Itxa/1829/2016 Of Pr. Commissioner Of Income Tax-2 v. M/S Audco India Ltd

Priya Soparkar IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1829 OF 2016 Pr. Commissioner of Income-Tax-2 … Appellant V/s. M/s Audco India Ltd.… Respondent --- Mr.Suresh Kumar for the Appellant.Mr.Nitesh Joshi i/by Mr.Atul Jasani for the Respondent. --- CORAM : AKIL KURESHI AND M.S.SANKLECHA, JJ. DATE : MARCH 6, 2019. P.C.:- 1.The Appeal under Section 260-A of the Income Tax Act,1961 (the Act), challenges an order dated 16[th] December, 2015 passed by the Income Tax Appellate Tribunal (the Tribunal).This Appeal relates to Assessment Year 2004-05. 2.The revenue has urged the following questions of law forour consideration: “(A) Whether in the facts and circumstances of the case and in law was the Tribunal justified inupholding the order of CIT (A) benchmarkinginternational transactions of sale of Valves to itsAssociated Enterprise (AE) viz. one L & T LLC byaggregating all its transactions with the A.E. andcomparing it with aggregation of all comparableNon AE transactions? (B) Whether on the facts and circumstances of thecase and in law was the Tribunal justified in law inupholding the order of CIT (A) deleting theTransfer Pricing Adjustment on export of Valves(Rs.8,79,23,415/-) and Valves in Kit form(Rs.1,44,93,984) to its AE in USA viz. Flow ServeSulphur Spring (Flow Serve) by holding thebenchmarking of international transactions bycomparing controlled (AE) transactions withuncontrolled (Non-AE) transactions? 3.The respondent is joint venture company between L & T Limited and Audco Limited. The respondent is engaged inmanufacture and sale industrial valves. It sells its valves togroup companies and also to others. -4.ReQuestion (A) (a)During the assessment proceedings, the Assessing Officernoticed that the respondent had sold valves to its A.E. i.e. one L& T LLC, U.S.A.. On a reference the Transfer Pricing Officer(TPO) computed the arms length price (ALP) of the sale of valves Priya Soparkar 39 itxa 1829-16-o-s to L & T LLC. This the TPO did after recording the fact that therespondent was exporting finished valves not only to its A.E. oneL & T LLC, USA for sale in the U.S. market but also otherdistributors and customers in USA. The TPO thereafter shortlistedonly those transactions where the prices charged to the A.E. wasless than that charged to unrelated parties in USA. On the abovebasis alone he made an upward revision/adjustment in respectof the price charged by the respondent to its A.E. i.e. L & T LLC,USA. On the basis of the above order of the TPO, the finalassessment order was passed by Assessing Officer. (b)Being aggrieved on the above transfer pricing adjustmentthe respondent challenged it in appeal before the Commissionerof Income Tax (Appeals)(CIT (A)). In appeal the CIT (A)allowed the appeal of the respondent holding that during the yearvarious standard valves were supplied not only to its AE i.e. L &T LLC, USA but also to others i.e. non AE entities in USA. TheCIT (A) found that in some cases the respondent chargedhigher rate from its AE and in other cases lesser than thosecharged to non AE's. However he was of the view that the AE and Priya Soparkar49 itxa 1829-16-o-snon AE transactions are to be separately aggregated, then thedifference on aggregation of transactions is to be determined todecide the ALP. The CIT (A) found that if the above exercise isdone then the difference between ALP and the price at which itsold to AE was less than 5% as provided in Section 92C of theAct. Therefore, the addition on account of sales of valves to L &T LLC, USA made by the Assessing Officer was deleted. Priya Soparkar49 itxa 1829-16-o-snon AE transactions are to be separately aggregated, then thedifference on aggregation of transactions is to be determined todecide the ALP. The CIT (A) found that if the above exercise isdone then the difference between ALP and the price at which itsold to AE was less than 5% as provided in Section 92C of theAct. Therefore, the addition on account of sales of valves to L &T LLC, USA made by the Assessing Officer was deleted. (c)Being aggrieved with the order of the CIT (A) the revenuecarried the issue in appeal to the Tribunal. The Tribunal upheldthe order of the CIT (Appeals). It found the respondent's claimwas based on aggregation of sales of valves to AE's andcompared it with aggregation of sales to non A.E.. It found thatthe TPO was doing the comparison on selective basis i.e. onlyselecting those transactions where the price charged to A.E. isless than the price charged to non A.E. and enhancing its ALP.The Tribunal in the impugned order concluded that the mostlogical approach is to aggregate all the transactions madeduring the year with the AE and with non AE separately andthereafter determine the ALP of the respondent's transactions 59 itxa 1829-16-o-s with the A.E.. The difference between the prices charged to A.E.and non A.E. being within the tolerance limit of 5% as held inthe order of the CIT (A) was found correct. Thus, dismissed theappeal of the Revenue. (d)Mr.Suresh Kumar, learned counsel appearing in respect ofthe appeal submits that the approach adopted by the TPO wascorrect approach. However, he is not able to point any flaw in theapproach of the CIT (A) and the Tribunal in adopting theaggregated approach in the present facts. Thus, the view taken bythe Tribunal of determining the ALP of sales to AE on thecomparison of the aggregation of AE and non AE transactions(taking its arithmetical mean) does not call for any interference. (e)Therefore, question No.1 as proposed does not give rise toany substantial question of law. Thus, not entertained. 