Income Tax Appellate Tribunal - Mumbai
Samsonite South Asia Pvt. Ltd ( Formerly ... vs Assessee on 19 January, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
"L" Bench, Mumbai
Before Shri D.K. Agarwal, Judicial Member
and Shri B. Ramakotaiah, Accountant Member
ITA No. 2496/Mum/2007
(Assessment Year: 2003-04)
M/s. Samsonite South Asia P. Ltd. JCIT (OSD), Range 8(3)
(formerly Samsonite India P. Ltd.) Vs. Mumbai
401/B-MIDC Cross Road
Andheri (E), Mumbai 400059
PAN - AAACS 8598 L
Appellant Respondent
Appellant by: Shri D.B. Shah
Respondent by: Shri Narender Singh
ORDER
Per B. Ramakotaiah, A.M.
This appeal by the assessee is against the order of the CIT(A)- XXIX, Mumbai dated 19.01.2007
2. Assessee has raised the following grounds: -
"1(a) The Commissioner of Income-tax (Appeals), hereinafter referred to as "CIT(A)", has erred in disallowing deduction u/s 80HHC of the Income-tax Act, 1961 on the ground that the appellant has brought forward business losses and unabsorbed depreciation. 2(a) The CIT(A) has erred in upholding the decision of the AO to disallow deduction for the amount of profits eligible for deduction under section 80HHC of the Act, while computing book profit under section 115JB of the Act.
3(a) The CIT(A) erred in confirming the addition of Rs.430,442/- on the basis of the order under section 92CA(3) of the Act without appreciating the fact that transfer of sub-assemblies (semi- finished goods) involves further processing and, hence, the price of sub-assemblies can not be compared with the transfer price of raw materials (which are simply bought and sold without further processing)."
Sub-grounds (b) & (c) in all the above grounds are nothing but submission of the assessee which are not extracted. Ground No. 4 is general in nature, which does not require any adjudication.
2 ITA No. 2496/Mum/20073. During the course of hearing the learned counsel has not pressed ground No. 1 in view of the decision of the Hon'ble Supreme Court in the case CIT vs. Shirke Construction Equipment Ltd. 291 ITR 380. Accordingly the ground is treated as withdrawn.
4. Ground No. 2(a): briefly stated the assessee has claimed deduction of Rs.5,33,27,898/- under section 80HHC while computing profits under section 115JB whereas the deduction claimed under normal computation was Rs.2,66,63,949/- as per the audit report in Form No. 10CCAC. In the course of assessment, since the assessee had carry forward losses deduction under section 80HHC was not allowed, which was the bone of contention in ground No. 1 now withdrawn by the assessee. Consequent to the denial under section 80HHC in the normal computation the A.O. denied the same while computing deduction under section 115JB as in his opinion, the deduction allowable under section 80HHC can only be considered for exclusion while computing book profit under section 115JB. The assessee contended before the CIT(A) that under the provisions of the Act, the book profits has to be re-determined and while doing so the profit as computed under section 115JB alone can be considered in reworking out the deduction under section 80HHC and accordingly the assessee was eligible for deduction and claim was correct. The assessee further relied on the decision of the Hon'ble Kerala high Court in the case of CIT vs. G. T. N. Textiles Ltd. 248 ITR 372 and Tribunal's decisions in the case of Starchik Specialities Ltd. 90 ITD 34 (Hyd) and Smruthi Organics Ltd. vs. DCIT 101 ITD 205 (Pune). The CIT(A), however, rejected the contentions holding that section 115JB(4) is materially different from the provisions of section 115J and 115JA. In view of that he differed from the decision of the Hon'ble Kerala High Court in the case of G. T. N. Textiles Ltd., which is given in the context of section 115J and the decisions of the Hon'ble ITAT which are in respect of section 115JA. He followed the principles laid down in the case of Ipca Laboratories Ltd. 266 ITR 521 (SC) and upheld the order of the A.O.
