Income Tax Appellate Tribunal - Delhi
Smcc Construction India Ltd , New Delhi vs Assessee on 14 September, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : G : NEW DELHI
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER
AND
SHRI A.K. GARODIA, ACCOUNTANT MEMBER
ITA No.4333/Del/2009
Assessment Year : 2006-07
M/s SMCC Construction India Vs. Addl. CIT,
Limited, Range-9,
23, Local Shopping Centre, Room No.185-B,
Madangir, Near Pushpa CR Building,
Bhawan, New Delhi.
New Delhi.
PAN : AAACM7822P
(Appellant) (Respondent)
Assessee by : Shri M.P. Lohia, CA
Revenue by : Shri Kishore B., DR
ORDER
PER I.P. BANSAL, JUDICIAL MEMBER
This is an appeal filed by the assessee. It is directed against the order of the CIT (A) dated 14th September, 2009 for assessment year 2006-07. The main grievance of the assessee in the present appeal is against the addition made by the Assessing Officer of a sum of ` 1,04,26,928/- made on account of adjustment to the arm's length price. In the grounds of appeal the assessee has raised various issues assailing the above addition, but, at the time of hearing, Ld. AR restricted his arguments to ground Nos.4.4 and 5 which read as under:-
4.4. That on facts and in law the CIT (A) has erred in law in not applying the proviso to section 92C of the Act and has failed to allow the appellant an option for the downward variation of 5 percent in determining the arm's length price.2 ITA No.4333/Del/2009
5. That on the facts and in law, the CIT (A) has failed to appreciate that by making a transfer pricing adjustment of Rs.10,426,928 based simply on difference in operating margins of the appellant and comparable cases the Ld. A.O. has ignored that adjustment has to be made in relation to value of international transaction with AE only and not with reference to total value of all the transactions undertaken by the appellant which in fact included almost 90% of the transactions with unrelated independent parties.
2. The assessee is an engineering and construction company and is a joint venture between Sumitomo Mitsui Construction Co. Ltd., Japan (SMCC Japan) and Kairali Construction India. SMCC Japan is one of the leading construction companies in the world and in India it has its presence in the form of assessee company. The international company has a stake of 80% in the assessee company and the rest 20% share belongs to Kairali Construction India. The assessee is executing a number of construction projects on turnkey basis. Its role started with helping the prospective client in site selection, water and soil investigation, information regarding local site conditions like availability of skilled and unskilled manpower weather, population, accessibility, proximity to major markets and other such information; concept drawings and preparation of scope of works, detailed design and construction - civil, electrical and mechanical, etc. During the relevant assessment year, the assessee has entered into the following international transactions as reported in Form 3CEB:-
S.No. International transaction Value (in Rs.) Method used
1. Import of design and drawing 1,31,33,134 TNMM
2. Import of technical know-how 69,69,753 TNMM
3. Royalty 6,59,20,412 TNMM
4. Rent received 72,000 TNMM
3. So far as it relates to the method adopted by the assessee as TNMM and profit level indicator i.e., operating profit margins over 3 ITA No.4333/Del/2009 operating revenue, these two factors have been found by the Assessing Officer to be proper as adopted by the assessee and the observations of the Assessing Officer in this regard are contained in para 6.3 of the assessment order. Therefore, there is no dispute so as it relates to the method adopted by the assessee and the profit level indicator shown by the assessee.
4. The Assessing Officer vide para 11 of the assessment order has computed the operating profit/operating income at 4.17% and the computation of the Assessing Officer is as under:-
"Total Operational Revenue 92,25,03,849/- Less Operating Expenditure 88,55,56,775/-
Profits 3,69,47,074/-
Add: Fringe Benefit Tax 15,18,721/-
Operating Profit 3,84,65,795/-
Operating Profit/Operating Income 4.17% "
5. While computing the arm's length price, the Assessing Officer by taking average operating margin of operating income (present) based on 2005-06 data of various comparable companies has arrived at arithmetic mean of 6.30%. The assessee claimed adjustment from the said arithmetic mean on account of financials. It was the contention of the assessee that working capital requirement should be considered as a factor as the assessee has to incur expenditure on that account. The Assessing Officer did not agree with such contention of the assessee. However, he has granted adjustment to the extent of 1% and net margin of the comparable was applied at 5.30%. The difference of ` 1,04,26,908/- is computed by the Assessing Officer as per para 13 of the assessment order as under:-4 ITA No.4333/Del/2009
Rs.
