Income Tax Appellate Tribunal - Pune
Brintons Carpets Asia Privte Ltd.,, ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
Pune Bench "B" , Pune
Before Shri Shailendra Kumar Yadav Judicial Member
and Shri R.K. Panda Accountant Member
ITA No. 1321/PN/2011
(Asstt. Year : 2007-08 )
Brintons Carpets Asia Private Limited ... Appellant
Gat No. 414/415/416, Village- Urawade,
Tal. - Mulshi,
Pune - 412108
PAN : AAACB 7059 H
v.
Deputy Commissioner of Income tax ... Respondent
Cir 1(1) Pune, Income Tax office,
A-Wing, 2nd Floor, Near PMT Building,
Shankarshet Road, Swargate,
Pune - 411037
Appellant by : Shri. Dinesh Supekar
Respondent by :Shri. S.K. Singh
Date of Hearing :11-4-12
Date of Pronouncement : 12 -4-12
ORDER
Per R.K. Panda, AM
This appeal filed by the assessee is directed against the order of the A.O. passed u/s. 143(3) r.w.s. 144C(1) of the I.T. Act, 1961, after considering the guidelines of the D.R.P., Pune dated 25th August 2011.
2. The grounds raised by the assessee are as under :
"1. The Ld. Assessing Officer ('AO') pursuant to the directions of the Ld. Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted by the appellant in the transfer pricing study and thereby making a transfer pricing adjustment of Rs. 33,527,903 to the income of the appellant by holding that the international transaction of 'Export of carpets' of the appellant does not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act').
2. The Ld. DRP / AO erred in not granting an economic adjustment on account of labour unrest while conducting the comparability analysis. The Ld. 2 ITA . Nos. 1321/PN/2011 Brintons Carpets Asia Private Limited A.Ys. 2007-08 Page of 10 DRP / AO erred in not considering the impact of labour unrest on the appellant's profitability from its international transactions and thereby not taking cognizance of the directions passed by the Hon. Pune Tribunal for the AY 2006-07, wherein under similar circumstances the Hon. Tribunal has directed to provide for economic adjustment on account of labour unrest.
3. The Ld. DRP / AO erred in making a transfer pricing adjustment of Rs. 33,527,903 without appreciating the fact that the appellant is availing tax holiday benefits under Section 10B of the Act, and hence, there would not have been any untoward motive of desiring a tax advantage by manipulating transfer prices of its international transactions.
4. The Ld. DRP / AO erred in not giving cognizance to the explanatory circular issued by the Central Board of Direct Taxes ('CBDT') which clarifies that the amendment to the proviso to Section 92C(2) is applicable in respect of Assessment Year 2009-10 and onwards. Thus, the Ld. DRP / AO erred in not granting the benefit of +/- 5% range as per the proviso to Section 92C(2) as it stood before the amendment.
5. On the facts and in the circumstances of the case, the Ld. AO erred in initiating the penalty proceedings under Section 271(1)(c ) of the Act on the premise that the appellant has furnished inaccurate particulars of income without appreciating the fact that the transfer pricing adjustment so made is not in accordance with the law.
The above grounds are without prejudice to each other ".
3. The Ld. Counsel for the assessee at the outset submitted that identical grounds have been raised by the assessee during the A.Y. 2006- 07 and the Tribunal vide ITA No. 1296/PN/10, order dated 15th June 2011 has restored the issue to the file of the A.O to pass a speaking order with certain transactions. He, accordingly, submitted that this order of the A.O should go back to his file for adjudication in the light of the direction of the Tribunal in assessee's own case for A.Y. 2006-07. The ld. D.R. on 3 ITA . Nos. 1321/PN/2011 Brintons Carpets Asia Private Limited A.Ys. 2007-08 Page of 10 the other hand fairly conceded that the Tribunal in assessee's own case for the A.Y. 2006-07 has restored the issue to the file of the A.O for passing a speaking order with certain direction.
4. We have considered the rival arguments made by both the sides and perused the orders of the A.O and directions of the DRP. We find Identical grounds were taken by the assessee before the Tribunal in the immediately preceding Asst. Year. We find the Tribunal vide ITA No. 1296/PN/10, order dated 15th June 2011 has restored the issue to the file of A.O with certain directions. The relevant finding of the Tribunal from para 7 to 19 of the order reads as under :
"7. We have heard the parties and perused the draft order/orders/guidelines of the DRT of the Revenue as well as the cited decision before us. Correct operating margin of the export segment and the need for the adjustments based the correct comparables in accordance with the transfer pricing guidelines are the broad area of disputes. In this regard, the rival stands are as follows. Assessee's case is that the unadjusted operating margin of the export segments with 91.14% of the total annual sales of the assessee is -13.57%. This lower operating margin is due to labour unrest and therefore, the capacity of the company was under-utilized ie the overheads expended as per the original targets fixed were not absorbed by the company to its full extent due to go slow approach and lock out of the labour. Therefore, the unadjusted operating margin of 13.57% (-ve) needs to be adjusted by adjusting the 'total cost' of the export segment. Such adjustments, which are attributable to the under absorbed overheads, work out to Rs 7.32 cr (rounded off). In effect, the adjusted operating margin works out to 5.88% as against the operating margin of 7.12% of the external comparable. The difference being only below 2%, the same has to be ignored in view of the proviso to section 92C(2) of the Act. Further, the as per the assessee, the domestic comparables is improper here as the AO rejected the external comparable prices summarily and honoured the same in the subsequent year and therefore, there is inconsistency in AO's approach, which is improper. Further, in these matters of such inconsistency, the assessee relied on decisions of the Tribunal in the cases of Fiat India P Ltd (supra) and E-gain Communication P Ltd (supra).4 ITA . Nos. 1321/PN/2011
Brintons Carpets Asia Private Limited A.Ys. 2007-08 Page of 10
8. Per contra, the case of the revenue is that the principle of res judicata is inapplicable to the income tax matters and AO/TPO/DRP is free to decide the issue AY-wise depending on the facts of the case of that year. The unanswered queries of the revenue are as to how there can be two different operating margins ie -13.57% and 27.09% for export and domestic segments respectively of the same product in the same year. Further, how the labour unrest effected the export segment of the carpet manufacture and not the domestic. Therefore, these two operating margins are justly compared and different being above 40% ie -13.57% to 27.09%, the addition of Rs 16,20 crores is justified and consequently, there is no need for economic adjustments to the labour's pressure tactics to get their demands met ie go-slow approach,lock out etc.
9. The above rival stands are considered and we now proceed to adjudicate the two focal issues underlined by the Ld Counsel for the assessee. We shall take up the first issue first and the same is whether the export segment can be compared with the domestic segment when the AO accepted the external comparables were accepted as appropriate in the subsequent AY. This issue has various facets and they are: (i) what is wrong with the external comparable adopted by the assessee;
(ii) whether, it is justified to adopt the domestic comparable where the domestic segment consists of only 8.86% against the 91.14% of the export segment in terms of volume; (iii) rule of consistency; and (iv) the existing decision on this issue etc.
10. To discuss the above, on the issue of 'external comparable' versus the 'domestic comparable', the revenue authorities or the DRP deliberated on the acceptability of the six comparable furnished by the assessee. We find they have summarily dismissed the assessee's submissions in this regard. In our opinion, the same is not proper that the AO/TPO have not find mistake with the six external comparable filed by the assessee. They merely held that the domestic comparables are to be relied as the labour related problems are common to both export and domestic segments. In fact, considering the facts relevant to the subsequent AY where the AO/TPO accepted the six external comparable for the purpose of the TNMM, the Ld Counsel for the assessee conveyed no objection for going to the files of the AO/TPO in this regard. Para 6.4 of the DRP explains the depth of the travel by the panel on the issue. For the sake of the completeness of the order, relevant paragraph is reproduced as under.
"6.4. The assessee's submission has been considered. Since the same resources, the same labour, the same machines are being used for export as well as domestic segments, it is difficult to accept the contention of the assessee that the labour unrest affected only export and not a domestic segment. In fact, initially the asessee had denied having two separate segments. The assessee has given the break up on estimate basis. Since the same set up of facilities are being used the same man power, the same machines and same labour employed for manufacturing carpets for 5 ITA . Nos. 1321/PN/2011 Brintons Carpets Asia Private Limited A.Ys. 2007-08 Page of 10 export and for domestic sale, it cannot be accepted that the labour strike or under utilization of capacity affected export segment only and the profitability went down because of the labour strike. Moreover, it was for a limited period and the loc out, admittedly has been for 19 days only. In these circumstances, we do not consider it necessary to interfere with the decision of AO/TPO.
11. Regarding the 'rule of consistency' and the relevant decisions on the topic, we have examined the facts for the AY 2006-07 and 2007-08. So far as the external comparables, turn over details of export and domestic segments and other relevant facts are concerned, we find similarity of the facts between both the years. The argument of the assessee is that the external comparable prices for the impugned AY 2006-07 supplied by the assessee, when accepted by the AO for the AY 2007- 08, must be accepted for that year in view of the absence of material facts and also in view of the rule of consistency. We have considered this argument and in our opinion, it is a settled law that the principle of res judicate is inapplicable to income tax matters. However, the same is true as long as the facts of different in different AYs. Otherwise, the rule of consistency is relevant to income tax matters and AO cannot be ignore the same. There ought to be uniformity in treatment and consistency when the facts and circumstances are identical as held by the Mumbai Tribunal reported in 122 TTJ 87. Recent judgment of the Mumbai High court in the case of Gopal Purohit (228 CTR 582) (Mum), of course, in connection with the issue of proper head of income for taxing the gains on sale of the shares is relevant for the conclusion and it read as follows.
"................ there ought to be uniformity in treatment and consistency in various years when the facts and circumstances are identical no substantial question of law arises.
12. Further, we have perused the decision of the Mumbai Benches in the case of NGC Network (India) P Ltd. ITA No 5307/M/2008 dated 23.02.2011 relied upon by the assessee on the of rule of consistency and need for not taking the domestic comparables and the need for taking up the external comparable in matters of the 'transfer pricing' adjustments. The perusal of paragraph 15 which is reproduced as under underlines the principle that the uncontrolled transactions and the external comparables which was adopted by the officer in subsequent year holds relevant for the current assessment year as well. For the sake of completeness, paragraph 15 is reproduced as under:
"15. We have considered the various aspects. The AO had accepted the license fees for the month of February and March 2003 to be at arm's length. However the steep increase given from the beginning of the year with retrospective effect has not been accepted. The reasons given by the AO is that over the year there has been decline in rate of hiring transponders/satellite due to availability of higher capacity digital transponders and higher competition amongst various transporters. There would have been no difficulty if retrospective increase was with respect to an unrelated party because these are commercial decisions which the assessee may take according to its business needs and cannot be questioned unless they are found not genuine. The position is however different in case of 6 ITA . Nos. 1321/PN/2011 Brintons Carpets Asia Private Limited A.Ys. 2007-08 Page of 10 transactions with a related party as in the present case, which has to be compared to unrelated party transactions to fine out the arm's length price. In this case arm's length price has been computed by the assessee with respect to certain comparables as mentioned in para 4 using TNMM. These comparables and the method of computation of arm's length price has been accepted by the department in the subsequent assessment year i.e. 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also. However, it is noted that the assessee has worked out the arm's length price on the basis of transactions relating to the comparable for A.Y 002-03 as at the relevant point of time complete details in respect of A.Y 2003-04 were not available. In our view when the facts and figures in relation to the relevant assessment year i.e. AY 2003-04 are now available then the transfer pricing adjustments have to be computed based on the said facts and figures. In case working is to be made on the basis of figures for AY 2002-03, then in our view the transactions in assessee's own case for the said year which have been found to be at arm's length in that year should be adopted as basis as the business being same, it will give better results. Merely because the transaction is with an associate enterprise cannot be the ground to reject it as a comparable when the transaction is at arm's length. However as we have held earlier, in our view it will be most appropriate to compare the transactions for the same year i.e. AY 2003-04 for which the figures are available in respect of comparables which have already been accepted by the department. We therefore set aside the order of CIT(A) and restore the matter to the file of AO for reworking of the transfer pricing adjustments using TNMM on the basis of facts and figures available for AY 2003-04 in respect of the comparable selected by the assessee and pass fresh order after allowing opportunity of hearing to the assessee."
13. From the above, it is evident that '... comparables and the method of computation of arm's length price has been accepted by the department in the subsequent assessment year i.e. 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also. We find no reason to not accept the above proposition considering the commonality of the facts in the instant case. Therefore, we are of the considered opinion in the instant case that for making the transfer pricing adjustments, the AO cannot resort to the domestic comparable in the instant AY. Here, the AO/TPO entertained the external comparable in the subsequent AY 2007-08 for the said purpose of determining the transfer pricing adjustments to the export segments. In our opinion, considering the comparability of the relevant facts in both the AYs and the rule consistency is required to be honored by the revenue. Consequently, in this case and for this year, the revenue needs to resist from adopting the domestic comparable and proceed to adopt the external comparables as supplied by the assessee or any other external comparables for the purpose of making transfer pricing adjustments to the export segments or the international transactions involving the AE. If the external comparables are available, AO/TPO may even attempt the compute the operating profits as per the TNMM considering the external comprables that fall in the periods of labour unrest and unrest-free period of the same AYs too. In any case, admittedly and undisputedly, the AO/TPO have not reckoned and adopted the external comparable cases cited by 7 ITA . Nos. 1321/PN/2011 Brintons Carpets Asia Private Limited A.Ys. 2007-08 Page of 10 the assessee for making the transfer pricing adjustments and the orders are free of any reasoning by the AO/TPO/DRP. Therefore, we are of the opinion that the matter should be set aside for examining the issue de novo after granting the reasonable opportunity of being heard to the assessee. Accordingly, all the relevant grounds raised in this regard are set aside.
14. The other key issue raised by the Counsel relates to economic adjustments on account of labour unrest warranted to arrive at the correct profitability of the international transaction pertaining to export of carpets. As discussed in the other paragraphs of the order, assessee made adjustment to the total cost and the said adjustment works out to Rs 7,31,73,120/- on account of unabsorbed overheads and underutilization of the capacity. AO/TPO rejected the claim as they resorted to consider the domestic comparable as proper in this case stating that the said labour unrest is common to both export and domestic segment. In this regard, the counsel relied upon the decision of the Mumbai Bench in the case of Fiat India P Ltd (2010- TII-30-ITAT-Mum-TP) for the proposition that in cases of adoption of TNMM, the assessee are entitled to adjustments on account of under utilization of capacity. We have examined the issue in depth and find there is no dispute on the facts relating to the labour unrest. Nevertheless, there is some confusion on the length/period of the labour unrest or agitations. The revenue holds the company was closed for 19 days and on the contrary the assessee holds that the said period run into more than 5/6 months in the year under consideration. Thus, considering our decision that the need for the AO/TPO to adopt the external comparable for the reasons given above, there is need for setting aside this key issue also to the files of the AO for examining the issue of economic adjustments. Philosophically, in matters of TNMM cases, the AO is empowered to make the adjustments and the relevant rules are reproduced as under.
Sec.10B(a)-(d).....
......
(e) transactional net margin method, by which-.
(i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or asset employed o to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to taking into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
8 ITA . Nos. 1321/PN/2011Brintons Carpets Asia Private Limited A.Ys. 2007-08 Page of 10
(iv) the net profit margin realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.........."
15. From the above, it is clear the AO has authority vide clause (iii) above to make the adjustments. Such adjustments are necessary only to remove or minimize the differences in the comparable or anomaly in the said comparable. Such adjustments are authenticated by the OECD guidelines too. In this regard, we have perused the important findings of the Tribunal in the case of the Fiat India P Ltd (supra) placed at page 191 of the paper book. For the sake completeness, the same is reproduced as under.
"......
......
++ as regards the adjustments made by the assessee to work out its operating margin for comparing the same with the profit margin of comparable cases, it was held that there was a material difference in the facts of the assessee's case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences. Further, the TPO himself has allowed similar adjustments made by the assessee in the immediate preceding years i.e. AY 2002-03, 2003-04 as well as in the immediate succeeding years i.e. 005-06 and 2006-07 wherein the facts involved were similar to that of the year under consideration i.e. AY 2004-05;
+ accordingly, no infirmity is found in the impugned order of the CIT(A) as the adjustments made by the assessee in TNMM analysis were reasonable and accurate and as reflected in the said analysis, international transactions made by the assessee company with its associated concerns during the year under consideration were at arms length requiring no adjustment/addition on this issue."
16. From the above, it is evident that the assessee is entitled to economic adjustments in the circumstances of under capacity utilization of the company. Of course, such adjustments must be restricted to fixed cost/overheads only. In the instant case, the AO/TPO did not have the occasion to go into the period or the extent of the labour unrest, break up of the claimed adjustments amounting Rs 7.32 crores (rounded off), fixed cost versus the variable cost etc as they summarily rejected the external comparables in view of their preference to the operating profits of the domestic segment of the carpets. Therefore and consequently, this key issue also has to be set aside to the files of the TPO/AO for fresh examination of the issue. Prima facie, we see the need for such economic adjustments to the total cost of the carpet of the export segments. We refuse to comment on the facts relating to the figures as none of the authorities has gone into the details of such economic adjustments and they summarily rejected the claims. As such, the requisite adjustments are borne out of the relevant rules/provisions and therefore, the claim is bona fide and has support of the law. For this, the assessee prefers to go to the files 9 ITA . Nos. 1321/PN/2011 Brintons Carpets Asia Private Limited A.Ys. 2007-08 Page of 10 of the AO for want of a speaking order on this issue. In our opinion, the request of the assessee deserves to be considered favourable.
17. In the set aside proceedings, the AO/TPO needs to examine (i) total cost amounting to Rs 39.84 cr by analyzing the same considering the fixed cost and the others; (ii) needs to determine the exact period of unrest of the labour; (iii) needs to determine balkanization of the said unrest period ie the period of go slow approach of the labour and its adverse effect on the production of the carpets for the export and the period of nil production of the carpets for the export, etc. (iv) compare the economic activity of the company during these disturbed periods with that of the normal period of the year; (v) if fact the authorities may compare the operating profits of the company considering the external comparables ie prices that fall in the labour unrest and that fall in the normal period of the previous year as the AY registers both the periods; (vi) regarding the variable cost segment of the claimed overheads, there is need for examining the essentiality of the incurring of such expenditure considering the prudence of the management and the factors relating to the commercial expediency of the conducting of the business. TPO/AP shall pass a speaking order in this regard. AO/TPO is required to grant reasonable opportunity of being heard to the assessee in the set aside proceedings. Accordingly, the relevant grounds are set aside.
18. There are other grounds raised in the appeal relating to applicability of the provisions of section 10B of the Act, the applicability of the provisions of the proviso to section 93C(2) of the Act etc. On hearing the parties, we find these issues should go to the files of the AO as they are dependent on the outcome of the key issues set aside above. AO is directed to pass a speaking in this regard too depending on the outcome in the set aside proceedings and also considering the plethora of judgments on the said proviso. Accordingly, the said grounds are set aside too.
19. In the result, the appeal of the assessee is allowed pro tanto for statistical purpose"
5. Respectfully following the decision of the Tribunal in assessee's own case and in absence of any contrary material brought to our notice, we restore the issue to the file of A.O for fresh adjudication in the light of the directions of the Tribunal in assessee's own case for A.Y. 2006-07. The grounds raised by the assessee are accordingly allowed for statistical purposes.10 ITA . Nos. 1321/PN/2011
Brintons Carpets Asia Private Limited A.Ys. 2007-08 Page of 10
6. In the result, appeal filed by the assessee is allowed for statistical purposes.
The order is pronounced in the open Court on 12th April, 2012.
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV) (R.K. PANDA )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, dated the 12th April , 2012
US
Copy of the order is forwarded to :
1. The Appellant
2. The Respondent
3. The CIT - I, Swargate, Pune
4. The Director of Income Tax (TP), Praptikar Bhawan Annexe, Karve Road,)-II, Pune 411 004 / DRP, Pune
5. The D.R. "B" Bench, Pune
6. Guard File By order Senior Private Secretary Income Tax Appellate Tribunal Pune