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Income Tax Appellate Tribunal, DELHI BENCH ‘I’, NEW DELHI
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’, NEW DELHI Before Sh. N. K. Saini, AM And Smt. Beena Pillai, JM Asstt. Year : 2005-06 ACIT, Vs M/s Dentsply India Pvt. Ltd. Circle-10(1), Plot No. 358, FIES Patparganj, New Delhi Industrial Areas, Delhi-110092 (APPELLANT) (RESPONDENT) PAN No. AAACD3171E Assessee by : Sh. Himanshu S. Sinha, Adv., Sh. Gaurav Bhutani, CA & Ms. Pallavi Chopra, CA Revenue by : Sh. Subhakant Sahu, Sr. DR Date of Hearing : 22.02.2016 Date of Pronouncement : 11.05.2016 ORDER Per N. K. Saini, AM:
This is an appeal by the department against the order dated 15.03.2013 of ld. CIT(A)-XX, New Delhi.
Following grounds have been raised in this appeal:
“1. The Ld. CIT(A) has erred in law and on facts in not considering the commission income and service charges for Ashco Ltd. especially when entity level margins are being considered and such charges constitute 22% of the total income of the said company.
Dentsply India Pvt. Ltd.
2. The CIT(A) has erred in law and on facts in including finance costs/interest expense, which is a non operating item, while arriving at OP/OC of Advanced Micronic Ltd.
On the facts & in the circumstances of the case, Ld. CIT(A) has erred in accepting the figures furnished by the tax payer during the appellate proceedings without reconciling or rebutting the figures of comparables ascertained by the Transfer Pricing Officer.
The appellant craves to leave, to add, alter or amend any ground of appeal
raised above at the time of the hearing.”
3. The grievance of the department in this appeal relates to the working of Profit Level Indicator (PLI) i.e. Operating Profit/total Operating Cost (OP/OC) by taking into consideration two comparables namely Ashco Industries Ltd. and Micronic Devices Ltd.
4. Facts of the case in brief are that the impugned order had been passed by the ld. CIT(A) on the direction of the ITAT vide order dated 02.03.2012 in ITA No. 31/Del/2011. The ITAT in the said order directed the ld. CIT(A) in the following manner: “5…………In view of the foregoing and in the interest of natural justice, especially when the ld. CIT(A) have not confronted the additional material placed before him by the Dentsply India Pvt. Ltd. assessee, to the AO nor allowed any opportunity to the TPO, we have no alternative but to vacate the findings of the ld. CIT(A) and restore the matter to his file with the directions to readjudicate the issues in accordance with law after allowing sufficient opportunity to both the parties. Subject to these directions, ground nos. 2 to 6 in the appeal are disposed of. ” 4. The ld. CIT(A) incompliance to the said direction of the ITAT decided the issue relating to the working of OP/TC and observed that since the TPO selected only two comparables out of the seven comparables selected by the assessee in the TP study, as such the assessee did not object to the use of two comparables, namely, Advanced Micronic Devices Ltd. and Ashco Industries Ltd. The ld. CIT(A) observed that the working of the TPO was based on the data as available in the Prowess database and that the assessee obtained the audited accounts of the aforesaid two comparables from website of Registrar of Companies and thereafter the OP/TC was re-computed and submitted to the then CIT(A) who held that the international transaction was at the arm’s length. However, the then CIT(A) while giving her finding, did not provide any opportunity to the TPO. Therefore, the matter was restored back to the file of ld. CIT(A) by the ITAT in the aforesaid referred to vide order dated 02.03.2012. The ld. CIT(A)
Dentsply India Pvt. Ltd. while adjudicating this issue, forwarded the working of OP/TC alongwith audited profit and loss account and balance sheet furnished by the assessee to the TPO who had given the following comments:
“8. The comment on the submission made bu the assessee:- (i) The assessee has submitted the annual report of the two comparables taken by TPO namely Advanced Micronic Devices Limited and Ashco Industries Ltd as the submission along with calculation sheet of operating income of 7 comparable companies. (ii) According to the submission, assessee has computed the OP/OC of Advanced Micronic Devices Ltd and Ashco Industries Ltd for the year ended March, 2005 at -1.50% and -16.082% respectively. Upon examination it was observed that in calculation of the margins of Advanced Micronic Devices, Commission Income has been kept out of operating income when in fact the same relates to operations. Similarly, in the case of Ashco, the service income has been kept out of the purview of operating income whereas the same is very much an operating component. Interestingly, it may kindly be noted that during the course of TP proceedings the assessee itself has vide submission dated 08.09.2008 included the above figures in the operating income and the margins has been submitted as 4.66% and 8.56% of Advanced Micronic Devices and Ashco respectively. So, on a conservative basis, if we were to adopt the audited financial accounts, the margins would be 4.66 and 8.56%.
