Income Tax Appellate Tribunal - Ahmedabad
Lubrizol Advanced Materials India ... vs Assessee on 21 October, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "D" BENCH
Before: Shri Pramod Kumar, Accountant Member
and Shri S. S. Godara, Judicial Member
ITA No. 2811/Ahd/2011
Assessment Year 2007-08
Lubrizol Advanced Deput y Commissioner
Materials India Pvt. Ltd, of Income of Income
(Formerly Known as Vs Tax, Circle 1(2),
Indiamalt Pvt. Ltd), P.O. Baroda
Manjusar, Tal. Savli, (Respondent)
Distt. Baroda, Gujarat-
3914770
PAN: AACI4361B
(Appellant)
Revenue by: Shri Krishan Vyas CIT-D.R. and
Shri B.Y. Chavan, TPO
Assessee by: Shri Dhanesh Bafna, A.R.
Date of hearing : 24-07-2015
Date of pronouncement : 21-10-2015
आदेश /ORDER
PER : S. S. GODARA, JUDICIAL MEMBER:-
This assessee's appeal for AY2007-08, arises from assessment order passed by the DCIT, Circle- 1(2), Baroda dated 06-09-2011 in I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 2 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT case No. D.C. 05/001/II/2011-12, in proceedings under section 143(3) r.w.s.144C(13) of the Income Tax Act, 1961; in short "the Act".
2. The assessee pleads following grounds:-
"1. On the facts, in law and in circumstances of the case, the Asst. CIT, (TPO) II, Ahmedabad (TPO') and the Deputy Commissioner of Income-tax, Circle 1(2), Baroda ('AO') have erred in proposing and the Dispute Resolution Panel ('DRP') has further erred in upholding / confirming the action of the TPO/AO in holding that the Appellant's international transaction of provision of marketing support services is not at arm's length price and thereby confirming the addition of Rs. 1,16,26,716.
The appellant prays that the addition be deleted.
2. On the facts, in law and in circumstances of the case, the AO has erred in not following the directions of the DRP with respect to rejecting a company as comparable, calculation of correct margin of certain comparables and allowing working capital adjustment.
The Appellant prays that the additions made by the AO in violation of the directions of the DRP be held to be void ab initio and therefore be deleted.
3. On the facts, in law and in circumstances of the case, the TPO/AO have erred in proposing and the DRP has further erred in upholding / confirming the action of the TPO/AO in denying the (+/-) 5% standard deduction available under proviso to Section 92C(2) of the Act.
The Appellant prays that the 5% standard deduction as per proviso to Section 92C(2) of the Act be granted to the Appellant.I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 3
Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT
4. On the facts, in law and in circumstances of the case, the TPO/AO have erred in proposing and the DRP has further erred in upholding/confirming the action of the TPO/AO based on the reference to the TPO, which is not in accordance with the provisions of Section 92CA(1) of the Act.
The Appellant prays that the proceedings initiated by the TPO be held as void ab initio and thus the order passed by the TPO be annulled.
5. On the facts, in law and in circumstances of the case, the TPO/AO have erred in proposing and the DRP has further erred in upholding / confirming the action of the AO in confirming the TPO's holding that the price charged by the Appellant towards provision of marketing support services was not determined in accordance with provisions of the Act although none of the conditions set out in Section 92C(3) of the Act are satisfied in the case.
The Appellant prays that the additions made by the AO under Section 143(3) read with section 144C(13) of the Act on the basis of the order passed by the TPO be deleted.
6. On the facts, in law and in circumstances of the case, the AO has erred in rejecting deduction under Section 10B of the Act in respect of income received on account of brokerage on sea freight of Rs. 83,267 without appreciating that such income was earned by the Business by the Appellant in the course of its business and hence it formed part of the profits of the business.
