appellant company had submitted the cost sheet before the TPO showing the expenses actually incurred towards a particular segment. The TPO benchmarked the international transaction related to the Import of Raw Materials in the ratio of Turnover without considering the cost sheet. The appellant has stated that the purchases has to be allocated on actauls and should not be segregated on the basis of turnover. The percentage of raw materials consumed by the appellant to the export to AE's is 68.78% (value in Rs. 42,127,962) and it has already been benchmarked. The raw materials of Rs. 19.122.757/- being 31.22% of the total raw materials remain to be benchmarked. While benchmarking the import of raw materials, the TPO has treated the technical knowhow as operating expenses and DCIT Vs. W Diamant India Ltd Assessment year: 2009-10 Page 3 of 4 applied the margin of -59.46% and computed the resultant sale at Rs.24,798,359. The TPO has computed the adjustment for the import of raw materials in the following manner; "The operating loss is Rs. 14,745,105. Using this as a base the ALP is calculated as under Operating profit @ 9.75% : Rs. 2,417,840 Operating profit shown :(Rs.l4,745,106 Arm's length value of purchases (benchmarked Here) : Rs.22,380,518 Value shown (benchmarked here) : Rs.39,543,464 Adjustment u/s 92 CA : Rs. 17,162,946
I have already held that the technical knowhow should be treated as non-operating expenses and the cost of raw materials should be allocated on the basis of actuals. The percentage of raw materials consumed by the appellant for the export to AE's is 68.78%. Thus the raw materials of Rs. 42,127,962/ related to exports based on actuals have been already benchmarked. The import of raw materials amounting to Rs. 19,122,757/- has not been benchmarked. As per the computation filed by the appellant, the overall operating loss is Rs 4,95,80,411/- and the total turnover is Rs 13,28,39,971/. Treating the technical knowhow fee as non-operating expenses, the revised margin (OP/Sales) is computed at -37.32% instead of -59.46% and the resultant sale is computed at Rs 1,19,86,144/- instead of Rs.2,47,98,359/- as computed by the TPO. Using this as a base, the ALP is recomputed as under: Average margin of the comparables (OP/Sales) : 9.75% Operating Profit @9.75% : Rs 11,68,650/- Arm's length value of purchases : Rs 1,08,17,494/- Value shown the import of raw materials : Rs 1,91,22,757/- Difference : Rs 83,05,263/- Accordingly, the addition on account of benchmarking the import of raw materials from AE is restricted to Rs 83,05,263/- instead of Rs.1,71,62,986/-. Thus the appellant gets a relief of Rs. 88,57,723/-.”
The Assessing Officer is aggrieved by the relief so granted by the CIT(A) and is in appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
We find that, as fairly accepted by the learned counsel for the assessee, the specific computations and cost sheets based on which the CIT(A) has granted by the impugned relief in respect of ALP adjustments on export sales and raw material imports have not been produced before us. In any event, there is no material on record to even suggest that the CIT(A) had confronted the AO/TPO with these computations filed by the assessee and that the AO/TPO had any opportunity to be heard in respect of the same. When we pointed out this position to the learned counsel, he did not dispute this position but suggested that the matter may be adjourned for some more time so as to enable him to obtain the requisite documents from the assessee. We have noted that this matter has been adjourned on quite a few occasions, at the request of the assessee, and, in our considered view, no useful purpose will be served by keeping it pending further. The assessee has at the time of last hearing a DCIT Vs. W Diamant India Ltd Assessment year: 2009-10 Page 4 of 4 detailed paper-book but he could not point out specific document dealing with, beyond on some vague generalities, our question on the computations and the explanations for variations between the computations of the TPO vis-à-vis the computation by the assessee. Learned CIT(A) has clearly proceeded to give his decision on the basis of certain cost sheets and computations but then not only these computations were required to be examined and the variations in the computations should have been reasonably probed, all the material should have been confronted to the AO/TPO. Learned counsel has laid lot of emphasis on the fact that so far as treatment for payment to know how is concerned, which was treated as an operating cost by the TPO, is concerned, the CIT(A) has already held that this is a capital cost and only depreciation in respect of the same is to be allowed- a finding against which the Assessing Officer is not in appeal, the matter rests at that. This, however, is not entirely correct inasmuch as, even after making this adjustment, the ALP adjustment, even if not in entirety, will survive because of the variations in allocation of expenses. What has been said to be allocation of expenses on the basis of actual, is not, nor the evidences in support therefore, are before us. When the very basis on which the impugned relief is granted, which was never confronted to the AO/TPO at the first appellate stage anyway, is not available on record, we have no choice but to remit the matter to the file of the CIT(A) for fresh adjudication after confronting all such material, based on which he takes his judicial call, to the AO/TPO and calling for the remand report on the same. Of course, as learned counsel rightly points out, so far as the payments for know how being treated as operation cost is concerned, that has been decided in favour of the assessee, and that matter rests there. There are, however, other adjustments as well- as we have pointed out. We, therefore, direct the CIT(A) to decide the matter afresh in the light of our above observations. While doing so, he will give due and reasonable opportunity to both the parties, decide the matter in accordance with the law and by way of a speaking order dealing with variations in the computations of the assessee vis-à-vis that of the TPO. Ordered, accordingly.