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Income Tax Appellate Tribunal, DELHI BENCH ‘I’ -1 NEW DELHI
Before: SHRI R.S. SYAL & SHRI SUDHANSHU SRIVASTAVA
PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER This appeal has been filed by the assessee against the order dated 31/10/2016 passed by the AO subsequent to the directions of the Hon’ble DRP-1, New Delhi vide order dated 23.8.2016 and pertains to assessment year 2012-13.
Following grounds have been raised by the assessee:-
“On the facts and in the circumstances of the case and in law-
The impugned order passed by the ACIT, Circle-5(1), New Delhi u/s. 143(3) read with section 144C of the I.T. Act following directions of Ld. DRP-1 u/s. 144 (5) of the Act is unjustified and wrong in computing the total income at Rs.67,84,771/- as against the returned loss of Rs.73,53,082/-;
2. That the Ld. DRP-1 erred in confirming addition of Rs. 1,41,36,214/- by recalculating ALP (Arm’s Length Price) of international transaction u/s 92 CA(5) of the Act;
3. That the Ld. DRP-1 erred in confirming AO/TPO's action in applying the derived operating ratio of 7.98% on the revenue corresponding to the international transaction under CUP (Comparable Uncontrolled Price) method;
4. That the Ld. DRP-1 erred in rejecting the calculation of ALP by the Appellant by applying TNMM (Transaction at Net Margin Method) on the revenue corresponding to the international transaction as had been done by the Assessing Officer in Appellant's own case in AY 2008-09;
5. That the Ld. DRP-1 erred in not following the rule of consistency when there is no difference in the facts of the case for the assessment year in question;
6. That the Ld. DRP-1 erred in confirming AO/TPO's action in applying the operating profit ratio on the entire turnover instead of doing so with the turnover generated due to transaction with associated enterprises;
That the Ld. DRP-1 erred in confirming AO/TPO’s selection of ITDL Imagetic Limited and Tirupati Inks Limited amongst the set off comparable companies when they are wholly manufacturing companies while Appellant is entirely in trading business;
That the Ld. DRP-1 erred by not deducting the amount of Rs.36,98,683/- from the adjustment amount calculated by AO/TPO which had already been added back by the Appellant in the computation of taxable income;
That the Ld. AO erred in charging interest u/s 234A, 234B, 234C and 234D of the Income-tax Act, 1961;
That the Ld. AO erred in initiating penalty proceedings u/s 271 (1) (c) of the Act.
The Appellant craves leave to add, delete, modify all or any of the above grounds of appeal.”
The brief facts of the case are that the Assessee Company is engaged in the business of trading of roller, chemical, blanket, Testing equipments, liner, web cloths and other items related to printing industry. It imports material manufactured by the Felix Boettcher GMBH & Co. KG, Germany, Boettcher Thailand Limited, Thailand and KB Roller Tech Koplerwalzen GMBH, Germany and market the same to Indian printing industry. It is a subsidiary of Boettcher Holding GMBH & Company, Germany which makes products related to the printing industry. The materials purchased were sold without further processing the same. The Assessee Company filed its return for the AY 2012-13 u/s 139(1) of the Income-tax Act, 1961 (hereinafter called ‘The Act’) declaring loss of Rs.73,53,082/-. As per Form 3CEB filed along with the return for the AY 2012-13, the assessee had entered into international transactions with its associated enterprises/concerns during the year. Accordingly, a reference was made by the AO to the TPO to determine arm's length price u/s 92CA (3) of the Act in respect of international transaction entered into by the Assessee-Company. Order u/s 92CA (3) of the Act was passed by the TPO after rejecting the ALP calculated by the assessee and deriving operating profit ratio of 7.98% on the comparable companies and applying the same on the entire turnover instead of applying it on the turnover generated from transactions with associated enterprises. The AO proceeded to add back an amount of Rs. 2,08,34,782/- as adjustment to the ALP. The AO also did not allow the benefit of deduction of Rs. 36,98,683/- from the ALP adjustment which had already been added back by the assessee in its computation of income.
2.1 Aggrieved, the assessee approached the Hon’ble DRP-I, New Delhi against the AO's draft order for directions u/s 144C (5) of the Act. Hon’ble DRP-I partly endorsed the view of the TPO and approved the draft order. They directed AO/TPO to consider only the transaction with the AE's for adjustment and also directed to exclude the self adjustment made by the assessee and to include the foreign currency exchange loss in the cost attributable to international transaction.
2.2 Following these directions of the Hon’ble DRP partly, the TPO revised the amount of adjustment u/s 92CA of the Act from Rs.2,08,34,792/- to Rs. 1,41,36,214/- u/s 92CA(5) of the Act.
The AO, however, took the same amounts as originally taken for the AE transactions in the impugned order. Accordingly the AO computed the total income as under:
Business Loss as per return - Rs.73,53,082/- Adjustment made u/s 92CA(3) as per Para 4 above - Rs.1,41,36,214/- Addition of Interest Income (Para 5) Rs. 1,639/- Total income - Rs. 67,84,771/- 2.3 Now the assessee is before the ITAT against the order giving effect to the order of the Hon’ble DRP.
The Ld. AR submitted that the Appellant objects to the aforesaid orders and adjustment made u/s 92CA (3) of the Act by the AO in its appeal and assails the same and pleads for correction. The Ld. AR submitted that on ground No. l it is submitted that the computation of total income at Rs.67,84,771/- as against returned loss of Rs.73,53,082/- in the impugned order is unjustified and wrong. The returned loss is supported by the books of accounts which are audited by Chartered Accountants as also by the Accountant's report in Form 3CEB. It was submitted that the Appellant duly complied with the requirements of sec. 92E and Rule 10E and Form No.3CEB in which no specific defect had been pointed out by the AO/TPO. It was that the returned loss may be accepted as fully explained and supported by books of accounts, documents, etc. as required in law. Further, it was submitted by the Ld. AR that the corrections for AE-related transactions and self additions and AE rate adjustments, as directed by the Hon’ble DRP, be also directed to carried out by the AO.
3.1 The Ld. AR further submitted that Ground Nos.2, 3, 4 and 5 are inter-connected and that they are directed against the addition of Rs. l,41,36,214/-by recalculating ALP of international transactions u/s 92CA(5) of the Act. It was submitted that the Appellant-Company applied TNMM method i.e. Transactional Net Margin Method on the revenue corresponding to the International transaction as had been done by the AO in Appellant’s own case in AY 2008-09. The Ld. AR submitted that in the appeal for the AY 2008-09, the Hon’ble DRP had held as under:
"4.1 DRP has considered the submission of assessee and conclusion of the TPO. Accordingly no interference in choice of method i.e. TNMM by the TPO in view of facts is called for. However Forex loss has directly impacted the revenue for this year hence in our view must be included in cost attributable to International transaction.
The TPO is directed to accordingly recalculate ALP. Objection is partly accepted.”
3.2 The Ld. AR further submitted that the the AO/TPO/DRP-I were not justified in ignoring the past method adopted by the Department in this case. Their action in rejecting the TNMM method and applying altogether new method i.e. CUP method in the assessment year in question were erroneous, unwarranted and uncalled for. The facts of the case in the assessment year in question were similar to those in the AY 2008-09. There was no justification for deviating from the earlier method which had also been confirmed by the Hon’ble DRP in AY 2008-09.
