Case Law Details
Kem Tron Technology (P) Ltd. Vs CIT
ITAT Ahmedabad
ITA No. 356 (Ahd.) of 2008
Assessment Year: 2004-05
Decided on: 17 June 2011
Order
D.K. Tyagi, JM
1. This appeal by the assessee has been preferred against the order dated 7-12-2007 of CIT(A)-V, Baroda for the assessment year 2004-05. The assessee has taken the following grounds of appeal:
“1.00 On the facts and in the circumstances of our appellant case as well as in law, the Hon’ble Commissioner of Income-tax (A)-V, BRD had erred in confirming the Order of ld. Asstt. Comm. of Income-tax, Circle 1(2), BRD on account of upward adjustment in international transaction on the plea that similarly placed companies have better margin as compared to your appellant’s company.
1.01 Your appellant says and submits that the Hon’ble CIT(A) had erred in not considering the other income, mainly consisting of export incentives for the purpose of calculating margin with other companies whose net profits are comprising of the other income.
1.02 Your appellant further says and submits that the Hon’ble CIT(A) had erred in not considering the plea of your appellant that data furnished by the ld. A.O. in respect of various companies is not comparable with that of your appellant company on various reasons furnished during the course of assessment proceedings as well as before the Hon’ble CIT(A), BRD., the principal reason being the companies whose data are furnished by the ld. A.O. are not similarly placed companies.
1.03 Your appellant says and submits that the Hon’ble CIT(A), BRD had erred in not taking any cognizance of the submission made by your appellant in respect of data submitted for comparison purpose for calculating net margin with that of your appellant company.”
2. The brief facts of the case are that during the assessment proceedings, the A.O on perusal of P and L account of the assessee found that the assessee has declared a gross profit of Rs.18,86,446 against export sales of Rs.2,82,70,233. This sale was entirely made to its principal holding company. The gross profit ratio comes out to 6.67% and the net profit of the business has been worked out at Rs.9,22,281 which is 3.26%. The A.O. was of the view that there was a transaction with the related concern as the holding company has 98% shareholding of the assessee company. He also observed that the profit of the assessee becomes a negative figure if other income of Rs.18,28,677 is reduced from the net profit declared. The other income comprised of interest income and income by way of export incentive. He concluded that in these circumstances, net profit will become negative i.e. (-) 3.21%. Invoking the provisions of section 92C(3), the A.O. issued a show cause notice. The A.O. pointed out that the profit of business ensuing to the assessee did not appear to be the coefficient of the turnover of the business of international transaction carried out by the assessee during the year with its associate enterprises. As the operating margin appears low, the A.O. proposed to make upward adjustment in the ALP by treating the instances of similarly placed companies and made upward adjustment after allowing the assessee reasonable opportunity to rebut the objection of the department. The A.O. stated that the assessee has not been able to prove in terms of documents that the transaction between the assessee company and its principal was at arm’s length price. The details on the basis of which the revenue held that there was a case to disturbed the ALP had been culled out from prowess software which was a reliable data.
3. Before CIT(A), assessee company filed written submission which have been summarized by the Ld. CIT(A) as under:
“The appellant has inter alia submitted that the company had entered into sales transaction with AE and on that transactions being export sales, the Government of India had given incentive in the form of DEPB licenses, which are accounted as other income. The Assessing Officer while calculating the margins had not considered the incentive and had made calculation after ignoring the incentive only. The appellant further argues that during the course of assessment proceedings they had submitted before the Assessing Officer, that the appellant had sold certain items at a higher price compared to the other suppliers from Turkey and China. However, as argued by the appellant, the Assessing Officer has not considered the same while framing the assessment order. The appellant argues that the Assessing Officer had selected the net transaction margin method and for that purpose had selected certain companies from India. The appellant further argues that during the course of assessment it was submitted that the companies which are selected by the Assessing Officer are not comparable with that of appellant company due to various reasons, main reason being the size of the company, infra structure, turn over of the company, and full data of the company, being not provided to the appellant company. It was contended by the appellant that the comparison can be made when there exist similar situation but no comparison can be made with the companies when they are not similar and this fact was also explained to the Assessing Officer in details during the assessment proceedings. The appellant further argues that while calculating net margin the Assessing Officer has ignored the other income while data provided of other companies, it appears that they are inclusive of other income and the appellant was ignorant about this fact. It is also submitted by the appellant that the Assessing Officer has not taken cognizance of the detailed working of FAS Analysis even though it was submitted by the appellant.”
4. The submissions of the assessee were sent to the A.O. for his comments. The A.O. filed a remand report on which assessee’s counter comments were also obtained by Ld. CIT(A). After taking into consideration the submissions of the assessee, remand report by the A.O. and counter comments of the assessee on A.O.’s remand report, Ld. CIT(A) upheld the upward adjustment in the price adopted for international transaction made by the assessee with its associate concern by observing as under:
“6. I have carefully considered the facts of the case, the arguments of the Assessing Officer and the arguments of the learned Authorized Representative. The Assessing Officer in this case has adopted the net margin method to make an up-ward adjustment in the price adopted for International transaction made by the appellant with its associated-concern. This adjustment made by the Assessing Officer is justified and according to Law for the following reasons:
6.1 The appellant is almost a 100% subsidiary of the foreign enterprise. The parent company holds 98% of the total number of shares of the appellant. Therefore, the principal company is in a vantage position to dictate or determine the sale price made by the appellant. Secondly, the parent company is the only buyer of the customized components sold by the appellant company. In such a situation it has to be seen whether the Indian enterprise is selling its products to foreign enterprise at arm length price. The Assessing Officer has correctly found that the appellant is not making any profit in its entire operation with the parent company. Once export incentive and other income are taken out, there is a loss of about 3.21%. Therefore, the conclusion of the Assessing Officer that the pricing of the product is not at arm’s length price is a logical and defendable conclusion.