5. The learned counsel submitted that similar issue arose in the case of CIT vs. Rajanikant Schneldar and Associate Pvt. Ltd. 302 ITR 22 (Mad) 3 ITA No. 2496/Mum/2007 wherein the Hon'ble Madras High Court has upheld the contentions while computing the deduction under section 115JA. It was his submission that Special Leave Petition filed before the Hon'ble Supreme Court was dismissed as reported in 320 ITR (St.) 21 and accordingly the decision of the Hon'ble Madras High Court has become final. Similar is the position with reference to the decision of the Hon'ble Supreme Court in the case of Malayala Manorama vs. CIT 300 ITR 251 and submitted that the A.O. should have taken book profit arrived u/s 115JB for the purpose of calculation of deduction under section 80HHC and not normal profit computed under the general computation.
6. The learned D.R., however, submitted that the case laws relied upon by the learned counsel were in the context of 115J and 115JA whereas there is direct decision of the jurisdictional High Court in the case of CIT vs. Ajanta Pharma Ltd. 318 ITR 252 where the Hon'ble High Court has considered that the Special Bench decision in the case of CIT vs. Syncome Formulations (I) Ltd. 292 ITR (AT) 144 (Mum) (SB) was not correct and upheld the Revenue's contentions.
7. We have considered the issue. As rightly pointed out by the learned D.R., this issue is in now crystallised by the decision of the Hon'ble Bombay High Court judgement in the case of CIT vs. Anajta Pahrma Ltd. wherein the Hon'ble court has held as under: -
"Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even "do some violence" to it, so as to achieve the obvious intention of the Legislature and produce a rational construction.
The statement of the Finance Minister who moved the Bill in Parliament could be looked into to ascertain the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted.
When section 115J of the Income-tax Act, 1961, was originally introduced MAT companies were not entitled to deduction of profits under section 80HHC while working out the book profits. That benefit came to be introduced by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989. Parliament, therefore, initially had even 4 ITA No. 2496/Mum/2007 denied to MAT companies deduction under section 80HHC. When section 115JA was introduced with effect from April 1, 1997, section 80HHC benefits were once again not available to MAT companies. The amendment by the Finance Act, 1997, to give the benefit was with effect from April 1, 1998. Thus, MAT companies, considering section 115JB(2) Explanation 1(iv), are not entitled to be placed in a better position than other companies entitled to the export deduction under section 80HHC though earlier they constituted one class. No rule of construction nor the language of section 80HHC read with section 115JB, will permit such construction. If such construction is not possible then both the classes of companies will be entitled to the same deduction. This would contemplate that both would be entitled to deduction of profits in terms of section 80HHC(1B). So read, it would be a harmonious construction. A class of companies covered by section 80HHC cannot be sub-classified into two classes, more so, when for intermittent periods Parliament had even denied the benefit of section 80HHC to MAT companies.
The language used in section 115JB is deduction available under section 80HHC. It is difficult to conceive of any rational reason as to why the Legislature should have thought to give MAT companies additional benefits than the other companies who are paying tax on their total income and not the tax based on book profit as calculated under section 115JB. The object of section 115JB or for that matter section 115J or 115JA was to impose tax on those companies which otherwise considering various exemptions or deductions available under the Act, though making huge profits and paying large dividends, were not paying any tax. It is therefore, not possible to accept the construction that should be treated on a different footing in computing export profits under section 80HHC for the purpose of section 115JB.
MAT companies are entitled to the same deduction of export profits under section 80HHC as any other company involved in export in terms of section 80HHC(1B)."
8. In view of this we uphold the order of the CIT(A), which was in conformity with the principles laid down by the jurisdictional High Court. Accordingly the ground is rejected.
9. Ground No. 3(a): Briefly stated the assessee company had transactions with the Associate Enterprises (AE) exceeding Rs.5 crores and on a reference under section 92CA(3) of the I.T. Act the Transfer Pricing Officer, ACIT (TP) 3, Mumbai suggested an addition of Rs.4,30,442/- on account of international transactions entered into by the assessee with the AE. The A.O., eventhough gave an opportunity to the assessee, has followed the same impugned addition of Rs.4,30,442/-. Before the CIT(A) it was contended that the transfer price of sub-assemblies purchased by the 5 ITA No. 2496/Mum/2007 assessee from the AE is arrived at by using cost+25%. Cost included only direct material (including over consumption at standard rate, direct labour and direct overheads). In addition to the direct cost the assessee has stated that there are other periodic manufacturing costs require to be considered and accordingly gave a detailed working of the periodic manufacturing expenses incurred by the AE. In addition to the above details the assessee also justified the periodic manufacturing cost and profit earned by the AE with comparative cost profit ratio with other companies as well and justified that cost + 25% was reasonable, whereas the TPO's order on purchase of sub-assemblies charging mark up at cost +10% is not appropriate. It was submitted that additional 15% was attributed to the general manufacturing cost. In addition to the above explanation the assessee has further justified adaptation of 25% over the cost as the AE has spent about 21.20% towards indirect manufacturing overheads and 25% margin paid over the cost to the AE is fair. The CIT(A), however, has rejected the contentions by holding as under: -
"I have considered the facts of the case and submission made by AR/appellant. I do not agree with the submission of appellant. It is seen from the records that appellant has entered into various transactions with the Associated Enterprises which have been noted by Transfer Pricing Officer in his order as follows:
Nature of transaction Total Value Method
Purchase of raw materials & 4,68,59,645 Cost Plus
sub-assemblies
Purchase of capital goods 5,61,13,246 Cost Plus
Sale of goods 47,21,27,943 CUP
Payment of Royalty 1,73,43,949 CUP
It is only in respect of Purchase of Raw Materials & Sub-Assemblies that there has been a dispute raised by Transfer Pricing Officer. Appellant is following Cost Plus Method (CPM) in respect of Purchase of Raw Materials & Sub-Assemblies. In respect of Raw Material, the Transfer Pricing is Cost Plus 10% while in respect of Sub-Assemblies, it is Cost Plus 25%. The Transfer Pricing Officer raised the query regarding differentiation in Transfer Pricing of Sub-Assemblies. Appellant has stated that supply of sub-assemblies involves use of additional resources and, therefore, transfer pricing was made Cost Plus 25%. The 6 ITA No. 2496/Mum/2007 Transfer Pricing Officer has pointed out that additional resources utilized would form part of the cost and, therefore, cost for the purpose of sub- assemblies is different from the cost in respect of raw material. Since additional resources utilized would form part of the cost, the margin of 10% on sub-assemblies would be reasonable and there is no reason to increase the margin in respect of sub-assemblies than what has been provided in respect of raw material. Accordingly, the Transfer Pricing Officer has made an adjustment of Rs.4,30,442/-. In my considered opinion, the reasons given by Transfer Pricing Officer are acceptable and, therefore, the adjustments made are not unreasonable. AO has rightly made an addition of Rs.4,30,442/-. Therefore, this ground is also dismissed."
10. The learned counsel submitted that the assessee had purchased raw- materials at cost + 10% whereas the sub-assemblies were purchased cost + 25% and the TPO considered that the mark up of 15% was not required and made adjustment at Rs.4,30,442/- under section 92CA(3). It was submitted that the CIT(A), in the later year, has accepted cost + 30% mark up on sub- assemblies on the basis of the explanation given by the assessee and this order was accepted by the Revenue and has not come in appeal to the ITAT and since the purchases were similar in these two years, the order of the CIT(A) has to be reversed and assessee be given relief on this issue. Further, he has no objection if the matter is restored back to the A.O. for verification of the details.
11. The learned D.R., however, submitted that each year is separate and it is for the assessee to show that it has done the mark up correctly. Generally since raw-material was purchased at 10% mark up, sub-assemblies cost also should be likely to be considered at same 10% whereas the assessee has paid 25% mark up and accordingly the orders of the TPO and A.O. are to be upheld. It was his submission that the assessee should submit the current data and relevant data as held by the Special Bench in the case of Aztec Software & Technology Services Ltd. vs. ACIT 107 ITD 141 and since the assessee has not submitted the relevant data the order of the CIT(A) should be upheld.
