Income Tax Appellate Tribunal - Delhi
Airtech Pvt. Ltd., New Delhi vs Assessee on 7 January, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'A' DELHI
BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL
I.T.A.No. 3591(Del)/2010
Assessment year: 2006-07
Airtech Private Ltd., Deputy Commissioner of Income
2A, Shankar Market, Vs. tax, Circle 1(1), New Delhi.
Connaught Place,
New Delhi.
PAN-AAACA4690D
(Appellant) (Respondent)
Appellant by : S/Shri S.D. Kapila, R.R. Maurya,
& Ms. Charu Kapoor, Advocates
Respondent by : Shri Ashok Pandey, CIT, DR
ORDER
PER K.G. BANSAL : AM The assessee has taken up 7 grounds in its appeal. However, in the course of hearing before us, the ld. counsel for the assessee pressed only ground nos. 1, 1.a and 5 as other grounds are narrative and argumentative in nature. Ground no. 1 is to the effect that the AO erred in making addition of ` 2,96,72,372/- on account of transfer pricing adjustment in violation of Rule 10B of the Income-tax Rules, 1962, read with section 92C of the Income-tax Act, 1961. It is mentioned that he erred in rejecting the cost plus method, which had been consistently accepted by him in the proceedings of earlier years. This method had also 2 ITA No. 3591(Del)/2010 been accepted by the IRS, United Kingdom, in the case of the buyer. Ground no. 5 is to the effect that the AO erred in disallowing expenditure of ` 1,29,23,216/- on inland haulage charges paid to agents of foreign shipping lines by invoking the provision contained in section 40(a)(ia) read with section 194C of the Act.
1.1 The assessee had also made an application for stay of demand, which was disposed off in S.A. No. 46(Del)/2010 on 13.08.2010. This interim-order comes to an end on passing the final order on the appeal.
2. The facts of the case are that the assessee filed its return on 20.11.2006 declaring total income of ` 4,11,57,200/-. This return was processed u/s 143(1) on 13.11.2007. Subsequently, the case was picked up for scrutiny as it was found that it entered into international transactions with the associated enterprise. The valuation of these transactions was referred to the Transfer Pricing Officer ("TPO" for short), who passed an order u/s 92CA(3) of the Act on 23.7.2009. The TPO suggested adjustment of ` 2,96,72,372/- to bring the price of international transactions with the associated enterprises in line with arm's length price. The AO discussed the report of the TPO with the 3 ITA No. 3591(Del)/2010 assessee. It is mentioned that the assessee is engaged in manufacturing of designer steel furniture and parts. Most of the goods are exported out of India. On the basis of the transfer pricing report, the AO proposed an addition ` 2,96,72,372/- to be made to the total income of the assessee. 2.1 The AO also found that the assessee expended a sum of ` 1,29,23,216/- by way of payments in respect of inland haulage of the goods from the factory of the assessee to the port in Mumbai. Tax was not found to have been deducted on these payments. Therefore, a further addition of ` 1,29,23,216/- was proposed to the total income by invoking the provisions contained in section 40(a)(ia) of the Act. Thus, the income was proposed to be computed at ` 8,37,52,788/- as under:-
Particulars Amount (In Rs.)
Net income as per return 4,11,57,200/-
Add: Addition on account of arm's
length price adjustment u/s 92C(4) 2,96,72,372/-
Disallowance u/s 40(a)(ia) as
discussed above. 1,29,23,216/-
Taxable income 8,37,52,788/-
2.2 The assessee filed objections to the proposed additions before the Dispute Resolution Panel, New Delhi (the 'DRP' for short). A number of 4 ITA No. 3591(Del)/2010 objections were raised before the panel in regard to transfer pricing adjustment. The panel considered the objections but found that although the assessee suggested some adjustments mentioned in the chart furnished in the course of hearing, there was no clear methodology suggested by it. Therefore, the AO was directed to compute income by making the proposed addition in this behalf. Its findings are reproduced below:-
"The AR for the assessee has suggested that there should be adjustments for items given point-wise in the chart provided. There is no clear cut methodology suggested by the AR for the assessee. In the case of Philips Software Centre (P) Limited 2009 TIOL 123-HC Karnataka-IT, Karnataka High Court has admitted the question of law. It arose from Tribunal's order where certain adjustments were made by Hon'ble ITAT. As the procedure of adjustments sought by the assessee are not clear, we decline to interfere in the adjustments ordered by TPO."