6.2 As has briefly already discussed the appellant is manufacturing a part or components of a product for the parent company. For this no direct comparable are available. Neither the appellant is able to find one. Therefore, the only logical way is to adopt net margin method to determine whether appellant is making any profit in this transaction. The Assessing Officer has precisely done the same thing.
6.3 The objection of the appellant that for calculating net margin, other income should have been taken into account is not correct as these incomes are not strictly related to the transaction. Courts of Law have already held that export incentives cannot form part of business profit although in different context. Export incentives are to be taken as other income for the purpose of 80HHC. Export incentive could be incidental to export activities, but this is not a factor of the cost.
6.4 The net margin adopted by the Assessing Officer at 3.768%, from the available International Comparables, is again a fairly reasonable margin. Appellant has cited cases where companies have also incurred losses, that argument is not tenable, because the background of those cases are not given and appellant company also did not face any adverse or extraordinary circumstances to warrant a negative margin.
7. In view of the above, I am in complete agreement with the Assessing Officer that transfer price between the Associated Enterprises is to be suitably altered for determining correct profit for the Indian Enterprise i.e. appellant company. The upward adjustment made by the Assessing Officer amounting to Rs.19,72,697 in the ALP and consequential addition made is upheld and the appeal on this ground is dismissed.”
5. Further aggrieved, now the assessee is in appeal before us.
6. At the time of hearing Ld. counsel for the assessee reiterated the submissions made before the Ld. CIT(A) and further argued that Ld. CIT(A) has erred in confirming the action of the A.O. on account of upward adjustment in international transaction on the gourd that similarly placed companies have better margin as compared to the assessee company. The companies which were selected by the A.O. are not comparable with the assessee company as the size of the company, infrastructure, turnover and full data of the company was not provided to the assessee company to rebut the findings of the A.O. Most of the companies referred for comparison with the assessee company were not even dealing in the goods in which assessee company deals. Ld. counsel for the assessee further argued that Ld. CIT(A) was wrong in not considering the other income of the assessee company mainly consisting of export inventive for the purpose of calculating margin money with the other companies whose net profit is including other income also. To be fair to the assessee, the other income of those companies should also be excluded from the net profit of those companies while comparing with the results of the assessee company. Ld. Counsel for the assessee also argued that the authorities below also ignored the data submitted by the assessee before them for comparison purpose for calculating the net margin of the five similarly placed companies without giving any cogent reasons. It was also argued by the Ld. Counsel for the assessee that in the subsequent years i.e. assessment years 2005-06, 2006-07 and 2007-08, though a reference under section 92(c)(1)(a) of the Act for the computation of arms length price in relation to international transaction was made to TPO but no such adjustment was made by the TPO in those assessment years. Concluding his arguments, Ld. Counsel for the assessee submitted that upward adjustment of net price international transaction was uncalled for in this case therefore, addition made in this case may kindly be deleted.
7. Ld. D.R. on the other hand relied on the orders of authorizes below.
8. We have heard both the parties and perused the material on record. We find that the assessee company is a private limited company whose 98% shares are held by M/s. Kem-Tron Technologies Inc. USA. The assessee is engaged in the business of manufacturing equipments and machinery parts and components of solid operating equipments and parts used in oil and gas filled machinery. The assessee does not supply any complete component but only spare parts are being manufactured and supplied through its holding company.
9. As the assessee’s major sales in international market related to associate enterprise section 93E was applicable and a report in Form 3CEB was duly filed along with the return of income by the assessee. The A.O. invoking the provisions of section 92C(3) of the Act made addition of Rs.19,72,697 by making upward adjustment in international transaction with the associate enterprise on the ground that similarly placed companies had better margins as compared to the assessee company. While doing so, the A.O. took the net profit of the assessee company at (-) 3.21% instead of 3.26% shown by the assessee, excluding the other income of Rs.80,28,677 from net profit declared by the assessee. A.O. while holding that similarly placed companies had better margin as compared to assessee company, has not done the same exercise i.e. other income of those companies had not been excluded from their net profit, which according to us, is not proper. We further find that full data of the companies with which assessee’s profit margin was compared, was not provided to the assessee company. On the other hand, the data of five companies which were engaged in the similar type of business, provided by the assessee to the A.O., was totally ignored for no cogent reason. We are therefore, of the considered opinion that the matter requires fresh adjudication by taking the average of net profit shown by the companies considered by the A.O. while making this upward adjustment and the companies on which assessee has placed reliance to show that transaction between the assessee company and its principal was at arm’s length price. While doing so, similar figures of all the companies should be taken into consideration. In case, other income of the assessee is excluded form the net profit, the other income of comparable companies should also be excluded from their net profit. With these observations, the matter is restored back to the file of the A.O. for fresh adjudication after giving opportunity of being heard to the assessee.
10. In the result, the appeal of the assessee stands allowed for statistical purposes.
