Income Tax Appellate Tribunal - Mumbai
Mettler Toledo (I) P. Ltd, Mumbai vs Department Of Income Tax on 26 November, 2013
आयकर अपीलीय अिधकरण, के" खंडपीठ मुंबई
अिधकरण "क
INCOME TAX APPELLATE TRIBUNAL,MUMBAI - 'K' BENCH.
सव[ौी आय.पी
आय पी.
पी बंसल,
ल Ûयाियक सदःय एवं राजेÛि,ले
ि लेखा सदःय
Before S/Sh. I.P. Bansal,Judicial Member & Rajendra,Accountant Member
आयकर अपील सं/.ITA No.8485/Mum/2010 ,िनधा[
िनधा[रण वष[/Assessment Year-2005-06
D.C.I.T CIR 8(2) Mettler Toledo (I) P. Ltd.
Room No. 216-A, Amar Hill Saki Vihar Road,
Aayakar Bhavan, Vs Powai
M.K.Road, Mumbai-400072
Mumbai.
PAN:AABCM0779A
(अपीलाथȸ/ Appellant) (ू×यथȸ /Respondent)
िनधा[ǐरती ओर से/ Assessee by : Shri O.P. Singh &
Shri Ajit Kumar Jain
राजःव कȧ ओर से/Revenue by : Shri K. Shivram
सुनवाई कȧ तारȣख/ Date of Hearing : 26-11-2013
घोषणा कȧ तारȣख / Date of Pronouncement : 29-11-2013
आ यकर अ िधिनयम,
िधिनयम 1961 कȧ धारा ( 1 ) 254 के अÛतग[ त आ दे श
Order u/s.254(1)of the Income-tax Act,1961(Act)
PER RAJENDRA, AM
Challenging the order dated 27.09.2010 of the CIT(A)-15, Mumbai Assessing Officer (AO) had filed following grounds of appeal:
"1.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the adjustment of Rs. 82,52,119/- made u/s.92CA(3) of the I.T.Act without appreciating the facts of the case.
2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in taking Avery India as the only case comparable with the assessee ignoring the other two comparable cases adopted by the TPO.
3."On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred not considering the TPO's reasons for rejecting the other two comparables selected by the assessee.
2. The appellant prays that the order of the Ld. CIT(A) on the above ground be set aside and that of the AO be restored.
3. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.
Assessee-company,engaged in the business of importing, assembling and distribution of weighing machines,filed its return of income on 31.10.2005 declaring Nil income.During the assessment proceedings,AO found that assessee had reported following international transactions for the year under consideration:
2 ITA No. 8485/Mum/2010 Mettler Toledo (I) P. Ltd.
SN. Particulars Amount Method AY
adopted 2004-05
1 Purchase of Components 5.08 crs TNMM 4.87 crs
2 Purchase of trading goods 0.40 crs TNMM 1.29 crs
3 Commission Income 0.78 crs TNMM 0.22 crs
4 Marketing support service(re-invoiced income) 1.60 crs TNMM -
5 Reimbursement (received) 0.01 crs TNMM -
6 Reimbursement of incentives (paid) 0.01 crs TNMM -
7 Allocation of hub charges 0.09 crs TNMM -
8 Corporate support services paid 0.14 crs TNMM -
9 Reimbursement made (paid) 0.17 crs TNMM -
TOTAL 8.28 crs 6.38 crs
10 Loan Received (Brought forward only) 13.05 crs CUP -
He made a reference to the Transfer Pricing Officer (TPO) to determine arm's length price (ALP) of the international transaction.TPO issued a notice u/s. 92CA(2) of the Act to the assessee and directed it to make submissions to support the ALP computed by it.After considering the submiss
-ions of the assessee with regard to international transactions with the Associate Enterprise (AE), TPO held that assessee had purchased raw-material/components worth Rs.8.08 Crores from the assessee, that it had also purchased trading goods worth Rs.40 lacs,that it had adopted TNMM method,that eight companies were identified as comparable,that the operating profit (two sales) margin of the assessee was at 5.22% as against the comparables of 4.83% as claimed by the assessee.He re-worked the operating margins of the above comparables and the assessee company as under:
SN Name of the Company Sales Total Cost Op.profit OP/TC % OP/Sa les % Assessee* 29.72 28.17 1.55 5.50 5.09 Comparables:
1 Addison & Co. Ltd. 115.87 109.65 6.22 5.67 5.37 2 Avery India Ltd. 74.15 68.59 5.56 8.11 7.50 3 Gansons Ltd. 39 37.05 1.95 5.26 5.00 4 L G Balakrishnan & Bros. Ltd. 409.03 373.37 35.66 9.55 8.72 5 Monozyme India Ltd. 9.82 8.94 0.88 9.84 8.96 6 Rajasthan Udyog & Tools Ltd. 42.66 40.75 1.91 4.69 4.84 7 Rolcon Engineering Co. Ltd. 19.57 18.94 0.63 3.33 3.22 8 T A L Manufacturing Solutions Ltd. 88.81 84.16 4.65 5.53 5.24 Arithmetical mean 6.50 6.06 While working the operating margin of the assessee, the foreign exchange fluctuation gain is excluded from the sales.