The Appellant prays that the deduction under section 10B of the Act be granted on income received on account of brokerage on sea freight."I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 4
Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT
3. Both parties reiterate their respective cases during the course of hearing. They file written submissions as well. The assessee's contentions challenge lower authorities' action making transfer pricing adjustment of Rs. 1,16,26,716/- relating to provision of marketing support services. Its second plea claims (+/-) 5% tolerance margin as a standard deduction in the impugned arms length price 'alp' adjustment. Its third substantive argument is on the issue of deduction claim u/s. 10B qua income received on account of brokerage on sea freight amounting to Rs. 83,267/- . The Revenue strongly supports all three additions being made in assessee's hands.
We have heard both the parties and gone through the record.
4. The assessee (formerly known as the Indiamalt Pvt. Ltd) manufactures guar gum and cassia gum powder. It is a 100% export oriented undertaking selling all its finished goods to overseas associate enterprises 'AEs' for marketing in european markets. The assessee does have two business segments of manufacturing and provision for market support services. This lis pertains to the latter category only. We find from the case file that two overseas entities namely; M/s Noveon Pharma GmbH Co. Kg & M/s. Lubrizol Luxemberg Ltd hold assessee's 74% and 26% stakes; respectively.
5. The assessee filed its return on 31-10-2007 stating income of Rs. 70,72,190/-. The Assessing Officer noticed during scrutiny its international transactions with AEs exceeding Rs. 15 crores. He I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 5 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT made section 92CA(1) reference to the Transfer Pricing Officer ' the TPO' for ascertaining ALP thereof.
6. The assessee had provided marketing support services to its AEs worth Rs. 5,16,53,106/- in furtherance to a service agreement dated 19-10-2005 fixing rate at cost plus 5% controlled rate. The relevant method used is the Transaction Net Margin Method (the TNMM). The assessee justified its operating profits calculated @ 4.53% by including seven entities in the array of comparables i.e. M/s. Ace Software, B & K Corporation, CS Software Enterprise Ltd, Cosmic Global Ltd, Crisil Marketware Ltd, Raynolds Software Solution Ltd and Vakerangee Software Ltd. The Assessing Officer was of the view that only two of them i.e. M/s. CS Software Enterprise Ltd and Cosmic Global deserved to be treated a comparables. And inter alia observed remaining five entities to be having transactions with related parties, they were loss making entities without data available in public domain and they were engaged in computer software business with either having turnover of less than Rs. 1 crore or more than 100 crores. He undertook prowess data base search and sought to include seven more comparables in the field of Information Technology enabled services/business processing outsourcing (ITES/BPO) namely M/s. Camco Corporate Service Ltd, ICRA Online Ltd, Indusind Information Technology Ltd, Taylormade Outsourcing Solutions Pvt. Ltd, Maple E-Solutions Ltd and Vishal Information Technology Ltd having sales (in crores) of Rs. 11.8, I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 6 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT 6.77, 6.86, 4.99, 2.14, 12.21 and 30.6; respectively thereby issuing show cause for adopting average profit level indicator 'PLI' @ 32.56.
7. The assessee filed its reply on 14-08-2010 supporting its ALP. It stated market support activity as not involving any technical expertise being in the nature purely supportive functions. The prowess data base was also justified. The assessee submitted that its methodology of operating profit to operating cost (%) as very much appropriate since arithmetic mean of its seven comparables was only 4.3% was against the one declared @ 4.53%. It pleaded absence of the TPO's satisfaction u/s. 92C(3) before rejecting its TP study indicated hereinabove. And that the relevant data as available in public domain stood duly searched supported its comparability exercise in selecting five entities sought to be rejected (supra). The assessee highlighted the fact that the relevant data qua the TPO's seven entities sought to be included came in data base much after its TP study. It objected to inclusion of seven comparables by quoting various anomalies in their services performed, annual reports indicating alleged extra-ordinary profit margins etc. The TPO rejected all these pleas. He appears to have proceeded on industrial/segmental/activity similarities, data availability, financial years involving twelve months, net worth > 0, companies having sales, employee's costs > 20%, extremeness (having sales < 1crore and > 50 crores and qualitative analysis.
I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 7Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT
8. The case file reveals that the assessee objected to inclusion of M/s Camco Corporate. Its case was that the TPO had wrongly taken Rs. 11.86 crores operating income with Rs. 29.10 lacs rental income. The TPO turned down the same by observing that he had taken operating income of Rs. 11.80 without any rental income component. And also that this entity was functionally comparable being engaged in ITES/BPO activities.
9. Next is the case of M/s ICRA Ltd. The assessee's plea was that this entity had entered into related party transactions. The Transfer Pricing Officer was of the opinion that this entity's related party transactions did not include any international transactions. He was further of the view that it was a functionally similar comparable.
10. The assessee thereafter opposed inclusion of M/s Indusind Information Technology by averring that it was a captive service provider not functionally similar having related party transactions during AY 2007-08. The TPO opined that the assessee was also a captive service provider in ITES/BPO alike the above stated entities and its related parties transactions were only domestic and not international.
11. The assessee further contested the TPO's action seeking to include M/s Informed Technologies Ltd. It pleaded that this entity had 15% of its total revenue from related parties transactions. Its receipt of Rs. 4.99 crores included hiring charges of Rs. 89.63 lacs. The I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 8 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT TPO declined the same by holding that such a percentage upto 25% was permissible. And that prowess data base revealed income of Rs. 4.85 crores exclusive of all other incomes.
12. The assessee's next objection pertained to inclusion of M/s. Maple E-Solutions on the ground that it had related parties transactions and not functionally comparable. The assessee further sought to include two more companies, M/s. Shrejal Info. Hubs and M/s Optimus Global Service Ltd. having functional similarities. The TPO rejected the same inter alia by holding that M/s Maple E- Solutions did not have related party international transactions.. It was stated to be engaged in ITES/BPO activities. He accepted inclusion of the former entity above said and rejected the latter one by terming it as a loss making company in the last three years.
13. Now we come to yet another entity M/s Taylormade Outsourcing Solutions. The assessee pleaded that in case this company was included in the array of comparables, two more entities namely; M/s. E-nxt Financial Ltd and Quantum E-Services Pvt. Ltd should also follow the suit. The TPO ordered inclusion of the former entity and turned down the latter one being a loss making company in F.Y.s 2004-05 to 2005-06.
14. The assessee's last objection pertained to M/s Vishal Information. Its case was that this entity's employees cost was only 3.5%. The TPO observed that the assessee itself included M/s I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 9 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT Shreejal (supra) having 7.7% employee's cost. He adopted the same analogy and included M/s Vishal Information in the array of comparables.
15. We find that the TPO's above stated action in rejecting assessee's objections and in accepting two more companies resulted in eleven entities taken as comparables as under:-
Sl Name of the PBIT/Cost %
No. Company
1 C S Software 22.75%
2 Cosmic Global 11.75%
3 Camco Corporate 9.56%
Services Pvt. Ltd
4 ICRA Online 33.20%
5 Indusland Information 41.44%
Technology
6 Informal Technology 66.11%
India Pvt. Ltd
7 Taylormade 20.90%
Outsourcing
Solutions
8 Maple E-Solutions 34.32%
9 Vishal Information 53.02%
Tech Ltd
I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 10
Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT 10 E-next Financial Ltd 9.59% 11 Shreejal Info Hubs 6.05% Ltd Average PBIT/Cost -------- 28.06% The TPO in his order dated 30-09-2010 accordingly recomputed assessee's ALP @ 28.06% on cost of Rs. 4,49,14,198/- coming to Rs. 1,38,65,624/- as against that declared of Rs. 22,38,908/- @ 4.53% resulting in the impugned adjustment of Rs. 1,16,26,716/-. The Assessing Officer framed draft assessment on 24-11-2010 in line with the TPO's action. The assessee petitioned before the Dispute Resolution Panel 'the DRP'. The learned panel in its direction dated 30-08-2011 accepted its arguments to a limited extent seeking exclusion of M/s. Indusind Information Technology (supra) from the array of comparables. It agreed with inclusion of rest of the ten companies (supra). The Assessing Officer accordingly framed the impugned assessment vide order under challenge making the transfer pricing adjustment under challenge. He further declined assessee's plea claiming tolerable margin of (+/-) 5% in the ALP recomputed as a standard deduction. This leaves the assessee aggrieved.
