Mainetti India (P.) Ltd. v/s. ACIT
IT APPEAL NO. 1789 (MDS.) OF 2011
[ASSESSMENT YEAR 2007-08]
MARCH 16, 2012
George Mathan, Judicial Member – This appeal is filed by the assessee against the assessment order dated 27.09.2011 and also the order of the Dispute Resolution Panel (DRP) Chennai in F.No.DRP/Chennai/Sectt./016/2011-12 dated 19.08.2011 for the Assessment Year 2007-08.
2. In this appeal, the assessee has raised the following grounds:-
“1. For that the order of the Assessing Officer is contrary to law, facts and circumstances of the case and at any rate is opposed to the principles of equity, natural justice and fair play.
2. For that the Assessing Officer erred in computing deduction u/s.10AA at Rs. 3,28,00,296 instead of 3,42,89,229 as computed by the assessee.
3. For that Assessing Officer erred in computing export turnover for the purpose of deduction u/s.10AA by adjusting the exchange gains/losses from the export realization, instead of considering the actual export realizations.
4. For that Assessing Officer erred in holding that where an adjustment has been made in the export turnover, a corresponding adjustment need not be made in the value of total turnover for the purpose of computing deduction u/s.10AA.
5. For that while determining Arms’ Length Price the Assessing Officer erred by taking into account only those transactions where the sale price to Associated Enterprise was lower than the sale price to non-Associated Enterprise, ignoring the instances where the sale price to Associated Enterprise exceeded the sale price to non-Associated Enterprise.
6. For that Assessing Officer erred in computing Arms’ Length Price by considering only the negative differential on sales to Associated Enterprise and ignoring the positive differential on purchases from Associated Enterprise.
7. For that Assessing Officer erred in holding that the 5% tolerance limit prescribed by the second proviso to Section 92V(2) would apply only in those cases where more than one comparable price has been adopted to arrive at the Arm’s Length Price.
8. For that, ignoring the principles of res judicata, the Assessing Officer erred in placing reliance on the fact that in the earlier year the adjustment in sales had not been challenged by the appellant.
9. For that consequently the Assessing Officer erred in determining difference in Arm’s Length Price at Rs. 1,06,99,296/-.
10. For that the Assessing Officer erred in computing demand payable by the appellant without giving credit for self assessment tax of Rs. 1,25,00,000/- paid by the appellant.
11. For that the appellant objects to the levy of interest under section 234A, 234B and 234C of the Act.
12. For these grounds and such other grounds that may be urged before or during the hearing of the appeal it is most humbly prayed that the Hon’ble Tribunal may be pleased to
(a) Allow the deduction u/s.10AA as claimed by the appellant.
(b) Delete the adjustment made to the Arms length price made by the Transfer Pricing Officer.
(c) Direct the Assessing Officer to give credit for self assessment tax paid by it.
(d) Delete the levy of interest.
(e) Pass such other orders as the Hon’ble Tribunal may deem fit.”
3. Shri T. Banusekar, C.A., represented on behalf of the assessee and Shri R.B. Naik, Ld. C.I.T. D.R. represented on behalf of the Revenue.
4. At the time of hearing, it was submitted by the Ld. A.R. that ground No.10 of the assessee’s appeal was not pressed as necessary relief had already been granted by the Assessing Officer. In the circumstances, the said ground No.10 of the assessee is dismissed.
5. In regard to Ground Nos. 2 to 4, it was submitted by the Ld. A.R. that the issue was against the action of the Assessing Officer in re-computing deduction u/s.10AA holding that the foreign exchange fluctuation was not part of the sale proceeds. He submitted that the issue was squarely covered by the decision of the Hon’ble Gujarat High Court in the case of CIT v. Amba Impex  282 ITR 144/ 164 Taxman 344 wherein the Hon’ble Gujarat High Court held that foreign exchange fluctuation is liable to be treated as part of the sale proceeds and consequently liable to be included in the export turnover. In reply, Ld. DR vehemently supported the order of the Assessing Officer.
6. We have considered the rival submissions. As it is noticed that the issue is now settled by the decision of the Hon’ble Gujarat High Court in the case of Amba Impex (supra), the Assessing Officer is directed to re-compute the deduction u/s.10AA by including the exchange gain and loss when computing the export turnover.
7. In regard to Ground Nos.5,6, 8 & 9, it was submitted by the Ld. AR that the issue was against the determination of the Arm’s Length Price (ALP) by the Assessing Officer. It was the submission that when computing the ALP, the Assessing Officer had taken into account only those transactions where the sale price to Associate Enterprise (AE) was lower than the sale price to non-Associated Enterprise (non-AE) and ignoring the instances where the purchase-price from and sale price to AE exceeded the purchase-price from and the sale price to non-AE. It was the submission that the assessee is in the business of manufacturing plastic garment hangers. It was submitted that as the assessee was part of the global group of Mainetti, the assessee used to buy and sell the hangers. The assessee was also in the business of manufacturing of the same. It was the submission that while applying CUP method for determining the ALP, Transfer Pricing Officer (TPO) had considered only positive deviations and had ignored negative deviations. It was further submission that the margin of plus or minus 5% as per Proviso to Section 92C(2) was also not considered. It was the submission that on a reference to the DRP, the DRP had held that the comparable uncontrolled price method was to be applied to each transaction independently and the netting off between separate transactions was not contemplated under CUP method. It was further submission that the TPO had made the adjustments only in respect of the sales made by the assessee and not the purchases, to which the DRP had held that the purchases and sales were two different transactions and there was no scope for such netting off. It was the submission that the DRP had also further rejected the objections of assessee in regard to the applicability of the proviso to Sec. 92C(2) by holding that the said proviso shall apply only if most appropriate method resulted in more than one price. It was further submission that the DRP had also held that similar adjustments had been made in respect of the sales to the AE during the earlier years and no objections had been raised by the assessee. It was the submission that during the earlier years, the adjustments did not lead to any substantial tax implications on the assessee and on the basis of advice give by the counsel for the earlier assessment years, appeals had not been filed and no reference was made. It was the submission that even when applying the CUP method, it was the net of the transaction that was liable to be considered. It was the submission that under the provisions of Sec.92C what was being determined was the ALP and to verify as to whether there was any variation in regard to the same and to see whether the assessee was under-stating its profits or transferring its profits to the AE outside the country. It was the submission that this is not case where the assessee is only purchasing the products or only selling the products. It was the submission that the assessee was buying and selling the products to the AEs. It was the further submission that on comparison with the non-AE when the pricing is considered by applying the CUP method, the same could be done only if a reasonable comparison could be made and only if direct methods were available. It was fairly agreed by the Ld. A.R. that assessee itself agrees with the applicability of CUP method. It was the submission that when applying the CUP method as the transaction done by the assessee was continuous transaction with the AEs, the consolidated effect of all the transactions between the assessee and the AEs must be considered as a whole. As otherwise it would lead to a situation where the assessee would be making very high margins in some cases and very low margins in some cases and where the transactions show high margins, the same would stand accepted and in the transactions were low margins, the same would call for an adjustment, which would in effect be inflating the margins of the assessee to disproportionate levels. It was the submission that this was not what was contemplated under the provisions of Sec.92C of the Act. The Ld. A.R. drew our attention to page-28 of the paper book, which was a computation of gain to the assessee on the purchase from AE at Rs. 87,41,490/-, as also page-36 which showed the transactions which had resulted in the loss or a lower margin, which was treated as a loss at Rs. 53,11,464/-. It was the submission the net of the transaction in any case was a profit. However, if individual transactions were taken, then the gain generated by the assessee of Rs. 87,41,490/- would get completely overlooked and what would be highlighted is only the transactions where the assessee has not generated the requisite margins. It was the submission that if the transactions where the assessee had made the higher margins when making purchase from the AE is excluded the transfer pricing adjustment of Rs. 1,06,99,296 would come to the front. It was the submission that this was not contemplated u/s. 92C of the Act. It was the submission that the Assessing Officer may be directed to take into consideration all the transactions as a whole when computing the ALP. It was the submission that the profit is the net of the cost of sales less cost of purchase and other expenses. By ignoring the positive deviation on the purchase from the AE and considering only the negative deviation on the sale to AE, the transaction itself would not be complete for the purpose of computing the ALP. It was the submission that the order of the Assessing Officer on this issue may be reversed. It was the submission that the AO may also be directed to grant the assessee the benefit of 5% of tolerance limit prescribed by the second proviso to Sec. 92C(2) of the Act. In reply, Ld. DR vehemently supported the order of the Assessing Officer and the DRP. It was the submission that the transactions independently were liable to be considered. It was the submission that each transaction was a separate one and no netting could be granted.
8. We have considered the rival submissions. Perusal of the provisions of Sec.92C shows that the words used is “in relation to an international transaction ………… having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons” The term ‘class of transaction’ and ‘nature of transactions’ come to the forefront in the present case. In the assessee’s case, the transaction with the AE is not one of simple purchase or simple sale. The assessee purchases from one and sells to another. The assessee has purchased from its AE in Hongkong, Srilanka, Malayasia, Pakistan and RANDY Asia and has sold to its AE in Srilanka, Korea, Hongkong, Gulf, Egypt, Bangladesh, Malayasia, Taiwan, UK and Pakistan. In regard to the sales made by the assessee, the transaction with Bangaladesh is in positive, the transaction with Egypt is in negative, the transaction with Gulf is in the positive, the transaction with Hongkong is in negative, the transaction with Korea is in positive, the transaction with Srilanka is in the negative, the transaction with Malayasia is in the negative, the transaction with Pakistan is in the negative, the transaction with Taiwan is in the negative and the transaction with UK is in the negative. Thus, what is noticed is that on the purchase the assessee has a positive differential i.e. the assessee purchases at a lower price from its AE than the non-AE and when its sales to the AE, its selling price is lower than the selling price as compared with the non-AE. There is no question that the assessee is generating profits from the transaction. There is no dispute that the assessee is also paying taxes on the profits that it has generated from its transaction of purchase and sale with its AE. The assessee, thus it is noticed, is doing the business of trading when it purchased from its AE from one country and sells to another AE in another country. This margin could be on account of both foreign exchange fluctuations as also the mark up done by the assessee. These transactions clearly show that what is done by the assessee is one of purchase and sale. With this in mind reading of the provisions of Sec.92C shows that the word used is “nature of transaction”. “nature of transaction” would be a particular set of transaction, which are to be seen together. When the assessee is buying from one place and selling at another that would be a “class of transaction”. When the assessee is doing the business of trading, it would not be a right to hold that the purchase is one “class of transaction” and the sales are another “class of transaction”. The assessee dealing with the AEs is a better position to negotiate better prices and consequently would be able to get a better bargain. Here, what is to be seen is whether the transaction of purchase and sale being the nature of transactions, when seen in consolidated from, generates profits which normally would be generated. For this both the purchase and sale transactions would have to be considered.
To explain by an example, the assessee purchases a product at Rs. 10 from its AE. The same product is sold by a non-AE at Rs. 12/-. The assessee sells the finished product to its AE at Rs. 15/-. The same finished product is sold by a non-AE at Rs. 17/-. The profits from both transactions, assessee to AE, as also non-AE to non-AE would give Rs. 5/- But for the purpose of determining the ALP as the assessee purchases from its AE at a price lower than non-AE, the purchase price would be accepted as the deviation is negative i.e. Rs. 10/- is lower than Rs. 12/-, but as the assessee sells to its AE at a price lower than a non-AE, the sale price will be adjusted to the selling price of the non-AE as the deviation is positive i.e. Rs. 15/- is lower than Rs. 17/-. Therefore, Rs. 17/- will be considered as ALP. This would result in (i) The assessee buys from the AE at Rs. 10/-
(ii) The assessee’s sale price is adjusted to ALP at Rs. 17/-.
Thus, the profit of the assessee will be determined at Rs. 7/-.
Now if we compare the profitability,
Assessee’s purchase and sale to AE is Rs. 5/-.
Percentage of profit =
5 × 100
Non-AE purchase & sale is Rs. 5/-
Percentage of profit =
5 × 100
After adjustment profit is Rs. 7/-
Percentage of profit =
7 × 100
Thus the profitability if considered without considering the positive deviations would lead to impossible profitability positions, which is not what is contemplated under the provisions of 92C. In the circumstances, the Assessing Officer is directed to re-compute the ALP by taking into consideration both the net difference on the sale from the AE and purchase from the AE. The Assessing Officer may look into the fact as to the margins of the profits in regard to the transactions done by the assessee with its AE, as also the non-AE transactions and then compute the adjustment of ALP, if any. In the circumstances, the grounds Nos. 5, 6, 8 & 9 of the assessee stand partly allowed for statistical purposes.
9. In regard to ground No.7, the assessee has asked for 5% of tolerance limit prescribed by the second proviso to Section 92C(2) of the Act. This claim of the assessee for 5% of tolerance limit cannot be granted as no arithmetical mean as provided in the first proviso has been determined. In the circumstances, Ground No.7 of the assessee’s appeal stands dismissed.
10. Ground No.11 is against the levy of interest under sections 234A, 234B and 234C of the Act. As the levy of interest under sections 234A, 234B and 234C are consequential in nature, the same are dismissed. In the circumstances, the appeal of the assessee is partly allowed for statistical purposes.
11. In the result, the appeal of the assessee is partly allowed for statistical purposes