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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI G.S.PANNU & SHRI PAWAN SINGH
ORDER PER G.S.PANNU,A.M:
The captioned appeal filed by the assessee pertaining to assessment year 2008-09 is directed against an order passed by DCIT- 8(2), (in short the Assessing Officer ) passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ( in short the Act) dated 11/09/2012, which is in conformity with the direction of the Dispute Resolution Pannel-1, Mumbai ( in short “the DRP”) dated 31/07/2012.
In this appeal, although assessee has raised multiple grounds of appeal, but the solitary grievance is with regard to an addition made by the Assessing Officer on account of the transfer pricing adjustment of Rs.2,41,15,386/-.
3. In brief, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter- alia, engaged in the business of manufacturing of magnetic inductor and transformers. For the assessment year under consideration, it filed a return of income declaring a loss of Rs.98,12,00,900/-, which was subject to scrutiny assessment, whereby the total income has been assessed at Rs.1,44,00,650/-. In the assessment so finalized, a major addition of Rs.2,41,15,386/- has been made, which is on account of determination of arm's length price of the international transaction carried out by the assessee with its associated enterprise M/s.Cherokee International LLC, USA. Notably, assessee is a subsidiary of M/s. Cherokee International LLC, USA and it has undertaken its entire business with its associated enterprise. The total turnover of the assessee for the year under consideration at Rs.6,60,09,364/- is on account of sales made to its associated enterprise. The assessee is undertaking its manufacturing operations at its EOU located in SEEPZ. The factual matrix brought out by the lower authorities reveal that the overseas associated enterprise provides to the assessee raw materials free of cost and after undertaking the manufacturing activity, the finished goods are exported back to the associated enterprise. At the time of hearing, the Ld.Representative for the assessee pointed out that almost 95% of the requirement of raw materials comes to the assessee free of cost from its associated enterprise. The balances of the raw material is quite insignificant and it is procured by the assessee on its own. The Ld.Representative for the assessee also pointed out that during the year under consideration, the assessee company had determined the price chargeable for its services from associated enterprise on the basis of estimated cost plus 6% mark-up on the same. It is pointed out that even in the earlier years, the basis is similar. Since the transactions entered by the assessee with its associated enterprise fell within the definition of ‘international transaction’ as per section 92B of the Act, the Assessing Officer had referred the matter for determination of its arm's length price to the Transfer Pricing Officer. The Transfer Pricing Officer noticed that assessee had declared loss of Rs.1,14,80,070/- in its operations, which was quite unjustified. The Transfer Pricing Officer was of the opinion that the loss is because of under pricing of services rendered to the associated enterprise. The Transfer Pricing Officer also observed that the price determined for the services was not related to actual costs incurred by the assessee but was based on estimated costs, which were not revised for a considerable period of the year under consideration. Accordingly, the Transfer Pricing Officer adopted the average margin of the four comparables selected and comparing it with assessee’s margin of (-)17.42%, determined an adjustment of Rs.2,41,15,386/- for the purposes of arriving at arm's length price. The final assessment order made by the Assessing Officer is based on the aforesaid determination of arm's length price as objections raised by the assessee before the DRP have also been dismissed vide order dated 31/07/2012.
4. Before us, the Ld.Representative for the assessee vehemently pointed out that the business of the assessee was hit due to unavoidable market conditions and that in any case, in the next year it has closed down its business. The Ld.Representative for the assessee pointed out that under- pricing of the services was not the reasons for the losses, but the losses have been sustained on account of adverse market condition. The Ld.Representative for the assessee pointed out that the margin of the comparables which have been adopted is not comparable of the assessee’s margin inasmuch as, assessee receives majority of its raw material from the parent company, which does not belong to the assessee. On the other hand, the comparables are concerns which are full-fledged manufacturers, whereas the assessee is a manufacturer only working for its associated enterprise. It has also been pointed out that the pricing of the product, which is determined on the basis of estimated cost plus 6% mark-up, has been accepted in the past in the assessment year 2007-08 and, therefore, there was no justification for rejecting the same in this year and making the impugned addition.
On the other hand, Ld. Departmental Representative pointed out that the four comparables adopted by the Transfer Pricing Officer are the comparables which have been selected by the assessee in its transfer pricing study except to the extent that the data used by the Transfer Pricing Officer was for the instant year, whereas the assessee had used the earlier years data of the comparables in its transfer pricing study. In sum and substance, she has defended the determination of arm's length price made by the Transfer Pricing Officer.
We have carefully considered the rival submissions. Factually speaking, instant is a case where assessee is a captive manufacturer, undertaking its activities only for its associated enterprise based on 95% of raw material supplied to it free of cost, whereas the comparables that have been selected are independent manufacturers, in whose case risks of business are more pronounced, an aspect which merits appropriate adjustment. Another peculiar feature is the fact that the expenditure incurred by the assessee, inter-alia, includes goods/raw material received from its associated enterprise free of cost. Thirdly, the pricing of the products is made by the assessee on the basis of estimated cost plus profit margin of 6%, a formula which is similar to that adopted in assessment year 2007-08. The order of the Transfer Pricing Officer reveals that the primary reason for him to make the addition was the fact that according to him there was under-pricing of services by the assessee. For this, the Transfer Pricing Officer noticed that the estimated cost determined by the assessee was not revised for a considerable period of time during the year under consideration, whereas an independent party would revise its price as soon as it is found that it is not profitable. In our considered opinion, notwithstanding the aforesaid feature, what is of essence is to establish the arm's length price of the international transactions based on a methodology and mechanism provided under the Act. In that regard, we find that the Transfer Pricing Officer has discussed in para -3 of his order search criteria adopted by the assessee itself, which revealed four comparables. The Transfer Pricing Officer adopted the very same set of comparables but based on the data for the current financial year, an aspect on which there can be no dispute. So however, it is quite evident that some of the search criteria at qualitative level, which was required to be applied, has not been done at all. Notably, assessee asserted before the Transfer Pricing Officer difference in the risk perception vis-a-vis the comparables; another aspect which was asserted by the assessee was the absence of profit element on the raw material cost because 95% of the raw material was free of cost in the hands of the assessee company, whereas the same was not the position in the case of comparables. Another aspect which has been asserted by the assessee was that the basis of pricing the products undertaken by the assessee in this year was the same, which has been acceptable to be an arm's length price in the earlier year. Referring to such formula, the Ld. Representative for the assessee submitted at the time of hearing that in a group concern, the Assessing Officer/Transfer Pricing Officer had itself accepted such a formula as reflective of the arm's length price. Be that as it may, in our view, all these aspects have not been appropriately addressed by the lower authorities, and the same deserve to be considered on their merits. Therefore, in this background, we deem it fit and proper to set-aside the order of the lower authorities and restore the matter back to the file of Assessing Officer/Transfer Pricing Officer for redetermination of the arm's length price of the international transactions carried out by the assessee with its associated enterprise, in accordance with law. Needless to mention, assessee shall be allowed a reasonable opportunity of being heard before a fresh assessment on this aspect is made.
In the result, appeal of the assessee is treated as partly allowed for statistical purposes, as above.
Order pronounced in the open court on 17/05/2017