HOPE INDIA POLISHING WORKS P.LTD, MUMBAI v. DCIT 8(2), MUMBAI

ITA 7067/MUM/2012 | 2008-2009
Pronouncement Date: 13-11-2014 | Result: Partly Allowed

Appeal Details

RSA Number 706719914 RSA 2012
Assessee PAN AAACH7357L
Bench Mumbai
Appeal Number ITA 7067/MUM/2012
Duration Of Justice 1 year(s) 11 month(s) 17 day(s)
Appellant HOPE INDIA POLISHING WORKS P.LTD, MUMBAI
Respondent DCIT 8(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 13-11-2014
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted K
Tribunal Order Date 13-11-2014
Date Of Final Hearing 13-11-2014
Next Hearing Date 13-11-2014
Assessment Year 2008-2009
Appeal Filed On 26-11-2012
Judgment Text
DS DSDS DS INCOME TAX APPELLATE TRIBUNAL MUM BAI - K BENCH. . . BEFORE S/SH.I.P.BANSAL JUDICIAL M EMBER & RAJENDRA ACCOUNTANT MEMBER /. ITA NO.7067/MUM/2012 ! ! ! ! / ASSESSMENT YEAR-2008-09 HOPE INDIA POLISHING WORKS PVT. LTD. PLOT NO.2 CTS NO. 46 OFF. CHANDIVALI FARM ROAD BEHIND ICC FACTORY CHANDIVALI VILLAGE ANDHERI(E) MUMBAI-400072. ' ' ' ' . . . /PAN:AAACH7357L V/S. DCIT 8(2) MUMBAI. ( '# / APPELLANT) ( $%'# / RESPONDENT) &' &' &' &' ( ( ( ( / ASSESSEE BY : SHRI K.GOPAL ) ( / REVENUE BY : SHRI M. PADMANABH ) )) ) '* '* '* '* / DATE OF HEARING : 13-11-2014 + ! ) '* / DATE OF PRONOUNCEMENT : 13-11-2014 1961 ) )) ) 254 )1 ( '-' '-' '-' '-' . . . . ORDER U/S.254(1)OF THE INCOME-TAX ACT 1961(ACT) PER RAJENDRA AM : CHALLENGING THE ORDER DATED 14.09.2012 OF THE DEPUT Y-COMMISSIONER OF INCOME TAX 8(2) MUMBAI THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL : ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD . DISPUTE RESOLUTION PANEL-I MUMBAI ERRED IN PASSING THE ORDER DATED 28/08/2012 UNDER THE PROVIS IONS OF SECTION 144C(5) OF THE INCOME TAX ACT 1961 (HEREINAFTER REFERRED TO AS THE ACT) CONFIRM ING THE PROPOSAL OF THE A.O. IN MAKING UPWARD ADJUSTMENT OF RS.2 98 38 722/- ON THE INTERNATIONAL TRANSACTION IN THE DRAFT ASSESSMENT ORDER DATED 28/11/2011. 2.THE LEARNED DISPUTE RESOLUTION PANEL FAILED TO AP PRECIATE THAT THE TPO AS WELL AS THE AO HAVE NOT MADE ANY ADJUSTMENT REQUIRED IN OP OF THE COMPA RABLES ON ACCOUNT OF THE FUNCTIONS ASSETS EMPLOYED AND RISKS WHILE REDUCING THE COST OF MATER IAL FROM VALUE ADDED COST IN ADOPTED PLI OF OC/VAC. 3.THE LEARNED DISPUTE RESOLUTION PANEL FAILED TO AP PRECIATE THAT THE APPELLANT HAD RIGHTLY ADOPTED OPERATING PROFIT/OPERATING COST (OP/OC) AS PROFIT LEVEL INDICATOR (PLI) UNDER COST PLUS METHOD(CPM) AS THE MOST APPROPRIATE PLI TO DET ERMINE THE ARMS LENGTH PRICE AND THE TPO AS WELL AS THE ASSESSING OFFICER HAVE NOT BROUGHT A NY MATERIAL OR REASON ON RECORD TO SHOW THAT OP/OC PLI CANNOT BE CONSIDERED AS MOST APPROPRIATE PLI ON THE FACTS OF THE APPELLANT COMPANY. THUS THE ADDITION OF RS.2 98 38 722/- IS NOT AT AL L JUSTIFIED AND THE SAME BE DELETED. 4.THE LEARNED DISPUTE RESOLUTION PANEL FAILED TO AP PRECIATE THAT THE TPO AS WELL AS THE AO HAVE ADOPTED OPERATING PROFIT /VALUE ADDED COST (OP/VAC) AS THE MOST APPROPRIATE PLI WITHOUT SPECIFYING THE REASON WHY THE OP/OC CANNOT BE CONSI DERED AS MOST APPROPRIATE PLI. THE LD. DRP FAILED TO APPRECIATE THAT THE APPELLANT HAD GIVEN A DETAILED AND A POINT WISE REASON TO JUSTIFY THE SELECTION OF OP/OC PLI ADOPTED BY THE APPELLANT AS MOST APPROPRIATE PU AND THE REASONS BY OP/VAC PU CANNOT BE CONSIDERED AS MOST APPROPRIATE PU TO DETERMINE ALP IN THE CASE OF APPELLANT. THE LD. DRP CONFIRMED THE ADJUSTMENTS SU GGESTED BY THE TPO WITHOUT APPRECIATING THE SUBMISSIONS MADE BY THE APPELLANT. THUS ADDITION O F RS 2 98 38 722/- IS WITHOUT ANY JUSTIFICATION AND THE SAME MAY BE DELETED. 5.THE LD DRP ERRED IN DENYING THE PROPER ADJUSTMENT S TOWARDS THE CAPACITY UTILIZATION OF THE ASSESSEE AS WELL AS THE COMPARABLES TO THE PLI ADOP TED BY THE TPO. THE DRP FAILED TO APPRECIATE THAT IT IS THE TPOS ONUS TO OBTAIN THE DETAILS OF THE CAPACITY UTILIZATION OF THE COMPARABLES WHEN 2 ITA NO. 7067/M/2012 HOPE INDIA POLISHING WORKS PVT. LTD. NO SUCH DATA IS AVAILABLE IN THE PUBLIC DOMAIN. 6.THE LD DRP FAILED TO APPRECIATE THAT FUNCTIONS A SSETS EMPLOYED AND RISKS (FAR) OF LARGE TURNOVER COMPANIES DIFFER FROM THE FAR OF THE SMALL TURNOVER COMPANIES THUS DENYING THE SUITABLE ADJUSTMENT TO THE PROFITS OF THE ASSESSEE. 7.THE DRP ERRED IN IGNORING THE PRINCIPLES UPHELD B Y THE ITAT IN ITS OWN CASE FOR AY 2005-06 AY 2006-07 THAT THE SUITABLE ADJUSTMENT TO THE PROFITS NEEDS TO BE GIVEN FOR CAPACITY UNDER UTILIZATION. THE DRP IS NOT CORRECT TO SAY THAT THE ASSESSEE HAS NOT GIVEN ANY SUCH DETAILS TO IT. 8.THE DRP ERRED IN NOT APPRECIATING THE FACT THAT T HE ASSESSEE OPERATE IN A SPECIALIZED FIELD OF PROCESSING OF DIAMONDS AND NO COMPARABLES ARE AVAIL ABLE IN THE PUBLIC DOMAIN SIMILAR TO THAT OF THE ASSESSEE THUS THE COMPUTATION OF PLI OF COMPARA BLES CHOSEN BY THE ASSESSEE IS THE RIGHT COMPUTATION AND BEEN ACCEPTED IN TOTO. 9.THE LD. DISPUTE RESOLUTION PANEL FURTHER ERRED IN CONFIRMING THE ACTION OF THE A.O. IN REFERRING THE PROCEEDINGS TO THE TRANSFER PRICING OFFICER WIT HOUT APPRECIATING THE FACT THAT THE TOTAL VALUE OF THE TRANSACTION WITH THE ASSOCIATE ENTERPRISE IS RS 9 09 05 475/-. HENCE THE VALUE OF THE RELATED PASTY TRANSACTIONS IS MUCH LESS THAN THE MONETARY L IMIT LAID DOWN BY THE CBDT AT 15 CRORES. THE APPELLANT THEREFORE PRAYS THAT THE REFERENCE TO TH E TRANSFER PRICING OFFICER IS WITHOUT JURISDICTION AND BAD-IN-LAW AND HENCE THE ORDER PASSED BY THE A SSESSING OFFICER BASED ON ORDER OF THE TPO AND ORDER PASSED BY THE LD. DISPUTE RESOLUTION PANE L IS AB-INITIO-VOID AND HENCE THE SAME MAY BE QUASHED. 10.THE APPELLANT DENIES ANY LIABILITY TO PAY THE IN TEREST UNDER SECTION 234B AND 234D OF THE ACT AND HENCE THE SAME ARE NOT LEVIABLE. 11.THE APPELLANT CRAVES LEAVE TO ADD ALTER RESCIN D OR AMEND ANY OF THE GROUNDS. 2.ASSESSEE-COMPANY ENGAGED IN THE BUSINESS OF PROCE SSING OF ROUGH DIAMONDS IN TO POLISHED DIAMONDS FILED ITS RETURN OF INCOME 29.09.2008 DECL ARING TOTAL INCOME OF RS.(-)1 19 41 734/-.ON 29.09.2008 A REVISED RETURN WAS FILED SHOWING INCO ME OF THE ASSESSEE AT RS.(-)1.15 CRORES.THE AO COMPLETED THE ASSESSMENT ON 14.09.2012 DETERMINI NG THE INCOME OF THE ASSESSEE AT RS.2 44 76 290/- U/S.143(3)R.W.S.144C(13)OF THE ACT. DURING THE COURSE OF HEARING AUTHORISED REPRESENTAT IVE (AR) OF THE ASSESSEE DID NOT PRESS GROUND NO.9 AND SAME IS DISMISSED AS NOT PRESSED. HE FURT HER STATED THAT GROUND NO.3 WAS EFFECTIVE GROUND AND ONLY THAT HAS TO BE ADJUDICATED THAT RE ST OF THE GROUNDS WERE IN SUPPORT OF GROUND NO.3 AND THEY DO NOT NEED SEPARATE ADJUDICATION. CONSIDE RING THE SAME WE ARE DEALING WITH GROUND NO.3. 3. THE EFFECTIVE GROUND OF APPEAL DEALS WITH THE ADJUS TMENT MADE BY THE TRANSFER PRICING OFFICER (TPO)WITH REGARD TO THE INTERNATIONAL TRANSACTION E NTERED IN TO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE(AE).IT WAS FOUND THAT DURING THE YEAR UN DER CONSIDERATION THE ASSESSEE HAD ENTERED INTO FOLLOWING TRANSACTIONS: SR. NO. DESCRIPTION AMOUNT (IN RS. CRORE) 1. PURCHASE OF RAW MATERIAL 0.061 2. INCOME FROM PROCESSING 8.97 3. INTEREST ON LOAN 0.211 4. RECOVERY OF EXPENSE (FREIGHT) 0.140 VIDE ITS LETTER DATED 29.09.2011 THE ASSESSEE BENCH MARKED THE INTERNATIONAL TRANSACTION USING COST PLUS METHOD (CPM)AS THE MOST APPROPRIATE METHOD.IT WAS STATED THAT IT HAD CONSIDERED SEVEN COMPARABLES AND COMPUTED THE COST PLUS MARGINS FOR THOSE COMPARABLES. IT WAS SUBMITTED BEFORE THE TPO THAT DURING THE YEAR UNDER APPEAL THE CAPA CITY UTILISATION WAS ONLY 44.08% THAT AFTER ADJUSTMENT OF CAPACITY UNDER UTILISATION THE MARGIN WAS 50.15% THAT HE ARITHMETICAL MEAN OF COST PLUS MARGIN FOR COMPARABLES WAS 5.48 % THAT MARGIN EARNED BY THE ASSESSEE WAS HIGHER THAN THE COMPARABLES THAT THE TRANSACTION ENTERED BY IT WERE AT ARMS LENGTH.AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE THE TPO HELD THAT IN CAS E OF COMPARABLES THERE WAS SIGNIFICANT COST ATTRIBUTED TO PURCHASE OF MATERIAL THAT IN THE CASE OF THE ASSESSEE PURCHASE OF MATERIAL WAS NOT PART OF THE COST FOR COMPUTING THE MARGIN ON COST THAT TO HAVE THE PROPER COMPARABILITY NECESSARY ADJUSTMENTS HAD TO BE MADE WHILE CONSIDERING THE MA RGINS.VIDE NOTE SHEETS ENTRY DATED 5.11.11 THE ASSESSEE WAS ASKED TO JUSTIFY AS TO WHY COST OF MATERIAL SHOULD NOT BE EXCLUDED WHILE COMPUTING THE MARGINS OF COMPARABLE. AS PER THE TPO THE ASSESSEE DID NOT FILE ANY REPLY IN THIS 3 ITA NO. 7067/M/2012 HOPE INDIA POLISHING WORKS PVT. LTD. REGARD.THE TPO TOOK THE PLI AS OPERATING PROFIT ON VALUE ADDED COST (OPERATING COST COST OF MATERIAL). FINALLY HE WORKED OUT THE ADJUSTMENT AS UNDER: OPERATING REVENUE/PROCESSING CHARGE 8 96 99 291 COST OF MATERIAL 56 54 858 VALUE ADDED COST 5 32 63 718 OPERATING PROFIT AT ALP(@113.81% ON COST) 6 06 1 9 437 OPERATING PROFIT 3 07 80 715 ALP OF OPERATING REVENUE/PROCESSING CHARGE 11 95 38 013 ADJUSTMENT U/S 92CA 2 98 38 722 THE ARMS LENGTH PRICE OF PROCESSING CHARGES WAS DET ERMINED AT RS. 11.95 CRORES AS AGAINST 8.96 CRORES SHOWN BY THE ASSESSEE. THE TPO RECOMMENDED A N UPWARD ADJUSTMENT OF RS. 2.98 CRORES TO THE TOTAL INCOME OF THE ASSESSEE.THE MATTER TRAV ELLED TO DRP-1 MUMBAI AND AFTER RECEIVING THE DIRECTIONS OF THE DRP THE AO WHILE PASSING THE FINA L ORDER ADDED THE SAID AMOUNT TO THE INCOME OF THE ASSESSEE FOR THE YEAR UNDER APPEAL. 4. BEFORE US THE AR ARGUED THAT ASSESSEE WAS GETTING D IAMONDS FROM THE ASSOCIATE ENTERPRISE (AE)FOR POLISHING THAT IT WAS GETTING PROCESSING C HARGE ONLY THAT ASSESSEE HAD SUBMITTED ITS OWN TRANSFER PRICING STUDY BEFORE THE TPO THAT IT HAD COMPARED THE INTERNATIONAL TRANSACTION WITH SEVEN OTHER PARTIES THAT THE METHOD ADOPTED BY THE ASSESSEE WAS NOT REJECTED BY THE DEPARTMENTAL AUTHORITIES THAT THE ASSESSEE WAS NOT CARRYING OUT TRADING ACTIVITIES THAT THE TPO HAD TAKEN OPERATIONAL PROFITS WHILE RECOMMENDING THE ADJUSTME NTS THAT FACTOR UNUTILIZED CAPACITY WAS NOT CONSIDERED THAT IN THE EARLIER YEARS TRIBUNAL HAD UPHELD THE METHOD ADOPTED BY THE ASSESSEE THAT THE ASSESSEE HAD FILED DETAILS BEFORE THE TPO IN RE SPONSE TO THE NOTE SHEET ENTRY DATED THAT THE SUBMISSION FILED BY THE ASSESSEE WERE NOT CONSIDERE D.HE REFERRED TO PAGE NO.53 69 81AND 82 OF THE PAPER BOOK.HE ALSO REFERRED TO THE ORDERS PASSE D BY THE TRIBUNAL FOR THE AY.S.2005-06 AND 2006-07(ITA/2043& 8187/ MUM/2010/-DATED 09.09. 2011 ). DEPARTMENTAL REPRESENTATIVE (DR) SUPPORTED THE ORDE R OF THE DRP/AO. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE WAS DOING JOB WORK FOR ITS PARENT COMPANY ONLY THAT THE AO HAD REFERRED THE INTERNATIONAL TRANSACTION TO THE T RANSFER PRICING OFFICER (TPO) THAT IN THE STUDY REPORT THE ASSESSEE HAD FURNISHED COMPARABLES OF SE VEN ENTITIES THAT ALL OTHER ENTITIES WERE TRADING IN DIAMOND AND WERE ALSO EXPORTING THE GOODS MANUFA CTURED BY THEM THAT ASSESSEE WAS THE ONLY ENTITY WHO HAD CARRIED OUT JOB WORK ONLY THAT TPO H AD NOT BROUGHT ON RECORD ANY ENTITY THAT WAS DOING ONLY JOB WORK THAT HE MADE SOME ADJUSTMENT I N THE COMPARABLES FURNISHED BY THE ASSESSEE.IN THESE CIRCUMSTANCES THE BASIC ISSUE BEF ORE US IS WHAT CAN BE THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP FOR THE TRANSACTIONS CA RRIED OUT BY THE ASSESSEE WITH THE AE.IT IS FOUND THAT THE ASSESSEE WAS GETTING ROUGH DIAMONDS FROM THE AE AND AFTER PROCESSING THEM WAS SENDING BACK TO THE AE THAT IT WAS ENTITLED TO RECO VER PROCESSING CHARGES ONLY.WE FIND THAT THE ASSESSEE HAD FILED A LETTER ON WITH REGARD TO THE DIRECTIONS ISSUED BY THE TPO ON BUT HE HAD NOT CONSIDERED THE SAME. FROM THE FACTS AVAILABLE ON RECORD IT IS EVIDENT TH AT THE ASSESSEE IS ONLY A JOB WORKER OR A CONTRACT MANUFACTURER WHO IS ENTITLED FOR PROCESSING CHARGES BASED ON ITS COST INCURRED AND NOT BASED ON THE VALUE OF MATERIAL SUPPLIED BY ITS AE. IN SUCH A SITUATION THE COMPARABLES CHOSEN BY THE ASSESSEE OF THE FULL FLEDGED INDEPENDENT MANUFACTUR ERS CANNOT BE PRIMA FACIE CONSIDERED FOR THE PURPOSE OF COMPARABILITY ANALYSIS.WE HAVE COMPARED THE AUDITED ACCOUNTS OF THE ASSESSEE FOR THE CURRENT YEARS WITH THE ACCOUNTS FOR THE LAST YEAR. IT IS FOUND THAT THE TOTAL INCOME RETURNED BY THE ASSESSEE FOR LAST YEAR WAS RS.(-)1.94 LAKHS WHEREAS DURING THE YEAR UNDER CONSIDERATION IT HAD FILED 4 ITA NO. 7067/M/2012 HOPE INDIA POLISHING WORKS PVT. LTD. A RETURN SHOWING INCOME OF RS.(-)1.58 CRORES.ON A Q UERY BY THE BENCH IT WAS EXPLAINED THAT BECAUSE OF THE FLUCTUATION IN FOREIGN EXCHANGE RATE THE ASSESSEE HAD SUFFERED HEAVY LOSSES. WE FIND THAT WHILE COMPARING THE CASE WITH OTHER ENTIT IES THE ASSESSEE/TPO HAD NOT TAKEN INTO CONSIDERATION ABOUT THE FLUCTUATION IN THE FOREIGN EXCHANGE RATES AND THE RESULTANT EFFECT ON THEIR PROFITS/LOSSES.BESIDES IT IS NOT KWOWN THAT WHETHER FACTOR OF UNDER UTILISATION OF CAPACITY WAS EXISTING OR NOT IN THE COMPARABLES CHOSEN BY THE AS SESSEE.IN OUR OPINION TO DECIDE THE TRANSFER PRICING MATTERS SIMILAR OR ALMOST SIMILAR COMPARABL ES HAVE TO BE ADOPTED. IT IS SAID THAT AN APPLE HAS TO BE COMPARED WITH AN APPLE ONLY AND NOT WITH THE CABBAGE.AS THE COMPARABLES ADOPTED BY BOTH THE PARTIES-THE ASSESSEE AND THE TPO-ARE NOT A CCORDING TO THE ESTABLISHING PRINCIPLES OF TRANSFER PRICING SO WE ARE OF THE OPINION THAT IN T HE INTEREST OF JUSTICE MATTER SHOULD BE RESTORED BACK TO THE FILE OF THE TPO FOR FRESH DETERMINATION OF TRANSFER PRICING ISSUE.HE IS DIRECTED TO FIND OUT SOME ENTITIES THAT ARE DOING JOB WORK ONLY OR A RE MAINLY ENGAGED IN DOING JOB WORK.AFTER OBTAINING RELEVANT DATA FOR BENCH MARKING THE TRANS ACTIONS HE SHOULD DECIDE THE ISSUE AFRESH.HE WOULD AFFORD A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. WE FURTHER FIND THAT IN THE CASE OF TWILIGHT JEWELL ERY (P.)LTD. IN ALMOST SIMILAR CIRCUMSTANCES THE TRIBUNAL HAD REMITTED BACK THE MATTER TO THE FILE O F THE TPO FOR FRESH ADJUDICATION (147 ITD 89). GROUND NO.3 IS ALLOWED FOR STATISTICAL PURPOSES IN THE MANNER AFORESAID. AS A RESULT APPEAL FIELD BY THE ASSESSEE STANDS PAR TLY ALLOWED. 0'1 &' 2 3 . 4 ) ' 56. ORDER PRONOUNCED IN TH E OPEN COURT ON 13 TH NOVEMBER2014 . . ) + ! 8 9 13 UOA 201 4 ) - : SD/- SD/- ( . . / I.P. BANSAL) ( / RAJENDRA) / JUDICIAL MEMBER /ACCOUNTANT MEMBER / MUMBAI 9 /DATE: 13.11 . 2014. . . . . ) )) ) $'; $'; $'; $'; <;!' <;!' <;!' <;!' / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / '# 2. RESPONDENT / $%'# 3. THE CONCERNED CIT(A)/ = > 4. THE CONCERNED CIT / = > 5. DR K BENCH ITAT MUMBAI / ;?- $' DS DSDS DS . . . 6. GUARD FILE/ - 0 %;' %;' %;' %;' $' $'$' $' //TRUE COPY// . / BY ORDER @ / 5 DY./ASST. REGISTRAR /ITAT MUMBAI