12. We have considered the issue. As seen from the order of the CIT(A) for A.Y. 2004-05 placed on record the assessee made similar submissions and the CIT(A) has given the following findings: -
7 ITA No. 2496/Mum/2007"6.10 I have examined the above submissions in detail. I am satisfied that neither TPO nor the AO have considered the fact tht the sub- assemblies are the semi-finished goods and that the appellant is bound to incur some additional expenditure for processing the raw materials so as to come to the stage of sub-assemblies. In the submissions made before me and supported as stated above, this aspect is amply demonstrated on behalf of the appellant.
6.11 This issue was also a subject matter of the appellant's appeal for assessment year 2003-04. In the order passed by my predecessor for that year, he has observed that since the additional resources utilised would form part of the cost, the margin of 10% on sub-assemblies would be reasonable and there is no reason to increase the margin in respect of sub-assemblies than what has been provided in respect of raw materials. With this observation the addition for that year was upheld by my predecessor. In this connection, the learned AR has drawn my attention to the fact that the period manufacturing costs are not included in the cost as observed by my predecessor in his order for assessment year 2003-04. Therefore, there is enough justification for mark up of 30% in the case of the sub-assemblies as compared to the mark up of 10% in the case of raw materials.
6.12 He has supported his argument by referring to Page No. 39 in the compilation, which shows that the actual periodic manufacturing costs, incurred by Oudennarde (Belgium) Unit of Samsonite Europe, are 21.2%. This means that the net margin of Samsonite Europe for sub- assemblies is 8.8%, which is quite comparable with 10% margin considered for the raw materials. Further, the data collected by the appellant from the 'Prowess' site and submitted to me at Page No. 44 of the compilation also shows that average ratio of Gross Profit to Sales for the Luggage Industry is 22.3% and the industry range is from 21.24% to 25.56% as against the said ratio of 31.05% in the case of the appellant. 6.13 The above analysis demonstrates that the price paid by the appellant for the sub-assemblies purchased by it from Samsonite Europe is very close to the arms' length price. Hence, I am of the considered view that the addition was proposed by the TOP without properly applying his mind to the facts of the case and the AO also has followed the same without looking into these submissions made by the appellant. As neither the TPO nor the AO have brought on record any comparable instance or any other material to support the arm's length rate of 10% adopted by them, I am inclined to accept the arguments put up before me on behalf of the appellant. Accordingly, I direct the AO to delete the addition of Rs.2,78,990/- on account of adjustment under section 92CA(3) of the Act."
13. We were also informed and evidences placed on record that the order of the CIT(A) for A.Y. 2004-05 has been accepted by the Department and no appeal was preferred (vide letter dated 19.02.2010 addressed by the DCIT 8 ITA No. 2496/Mum/2007 8(3), Mumbai to the CIT - DR, copy of which is placed on record). Since, on similar facts the CIT(A) has come to a conclusion that there is enough justification for mark up of 30% in the case of sub-assemblies, as compared to the mark up of 10% in the case or raw materials in the later year, we are of the opinion that mark up of 25% during the year is reasonable and no adjustment is required. However, as rightly pointed out by the learned D.R. and also submitted by the learned counsel, the working of the cost of periodical cost has not been examined by the A.O. and the TPO. In the interest of justice, we are of the opinion that this issue can be re-examined by the TPO/AO and take appropriate decision in this year in the light of the decision taken in A.Y. 2004-05 for examination of the details of working of cost of mark up. The matter is restored back to the file of the A.O. Ground is considered allowed for statistical purpose.
14. In the result, appeal is partly allowed.
Order pronounced in the open court on 13th April 2010.
Sd. Sd.
(D.K. Agarwal) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, Dated: 13th April 2010
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - XXIX, Mumbai
4. The CIT- VIII, Mumbai City
5. The DR, "L" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.