16. The assessee's first substantive argument raised in the course of hearing and written submissions challenges inclusion of five entities in the array of comparables. They are M/s C S Software I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 11 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT Enterprise Ltd, ICRA Online Ltd, Informed Technologies India Ltd, Maple E-Solutions and Vishal Information Technologies Ltd. It submits that the first company M/s. ICRA had been selected at the assessee's behest and no objection in this regard seeking its exclusion was raised before any of the lower authorities. It refers to page 6 39 of the paper book pointing out that this entity is engaged in engineering design services and computer software. Our attention is drawn to the fact that the TPO had himself rejected one of such entity M/s Vakranjee Software (supra) performing the very functions. The Revenue's submissions invoke estoppel principle. It pleads on merits at page no. 116 containing this entity's annual report clarifying that M/s. CS Software Enterprise Ltd provided information technology enabled services in a single segment. The assessee cites case law of DCIT vs. Quark Systems Pvt. Ltd 38 SOT 307 (Chandigarh) (SB) holding that there is no estoppel in arguing exclusion of a comparable already included in an assessee's TP study. It quotes page 639 of the paper book to submit that this entity is in engineering design services and computer software. However, it fails to rebut the fact highlighted at the Revenue's behest demonstrating that this comparable company is providing information technology enabled services as per its annual report. We accept assessee's legal plea on estoppel principle and decline the same on merits in view of annual report hereinabove. We accordingly confirm lower authorities action in treating M/s CS Software Enterprise as a valid comparable selected by the assessee itself.
I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 12 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT
17. The assessee's next argument seeks exclusion of M/s ICRA Online Ltd. It takes us to page 439 of the paper book demonstrating this company's revenue to have been increased @ 4.55 times (in thousand) from Rs. 6,414.70 to Rs. 35014.96 in assessment year 2005-06 and BPO segment results jumping from Rs. 963.29 to Rs. 10,951.43/-. Our attention is drawn to pages 269 -284 of the paper book indicating fluctuating operating profits @ -13.08%, -1.47%, 7.66%, 29.8% and 6.02% for assessment years 2003-04 to 2007-08; respectively. The assessee relies upon case law Actis Advisors Pvt. Ltd vs. DCIT ITA 5277/Del/2011 for assessment year 2007-08 holding that disproportionate fluctuations in profits and loss would not result from a company business operations but are attributable to extra-ordinary reasons. The Revenue's arguments mainly highlight this entity employee's cost factor in justifying comparability thereof. It fails to rebut the assessee's contentions with regard to fluctuating profit margins in light of tribunal's decision. We accept assessee's plea accordingly and order exclusion of this entity M/s ICRA Ltd from the array of comparables.
18. The assessee's next argument challenges comparability of M/s Informational Technology India Pvt. Ltd. It contends that this entity is functionally different as its annual accounts in management discussion and analysis report indicate the same to be engaged in IT enabled knowledge base back office processing centre. Its case is that this entity provides services in the niche market of financial contents with its customers. Reliance is placed on definition of a I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 13 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT KPO in Safe Habour Rules notified by the board in 2013 including financial analytics. The Revenue's pleads that no such argument was raised before the lower authorities. It highlights the fact that the assessee's case before the TPO and DRP was that co-related parties of 15% approximately falling less than the filter limit of 25%. The Revenue further quotes case law of Willis Processing Services India Pvt. Ltd. vs. DCIT 41 taxman.com 33 (Mumbai), PTC Software India Pvt. Ltd vs. ACIT (Pune) ITA 1605/Pn/2011 and M/s Zabata India Pvt. Ltd vs. DCIT 35 taxman.com 423 (Hydra) holding that this comparable entity is very much engaged in ITES/BPO services. The assessee seeks to raise yet another plea relying upon the decision of Maersk Global Centre India Pvt. Ltd vs. ACIT 147 ITD 83 (Mumbai) (SB) holding that whether a comparable is a low end or high end service provider has to be seen in facts of each case . It states that this comparable entity provides high end services to its clients and deserves to be excluded.
