ITAT PUNE BENCH ‘A’
Deputy Commissioner of Income-tax
versus
Bekaert Industries (P.) Ltd.
IT Appeal Nos. 1058 to 1060 and 1093 & 1094 (PN) OF 2011
[ASSESSMENT YEARS 2002-03 TO 2004-05]
JANUARY 31, 2013
ORDER
Per Bench
The first four cross appeals pertaining to A.Y. 2002-03 and 2003-04 and last appeal for A.Y. 2004-05, are filed by the assessee. The issues are almost common, so they are being disposed of by a common order for the sake of convenience.
2. First we take up ITA.No.1093/PN/2011 and 1098/PN/2011. These cross appeals are arising from the order of the CIT(A) for A.Y. 2002-03.
3. The Assessing Officer has added Rs. 50,32,752/- passed on the order of the TPO passed u/s.92CA(3) on 21.10.2004. The Assessing Officer in his assessment order dated 21.10.2004 has made addition of Rs. 50,32,752/- on the basis of order of TPO dated 25.10.2003. The TPO found that assessee M/s. Bekaert Industries Pvt. Ltd Pvt. Ltd., hereinafter called BIPL, was incorporated in 1996 as wholly owned subsidiary of N.V. Bekaert S.A. Belgium and was engaged in the manufacturing of Steel Tyre Cord and Hose Reinforcement Wire, used as a reinforcing material in radial tyres etc. The major purchasers in India are CEAT, J.K. Industries, MRF etc. These tyre manufacturing companies have been sourcing these materials from Bekaert group companies located outside India. In this background the parent company thought it prudent to establish a unit in India itself to meet the market requirement to the extent possible. The plant of the assessee was established at MIDC Ranjangaon Pune. Even though the commercial production started in February, 2001, the business of the assessee company practically took off from A.Y. 2004-05 onwards. The Bekaert Group head quartered at Belgium is the largest independent multi-national manufacturer of these products and have more than 55 manufacturing facilities worldwide. During the year under consideration, the assessee company was found to have numerous international transactions which were examined by the TPO for determining Arm’s Length Price (hereinafter called ALP). The TPO found most of the transactions at ALP requiring no adjustment except for
(a) export of spools and
(b) import of dies.
Out of the total adjustment of Rs. 50,32,752/- suggested by the TPO, Rs. 49,62,075/- was in respect of export of spools to various companies of this group worldwide and Rs. 70,676/- was for import of dies from China Bekaert Steel Cord Co. Both the above two adjustments being objected by the assessee which are being dealt in the following paras.
Adjustment in export price of spools:
4. The assessee claimed that spools are packaging material made of either steel or plastic on which the steel tyre cord is wound and packaged. These spools are reusable unless severely damaged. These are therefore, used for the supply of goods made by the assessee as well as other companies of this group engaged in manufacturing of similar products. It has been shown that the goods being manufactured by the assessee company are an import substitution and therefore, foreign group companies do supply similar products to the Indian consumers. During the year under consideration, supplies were made to Indian customers by N.V. Bekaert S.A. and China Bekaert Steel Cord Co. Ltd., China. As the spools are reusable and has no utility to the buyers, as a measure to increase the bottom line the local group companies, wherever possible, are involved in collection of empty spools for free from buyers for the packaging of their own products and its export in case the same are in excess of their requirement. It has been claimed that only cost of collection is required for these reusable spools. During the year, it was claimed that the assessee had exported spools to various group companies which were in excess of their own requirement. In doing so it has been claimed that the assessee company is charging cost plus 10% mark up. For determining the cost, only direct cost has been taken into account. The Assessing Officer/TPO observed that the major portion of the turnover in this year relates to export of spools (spools export turnover being nearly 50% of the total turnover) decided to also consider 25% of the indirect cost for determining ALP. The objections of the assessee that the method employed was incorrect because the spools were available to the assessee free of cost and only excess was exported with 10% mark up and the indirect expenses are not attributable to this incidental activity were not accepted by the Assessing Officer.
5. Matter was carried before the First Appellate Authority wherein detailed submissions were made from time to time. It was explained as to how different expenses constituting indirect cost expenses considered by TPO for calculating ALP should not have been considered. It has been claimed that the TPO has erred in allocating the expense on the basis of turnover as in the initial years the assessee was in the process of establishing and stabilizing its business. The majority of the expenses were towards this activity which got reflected in higher turnover in subsequent years. It was further submitted that the spools were mainly collected for its own use and only the excess was exported, that too with 10% mark up. In the initial years the export of spools was more than its own use as the production and business had not stabilized and gradually the consumption increased. The TPO, as per the assessee, had failed to consider the benefit accruing to the assessee on the free use of spools which otherwise would have costed Euro 5.32 per spool on import. According to the assessee no incremental overhead cost (other than direct cost charge) were incurred for the export activity considering the overall cost of the whole plant. As per assessee the spools collected do not undergo any process and therefore, all costs which are incurred are recovered from the customer with 10% margin. The overall activity of the company employed for this work is claimed to be minimal and negligible. The assessee subsequently also made their submission vide their letter dated 04.06.2010 wherein without prejudice to their claim of no adjustment, agreed to adoption of principle applied by the TPO in A.Y. 2004-05, claiming the same to be more judicious. In the said method the TPO had taken into consideration the entire economic activity for allocation of indirect expenses.
6. The assessee has given computation on the basis of principle adopted by the TPO in A.Y. 2004-05 without prejudice to their claim raised in the grounds. The said computation given in Annexure-3 of their letter dated 04.06.2010 and same is quoted below:
