Case Law Details
Summary of the case:- Assessee has an option when there is arithmetical mean involved while computing the ‘arm’s length price’ and it happens only if more than one price is determined by the most appropriate method. The First Proviso becomes operational where more than one comparable price is determined. The assessee at his option can make claim of deduction out of the arithmetic mean not exceeding 5%.
In The Income Tax Appellate Tribunal, Pune Bench ‘A’, Pune
- Cummins India Limited Vs. Dy.CIT (ITA No. 277 & 1412/ PN/07) (Asst. Year 2003-04 & 2004-05)
- Dy.CIT Vs. Cummins India Limited (ITA No. 148 /PN/07) (Asstt. Year 2003-04)
- Addl. CIT Vs. Cummins India Limited (ITA No. 1430/PN/07) (Asstt. Year 2004-05)
ORDER
Per D. Karunakara Rao AM
There are four appeals under consideration, ITA No. 277/PN/07 (Assessee’s appeal), ITA 148/PN/07 (Revenue’s appeal) for the A.Y 2003-04 and ITA 1412/PN/07 (Assessee’s appeal), ITA No. 1430/PN/07 (Revenue’s appeal) for the A.Y 2004-05, against the different orders of the CIT(A)-I, Pune dated 09-11- 2006 for the A.Y 2003-04 and 2 1-08-2007 for the A.Y 2004-05 respectively. Appeal wise adjudication is taken up in the preceding paragraphs.
During the proceedings before us, referring to his appeals ie ITA No. 277&1412/PN/07, Shri S.N. Inamdar, Ld. Counsel for the assessee appeared and stated that grounds 1 to 4 in both the appeals are not pressed. Ld. DR has nothing to say on the request and therefore, grounds 1 to 4 are dismissed as not pressed.
ITA No. 277 & 1412/PN/07 – Assessee’s Appeals
2. Assessee is resident company engaged in the business of manufacturing and sale of IC Engines for power generation and industrial application in the domestic market. During the years, assessee had international transactions relating to ‘procurement Support Services’ and therefore, these transactions were referred to the Transfer Pricing Officer at Mumbai held that the said transactions are not at arm’s length and an order was passed u/s 92CA(3) of the Act. In the process, no deduction from the arithmetic mean was allowed in accordance with the provisions of the first proviso to section 92C(2) of the Act. Otherwise, on facts, the TPO considered 61 comparable prices and finally relied on 3 prices for arriving at the arithmetic mean, which computing the ‘arm’s length price’ in this case for both the years under consideration. These facts relate to ground 5 of the appeals.
3. In this regard on ground 5, Ld. Counsel mentioned that the issue raised in the ground relates to the proper appreciation of the first proviso to section 92(C)(2) of the Act. In this regard, Ld. Counsel took us through the report of the TPO which is partly reproduced in para 7.2 of the impugned order and he summed up stating that the AO/TPO analysed 61 comparable prices and finally narrowed down to 3 prices as per the comparable Uncontrolled price method (CUP) for the purpose of computation of arm’s length price. Considering the multiple prices involved, as per the first proviso, at the option of the assessee, the assessee is entitled to the benefit of reduction of 5% from the arithmetic
mean of such prices. In this regard he relied on various orders of the Honble Tribunal such as SAP Labs India Pvt. Ltd. 6 ITR (Trib) 81 (Bangalore) and Soni (I) Pvt. Ltd. 315 ITR (AT) 150. Further, he mentioned that the CIT(A) did not have the benefit of the said orders of the Tribunal. As per the Counsel, the decisions in the case of Soni (I) Pvt. Ltd (supra) and SAP Labs India Pvt. Ltd (supra) are famous for the proposition that the benefit of deduction at 5% has to be given to the assessee as per the first proviso for the AY 2002-03 onwards till the amendment brought in by the Finance (no 2) Act, 2009. Applying the said ratio to the assessee’s case Ld. Counsel took us through para 7.3 of the impugned order and stated that the CIT(A) did not have the benefit of above referred orders and therefore the issue was not decided in favour of the assessee. Per contra, Ld. DR for the Revenue relied on the orders of the CIT(A) and the TPO. Further, Ld CIT-DR relied on the orders of the Tribunal in the case of Essar Steel Ltd (formerly Hyderabad Pellets Ltd) ITA NO 228/Vizag/2008 for the AY 2004-05 and UE Trade Corporation (I) P Ltd vide ITA NO 4405/Del/2009 for the Ay 2003-04 for strengthening the orders of the AO/TPO/CIT(A).