19. We have given our thoughtful consideration to our rival contentions. We see merit in assessee's arguments. It is evident from annual report of this compare entity, this company is indeed involved in high end niche market segment of financial contents which cannot be equated with routine marketing support services in which the assessee is involved. The relevant extracts at page 333 relating to this entity are as follows:-
I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 14 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT "The Company is operating as IT enabled, knowledge based Back Office Processing Centre.
The Company currently serves the needs of the financial content sector in the USA. The Company collects and analyses data on Financial fundamentals, Corporate Governance, Director/Executive Compensation and capital market. The outsource services consist of financial databases and back office activity for research /advisory reports.
The Company has a focus on the niche market segment of financial contents and has developed repeat business with its customers, which are well known and respected American corporates. The focus also helps in enhanced expertise and domain knowledge."
Accordingly, we hold that this entity is not an appropriate comparable in given peculiar set of facts of the instant case. The same shall stand excluded from the array of comparables.
20. The assessee's next grievance seeks exclusion of M/s. Maple E-Solutions from the array of comparables. It cites case law of Capital IQ Information Systems India Pvt. Ltd vs. DCIT ITA 1961/Hyd/2011 pertaining to assessment year 2007-08 in question holding therein that directors of this entity i.e. Rastogi Group had faced serious indictment. Therefore, the financial results demonstrating profitability could not be accepted as comparable instances. The same view stands followed in various other decisions of the tribunal. The Revenue relies upon yet another decision of the tribunal in Vodafone India Services Pvt. Ltd. vs DCIT 36 taxman.com 127 (Mum) accepting M/s Maple E-Solutions as comparables in case of ITES/BPO functions. The assessee states that this decision has I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 15 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT not examined fraud indictment of above stated directors. We find force in this submission. A perusal of this decision reveals that the ld. co-ordinate bench has considered issue of merger and not that of the above stated indictment. We accept the assessee's arguments and hold that this entity M/s. Maple E-Solutions Ltd. is not a valid comparable. We direct the TPO to accordingly exclude this company from the array of comparables.
21. This leaves us with the assessee's last objection seeking to exclude M/s Vishal Information Technologies from the array of comparables. It refers to pages 408 and 412 of the paper book and contends that profit and loss account of this entity demonstrates data entry charges and vendor payments forming part of operating expenses in schedule 15. The latter segment is stated to be that of approximate 65% of the total cost. The assessee pleads that this entity had outsourced its ITES services to third party vendors. It refers to case law of ACIT vs. Meersk Global Services Centre (India) Pvt. Ltd (ITA No. 3774/Mum/2011) (A.Y. 2005-06), M/s. Capital IQ Information Systems (India) Pvt. Ltd vs. DCIT (ITA No. 1961/HYd/2011) (Hyd) (A.Y. 2007-08) and ACIT vs. Hapag Lloyd Global Services P. Ltd (ITA No.8499/Mum/2010) (Mum) (AY 2005-06) in support
22. The Revenue's arguments refer to DRP's observations relying upon this entity's expenditure account allegedly confirming it to be an ITES company. And also that an expenditure book as salary or data I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 16 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT entry charges cannot form basis for determining whether or not these services had been performed. Its case is that mere accounting treatment does not change a company's function. Case law of DCIT vs. Deloittee Consulting India Pvt. Ltd (2011) 12 taxman.com 500 (Hyd) is quoted in support holding this entity as a valid comparable.
23. The assessee in rebuttal submits three decisions of the tribunal i.e. Techbooks International (P.) Ltd. (2014) 45 taxmann.com 528 (Delhi-Trib) AY 2009-10, Copal Research India (P) Ltd (2015) taxmann.com 27 (Delhi-Trib) AY 2006-07 and New River Software Services (P.) Ltd (2015) 56 taxmann.com 440 (Delhi-Trib) excluding M/s Vishal Information Technologies post Deloitee's decision. The Revenue fails to counter this submission. We accordingly accept assessee's arguments by following the above stated case law and conclude that the lower authorities have wrongly included M/s Vishal Information Technologies as a valid comparable. This renders the assessee's alternative argument seeking exclusion of M/s Vishal on the ground that the TPO had violated his filter of employee's cost less than 20% as having being rendered infructuous.
In view of our above discussion qua comparability of five entities hereinabove, we direct the learned Transfer Pricing Officer to re-compute assessee's ALP accordingly. The needful may be done expeditiously keeping in mind the fact that much water had flown down the bridge since the impugned assessment year. The I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 17 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT assessee's arguments on this first issue of comparables are partly accepted.
24. Now we come to assessee's second substantive argument challenging action of the lower authorities denying (+/-) 5% relief u/s. 92C(2) as standard deduction qua the ALP determine hereinabove vis-à-vis that declared earlier. We find that a Special Bench of the tribunal in (2013) 023 ITR 0608 (Del) IHG IT Services India Pvt. Ltd vs. ITO has decided the very issue in the Revenue's favour as under:-
"5. We have carefully considered the arguments of both sides and perused the material placed before us. Before we proceed to consider the arguments of the parties, it would be appropriate if we narrate the history of section 92C(2) of the Income-tax Act, 1961. Section 92C(2), before the amendment by the Finance (No.2) Act, 2009, reads as under :
"(2) The most appropriate method referred to in sub-
section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed:
Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean."
6. The Finance (No. 2) Act, 2009 with effect from October 1, 2009 substituted proviso to section 92C(2) with two provisos.
The position of section 92C(2) after the amendment by the Finance (No. 2) Act, 2009 with effect from October 1, 2009 is as under :
I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 18 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT "(2) The most appropriate method referred to in sub-section (1) shall be applied for determination of arm's length price, in the manner as may be prescribed:
Provided that where more than one price is determined by the most appropriate method, the .arm's length price shall be taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent, of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price."
7. That Finance Act, 2012 with retrospective effect from April 1, 2002 has modified the second proviso to section 92C. The position of section 92C(2) after the Finance Act, 2012 reads as under :
"(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed :
Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price.
I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 19 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT Explanation.--For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009."
'
8. From the above, it is evident that before the amendment by the Finance (No. 2) Act, 2009 with effect from October 1, 2009, there was no dispute that the assessee had an option to claim the benefit of 5 per cent, tolerance margin while determining the arm's length price. However, after the amendment by the Finance (No. 2) Act, 2009 with effect from October 1, 2009, such benefit of 5 per cent, tolerance margin was restricted to the cases where variation between the arm's length price and the price at which the international transaction has actually taken place does not exceed 5 per cent. After the above amendment, there were contrary decisions of the Income-tax Appellate Tribunal on the issue of allowability of benefit of 5 per cent, tolerance margin while determining the arm's length price in the assessment years prior to October 1, 2009. In view of the apparent contrary decisions on the subject, the present Special Bench was constituted by the hon'ble President to resolve the controversy. However, in the meanwhile/ the second proviso to section 92C has been modified by the Finance Act, 2012 with retrospective effect from April 1, 2002, which is extracted above in paragraph 7.
9. From the above the second proviso to section 92C(2), it is evident that if the variation between the arm's length price and the price at which international transaction was actually undertaken does not exceed the specified percentage, then only the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. Thus, the benefit of tolerance margin would be available only if the variation is within the tolerance margin. Once the variation exceeded the tolerance margin, then there would be no benefit I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 20 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT even up to tolerance margin. Then, the arm's length price as worked out under section 92C(1) shall be taken as the arm's length price without any benefit of tolerance margin.