2.3 In respect of disallowance u/s 40(a)(ia), it was submitted before the DRP that the payments made to the agent of a foreign shipping lines does not attract the provisions contained in section 194C. For this purpose, reliance was placed on a Board circular as well as on decided cases in the matter. The learned Panel mentioned that the payment has been made to Indian agent of foreign shipping lines for inland haulage of goods by railways from Tughlakabad, New Delhi, to sea port of Navi-Mumbai. The 5 ITA No. 3591(Del)/2010 AO was directed to make the disallowance in view of the history of the case.
3. Before us, the ld. counsel for the assessee mentioned about the brief history of the case. It is submitted that the assessee-company is being managed by the husband-wife team. It has been running a factory at Sahibabad since 1996 for production of metal bedsteads. The process of manufacturing does not involve any sophisticated technology. All the goods manufactured by it are sold to the wholly owned subsidiary company in the United Kingdom. The assessee had a long-standing understanding with the subsidiary company to sell the goods at cost plus method. The value to be added to the cost is ` 2000 per piece in respect of all items except the headboard where the margin is ` 1,000/-. The AO had conducted transfer pricing study for the first time in the year 2002-03 and accepted that the international transactions with the subsidiary company did not require any transfer pricing adjustment. It is further submitted that similar study was made in the case of the subsidiary company by the I.R.S, U.K. The I.R.S also did not make any adjustment in the case of the buyer. It is also submitted that in view of the aforesaid arrangement, the assessee is not required to maintain any documentation as per the proviso to Rule 10D(4) of the Income-tax Rules, 6 ITA No. 3591(Del)/2010 1962. However, the AO applied the provision contained in Rule 10D(4), ignoring the proviso to the Rule.
3.1 Coming to the adjustment, it is submitted that the TPO selected two comparable cases. It appears that the data in respect of one company, used by the TPO, is not reliable. This company has shown exceptional growth in the year under consideration. It is further submitted that before the DRP it had been clarified that the products of the assessee are quite different from those of the comparable cases chosen by the TPO. However, ignoring these and other objections raised before the DRP, it directed the AO to make the proposed addition to the total income. 3.2 In regard to the disallowance u/s 40(a)(ia), it is submitted that the goods were transported from Tughlakabad to the port in Navi Mumbai by train. The payment in respect of transportation by train does not require deduction of tax at source u/s 194C. However, the DRP did not issue a specific direction in the matter but merely mention that the same may be made as per past history of the case.
3.3 Thus, it is strongly agitated that both the additions require to be deleted from the total income of the assessee.
7 ITA No. 3591(Del)/2010
4. In reply, the ld. DR has submitted that the assessee had not maintained any documentation regarding transfer pricing of the goods exported to its wholly owned subsidiary company. The assessee also did not maintain any contemporary data for deciding arm's length price of the goods sold to the associated enterprise. Although the TPO asked for the information, nothing had been submitted before him. Otherwise, the assessee was required to maintain documentation as provided in Rule 10D. In absence thereof, the TPO applied TNMM method, which is a recognized method, prescribed under the Rules. It is agitated that since the assessee failed to maintain any data, the adjustment should be upheld. In respect of disallowance u/s 40(a)((ia), reliance is placed on the order of the AO.
5. In the rejoinder, the ld. counsel submitted that even if the assessee was required to maintain proper documentation as required under the Rules, non-maintenance thereof cannot lead addition as the same has to be made on the basis of a proper study by the AO or the TPO. 8 ITA No. 3591(Del)/2010
6. We have considered the facts of the case and submissions made before us. The facts in regard to transfer pricing adjustment are that the assessee is engaged in the manufacture of designer steel furniture and parts made of cast metal, brass, chrome etc. The raw-materials used are aluminum, steel tubes, brass casting, brass tubes and hardware. The assessee exported goods of the value of about ` 30.24 crores to its wholly owned subsidiary in U.K., The Original Bedsteads Company Ltd. The price of the goods accounted for in the books is based on cost plus method. The assessee had been required to furnish information and documents to be maintained u/s 92D(1) and the transfer pricing study report to support the claim that the international transactions with the associated concern had been undertaken at arm's length. The assessee justified its transactions by way of arguments but did not furnish any transfer pricing study report or documents, prescribed under Rule 6D(1) and (3). In absence thereof, the matter had been referred to the TPO. Since the assessee had not justified the international transactions under cost plus method as stipulated in Rule 10B(1)(c) and had not furnished any documentation, the TPO used TNMM method. According to him, comparable cases on cost plus method are not available while data of the comparable cases is available at profit level. The TPO worked out the 9 ITA No. 3591(Del)/2010 ratio of operating profit to operating cost at 14.28% in the case of the assessee as overleaf:-
Sales net of excise duty 30,37,64,097/-
Operating cost 26,57,86,071/-
Operating profit 3,79,78,026/-
OP/OC 14.28%
6.1 Thereafter, he had carried out a search on "Prowess Data Base" in
respect of companies engaged in the business of manufacturing of metal furniture and fixtures, mounting and fittings for furniture, stopper caps and lids, crown caps etc. The search showed 8 companies. Further analyses has been made to find out companies manufacturing similar products. Two such companies were found, i.e., Eurocoustic Products Ltd. and Shakti Met Dor Ltd. , having the ratio of operating profit to operating cost at 8.33% and 41.54% respectively. The objections of the assessee were sought on making adjustment on the basis of the book- results of these two companies. The assessee raised a number of objections, which are listed below:-
(i) the sale price is fixed on the basis of cost of material and on an average price that the assessee has added Rs. 2000 for a bed stead and Rs. 1000 for a headboard;
(ii) the products are designer products and are not manufactured or dealt with by other manufacturers;10 ITA No. 3591(Del)/2010
(iii) cost plus method adopted by the assessee has been accepted by the department in all earlier years;
(iv) the present transactions of the assessee are part of the ongoing transactions and the assessee is not expected to maintain records as per Rule 10D because the transaction being ongoing over a number of years;
(v) the companies proposed by the TPO are manufacturing different products;
(vi) the PLI suggested has too much variation to enable a reasonable comparison;
(vii) the margins of Shakti Met-Dor Limited are changing drastically from year to year. The company seems to have added some specialized products after March, 2005 which are resulting into high profits. The margins of Eurocoustic Products Limited have also increased substantially due to introduction of new products; and
(viii) a fresh search has been carried out by the assessee on Prowess taking all manufacturing companies having a turnover between 10 crores to 50 crores and having some exports. This has thrown up 636 companies whose mean margin (OP/OC) has been computed at 13.05%.
6.2 The objections of the assessee had been considered. It is mentioned that the assessee has not filed any documentation to prove that associated parties transactions have been carried out at arm's length. The assessee had fixed profit of ` 2,000/- per bed stead and ` 1,000/- per headboard, which is not fixed on any credible or comparable basis. This 11 ITA No. 3591(Del)/2010 value addition does not represent arm's length profit as it does not take into account the design of the furnished product and the cost incurred. The method is not appropriate as it leads to vastly different results as seen from the following data submitted by the assessee:
Sales Operating Operating OP/OC%
Cost Profit
March 98 13.82 10.85 2.97 27.37%
March 99 12.68 11.07 1.61 14.54%
March 00 12.93 11.18 1.75 15.65%
March 01 9.41 9.08 0.33 3.63%
March 02 14.11 12.53 1.58 12.61%
March 03 21.01 17.56 3.45 19.65%
March 04 25.02 20.24 4.78 23.62%
March 05 32.15 27.58 4.57 16.57%
March 06 30.61 26.56 4.05 15.25%
March 07 34.86 31.28 3.58 11.45%
March 08 29.03 25.35 3.68 14.52%
6.3 Coming to the comparable cases selected by the TPO, the case of
the assessee had been that it appears that new products have been
added leading to higher profitability. This was negativated by
mentioning that according to its own assertion, the assessee has been manufacturing designer products. Further, addition of new products does not lead to increased profitability immediately as there is always some gestation period. The designer products would always lead to 12 ITA No. 3591(Del)/2010 higher profits due to proprietary design and unique workmanship. Therefore, the submissions of the assessee have been rejected. The average profit ratio of the two companies has been worked out at 24.93%, which has been applied to the case of the assessee, leading to adjustment of ` 2,96,72,372/-. This adjustment has been approved by the DRP and was finally adopted by the AO.
6.4 It has been the case of the assessee that the cost plus method had been accepted by the revenue in past. The IRS, United Kingdom had also conducted transfer pricing study in the case of the subsidiary company and found that the company had adopted a suitable transfer pricing policy for the year ended on 31.3.2001. As against the aforesaid, the case of the ld. DR is that the IRS had expressed reservation regarding exchange rate between Rupee and Pound. In any case, a lower purchase price shown by the wholly owned subsidiary company would not be of any interest to the U.K. tax authorities. For the sake of ready reference, the communication from the IRS to that associated enterprise is reproduced below:-
"As I said at our meeting, having considered the issues, I am content that the company has adopted a suitable transfer pricing policy for the year ended 31 March, 2001. As 13 ITA No. 3591(Del)/2010 suggested at the meeting I would appreciate if the company would keep this matter under review especially with relation to the exchange rates between the rupee and the pound used to calculate the resale minus figure."
6.5 The ld. counsel has also submitted that there is some mistake in the data used by the AO in case of Shakti Met-Dor Ltd. He has drawn our attention to page no. 41, which shows the total expenses debited to income and expenditure account as on 31.3.2006 at 40.59. The assessee downloaded the data in respect of this company from the Bombay Stock Exchange Website (paper book page 213), which shows total income at ` 4932.30 lakhs and profit before tax at ` 1364.82 lakhs. The figures in this data base do not tally with the figures taken by the AO. This company is having both inland sales and overseas sales. Further, it has been mentioned in the director's report that the company had a year of exceptional growth that exceeds the industry average. The increase in sales has been primarily due to significant growth in infrastructure, ITES, BPO, Pharma and Healthcare industries etc. It is also mentioned that in the year under review, the company has retained its status of "preferred supplier" and "market leadership" by maintaining a fair share in domestic market. On the basis of the discrepancy in the two data bases and aforesaid remarks, it has been argued that the case of Shakti Met- 14 ITA No. 3591(Del)/2010 Dor Ltd. is not a valid comparable case. If the results of this company are ignored, the only comparable case left is that of Eurocoustic Products Ltd. The assessee company has shown better results than this company. Therefore, it is strongly urged that no adjustment should be made to the book results of the assessee.
6.6 It is an accepted fact that the assessee has not maintained any documentation to prove that transactions undertaken by it with overseas associated enterprise are at arm's length. The ld. counsel has argued that the assessee company is not required to maintain any documentation as there has been a long standing arrangement to sell the goods by way of export at cost plus method. In this connection, we may have regard to the provision contained in Rule 10D(4), which read as under:-
"(4) The information and documents specified under sub-
rules (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F.
Provided that where an international transaction continues to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature or terms of the international transaction, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under sub-rules (1) and (2) shall be maintained bringing out 15 ITA No. 3591(Del)/2010 the impact of the change on the pricing of the international transaction."
