DY. CIT, Pune v. Haworth [I] P. Ltd, Pune

ITA 2422/PUN/2012 | 2005-2006
Pronouncement Date: 21-04-2014 | Result: Dismissed

Appeal Details

RSA Number 242224514 RSA 2012
Assessee PAN AAACH8417K
Bench Pune
Appeal Number ITA 2422/PUN/2012
Duration Of Justice 1 year(s) 4 month(s) 15 day(s)
Appellant DY. CIT, Pune
Respondent Haworth [I] P. Ltd, Pune
Appeal Type Income Tax Appeal
Pronouncement Date 21-04-2014
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 21-04-2014
Assessment Year 2005-2006
Appeal Filed On 06-12-2012
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHE B PUNE BEFORE SHRI G.S. PANNU ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR JUDICIAL MEMBER ITA NO.2422/PN/2012 (ASSESSMENT YEAR : 2005-06) DY. COMMISSIONER OF INCOME TAX CIRCLE 1(2) PUNE. . APPELLANT VS. HAWORTH (INDIA) PVT. LTD. RAISONI INDUSTRIAL PARK SITE NO.276 VILLAGE MANN TALUKA MULSHI PUNE 411 047. PAN : AAACH8417K . RESPONDENT DEPARTMENT BY : SHRI S. P. WALIMBE ASSESSEE BY : SHRI RAKESH GUPTA DATE OF HEARING : 03-04-2014 DATE OF PRONOUNCEMENT : 21-04-2014 ORDER PER G. S. PANNU AM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST AN O RDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-XX NEW DELHI DATED 28.09.2012 WHICH IN TURN HAS ARISEN FROM AN ORDER DATED 25.1 1.2008 PASSED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME-TAX ACT 1961 (IN SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2005-06. 2. THE REVENUE HAS ASSAILED THE ORDER OF THE CIT(A) ON THE FOLLOWING GROUNDS OF APPEAL :- 01. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S) ERRED IN HOLDING THAT THE ASSESSEE WAS A SERVICE PROVIDER AN D WAS THUS ENTITLED TO COMMISSION WHEREAS THE FAR ANALYSIS SHOWED THAT THE ASSESSEE WAS A FULL FLEDGED DISTRIBUTOR. 02. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED IN NOT APPRECIATING THE FACT THAT THE APPELLANT ASSESS EE WAS NOT AN ORDINARY COMMISSION AGENT BUT A DISTRIBUTOR OF THE ASSOCIATE D ENTERPRISES UNDERTAKING THE TASK OF SALES REPRESENTATIVE MARKETING CLEARI NG & FORWARDING ASSEMBLING ITA NO.2422/PN/2012 A.Y. : 2005-06 AND INSTALLATION & COMMISSIONING THEREBY ASSUMING A LL THE NORMAL RISK OF THE FULL FLEDGED DISTRIBUTOR INCLUDING THE CREDIT RISK. 03. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED IN HOLDING THAT PROFIT LEVEL INDICATOR OF RETURN ON OP ERATING COST WAS CORRECT RATHER THAN RETURN ON SALES EVEN THOUGH THE OPERATI NG COST WAS A CONTROLLED TRANSACTION AND THEREFORE TAINTED. 3. AT THE TIME OF HEARING IT WAS A COMMON POINT BE TWEEN THE PARTIES THAT THE ISSUES RAISED IN THE PRESENT APPEAL AS WELL AS THE FACTS AND CIRCUMSTANCES FOR THE YEAR UNDER CONSIDERATION STAND ON IDENTICAL FOOTING TO THOSE CONSIDERED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE PRECEDING ASSESSMENT YEAR 2004-05 VIDE ITA NO.1246/PN/2011 DATED 27.02.2013. A COPY OF THE ORDER OF THE TRIBUNAL DATED 27.02.2013 (SUPRA) WAS PLACED ON RECORD. IN THE ABOVE BACKGROUND THE CAPTIONED APPEAL IS BEING DISPOSED- OFF. 4. IN BRIEF THE RELEVANT FACTS ARE THAT THE RESPON DENT-ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE CO MPANIES ACT 1956 AND IS A SUBSIDIARY OF HAWORTH INC. USA. THE ASSESSEE COM PANY IS INTER-ALIA ENGAGED IN THE BUSINESS OF WHOLESALE TRADING AND IN STALLATION OF FURNITURE. THE RESPONDENT-ASSESSEE IS ALSO ENGAGED IN THE ACTIVITY OF PROVIDING MARKETING AND INSTALLATION SUPPORT SERVICES TO SOME OF ITS AS SOCIATED ENTERPRISES BASED ABROAD NAMELY HAWORTH FURNITURE (THAILAND) CO. LT D. AND HAWORTH SINGAPORE PTE. LTD.. IT WAS NOTICED THAT THE ASSESSEE HAD EN TERED INTO THE CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES ON ACCOUNT OF PROVISION OF MARKETING SUPPORT SERVICES AT STATED V ALUE OF RS.10 75 76 153/-. IN ORDER TO BENCHMARK ITS INTERNATIONAL TRANSACTION S WITH THE ASSOCIATED ENTERPRISES ASSESSEE SELECTED THE TRANSACTIONAL NE T MARGIN (TNM) METHOD AS THE MOST APPROPRIATE METHOD IN ITS TRANSFER PRIC ING STUDY. THE PROFIT LEVEL INDICATOR (I.E. PLI) WAS COMPUTED WITH REFERENCE TO OPERATING PROFITS /TOTAL COSTS AND SINCE THE PLI OF THE ASSESSEE WAS 30.32% AND THE AVERAGE OF PLIS OF THE COMPARABLE CASES SELECTED WAS 2.32% INTERNA TIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES ON ACCOUNT OF PROVISION OF MARKETING AND INSTALLATION SERVICES WAS CONSIDERED AT AN ARM' S LENGTH PRICE. ITA NO.2422/PN/2012 A.Y. : 2005-06 5. THE TRANSFER PRICING OFFICER (TPO) DISAGREED WIT H THE ASSESSEE BROADLY ON TWO ISSUES. FIRSTLY AS PER THE TPO THE NATURE OF ASSESSEES TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES SHOWED THAT IT WAS NOT MERELY A SERVICE PROVIDER BUT WAS INDEED A DISTRIBUTOR OF FURNITURE PRODUCED BY SUCH ASSOCIATED ENTERPRISES. THE STAND OF THE TPO WAS THAT ALL THE ACTIVITIES RELATED TO THE SALES OF THE PRODUCTS PRODUCED BY THE ASSOCIATED EN TERPRISES WAS BEING PERFORMED BY THE ASSESSEE IN INDIA. ACCORDING TO T HE TPO THE ACTUAL INTERNATIONAL TRANSACTIONS WAS IN EFFECT A TRANSACT ION OF PURCHASE OF GOODS FROM THE ASSOCIATED ENTERPRISES AND SELLING IT TO C USTOMERS IN INDIA AND NOT MERELY OF PROVIDING MARKETING SUPPORT TO THE ASSOCI ATED ENTERPRISES AS MADE OUT BY THE ASSESSEE. THE LEARNED TPO ALSO OBSERVED THAT ASSESSEE WAS ALSO ENGAGED IN INSTALLATION AND COMMISSIONING ACTIVITIE S AND THAT ASSESSEE HAD ALSO INCURRED EXPENSES ON CLEARING CHARGES. THE TP O ALSO NOTICED THAT ASSESSEE BECAME ENTITLED TO HIS COMMISSION INCOME O NLY WHEN THE SALE VALUE WAS REALIZED BY THE ASSOCIATED ENTERPRISES WITH RES PECT TO THE SALES MADE TO THE INDIAN CUSTOMERS. IN SUM AND SUBSTANCE ACCORD ING TO THE TPO ASSESSEE WAS ACTING AS A FULL-FLEDGED DISTRIBUTOR OF HAWORTH PRODUCTS IN INDIA AND THEREFORE THE CORRECT TRANSFER PRICING APPROACH WOU LD BE TO EXAMINE THE INTERNATIONAL TRANSACTIONS FROM THE PERSPECTIVE OF AN INDEPENDENT DISTRIBUTOR AND NOT FROM THE STAND POINT OF A SERVICE PROVIDER. THE SAID STAND OF THE TPO IS IN LINE WITH SIMILAR STAND TAKEN BY THE REVENUE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2004-05. 6. THE SECOND AREA OF DIFFERENCE BETWEEN ASSESSEE A ND THE TPO WAS THE MANNER OF COMPUTING THE PLI. THE TPO CHANGED THE P LI FROM OPERATING PROFITS/ TOTAL COSTS TAKEN BY THE ASSESSEE TO OPERA TING PROFIT/ SALES. THE TPO CHOSE 5 COMPARABLES OUT OF 8 SELECTED BY THE ASSESS EE IN ITS TRANSFER PRICING STUDY AND THE PLI BASED ON THE FORMULA OF OPERATING PROFIT/ SALES OF THE 5 COMPARABLES WAS CALCULATED AT 6.44% AND ACCORDINGLY THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS WAS ARRIVED AT BY MAKING AN UPWARD ADJUSTMENT OF RS.11 28 35 670/-. THE ADDITION MADE BY THE ASSESSING OFFICER ITA NO.2422/PN/2012 A.Y. : 2005-06 BASED ON SUCH ADJUSTMENT WORKED OUT BY THE TPO WAS CARRIED IN APPEAL BEFORE THE CIT(A) WHO HAS SINCE DELETED THE SAME F OLLOWING HIS OWN ORDER FOR THE ASSESSMENT YEAR 2004-05 IN THE ASSESSEES OWN C ASE ON IDENTICAL ISSUE. 7. THE STAND OF THE ASSESSEE WAS THAT HAVING REGARD TO THE FUNCTIONS ASSETS AND RISKS (FAR) ANALYSIS OF ITS NATURE OF IN TERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES IT WAS A CASE OF MERE M ARKETING SUPPORT SERVICES PROVIDER AND NOT OF A DISTRIBUTOR. ACCORDING TO TH E ASSESSEE IT IS NOT A FULL- FLEDGED DISTRIBUTOR INASMUCH AS THE PRODUCTS ARE SO LD BY THE FOREIGN BASED ASSOCIATED ENTERPRISES TO THE CUSTOMERS BASED IN IN DIA ON THEIR TERMS AND CONDITIONS. ALL PRICING RELATED DECISIONS WERE TAK EN BY THE ASSOCIATED ENTERPRISES NAMELY HAWORTH THAILAND AND HAWORTH S INGAPORE AND THAT ASSESSEE HAD NO AUTHORITY TO CONCLUDE ANY CONTACTS WITH INDIAN CUSTOMERS IN THE COURSE OF PROVIDING MARKETING SUPPORT SERVICES. THE STAND OF THE ASSESSEE WAS THAT PROVISION OF MARKETING SUPPORT SE RVICES CANNOT BE REGARDED AS A TRADING FUNCTION FROM ANY PERSPECTIVE SINCE IN A TRADING ACTIVITY THE TRADER IS THE DECISION MAKER ON THE PRICES AT WHICH SALES NEED TO TAKE PLACE AND IN THE PRESENT CASE THE SAID RESPONSIBILITY/PREROGATIV E WAS OF THE ASSOCIATED ENTERPRISES AND NOT OF THE ASSESSEE. IT WAS ALSO P OINTED OUT THAT THE ASSOCIATED ENTERPRISES WERE RESPONSIBLE FOR ALL THE CLAIMS OF WARRANTIES ETC. TOWARDS THE INDIAN CUSTOMERS AND ASSESSEE WAS NOT L IABLE FOR THE SAME. THAT ASSESSEE WAS NOT CARRYING ANY INVENTORY RISK SINCE IT WAS NOT MAINTAINING ANY STOCKS FOR RE-SALE WHICH WOULD HAVE BEEN A CASE IF ASSESSEE WAS A TRADER. IT WAS POINTED OUT THAT BEING A MARKETING SUPPORT SERV ICES PROVIDER ASSESSEE WAS BEARING THE CREDIT RISK ONLY TO THE EXTENT OF C OMMISSION INCOME ACCRUING ON THE RESPECTIVE SALES AND IN SO FAR AS THE CREDIT RISK OF THE ENTIRE SALE PRICE RECOVERABLE FROM THE INDIAN CUSTOMER WAS CONCERNED IT WAS BORNE BY THE ASSOCIATED ENTERPRISES. FOR ALL THE ABOVE REASONS IT WAS CANVASSED BY THE ASSESSEE THAT IT WAS MERELY A MARKETING SUPPORT SER VICE PROVIDER AND NOT A DISTRIBUTOR. ITA NO.2422/PN/2012 A.Y. : 2005-06 8. THE ACTION OF THE TPO IN CHANGING THE PLI FROM O PERATING PROFIT/ TOTAL COST TO OPERATING PROFIT/ SALES WAS ALSO CHALLENGED BY POINTING OUT THAT TESTED TRANSACTION PERTAINED TO COMMISSION INCOME RECEIVED FROM THE ASSOCIATED ENTERPRISES AND THEREFORE THE PLI CANNOT BE BASED ON INCOME WHICH ITSELF WAS THE SUBJECT-MATTER OF THE COMPARABILITY ANALYSIS. SECONDLY IT WAS CANVASSED THAT SINCE THE ASSESSEE WAS A SERVICE PROVIDER IT WAS MORE APPROPRIATE TO CONSIDER THE PROFITABILITY BASED ON COSTS. 9. THE AFORESAID POSITION CANVASSED BY THE ASSESSEE WAS FOUND BY THE CIT(A) TO BE IDENTICAL TO THE ASSESSMENT YEAR 2004- 05. ACCORDINGLY FOLLOWING HIS OWN ORDER FOR ASSESSMENT YEAR 2004-05 IN ASSESS EES OWN CASE THE CIT(A) HELD THAT THE CHARACTERIZATION OF THE ASSESS EE AS A SERVICE PROVIDER WAS JUSTIFIED AND ACCORDINGLY THE STAND OF THE TPO WAS NEGATED. THE ACTION OF THE TPO IN CHANGING THE PLI FROM OPERATING PROFITS/ TOTAL COST TO OPERATING PROFIT/ SALES WAS ALSO NEGATED HAVING REGARD TO THE NATURE OF ASSESSEES INTERNATIONAL TRANSACTIONS BEING THAT OF A SERVICE PROVIDER. AGAINST THE AFORESAID DECISION OF THE CITA() REVENUE IS IN APP EAL BEFORE US. 10. AT THE TIME OF HEARING THE LEARNED COUNSEL REF ERRED TO THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2004-05 DATED 27.02.2013 (SUPRA) AND POINTED OUT THAT BOTH THE IS SUES RAISED BY THE REVENUE IN THE PRESENT YEAR WERE SUBJECT-MATTER OF CONSIDERATION BY THE TRIBUNAL WHEREIN THE STAND OF THE CIT(A) WAS UPHELD . APART THEREFROM LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE SUBS EQUENT ASSESSMENT YEARS OF 2006-07 AND 2007-08 THE NATURE OF FUNCTIONS OF THE ASSESSEE IN THE SEGMENT OF PROVISION OF MARKETING SUPPORT SERVICES TO THE ASSOCIATED ENTERPRISES HAS BEEN ACCEPTED BY THE TPO TO BE THAT OF A SERVICE PROVIDER AND NOT A DISTRIBUTOR. EVEN WITH REGARD TO THE MANNER OF COMPUTING THE PLI IN THE SUBSEQUENT ASSESSMENT YEARS THE FORMULA ADOPTED BY THE ASSESSEE OF OPERATING PROFITS/ TOTAL COST HAS BEEN ACCEPTED. F OR ALL THE ABOVE REASONS IT ITA NO.2422/PN/2012 A.Y. : 2005-06 WAS THEREFORE CONTENDED THAT THE PRESENT APPEAL OF THE REVENUE IS DEVOID OF ANY MERIT. 11. THE AFORESAID FACTUAL MATRIX BROUGHT OUT BY THE LEARNED COUNSEL FOR THE RESPONDENT-ASSESSEE HAS NOT BEEN ASSAILED BY THE LE ARNED DEPARTMENTAL REPRESENTATIVE BEFORE US. IT IS ALSO NOT IN DISPUT E THAT THE DISPUTE IN RELATION TO THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS OF PROVISION OF MARKETING SUPPORT SERVICES TO THE ASSOCIATED ENTERP RISES STANDS ON SIMILAR FOOTING AS IN THE PRECEDING ASSESSMENT YEAR 2004-05 . SINCE THE TRIBUNAL HAS CONSIDERED A SIMILAR DISPUTE IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2004-05 VIDE ITS ORDER DATED 27.02.2013 (SUPRA) THE AFORESAID APPEAL IS ACCORDINGLY DECIDED IN THE SAME LIGHT. FOLLOWING T HE ORDER OF THE TRIBUNAL DATED 27.02.2013 (SUPRA) WHEREBY THE SIMILAR FINDIN GS OF THE CIT(A) HAVE BEEN AFFIRMED IN THIS YEAR ALSO WE HEREBY AFFIRM THE OR DER OF THE CIT(A) AND ACCORDINGLY THE REVENUE FAILS. 12. IN THE RESULT THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST APRIL 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED: 21 ST APRIL 2014. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-XX NEW DELHI; 4) THE CIT-XX NEW DELHI; 5) THE DR B BENCH I.T.A.T. PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T. PUNE