Income Tax Appellate Tribunal - Kolkata
Manaksia Limited , Kolkata vs Assessee on 14 March, 2013
आयकर अपीलीय अधीकरण, Ûयायपीठ - "बी ", कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH "B", KOLKATA
[(सम¢) ौी पी.
पी.के.बंसल,
ल, लेखा सदःय, एवं ौी जाज[ माथन Ûयायीक सदःय]]
[Before Hon'ble Sri P.K.Bansal, AM & Hon'ble Sri George Mathan, JM]
आयकर अपील संÉया /ITA No.1718/Kol/2012
िनधॉरण वषॅ/Assessment Year : 2008-09
(अपीलाथȸ/APPELLANT ) -वनाम- (ू×यथȸ/RESPONDENT)
M/s. Manaksia Limited Additional C.I.T., Range-4,
Kolkata -versus- Kolkata
(PAN:AAACH 6882 J)
अपीलाथȸ कȧ ओर से/ For the Appellant: Shri Ravi Tulsiyan, FCA
ू×यथȸ कȧ ओर से/For the Respondent: Shri Ajoy Kumar Singh,
CIT(DR)
सुनवाई कȧ तारȣख/Date of Hearing : 14.03.2013
घोषणा कȧ तारȣख/Date of Pronouncement : 14.03.2013
आदे श/ORDER
Per Bench This is an appeal filed by the assessee against the order of Dispute Resolution Panel, Kolkata u/s. 144C (5) of the Act read with 144C(8) of the Act dated 23.08.2012 for the Assessment year 2008-09 and consequential assessment order passed u/s 143(3) on 26.0.2012.
2. Shri Ravi Tulsiyan, FCA represented on behalf of the assesee and Shri Ajoy Kumar Singh, CIT(DR) represented on behalf of the Revenue.
3. In the assessee's appeal the assessee has raised the following grounds :-
"1. That on the facts and in the circumstances of the case, the Transfer Pricing Officer (TPO)/Assessing Officer (A.O.)/Dispute Resolution Panel (DRP) erred in making adjustment to the arm's length price of the International Taxation entered into by the appellant with its Associated Enterprises (AEs) and in making other disallowances and additions.
2. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP grossly erred in rejecting the Internal Comparable Uncontrolled Price Method for determining the arm's length price of the assessee's export of finished goods to its AEs.ITA No.1718/Kol/2012 2
3. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP erred in rejecting the Transactional Net Margin Method (TNMM) analysis undertaking by the assessee without any proper basis.
4. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP erred in selecting Madras Aluminium Co. Ltd. (MALCO) as a comparable company while determining the arm's length price of the assessee's transactions with its AEs without taking into account that MALCO was not a comparable company on the basis of the FAR analysis of MALCO.
5. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP erred in not considering all the objections raised by the assessee during DRP proceedings in respect of the adoption of MALCO as a comparable company while determining the arm's length price of the assessee's transactions with its AEs.
6. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP erred in making an adjustment of Rs.19,34,17,87/- to the value of transactions entered into by the assessee with its AEs by adopting MALCO as a comparable company.
7. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP erred in making a disallowance of Rs.2,20,000/- u/s 35AC of the I.T.Act, 1961.
8. That on the facts and in the circumstances of the case, the ld. TPO/A.O./DRP erred in making an addition of Rs.1,06,000/- on account of donation.
9. That on the facts and in the circumstances of the case, the ld. A.O. erred in not allowing the claim in respect of expenses pertaining to previous years amounting to Rs.2,07,08,042/- while passing the final assessment order u/s 143(3) though the said expenses had been allowed in the draft assessment order passed by the A.O.
10. That on the facts and in the circumstances of the case, the ld. A.O. erred in not allowing the claim of expenses pertaining to previous years amounting to Rs.2,07,08,042/- by altering the draft assessment order beyond jurisdiction since the said claim was not effected nor was a ground of appeal before DRP.
11. That further ground (s) of appeal may be submitted on or before the date of hearing."
4. At the time of hearing the ld. AR submitted that he did not wish to press ground Nos.2,3, 9 and 10 of the assessee's appeal. Consequently the same has been dismissed as not pressed. Ground Nos.1 and 11 are general in nature and consequently do not call for any adjudication.
5. Effectively the ld. AR argued ground nos.4,5 and 6 which are against the action of the Transfer Pricing Officer, Assessing Officer and Dispute Resolution Panel in selecting Madras Aluminium Co. Ltd. (MALCO) as a comparable company while determining the arm's length price in respect of the assessee's transactions with AE's without taking into account that MALCO was not a comparable company. It was submitted by the ld. AR that in the course of assessment the AO had referred the transaction of the assessee in respect of international taxation with its Associated ITA No.1718/Kol/2012 3 Enterprises to the Transfer Pricing Officer (TPO). The TPO had originally asked the assesee to submit its transfer price study report. The assessee had submitted its report with TPO on 22.08.2011. The ld. AR drew our attention to pages 223 to 284 of the assessee's paper book which was a copy of the Transfer pricing documentation. It was the submission that in the said report the assessee had taken into consideration ten companies. It was the submission that the assessee had shown its margin representing the operating profits to the operating expenses of 10.69 as against the arithmetical mean of the eleven companies selected for the transfer price study at 7.07%. Consequently the assessee had requested that no adjustments to the assessee's pricing in the international taxation with its AE'swere called for. However, the TPO rejected the assessee's transfer price documents filed on the ground that on verification of the financials and business description of the assessee it was noticed that the assessee had accepted as comparables companies having sales turnover as low as Rs.28.98 crores and the highest being that of 298.81 crores where as the assessee had a turnover of nearly 732 Crores. Consequently the AO had held that the filter for the companies was to be on the basis of the turnover between Rs.500 Crs-Rs.1500 Crores. As a consequence of the filter being applied for the turnover of Rs.500 crores -Rs.1500 crores the AO identified seven comparable companies and the arithmetic mean of the seven companies came to 18.30% as against 10.69% disclosed by the assessee. The assessee had objected to the seven companies on the ground that the seven companies were not functionally comparable. This submission of the assessee found favour with the TPO and consequently the TPO shifted from Prowess Data Base adopted by both the assessee and the TPO, to the Capitaline Data Base monitored by Centre for monitoring Indian Economy. This was because the search analysis on the prowess database yielded no result with the turn over filter between Rs.500 crores to Rs.1500 crores when applied. The search resulted in 2 companies as mentioned by the TPO one being the assessee itself and the other MALCO. Ltd. The comparable profits to the turn over cost yielded result in the case of MALCO was 17.72% as against 10.69% shown by the assessee. It was the submission that the TPO adopted 17.72% as disclosed by MALCO and made the adjustments. The TPO's order was adopted by the AO in the draft assessment order. The assessee had proceeded before the DRP in ITA No.1718/Kol/2012 4 respect of the TPO's order. It was the submission that before the DRP the assessee had specifically challenged that the assessee had not been provided with any opportunity for treating MALCO as comparable and making adjustments. It was the submission, at the outset, the assessee had objected that MALCO cannot be considered, as MALCO's financial statements had not been given to the assessee for its objection. It was the further submission that the financials of the MALCO had been obtained by the assesee from external source which was shown at pages 355 to 449 of the assessee's paper book. The ld. AR specifically drew our attention to page 425 which showed that the total sales of MALCO was 548.52 crores of which 433.77 crores relate to Properzi Rods which are used by the Cable and Transmission companies for transmission and distribution of electricity and therefore requires a more pure form of aluminum. It was the submission that in short nearly 79.08% of the total sales of MALCO was of the product which is not manufactured by the assessee. It was the further submission that the assessee's products is used for roofing, flooring in buses and therefore the value realisaiton is much lower in comparison to Properzi Rods. The assessee was also not manufacturing Properzi Rods. It was the further submission that out of the total sales of MALCO the export sales was only Rs.21.73 crores being only 3.96% of its turn over whereas domestic sales was 96.04% of its turn over. It was the submission that in the assessee's case more than 50% of the total sales are derived from exports. The ld. AR submitted that this submission of the assessee was overridden by the DRP by stating that the assessee's case was getting almost time barred due to non compliance of the assessee on several occasions as well as to verify the veracity of the assessee's claim. An independent analysis was carried out on capitaline data base wherein the assessee's claim of non existence of the comparables having turnover between Rs.500 crores - Rs.1500 crores was found to be incorrect. The objections of the assessee were not considered by the DRP at all. It was the further submission that even though the assessee had specifically objected to the non providing of the details of MALCO by the AO the same was rejected by the DRP by holding that the assessee had not included the financial statements of the MALCO. The AO had also objected before the DRP that the submissions before the DRP and the source for the same was also known and consequently the genuineness and veracity of the assessee's claim cannot ITA No.1718/Kol/2012 5 be verified. Even though the DRP recognized that the principles of natural justice had been violated, just because the assessee had obtained the financials of MALCO it held that what had not been done by the TPO has been corrected by the DRP and consequently over ridden the objection that the principles of natural justice had not been followed. It was the further submission that the assessee had before the DRP specifically objected to adopting of MALCO as a comparable as MALCO held mining rights for 2027.79 acres of land and bauxite being the primary raw material has been sourced from these mines during the entire year. It was the submission that the assessee did not have any such captive mines and Aluminium ingots were purchased by the assessee. It was the submission that consequently the assets employed by MALCO were completely different from the assets employed by the assessee. It was the submission that this specifically affected the costing in respect of the raw materials consumed in respect of that of MALCO and that of the assessee by 5.93%. It was the submission that the costing of the raw materials consumed in the case of MALCO was 73.8% as against that of the assessee at 79.01%. It was the submission that this objection of the assesee was overridden by the DRP by holding that in the report of the MALCO it was mentioned that the lease had expired over the mines. It was the submission that this finding of the DRP at page 10 of its order was specifically erroneous in so far as at page 422 of the assessee's paper book representing the schedules being part of the balance sheet in respect of MALCO under the head F.A. Note No.3 clearly shows that MALCO holds mining rights for 2027.79 acres of land of which the lease agreements in respect of the entire land has expired and the company has applied for renewal of the leases. Further in Schedule-XIII for the year ended 31.3.2008 the quantity of bauxite has increased showing that mining was still continued by MALCO even after the expiry of the lease. The ld. AR also drew our attention to page 394 of the paper book which was the management discussion analysis of MALCO wherein under the head "Raw material" it has been specifically mentioned that the primary raw material, bauxite continued to be sourced from the captive leased mines of the company at Yerced and Kolly Hills. It was also submitted that thus the DRP fell into error in assuming that MALCO was not extracting bauxite from the mines where the lease had expired. It was the further submission that ITA No.1718/Kol/2012 6 MALCO had its own integrated power generation facility which fulfills most of its power requirements whereas the assessee did not have such facility. The ld. AR drew our attention to page 387 of the paper book as also page 432 of the paper book to show that MALCO generates its own electricity and MALCO had also sold part of the power generated by it. It was the further submission that MALCO was also debt free company and the only debt was Rs.21.77crores whereas the assessee has substantial borrowings amounting to Rs.184.crores and consequently the cost of finances was high in the case of the assessee. It was the submission that the interest in financial charges in respect of MALCO was only Rs.77 lakhs as against the net interest expenditure in the case of assessee was Rs.30.27 crores. It was the submission that these financial charges itself substantially affected the profitability and margin of the assessee when compared to the profitability of MALCO. It was the submission that none of these objections raised by the assessee found favour with the DRP. It was the further submission that the DRP had consequently accepted the TPOs adjustment of 17.72% as against assessee's 10.69%. It was the submission that even at the outset if the adjustments of the electricity expenses and the raw material consumption difference being 1.01% and 5.93% coming to 6.93% was adjusted against 17.72% adopted in the case of MALCO, the difference between the arms length margin of the assessee and MALCO would be negligible i.e. 10.69 in the case of the assessee and 10.78 in the case of MALCO. It was the further submission that the assessee had categorically prayed that the arm's length margin had been applied by the TPO on the entire operating cost of the assessee whereas the functions performed by the assessee was a retail seller and was different from that of MALCO which was a manufacturer. It was the submission that the TPO had rejected the assessee's application on the ground that no segmental data of manufacturing and trading schemes had been provided. It was the submission that however, the DRP had directed that the adjustments of the arms length margin was to be limited on total sales to AE only. It was the submission that the DRP failed to appreciate that the segmented details of the sales were available in the case of the assessee. He drew our attention to page 315 of the paper book which was the auditors report in the case of the assessee wherein the segmented analysis was available. Further, the ld. AR drew our attention to printed ITA No.1718/Kol/2012 7 accounts of MALCO and submitted that the segmental data more so segmental analysis was not available in the case of MALCO whereas the said segmented analysis was available in the case of assessee. It was the submission that in any case in the course of the proceedings before the DRP the assessee filed a fresh Transfer price analysis dated 22.05.2012 wherein the assessee had considered another 10 fresh companies. It was the submission that the average mark up on the Revenue as per the fresh transfer price study dated 22.05.2012 was 4.16% as against operating margin on the sales in the case of assessee at 9.91%. It was the submission that even this transfer price study was not considered. It was the further submission that however, for the immediately succeeding assessment year being the Assessment year 2009-2010 the operating margin of the sales in the case of assessee remaining nearly the same no adjustments has been adopted by the TPO and the TPO has accepted the Transfer price study for the assessment year 2009-2010 accepting the companies as considered in the transfer price study dated 22.05.2012 placed by the assessee. It was the submission that MALCO was not considered for the assessment year 2009-2010 as comparable. It was the submission that the addition has been made by the AO in respect of the arms length price on the basis of the DRP's order be deleted in its entirety.
6. In reply the ld. DR drew our attention to the order of the DRP. It was the submission that the DRP had taken into consideration of the objections as raised by the assessee and had found no error in the action of the TPO in adopting MALCO as comparable with the assessee. It was the submission that the TPO had also replied to all the objections raised by the assessee in the Remand Report filed before the DRP.
6.1. The ld. DR drew our attention to page 382 of the paper book which was a copy of the report of the Board of Directors in the case of MALCO to submit that MALCO held 38.8% of the equity capital in India Foils Ltd. and effects were on to revive India Foils Ltd. which was before the BIFR. It was the submission that even after holding the strategic investment in a sick company MALCO was able to show a mark up of 17.72%. It was the submission that India Foils Ltd. had been considered by the ITA No.1718/Kol/2012 8 assessee as comparable though subsequently dropped in its Transfer Pricing Study. It was the submission that the DRP had considered all the objections of the assessee and the same have been rejected. The order of AO as a consequence of the DRP was liable to be upheld
7. We have considered the rival submissions. A perusal of the submissions of the two sides as also the order in appeal before us clearly show that the issue before us is to consider whether MALCO is comparable to the assessee for the purpose of determining of arm's length adjustments, if any. A perusal of the order of the TPO which has been placed before us by the ld. DR shows that the TPO has accepted that the assessee is a manufacturer and exporter of aluminium coils, hot and cold rolled steel sheets, galvanized corrugated roofing sheets, crown corks, caps, glass bottles etc. The TPO has adopted the TNMM method which would stand confirmed in so far as the assessee has not pressed its grounds against this adoption. Further, the TPO has adopted the sales/turnover filter for arriving at the nearest comparable company. The AO has rejected the assessee's Transfer Price study on the ground that the turn over of the assessee exceed Rs.700 crores and none of the companies which have been compared by the assessee in its Transfer Price study had turnover anywhere near the said figure. The TPO attempted to compare seven companies which was dropped after accepting the contention of the assessee that the said seven companies were not functionally comparable. Subsequently the TPO conducted an independent analysis on capital line data base which yielded the name of MALCO. A perusal of the order of the TPO clearly shows that after doing the independent analysis the TPO blindly adopted MALCO as comparable without putting the same to the assessee for its rebuttal. Nowhere in the order of the TPO does the TPO talk of having questioned the assessee in respect of the adoption of MALCO. Thus there is a clear violation of the principles of natural justice as has been claimed by the assessee in respect of the TPO's order. Now coming to the order of the ld. DRP, a perusal of the same shows that before the DRP the assessee has specifically challenged the comparison of the assessee's company with MALCO. Though the DRP recognizes that the assessee produces, manufactures a product that is different when compared to that manufacture ITA No.1718/Kol/2012 9 by MALCO, the same has been rejected on the ground that under TNMM product comparable is not so strict as it is in the case of CUP and CPM method. The DRP has held the view that as long as the products belong to the same group of products TNMM can be applied. Here a perusal of the products manufactured by MALCO shows from the schedule 12 forming part of the accounts of MALCO that out of the total sales Rs.494 crores, Rs.433 crores is of Properzi Rods, Rs.36.1 crores is of aluminium ingots, Rs.45.9 crores is of rolled products and Rs.1.8 crores of power. Further as per schedule 11 the installed capacity of MALCO for manufacture of aluminium ingots is 12,500 Metric tones as against which MALCO has manufactured only 2,964 M.Tonnes, as against 36,000 M.Tonnes installed capacity for Properzi Rods MALCO has manufactured 31,254 M.Tonnes of Properzi Rods and against 12,000 M.Tonnes installed capacity for rolled products/busbars, MALCO has produced 3,418 M.Tonnes of rolled products. This clearly and unilaterally show that MALCO is in the business of manufacturing of Properzi Rods and its sales as it is the primary business,. The fact that MALCO has used nearly 85% of its annual installed capacity in respect of the Properzi Rods only shows that its intention and its action were specifically for manufacturing of Properzi Rods only. In fact the management discussion and analysis found at page 390 of the paper book more specifically at page 392 of the paper book it has been categorically mentioned that during the year under review, the company produced 37,635 MT of aluminium. Production of Properzi Wire rods, having higher realization than ingots was 31,254 MT. It further clarifies that the company "MALCO" produced 3408 MT though the company is relatively small compared to other domestic Aluminum majors, it has a strong presence in the Southern India with a market share of more than 50%. Further in the over view in the Financial Report of MALCO it has recorded that it enjoys the distinction of being a premium aluminium wire rods producer with the largest market share in South India. It also recognizes that its bus bars are a critical product used in aluminium smelters. This management discussion and analysis itself shows that MALCO primarily is a manufacturer under its own recognition of Properzi Rods and is a very small player in respect of rolled products. A perusal of the similar item sold by the assessee in appeal before us shows that the assessee is not a manufacturer of aluminium ingots nor is it ITA No.1718/Kol/2012 10 manufacturing Properzi Rods nor is it manufacturing electricity. The assessee has an installed capacity for aluminium rolled product of 36,000 MT and it has produced 17223 MT of aluminium rolled products. It has an installed capacity of 12,000 for aluminium alloy ingots and its manufacture is 5,815 MT, as against 60,000 MT capacity of colour coated sheets it manufactures 5,449 MT, as against 30,000 MT installed capacity for steel coils and sheets its manufacture is 30,993 MT. so on so forth. This has been found in page 313 of the paper book. Thus except for the aluminum coil sheet no product of the assessee and MALCO are identical. When comparing the aluminium coil MALCO itself recognizes that the Properzi wire rods has higher realization and MALCO is relatively small compared to other domestic majors. In the case of the assessee, substantial portion of its production is in aluminium coils and other items. Thus we find that on this ground alone MALCO cannot be treated as comparable to the assessee. Here we may mention that in the case of MALCO the identical product which is being used for comparing MALCO to the assessee being aluminium rolled product represents just about 8% of the total turnover of MALCO. In the circumstances we are of the view that MALCO cannot be used as comparable for determining the arms length price in the case of the assessee.
7.1. Coming to the next objection of the assessee that MALCO has captive mines for extraction of its raw material whereas the assessee has to procure the raw material from the open market. We find that the ld. DRP has rejected this argument by holding that in the report of MALCO it has been mentioned that the lease has expired over the mines. However, it is noticed that the ld.DRP missed to take into consideration the management discussion and analysis of MALCO which is also a part of the financial report of MALCO wherein it has been specifically accepted that the primary raw material "bauxite" continued to be sourced from the captive leased mines of the company at Yerced and Kolly Hills. Further, a perusal of schedule forming part of the accounts under the head "raw material consumed" shows an increase in the quantity of bauxite. Further, in the case of MALCO it has shown mining expenses which is found at page 426 of the paper book. Further a perusal of the raw material consumed in the notes of the accounts show that MALCO used bauxite as its raw material. When this ITA No.1718/Kol/2012 11 was compared with the assessee's accounts it showed that the raw material consumed in the assessee's case is aluminium ingots and aluminium sheets. A perusal of the costing of the same shows that in the case of MALCO the value of raw material consumed being bauxite is at 347563 MT is Rs.14.04 crores as against in the assessee's case the aluminium ingots and sheets are 25845 MT costing Rs.266 crores. This itself clearly shows that the very foundation of the manufacturing process being the raw materials are difference in the case of MALCO and the assessee. Here we may also mention that MALCO is manufacturing aluminium ingots and trading in aluminium ingots also whereas the assessee's primary raw material is aluminium ingots. Thus even on this ground MALCO cannot be treated as comparable to the case of the assessee.
7.2. Coming to the next objection raised by the assessee that MALCO is a debt free company, in so far as it has a debt of only Rs.21.77 crores as against Rs.184 crores in the case of the assessee. Obviously the interest cost in the case of MALCO being Rs.77 lakhs as against Rs.30 Crores in the case of the assessee would make a substantial dent in the profit. Here we may also mention that the net result of the Transfer price adjustment is an amount of Rs.19.34 crores. If the adjustment in respect of annual financial charges are made then this differential would get completely wiped out as the differential in the interest burden is Rs.30 crores in the case of the assessee whereas it is only Rs.77 lakhs in the case of MALCO.
7.3. As it has already been found by us that MALCO is not comparable with the assessee for the reasons mentioned earlier we are not going into the various other objections raised by the assessee. Coming to the submissions of the ld. CIT(DR) we may mention here that MALCO has only invested in the equity of India Foils Ltd. The loss of India Foils Ltd has not been absorbed by MALCO. Consequently it would not affect the profitability of MALCO in any manner. In the circumstances the finding of the DRP holding that the MALCO is comparable for the purpose of adjustments to be made on the arms length price in respect of the transactions of the assessee with its Associated Enterprises stand cancelled. Consequently the addition made by the AO ITA No.1718/Kol/2012 12 representing the adjustment made by the TPO on the basis of the direction of the DRP stand deleted.
8. In ground No.7 and 8 it was fairly agreed by both the sides that the issues in respect of the disallowance u/s 35AC of the IT Act and the addition on account of donation was liable to be restored to the file of AO for re-adjudication. As it is noticed that the details of the claim of the deduction u/s 35AC of the Act also the donation have not been verified by the AO, we are of the view that this issue requires to be restored to the file of AO for re-adjudication after giving opportunity to the assessee and we do so.
9. In the result of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 14.03.2013.
Sd/- Sd/-
[ौी पी.के.बंसल लेखा सदःय ] [ौी.जाज[ माथन, Ûयायीक सदःय ]
[P.K.Bansal] [ George Mathan ]
Accountant Member Judicial Member
(तारȣख)
तारȣख)Date: 14.03.2013.
R.G.(.P.S.)
आदे श कȧ ूितिलǒप अमेǒषतः-
Copy of the order forwarded to:
1. M/s.Manaksia Limited, 8/1, Lal Bazar Street, Bikaner Bldg., Kolkata-700001.
2 The Addl. C.I.T., Range-4, Kolkata.
3. CIT Kolkata 4. Dispute Resolution Panel, Kolkata.
5. DR, Kolkata Benches, Kolkata स×याǒपत ूित/True Copy, आदे शानुसार/ By order, Deputy /Asst. Registrar, ITAT, Kolkata Benches ITA No.1718/Kol/2012 13