6.6 Sub-rule (4) provides that the information and documents, in so far as possible, should be contemporaneous. However, the proviso carves out an exception in case an international transaction continues to have effect over more than one previous year. In such a case, it is provided that fresh documentation need not be maintained in respect of each year unless there is significant change in the nature or terms of international transaction. Thus, in general, rule 10D casts an obligation on an assessee to maintain information and documents in respect of international transaction as mentioned in sub-rules (1) and (3). However, where a transaction continues over more than one year, fresh documentation is not necessary unless there is a significant change in the nature or terms of international transaction. The exception is applicable only when an international transaction continues to have effect over two or more years. In the instant case, each transaction of sale is a separate transaction. The assessee has not shown any agreement between it and the associated enterprise which subsisted right from the year 1996 and which is binding in nature. The market conditions also keep on changing from year to year. Therefore, it does not stand to reason that the margin 16 ITA No. 3591(Del)/2010 charged in the year 1996 in rupee terms per piece should be taken to be a fair margin for all times to come. The case of the ld. counsel in this behalf has also been that all the costs are reimbursed by the subsidiary company and, therefore, any increase in the profit per item would amount to profiteering. We are not able to subscribe to this view for the simple reason that even for maintaining parity of real profit in different years, the fall in the value of rupee will have to be taken into account. Thus, it is held that proviso to Rule 10D(4) is not applicable on the facts of the case and, therefore, the assessee was required to maintain documents as per Rule 10D.
6.7 In so far as the study of IRS, United Kingdom is concerned, it pertains to the year ended on 31.3.2001. No adjustment has been made by the AO for that year. We are dealing with assessment year 2006-07. The study is subject to review by the company in the field of exchange rate between rupee and the pound. Therefore, the acceptance of the price placed by the U.K. company for its purchases is conditional on exchange rate. Further, we tend to agree with the ld. DR that under pricing by the U.K. company would be of no interest to the UK tax authorities. In view of fluctuation in the exchange rate between 2001 and 2006, the condition 17 ITA No. 3591(Del)/2010 regarding the exchange rate is a significant condition. Accordingly, the report, according to us, does not advance the case of the assessee. 6.8 Having considered the facts that the assessee has failed to maintain the documents prescribed under Rule 10D, the profit per piece had remained static in rupee terms, and the conditional acceptance of the transfer pricing study of the subsidiary company for the year ended on 31.3.2001, we are of the view that the case required transfer-pricing study by the AO. However, for the reason mentioned earlier, the case of Shakti Met Dor Ltd. is not a valid comparable case. The results shown by the assessee are better than the results of Eurocaoustic Products Ltd. But, as submitted by the ld. counsel, the product line of this company is also different. Thus, no valid comparable case has been brought on record even by the revenue. Therefore, we think it fit to restore the matter to the file of the AO with a view to obtain data of comparable cases so as to come to an informed decision whether the price charged by the assessee from its associated enterprise is at arm's length or not. Thus, the matter is restored to the file of the AO for re-adjudication of the matter after giving a reasonable opportunity of being heard to the assessee. 18 ITA No. 3591(Del)/2010
7. In so far as tax deduction at source from payment to Indian agents of foreign shipping lines for inland haulage of goods by railways is concerned, the ld. counsel has drawn our attention to the provision contained in clause (c) of Explanation-III to section 194C, which includes carriage of goods and passengers by any mode of transport other than by railways in the expression "work" for the purpose of tax deduction at source. His case is that the payment has been made for transportation of goods from Tughlakabad to Mumbai port by railways, which has not been disputed in any manner either by the lower authorities or by the ld. DR. This mode of transportation does not fall within the ambit of "work". Therefore, it is held that there had been no obligation on the assessee to deduct tax at source u/s 194C. Accordingly, no disallowance can be made u/s 40(a)(ia) in the case of the assessee.
7.1 Thus, ground no. 5 is allowed.
8. In the result, the appeal is treated as allowed for statistical purposes. This order was pronounced in the open court on 7 January, 2011.
Sd/- sd/-
19 ITA No. 3591(Del)/2010
(C.L. Sethi) (K.G.Bansal)
Judicial Member Accountant Member
Date of order: 7th January, 2011.
SP Satia
Copy of the order forwarded to:-
Airtech Private Ltd., New Delhi.
Dy. CIT, Circle 1(1), New Delhi.
CIT(A)
CIT
The DR, ITAT, New Delhi. Assistant Registrar.