TaxTMI 
TaxTMI 
2021 (3) TMI 53
X X X X Extracts X X X X
X X X X Extracts X X X X
....'the Act') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel-l, (hereinafter referred to as the 'Hon'ble DRP') on the following grounds, each of which are without prejudice to one another. On the facts and in the circumstances of the case and in law, the learned AO/ Deputy Commissioner of Income-tax (Transfer Pricing) - l(2)(2) ('TPO') on fact and in law has: GENERAL 1. Erred in assessing the total income at Rs. 99,44,02,394 as against returned income of Rs. 66,91,50,480 disclosed in the return of income filed. TRANSFER PRICING ADJUSTMENTS 1. PAYMENT OF ROYALTY TO ASSOCIATED ENTERPRISE ('AE') General 2. Erred in making an adjustment of Rs. 5,40,32,169 to the total income of the Appellant under Section 92CA(3) of the Act on account of adjustment in the arm's length price of the international transaction of payment of royalty. Rejection of economic analysis undertaken by the Appellant 3. Erred in not considering approvals received from Secretariat of Industrial Assistance ('SIA'), Ministry of Industry and Reserve Bank of India ('....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r AE of the Appellant, to Dow Netherlands. 12. Erred in not considering the difference in definition of 'net sales' as per agreement between Appellant and Dow Netherlands and as per agreement between Dow UK and Dow Netherlands 13. Without prejudice to the above, erred in ignoring the fact that prices of the products in UK is significantly different as compared to India, since UK is a developed country and thereby the royalty paid by Dow UK cannot be compared with the royalty paid by the Appellant. 14. Without prejudice to the above, erred in ignoring the fact that there exists technological differences between the technology availed by the Appellant and Dow UK (where the technology was old) and hence the same cannot be taken as comparable. 15. Without prejudice to the above, even if controlled rate of royalty paid by Dow UK to Dow Netherland is taken as CUP, appropriate adjustment should be provided on the same to eliminate the differences. Variation from the arithmetic mean 16. Without prejudice to the above, the benefit of proviso to section 92C(2) of the Act (Variation of 3% from the arithmetic mean) should be granted....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ailed and benefits derived 24. Erred in stating that the services availed by the Appellant are in the nature of shareholder activities/ routine services without appreciating the nature of services availed from AEs and benefit derived by the Appellant therefrom. 25. Erred in not appreciating the evidences submitted to substantiate services received/ benefits derived/ basis of allocation of costs and disregarded the same without giving any cogent reasons. CORPORATE TAX ADJUSTMENTS I. SHORT TERM CAPITAL GAIN ON SALE OF BUILDING 26. Erred in computing the short term capital gain on sale of building at Rs. 3,05,52,648 as against Rs. 36,17,750 computed by the Appellant. 27. Erred in passing the final assessment order under section 143(3) read with section 144C(13) without taking into account the report of the Department Valuation Officer, as directed by the Hon'ble Dispute Resolution Panel. 28. Erred in considering the stamp duty value of the building amounting to Rs. 3,58,42,240 as the lull value of consideration' as against the actual sale consideration of Rs. 89,07,342, as determined by a Government Approved Valuer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssed by the TPO under Sec. 92CA(3), dated 31.10.2017 passed a draft assessment order under Sec. 143(3) r.w.s 144C(1), dated 22.12.2017 and proposed to assess the income of the assessee company at Rs. 99,44,02,390/-. 5. Objecting to the additions proposed by the A.O the assessee carried the matter before the Dispute Resolution Panel-1, Mumbai (for short "DRP"). Insofar the issue of determination of ALP of the payment of royalty by the assessee to its AE, viz. Dow AgroSciences BV, Netherland was concerned, the DRP observing that the facts therein involved in context of the aforesaid issue in the assessee's case for the year in question were pari materia with the facts as were there in its case for A.Y 2011-12 thus, followed the view taken by the predecessor panel and upheld the transfer pricing adjustment made by the TPO and rejected the objection of the assessee. As regards the objection pertaining to the transfer pricing adjustment of Rs. 24,42,84,844/- made by the A.O regarding the intragroup services received by the assessee from its AEs, the DRP was of the view that the facts of the case and assessee's submissions and the issues at hand were squarely covered against the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d on the orders of the lower authorities. However, the ld. D.R could not controvert the claim of the counsel for the assessee that the issues pertaining to the transfer pricing adjustments for the year in question were squarely covered by the order of the tribunal in the assessee's own case for A.Y 2011-12 in ITA(TP)A. No. 203/2016, dated 11.01.2021. 10. We have perused the order of the DRP for the year in question and find that insofar the issues pertaining to the transfer pricing adjustments are concerned, viz.(i) royalty paid by the assessee to its AE, viz. Dow AgroSciences BV, Netherland; and (ii). intra-group services received by the assessee from its AEs, the panel had merely relied on its earlier order passed in the case of the assessee for A.Y 2011-12 and had not given any independent findings as regards the said respective issues. Accordingly, in the backdrop of the aforesaid admitted factual position we shall deal with the respective issues pertaining to the transfer pricing adjustment made by the A.O/TPO in the backdrop of the view taken by the Tribunal in A.Y 2011-12 in its order passed in ITA(TP)A. No. 203/2016, dated 11.01.2021. 11. Insofar the issue pertaining ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rticle 4 shall cease at the end of the seventh (7th) year after the Commencement of Production Date. A. Upon fully meeting all its obligations under this Agreement, LICENSEE shall have a fully-paid, non-assignable, non-exclusive right, without the right to sub-license: to practice, only at the Plant, the Process utilizing Technology received prior to such consummation, and to use and sell Product made thereby and Product Formulations formulated from such Products, in India and export for sale to such countries outside India as may be mutually agreed in writing from time to time between LICENSOR and LICENSEE. B. In the event LICENSEE subsequently wishes to receive from LICENSO any additional technical information related to the production of Product or to use Technology received under this Agreement outside the scopeo the license granted in this Article 11.1 subsequent to consummation of this Agreement , it shall first negotiate a new technology license agreement with LICENSOR." On a perusal of the aforesaid clause, we find that the same inter alia places the respective parties at a liberty to extend the same. As per the "agreement" the licensee i.e the as....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... use technology received under the terms of the said agreement, it would be required to negotiate a new technology license "agreement" with the licensor. However, we find that the DRP had wrongly observed that as per Clause 11.1 of the aforesaid "agreement" the new agreement was to be executed only if the assessee company received any additional technology. As observed by the DRP, since the assessee had not produced any evidence of having received any new technology, therefore, it was not obligated to pay any royalty to its AE. Summing up, the Clause 11.1 required the AE to provide additional information in relation to the technology already provided. In the backdrop of the observation of the TPO in his 'remand report' that the assessee had during the year under consideration got some kind of technical support from its AE, we are unable to comprehend as to on what basis it has thereafter been concluded by the lower authorities that no new "agreement" was required to be executed by the assessee with its AE. Admittedly, after consummation of the original "agreement", dated 23.01.1997 the assessee was to be vested with a fully paid, non-assignable and non-exclusive right, tho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce from its AE. In our considered view the receipt of technical assistance by the assessee during the year under consideration from its AE being related to the production of the product and/or use of the technology received as per the original "agreement", after its consummation, safely justified negotiation of the new technology license "agreement" between the assessee and the licensor i.e the AE, and thus, the payment of royalty as per the terms therein contemplated. Also, we find substantial force in the claim of the ld. A.R that the TPO/DRP had wrongly construed the Clause 11.1(B) of the original "agreement". All that Clause 11.1(B) required was receipt of additional technical information in relation to the technology already received by the assessee as per the original "agreement". However, the lower authorities had wrongly observed that the "agreement" required receipt of new technology by the assessee from its AE. Be that as it may, we find substantial force in the claim of the assessee that now when on the basis of the supplementary royalty "agreement", dated 08th June, 2005 that was made effective from 01st June, 2004, i.e A.Y 2005-06 the assessee had re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e relevant extract of Rule 10B is reproduced as under: "(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of completion and whether the markets are wholesale or retail." Accordingly, now when the royalty paid by the assessee to its AE was approved by the Government of India and RBI by their respective approvals dated 17th September, 1996 and 22nd January, 1997, and the same was also in conformity with the rates that were prescribed in the "Press Note No. 2 (2003 series)", dated 24th June, 2003, therefore, no infirmity could be related to the assessee in considering the same for benchmarking the royalty paid by the assessee to its AE using CUP method. Insofar