"Operational Revenue 92,25,03,849/-
Arm's length margin 5.30%
Arm's length operating profit which
should have been earned 4,88,92,703/-
Actual operating profit earned 3,84,65,795/-
Difference being the adjustment
required to be made to the price
of international trans. 1,04,26,908/-"
6. Under these facts, it was argued by the Ld. AR that the international associate enterprise transaction of the assessee are only to the extent of 9.71% of the total turnover of the assessee and, therefore, the other part of the total transactions, namely, 90.29% related to the parties other than associate enterprise and, thus, he pleaded that the Assessing Officer while working out the difference in arm's length price has taken into consideration the entire transactions entered into by the assessee. He has produced before us a calculation according to which the addition which could have been made on that account was to be restricted only to a sum of ` 10,12,874/- and he has produced that computation which reads as under:-
"Computation of working of adjustment having regard to the value of international transactions of the assessee.
Particulars Amount (`)
Total operating revenue ('OR') 922,503,849
Less: Operating expenditure 885,556,775
Add: Fringe benefits 1,518,721
Operating profits ('OP') 38,465,795
OP/OR 4.17%
Arm's length margin as determined by 5.30%
A.O.
Addition on account of arm's length 10,426,908
price made by A.O.
5 ITA No.4333/Del/2009
Particulars Related Unrelated Total
party cost party cost
Expenditure (other than related 799,533,476 799,533,476
party expenditure relating to design
& drawings, technical know-how and
royalty)
Transactions with AEs
- Import of design and drawing 13,133,134 - 13,133,134
-Import of technical know-how 6,969,753 - 6,969,753
- Payment of royalty 65,920,412 - 65,920,412
- Rent received
Aggregate value of transactions 86,023,299 799,533,476 885,556,775
Ratio 9.71% 90.29% 100%
Proportionate adjustment based on 1,012,874
value of international transactions =======
undertaken with related party
7. Ld. AR contended that the above contention is supported by the decision of Delhi ITAT in the case of IL Jin Electricals (I) Pvt. Ltd. 36 SOT 227 (Del). He drew out attention towards the following observations of the Tribunal in the said decision:-
"15. The assessee has also taken one alternative ground out of the total raw materials consumed by the assessee for manufacturing print circuit boards, only 45.51 per cent of the total raw materials were imported through assessee's associate concerns, and, therefore, any adjustment, if any called for, can only be made to the 45.51 per cent of the total turnover, and not to the total turnover of the assessee. After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51 per cent of the operating profit can be attributed to imported raw material acquired from assessee's associate concerns. In the present case, the Assessing Officer has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not justified, when it is admitted position that only 45.51 per cent of raw material has been acquired by the assessee from its associate concerns for the purpose of manufacturing items. The assessee has stated that the operating profit if applied to 45.51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as addition to the profit shown by the assessee. We, therefore, direct the Assessing Officer to modify the assessment and make the adjustment only to the extent of difference in the arm's length operating profit 6 ITA No.4333/Del/2009 with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. Therefore, to this extent, the addition made by the Assessing Officer and further confirmed by the CIT(A) is reduced. We order accordingly."
8. Further, it is the case of the Ld. AR that the proviso to Section 92 C (2) of the Act provides a standard deduction of 5% to the tax payer and the only condition for availing such benefit is that it is subject to the option of the tax payer. Thus, it was pleaded by Ld. AR that 5% adjustment should be given to the assessee and for such proposition he has relied upon the following decisions:-
i) Philips Software Centre vs. ACIT 119 TTJ 721 : Adverting to this case, Ld. AR drew our attention towards para 5.71 in which the Tribunal as per clause 11 thereof summarises the position regarding Section 92 C (2) of the Act as under:-
"5.71. We, therefore, summarise our conclusion as follows:
i)..............................................................................................
................................................................................................ ................................................................................................
xi) The proviso to Section 92C(2) of the Act provides a standard deduction of 5% to the tax payers. The only condition for availing this benefit is that it is subject to the option of the tax payer."
ii) Skoda Auto India Pvt. Ltd. vs. ACIT 30 SOT 319 (Pune): Ld. AR invited our attention towards the following observations in the said decision:-
"20. The only other issue that is argued before us is the adjustment for +/- .5 per cent. Learned representatives agree that this issue is now covered in favour of the assessee by a series of Tribunal decisions including decision in the case of Sony India Ltd. (supra) even as learned Departmental Representative vehemently supported the stand of the authorities and justified the same. We, therefore, uphold assessee's grievance in this respect and direct the Assessing Officer to bear, in mind the same while deciding the matter afresh. To summarise, (i) the applicability of CUP method is 7 ITA No.4333/Del/2009 rejected on the facts of this case; (ii) on the question of determination of ALP as per TNMM method, the matter is remitted to the file of the TPO with specific directions; and (iii) the grievance against denial of 5 per cent adjustment is upheld in principle in accordance with the coordinate bench decisions."
9. On the other hand, relying upon the order of CIT (A) and the Assessing Officer, it was submitted by Ld. DR that the turnover issue has never been raised by the assessee before the CIT (A) and in the present case the matter required to be restored back to the file of CIT (A). So as it relates to adjustment of 5%, he submitted that the order of CIT (A) should be upheld.
10. We have heard both the parties and their contentions have carefully been considered. So as it relates to the argument of Ld. DR that the matter should be restored back to the file of CIT (A), we do not find any substance in such submission of Ld. DR. The facts stated in the assessment order are very clear. The Assessing Officer is taking the entire turnover while computing the arm's length price whereas the international transactions of the assessee constitute only 9.71% of the total transactions. The matter being clear from the record itself, we do not consider it proper to restore this issue to the file of CIT (A). The case of the assessee is well supported by the decision of Coordinate Bench in the case of IL Jin Electronics (I) (P) Ltd. (supra). Applying the said ratio, we direct the Assessing Officer to modify the assessment and make the adjustment only to the extent of difference in arm's length price operating profit with adjusted profit with reference to 9.71% of the turnover and not to the total turnover of the assessee.
11. So far as it relates to grant of 5% profit, that issue is also supported by the aforementioned decisions relied upon by Ld. AR. Therefore, we direct the Assessing Officer to give the said adjustment also to the assessee.
8 ITA No.4333/Del/200912. To make the matter simple, Ld. AR was required to submit a chart giving the calculations regarding above adjustments to arrive at an arm's length price in respect of international transactions of the assessee with its associate enterprise. The said chart reads as under:-
"Computation of working of adjustment having regard to the value of international transactions of the assessee.
Particulars Amount (`)
Total operating revenue ('OR') 922,503,849
Less: Operating expenditure 885,556,775
Add: Fringe benefits 1,518,721
Operating profits ('OP') 38,465,795
OP/OR 4.17%
Arm's length margin as determined by 5.30%
A.O.
Transfer Pricing adjustment - 10,426,908
Addition on account of arm's
length price made by A.O. ('A')
Particulars Related Unrelated Total
party cost party cost
Expenditure (other than related 799,533,476 799,533,476
party expenditure relating to design
& drawings, technical know-how and
royalty)
Transactions with AEs
- Import of design and drawing 13,133,134 - 13,133,134
-Import of technical know-how 6,969,753 - 6,969,753
- Payment of royalty 65,920,412 - 65,920,412
- Rent received
Aggregate value of transactions 86,023,299 799,533,476 885,556,775
Ratio ('B') 9.71% 90.29% 100%
Proportionate adjustment based on 1,012,874 value of international transactions ======= undertaken with related party ('C= 'A' x 'B') Actual value of international transactions ('D) 86,095,299 Arm's length value of transactions ('E'='D'-'C') 85,082,425 Arm's length value based on + 5% range ('F'='E' x 105%) 89,336,547 Whether in range or out of range In range"9 ITA No.4333/Del/2009
13. We direct the Assessing Officer to go through the figures shown in the chart and if the chart prepared by the assessee is in accordance with the aforementioned directions, then, the Assessing Officer will compute the arm's length price as per the aforementioned chart and give proper relief to the assessee. We direct accordingly.
14. In the result, as several other grounds were not pressed by the assessee, the appeal filed by the assessee is partly allowed for statistical purposes in the manner aforesaid.
The order pronounced in the open court on 18.11.2010.
Sd/- Sd/-
[A.K. GARODIA] [I.P. BANSAL]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 18.11.2010.
dk
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches