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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’, NEW DELHI
Before: SHRI J.S. REDDY & SMT. BEENA PILLAI
ORDER PER BENCH:
These appeals are filed by the assessee against the assessment order dated 29.04.2013, passed u/s.143(3) r.w.sec.144C of the Income Tax Act, 1961 for A.Y. 2006-07.
Brief facts in assessee’s case are as under: 2.1 Assessee is one of group company of Degussa AG, Germany, which is the leading producer of precipitated silica in India. Assessee was formed as a joint venture company in 1988. In April 1999, Degussa took-over the majority equity holding, thereby raising its holding to 63%, the balance being widely distributed among public. As of March 31, 2006, Degussa AG holds 73.11% shares of the assessee. Assessee has two state-of-the-art plants in India, located at Gajraula, U.P. (110 km. north east of Delhi) and Patalganga, Maharashtra (75 km. south east of Mumbai). 2.2 Its main customers consist of Indians manufacturing tires, rice hulling rollers, footwear, mechanical rubber goods, in the rubber segment, and plant protection, feed, food, detergents, battery separators and toothpaste customers in the non-rubber segment. 2.3 Assessee has its independent agents and distributors which perform the sales and marketing function. Assessee pays commission to all its agents and distributors for the sales made by them. Degussa India Private Limited, another group company in India, coordinates with these agents and distributors and assists the Assessee in the Sales and marketing of its products in the domestic market and in countries like Bangladesh, Nepal and Sri Lanka. DIPL has it’s headquarter in Mumbai and regional offices in Delhi, Mumbai, Chennai and Kolkata. 2.4 The assessee filed its return of income 02.11.2006 declaring the total income at Rs.2,31,36,857/-. The case was selected for scrutiny. During the assessment proceedings, the assessing officer noticed that the assessee has entered into international transactions, and hence a reference was made to the TPO, u/s.92 CA(3).
2.5 During the year under consideration, the assessee undertook the following international transactions with its Associated Enterprises (‘AEs’):
Description of Amount(Rs.) Transfer Transaction Pricing Method Marketing & 7,88,107 CUP Logistic support Export sales 9,17,27,331 TNMM IT Related Services 5,08,350 TNMM Packing Charges 16,179 TNMM Cost Recharges 62,82,080 CUP 2.6. The above mentioned transactions were duly reported in the Accountant’s Report (Form No. 3CEB), filed along with the assessee’s return of income, for the relevant AY. For the purpose of Transfer Pricing analysis in its TP study for the relevant assessment year, the assessee adopted the Transactional Net Margin Method(TNMM) as most appropriate method(MAM), for determining the Arms length Price(ALP), of international transactions, pertaining to Export sales, IT related services and packing charges. Further, the assessee used CUP as MAM, for determining ALP in respect of marketing and logistic support services and cost recharges. 2.7 The assessee exports goods to its AE’s, which are broadly similar to the exports made to unrelated parties. Therefore, in order to determine the arm’s length price for the exports made to AE’s, the assessee used comparable margin earned from the exports made to unrelated parties.
2.8 For this purpose the assessee segmented the profit and loss account of the company into three segments viz. domestic sales, export sales to AE’s and export sales to non AE’s. 2.9 During the first round of the assessment proceedings, the ld. TPO issued a show cause as to why CUP should not be used to determine the arm’s length price of the Export sales, IT related services and packing charges. The assessee filed its detailed response to the above and explained the business and commercial realities to justify the use of internal TNMM as the MAM, instead of CUP to satisfy the arm’s length nature of the exports made to AEs. 2.10 The ld. TPO observed that assessee has exported the same product to AE’s as well as Non AE’s, and hence the assessee had a domain where direct comparability existed. The ld.TPO further observed the geographical difference in the location of AE’s and Non AE’s is of no consequence as FOB price is taken. The ld.AO rejected the segmental Financials of the assessee, on the ground that the same were unaudited. 2.11. Thus, the ld.TPO applied CUP to be the most appropriate method to determine the ALP of sales, made to AEs and made adjustment of Rs. 49,52,417/-. 2.12. Aggrieved by the order of the ld.TPO, the assessee filed its objections before the DRP. The DRP without going into other issues, upheld the order of the ld. TPO vide his order dated 30.09.2010.
2.13. The assessee preferred appeal before the Hon’ble Tribunal against the order of the DRP. The Tribunal at this stage observed that, the DRP had brushed aside the issues without proper consideration. The Tribunal vide order dated 08.06.2011, remanded the issue back to the DRP for de novo consideration of the issue.
2.14. The ld.DRP accordingly vide his order dated 26.02.2013, observed as under:
“4. The assessee has explained, for the purpose of the arm’s length analysis of the exports made to AEs, the assessee, selected TNMM as the most appropriate method and used internal margins earned from the export to non AEs for the comparability analysis and to determine the arm’s length margin of its related party transactions. Facts on record indicated that assessee has made sale to AEs and non AEs. AE is located in Germany and non AE are in Malaysia, Sri Lanka, Vietnam. In view of DRP there is difference contractual terms as well as difference in geographical and economic in circumstances of the AEs and non AEs, hence CUP method is not appropriate, nor is internal TNMM.
4.1 DRP has noted the appellate history of the assessee with reference to the choice of method.
5. Directions of DRP u/s 144C.
DRP has examined all facts on record and finds TNMM as the most appropriate method. The TPO is directed to recomputed ALP using TNMM after taking suitable external comparables and filters relevant for comparability analysis into account.”
2.15. The ld. TPO, following the directions of DRP, passed the order on 26.04.2013, and computed the adjustment at Rs.3,12,08,723/-, after adopting external comparables.
Aggrieved the assessee is in appeal before us on the following grounds:
“1. The ld. Dy. Commissioner of Income Tax, Circle 11(1), New Delhi (“the Assessing Officer” or the “AO”) in his impugned order dated 29 April, 2013 has erred in confirming the order passed u/s 92CA(3) of the Income Tax Act, 1961 (“Act”) (giving effect to Dispute Resolution Panel’s (“DRP”) directions u/s 144C of the Act) making an addition of Rs. 31,208,723/- to the total income of the appellant on account of adjustment in the arm’s length price (“ALP”) determined by the ld. Transfer Pricing Officer – 1(5) (“TPO”).
2. That on the facts and in law the impugned directions passed by the DRP dated 26 February, 2013 are against proviso to section 144C(8) of the Act as per which the DRP cannot issue any directions for further enquiry, undertaking a fresh search and passing of the assessment order. Hence, the impugned directions issued by the DRP dated 26 February 2013 directing the TPO to conduct a fresh search and re-compute the ALP.
3. That on the facts and in law the impugned order/directions passed by the ld. Assessing Officer/TPO/DRP are bad, unreasonable, unjustified and not sustainable under law as the same has been passed without properly considering the facts and submissions of the Appellant and proper application of mind.
4. That on the facts and the circumstances of the case and in law, the ld. DRP has erred in giving impugned direction that external comparable should be adopted for Transactions Net Margin Method (“TNMM”) and rejected internal TNMM analysis of the Appellant.
5. That the ld. DRP has failed to appreciate the appropriateness of the method used by the Appellant in order to determine ALP, which was accepted by the Income Tax authorities in other year’s assessment proceedings (i.e. for Assessment Years 2007-08, 2008-09 and 2009-10) and Hon’ble Commissioner of Income Tax (Appeals) proceedings (i.e. for AYs. 2003-04, 2004-05 and 2005-06) hence showing inconsistency with the already accepted position of the Appellant and Income Tax authorities.
6. That the ld. DRP has erred in not following the direction and observation of the Hon’ble Tribunal in the order passed in appeal for AY 2006-07 which had directed to pass a proper and speaking direction u/s 144C of the Act.
7. That the reference made to the ld. TPO by the ld. DRP and the additions/adjustments made are illegal and bad in law as the reference had already been made earlier to the ld. TPO and an order dated 20 October, 2009 u/s 92CA(3) of the Act was passed by making an adjustment of Rs. 4,952,417/- and subsequent rectification order dated 25 April 2011 u/s 92CA(3) of the Act reducing the adjustment to Rs. 36,11,840/- on account of difference in the arm’s length price of the international transaction entered between Appellant and its AE’s.
That the ld. DRP has failed to consider and adjudicate the contention of the Appellant that the Assessing Officer has not recorded the reasons based on which he had reached the conclusion that it was ‘necessary and expedient’ in the case of the Appellant to refer the matter for determination of Arm’s length price to back to the TPO.
Without prejudice to our other grounds of appeal, the ld. DRP, Assessing Officer and TPO have erred in law by not issuing showcase notice to in relation to re-computation of arm’s length price of the transaction pertaining to sale of goods by the Appellant to its AE’s, which is contrary to the facts, law and the principles of natural justice and since no opportunity of being heard was provided to the Appellant, the same is void and vitiated.
