Income Tax Appellate Tribunal - Mumbai
Touchstone, Mumbai vs Department Of Income Tax
1
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "L", MUMBAI
Before Shri R.V. Easwar, Hon'ble President and
Shri J. Sudhakar Reddy, Accountant Member
I.T.A. No. 6436/Mum/2005.
Assessment year : 2002-03.
Dy. . Commissioner of Income-tax, M/s Touchstone,
Range-16(3), Mumbai. Vs. 801, Prasad Chambers,
Opera House,
Mumbai - 400 004.
(Appellant) (Respondent)
Appellant by : Shri Narendra Singh
Respondent by : Shri Vijay Kumar Biyani.
ORDER
Per J. Sudhakar Reddy :
This is an appeal filed by the Revenue directed against the order of the CIT(Appeals)-XVII, Mumbai dated 09-08-2005 for assessment year 2002-035 on the following grounds :
1. That the Learned CIT(A) has erred in law and on facts in directing the A.O. to consider foreign exchange rate difference gain of Rs.14,15,862/-
pertaining to the exports of earlier years eligible for deduction u/s 80HHC of the I.T. Act, 1961 without appreciating the facts that the said amount did not form part of export turnover for the assessment year under question as defined in Clause(b) of Explanation below sub-section (4C) of Sec. 80HHC of the I.T. Act, 1961.
2. That the Learned CIT(A) has erred in law and on facts in directing the Assessing Officer to delete the addition of Rs.40,57,154/- which was made u/s 92CA(3) as per order of the Addl. CIT, T.P. III.
23. That the Learned CIT(A) has erred in law and on facts in directing the A.O. to reduce 10% of licence premium amount of Rs.2,42,367/- from indirect cost to compute the deduction u/s 80HHC of the I.T. Act.
2. The facts of the case are as below:
The assessee is a firm and is engaged in the business of import, manufacture and export of diamonds. It filed a return of income on 31-10-2002 declaring a total income at Rs. Nil. The return of income was accompanied by tax audit report in form No. 3CB, 3CD and 3CEB as well as a certificate in form No. 10CCAC. The assessee filed an audit report in form No. 3CEB. In this report the assessee applied TNMM method for determining Arm's Length Price. While doing so the assessee has compared entity level gross profit margins of different enterprises. The AO adopted the TPO's order wherein the TPO had taken entity level gross profit comparison of certain other enterprises and suggested adjustment of Rs.40,57,154/-. The comparisin in question are brought out at para 4 of the CIT(Appeals)' order.
3. The assessee carried the matter in appeal. The first appellate authority granted relief. Aggrieved, the Revenue is in appeal before us.
4. We have heard the learned CIT- DR, Shri Narendra Singh and the learned counsel for the assessee Shri Vijaykumar Biyani.
5. The learned DR, Shri Narendra Singh, submitted that in this case both the assessee as well as the TPO and the AO have gone wrong in the manner of applying the TNMM Method in determination of Arms Length Price. He submitted that the statute contemplates that under the TNMM Method only an international transaction or a class of international transaction have to be compared and not gross profit margin of enterprises as a whole and whereas both the assessee as well as the TPO have committed illegality by adopting a method which is not approved 3 by the statute, under these circumstances, he submits that the issue should be set aside to the file of the AO for fresh adjudication. He submitted that the issue is covered in his favour by the following decisions of the ITAT, Mumbai :
i) ITA No.5033/Mum/2007 dated 30th April, 2010.
ii) ITA No.5034/Mum/2007 dated 15th January, 2010.
iii) ITA No. 2279/Mum/2006 dated 20th April, 2010.
iv) ITA No.6194/Mum/2008 dated 31st May, 2010.
As such, he prayed for relief.
6. The learned counsel for the assessee, on the other hand, opposed the contention and submitted that it is neither the case of the AO nor the case of the assessee that under the TNMM method, the net margin should be compared between transactions or between class of transactions. He argues that in such a situation, the Tribunal cannot suggest the same. He further submits that net margins have been compared at the entity level for the reason that in this line of business, comparisons of margins of class of transaction level is not possible.
7. Joining the issue the learned DR submitted that the law laid down has to be followed and it would be incorrect to hold that if the assessee, as well as the AO, agree not to follow the statute, then the Tribunal should not draw their attention to the Act.
8. Rival contentions heard. This Bench of the Tribunal in ITA No. 5033/Mum/2007 in the case of ACIT vs. M/s Twinkle Diamond at para 5 and 6 held as under :
4"5. Rival contentions heard. On careful consideration and circumstances of the case, perusal of the papers on record and orders of the authorities below as well as case laws cited, we hold as follows :-
The assessee has adopted cost plus method for computing ALP of the international transactions. The TPO for various reasons cited in his order held that cost plus method is not the most appropriate method. This finding is not challenged by the assessee; and hence, we have to only consider whether, the Transaction Net Margin Method (TNMM) adopted by the TPO, and the manner the same is applied, is correct or not. Both, TPO as well as the assessee in our humble opinion have committed an error in applying TNMM in a manner where entity level operational margin to sales are compared. Such methodology is not contemplated under Statute. Coming to the issue of determination of ALP, it is mandatory, under special provision stipulated in Chapter-X of the Income Tax Act, 1961, to compute the ALP in one of the methods specified under Statute. Section 92(1) reads as follows :-
Meaning of international transaction.
92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.
Section 92(C) reads as follows :
Computation of arm's length price.
92C. (1) The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or 5 class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe78, namely :--
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed79 by the Board.
Rule 10B reads as follows :
Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely ...................
11. Plain reading of the above provisions in the Act as well as in the Rules, show that it is mandatory for the assessee, to follow one of the prescribed method and demonstrate that the international transactions, entered into by it, with an associated enterprise, are at Arms Length Price, and such exercise are only with reference to, a transaction or a class of transactions.
12. Coming to the computation of ALP, the TPO, as well as by the assessee, have adopted enterprises level operating margins, as TNMM for the purpose of comparison. In our considered opinion, Transactions Net Margin Method (TNMM) does not permit the assessee or the Assessing Officer, to compare enterprise level profits and make adjustments under Chapter-X. This Bench of the Tribunal in ITA No. 5034/Mum/07 dated 15.2.2010, 'L' Bench in the case of Addl. CIT Vs. M/s. Tej Diam at paragraph 6 onwards held as follows :-6
"6. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below, we hold as follows.
7. The following definitions are extracted for ready reference :
Section 92F(ii) arm's length price:
" arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions."
(v) - transaction.
"transaction includes an arrangement, understanding or action in concert,-
(A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. "
Rule 10B sub clause (e) - transaction at margin method:
(e) transactional net margin method, by which,--
(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;7
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub-
clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.
8. A plain reading of the above shows that TNMM requires comparison of net profit margins realised by an enterprise from an international transaction or an aggregate of a class of international transactions and not comparisons of operating margins of enterprises. For arriving at this conclusion, we drew strength from the decision of Mumbai 'L' Bench of the Tribunal in the case of UCB India P. Ltd. vs. ACIT 121 ITD 131 (Mum.) where it is held that section 92C read with Rule 10B(1)(e) deals with Transactions Net Margin Method (TNMM) and it refers to only net profit margin realised by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole.
6. In view of the above discussion, we are unable to sustain computation of ALP done by the TPO. In our humble view it is unnecessary to go into various issues raised by the assessee as well as the Assessing Officer on this issue, for the reasons that the very method of applying TNMM is wrong. The assessee has not taken the ground that cost plus method is the most appropriate method and the TPO has struck down this method as 8 inappropriate. Under the facts and circumstances of the case, we have no other alternative but to set aside the entire issues to the file of the Assessing Officer for fresh adjudication. In view of the peculiar circumstances of this case, we permit the assessee to file yet another report contemplated under section 92E of the Act and also support its ALP under any other method by relying on fresh comparables and documents. With these observations, we set aside the matter to the file of the Assessing Officer for fresh adjudication de novo, in accordance with law after giving the assessee adequate opportunity.
In the result, Ground No. 1 of the revenue is allowed for statistical purposes."
9. This view was followed by this Bench of the Tribunal in the case of M/s Indo American Jewellery Ltd. (ITA No. 6194/Mum/2008) and M/s Starline (ITA No.2279/Mum/2006.
10. We respectfully follow the consistent view of this Bench of the Tribunal in various cases, that under the TNMM method, what is to be compared is the net margin of a transaction or a class of transaction and not gross profit margins at the entity level. The argument of the assessee that, this was neither the case of the AO nor that of the assessee and hence the Tribunal should not insist on following the specific provisions stipulated under Chapter X, for computing the arm's length price along with the rules thereon, is devoid of merit. The statute has prescribed the method and it is to be followed. The argument that following the rules laid down in the statute is not possible in this line business, is also not correct. When diamonds are exported, information is furnished to the Customs unit-wise. While so we do not understand what is the difficulty for the assessee in providing comparable transactions. Even in case there is a difficulty, it is not for 9 the Tribunal to prescribe a new method. The assessee may approach appropriate authorities in this regard.
11. In view of the above discussion, we reject the contentions of the assessee and set aside the issue to the file of the AO for fresh adjudication in line with the decision of the Tribunal in the case of M/s Tej Diam (supra).
12. Coming to the ground of computation of relief u/s 80HHC, with reference to foreign exchange difference gain, the issue is now covered by the decision of Special Bench of the Mumbai Tribunal in the case of ACIT vs. Prakash Shah in ITA No. 6349/Mum/2004 for assessment year 2001-02, order dated 22nd August, 2008, wherein it is held that the deduction is permissible on foreign exchange difference in the preceding year when export was made and not in the current year. The AO was directed to exclude the disputed amount of foreign exchange fluctuation difference from the income of the current year and include it in the income of the preceding year in which the exports were made by the assessee and allow the deduction accordingly.
13. Respectfully following the aforesaid Special Bench decision of the Tribunal, we set aside this issue to the file of the AO for fresh adjudication.
1014. In the result, the appeal of the Revenue is allowed for statistical purposes.
Order pronounced in the open court on 27th Oct. , 2010.
Sd/- Sd/-
(R.V. Easwar) (J. Sudhakar Reddy)
President Accountant Member
Mumbai,
Dated: 27th Oct., 2010.
Wakode
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, L-Bench
(True copy)
By Order
Asstt. Registrar,
ITAT, Mumbai Benches,
Mumbai.