5.Re:Question No. B (a)During the assessment proceedings on a reference to theTPO, it was noted that the respondent had exported finished Priya Soparkar 69 itxa 1829-16-o-s valves and valves in kit form to its AE i.e. Flow Serve SulphurSpring (Flow Serve) USA and also its group companies acrossthe globe. It was also found that finished valves and kitssupplied to Flow Serve was unique in nature. It was found thatsales to Flow Serve U.S.A. were at a loss. The respondent hadduring the proceedings before TPO placed reliance upon twocomparable companies viz. BHEL & KSB Pumps to determinethe transfer pricing adjustment at cost of production plus 15%.However, the TPO found that supply of valves and kits to othergroup companies was at a higher price. Therefore, the TPOadjusted the profit margin ( average) of similar supplies made togroup companies (AEs) to enhance/revise the sales price ofvalves and kits sold to M/s Flow Serve, U.S.A. The AssessingOfficer passed an Assessment Order in terms of the TPO'sdirections resulting in enhancement of Rs.8.79 crores (valves) andRs.1.44 crores (kits). (b)Being aggrieved by the order of the Assessing Officer onthe above issue, the respondent filed an appeal to the CIT (A). Byorder dated 27[th] October, 2012 the CIT (A) held that the two Priya Soparkar 79 itxa 1829-16-o-s (b)Being aggrieved by the order of the Assessing Officer onthe above issue, the respondent filed an appeal to the CIT (A). Byorder dated 27[th] October, 2012 the CIT (A) held that the two Priya Soparkar 79 itxa 1829-16-o-s comparables viz. BHEL and KSB Pumps were not accepted bythe TPO without establishing, how and why they wereinappropriate. It further held that selection of profit margins ofthe respondent's transactions with Flow Serve with salesmade/prices charged by the assessee to its A.E.'s in other countriescannot be the basis for determining the ALP of sales made toother AE's in different countries. This as they are in differentgeographical location i.e. different from the USA, thus notcomparable. Therefore, allowed the appeal of the respondentassessee. (c) The revenue being aggrieved, filed an appeal of theTribunal. The impugned order of the Tribunal held that TPO hadclearly made a fundamental error in determining the ALP ofsales of vales and kits made to Flow Serve by comparing itsmargin with other sales by the respondent to its AEs in differentparts of the world. The Tribunal held that in terms of theprovision of the Act the comparison to determine the ALP cannotbe done by comparing the prices charged to other AE's i.e.controlled transactions. The Tribunal further held that the 89 itxa 1829-16-o-s transfer pricing adjustment of transactions with AEs in USA has tobe done/arrived at by making comparisons with uncontrolledparties in USA. In the aforesaid circumstances, impugned order ofthe Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s order. (d)We note that Chapter X of the Act is a special provisionrelating to avoidance of tax. Section 92 deals with computationof income from international transaction having regard to ALP. Itprovides any income arising from the international transactionshall be computed having regard to the ALP. The ALP is definedunder Section 92F(ii) of the Act to mean a price which is appliedor proposed to be applied in transactions between persons otherthan AE's in uncontrolled transactions. This is further supported byRule 10A(d) where uncontrolled transaction has been defined asa transaction between enterprises other than with A.E's. whetherresident or non-resident. In view of the above clear position inlaw, the TPO ought to have arrived at the ALP of the respondent'ssale to its A.E.viz. Flow Serve by only comparing it withuncontrolled transaction of sale to in USA. Thus the approach of Priya Soparkar 9 itxa 1829-16-o-s the TPO is contrary to the clear provisions of law. Besides asheld by the Tribunal the comparison has to be region /countryspecific, which in this case, the TPO has completely ignored. (e)Therefore, the view taken by the Tribunal does not call forany interference as it is in accordance with the self evidentprovisions of law. Thus, this question as proposed does not giverise to any substantial question of law. Thus, not entertained. 6.Accordingly, Appeal dismissed. No order as to costs. (M.S.SANKLECHA,J.) (AKIL KURESHI,J.)….