4. During the hearing on 24/2/2010, Ld Counsel filed a written submissions vide the letter dated 21.1.2011 and demonstrated adequately to make out tht the cases, which are relied upon by the DR are distinguishable. Detailing further, Ld Counsel stated that in the said cases, only one comparable price is considered. Whereas in the instant case, 61 price cases were considered and finally used three comparable prices. Relevant discussion from the said letter is reproduced as under.
“Now, in our case, it will be seen from pages 10 & 16 (Annexure-3) of the paper book, that as many as 61 cases were considered and finally arithmetical mean of 3 most comparable was adopted viz. Gilcon Projects Services Ltd., Rites Ltd. & NIS Sports Ltd. The TPO also mentions in her order in para 5 that “the company has earned as operating margin as a percentage and operating cost earned by the com parables (plural) of 8.21%. Same applies to AY – 2004-05, where the TPO in para 5 of her order records that “the company has earned operating margin of a percentage of operating cost of 1.42% as against arithmetic mean of the operating margin as a percentage of operating cost earned by com parables (Plural) of 5.51%. For this year, as many as five companies were considered, page no.10 of the paper book). Since more than one com parables prices were considered in our case, according to U.E. Trade Corporation case, benefit of 5% is available to us.”
For strengthening the above, Sri Inamdar also filed certain decisions of various Tribunals in favour of the interpretation of the impugned proviso to section 92C(2) of the Act to mean that the assessee is entitled to deduction of 5% out of the arithmetical mean at the assessee option of the assessee.
5. We have heard both the parties and perused the orders of the Revenue as well as the Tribunal orders cited by Sri Inamdar, the Ld. Counsel and the Sri Sharma, Ld CIT DR. The limited issue raised in the ground revolves around the applicability of the first proviso to section 92C(2) of the Act and whether the assessee is entitled to reduction of 5% from the arithmetic mean price adopted by the TPO while computing the arm’s length price.
6. First proviso to section 92C(2) of the Act is required to the explained here and same as existed at the relevant point of time reads as follows.
“provided that where more than one price is determined by the most appropriate method, the arms length price shall be taken to be the arithmetical mean of such prices or at the option of the assessee, a price which may vary from the arithmetical mean of an amount not exceeding five per cent of such arithmetical mean.”
From the above provisions, it is clear that the assessee has an option when there is arithmetical mean involved while computing the ‘arm’s length price’ and it happens only if more than one price is determined by the most appropriate method as in the case of the present assessee.There are three prices determined involving three comparable namely Gilcon Projects Services Ltd., Rites Ltd. & NIS Sports Ltd. Ld Counsel has demonstrated above from the text of the order of the CIT(A) too, where plurality was used in the such text. From the judicial decisions relied upon by both the parties, we find that first proviso becomes operational where there are more comparable price cases are determined in computation of arm’s length price and assessee at his option can make claim of deduction out of the arithmetic mean not exceeding 5%.
7. We have also perused the said judicial decisions and relevant portions from to the issue under consideration are reproduced as follows.
A. Extract from the decision in the case of SAP Labs India Pvt. Ltd reported in (6 ITR (Trib.) 81 (Bangalore):
The proviso to section 92C substituted by the Finance (No.2) Act, 2009 with effect from October 1, 2009 will be applicable to the assessment year 2009-10 and onwards. For the assessment year 203-04 the proviso applicable was the one which stood before the substitution by the Finance (No.2) Act, 2009 with effect from October 1, 2009. That proviso says that at the option of the assessee, the assessee may adopt a price different from the arithmetical mean by an amount not exceeding 5 per cent. of such arithmetical mean, i.e. the assessee has an option to claim the tax payer’s marginal relief at 5 per cent. with reference to the arithmetical mean irrespective of the range of actual deviation between the margin disclosed by the assessee and the average mean margin. The assessee will get a standard deduction of 5 per cent. and the assessee’s arm’s length price will be increased to 15 per cent. and thereafter the difference of 5 per cent. between 20 per cent. and 15 per cent alone shall be added as arm’s length price adjustment.
B Extract from the decision in the case of UE Trade Corporation (I) P Ltd vide ITA NO 4405/Del/2009 for the Ay 2003-04
“5.4 We have considered the facts of the case and submissions made before us. The proviso, which is applicable to the proceedings of this year, contemplates an option to the assessee to choose a price which may vary from the arithmetical mean. This proviso is applicable where more than one price is determined and thereafter the mean of such prices is taken to be arm’s length price. However, there is only one comparable instance in this case. The decision in the case of Perot Systems TSI (India) Ltd. (supra) supports the case of the revenue.”
c. Extract from a decision in the case of Essar Steel Ltd vide ITA No. 228/Visak/ 2008 (Visakapatnam):
In view of the above, we are of the view that the assessee could not place reliance on the Circular no. 12 and for the year under consideration, only the proviso to sec. 92C(2), as amended by Finance Act 2002 is applicable. In that case, the said proviso shall apply only if the “most appropriate method” results in more than one price, in which case the arithmetical mean of such prices shall be taken as the ALP. However, the assessee shall have an option to adopt a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean.