10. We have gone through the decision of the Income-tax Appellate Tribunal, Pune Bench in the case of Piagio Vehicle P. Ltd. [2012] 53 SOT 253 (Pune) (URO) wherein the Income-tax Appellate Tribunal held as under :
"17. In view of the precedent, the stand of the Revenue in the present case to deny the assessee benefit for adjustment of ± 5 per cent, variation while computing the arm's length price is not justified. As per the Tribunal, though the amended proviso to section 92C(2) was applicable with effect from October 10, 2009, so however, for the reasons contained therein, it would not cover such like cases as is the case before us. In para 22 of the order, which has been reproduced above, it has been observed that the applicability of amendment is to be effective in respect of the assessment year 2009-10 and subsequent years and such inference was found to be fortified by the decision of the Delhi Bench in the case of Asst, CIT v. UE Trade Corporation (India) P. Ltd. [2011] 9 ITR (Mb) 400 (Delhi) vide I.T.A. No. 4405(Del)/2009 dated December 24, 2010. Apart from the aforesaid precedent, the assessee has also referred to certain Tribunal decisions, which are on similar lines. In view of the aforesaid discussion, we find no justification in the action of the lower authorities from disentitling the assessee from its claim of ± 5 per cent, while computing the arm's length price in terms of the erstwhile proviso to section 92C(2) of the Act. On this aspect, we uphold the plea of the assessee. However, as we have remanded the matter to the file of the Assessing Officer with regard to the benchmarking of transactions of category 'B' and 'C' undertaken by the assessee with its associated enterprises, on the instant aspect also, the Assessing Officer shall pass an order afresh considering the I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 21 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT aforesaid precedent and the concurrent legal position prevailing on this subject."
11. From the above, it is evident that the Income-tax Appellate Tribunal, Pune Bench has followed the decision of the Income-tax Appellate Tribunal, Delhi Bench which were rendered prior to amendment of the second proviso to section 92C(2) by the Finance Act, 2012 with retrospective effect. Though the decision of the Income-tax Appellate Tribunal, Pune Bench is after coming into force of the Finance Act, 2012, but, the amendment by the Finance Act, 2012 which has retrospective effect has not been considered by the Income-tax Appellate Tribunal, Pune Bench. Therefore, in our 'Opinion, the decision of the Income-tax Appellate Tribunal, Pune Bench is per incuriam and cannot be said to be good law after the retrospective amendment to the second proviso to section 92C(2) by the Finance Act, 2012.
12. Learned counsel for the assessee has challenged the constitutional validity of retrospective amendment to second proviso to section 92C(2). However, the Income-tax Appellate Tribunal is a creation of the Income-tax Act and not a constitutional authority. It has to interpret the provisions of the Income-tax Act as it stands. It cannot adjudicate upon constitutional validity or otherwise of any provisions of the Income-tax Act. We, therefore, reject the assessee's argument that retrospective amendment to the second proviso to section 92C(2) by the Finance Act, 2012 is constitutionally invalid.
13. Coming back to the provisions of the Income-tax Act, we are of the opinion that after the retrospective amendment to the second proviso to section 92C(2) by the Finance Act, 2012, there remains no ambiguity that the benefit of tolerance margin is available only when the variation between the arm's length price as determined under section 92C(1) and the price at which the international transaction has actually been under- I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 22 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT taken does not exceed the tolerance margin. Once it exceeds the tolerance margin, no benefit under the proviso would be available to the assessee and the arm's length price as determined under section 92C(1) shall be considered. The question referred to the Special Bench is answered accordingly, i.e., in favour of the Revenue and against the assessee."
The assessee fails to point out any distinction on facts or law. We uphold action of the lower authorities by deciding the issue in hand against the assessee by following the Special Bench decision hereinabove. The assessee's second substantive ground is rejected.
25. This leaves us with assessee's third substantive grond challenging lower authorities' action in rejecting its claim of section 10B deduction in respect of income received on account of brokerage on sea freight of Rs. 83,267/-. We find that a co-ordinate bench of the tribunal in assessee's own case pertaining to the preceding assessment year has decided this very issue as follows:-
"17. During the course of assessment proceedings AO noticed that Assessee has received brokerage on sea freight of Rs 1,00,318/- and insurance claim of Rs 64,1257- and had considered both of them as part of profit of the business for computing deduction u/s 10B. AO was of the view that the aforesaid amounts did not have the attributes of profits derived from the business of the undertaking of export of articles or things and therefore cannot be considered to be part of profit for deduction u/s 10B. He accordingly reworked the profit of the business by excluding the same. Aggrieved by the order of AO, I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 23 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT Assessee carried the matter before DRP. DRP upheld the order of AO and therefore the Assessee is now before us.