He further found that for the AY 2004-2005 three comparables were adopted by the department as against only one comparable,Avery India Ltd (AIL),selected by the assessee.Referring to the transfer pricing order for the AY 2004-05,TPO held that same comparables were to be adopted for the year under consideration in addition to the list of comparables selected by the assessee. He determined the arithmetic mean as under:
SN Name of the Company Sales Total Cost Op.profit OP/TC % OP/Sales % Assessee* 29.72 28.17 1.55 5.50 5.09 Comparables:
1 Addison & Co. Ltd. 115.87 109.65 6.22 5.67 5.37 2 Avery India Ltd. 74.15 68.59 5.56 8.11 7.50 3 Gansons Ltd. 39 37.05 1.95 5.26 5.00 3 ITA No. 8485/Mum/2010 Mettler Toledo (I) P. Ltd.
4 L G Balakrishnan & Bros. Ltd. 409.03 373.37 35.66 9.55 8.72 5 Monozyme India Ltd. 9.82 8.94 0.88 9.84 8.96 6 Rajasthan Udyog & Tools Ltd. 42.66 40.75 1.91 4.69 4.84 7 Rolcon Engineering Co. Ltd. 19.57 18.94 0.63 3.33 3.22 8 T A L Manufacturing Solutions Ltd. 88.81 84.16 4.65 5.53 5.24 9 Flex Engineering Ltd. (Merged) 59.16 49.99 9.17 18.34 15.50 10 Manugraph India Ltd. 282.92 237.09 45.83 19.33 16.20 Arithmetical mean 8.97 8.02 While working the operating margin of the assessee, the foreign exchange fluctuation gain is excluded from the sales.
He held that the arithmetic mean of operating profit margin of the comparables was higher than the margin shown by the assessee,that ALP of the transactions had to be re-worked applying the safe harbor limits.Finally,he calculated ALP as under:
Sl. No. Particulars Amount (Rs.) 1 International Transaction (imports from AEs) 5,48,13,219 2 Sales 29,72,34,902 3 Desired profits @ 8.02% on sales 2,38,38,239 4 Actual Profits 1,55,86,120 5 Adjustment (304) 82,52,119 6 Arm's Length Price for imports (1-5) 4,65,61,100
As he had determined the price for international transaction at Rs. 4.65 Crores as against 5.48 Crores,so,he held that an adjustment of Rs. 82.52 lacs was to be made in the case of the assessee. 2.1.After receiving the recommendation of the TPO, AO issued a show cause notice to the assessee and asked him to explain as to why the adjustment/addition should not be made to its total income.After considering the submissions of the assessee,he made an addition/adjustment on account of ALP,amounting to Rs. 82,52,119/-of the international transaction,to the total income of the assessee.
2.2.Assessee preferred an appeal before the First Appellate Authority (FAA).After considering the TPO's order,assessment-order,the written submissions and oral arguments of the assessee,he held that the TPO had not disputed the amount of the international transactions and the TNMM method applied for justifying the arm's length nature of the transaction-in-question,that although both the assessee and the TPO had agreed to eight comparables yet the operating margins of the said comparables were different,that the assessee had carried out detailed Transfer Pricing Study justif
-ying the ALP of the international transactions with its AEs by considering the various factors, particularly a comparative analysis of the functions performed by the assessee-company as against functions performed by the host of companies,that in addition the functional comparablity the assessee had applied quantitative filters like turnover,companies having negative net worth etc. with a view to establish comparability with reference to assets employed and risks assumed,that the TPO had not provided detailed parameters(like treatment of non-operating incomes and expen
-ses)for arriving at the operating sales,operating cost and operating margins of the comparables and hence carried out its scrutiny in a opaque manner,that the TPO had failed to issue show cause notice to the assessee for rejecting the margins of the assessee and adopting two additional compa
-rables,Flex Engineering Ltd.(FEL)and(Manugraph India Ltd.)MIL,against the mandate of law.In this regard he relied upon the cases of Moser Baer India Ltd.(316ITR1)and Maruti Suzuki India Ltd.(WP 6876/2008/ -Delhi.) He further held that the TPO had selected two additional comparables and had made reference to the assessment order for the AY.2004-2005.In this context, he referred to his order for the AY.2004-05 wherein he had held that comparables adopted by the AO could not be applied to the case under consideration,that FEL and MIL were engaged in different line of business than that of 4 ITA No. 8485/Mum/2010 Mettler Toledo (I) P. Ltd.
