SAKATA INX (INDIA) LTD., GURGAON v. ACIT, Alwar

ITA 5/JPR/2011 | 2006-2007
Pronouncement Date: 14-11-2014 | Result: Allowed

Appeal Details

RSA Number 523114 RSA 2011
Assessee PAN AACCS4797D
Bench Jaipur
Appeal Number ITA 5/JPR/2011
Duration Of Justice 3 year(s) 10 month(s) 8 day(s)
Appellant SAKATA INX (INDIA) LTD., GURGAON
Respondent ACIT, Alwar
Appeal Type Income Tax Appeal
Pronouncement Date 14-11-2014
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted A
Tribunal Order Date 14-11-2014
Date Of Final Hearing 15-12-2011
Next Hearing Date 15-12-2011
Assessment Year 2006-2007
Appeal Filed On 05-01-2011
Judgment Text
ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH JAIPUR (BEFORE SHRI R.P. TOLANI AND SHRI T.R. ME ENA) ITA NO. 5/JP/2011 ASSESSMENT YEARS : 2006-07 PAN : AACCS 4797 D M/S. SANKATA INX (INDIA) LTD. VS. THE ACIT D-17 INFOCITY-II SECTOR 33 CIRCLE- 2 GURGAON ALWAR (APPELLANT) (RESPONDENT) DEPARTMENT BY: SHRI SUBHASH CHANDRA ASSESSEE BY : SHRI PIYUSH SINGH NITIN NARANG &ANIL GUPTA DATE OF HEARING: 18-09-2014 DATE OF PRONOUNCEMENT: 14-11-2014 ORDER PER R.P. TOLANI JM THIS IS AN APPEAL FILED BY THE ASSESSEE ARISING OU T OF ORDERS OF AO TPO AND DRP-II NEW DELHI FOR THE ASSESSMENT YEAR 2 006-07. VARIOUS ISSUES ARE RAISED WHICH IN FACT AGITATE THE FOLLOWI NG GROUNDS OF APPEAL. 1. THE HON'BLE DRP/LD AO AND LD. TPO HAVE ERRED IN LAW AND IN FACTS IN NOT ACCEPTING THE ECONOMIC A NALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISION OF THE ACT READ WITH THE INCOME-TAX RULES 1962 (THE RULES) FOR DETERMINATION OF ALP IN CONNECTION WITH THE IMPUGNE D INTERNATIONAL TRANSACTION. 1.1 THE HON'BLE DRP/ LD. AO AND LD TPO HAS ERRED IN REJECTING SIX COMPARABLE COMPANIES SELECTED BY T HE ASSESSEE. ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 2 1.2 THE HON'BLE DRP / LD. AO AND TPO HAS ERRONEOUS ADDED SIX ADDITIONAL COMPANIES TO THE COM PARABLE COMPANIES CONSIDERED BY THE ASSESSEE. 1.3 THE HON'BLE DRP / LD. AO AND LD TPO ERRED IN ACCEPTING THE MICRO INKS LTD. FOR THE FINANCIAL YEA R 2005-06 WHILE RECOMPUTING THE MARGINS FOR SINGLE YEAR. 1.4 THE HON'BLE DRP / LD. AO AND LD TPO HAS WRONGLY COMPUTED THE MARGINS OF THE COMPARABLES SEL ECTED IN THE IMPUGNED ORDER. 1.5 THE HON'BLE DRP / LD. AO AND LD TPO HAS ERRED IN FACTS AND CIRCUMSTANCES BY EXCLUDING THE WORKING CAPITAL ADJUSTMENT WHILE RE-COMPUTING THE OPERATING MARGINS OF THE COMPARABLE COMPANIES. 1.6 THE HON'BLE DRP / LD. AO AND LD TPO HAS ERRED IN USING THE DATA WHICH WAS NOT AVAILABLE TO THE AS SESSEE AT THE TIME OF UNDERTAKING THE TRANSFER PRICING DOCUMENTAT ION. 1.7 THE HON'BLE DRP / LD. AO AND LD TPO HAS ADOPTED A FLAWED APPROACH BY USING SINGLE YEAR DATA AS AGAINST MULTIPLE YEAR DATA USED BY THE ASSESSEE IN ACCORDAN CE WITH THE LAW TO COMPUTE THE MARGINS OF THE COMPARABLE COMPAN IES. 2. THE HON'BLE DRP / LD. AO AND LD TPO HAS ERRED IN LAW IN NOT APPLYING THE PROVISO TO SECTION 92C O F THE ACT AND HAS FAILED TO ALLOW THE ASSESSEE THE BENEFIT OF DOW NWARD VARIATION OF 5 PERCENT FROM THE AL SO DETERMINED FO R THE IMPUGNED INTERNATIONAL TRANSACTION. 3. THE LD. AO HAS ERRED IN RESTRICTING THE SET OFF ALLOWED FOR UNABSORBED DEPRECIATION AGAINST THE TAX ABLE INCOME AS COMPUTED BY THE LD. AO. ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 3 2.1 BRIEF FACTS OF THE CASE ARE THAT SAKATA INX (IN DIA) LTD. IS A WHOLLY SUBSIDIARY OF SAKATA INX CORPORATION JAPAN. M/S. S AKATA INDIA WAS INCORPORATED IN 1994. IN THE YEAR IN QUESTION THE COMPANY WAS ENGAGED IN THE MANUFACTURING AND SELLING PRINTING INKS AND RES INS. THE MANUFACTURING PLANTS OF SAKATA INDIA IS SITUATED AT BHIWADI. THE PLANT HAS DEVELOPED HIGH QUALITY PRINTING INKS. FOR THE YEAR IN QUESTION TH E ASSESSEE FILED ITS ORIGINAL RETURN OF INCOME ON 29-11-2006 ALONG WITH PROFIT AS PER I.T. ACT AT RS. 2 60 71 160/- AND AFTER CLAIMING SET OFF OF BROUGHT FORWARD LOSSES OF RS. 2 59 46 027/- DECLARED NET INCOME OF RS. 1 25 133/- BEING INCOME FROM OTHER SOURCES. THE ASSESSEE WORKED OUT ITS BOOK PRO FIT U/S 115JB AT RS. 4 07 81 284/- AND THE TAX LIABILITY UNDER MAT WAS S HOWN AT RS. 30 58 596/-. SUBSEQUENTLY THE ASSESSEE FILED A REVISED RETURN ON 21-09-2007 DECLARING PROFIT AS PER THE IT AT RS. 2 16 40 763/- TO CORREC T THE CLAIM OF DEPRECIATION AND AFTER CLAIMING SET-OFF OF THE BROUGHT FORWARD L OSSES OF RS. 2 15 15 630/- AND DECLARED NET INCOME OF RS. 1 25 133/-. THE BOOK PROFIT U/S 115JB REMAINED UNCHANGED AT RS. 4 07 81 284/-. ACCORDING TO THE AO DURING THE YEAR THE ASSESSEE UNDERTOOK THE FOLLOWING INTERNATI ONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE. ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 4 S.N. DESCRIPTION OF TRANSACTION VALUE IN (RS. 1. IMPORT OF RAW MATERIALS STORES SPARE ETC. 9 55 84 461 2. EXPORT OF POLYURETHANE RESIN 2 83 16 131 3. PURCHASE OF CAPITAL GOODS 1 45 43 569 4. PURCHASE OF TRADING GOODS 1 07 97 545 5. COMMISSION INCOME 66 278 6. PAYMENT OF ROYALTY 68 06 000 7. SHARING OF COST OF EXPATRIATE EMPLOYEES BY AES. 51 39 560/- IN THIS CASE REFERENCE U/S 92CA WAS MADE TO THE TP O VIDE LETTER NO. ACIT/ CIRCLE- 2/ALW/2008-09/838 DATED 3-12-2008. THE TPO AFTER HEARING THE ASSESSEE CAME TO THE CONCLUSION THAT THE T.P. REPOR TING SUBMITTED BY THE ASSESSEE WAS NOT ACCEPTABLE AND WAS REWORKED OUT. WHILE DOING SO THE TPO REJECTED SIX COMPARABLES OFFERED BY THE ASSESSE E AND AT THE SAME TIME APPLIED NEW SIX COMPARABLES WHICH ACCORDING TO THE ASSESSEE WERE NOT APPLICABLE TO ITS CASE. AFTER CONDUCTING EXERCISE THE TPO SUMMED UP HIS RECOMMENDATIONS AS UNDER:- 8.9 GENERAL PRINCIPLES EMERGING FROM THE ABOVE DI SCUSSIONS: VARIOUS PRINCIPLES REGARDING COMPARABILITY ADJUSTME NT AS LAID DOWN IN ABOVE REFERRED TO JUDGMENTS MAY BE SUMMARIZ ED AS UNDER: (A) RULE 10B (E)(II) AND 10B (3)(III) STIPULATE FOR COMPARABILITY ADJUSTMENT. (B) THE OECD EXISTING GUIDELINES AND THE OECD DRAFT ISSUE NOTES ON COMPARABILITY PUBLIC INVITATION TO COMMENT ON A SERIES OF ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 5 DRAFT ISSUE [CPTA/CFA(2006)31] MAY BE RELIED UPON T O MAKE COMPARABILITY ADJUSTMENT. (C) THE COMPARABILITY ADJUSTMENT CAN BE MADE FOR WO RKING CAPITAL RISK AND GROWTH AND R&D EXPENSE. (D) RULE 10B(3)(II) PROVIDES FOR ONLY REASONABLE AC CURATE ADJUSTMENT. (E) AS PER OECD DRAFT ISSUE NOTES QUALITY OF DATA B EING ADJUSTMENT PURPOSE OF THE ADJUSTMENT RELIABILITY OF THE ADJUSTMENT AND DOCUMENTATION ARE ESSENTIAL PER REQUIREMENT BEF ORE ANY COMPARABILITY ADJUSTMENT COULD BE MADE. (F) HONBLE ITAT IN CASE OF SONY INDIA PVT. LTD. (S UPRA) AND M/S PHILIPS SOFTWARE PVT LTD(SUPRA) HAS ALLOWED ADH OC OR FLAT COMPARABILITY HOWEVER HONBLE KARNATAKA HIGH COURT HAS STAYED OPERATION OF THE ORDER IN CASE OF M/S PHILIPS SOFTW ARE CENTER PVT. LTD. ON THE PLEA OF THE DEPARTMENT THAT RULE 10B(3)(III) STIPULATE FOR ONLY REASONABLE ACCURATE ADJUSTMENT. 8.10 THE ABOVE DISCUSSION CLEARLY SHOWS THAT THE PR INCIPLES GOVERNING THE NEED FOR WORKING CAPITAL ADJUSTMENT A ND METHOD OF CALCULATION THEREOF IS STILL EVOLVING. THERE IS NO CLEAR CONSENSUS REGARDING THE SAME. THE HONBLE HIGH COURT HAS STAY ED THE DECISION RELATING TO ADHOC ADJUSTMENT AS THE ADJUSTMENT HAS TO BE REASONABLY ACCURATE AS PER I.T. RULES. 8.11 THE OECD PUBLIC DRAFT HAS ALSO MADE SOME SERIO US OBSERVATIONS. PARTICULARLY THE FACT THAT THE COMPARISONS OF WORKI NG CAPITAL ONLY COMPARES THE LEVELS ON THE LAST DAY OF THE TES TED PARTY AS WELL AS THE COMPARABLES WHICH MAY NOT GIVE A REPRESENTATIV E LEVEL OF WORKING CAPITAL OVER THE YEAR. IN CASE OF A SIGNIFICANT ADJUSTMENT ON ACCOUNT OF W ORKING CAPITAL SELECTION OF THE COMPARABLE ITSELF BECOMES QUESTIONABLE. ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 6 WORKING CAPITAL ADJUSTMENT REQUIRES CONSIDERING OF THE INTEREST RATE TO BE USED. THE INTEREST RATE HAS TO BE ASSUME D WHICH MAY BE DIFFERENT IN REALITY. THE MARGINS OF THE COMPARABLES MAY OR MAY NOT BE RE LIABLY ADJUSTED DEPENDING ON THE INTEREST RATE TAKEN LEV ELS OF RECEIVABLES INVENTORY AND PAYABLES MAINTAINED THROUGHOUT THE YE AR AS AGAINST THE LAST DAY. 8.12 IN THESE CIRCUMSTANCES WORKING CAPITAL ADJUST MENT AS CLAIMED BY THE ASSESSEE CANNOT BE ACCEPTED AS A MAT TER OF RULE AND HAS TO BE EXAMINED WITH EXTREME CAUTION. IT IS EVIDENT FROM ABOVE FINDINGS THAT THE ASSESSEE HAS NOT FURNISHED POSITION OF PAYABLES AND RECEIVABLES AT B EGINNING AND END OF THE YEAR. THE ASSESSEE HAS NOT MADE AVAILABLE BI FURCATION OF TRADE CREDITORS AND NON-TRADE DEBTORS AND NON-TRADE DEBTO RS. IN SOME CASES IT IS NOT POSSIBLE TO SEGREGATES THE DEBTORS AND CR EDITORS OF THE COMPANY PERTAINING TO EACH SEGMENT. THESE FINDINGS CLEARLY PROVE THAT QUALITY OF DATA AS USED BY THE ASSESSEE FOR WO RKING CAPITAL ADJUSTMENT CANNOT BE RELIED UPON. HENCE THE CLAIM OF THE ASSESSEE FOR WORKING CAPIT AL ADJUSTMENT IS NOT ACCEPTED. FURTHER AFTER THE NEW SET OF COMPARABLES WAS PROPOSED TO BE APPLIED IN THE SHOW-CAUSE NOTICE THE ASSESSEE SOUGHT MORE TIME SO THAT IT COULD FURNISH COMPLETE WORKING OF THE WORKING CAPITAL ADJUSTMENT. DESPITE BEING PROVIDED AND OPPORTUNITY THE WORKING HAS NOT BEEN FURNISHED BY THE ASSESSEE. AS PER THE ABOVE OBSERVATIONS THE WORKING CAPITAL ADJUSTMENT AS SOU GHT BY THE ASSESSEE CANNOT BE CONSIDERED. 9. IN THE LETTER DATED 22.10.09 THE ASSESSEE HAD I NFORMED THAT THE MARGINS OF THE COMPARABLES HAVE BEEN CALCU LATED BY IT AND THE RESULTS THEREOF WERE FOUND TO BE DIFFERENT FROM THE CALCULATION GIVEN BY THE TPO. IN THIS REGARD IT IS CLARIFIED THAT THE T.P.O HAS FOLLOWED THE SAME PARAMETERS FOR COMPUTATION OF MARGIN AS HAS BE EN GIVEN IN THE T.P. STUDY. NOR HAS THE ASSESSEE GIVEN THE CALCULAT ION FOR THE ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 7 COMPARISON. IN THESE CIRCUMSTANCES THE MARGIN CALC ULATED IN THE SHOW-CAUSE NOTICE IS NOT CHANGED. 10. APPLICABILITY OF + (-) 5% RANGE: THE ASSESSEE HAS CONTENDED THAT IN CASE ADJUSTMENT IS MADE BY TAKING THE ALP DIFFERENT FROM THE VALUE OF INTERNAT IONAL TRANSACTION BENEFIT OF 5% MARGIN SHOULD BE ALLOWED TO IT WHICH MEANS THE DIFFERENCE IN EXCESS OF 5% MARGIN SHOULD ONLY BE CO NSIDERED FOR ADJUSTMENT. HOWEVER THIS CONTENTION OF THE ASSESSE E IS NOT ACCEPTABLE. THE 5% MARGIN IS ALLOWED TO THE ASSESSE E AT THE TIME OF T.P. DOCUMENTATION. IF THE PRICE DETERMINED BY THE ASSESSEE IS WITHIN 5% OF THE VALUE OF INTERNATIONAL TRANSACTIONS THEN THE ASSESSEES VALUE IS ACCEPTABLE. HOWEVER ONCE THE PRICE IS BEY OND THE 5% RANGE THE ENTIRE DIFFERENCE HAS TO BE ADJUSTED. AS HAS BEEN DISCUSSED IN DETAIL THE NEW SET OF 14 COMPARABLES AS MENTIONED IN THE SHOW CAUSE ARE CONSIDERED IDEAL COMPARABLES FOR BENCHMARKING. THE MEAN MARGIN OF 8.64% IS APPLIED T O THE OPERATING REVENUE OF THE ASSESSEE. OPERATING REVENUE OF THE ASSESSEE RS.84 10 45 482/- 8.64% OF OR RS.7 26 66 329/- DECLARED OP RS.5 88 81 725/- DIFFERENCE RS.1 37 84 604/- THE ASSESSEE HAS IMPORTED RAW MATERIALS STORES AND SPARES AMOUNTING TO RS.9 55 84 461/- FROM ITS AES. AS THIS IS THE LARGEST TRANSACTION THE ADJUSTMENT IS MADE TO THIS INTERNA TIONAL TRANSACTION. THE DIFFERENCE IS 14.42% OF THE INTERNATIONAL TRANS ACTION I.E. ABOVE 5% ACCORDINGLY THE ADJUSTMENT IS MADE TO THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF THE ASSESSEE. ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 8 AS THE MARGINS OF THE ASSESSEE HAVE BEEN EXAMINED A T ENTITY LEVEL THE ALP OF THE OTHER INTERNATIONAL TRANSACTI ONS IS ACCEPTED AND NO ADVERSE INFERENCE IS DRAWN IN RESPECT OF THE SAM E. 2.2 THE AO ACCEPTING THE TPOS ORDER ISSUED A DRAFT ASSESSMENT ORDER WHICH WAS CARRIED BY THE ASSESSEE TO DRP WHICH ALSO CONFIRMED THE RECOMMENDATIONS OF THE TPO BY HOLDING THAT ASSESSEE S CONTENTIONS TO BE NOT ACCEPTABLE 2.3 CONSEQUENT TO DRP DIRECTIONS U/S 144C AO PASSED FIN AL ASSESSMENT ORDER BY ADOPTING FOLLOWING COMPUTATION OF INCOME: 11. SUBJECT TO THE ABOVE REMARKS TOTAL INCOME IS COMPUTED AS UNDER:- (A) PROFIT UNDER THE HEAD INCOME FROM BUSINESS & R S. 21515630/- PROFESSION (AS PER COMPUTATION OF INCOME BY THE ASSESSEE ) ADD:- DIFFERENCE ON ACCOUNT OF OR ALP AS PER TPOS RS. 13784604/- ORDER U/S 92CA(3) TOTAL PROFIT RS. 35300234/- LESS:- UNABSORBED DEPRECIATION AS PER ORDER U/S 143(3) RS . 30906297/ - /250 DTD 7-01-2010 THE ASSESSMENT YEAR 2005-06 (B) INCOME FROM OTHER SOURCES RS. 125133/- TOTAL RS. 4519070/- BOOK PROFIT U/S 115JB :RS. 4 07 81 284/- (AS PER AUDIT REPORT U/S 115JB IN FORM NO. 29B) 1.B/F BUSINESS LOSS ALLOWED TO BE CARRIED FORWARD NIL 2. UNABSORBED DEPRECIATION ALLOWED TO BE CARRIED FORWARD B/F UNABSORBED DEPRECIATION AS PER ORDER U/S 143(3 )/ ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 9 250 DTD 7-01-20120FOR THE A.Y. 2005-06 RS. 309062 97 LESS:- SET OFF FROM THE ASSESSED PROFIT OF THE A.Y.2006-0 7 RS. 30906297/- RS. NIL ASSESSED AT TOTAL INCOME OF RS. 451907 AND DECLARE D BOOK PROFIT U/S 115JB OF RS. 40781284/-. ISSUE DEMAND NOTICE AND CH ALLAN.AS THE MAT PAYABLE ON THE BOOK PROFIT U/S 115JB DECLARED AT RS . 40781284/- IS MORE THAN THE TAX PAYABLE UNDER THE REGULAR PROCEDURE ON TOTAL INCOME OF RS. 4519070/- THE SAME IS ADOPTED FOR TAXATION PURPOSE S. CHARGE MAT ON BOOK PROFIT U/S 115JB DECLARED AT RS. 40781284/-. CHARGE INTEREST U/S 234B 234C OF THE ACT 1961. PENALTY PROCEEDINGS U/S 271(1)( C) ARE BEING INITIATED SEPARATELY FOR CONCEALING INCOME OF TRUE INCOME AND FURNISHING OF INACCURATE PARTICULARS OF INCOME. 2.4 A PERUSAL OF THE COMPUTATION OF INCOME OF THE A O WILL SHOW THAT BOOK PROFIT AS COMPUTED U/S 115JB BY ASSESSEE AND A O REMAINS THE SAME. AGGRIEVED UPON THE TP ADJUSTMENTS OF RS. 1 37 84 60 4/- ON AE TRANSACTIONS THE ASSESSEE IS BEFORE US. 2.5 THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT FOLLOWING SIX COMPARABLES INCLUDED BY THE ASSESSEE IN ITS TP REPO RT HAVE BEEN REJECTED BY THE TPO WITHOUT ANY JUSTIFICATION COMPANY NAME UNADJUSTED MARGINS APPELLANTS OBJECTIONS ON TPOS ACTION ATUL LIMITED -1.46 FOR THE PURPOSE OF OUR ANALYSIS IN THE TRANSFER PRICING DOCUMENTATION THE APPELLANT HAS CONSIDERED COLOURS SEGMENT AS COMPARABLE TO ITS OWN OPERATION. AS PER THE RELATED PARTY DISCLOSURE IN THE NOTES TO ACCOUNTS IN THE ANNUAL REPORT OF ATUL LTD. FOR F.Y. 2005-06 THE VALUE OF RELATED PARTY TRANSACTION FOR ATUL LTD. WAS 14.45 PERCENT WHICH IS BELOW OUR THRESHOLD LIMIT OF 25%. ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 10 CHROMATIC INDIA LIMITED 1.31 MANUFACTURING OF DYES IS COMPARABLE TO MANUFACTURING OF INKS. THE APPELLANT HAS ACCEPTED COMPANIES WHICH ARE ENGAGED IN MANUFACTURING DYES-INDOKEM LTD. JAYSYNTH IMPEX LTD. LONA INDUSTRIES LTD. METROCHEM INDUSTRIES LTD. METROPOLITAN EXIMCHEM LTD. PHTHALO COLOURS & CHEMICALS (INDIA) LTD. AND SARAF CHEMICALS LTD.. THESE COMPARABLE COMPANIES ARE ACCEPTED BY THE LEARNED TPO. METROPOLITAN EXIMCHEM LIMITED -4.54 METROPOLITAN EXIMCHEM LIMITED EARNED NEGATIVE OPERATING MARGIN ONLY DURING THE F.Y. 2005-06 AND HAS EARNED POSITIVE OPERATING MARGINS IN THE EARLIE R YEARS. PHTHALO COLOURS & CHEMICALS (INDIA) LIMITED 1.13 THE COMPANY HAS POSITIVE OPERATING MARGIN DURI NG F.Y. 2005-06 RAINBOW INK & VARNISH MFG. CO. LIMITED 1.38 THE COMPANY HAS POSITIVE OPERATING MARGIN DURI NG F.Y. 2005-06. LONA INDUSTRIES LIMITED NC THE APPELLANT HAS ITSELF REJECTED THIS COMPANY A S NON-COMPARABLE DURING THE TRANSFER PRICING ASSESSMENT PROCEEDINGS IT IS FURTHER CONTENDED THAT APROPOS EACH AND EVERY COMPARABLE INCLUDED BY THE ASSESSEE IN ITS TP REPORT DETAILED SUBMISSIONS HAVE BEEN MADE BEFORE TPO AND THEREAFTER BEFORE DRP WHICH ARE PART OF THE PAPER BOOK AND RESPECTIVE PAPER BOOK PAGES ARE MENTIONED IN THE WR ITTEN SUBMISSIONS. 2.6 APROPOS RESPECTIVE COMPARABLES FOLLOWING IS SU BMITTED (I) ATUL LIMITED:- THE ITAT VIDE ITS ORDER DATE4D 16-09 - 2011 FOR AY 2005-06 HAS HELD THE SAME TO BE INCLUDI BLE IN ASSESSEE'S TP STUDY. LD. TPO / OR DRP HAVE NEIT HER FOLLOWED ITAT NOR ANY REASON HAS BEEN ASSIGNED AS TO WHY IN THIS YEAR IT IS TO BE EXCLUDED. ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 11 (II) SIMILARLY THE COMPARABLE OF CHROMATIC INDIA LT D. WAS REJECTED BY THE TPO IN ASSESSMENT YEAR 2007-08 WHI CH IN FIRST APPEAL LD. CIT(A) HELD TO BE INCLUDIBLE W HICH HAS NOT BEEN CHALLENGED BY THE DEPARTMENT WHICH IS IN I TS APPEAL BEFORE ITAT AS ONLY ISSUE OF ROYALTY HAS BEE N CHALLENGED. 2.7 APROPOS THE COMPARABLES ADOPTED BY THE TPO BEYO ND THE LIST OF ASSESSEES COMPARABLES THE GIST OF THE ARGUMENTS MADE IS AS UNDER:- COMPANY NAME UNADJUSTED MARGINS APPELLANTS OBJECTION ON TPOS ACTION ASAHI SONGWON COLOURS LTD. 16.62 NOT IN SEARCH: THIS COMPANY WAS NOT AVAILABLE IN THE SEARCH RESULTS CARRIED OUT BY THE APPELLANT AT THE TIME OF PREPARATION OF TRANSFER PRICING DOCUMENTATION. THE LEARNED TPO HAS NOT PROVIDED ANY VALID JUSTIFICATION AS TO HOW THIS COMPANY WAS IDENTIFIED AS COMPARABLE WHEN IT DID NOT APPEAR IN THE SEARCH UNDERTAKEN BY THE APPELLANT. THE LEARNED TPO HAS NOT REJECTED THE SEARCH PROCESS OR THE PARAMETERS/FILTERS UTILIZED BY THE APPELLANT IN UNDERTAKING THE SEARCH PROCESS. DYNEMIC PRODUCTS LTD. 17.01 FOOD COLOUR: THE COMPANY IS ENGAGED IN MANUFACTURE OF DYE INTERMEDIATE AND VARIOUS TYPES OF FOOD COLOURS. THE AIM OF THE COMPANY IS TO SUPPORT AND TRAIN CONSTANTLY FOOD INDUSTRY IN THE CORRECT SELECTION AND APPLICATION OF COLOURS AND TO EXPLORE NEW APPLICATIONS OF THE COLOURS. THE PRODUCTS OF THE APPELLANT ARE NOT IN THE CATEGORY O F FOOD COLOURS. THE APPELLANT IN THE TRANSFER PRICING DOCUMENTATION HAS REJECTED ALL FOOD COLOUR COMPANIES. REJECTED BY LEARNED CIT(A) IN A.Y. 2007-08. INDIAN TONERS & DEVELOPERS LTD. (ITDL) 16.51 TONER: HONBLE ITAT IN A.Y. 2005-06 AND LEARN ED CIT(A) IN A.Y. 2005-06 AND A.Y. 2007-08 HAS REJECTED THIS COMPANY AS A COMPARABLE TO THE APPELLANT. RAW MATERIAL MANUFACTURING TECHNOLOGY MARKET DYNAMICS VALUE OF THE PRODUCT AND CUSTOMERS FOR TONERS ARE NOWHERE RELATED WITH ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 12 INK. ALSO PHYSICAL PROPERTY OF THE PRODUCTS MANUFACTURED BY THE APPELLANT AND ITDL IS NOT SAME AS TONER IS A POWDER AND INK IS IN LIQUID FORM . THE EXCISE TARIFF CODE FOR SAKATA INDIA ARE COVERED UNDER CHAPTER 32 WHEREAS ITDL PRODUCTS ARE COVERED UNDER CHAPTER 37 OF THE TARIFF UNDER IMAGING PRODUCTS. THE NIC CODE (1998 AND 2004 VERSIONS) FOR PRINTING INK IS 24223 WHEREAS AS PER TPOS ORDER ITDL IS COVERED UNDER 24222. KIRI DYES & CHEMICALS LTD. 7.82 NOT IN SEARCH: THIS COMPANY WAS NOT AVAILABLE IN THE SEARCH RESULTS CARRIED OUT BY THE APPELLANT AT THE TIME OF PREPARATION OF TRANSFER PRICING DOCUMENTATION. THE LEARNED TPO HAS NOT PROVIDED ANY VALID JUSTIFICATION AS TO HOW THIS COMPANY WAS IDENTIFIED AS COMPARABLE WHEN IT DID NOT APPEAR IN THE SEARCH UNDERTAKEN BY THE APPELLANT. THE LEARNED TPO HAS NOT REJECTED THE SEARCH PROCESS OR THE PARAMETERS/FILTERS UTILIZED BY THE APPELLANT IN UNDERTAKING THE SEARCH PROCESS. MAZDA COLOURS LTD. 5.73 THE COMPANY MANUFACTURES PI GMENTS AND THEREFORE THE PRODUCTS ARE COMPARABLE. MICRO INKS LTD. 12.01 SIGNIFICANT RELATED PARTY TRA NSACTIONS (RPT): THE COMPANY WAS CONSIDERED AS NON-COMPARABLE BY THE APPELLANT FOR F.Y. 2005-06 SINCE IT HAD SIGNIFICANT RELATED PARTLY TRANSACTION DURING THE SAID YEAR. AS PER THE RELATED PARTY DISCLOSURE IN THE NOTES TO ACCOUNTS IN THE ANNUAL REPORT OF THE COMPANY FOR F.Y. 2005-06 IT CAN BE COMPUTED THAT THE COMPANY HAD RELATED PARTY TRANSACTIONS OF MORE THAN 27 PERCENT DURING F.Y. 2005-06 WHICH IS ABOVE THE THRESHOLD (25 PERCENT) CONSIDERED BY THE APPELLANT IN TRANSFER PRICING DOCUMENTATION. 2.8 IT IS PLEADED THAT IF THE COMPARABLES ADOPTED B Y THE TPO ON HIS OWN ARE EXCLUDED THEN ASSESSEE'S OP MARGIN WILL BE SATI SFACTORY AND WILL FALL BELOW (+_ 5%) SAFE HARBOR RULE. SIMILARLY IF THE C OMPARABLES AS PROPOSED BY THE ASSESSEE ARE INCLUDED THEN NO ADJUSTMENT IS REQUIRED. RELIANCE IS PLACED ON FOLLOWING CASE LAWS:- ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 13 1. MENTOR GRAPHICS PVT. LTD. (109 ITD 101) (2007) (DEL HI ITAT). 2. E-GAIN COMMUNICATION PVT. LTD. (118 ITD 243) (2208) (PUNE ITAT). 3. SONY INDIA (P) LTD. (315 ITR 150) (2008) (DELHI ITA T). 4. PHILIPS SOFTWARE CENTRE (P) LTD. (119 TTJ 721) (200 8) (BANGLORE ITAT). 5. HONEYWELL AUTOMATION INDIA LTD. (ITA NO. 4/PN/08) ( 2009) PUNE ITAT). 6. QUARK SYSTEMS PVT. LTD. (132 TTJ 1) (2009) (PUNE IT AT). 7. DCIT VS. BP INDIA SERVICES P. LTD. (TS-568-ITAT-201 1) MUMBAI ITAT). 8. VERTEX CUSTOMER SERVICES INDIA (P) LTD. (ITA NO. 15 06/DEL/2008) (2008) (DELHI ITAT). 9. GLOBAL VANTEDGE (P) LTD. (37 SOT 1) (2009) (DELHI I TAT). 10. SKODA AUTO INDIA (P) LTD. VS. ACIT (2009 30 SOT 319 ) (PUNE ITAT). 11. TEVA INDIA PVT. LTD. (ITA NO. 6107/MUM/2009) (2009) (MUMBAI ITAT). 2.9 THE LD. DR SUPPORTED THE ORDER OF THE TPO AO A ND DRP AND RELIED ON THE SAME WRITTEN SUBMISSION AS FILED IN ASSESSME NT YEAR 2007-08. 2.10 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT ITAT JAIPUR BENCH FOR ASSESSMENT YEAR 2005-06 ALLOWED RELIEF TO THE ASSESSEE BY FOLLOWING OBSERVATIONS. 21. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE MATERIAL ON RECORD AND TAKING INTO CONSIDERATION OTHER MATER IAL ON WHICH RELIANCE HAS BEEN PLACED BY RESPECTIVE PARTIES WE NOTED THAT TP O HAS MADE ADDITION OF RS. 1 45 52 530/- BY ADOPTING MEAN PROFIT @ 6.5% OF TOT AL REVENUE RECEIPTS SHOWN BY ASSESSEE AT RS. 59.75 CRORES OR ODD. IN THIS WAY T HE TPO DEDUCED THE PROFIT OF ASSESSEE AT RS. 3.88 CRORES OR ODD AND AFTER REDUCI NG OPERATING PROFIT SHOWN BY ASSESSEE AT RS. 2.42 CRORES OR ODD THE ADDITION OF RS. 1.50 CRORES OR ODD AS STATED ABOVE WAS MADE. THEREAFTER THE AO PASSED ASSESSME NT ORDER IN VIEW OF THE FINDING OF LD. TPO. THE LD. TPO HAS TAKEN THE MEAN OPERATING PROFIT MARGIN OF 8 ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 14 COMPARABLES I.E. M/S. DYNAMIC INDUSTRIES LTD. M/S. JAYSYNTH IMPEX LTD. M/S. LONA INDUSTRIES LTD. M/S. METROCHEM INDUSTRIES LTD . M/S. ORGANIC COATING LTD. M/S. INDIAN TONERS & DEVELOPERS LTD. M/S. RAINBOW INK & VARNISH MFG. CO. LTD. AND M/S. DIC INDIA LTD. BEFORE ARRIVING AT PROFIT B Y APPLYING ARM LENGTH PRICE ON INTERNATIONAL TRANSACTIONS ON THE BASIS OF MAIN PROFIT OF 8 ABOVE STATED COMPANIES THE TPO FOUND THAT M/S. ATUL LTD. WAS NO T COMPARABLE WHEREAS ASSESSEE HAS SHOWN IT AS COMPARABLE. IN FACT AS P ER THE FIGURES AVAILABLE WITH THE ASSESSEE M/S. ATUL LTD. HAD 14.26% RELATED PAR TY TRANSACTION AS A PERCENTAGE OF SALES. THE ASSESSEE HAD RELIED UPON THE DECISIO N OF DELHI BENCH OF THE TRIBUNAL IN CASE OF SONY INDIA PVT. LTD. WHEREIN IT HAS BEEN HELD THAT AN ENTITY CAN BE TAKEN AS UN-CONTROLLED IF ITS RELATED PARTY TRANSACTIONS DO NOT EXCEED 10 TO 15% OF TOTAL REVENUE. HOWEVER THE TPO FOUND THAT THIS CANNOT BE TAKEN AS COMPARABLE CASE BECAUSE M/S. ATUAL LTD. WAS A RELAT ED PARTY AND WAS HAVING 14.26% TRANSACTION AS A PERCENTAGE OF SALES OF RELA TED TRANSACTION AND IT WAS NEARLY 15% AND THEREFORE IT WAS HELD THAT SINCE I T IS NEAR 15% AND THE DECISION OF TRIBUNAL IN CASE OF SONY INDIA PVT. LTD. CANNOT BE RELIED UPON AND HELD THAT THIS IS NOT A COMPARABLE CASE. 21.1. WE HAVE GONE THROUGH THE PRODUCT OF M/S. ATUA L LTD. AS WELL AS ASSESSEES CASE AND FOUND THAT THEY ARE COMPARABLE BECAUSE OF THE DECISION OF TRIBUNAL IN CASE OF M/S. SONY INDIA PVT. LTD. THOU GH LD. CIT D/R HAS TRIED TO DISTINGUISH THE FACTS OF THE ASSESSEES CASE AS COM PARED WITH M/S. ATUL LTD. AND HAS STATED THAT LD. TPO WAS CORRECT IN HOLDING THAT BOTH THE COMPANIES ARE NOT COMPARABLE. THE LD. CIT (A) HAS GIVEN DETAILED REA SONING FOR HOLDING THAT BOTH THESE COMPANIES ARE COMPARABLE. THE LD. CIT (A)S FINDING ARE REPRODUCED SOMEWHERE ABOVE IN THIS ORDER AND THESE FINDINGS RE MAINED UNCONTROVERTED. ON TECHNICALITIES THE TPO AS WELL AS LD. CIT D/R NOW HERE BEFORE THE TRIBUNAL HAS TRIED TO DISTINGUISH THE FACTS OF BOTH THESE COMPAN IES. IN OUR VIEW A BROAD VIEW HAS TO BE ADOPTED AND IF THE BROAD VIEW IS TAKEN TH EN WE SEE NO UNREASONABLENESS IN THE FINDINGS OF LD. CIT (A). 22. THE OTHER COMPANY I.E. M/S. INDIAN TONERS AND D EVELOPERS LTD. THE ASSESSEE CLAIMED THAT THE COMPANY MANUFACTURES TONERS AND DEVELOPERS FOR PHOTOCOPIES LASER PRINTERS AND DIGITAL PRINTERS. T HE SAME WAS NOT CONSIDERED BY THE ASSESSEE TO BE COMPARABLE TO THE PRINTING INKS MANUFACTURED BY ASSESSEE. HOWEVER LD. TPO NOTED THAT THE COMPANY M/S. INDIAN TONERS AND DEVELOPERS LTD. AND ASSESSEE HAS SAME NIC CODE I.E. 24222 HENC E THIS COMPANY WAS HELD AS COMPARABLE. THE LD. CIT (A) HAS DISCUSSED THE FACTS OF BOTH THE COMPANIES AND FACTS OF THE ASSESSEES CASE AND FOUND THAT M/S. AT UL LTD. IS A COMPARABLE CASE BECAUSE OF THE DECISION OF TRIBUNAL IN CASE OF M/S. SONY INDIA PVT. LTD. AND IN RESPECT OF M/S. INDIAN TONERS & DEVELOPERS LTD. IT WAS HELD THAT THIS IS NOT A COMPARABLE CASE BECAUSE THERE WAS VAST DIFFERENCE I N THE PRODUCT MANUFACTURED BY ASSESSEE AND MANUFACTURED BY M/S. INDIAN TONERS & DEVELOPERS LTD. THE LD. CIT (A) FOUND THAT THIS IS ALSO INCORRECT TO SAY TH AT BOTH THE COMPANIES HAS SAME ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 15 NIC CODE I.E. 24222. IT WAS FOUND THAT ASSESSEE CO MPANYS NIC CODE IS 24223 WHEREAS M/S. INDIAN TONERS & DEVELOPERS NIC CODE IS 24222. A LIST OF NIC CODE IS PLACED ON RECORD AND WE FIND THAT NIC CODE OF BO TH THE COMPANIES I.E. M/S. INDIAN TONERS & DEVELOPERS LTD. AND ASSESSEE COMPAN Y ARE DIFFERENT. 22.1. THE LD. CIT (A) HAS DISCUSSED IN DETAIL WHY M /S. INDIAN TONERS & DEVELOPERS LTD. IS NOT COMPARABLE WITH THE FACTS OF THE ASSESSEES CASE AND AGAIN THE FINDING OF LD. CIT (A) HAVE BEEN REPRODUCED SOM EWHERE ABOVE IN THIS ORDER WHICH IN OUR VIEW ARE FINDINGS OF FACT. IF THE F INDINGS OF LD. CIT (A) ARE TAKEN INTO CONSIDERATION WHICH IN OUR HUMBLE VIEW REMAIN ED UNCONTROVERTED THEN THE MEAN PROFIT ON THE BASIS OF 8 COMPANIES MENTIONED A BOVE ARE NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE. THEREFORE ARM LENGT H PRICE ADOPTED BY LD. TPO ON INTERNATIONAL TRANSACTIONS WERE NOT CORRECT. 22.2. HOWEVER ON APPLICATION UNDER SECTION 154 TH E LD. CIT (A) HAS HELD THAT AN ADDITION OF RS. 40 LACS HAS TO BE SUST AINED WHICH IS ON ACCOUNT OF OPENING STOCK AND BY RECTIFYING ORDER UNDER SECTION 154 HAS REDUCED THE DELETION BY RS. 40 LACS OR ODD. THE ISSUE IN RESPECT TO DEL ETION REDUCED BY RS. 40 LACS OR ODD HAS BEEN RESTORED BY US TO THE FILE OF LD. CIT (A) TO DECIDE THE SAME AFRESH AFTER AFFORDING REASONABLE OPPORTUNITY OF BEING HEA RD TO THE ASSESSEE AS AS PER ORDER OF LD. CIT (A) NO OPPORTUNITY WAS PROVIDED T O THE ASSESSEE. THEREFORE WE HOLD THAT THE ORDER OF LD. CIT (A) DELETING THE ADD ITION OF RS. 1 CRORE OR ODD WAS CORRECT AND WE CONFIRM THE ORDER TO THAT EXTENT. IN VIEW THEREOF AND LOOKING AT THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES OF THE CASE WE ARE OF THE VIEW THAT COMPARABLES 1 TO 6 AS APPLIED BY THE TPO TO THE ASSESSEE'S CASE CANNOT BE REGARDED AS COMPARABL ES AND THEY SHOULD BE EXCLUDED FROM THE TPO WORKING. SIMILARLY FOLLOWING THE ITAT JAIPUR BENCH JUDGMENT IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2005-06 ALL THE COMPARABLES OF M/S. ATUL LIMITED AND M/S. RAINBOW I NK & VARNISH MFG. CO. LTD. HAVE BEEN ACCEPTED TO BE COMPARABLES TO TH E ASSESSEE'S CASE. THEREFORE THE SAME SHOULD BE INCLUDED IN AL WORKIN G. THE AO WILL WORK OUT THE TP ADJUSTMENT ACCORDINGLY IF THE ADJUSTMEN T RESULTS IN (+ _ 5%) ITA NO. 5/JP/2011 M/S. SANKATA INX (INDIA) LTD. VS. ACIT CIRCLE- 2 ALWAR 16 VARIATION THEN SAFE HARBOR RULE OF PROVISO TO SEC. 92C(2) WILL BE APPLICABLE TO THE ASSESSEE'S CASE. THUS THE TPO WILL WORK OUT THE AE TRANSACTIONS ON THESE GUIDELINES. THUS GROUND NOS. 1 AND 2 OF THE ASSESSEE ARE ALLOWED ACCORDINGLY. 3.1 APROPOS REMAINING GROUNDS REGARDING SETTING OFF UNABSORBED DEPRECIATION THE AO WILL WORK OUT AFTER CONSIDERI NG THE RECTIFICATORY ORDER PASSED IN THE PRECEDING YEAR IN ACCORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD 4.0 IN THE RESULT THE APPEAL OF THE ASSESSEE IS A LLOWED AS INDICATED ABOVE THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 14-11-2014 SD/- SD/- (T.R. MEENA) (R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER JAIPUR DATED: 14 TH NOV 2014 *MISHRA COPY FORWARDED TO:- 1. M/S. SAKATA INX (INDIA) LTD. GURGAON 2. THE ACIT CIRCLE- 2 ALWAR 3. THE LD. CIT 4. THE LD. CIT(A) JAIPUR BY ORDER 5..THE LD. DR 6.THE GUARD FILE (IT NO. 5/JP/2011) AR ITAT JAIPUR