Dentsply India Pvt. Ltd. (iii) In the case of advances Micronic Devices Ltd, there is a segment reporting for the healthcare segment. Technically only the results of this segment should have been used. The OP/TC of this segment is calculated as under:-
Segment Revenue: Rs.3609.89 Lacs PBIT : Rs.273.83 Lacs Less: Unallocable expenditure of Rs. 69.67 Lacs (pro rata this segment)
Adjusted PBIT : Rs.204.16 Lacs (B) Cost : Rs.3405.73Lacs(A-B) OP/TC : 5.99% (iv) The assessee did not submit any justification for calculating its own margins as per appendix B of the TP report. Accordingly the TPO was justified in calculating the margin of the assessee at -4.55%.
(v) The fresh calculation of the OP/OC of the two comparables as per the submission made by assessee is as under:-
Advance Micronic Ashco Industries Total income 360384045 Total income 548084865 Les: TDS 1037572 Les: Interest 2930356 Other income 225712 Dividend 50398 Operating Income 359120761 (A) Operating Income 545104111(A) Total expenditure 346011263 Total expenditure 536065179 Less: Financial exp 14253507 Less: Bank charges 3240105 Operating cost 331757756(B) Less on sale Assets 196081 Financial charges 14685942 Total expenditure 517943051(B) Operating Profit 27363005 Operating Profit (A- 27161060 B) (A-B) OP/OC 8.25% OP/OC 5.24% Submitted please.”
Dentsply India Pvt. Ltd.
Thereafter the assessee, in response to the aforesaid comments given by the TPO, submitted to the ld. CIT(A) as under: “On perusal of the Remand Report submitted by learned Dy. Commissioner of Income Tax, Transfer Pricing Officer 1(4), New Delhi on 20th Sept., 2012, we have observed that the learned Assessing Officer has given her comments on submissions made by the appellant at SI No. 8 of the Remand Report. Our reply to the said comments in seriatim are as under:- 1) No comments, since it is a statement of facts of the case. 2) The learned Dy. Commissioner of Income Tax in this paragraph has narrated the statement of facts about exclusion of commission income from operating income in the case of M/s Advance Micronic Devices and service charges income for the purview of operating income in the case of M/s Ashco Industries before the Hon'ble Commissioner of Income Tax (Appeals). The learned Dy. Commissioner of Income Tax further pointed out that:- "it may be noted that during the course of TP proceedings, the assesses itself has vide submissions dated 8th Sept., 2009 included the above figures of operative income and the margin has been submitted 4.56% and 8.56% of M/s Advance Micronic Devices Ltd. and M/s Ashco Dentsply India Pvt. Ltd. Industries Ltd. respectively. So on a conservative basis, if we were to adopt the audited financial accounts, the margins would be 4.66% and 8.56% respectively". In this connection we are enclosing herewith the copy of said report dated 8th Sept., 2009 where at page No. 3, the net profit margin of operating profit of total cost in the case of M/s Advance Micronic Devices Ltd. has been stated to be 4.66% and in the case of M/s Ashco Industries Ltd., it has to be stated 8.56%. This profit margin have been data's derived from "PROWESS Data base" whereas the net margin of profit submitted by the appellant before the Hon'ble Commissioner of Income Tax (Appeals) are from the Audited Statement of Accounts of these companies In the case of M/s Advance Micronic Devices Ltd. and M/s Ashco Industries Ltd. comes to (-) 1.57% and (-) 16.08% which is based on the Audited financial statement of these two companies. The Audited Statement of Financial Results have shown “Other Income” which includes commission / service income but since all these are not related to the nature of assessee's business, therefore, they are being reduced from the net profit. Financial charges and non-recoverable income are also been reduced for the same reason. 3) On perusal of the information given at SL No. (iii), it has been noted that the learned Dy. Commissioner of Income Tax had computed the operating profit / total cost of 5.99% based on the information pertaining to financial year ended 31.03.2006 whereas the pending appeal before Dentsply India Pvt. Ltd. your honour is for assessment year 2005-06, therefore, the information pertaining to financial ended 31.03.2006 is of no use. 4) The appellant had already given the justification for calculating its own margin and the same was accepted by the Hon’ble CIT(Appeals). 5) The table reproduced by the learned Dy. Commissioner of Income Tax has not given any comments.”
The ld. CIT(A) after taking the cognizance of the submissions of the assessee and the report of the TPO discussed the issue by taking into consideration, the two comparables in para 3.4.1 and 3.4.2 of the impugned order as under: “3.4.1. The TPO has not commented on the revised working of the appellant in the case of Ashco Industries except reiterating the calculation given in the TP order. The service charges of Rs.7.98 crores received by Ashco Industries Ltd. should be excluded primarily because the appellant has no such receipts in its income. Even the second comparable company Advance Micronic Devices Ltd. is also not showing such receipts. The appellant is a distributor of materials related to Dental products. Major part of the revenue amounting to around 95% comes from trading activity in the case of the appellant. Therefore, service charges received by Ashco Industries should be treated as remuneration received for unrelated Dentsply India Pvt. Ltd. functions compared to the case of the appellant. Hence, the margin of Ashco Industries should be taken after excluding service charges. Therefore, the margin of this company, OP/OC, calculated at (- )16.082% is to be taken in this case. Advance Micronic Devices Ltd.: 3.4.2. The TPO in her remand report has made an arithmetical mistake while calculating the segmental, OP/TC, of this case. Submission of the appellant is verified with the audited accounts. The TPO in her remand report has taken some figures of financial year 2005-06 instead of taking the figures for FY 2004-05 in this case. Apparently, this confusion/mistake happened because the audited accounts furnished by the appellant for Advance Micronic Devices Ltd. was for FY 2005-06. However, the correct calculation of the segmental relating to health care products is as below: S. Particulars As on As on No. 31.03.2006 31.03.2005 i) Segment Revenue 3609 3935 ii) Profit before Interest 273 233 and Tax iii) Less: Unallocated 193 197 Expenditure iv) Adjusted PBIT (ii-iii) 80 36.00 v) Cost (i-iv) 3,529 3,899 vi) Operating Profit/Total 2.26 0.92 Cost (iv/v) 7. The ld. CIT(A) agreed with the view of the TPO that the segmental accounts should have been taken for benchmarking purposes and that the issue of excluding the commission income was certainly a debatable since the Dentsply India Pvt. Ltd. assessee was not having commission income in its account. The assessee was engaged both in trading and manufacturing of the products of dental care, equipments instruments and material related to teeth. The ld. CIT(A) pointed out that the average margin on cost of the above said two comparables came to -7.58% [(0.92% + (- )16.082%)/2]. The ld. CIT(A) further observed that even if the margin of the assessee was taken at (-)4.55% calculated by the TPO as against -2.11% as calculated by the AO, the margin earned by the assessee was more than that of the comparables. Therefore, the international transaction was held at arm’s length. The ld. CIT(A) also observed that 95% of the revenue of the assessee came from trading activity, therefore, Resale Price Method (RPM) should have been the most appropriate method which had been considered at the documentation stage as well as the transfer pricing proceedings. The ld. CIT(A) also worked out the gross profit earned by the assessee and the comparables as under:
Particulars M/s Advanced M/s Ashco M/s Dentsply Micronic Devices Industries Ltd. India Pvt. Ltd. Ltd. Sale 5445 2719 1868 Other Income 35 2 41 Gross Income 5480 2721 1909 Less: 4083 2126 1423 Expenditure 1397 595 486 G. P. Rate 25.65% 21.88% 26.00% Dentsply India Pvt. Ltd.
The aforesaid calculations were made on the basis of the balance sheet and profit and loss account furnished by the assessee, which were sent to TPO for his verification and remand report. The ld. CIT(A) pointed out that the gross profit rate of the assessee was at 26% as compared to the average profit earned by the two comparables at 23.76%. He, therefore, held that the conclusion drawn by him that the margin earned by the assessee was better than the comparables, was correct.
