Itxa 324.18.Docx v. Against The Order Of Cit(A)-I, Nashik, Revenue Filed Appeal To Theincome Tax Appellat

Digitally signedby URMILAURMILAPRAMODPRAMODINGALEDate:INGALE2023.07.1110:32:57+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 324 OF 2018 The Pr. Commissioner of Income Tax-1Vs. ….. Appellant Thyssen Krupp Electrical Steel India Pvt. Ltd. ….. Respondent Mr. Suresh Kumar, for Appellant.None for the Respondent. CORAM:K.R.SHRIRAM, J & FIRDOSH P. POONIWALLA, J. DATED :JUNE 28, 2023 P.C. 1.This appeal impugns an order dated 06/04/2017 passed by theIncome Tax Appellate Tribunal, Pune (‘ITAT’) wherein the ITAT hadupheld the order of CIT(A) deleting the addition/adjustment made by theAssessing Officer (‘AO’)/TPO (‘Transfer Pricing Officer’) on account ofArms Length Price (‘ALP’) of international transactions and dismissedRevenue's appeal. 2.Respondent is engaged in the business of manufacture of LowCarbon Cold Rolled Electrical & Mild Steel. Return of income for theAssessment Year 2005-06 was filed on 28/10/2005 declaring total incomeat Rs.43,68,70,518/- . AO completed the assessment under Section 143(3) of the Income Tax Act, 1961 (‘the Act’). Assessment order dated18/12/2008 was passed on total income of Rs.49,96,88,040/- before setoff of brought forward business loss and unabsorbed depreciation. Incourse of assessment, the AO referred the issue of internationaltransactions entered into by respondent with its Associated Enterprises(‘AE’) to the TPO for determination of Arm's Length Price (‘ALP’).Respondent had made export sales of Cold Rolled Electrical Steel in coilsamounting to Rs. 12,95,67,447/- to its AE, TKES EBG Italia S.r.L, Italy.Before the TPO it was submitted by respondent that the said transaction ofexport sales were benchmarked by applying Cost Plus Method (‘CPMmethod’) as the same was considered to be the most appropriate method.However, for reasons discussed in detail in the order passed under Section92CA(3) of the Act, the TPO held that Comparable Uncontrolled PriceMethod (‘CUP method’) is the most appropriate method for determinationof the ALP of the export sales to the AE. Applying the CUP method, theTPO calculated the adjustment at Rs. 2,56,33,366/- on account of the ALPof the export sales to the AE. Respondent also received commission onsales amounting to Rs. 1,66,36,970/- from its AE, TKES Gmbh, Germany,for Sales Orders executed by TKES Germany in India. While respondentreceived commission @ 1.5% when the customer is other than originalequipment manufacturer, it received 0.75% in case of original equipmentmanufacturer. By applying CUP method and comparing the Commission payments to respondent’s agents by the Company itself @ 0.5% and 1% fordifferent products, respondent contended that the commission earned by itfrom its AE is at arm's length. However, for reasons discussed in detail inthe order of the TPO, he rejected the CUP method and applied internal rateof return for benchmarking the international transaction relating tocommission income. This resulted in adjustment of Rs. 1,80,97,017/- onaccount of ALP of the transaction relating to receipt of Sales Commissionfrom the AE. The total adjustment suggested by the TPO is Rs.4,37,30,383/- (Rs. 2,56,33,366/- plus Rs. 1,80,97,017/-). In theassessment order passed on 18.12.2008, the AO made addition of Rs.4,37,30,383/- as adjustment on account of ALP of the internationaltransactions as determined by the TPO. 3.Against the assessment order, respondent filed Appeal to theCommissioner of Income Tax (Appeals)-1, Nashik on 23.01.2009. Videorder dated 12.09.2014, the CIT(A)-I, Nashik has deleted the addition ofRs. 4,37,30,383/- made by the AO/TPO as adjustment on account of ALPof the international transactions. In respect of export sales, the CIT(A)observed that the TPO has rejected the CPM method applied byrespondent, without providing cogent reasons. The transactionsconsidered as CUP by the TPO pertain to sale of small quantities of leftoverstock and are in no way comparable to very large quantities sold to its AEs 3.Against the assessment order, respondent filed Appeal to theCommissioner of Income Tax (Appeals)-1, Nashik on 23.01.2009. Videorder dated 12.09.2014, the CIT(A)-I, Nashik has deleted the addition ofRs. 4,37,30,383/- made by the AO/TPO as adjustment on account of ALPof the international transactions. In respect of export sales, the CIT(A)observed that the TPO has rejected the CPM method applied byrespondent, without providing cogent reasons. The transactionsconsidered as CUP by the TPO pertain to sale of small quantities of leftoverstock and are in no way comparable to very large quantities sold to its AEs in foreign countries. The CIT(A) observed that the transactions consideredin CUP by the TPO are not in line with the provisions of Rule 10B and 10Cof Income Tax Rules. In respect of the Commission receipt, the CIT(A)accepted respondent’s contention that the method applied by TPO isinapplicable and also observed that the ITAT, Pune, has held in the case of1Hoganas India Pvt. Ltd. Vs. DCIT that IPR method is not the correctmethod for benchmarking of commission receipt. The CIT(A) furtherobserved that in subsequent years, i.e., Assessment Years 2006-07 to 2010-11, the TPOs have not disturbed the ALP of the international transactionsreported by respondent. Accordingly, the CIT(A) deleted the addition ofRs.4,37,30,383/- made by the AO/TPO on this account. 4.Against the order of CIT(A)-I, Nashik, Revenue filed Appeal to theIncome Tax Appellate Tribunal, Pune. Vide a common order dated06.04.2017, the Income Tax Appellate Tribunal, Bench 'A', Pune hasupheld the order of CIT(A) in deleting the addition of Rs. 4,37,30,383/-and has dismissed Revenue's appeal. In respect of export sales to AE, theITAT observed that the CPM method had been accepted by the TPO forAssessment Years 2008-09 to 2010-11 and no adjustment has been madein the hands of respondent in those years. Therefore, ITAT found no meritin the order of TPO in applying the CUP method to benchmark the 1ITA NO. 1463/PN/2010) international transaction of export sales to AEs. In respect of thecommission receipt from AE, the ITAT observed that respondent has alsoapplied CUP method in the years 2006-07 to 2010-11. It is not the case ofRevenue that respondent has received commission on different accounts indifferent years. In the succeeding years starting from Assessment Years2006-07 to 2010-11, the TPO had applied CUP method. Therefore, theITAT found no merit in the methodology adopted by the TPO in rejectingthe method applied by respondent. Accordingly, the ITAT upheld the orderof CIT(A) in deleting the adjustment of Rs. 4,37,30,383/- and dismissedRevenue's Appeal on this issue. 5.The following substantial questions of law have been proposed: A) Whether, on the facts and in the circumstancesof the case and in law, the Hon'ble Tribunal isjustified in upholding the order of CIT(A) indeleting the additions/adjustments ofRs.4,37,30,383/- made by TPO on account of ArmsLength Price of International Transactions by wayof Export Sales and Commission receipts? B) Whether, on the facts and in the circumstancesof the case and in law, the Hon'ble Tribunal isjustified in upholding the CPM method adopted byassessee for benchmarking of Export Sales to AEs asagainst CUP method adopted by TPO and inupholding the CUP method adopted by assessee forbenchmarking of Commission receipts as againstInternal Rate Return (IRR) method adopted byTPO? C) Whether, on the facts and in the circumstancesof the case and in law, the Hon'ble Tribunal isjustified in deleting the additions ofRs.4,37,30,383/- for assessment year 2005-06relying on the method adopted by TPO insubsequent assessment years 2006-07 to 2010-11,ignoring the judicial decisions of Hon'ble ApexCourt that in Income tax proceedings the principleof 'res-judicata' is not applicable ? 6.Respondent is not represented though served on 29/09/2017. Thisis evident from an affidavit of service filed by one Mr.Ganesh Ghorpadeaffirmed on 06/10/2017 for appellant. C) Whether, on the facts and in the circumstancesof the case and in law, the Hon'ble Tribunal isjustified in deleting the additions ofRs.4,37,30,383/- for assessment year 2005-06relying on the method adopted by TPO insubsequent assessment years 2006-07 to 2010-11,ignoring the judicial decisions of Hon'ble ApexCourt that in Income tax proceedings the principleof 'res-judicata' is not applicable ? 6.Respondent is not represented though served on 29/09/2017. Thisis evident from an affidavit of service filed by one Mr.Ganesh Ghorpadeaffirmed on 06/10/2017 for appellant. 7.With the assistance of Mr. Suresh Kumar, we have perused theimpugned order. 8.The limited issue that arose before ITAT was to adjudicate on themethodology to be adopted while benchmarking the internationaltransaction of respondent. Respondent had entered into two separatetransactions with its AE; one was the export of manufactured steel items toAE and the second was receipt of commission from the AE. Respondent inthe Transfer Pricing Study report while benchmarking transaction of exportto AE had applied the CPM method for the year under consideration, i.e.,Assessment Year 2005-06 and also for Assessment Years 2008-09 to 2010-11. The TPO was of the view that CUP method was most appropriate method to be applied. Since the transaction picked up for comparison byTPO was very negligible, on the basis of small sales made by respondent ofsimilar components, the CIT(A) held that there is no merit in applying theCUP method. CIT(A) also observed that the methodology adopted byrespondent in applying CPM method had been accepted from AssessmentYears 2008-09 to 2010-11 by the TPO himself and no adjustment has beenmade in the hands of respondent. The assessment orders for thoseassessment years are also on record. Therefore CIT(A) came to theconclusion, which was correctly upheld by the ITAT, that there was nomerit in the order of TPO in applying the CUP method to benchmark theinternational transaction of export to AE in the hands of respondent. 9.While dealing with the second part of the transfer pricing adjustmentmade with regard to receipt of commission from the AE, respondent inTransfer Price report had applied the CUP method for benchmarking theinternational transactions with its AE. Respondent had applied CUPmethod in all the years starting from 2006-07 to 2010-11. The TPO forthe assessment year under consideration, i.e., Assessment Year 2005-06applied internal rate of return as the most appropriate method forbenchmarking international transactions, but, in the succeeding yearsstarting from Assessment Years 2006-07 to 2010-11, the TPO had appliedCUP method. CIT(A), therefore has rightly rejected the methodology adopted by TPO and ITAT has correctly upheld the findings of CIT(A). 10.In the circumstances, we find no case is made out for ourinterference. No substantial questions of law arise. 11. Appeal dismissed. (FIRDOSH P. POONIWALLA, J) (K.R.SHRIRAM, J)