Case Law Details
PCIT Vs Radhashir Jewellery Co. Pvt Ltd. (Bombay High Court)
Introduction: The recent judgment by the Bombay High Court in the case of PCIT Vs Radhashir Jewellery Co. Pvt Ltd. delves into intricate matters of international transactions and transfer pricing. This article provides a comprehensive analysis of the court’s decision and its implications.
Detailed Analysis: The case revolves around the assessment of the respondent-assessee, engaged in rendering research and technical services, for the assessment year 2008-09. The Assessing Officer, after a reference to the Transfer Pricing Officer (TPO), made adjustments on account of international transactions. The matter was subsequently appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], who partly allowed the appeal.
However, the key contention arose when the case reached the Income Tax Appellate Tribunal (ITAT). The ITAT, in its order dated 8th July 2016, partially allowed the appeal by directing a remand of the matter to the TPO for fresh adjudication. This decision was based on the need for reconsideration of various factors, including capacity utilization adjustments and comparables selection.
The High Court’s scrutiny of the ITAT’s decision reveals a critical analysis. It examines whether the ITAT was justified in directing capacity utilization adjustments while computing the net margin of the assessed party. The court also evaluates the validity of such adjustments concerning relevant provisions and judicial precedents.
One of the significant points highlighted in the judgment is the principle of comparing equals. The court emphasized that comparability should be based on businesses with similar operational durations and stages. Assessing an entity that recently commenced operations against well-established counterparts could lead to distorted conclusions. The court endorsed the ITAT’s observation that comparison should be made between entities with comparable operational timelines to ensure fairness and accuracy.
Conclusion: In conclusion, the Bombay High Court upheld the ITAT’s decision, dismissing the appeal. The judgment underscores the importance of ensuring comparability in transfer pricing assessments, particularly concerning entities at different stages of operation. This case sets a precedent for future transfer pricing disputes, emphasizing the need for thorough consideration of relevant factors to arrive at equitable outcomes.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
Respondent-assessee was in the business of rendering research and technical services. The return of income was filed on 24th September 2009 for A.Y.-2008-09 declaring total income at Rs. Nil. The return of income was duly processed under Section 143(1) of the Income Tax Act, 1961 (the Act). The case was selected for assessment and order under Section 143(3) of the Act was issued and served on assessee. Assessee had entered into international transaction with associated enterprises exceeding Rs.15 crores. Considering the nature of transaction, a reference under Section 92CA(1) of the Act was made to the TPO. The TPO vide order dated 24th October 2011 determined the ALP and suggested adjustment of Rs.3,59,81,523/- to be made with the international transaction. The Assessing Officer passed the draft assessment order dated 29th December 2011 and a final order dated 15th February 2012 was passed making an addition on account of international transaction amounting to Rs.3,59,81,523/-. Other additions were also made.
2. Assessee challenged the assessment order before the Commissioner of Income Tax (Appeal) [CIT(A)], who partly allowed the appeal. The CIT (A) upheld the order of the Assessing Officer to the extent of addition on account of international transaction amounting to Rs.3,59,81,523/-. This also was unacceptable to assessee, who preferred the appeal before the Income Tax Appellate Tribunal (ITAT) against the order dated 11th September 2013 passed by the CIT(A).
3. The ITAT vide order dated 8th July 2016 partly allowed the appeal filed by assessee by referring the matter back to the file of TPO for fresh adjudication. The TPO was directed to reconsider the capacity under utilisation factor alongwith other factors for determining TP adjustment. The ITAT observed that two of the comparables objected by assessee needs to be reconsidered to find out as to whether they are fair comparable. Challenging this order, the present appeal has been filed under Section 260A of the Act.
4. The following two substantial questions of law have been proposed:
“a) Whether on the facts and in circumstances of the case and in law the Hon’ble ITAT was correct in directing to make appropriate capacity utilization adjustment while computing net margin of the tested party (ie assessee) which is in violation of express provision of rule 10B(1) (e) (iii) of IT Rules 1962, which allows such adjustments only while computing net margins of the uncontrolled transactions (comparable companies) when TNMM is chosen as the most appropriate method to determine Arm’s length price.?
b) Whether on the facts and in circumstances of the case and in law the Hon’ble ITAT was correct in directing to make appropriate capacity utilization adjustment while computing net margin of the tested party (ie assessee) which is in violation of express provision of rule 10B(1) (e) (iii) of IT Rules 1962, as well as the judicial pronouncement in this regard including the decision of jurisdictional High Court in case of M/s Royal Star Jewellery Pvt. Ltd. (ITXA No 2463 of 2013) dated 30.01.2017? “
5. Mr. Suresh Kumar agreed that only first question of law be considered.
6. Respondent is not present and all attempts to serve respondent have failed. Mr. Suresh Kumar states that even when the Chartered Accountant, whose name appears in the Form-35 Appeal to CIT(A), was served, the papers were returned saying they had never represented assessee.
7. In the assessment order the TPO provided all set of 12 comparables to assessee. The set of 3 comparables selected by assessee were sent for bench marking. Assessee raised various objections to the proposed comparison and the main ground of objection was that assessee had started production only in the month of May 2007 and the sales have started only from the month of July 2007. Whereas, the comparables were in the business for many years. This objection was rejected by the TPO. The CIT(A) upheld the findings of the TPO. The ITAT has rightly came to a conclusion that comparison has to be made between two equals. We agree with the finding of the ITAT that assessee who started the business in a particular year cannot be compared with assessee who are doing business for many years. On facts, the ITAT has given a finding that though there has been no major sales throughout the whole year, the expenses incurred by assessee are almost the same as compared to the expenses of the next year. It is also a fact that assessee had achieved sales of Rs.62 crores in the next assessment year and assessee could achieve that turnover because the business by that time had got stabilised.
8. In view of the above, we find no infirmity in the order passed by the ITAT. Therefore, no substantial question of law arise.
9. Appeal dismissed.
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