Income Tax Appellate Tribunal - Chennai
Shachihata (I) Pvt Ltd, Thiruvallur vs Drp-2, , Bengaluru on 12 July, 2023
आयकर अपीलीय अिधकरण, 'डी' यायपीठ, चे ई।
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH: CHENNAI
ी वी. दु गा राव, माननीय ाियक सद एवं
ी मंजूनाथा .जी, माननीय लेखा सद के सम
BEFORE SHRI V. DURGA RAO, HON'BLE JUDICIAL MEMBER AND
SHRI MANJUNATHA. G, HON'BLE ACCOUNTANT MEMBER
आयकर अपील सं./IT (TP) A No.75/Chny/2018
िनधा रण वष /Assessment Year: 2014-15
M/s.Shachihata (India) Pvt. Ltd., v. The Dy. Commissioner-
Survey No.1092/126, of Income Tax,
Village: Viswanathapuram, Circle-1(1),
Peramakkam Road, Post: Ulandhai, Panaji, Goa.
Thiruvallur District,
Tamil Nadu-602 105.
[PAN: AABCA 6565 E]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से/ Appellant by : Mr.S.P.Chidambaram, Adv.
यथ क ओर से /Respondent by : Mr.A. Sasikumar, CIT
सुनवाई क तारीख/Date of Hearing : 03.07.2023
घोषणा क तारीख /Date of Pronouncement : 12.07.2023
आदेश / O R D E R
PER MANJUNATHA.G, AM:
This appeal filed by the assessee is directed against final assessment order passed by the AO u/s.143(3) r.w.s.92CA & 144C(1) of the Income Tax Act, 1961, (in short "the Act"), dated 29.10.2018, in pursuant to directions of the Dispute Resolution Panel-2, Bangalore, u/s.144C(5) of the Act, dated 20.09.2018, and pertains to assessment year 2014-15.
2. The assessee has raised the following grounds of appeal:
1. The directions u/s 144C (5) passed by the honorable Dispute Resolution Panel-2 are bad in law and are required to be set aside. - Rs.NIL IT (TP) A No.75/Chny/2018 :: 2 ::
2. The honorable Dispute Resolution Panel-2 did not consider exceptional one time legal and professional expenses for computing operating profit margin. - Rs.34,29,749/-
3. The honorable Dispute Resolution Panel-2 did not exclude M/s.Writefine Products Limited on turnover filter. - Rs.12,04,039/-
4. The honorable Dispute Resolution Panel-2 ought to have considered the fact that, the Company was in its initial period of running the operations on its own and costs of items like branding cost, marketing cost, cost of material consumed, employee cost, depreciation and other expenses were significantly higher when compared to the comparable companies. - 12,04,039/-
5. For these and other grounds that may be adduced at the time of hearing, the appellant prays that the assessment order passed by the AO and the directions passed by the Dispute Resolution Panel-2 may be set aside and this appeal may be allowed. - Rs.NIL
3. The brief facts of the case are that the assessee M/s.Sachihata (India) Pvt. Ltd., is engaged in manufacture and distribution of permanent markers, white board markers, painting markers, stamp pads, stationery products for office including pens, glue, etc., stationery items for students including pencil, colour pencil, crayons, pastels, modelling clay, eraser, scales, geometry box, glue etc. During the financial year relevant to AY 2014-15, the assessee has entered into various international transactions with its Associated Enterprises (in short "AEs"), including purchase of raw materials, royalty payment, and re-payment of loan, etc. The assessee has adopted Cost Plus Method (in short "CPM") as most appropriate method for purchase of raw materials, finished goods and packing materials and also for sale of finished goods, but for transactions like loan re-payment, interest on ECB loan, etc., the assessee has adopted Comparable Uncontrolled Price (in short "CUP") as most appropriate method. The case was selected for scrutiny and during the course of assessment proceedings, a reference was made to the Transfer Pricing Officer (in short "TPO") for determining Arm's Length Price (in short "ALP") of international transaction of the assessee IT (TP) A No.75/Chny/2018 :: 3 ::
with its AE. During the course of TP proceedings, the TPO called upon the assessee to file necessary details to justify CPM & CUP methods adopted for various international transactions. Since, the assessee could not provide relevant details, the TPO has rejected CUP & CPM, and has adopted TNMM Transactional Net Margin Method (in short "TNMM") as most appropriate method. In support of TNMM, the assessee has submitted list of two comparables with average margin of 3.76% against its own margin of (-) 3.76%. The TPO has rejected comparables selected by the assessee and has conducted fresh TP study and selected six comparables with an average margin of 4.30%. The assessee has objected for certain comparables on the ground of upper turnover filter and argued that companies having more than 10 times or above 200 Crores, turnover should be excluded. The TPO after considering relevant submissions of the assessee, has excluded two comparables and retained four comparables with average margin of 0.99%. The TPO had also worked out margin of the assessee at 3.76% and then compared with margin of comparables and made TP adjustment of Rs.84,86,054/- at entity level. Thereafter, the AO passed draft assessment order u/s.143(3) r.w.s.144C(1) of the Act, on 26.12.2017 and made additions towards international transactions as suggested by the TPO.
4. The assessee has filed objections before the DRP. Before the DRP, the assessee has challenged TP adjustment carried out by the TPO and also computation of operating margin by including 'legal & professional charges'.
IT (TP) A No.75/Chny/2018 :: 4 ::
The assessee seeking exclusion of M/s.GM Pens International Pvt. Ltd., having turnover of Rs.390 Crs., and M/s.Linc Pen & Plastics Ltd., having turnover of Rs.316 Crs. The assessee had also challenged computation of operating margin at (-)3.76% by including 'legal & professional charges' on the ground that 'legal & professional charges' incurred by the assessee is one-time expenditure to settle certain disputes between assessee and the third party, and same cannot be considered as operating in nature. The DRP after considering relevant submissions of the assessee and also by following the decision of the Hon'ble Bombay High Court in the case of Pentair Water India Pvt. Ltd. v. CIT reported in 381 ITR 216, excluded M/s.GM Pens International Pvt. Ltd., and M/s.Linc Pen & Plastics Ltd., from the final list of comparables. However, rejected arguments of the assessee for making adjustment towards international transaction alone as against entity level carried out by the TPO. The DRP had also rejected arguments of the assessee in so far as computation of operating margin by excluding 'legal & professional charges' on the ground that 'legal & professional charges' incurred by the assessee is ongoing dispute and it does not appear as if litigation going to end and likely to go to higher forum, and hence, opined that such litigation expenditure may have been incurred by comparables also and accordingly, rejected arguments of the assessee for excluding 'legal & professional charges' for computation of operating margin. In pursuant to the DRP directions, the AO has passed final assessment order u/s.143(3) r.w.s.144C(1) of the Act, on 29.10.2018 and IT (TP) A No.75/Chny/2018 :: 5 ::
determined total income of the assessee at Rs.38,35,370/- by making additions towards international transaction at Rs.38,35,369/-. Aggrieved by the final assessment order, the assessee is in appeal before us.
5. The first issue that came up for our consideration from Ground No.2 of the assessee's appeal is computation of operating profit margin by including 'legal & professional charges'. The Ld.Counsel for the assessee submits that the assessee has incurred certain 'legal & professional charges' in connection with Suit filed by the third party against the company and said legal expenditure is one time, and thus, same needs to be treated as non-operating in nature for the purpose of computation of operating margin.
5.1 The Ld.DR present for the Revenue supporting the order of the DRP submits that if you go through the nature of expenditure incurred by the assessee, it is in the nature of operating expenses incurred by any corporate house in day to day operations of their business. Further, the assessee has failed to make out a case that such litigation expenses may have not been faced by comparables, and thus, in absence of any specific evidences, the TPO & the DRP has rightly computed operating margin of the assessee by including 'legal & professional charges', and thus, their findings should be upheld.
5.2 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee has filed details of 'legal & professional charges' which includes fees paid for IT (TP) A No.75/Chny/2018 :: 6 ::
filing Suits, advise on corporate matters, advise on filing Suits and appearance before various authorities. From the details filed by the assessee, it appears that expenditure incurred under the head 'legal & professional charges' is routine in nature and further operating expenses like any other assessee / entity incurs in their day to day operations. Further, the DRP recorded categorical findings that the cases on which 'legal & professional charges' spent by the assessee is continuing one and every year the assessee has incurred such expenses. We further noted that such litigation may have been faced by comparable companies also and some legal expenses are part and parcel of running a business. Therefore, we are of the considered view that there is no merit in the arguments of the Ld.Counsel for the assessee for exclusion of 'legal & professional charges' on the ground that such expenditure is one time, which is non-operating in nature. The DRP after considering relevant submissions has rightly rejected the arguments of the assessee and upheld computation of operating margin by the TPO, and thus, we reject the arguments of the assessee and upheld the operating margin computed by the TPO.
6. The next issue that came up for our consideration from Ground Nos.3-4 of the assessee's appeal is exclusion of M/s.Writefine Products Pvt. Ltd., on turnover filter. The Ld.Counsel for the assessee submits that although, the DRP has excluded high turnover companies from the list of comparables, but failed to exclude M/s.Writefine Products Pvt. Ltd., even though, turnover of above company is more than 10 times of turnover of IT (TP) A No.75/Chny/2018 :: 7 ::
the assessee company. He further submits that it is a well settled principle of law, turnover is a criteria for exclusion of any comparables and this position is settled by the decision of various Courts and Tribunals, including the Hon'ble Bombay High Court in the case of Pentair Water India Pvt. Ltd. (supra). A similar view has been taken by the ITAT Bangalore Benches in the case of Mformalation Software Technologies (I) (P.) Ltd. v. ITO reported in [2020] 182 ITD 78 (Bangalore-Trib.). Therefore, he submits that a direction may be given to exclude M/s.Writefine Products Pvt. Ltd., from the list of final comparables.
6.1 The Ld.DR present for Revenue, on the other hand, supporting the order of the DRP submits that the assessee seeking an exclusion of at least two comparables on turnover filter from the list of final comparables. The DRP has excluded two comparables which are having turnover above 200 Crores. Therefore, there is no merit in the arguments of the assessee for exclusion of M/s.Writefine Products Pvt. Ltd., from the list of final comparables.
6.2 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. 'Turnover' in a manufacturing sector, is a criteria for deciding whether it can be a comparable or not. Because, in manufacturing sector, due to high fixed cost, the turnover is an important factor as it may have an impact on economic cost of production. It is also an admitted fact that high turnover companies cannot be compared with tiny companies having less turnover IT (TP) A No.75/Chny/2018 :: 8 ::
and this position has been upheld by the Hon'ble Bomaby High Court in the case of Pentair Water India Pvt. Ltd. (supra). The DRP on the basis of submissions of the assessee for exclusion of at least two comparables on the ground of turnover filters excluded M/s.GM Pens International Pvt. Ltd. & M/s.Linc Pen & Plastics Ltd., both are having above Rs.200 Crores turnover from the list of comparables. Now, the assessee seeks to exclude M/s.Writefine Products Pvt. Ltd., on the ground of turnover of said company, is more than 10 times of turnover of the assessee company. We find that the turnover of the assessee company is 16.21 Crs. whereas the turnover of M/s.Writefine Products Pvt. Ltd., is Rs.190 Crs. The assessee seeks to exclude M/s.Writefine Products Pvt. Ltd., on account of high turnover. We find that turnover filter is an important indicator to select any comparables. However, how to adopt turnover filter is depending upon facts of each case. There are two ways in applying turnover filters. One is on the basis of number of times of turnover, and the other one is on the basis of size of turnover. The various Tribunals have held that companies having turnover more than 10 times of the assessee company or turnover from 0-200 Crs. should be factor for comparing any company. In the present case, the assessee seeks to exclude at least two comparables on the ground of turnover filter and such filter has been adopted by the DRP by considering 0-200 Crs. turnover as the basis for exclusion for comparables and also excluded two comparables from the list of final comparables. The third comparable which the assessee seeks to exclude IT (TP) A No.75/Chny/2018 :: 9 ::
from the list is M/s.Writefine Products Pvt. Ltd., which is having turnover of Rs.190 Crs. is comes within 0-200 Crs. turnover filter adopted by the DRP. Since 0-200 Crs. turnover basis is one of the basis for adopting turnover filter, in our considered view, there is no error in the turnover filter adopted by the DRP, to exclude comparables from the list of final comparables. Further, the assessee had also seeking exclusion of at least two comparables from the list of final comparables. Therefore, we are of the considered view that the assessee cannot come and seek exclusion of the third comparable, even though, the turnover of such comparable is fitting within the range of turnover filter adopted by the DRP. Therefore, we are of the considered view that there is no merit in the arguments of the Ld.Counsel for the assessee for exclusion of M/s.Writefine Products Pvt. Ltd., from the list of comparables, and thus, we reject the ground taken by the assessee.
6.3 In so far as case law relied upon by the assessee, we find that although, the Tribunal has accepted turnover filter on the basis of number of times of turnover, but we find that the turnover filter adopted by the DRP by considering 0-200 Crs. as a basis is one of the accepted methods of applying turnover filter, and thus, we are of the considered view that the case law relied upon by the assessee are not applicable to the facts of the present case, and thus, rejected.
7. The next issue that came up for our consideration from Grounds of assessee's appeal is entity level adjustment carried out by the TPO. The IT (TP) A No.75/Chny/2018 :: 10 ::
TPO has carried out adjustment towards total turnover of the assessee, including the domestic turnover. It is a well settled principle of law by the decision of various courts and Tribunals that entity level adjustment cannot be made. Therefore, we are of the considered view that the TPO & the DRP erred in making adjustment at entity level, and thus, we direct the TPO to make adjustment to international transactions of the assessee alone.
8. In the result, appeal filed by the assessee is partly allowed.
Order pronounced on the 12th day of July, 2023, in Chennai.
Sd/- Sd/-
(वी. दु गा राव) (मं जूनाथा.जी)
(V. DURGA RAO) (MANJUNATHA.G)
याियक सद य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER
चे ई/Chennai,
दनांक/Dated: 12th July, 2023.
TLN
आदेश क ितिलिप अ ेिषत/Copy to:
1. अपीलाथ /Appellant 3. आयकर आयु"/CIT 5. गाड फाईल/GF
2. यथ /Respondent 4. िवभागीय ितिनिध/DR