YOUNG BUHMWOO INDIA COMPANY PVT. LTD.,KANCHEEPURAM vs. AIT, CHENNAI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the assessee against the Order dated

03.08.2016 of Dispute Resolution Panel-2, Bangalore, in DRP File

No.524/DRP-2-BNG/2015-16 for the AY 2012-13 and raised the following

grounds:

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Grounds of Appeal:

1.1 The Final Order passed by Assistant Commissioner of Income Tax is bad in law and liable to be quashed.

1.2 The DRP’s order has also violated principle of natural justice and hence the DRP order is also liable to be quashed.

1.3 On the facts and in the circumstances of the case and in law, the learned TPO erred in not demonstrating that the motive of the Assessee was to shift profits outside of India by manipulating the prices charged in its international transactions, which is a prerequisite condition to make any adjustment under the provision of Chapter-X of the Act.

1.4 The Dispute Resolution Panel (DRP) omitted to address certain key submissions made with respect to draft order issued by AO is bad in law.

2.1 The TPO also erred on facts and in law in not adding back ‘Depreciation’ of tested party as well as comparable companies, to eliminate the difference in methods followed.

3.1 The TPO also erred on facts and law in not considering power related adjustment as the company mainly caters to single OEM and located in power-starved area in Sriperumbudur, Tamil Nadu.

5.1 The TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in risk profile between the Assesse and the comparable companies.

11.1 The Honorable DRP has erred in law and on facts in not taking cognizance of the objections filed by the Appellant mentioned above in relation to the draft assessment order/TP Order issued by the AO/ TPO in the proceedings before them. 12. The Appellant craves leave to add or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal.

The Appellant submits that the above grounds are independent and without prejudice to one another.

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2.0 Background of the Company:

M/s.Young Buhmwoo India Company Pvt Ltd is a subsidiary of

Buhmwoo Co Ltd, South Korea which holds 60.43% of the shares, with

Buhmwoo Chemicals Co Ltd, South Korea holding 23.74%. The balance

15.83% of the shares are held by Yushiro Chemicals Co Ltd, Japan. The

assessee was incorporated as Private Limited Company under the

Companies Act 1956, during November 2005. The Company is having its

manufacturing facility in Sriperumbudur, Kanchepuram District, Tamil

Nadu. The Company is engaged in lubricant sector, manufacturing Cavity

Wax, Under body Wax, Hydraulic oil, Way lube oil, Gear oil, Spindle oil,

Vacuum oil, Compressor oil, Cutting oil, Press oil, Cleaning oil, Anti rusting

oil & Discharging oil. Other than these main products, the Company also

manufacture specialty products like Orchard spray oil & Knitting oil. Apart

from the above mentioned oil, the Company is importing Heat Treatment

Oil, Rolling oil, Automotive Rust Preventives & Grease directly from its

parent company and delivering to customers as per their need and

requirements & provides technical support to all their customers. The

Company basically caters to automotive industry Original Equipment

Manufacturers (“OEM5”) s like Hyunda Motors and rest to engineering

industries.

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3.0 Assets employed and risks carried:

Land & building and other infrastructure, Human Resources and

intangibles are used in manufacturing and trading functions of the

assessee company. Product Quality Risk, inventory Risk, Collection Risk,

Foreign Exchange Risk and Man Power Risk are carried by the assessee

company. Technology Upgradation Risk is carried by the Associated

Enterprise. (“AE”) of the assessee company.

4.0 The assessee has entered into an international transaction for

import of raw material and semi finished products for an amount of

Rs.18,22,07,656/-. The Assessing Officer (in short ‘AO’) referred the

international transaction to the TPO for determining the Arms Length Price

(in short ‘ALP’). As per the TP document, the comparables provided by

the assessee were M/s.Continental Petroleum Ltd., and Nandan Petrochem

Ltd. The assessee has adopted the TNMM as most appropriate method for

computing the ALP. The assessee computed the average margins of the

above companies at 6.71% before risk adjustment @5% and after risk

adjustment the mean margin was 1.71%. Not being impressed with the

computation of the mean margin arrived by the assessee company, the

TPO has issued show cause notice and conducted independent search

process and selected the same set of comparables selected by the

assessee. The Operating Margin computed by the assessee is as under:

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Depreciation Amount in INR Sales 330,559,064 Service Income 29,429,011 Operating Sales (A) 359,988,075 Raw material cost 270,986,418 Increase /Decrease in stock (26,657,466) Payment & Benefits for Employees 51,427,878 Manufacturing Expenses 5,463,239 Administrative Expenses 21,659,037 Excise Duty 36,609,956 Depreciation 11,467,435 Finance Charges 74,227 Operating Cost (B) 368,030,724 Profit before tax(PBT) C=(A-B) - 8,042,649 Add: Finance Charges (D) 74,227 Profit before Interest and tax (PBIT) E=(C+D) -7,968,422 Add: Depreciation (F) 11,467,435 Profit before interest, tax. Depreciation and amortization 3,499,013 (EBITDA) (G)=(E)+(F) Add: Power related adjustment as mentioned in para 6.10(H) 4,04,904 Adjusted Operating Profit I= (G+H) 3,914,924 Profit on Sales % J = (I/A*100) 1.09% Add: Longer Credit Period Adjustment as per Annexure 1A (K) 2.05% Adjusted Operating Profit (L) = (J) + (K) 3.14%

5.0 The assessee has made the adjustments in computing the operating

margin with regard to the excise duty, power related adjustment, long

period credit, adjustment for depreciation and Forex loss as non-operating

cost. The TPO has rejected the adjustments sought by the assessee and

re-worked the PLI of the assessee at (-)14.20% as under:

Sales 33,05,59,064 Less: Excise Duty 3,32,73,825 Operating Sales 29,72,85,239

Operating Cost 33,99,33,977 PBIT (4,26,48,738) Add: Forex loss 4,12,270 Adjusted Operating Profit (4,22,36,468) Profit on Sales -14.20%

6.0 Against the PLI of (-) 14.20% of the assessee the TPO determined

average mean of 6.16% of comparables M/s.Continental Petroleum Ltd.,

and Nandan Petrochem Ltd. as under:

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Name of company / Continental Nandan Expression Petroleum Ltd Petrochem Ltd Operating income 19.22 140.78 Operating exp 18.02 132.23 Operating profit 1.20 8.55 OP/OL 6. 24% 6.07% Mean 6.16% -

7.0 With the average margin of 6.16% the TPO determined the ALP as

under:

Description Assessee’s margin(A) - 14.20% Comparable margin(B) 6.16% Difference in margin(C) = (A) +(B) 20.36% Total revenue for the year (D) Rs.33,05,59,064 Arm’s length cost (E) = 79.64% of (D) Rs.26,32,57,239 Actual cost as per books (F) Rs.33,99,33,977 AE Cost (G) Rs.18,22,07,656 Proportion of AE cost to total cost (H) = (F)/(G) * 100 53.60% Proportionate Arm’s Length Cost (I)=(E) * (H) Rs. 14, 11,05,880 Downward adjustment to cost (J)=(G)-(I) Rs.4,11,01,776

8.0 The TPO determined the ALP at Rs.14,11,05,880/- against the actual

cost of goods as per books at Rs.18,22,07,656/- and suggested for

downward adjustment of Rs.4,11,01,776/-. The AO issued draft show

cause notice on receipt of Order from the TPO and the assessee filed

objections before the Dispute Resolution Panel (in short ‘DRP’) by raising

various grounds. The DRP has issued directions to the AO to work out the

ALP cost for total cost base of the assessee instead of restricting it to

proportionate AE cost and the AO/TPO reworked the ALP as per the

direction of DRP which worked out Rs.2,47,40,797/- as against original

adjustment of Rs. 4,11,01,776/ and concluded the assessment, on total

income of Rs.1,58,28,140/- against the returned loss of Rs.93,24,923/-.

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Against the order of the AO passed u/s.143(3) r.w.s.144C the assessee

has filed the appeal before this Tribunal.

9.0 Appearing for the assessee, the Ld.AR invited our attention to Para

No.5.7 and 6.0 of the DRP Order wherein the DRP has directed the

AO/TPO to work out the ALP of the cost which is extracted as under:

5.7 Thus adjustment u/s.92CA in above example works out to Rs.10/-, which is the same as presumed above in the example. Now if the argument of the assessee is accepted then adjustment of only 37.50% of Rs.10 i.e. Rs.3.75/- can be made which is evidently not correct. So this argument of the assessee is devoid of any merit and thus cannot be accepted. Any impact on the basis of calculation of ALP by MAM (here TNMM) has to be considered as adjustment u/s.92CA and the same cannot be proportionately reduced by considering that a part of the purchases was from non AE also. Whatever is the reduction in the margin of the assessee vis-a-vis comparables is on account of inflated purchases from AE and the same gets considered when ALP is calculated by applying TNMM. The AO/TPO is directed to work out the ALP cost for the total cost base of assessee and effect full downward adjustment rather than restricting the same proportionately to AE cost only. 6.0 As regards objection in ground 10, it is seen that AO found that an amount of Rs.3,09,19,951/- has been reflected as service income received by the assessee in form 26AS. This income is shown to be received from M/s.Hyundai Motors India Ltd., and M/s.Kukdon Cooland India Pvt. Ltd. And TDS to the tune of Rs.6,18,435/- has been made. However, the assesse has shown an amount of Rs.2,74,57,882/- only in its P&L A/c as service income received. Hence, the difference of Rs.34,62,069/- (3,09,19,951- 2,74,57,882) shown less as service income was added by the AO. The action of the AO is fully justified. However, in view of claim by the assesse before this Panel that the difference is on account of service tax and TDS pertaining to the income for FY 2010-11, the AO is directed to provide an opportunity to the assesse to produce details and evidence before him and the AO will consider the same and decide the matter as per law.

The Ld.AR argued that as per the direction of DRP, it has set-aside

the matter to the file of the AO/TPO to work out the ALP cost for the total

cost base and effect full downward adjustment rather than restricting the

same proportionately.

In this connection, the Ld.AR invited our attention to Sec.144C of

Income Tax Act (in short ‘the Act’) and argued that the DRP has no power

to remit the matter back to the file of the AO. The DRP has only power to

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call for enquiries, determine the ALP and issue directions. Therefore, the

Ld.AR argued that the entire case should be remitted back to the file of

the DRP on transfer pricing issue. On the other hand, the Ld.DR has relied

on the lower authorities Orders.

10.0 We heard the rival submissions and perused the material placed on

record.

We have also carefully gone through Sec.144C of Income tax act

and the relevant provisions of Sub.Sec.7 & 8 are extracted as under:

[Reference to dispute resolution panel. 3 144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward3a a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. (2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order (a)…….. (7) The Dispute Resolution Panel may, before issuing any directions referred to in sub- section (5),— (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order.

11.0 From Sub.Sec.8 of Section 144C of the Act, the DRP is empowered

to confirm or reduce or enhance the variations proposed in the draft

Order. But there is no power vested with the DRP to set-aside or issue

direction under Sub-sec.5 for further enquiry. In the instant case, as

evident from Para No.5.7 and para 6.0 the DRP has remitted the matter

back to the file of the AO/TPO for re-working the ALP. Therefore, we are

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of the considered opinion that the issue should go back to the file of DRP

for conducting the enquiries on its own and determine the amount of ALP

and issue necessary the directions to the AO/TPO to make the

adjustments. Accordingly, all the transfer pricing issues are remitted back

to the file of the DRP to decide the objection of the assesse and decide

afresh on merits. The appeal of the assessee is allowed for statistical

purposes.

12.0 Ground Nos.1.1 to 7 & 11 stands remitted to the file of DRP and

allowed for statistical purposes.

13.0 Ground No.8 is related to set off of earlier year brought forward

losses and Ground No.9 is related to the MAT credit u/s.115JAA of the Act.

The Assessing Officer has not allowed the set off of earlier year

brought forward losses from the assessed income and no reasoning is

given for not allowing the setoff. The Ld. A.R requested for set off of

earlier losses against the assessed income. Neither the AR nor the Ld.DR

furnished the details of earlier year losses which were brought forwarded

to the current year. Similarly the details regarding the fares paid under

MAT provisions in the earlier years and balances to be adjusted are

required for adjudicating the issue. The Ld.AR and the Ld.DR could not

furnish the details with relevant evidences and orders. Both the issues

require verification from the assessment records and both the parties have

agreed to remit the matter back to the file of the AO to verify the

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assessment records and allow the carry forward unabsorbed losses of earlier years and allow MAT credit. Accordingly, both the issues are remitted to the file of the AO with a direction to set off earlier year’s losses and to allow the taxes paid under MAT Provisions after due verification. Ground Nos.8 & 9 are allowed for statistical purposes.

14.0 Ground No.10 is related to the interest u/s.234B of the Act which is consequential and mandatory in nature. The Ld.AR has not made any argument on this issue. Therefore, this ground is dismissed.

15.0 In the result, the appeal of the assessee is dismissed.

Order pronounced in the Open Court on 19th April, 2017, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) ("ड.एस. सु�दर $संह) (N.R.S. GANESAN) (D.S.SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai, 5दनांक/Dated: 19th April, 2017. TLN

आदेश क0 .�त$ल6प अ7े6षत/Copy to: 4. आयकर आयु8त/CIT 1. अपीलाथ-/Appellant 2. ./यथ-/Respondent 5. 6वभागीय .�त�न�ध/DR 3. आयकर आयु8त (अपील)/CIT(A) 6. गाड* फाईल/GF