18. Before us, the Ld. A.R. submitted that brokerage on sea freight charges were nothing but merely discount availed by the Assessee and refund of insurance charges were in the nature of refund of excess amount paid to insurance company and claimed as deduction. He further submitted that the aforesaid transactions were reduction in actual expenses incurred in connection with the business of export of manufactured goods and therefore should not be reduced from the amount of profit for working out deduction u/s 10B. He further placed reliance on the Special Bench decision in the case of Maral Overseas Ltd Vs ACIT (2012) 146 TTJ (Ind) (SB) 129. The Id. D.R. on the other hand relied on the order of AO and DRP.
19. We have heard the rival submissions and perused the material on record. Before us the nature of income as submitted by the Assessee has not been controverted by Revenue. The contention of the Revenue is that the income cannot be said to be derived from the eligible undertaking and hence is not allowable. We find that before Special Bench in the case of Maral Overseas (supra) one of the question was as to whether the undertaking is eligible for deduction on export incentive received by it. The Special Bench has decided the issue by holding as under:-
"It is clear from the plain reading of section 10B(1) of the Act that the said section allows deduction in respect of profits and gains as are derived by a 100% EOU. Further, section 10B(4) of the Act stipulates specific formula for computing the profit derived by the undertaking from export. Thus, the provisions of sub-section(4) of section 10B of the Act mandate that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover by the total turnover. Thus, even though sub-section(l) of I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 24 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT section 10B refers to profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in sub-section(4) of that section. Both sub-sections (1) and (4) are to be read together while computing the eligible deduction u/s 10Bof the Act. We cannot ignore sub-section (4) of section 10B which provides specific formula for computing the profits derived by the undertaking from export. As per the formula so laid down, the entire profits of the business are to be determined which are further multiplied by the ratio of export turnover to the total turnover of the business. In case of Liberty India, the Hon. Supreme Court has dealt with the provisions of section 80IA of the Act wherein no formula was laid down for computing the profits derived by the undertaking which has specifically been provided under sub-section (4) of section 10B while computing the profits derived by the undertaking from the export. Thus the decision of the Hon. Supreme Court is of no help to the revenue in determining the claim of deduction u/s 10B in respect of export incentives.
20. Thus it is seen that the respected Special Bench of the Tribunal has held that once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking and will be eligible for deduction. Respectfully following the aforesaid Special Bench decision, we are of the view that the Assessee is eligible for deduction on the brokerage on sea freight and insurance claim which it has credited to its profit and loss account. Thus this ground of the Assessee is allowed."
The Revenue does not indicate any exception in the impugned assessment year for not applying the learned co-ordinate bench decision. The assessee's third substantive ground is accordingly accepted.
I.T.A No. 2811/Ahd/2011 A.Y. 2007-08 Page No 25 Lubrizol Advanced Material India Pvt. Ltd. (Formerly Known as Indiamalt Pvt Ltd) vs. DCIT
26. This assessee's appeal is partly allowed.
Order pronounced in the open court on 21-10-2015 Sd/- Sd/-
(PRAMOD KUMAR) (S. S. GODARA)
ACCOUNTNAT MEMBER JUDICIAL MEMBER
Ahmedabad : Dated 21/10/2015
ak
आदेश क त ल प अ े षत / Copy of Order Forwarded to:-
1. Assessee
2. Revenue
3. Concerned CIT
4. CIT (A)
5. DR, ITAT, Ahmedabad
6. Guard file.
By order/आदेश से,
उप/सहायक पंजीकार
आयकर अपील य अ धकरण,
अहमदाबाद