the assessee,that in the case of FEL the substantial income was from job work relating to domestic and export oil and gas sector in which the assessee was not engaged,that AIL was operating exactly in the same industry(weighing Scales/machines),that to expand the set of comparables and broaden the search criteria for benchmarking it had selected total eight comparables and the said comparable were accepted by the AO,that there was absence of any workings with regard to operating margins relied upon by the TPO,that the assessee could not verify the correctness in the said margins, that the TPO had not considered various factors like provision written back and bad debts recovered,bad-debts and provision for doubtful debts,advances written off and deferred expenses written off,that these factors were operating in nature,that the operating margin of AIL arrived at 1.65%,based on the audited financial statements,was correct and it was lower than the operating margin of 5.22%of the assessee,that if the operating margin of all other seven comparab
-les(excluding FEL and MIL)were considered as per the order of the TPO and the operating margin of AIL was considered at1.65% it was evident that average operating margin of 5.33% of the said comparables was within the +/-5% of the margins/transactions of the assessee, that the international transactions,entered in to by the assessee,were at ALP and no TP adjustment was req
-uired.Finally,he deleted the addition,amounting to Rs.82.52 lakhs,made by the AO.
2.3.Before us,Departmental Representative(DR) submitted that FAA had wrongly rejected two comparables, the mean margin approved by the FAA was factually incorrect,that in earlier year also mean was arrived by considering the results of FEL and MIL.Authorised Representative(AR) submitted that the assessee had ascertained eight comparables with average operating margin of 4.83%,that assessee's operating margin was 5.22%,that because of that reason transactions were regarded as arm's length,that TPO had reworked the margins of the comparables by adding two more comparable i.e.FEL and MIL,that the TPO had determined net margin @ 8.02%,that TPO had not cited any reason/ground nor had adduced any evidence to prove that the method benchmarking adopted by the assessee was flawed,that TPO had not given any working for arriving at the operating margin of AIL.He relied upon the judgment delivered by the Hon'ble Bombay High Court in the case of Karlyle India Advisors Pvt. Ltd.(357ITR 582)wherein the decision of Mumbai Tribunal delivered in the case of assessee,Karlyle India Advisors Pvt. Ltd., was confirmed.
2.4.We have heard the rival submissions and perused the material before us.We find that while finalising the ALP,TPO had added two new comparables i.e.FEL and MIL to the eight comparabl
-es adopted by the assessee,that because of the inclusion of the said two companies variation in operating margin arose,that the operating margin was within the range of 5% of the arithmetic mean of the operating margin of the comparable companies.We find that TPO had not given any reason as to why he was including FEL and MEL in the list of comparables.He did not give any notice to the assessee for inclusion of two new variables.Basic principles of natural justice demand and expect that assessees should be heard,before fastening tax-liability to them.It is not known as how did the TPO arrive at the conclusion that FEL and MEL could be compared with the other companies for arriving at operating margin.Similarly,it is also not known as whether both the companies were in the same line of business or not.If the TPO had some definite information,he should have brought it on record and should have confronted the assessee with it.It would have given a chance to the assessee to defend itself.By not affording an opportunity to the assessee,TPO had taken a unilateral decision and such decisions cannot be endorsed.TPO had not found any defect in TP Study carried out by the assessee.Secondly,TPO had not discussed the reason for not accepting the operating margins of AIL,though the said company was in the same business.If the average operating margin shown by the assessee is compared with AIL,it is clear that same was within the +/-5% of the margins/transactions and was allowable as per the rules.We find that while considering the basic data of AIL had ignored vital factors that have been highlighted by the FAA in his order.In our opinion,FAA had correctly held that international transactions entered in to by the assessee were at arm's length and that no adjustment was required.So, confirming his order we decide the effective ground of appeal against the AO.
5 ITA No. 8485/Mum/2010 Mettler Toledo (I) P. Ltd.
As a result,appeal filed by the AO stands dismissed.
पǐरणामःवǾप िनधा[ǐरती अिधकारȣ Ʈारा दाǔखल दाǔखल अपील नामंजूर कȧ जाती है .
Order pronounced in the open court on 29th November,2013.
आदे श कȧ घोषणा खुले Ûयायालय मɅ नवंबर 29, 2013 को कȧ गई.
Sd/- Sd/-
आय.पी
आय पी.
(आय पी बंसल,
ल / I.P.Bansal) राजेÛि/Rajendra)
(राजे ि
Ûयाियक सदःय /Judicial Member लेखा सदःय /Accountant Member
[
मुंबई/Mumbai,Ǒदनांक/Date: 29.11.2013
SK
आदे श कȧ ूितिलǒप अमेǒषत/Copy
षत of the Order forwarded to :
1. Assessee /अपीलाथȸ 2. Respondent /ू×यथȸ
3.The concerned CIT(A)/संबƨ अपीलीय आयकर आयुƠ,4.The concerned CIT /संबƨ आयकर आयुƠ
5. DR "K" Bench, ITAT, Mumbai /ǒवभागीय ूितिनिध. के खंडपीठ,आ.अ.Ûयाया.मुब ं ई
6. Guard File/गाड[ फाईल स×याǒपत ूित //True Copy// आदे शानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai