TaxTMI 
TaxTMI 
2016 (5) TMI 1474
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....ing the judgment passed by the Hon'ble ITAT, Delhi on similar issue in the Appellant's own case for AY 2006-07. 3.2 The Ld. CIT(A) erred in law and in facts in not allowing capacity utilization adjustment which is required to bring business operations of Appellant at par with comparables to determine the appropriate arm's length profitability of CPP segment. 3.3 The Ld. CIT(A) erred by disregarding the detailed computation of adjustment for differences in capacity utilization which have been submitted during assessment proceedings by the Appellant. 3.4 The learned CIT(A) erred in facts and in law in considering the entity level margin of Hikal Limited instead of Crop Protection Segment which is relevant for comparing with Appellant's CPP segment. 3.5 The learned CIT(A) erred in facts and in law in considering Dhanuka Agritech Limited as comparable although this Company has undergone restructuring and not ought to have been considered as comparable. 3.6 The learned CIT(A) erred in facts and in law in using only single year financial data of comparables instead of multiple year financial data for determining the arm's l....
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....vices * Legal Services 5.5 The Ld. CIT(A) failed to appreciate the fact that the Company is not guided by any motive to evade taxes and has in accordance with the provisions of the Income Tax Act adequately deducted taxes from payments made to AE's for services availed. 5.6 The Ld. CIT(A)erred by not taking the cognizance of the fact that the Ld. TPO has accepted the entire expense incurred for Legal Services during the assessment proceeding for AY 2009-10 and AY 2010-11. 5.7 The Ld. CIT(A)erred in accepting the CUP method as used by the Ld. TPO as the Most Appropriate Method instead of the TNMM method adopted by the Appellant although no comparables under CUP method were used by the Ld. TPO. 5.8 Without prejudiced to ground above, the Ld. CIT(A) has erred in not accepting the CUP provided by the Appellant. 5.9 The Ld. CIT(A) erred on facts in treating the Accounting and Financial services as Shareholder and/or Stewardship Services though these services have not been obtained from shareholder companies. 5.10 The Ld. CIT(A) failed to appreciate the fact that the Company has also earned income by rendering similar kin....
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....n rendering inter group as well as safety consultancy services. It has manufacturing facilities in Mumbai, Tamilnadu for tynex toothbrush bristle and Teflon nonstick quoting and in sable, Gujarat for engineering polymers and crop protection product. The international transactions entered into by the assessee during the year have been tabulated as under: Nature of transaction Total Value (Rs.) Method Selected PLI CPP Segment 706,884,741 340,192,900 7,404,707 TNMM OP/0R Import of raw materials Export of FG Payment of royalty EP Segment 891,904,715 43,132,661 TNMM OP/0R Import of raw materials Export of FG OC Segment 296,055,433 113,127 TNMM OP/0R Import of raw materials Export of FG Packaging Product Segment 8,849,135 19,521,273 TNMM OP/0R Import of raw materials Export of FG Distribution of FG 3,252,842,419 TNMM OP/0R Provision of administrative support services 116,958,511 TNMM OP/0C Availment of Administrative suppor....
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....ann.com 590 (Mum. - Trib.). * The Ld. TPO as well as CIT(A) have mentioned in the order that the company bears various risks including market risk and environment risk and hence the capacity utilization adjustment should not be granted. It may kindly be noted that the adjustment has been proposed by the Ld. TPO as well as CIT(A) for purchase price of goods. The risks assumed by the Appellant have no correlation with purchase price. Such risks would have consequent effect on selling price only and thus, capacity utilization adjustment should be granted to the Assessee Company for calculation of arm's length price of goods. For example, due to weak market conditions, the Appellant will not be able to sell the products at desired price and desired quantities - but this fact has no relationship with the price of raw material which is used in manufacturing the products. Accordingly, the argument of Ld. TPO as well as CIT(A) is devoid of any rational logic. * Similarly, the Ld. TPO as well as CIT(A) have cited comparison of depreciation incurred by the comparables and the Appellant. However, Depreciation also has no direct correlation with determining the price of r....
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.... to CPP segment, it is submitted that low capacity utilization is on account of environment risk, however, the assessee is not getting remuneration for this, therefore, it has to be borne by A.E. and no capacity adjustment should be given. He submitted further that margin without considering depreciation cost comes to 10.89% compared to 3.08% of the assessee. It shows that under utilization of capacity which primarily increases the depreciation cost is not happening in the case of assessee. The ground that Hikal Ltd. segment margin should be considered has been taken by the assessee for the first time before the ITAT hence it should not be allowed since it will require examination of facts. Similarly, the ground that Dhanuka Agritech has gone through restructuring, therefore, should be rejected as a comparable, cannot be taken for consideration since the assessee has failed to demonstrate that the amalgamation has led to increase in profits of the company. If the profile of the new company is same then it would not impact the profitability of the amalgamated company. In this regard, he placed reliance on the decision of Mumbai Bench of the ITAT in the case of Wills Processing Servi....
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.... Officer to consider the matter afresh and work the adjustment to be made in this respect by way of a speaking order to be passed after hearing the assessee." 12. We find that the authorities below proposed adjustment for purchase price of goods whereas we agree with the submissions of the Learned AR that the risk assumed by the assessee had no co-relation with purchase price. Such risk would have consequent effect on selling price only and thus capacity utilization adjustment should be granted to the assessee company for calculation of arm's length price of goods. We also find substance in the contention of the Learned AR that depreciation has no direct co-relation with determining the price of the raw material used in manufacturing the products. Without prejudice to above, the authorities below, however, were not justified in rejecting comparison of depreciation incurred by the comparable Hikal Ltd. furnished by the assessee. The assessee company is engaged in manufacturing of crop protection products, similarly Hikal Ltd. operates in two segments which are crop protection segment and pharmaceutical segments. Since crop protection segment is relevant and comparable to the ....
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....nly single year financial data of comparables instead of multiple year financial data for determining the arm's length price of international transaction for OC segment. We, therefore, find that in these grounds the only grievance of the assessee is that the Learned CIT(Appeals) was not correct in rejecting Sunshield Chemicals Ltd. as comparable for OC segment and in selecting the Paushak Ltd. as comparables for OC segment. 15. In support of the grounds, the Learned AR has made following submissions: (a) Sunshield Chemicals should be selected as comparable * Sunshield Chemicals is not a persistent loss maker as it has earned profits in FY 2005-06 and has been making profits ever since FY 2008-09 (refer Page 18 of CIT(A) order). * For rejecting Sunshield as comparable, the Ld. CIT(A) wrongly relied on Annual report for FY 2004-05 &FY 2005-06, whereas the Assessee's appeal is pertaining to FY 06-07. (Refer Para 6.2.2 on Page 19 of CIT(A) order). As per the said para, the Company suffered losses as a result of its business cycle which is normal for any business. * The Company is a potentially sick company which is merely a reporting requi....
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....any cannot be rejected merely because it is making losses. The submissions of Learned AR before the ITAT remained that as per annual report 2009 of Sunshield Chemicals, it has seized to be a potentially sick company. Submission of the assessee also remained that it is not a persistent loss maker as it has earned profits in financial year 2005-06 and has been making profits ever since financial year 2008-09. We also agree with the Learned AR that for selection/rejection of Sunshield Chemical as comparable, the Learned CIT(Appeals) should not have relied on annual report for financial years 2004-05 and 2005-06 whereas assessee's appeal is pertaining to financial year 2006-07. In view of these submissions of the Learned AR and furnishing annual report 2009 of Sunshield Chemicals for the first time before the ITAT, we find it just and proper to set aside the matter to the file of the learned TPO to consider comparability of Sunshield Chemicals afresh after verification of above submissions of the Learned AR after affording opportunity of being heard to the assessee. 18. So far as comparability of Paushak Ltd. is concerned, we find that submissions of the Learned AR that the lear....
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.... * The Company has a robust mechanism to capture the cost of regional resource providing services to the Appellant. All the data are fed in a database maintained by the Group for this purpose. The relevant extract of the database showing the percentage time allocated by regional resource on sample basis to the Company was submitted both before TPO as well as CIT(A) (please refer Paperbook 4 - Page 1330, 1333 & 1334). All the billable cost is mailed to the Service recipients for their review, (please refer Paperbook 4 - Page 1476-1479). Once confirmed by the Service recipients, the cost of regional resource is charged with a 5% markup. (b) One Single Agreement - Unbundling of Services and Allowing only part is Arbitrary * The appellant entered into one single agreement with every concerned DuPont Group entity (please refer Paper book 2 - Page 653 -692 for agreements in relation to availing of services from Group companies and Page 730 - 734 for agreement in relation to provision of services to Group company on sample basis). It is humbly submitted that Assessee receives services under one agreement from same entity & same people and has similar contractual obligati....
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....). * Further, the Ld. TPOs have been changing their stand for each successive assessment year. Please consider the status of disallowance in relation to the said services as submitted before Your Honor during the hearing. * The same TPO who did assessment in year under consideration (i.e. A.Y. 2007-08) again did assessment for A.Y. 2011-12 and completely changed his stand on principle issue and point of law. Please refer Paper book 5 -at Para 37 on Page 1917.The Ld. TPO commented- "The TPOs approach is based on the assumption that the decision to obtain these services is a business decision of the assessee, which it is free to take. The limited role of the TPO is to determine what would have been the arm's length price for these services. That is what has been done." * Reliance is placed in the judgment of Apex Court in case of Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) and CIT v. Excel Industries [2013] 358 ITR 295/219 Taxman 379/38 taxmann.com 100 that the principle "res judicata" does not apply to Income Tax proceedings by virtue of each tax year being a unit and what is decided in one year may not be applicable to a subsequent....
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....s. The benefit received from a particular service has to be perceived from the point of view of businessman and not the tax authority. During the course of hearing, the Appellant has shown before Your Honors a report of Audit (enclosed in Paper book 3 at Page 829 to 846) conducted by Woona Choi, Ju Young etc. for DuPont India Savli plant. The report is highly technical in nature and requires expertise to even understand it. From the point of view of Ld. TPO and CIT(A), this report may be worthless, but from the perspective of Appellant, it is an extremely important and beneficial report as it deals with safety of people working at Savli plant. * Reliance in this regard should be made in the judgment by the Hon'ble Delhi ITAT in the case of Avery Dennison India (P.) Ltd. (supra) - Para 33. The copy of the order was submitted to Your Honors during the hearing. Reliance should also be placed in the judgment in the case of Hive Communication (P.) Ltd. v. CIT [2013] 353 ITR 200/[2011] 201 Taxman 99/12 taxmann.com 287 (Delhi) by Delhi High Court dated July 8, 2011 and CIT v. EKL Appliances [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 by Delhi High Court dated March 2....
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....y using the CUP method the International Transaction is at Arm's Length. (Please refer Paperbook4 - Page 1328-1329 and Page 1378-1429). Both Ld. TPO as well as CIT(A) rejected the corroborative analysis without giving any cogent reasons. * Since the given service transactions are closely interlinked with the business of the Company, the same was allocated to its business segments (Please refer Paper book 2 - Page 333). Since the business segments (other than CPP & OC for which no adjustment has been proposed by the Ld. TPO on inter group services) have been held at arm's length by the Ld. TPO, the service fees allocated to segments should be held at arm's length price. Reliance in this regard should be made in the judgment by the Hon'ble Delhi ITAT in the case of Avery Dennison India P. Ltd. (supra). (h) Evidences on receipt of services duly submitted * The Assessee Company has duly submitted the evidences on sample basis relating to receipt of services from its AEs. ♦ Marketing and Business Support Services - Evidences relating to conducting of safety audits at Company plant and consequent generation of audit reports (Pleas....
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....d before your Honors during the course of hearing. * All the aforesaid evidences were placed before the Ld. CIT(A) as well as Ld. TPO. In reference to some additional evidences, remand report was obtained by the Ld. CIT(A). The copy of remand report is enclosed at Paper book 4 - Page 1320-1321. (i) No intention to shift profits * The Assessee Company has no intention to shift profits from India to other jurisdictions, having regard to the fact that is some of service provider countries, the Corporate Tax rate is as high as 41% [Japan] and 30% [Australia, New Zealand and Thailand] which is more than or close the Corporate Tax Rate in India. Reliance in this regard should be made in the judgment of Delhi ITAT in case of Hyper Quality India (P.) Ltd. v. Asstt. CIT [2014] 149 ITD 277/45 taxmann.com 102 (Delhi - Trib.) wherein it was held that : "In ITAT's considered view the TP adjustments made to assesses ALP is not justified in view of following reasons: i. Assessee furnished its split financials along with AE. Whereas the appellant has earned profit in India, its AE has continuously sustained losses. Thus with no element of profit in ....
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....ed that the detail of employees of DuPont entities providing services to the assessee, their role and the cost of such employees was maintained in an internal data base which was available to all DuPont group companies and was shown both to the learned TPO as well as Learned CIT(Appeals). Once confirmed by the service recipients, the cost of regional resource is charged with a 5% markup. It was submitted by the assessee that assessee receives services under one agreement from same entity and same people and has similar contractual obligation for whatever it receives under the agreement. It was submitted that there is no specific categorization of services in the agreement as such but the same has been done for internal as well as tax department convenience only. Accordingly, unbundling of services and consequently rejecting the fees paid for part of services on any ground is arbitrary and irrational. We agree with the contention of the Learned AR that the Learned CIT(Appeals) was not justified in allowing some of the services and rejecting others which are being part of the same agreement. This view is fully supported by the decision of Hon'ble Supreme Court in the case of Voda....
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.... proposition cannot be changed. We are thus of the view that the learned TPO is required to consider the issue afresh keeping in mind his stand on identical issues in other assessment years after giving opportunity of being heard to the assessee that facts on the issue in these assessment years are almost similar. While considering the above aspect of the matter, the learned TPO is also directed to consider the relevancy of the submission of the assessee that charge for intergroup services were accepted at arm's length by the Revenue in the other jurisdiction, an evidence to substantiate on mechanism and quantum of charge that DuPont Group has for intergroup services. In support, copy of advance pricing agreement for intergroup services with Australian as well as New Zealand Tax Authority has been submitted before the ITAT, which is required to be considered by the learned TPO while deciding the issue. 26. We also find substance in the grievances shown by the assessee against the reasoning given by the Learned CIT(Appeals) for rejecting intergroup service charge for part of services. The Learned CIT(Appeals) has disallowed some of the services on the grounds that (i) service....
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....i High Court in the case of Li & Fung India (P.) Ltd. (supra) TP holding that once assessee has given a methodology for working of ALP on selection of a particular method supported by appropriate comparables, the working can be dislodged by TPO on the basis of cogent reasons and objective findings. In that case, except theoretical assertions and generalized observations, no objective findings have been given to come a reasonable conclusion. Thus, the rejection of method by TPO as adopted by the assessee was held bereft of any cogency and objectivity. The grievance of the assessee remained that the learned TPO has erred in applying the CUP method in accordance with Rule 10B of the Income-tax Rules, 1962. The further submission of the assessee as an alternative argument remained that even if it is accepted that CUP is right method to benchmark such intergroup service charges, the assessee company had produced a corroborative analysis showing that even by using the CUP method the international transaction is at arm's length. The grievance of the assessee is that both the authorities below rejected the corroborative analysis without giving any cogent reasons. It was submitted that ....
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....stical purposes. 33. The grievances of the Revenue in ground Nos. 1 and 2 raised in its appeal is against the action of the Learned CIT(Appeals) in deleting the adjustment of Rs. 14,19,69,937 under intra group services and allowing the expenses related to treasury charges and safety consultancy services availed. Further grievance of the Revenue is that the Learned CIT(Appeals) has wrongly relied on TP order for assessment year 2010-11 while deciding the issue of some adjustment and in not forwarding by the Learned CIT(Appeals) the new break-up of expenses relating to services availed while calling for remand report from the TPO, as it was additional evidence. 34. In support of the above grounds of the appeal preferred by the Revenue, the Learned CIT(DR) has basically placed reliance on the assessment order. The Learned AR on the other hand tried to justify the first appellate order on the issue with the submission that the first appellate order in this regard is reasoned one and supported with the action of the TPO in the case of assessee itself for the assessment year 2010-11 under the similar set of facts. 35. Having gone through the orders of the authorities below, we f....
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....oject, an INR also pool account was opened with third party bank, which would be available for all the six groups entities resident in India including DuPont India. After noting these aspects, the Learned CIT(Appeals) has noted further that the TPO has allowed the expenses incurred in relation to inter- group treasury services. Considering these material aspects, the Learned CIT(Appeals) has come to the conclusion that there should not be any TP adjustment in respect to treasury charges services. We thus find that the Learned CIT(Appeals) while allowing the claim has given reason for his conclusion to which we concur with. Again regarding process safety management services, the Learned CIT(Appeals) has discussed explanation of the assessee and has placed reliance on the decision in the case of Gemplus India (P.) Ltd. v. Asstt. CIT [2010] 3 taxmnn.com 755 (Bang. - Trib.), Knowrr-bremse India (P.) Ltd. v. Asstt. CIT [2012] 27 taxmann.com 16/[2013] 56 SOT 349 (Delhi - Trib.). The explanation of the assessee in this regard remained that the process safety management (PSM) is the application of management system and controls (program, procedure, audits, evaluation) to a manufacturing or....