3.3 It was further submitted that the Appellant had maintained complete records, documents and information as required u/s 92D and Rule 10D. No specific defects had been pointed out. AO/TPO did not point out any failure on the part of the Appellant in complying with the requirements of sec.92D and Rule 10D. The Ld. AR submitted that Sub. Sec. 3 of section 92C provides that the AO may intervene only if he is, on the basis of material or information or documents in his possession, of the opinion that the price charged in the international transaction has not been determined in accordance with sub- section 1 and 2 of section 92C or information and documents relating to international transactions have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section 1 of section 92D of the Act and the Rules made there under or the information or data used in computation of the ALP is not reliable or correct or the assessee has failed to furnish any information or documents which he was required to furnish by a notice issued under sub. Sec. 3 of section 92D of the Act. It was submitted that AO/TPO/DRP-I did not point out any of the circumstances applicable in Appellant's case. They rejected the Appellant’s transfer pricing arbitrarily. It was urged that the addition of Rs. l,41,36,214/- may kindly be deleted.
3.4 It was further submitted by the Ld. AR that during the year 2011-12 relevant to AY 2012-13, the Appellant had purchased goods from Associated Enterprises of Rs.5,34,88,788/- and the total amount of goods purchased including goods purchased from Associated Enterprises aws Rs.13,61,83,125/-. The total turnover of the Appellant during the previous year 2011-12 was Rs.l8,45,31,019/- and the said revenue had been earned by way of sales of goods purchased from Associated Enterprises as well as other non-related parties. It was submitted by the Ld. AR that the Appellant calculated ALP of transactions with associated enterprises under TNMM method and made addition of Rs.36,98,683/- in computation of taxable income. The TNMM method was followed in view of the directions of the Hon’ble DRP as the appropriate method in the Appellant’s case in AY 2008-09 and that there was no justification for deviating from that method and adopting the new method. Sufficient reasons for changing the method were not recorded. Provisions of Rule 10CA was not followed in adopting the new method. The facts of the case in the AY 2012- 13 were similar to that of AY 2008-09. It was submitted that the TNMM method, as followed by the Appellant, in the computation should have been accepted in accordance with the provision of Rule 10CA. There was no circumstance or sufficient reasons as provided in Rule 10CA to follow another method in the current year. It was submitted that the justification given by the authorities for adopting the new method for the current year are not borne out and supported by the provisions of Rule 10CA In assessment year 2008-09 in the order u/s 92CA (3) in appellant's case.
3.5 The Ld. AR also argued against the two comparables included by the TPO and submitted that the comparable cases of M/s ITDL Imagetic Ltd. and M/s Tirupati Inks Ltd. selected by the authorities were in fact not appropriate and comparable because these Companies are wholly manufacturing Companies while the Appellant is entirely in trading business. It was submitted that the risk profile of a manufacturing Company is different from a trading Company and the result of the two are not comparable. It was submitted that ITDL Imagetic Limited is a subsidiary of Indian Toner & Developers Limited. Both these companies have been selected by the TPO as comparable companies. While Indian Toner & Developers Limited is into trading segment, its subsidiary ITDL Imagetic Limited is into the manufacturing business. The operative ratio of ITDL Imagetic Limited is 20.23% while the operating ratio of Indian Toners & Developers Limited is 4.05% only. This shows that risk profile and results thereon of a manufacturing and a trading company could not be compared and the operating results of ITDL Imagetic Limited and Indian Tones & Developers Limited confirm the appellant’s contention. Similarly, Tirupati Ink Limited manufactures printing inks and hence it should not be considered comparable to a trading company. The Ld. AR submitted that the authorities did not follow the provisions of Rule 10C regarding selection of the most appropriate method.
The TNMM method adopted by the Appellant was most appropriate which had also been followed by the authorities in the case in AY 2008-09. The Ld. AR submitted that in Rampgreen Solutions Pvt. Ltd. v. CIT, the Hon'ble Delhi High Court observed that “the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction/entity comparability of controlled and uncontrolled transactions has to be judged, inter-alia, with reference to comparability factors as indicated under Rule 10B (2) of the Income-tax Rules, 1962." The Ld. AR submitted that the TNMM method adopted by the appellant and the resultant computation of ALP may kindly be accepted as proper and reasonable.
Assessment year: 2012-13 3.6 The Ld. AR further submitted that the authorities below also erred in not observing the Rule of Consistency in deviating from the method adopted in AY 2008-09 in Appellant’s case. Attention was drawn to the decision of Mumbai Bench of the ITAT in the case of Clariant Chemicals (I) Ltd. v. JCIT (ITA No.2393/Mum/2011) wherein after finding that there was a similarity in facts of the case in two different years, the Hon’ble ITAT held that “When the facts are same the question will be that whether on the same facts Department can take a different stand for the year under consideration which is against the rule of consistency. When there is no difference in the facts of preceding year where the case of assessee has been accepted by the TPO expressly, then in our considered view TPO cannot take a different stand during the year under consideration as the assessee will be entitled to get benefit of the stand taken by the revenue in immediately preceding year."
3.7 It is further submitted by the Ld. AR that Rules 10A to 10E provide for the factors which are to be considered in selecting the most appropriate method to apply for transfer pricing. Major factors in this regard have been specified to be the availability, Assessment year: 2012-13 coverage and reliability of data necessary for application of the method, the extent and reliability of assumptions required to be made, and the degree of comparability existing between the international transaction and the uncontrolled transaction. It was submitted that the degree of comparability between the international transaction of the Appellant and the uncontrolled transaction of the aforesaid selected companies was nonexistent as while appellant is mere trader, the selected companies for comparison are manufacturers. The method adopted by the authorities below is, therefore, unwarranted and unjustified.
3.8 It was emphasised by the Ld. AR that the Appellant had fully complied with the requirements of sec.92D and Rule 10D in as-much-as it maintained the required information and documents specified by Rules. The Appellant also fully complied with the requirement of Sec.92E and Rule 10E and Form 3 CEB and filed the Accountant’s report in form No.3 CEB which fully supported the computation made by the Appellant. The authorities below did not find anything wrong or otherwise in the Accountant's report in Form No.3CEB and did not point out any material to show that the Appellant had not complied with the Assessment year: 2012-13 requirement of Sec.92E, Rule 10E and Form No.3 CEB.
3.9 On ground no 6, it was submitted that the authorities below did not consider the facts that the revenue from the transactions with unrelated entities was included in the total which should not be part of adjustment u/s 92CA of the Act. It was submitted that the Hon'ble DRP-1 in their order had held appellant's objection as valid and directed to restrict the application of the operating profit ratio of comparable companies on international transactions only. The TPO in his report dated 05.10.2016 to the DCIT noted Hon’ble DRP’s observations but ignored it in his calculation of ALP. This is clear mistake. In accordance with directions of the Hon’ble DRP, the relevant law and rules, the ALP of transactions with associated enterprises only should have been calculated by applying the said operating profit ratio of comparable companies on the turnover generated due to transactions with associated enterprises only. It was submitted that during the year the appellant company achieved operating margin ratio of (-)7.66% and the total value of transactions with associated enterprises of the appellant company was Rs.5,34,88,788/-. The turnover generated due to international Assessment year: 2012-13 transactions with associated enterprises should be calculated by applying the operating margin ratio of the company on the said value of transaction. The resultant turnover comes to Rs.4,96,84,209/-. The operating profit ratio of comparable companies as determined by TPO 7.98% should be applied on the above turnover of Rs.4,96,84,209/- and the resultant ALP will be Rs.4,57,19,409/-. The difference is in negative i.e. (-)
Rs.39,50,000/-. The Ld. AR submitted that as the difference is in negative no addition should be made under transfer pricing rules.
3.10 On ground no 7, the Ld. AR submitted that the TPO worked out average operating ratio to 7.98 of the comparable entities and computed arm’s length price at Rs. 2,08,34,782/- . It was submitted that there was wide variation of operating ratios of the comparable entities selected by the TPO. It was also submitted that comparable cases of ITDL Imagetic Limited and Tirupati Inks Limited selected by the authorities were in fact not appropriate and comparable because these companies are wholly manufacturing companies while the appellant is entirely in trading business. The Ld. Authorities did not follow the provisions of Rule 10C regarding selection of the most appropriate method. The Ld. AR reiterated that the TNMM Assessment year: 2012-13 method adopted by the appellant was most appropriate which had also been followed by the authorities in the case in AY 2008- 09.
3.11 On Ground No.8, the Ld. AR submitted that that the returned loss of Rs.73,53,080/- was computed after adjustment of Rs.36,98,683/- under transfer pricing rules. The AO in his computation of total income took the figure of Rs.73,53,080/- to which he added Rs. 1,41,36,214/-. Thus, the actual addition for ALP is Rs. l,41,36,214/- plus Rs.36,98,683/- whereas as per DRP/TPO it has to be only Rs. l,41,36,214/-. It was further submitted that this issue was raised before the Hon’ble DRP who held appellant’s objection as valid. TPO also referred to that in his report, but he ignored it in his calculation of the amount of ALP to be added and consequently AO also ignored the same in his impugned order.
3.12 The Ld. AR submitted that Ground No.9 is against the charging of interest u/s 234A, 234B, 234C and 234D of the I.T.
Act, 1961and urged that ITAT may direct the AO to modify the order in this regard.
Assessment year: 2012-13 3.13 The Ld. AR submitted that Ground No.10 is directed against initiation of penalty proceedings u/s 271(1) (c) of the Act. Since there was no concealment of income nor furnishing of inaccurate particulars of income by the Appellant the initiation of penalty proceedings u/s 271 (1) (c) of the Act was unjustified and wrong and that the AO may be directed to drop the penalty proceedings u/s 271 (1) (c) of the Act.
The Ld. CIT DR supported the orders of the authorities below.
We have heard the rival submissions and have perused the material on record. It is undisputed and apparent from the directions of the Hon’ble DRP that the Hon’ble DRP in page 3 of its directions dated 23.08.2016 had directed the TPO to calculate the ALP by restricting the adjustment to the international transaction and also allowing credit of amount of Rs. 3698683/- already added back by the assessee in the computation of taxable income. It is very much evident that while passing the order subsequent to the directions of the Hon’ble DRP, the AO has not followed the directions of the Hon’ble DRP in this regard and has Assessment year: 2012-13 proceeded to calculate the ALP by applying the entity level turnover. Therefore, we deem it fit to restore this issue to the file of the TPO/AO for giving effect to the directions of the Hon’ble DRP in a proper manner after verification and after affording due opportunity to the assessee to present its case. Accordingly, ground no. 6 and 8 of the assessee’s appeal stand allowed for statistical purposes.
5.1 As far as ground no. 7 of the appeal challenging selection of two comparables viz. ITDL Imagetic Ltd. And Tirupati Incs Ltd. are concerned, on going through the profiles of these two comparables, it is undisputed that ITD Imagetic Ltd. is not manufacturers printing inks on the other hand, the assessee is a trading company. It is undisputed that the risk profile of a manufacturing company is different from that of a trading company. We are of the considered opinion that the risk profile and the functionality of these two companies being different than that of the assessee company, these two companies should not have been selected as a comparable. Accordingly, we restore these two comparables to the file of the TPO with the direction Assessment year: 2012-13 that these two companies be excluded from the final set of comparables if on verification it is confirmed that both these two companies carry out manufacturing operations. Needless to say, the assessee will be afforded due opportunity of being heard at the time of verification by the TPO. Accordingly, ground no. 7 stands allowed for statistical purposes.
5.2 The ld. AR has agreed that if ground no. 6, 7 and 8 are allowed for statistical purposes, then ground nos. 3, 4 and 5 will become only academic in nature and the same need not be adjudicated. In view of our allowing ground no. 6, 7 and 8 for statistical purposes, ground nos. 4, 5 and 6 are treated as academic.
5.3 Ground no. 9 is consequential.
5.4 Ground no. 10 is premature and is dismissed as such.
In the final result, the assessee’s appeal stands partly allowed for statistical purposes.