Now the department is in appeal. The ld. DR strongly supported the order of the TPO and further submitted that the average operating profit earned on the total gross in the case of two comparables i.e. M/s Advanced Micronic Devices Ltd. and M/s Ascho Industries Ltd. came to 7.11% as mentioned by the TPO in para 8.6 of his order dated 25.04.2008 while in the case of the assessee it came to (-) 4.55%. Therefore, the international transaction of the assessee in respect of import of finished goods and raw material entered with its Associated Enterprises were not at arm’s length and that the assessee would have earned a profit of Rs.1,39,13,588/- instead of loss of Rs.89,08,166/-. Therefore, the adjustment of Rs.2,28,21,754/- was rightly Dentsply India Pvt. Ltd. made by the AO on the basis of the calculation done by the TPO.
In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the TPO while working out the OP/OC ratio, have taken the wrong figures of the financial year 2005-06 i.e. the succeeding year instead of taking the figures of the relevant financial year 2004-05 which has been corrected by the ld. CIT(A) in the impugned order and the average margin of the two comparables was worked out at (-)7.58% instead of 7.11% wrongly worked out by the TPO. It was further submitted that the ld. CIT(A) worked out the gross profit rate of the comparables M/s Advanced Micronic Devices Ltd. and M/s Ascho Industries Ltd. at 25.65% and 21.88% respectively whereas the said rate in the case of the assessee was at 26.00%. Therefore, the transaction entered by the assessee was at arm’s length price and arbitrary addition made by the AO was rightly deleted by the ld. CIT(A).
We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is noticed that the arm’s Dentsply India Pvt. Ltd. length price was determined on the basis of two comparables, namely, Advanced Mircronic Devices Ltd. and Ascho Industries Ltd. which remained as final comparables. The TPO worked out the operating profit/operating cost ratio and the average of the said ratio in the case of the above said two comparables came at 7.11% whereas in the assessee’s case it was considered at (-)4.55%. The operating margin was worked out at Rs.1,39,13,588/- by applying operating margin @ 7.11% on the total cost of Rs.19,56,90,403/- instead of operating loss declared by the assessee at Rs.89,09,166/-, accordingly an adjustment on account of arm’s length price was worked out at Rs.2,28,21,754/-. The AO made the addition on the basis of the calculation done by the TPO. However, the ld. CIT(A) vide order dated 29.10.2010, deleted the addition, thereafter the ITAT while adjudicating the issue in vide its order dated 02.03.2005 restored the issue to the file of the ld. CIT(A) because the then CIT(A) had not confronted the AO with the additional material placed before him nor the opportunity was allowed to the TPO. On the direction of the ITAT, the ld. CIT(A) confronted the additional evidence to the TPO and asked his remand report. In response to the said direction, the TPO vide report dated 26.09.2012 worked out the operating Dentsply India Pvt. Ltd. profit/operating cost ratio at 5.24% and 8.25% in the case of Advance Micronics Devices Ltd. and Ashco Industries Ltd. respectively whereas the said ratio in the case of the assessee was at (-) 4.55%. However, in the said report the TPO had taken information pertaining to the succeeding financial year 2005-06, the said mistake was corrected by the ld. CIT(A) and ratio in the case of Ashco Industries Ltd. was worked out at (-)16.08% and in the case of Advance Micronic Device Ltd. at 0.92%. In this manner, the average margin of the two comparables came at (-)7.58% while in the assessee’s case the operating profit/total cost ratio was calculated at (-)4.55% which was better than the average margin on cost in the case of comparables. Therefore, the ld. CIT(A) was justified in holding that the operating profit/total cost ratio in the case of the assessee was better than the average margin on cost of the two comparables. In the present case, it is also noticed that the gross profit rate disclosed by the assessee at 26% was better than the average gross profit earned by the two comparables at 23.68%. In the instant case, the observation of the ld. CIT(A) i.e. the average gross profit rate of the assessee was better than the comparables has not been challenged by the department. We, therefore, considering the totality of the facts, do not Dentsply India Pvt. Ltd. see any valid ground to interfere with the findings given by the ld. CIT(A).
In the result, appeal of the department is dismissed. (Order Pronounced in the Court on 11/05/2016)