D. Extract from a decision in the case of Perot Systems TSI (I) Ltd 130 TTJ 685 (Delhi)
“The Tribunal came to the conclusion that since only one rate was used as a comparable transaction, it cannot be equated with more than one price. Therefore, the tolerance limit of 5% was not available in the relevant proviso applicable to the proceedings of these years: (Emphasis supplied).”
E. Extract from a decision in the case of Sony India P. Ltd. 315 ITR 150, at page 155 for explaining of the proviso
“The proviso to section 92C() of the Act consists mainly of two parts:
(a) where more than one price is determined by the most appropriate method, then the arm’s length price shall be taken to be the arithmetical mean of such price; or (b) at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5 per cent. of such arithmetical mean. The first limp of the proviso has general application. There is no option with nor any sort of concession allowed to the assessee. The arm’s length price so determined may be accepted or contested by the assessee or by any aggrieved person in accordance with the statutory provisions. It is a statutory levy without an option.
The second limb of the proviso gives “an option” to the assessee to take the arm’s length price which may vary from the arithmetic mean by an amount not exceeding 5 per cent. of such arithmetic mean. The word “option” is synonymous with “choice” or “preference”. Therefore, it is the choice of the assessee to take the arm’s length price with a marginal benefit and not the arithmetical mean determined as the most appropriate method. There is nothing in the language to restrict the application of the provision only to marginal cases where the price disclosed by the assessee does not exceed 5 per cent. of the arithmetic mean. The arm’s length price determined on application of the most appropriate method is only an approximation and is not a scientific evaluation. Therefore, the Legislature though it proper to allow marginal benefit to assessees who opt for such benefit. In the case of an assessee who exercises the option and accepts the arm’s length price even exceeding 5 per cent. of the arithmetic mean determined by the tax authority as correct and is ready to pay tax on the difference between the price disclosed by him and the arm’s length price the application of the proviso is not excluded. The legal position cannot be different in a case where minor variation of 5 per cent. is not accepted and the arm’s length price is further challenged in appeal. The mere fact of acceptance or non-acceptance of the arithmetic mean cannot be taken to be the determining factor relating to the right to contest the arm’s length price in appeal. Such inference is not supported by the language of the provision. Both in the first as also in the second limb, the implications of the determined the arm’s length price are the same except for the marginal benefit allowed to the assessee under the second limb. Hence, the second limb of the proviso is applicable even to cases where the assessee intends to challenge the arm’s length price taken as arithmetic mean and determined through the most appropriate method. Therefore, the benefit of the price of international transaction disclosed by them exceeds the margin provided in the provision.”
8. All the above mentioned judicial pronouncements are uniform in making a proposition that where arithmetic mean is involved, the assessee obtains the eligibility for claim of deduction out of such arithmetic mean. It is commonsense that the statistical concept of arithmetic mean arises only when there exists more than one price data. Such concept is irrelevant to the data with only one variable. In the assessee’s case undisputedly, there are three comparable price data and further, it is a fact that, as per the said first proviso, the assessee exercised the option too. In such circumstances, in our considered opinion, the said first proviso has direct application to the facts of the case and the assessee is entitled for deduction not exceeding 5% out of the arithmetic mean. In the earlier paragraphs, we have explained the meaning of the first proviso as the one comparable price vis a vis many comparable prices for the purpose of granting deduction not exceeding 5% out of the arithmetic mean of the comparable prices, three in assessee’s case. Considering both legal position as well as the decided decision of various tribunals on this issue, we find the assessee has to succeed on this issue. Thus, the assessee’s case stands covered by the ratio of various decisions referred to above. Consequently, the impugned order of the CIT(A) is required to be reversed on this issue relating to the applicability of the first proviso to the assessee. Accordingly ground no. 5 in both the appeals of the assessee are allowed.
9. In the result, the appeals of the assessee are partly allowed. ITA No. 148/PN/07 – Revenue’s Appeal
10. Grounds raised in this appeal are as under:-
“1. The learned CIT(A) erred in directing the AO to exclude excise duty and sales tax from the total turnover of the assessee for the purpose of calculating deduction u/s. 80HHC.
2. The learned CIT(A) erred in directing the Assessing Officer to include income from scrap sale, discount and commission, inspection and testing charges, job work and income derived from supplies payment in total turnover while computing deduction u/s. 80HHC of the Act.
3. The learned CIT(A) erred in directing the AO to allow the provision for warranty expenses.
4. The learned CIT(A) erred in not appreciating the fact that the provision for warranty was in the nature of contingent liability and hence not allowable.
5. The learned CIT(A) erred in accepting the assessee’s claim that provision for warranty is made on scientific basis.
6. The learned CIT(A) erred in directing the Assessing Officer to verify the assessee’s claim in respect of New Engine Performance Inspection fees and allow the same without giving a clear finding as this tantamount to setting aside the assessment order which is beyond his power.”
11. Ground no. 1 relates to exclusion of excise duty and sales tax from the total turnover of the assessee for the purpose of calculating deduction u/s. 80HHC and as agreed by both the parties in the dispute, this issue is decided by the Supreme Court in the case of Lakshmi Machine Works 290 ITR 667(SC) in support of such exclusion. Considering the covered nature of the issue at ground 1 relating to exclusion of excise duty and sales tax from the total turn over of the assessee for the purpose of calculating the eligible deduction u/s. 80HHC of the Act, the issue has to be decided in favour of the assessee. Accordingly, this ground no. 1 of the Revenue’s appeal is dismissed.
12. Regarding ground no. 2, it is relating to inclusion of income from scrap, sale, discount and commission, inspection and testing charges, job work and income derived from the suppliers for the purpose of 80HHC deduction should be referred to the files of the AO for re-adjudication after considering various binding judgments on each issue. As seen from both order of the A.O and of the CIT(A) it is noticed that both the authorities have not applied their mind to each of the receipts and instead they have summarily adjudicated the issue without passing a speaking order. Considering this fact, both the parties have concurred to the proposal of sending these multiple issues raised in this ground to the files of the A.O. We find no reason to dishonour their request. Assessee is directed to file the evidences to support his case and also the copies of the decisions/judgments if any, which shall be taken into cognizance by the I.T. Authorities while adjudicating the issue afresh. A.O shall grant reasonable opportunity of being heard to the assessee as per the established principle of Natural Justice. Thus, in the result ground no. 2 is set aside.
13. Ground no. 3 to 6 relates to the correctness of the directions given by the CIT(A) to the A.O. During the proceedings, Ld. Counsel mentioned that assessee got relief on these issue’s relating to provision for warranty in the assessment year earlier to this. After considering the facts of the case, we find no mistake in the directions given by the CIT(A) to the A.O. In our opinion, such directions do not amount to assuming of the non-existent powers of set aside as argued by Ld DR for the revenue. Accordingly, grounds no3 to 6 are dismissed.
14. In the result appeal of the Revenue is partly allowed.
ITA No. 1430/PN/07 – Revenue’s Appeal
15. Grounds in this appeal are as under:-
“1. In the facts and in the circumstances of the case, the Learned CIT (Appeal) erred in directing the AO to include business income from scrap sale, discount and commission, inspection and testing charges, job work and income derived from suppliers payment in the business income while computing deduction u/s. 80HHC of the IT Act.
2. In the facts and circumstances of the case, the Learned CIT(A) erred in directing the AO to verify the Assessee’s claim in respect of new engine performance inspection fees and allow the same without giving a clear finding as this tantamount to setting aside of the assessment order which is beyond his powers.”
16. Ld. DR mentioned that there are two grounds in this appeal. Ground no.1 is identical to ground no. 2 of the ITA No. 148/PN/07, accordingly the issue has to be decided in line with the same, where we set aside this issue to the files of the AO for want of speaking order and deciding the issues afresh after considering the existing judicial pronouncements in force. Accordingly, ground no. 1 is also set aside with similar directions.
17. Regarding ground no.2, relates to the correctness of the directions given by the CIT(A) to the A.O. It is argued by the DR that the said direction which has an effect of setting aside to the A.O is side the powers of the CIT(A). During the proceedings, Ld. Counsel mentioned that assessee got relief on these issue’s relating to provision for warranty in the assessment year earlier to this. After considering the facts of the case, we find no mistake in the directions given by the CIT(A) to the A.O. In our opinion, such directions do not amount to assuming of the non-existent powers of set aside as argued by Ld DR for the revenue. Accordingly, ground no. 2 is dismissed.
18. In the result, appeal of the Revenue is partly allowed.
19. In the result, all the four appeals are decided pro-tanto.
Order pronounced in the open court on 28th day of February, 2011.