Without prejudice to our other grounds of appeal
, the ld. TPO has erred in his impugned order dated
26. April 2013 by not accepting the economic analysis undertaken by the Appellant which was in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (“Rules”) for establishing the arm’s length price of the international transactions.
Without prejudice to our other grounds of appeal
, the ld. TPO has erred his impugned order dated
26. April, 2013 by rejecting the segmental analysis carried out by the Appellant for determining the arm’s length margin of its international transactions.
The ld. TPO/Assessing Officer/DRP erred in ignoring the business/commercial reality that the export sales made to associated enterprises is not the primary business of the Appellant and exports to AE’s were made during the year to implement strategic business decision.
Without prejudice to our other grounds of appeal
, the ld. TPO has erred in his impugned order dated
26. April 2013 by rejecting twenty two comparable companies selected by the Appellant in the fresh search conducted and submitted to the ld. TPO as per the directions of the ld. DRP, based on conjectures and surmises, and without any cogent reasons.
Without prejudice to our other grounds of appeal
, the ld. TPO has erred in his impugned order dated
26. April 2013 by considering two additional companies (i.e. Cobat Sanmar Limited and Gujarat Multi Gas Base Chemicals Private Limited) as comparable to the Appellant, by considering similar grounds as considered for rejecting the comparables selected by the Appellant. Further, the ld. TPO has failed to establish the comparability of these two companies considered as comparable with the Appellant in the impugned order.
Without prejudice to our other grounds of appeal, the ld. TPO has erred in facts and circumstances by not accounting for material differences between the tested party and comparable companies.
Without prejudice to our other grounds of appeal
, the ld. TPO has erred in law as per his impugned order dated
26. April 2013 by not applying the Proviso to section 92C of the Act thereby failed to allow the Appellant the benefit of 5% variation from the arm’s length price.
That the Assessing Officer has incorrectly determined the taxable income of Rs. 5,93,44,313/- since the earlier demand of Rs. 49,52,417/- has been double counted, accordingly the demand of Rs. 1,66,69,750/- is also incorrectly determined.
The appellant craves leave to submit such further grounds at or before the hearing of the appeal, so as to enable your Honour to decide the appeal according to law.”
3.1 We have heard the rival contentions. On a careful consideration of the facts of the case, perusal of the papers on record and the orders of the authorities below, we find that the issue before us for consideration is, whether the internal comparables should be adopted over external comparables for the purposes of computing ALP, in respect of transaction pertaining to export of goods. TNMM has been accepted by both the parties as MAM.
3.2 The assessee exports to various AE’s and Non AE’s in different countries are as under:
Export to various AE’s Export to various Non AE’s Germany, Indonesia, Malaysia, Indonesia, Malaysia, Philippines, Philippines Vietnam, Nepal, Sri Lanka, Bangladesh.
The Ld.AR submitted that, it operates in three segments i.e; domestic sales, export sales to AE’s and Non AE’s. She further submitted that, the assessee has applied TNMM for benchmarking this transaction, as it had relevant data for this purpose. The ld.AR submitted that assessee had adopted the internal comparables which has been admitted to be in existence by the DRP (internal page 3 of DRP order dated 30.09.2010), and the ld.TPO in the first round of assessment(internal page 10 of the ld. TPO order dated 21.10.2009 and para(c ) ). However the DRP as well as the ld.TPO applied external comparables, in this round of proceedings.
The ld.AR also submitted that as there exist geographical differences, the FOB value of sales could be considered, and that such sales would not contain any element of fright and insurance which are variable factors depending on the location of export. We also note that a similar suggestion has been recorded by the ld.TPO in order dated 29.10.2009 at internal page 11. The submissions could not be controverter on facts, by the Ld.DR. The ld.DR placed her reliance on the order of the DRP.
On a careful consideration, we find force in the submission of the learned counsel for the assessee. Internal comparables are to be preferred to external comparables. There is no dispute that the assessee has internal comparables. Geographical differences are not relevant when FOB price is considered.
We, on the basis of above discussions, are inclined to set aside the matter to the ld.TPO with a direction to consider the sale in respect of export to AE’s at FOB value. Even otherwise, except for export to Germany, there are no geographical variations. The ld.TPO is directed to apply internal comparables, at FOB value, as in his view, this value is the comparable value. The assessee is directed to furnish the audited financials of the segmental accounts. Under these circumstances, we restore the issue to the files of the Ld.TPO/AO, for fresh adjudication of the ALP, as per the directions given herein.. 8. Accordingly assessee’s appeal has been allowed for statistical purposes. The order is pronounced in the open court on 04/12/2015