the reliance placed by the TPO on the judgment of the Hon'ble High Court of Punjab and Haryana in the case of Coca Cola India Inc. Vs. Asst. CIT (2009) 309 ITR 194 (P&H), we find that the said order had been relegated by the Hon'ble Supreme Court vide its order, viz. M/s Coca C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er passed by the TPO, we find that he had without following any of the methods prescribed in Sec. 92C of the Act determined the arm's length price of the royalty paid by the assessee to its AE at Nil, for the reason, that as per him the assessee was not required to pay any royalty without receiving any new technology from the AE. In our considered view the TPO had clearly traversed beyond scope of his jurisdiction which is restricted to determination of the arm's length price of the transaction by following any of the method provided in Sec. 92C of the Act. Also, the TPO is not vested with any jurisdiction to question the commercial expediency of the transaction carried out by the assessee with its AE, and his jurisdiction is restricted to determining of the arm's length price of the transaction. Our aforesaid view is fortified by the following judicial pronouncements: "(a) CIT vs. Lever India Exports Ltd. (78 taxmann.com 88) (b) CIT vs. Merck Ltd. (73 taxmann.com 23) (c) CIT vs. Johnson & Johnson (80 taxmnn.com 269) (d) CIT vs. RK Ceramics India P. Ltd. (78 taxmann.com 230) (e) Firmenich Aromatics India (P) Ltd. Vs. DCIT (96 taxmann.com....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the same, thus, being in blatant violation of the mandate of Sec.92F(ii) r.w. Rule 10B(i)(a) could not have been considered for the purpose of determining the arm's length price of the royalty paid by the assessee to its AE. Our aforesaid view is supported by the decision of a 'third member' of the ITAT, Mumbai in the case of Tecnimont ICB P. Ltd. Vs. Addl. CIT (2012) 24 taxmann.com 28 (Mum)(TM). In the said case, it has been held by the Tribunal that a controlled transaction or a transaction with an AE cannot be taken as a comparable for the purpose of determining the arm's length price of an international transaction of the assessee with its AE. Accordingly, in the backdrop of our aforesaid deliberations, we herein vacate the alternate transfer pricing adjustment of Rs. 1,37,52,774/- made by the TPO. 18. We shall now deal with the sustainability of the arm's length price determined by the TPO in the course of the remand proceedings by benchmarking the royalty transaction on the basis of an "agreement" between AARC Corporation and CCT Corporation found in the Royaltstat database. As observed by us hereinabove, the TPO in the course of the remand proceedings by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rpose of benchmarking the payment of royalty by the assessee to its AE. (iii) As the aforesaid "agreement" had been entered into between the parties based in USA, therefore, on account of geographical difference between the aforesaid agreements the same could not have been feasibly adopted for the purpose of comparability. (iv) Lastly, we find that as the products licensed under the aforesaid "amendment agreement" are biological granular matrix pest control as opposed to "Chlorpyrifos" in the case of the assessee, therefore, on account of the variance in the products also the aforesaid "agreement" could not have been selected for the purpose of comparability. In the backdrop of our aforesaid observations, we are of the considered view that the benchmarking of the royalty paid by the assessee to its AE could not have been carried out by selecting the aforesaid royalty "agreement". Accordingly, we vacate the alternate benchmarking that was suggested by the TPO in the course of the remand proceedings. 21. Although we have held that as the royalty paid by the assessee to its AE was approved by the Government of India and RBI, vide their respective ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by applying TNM method:- (i). Good Year India Ltd. Vs. DCIT (2016) 70 taxmann.com 67 (Delhi) (ii). Frigoglass India P. Ltd. Vs. DCIT (2016) 68 taxmann. Com 370)(Delhi) (iii) DCIT Vs. Air Liquide Engineering India P. Ltd. (2014) 43 taxmann.com 299 (Hyd). (iv). Daksh Business Process Services P. Ltd. Vs. DCIT (2016) 72 txamann.com 44 (Delhi) In the backdrop of our aforesaid deliberations, we are of the considered view that as the net margin of the assessee company is shown to be higher than the margin of the comparables, therefore, the adjustment made by TPO/DRP on the said count also could not have been sustained. 22. On the basis of our aforesaid observations, we herein conclude that the transfer pricing adjustment made by the AO/TPO as regards the royalty paid by the assessee company to its AE viz. Dow AgroSciences BV cannot be sustained and is liable to be vacated. Accordingly, we herein direct the A.O to delete the transfer pricing adjustment of Rs. 4,29,47,493/-. The Grounds of appeal Nos. 1 to 13 are allowed in terms of our aforesaid observations." As the order of the DRP for A.Y 2011-12 that was relied upon by the pane....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ronouncements that have been pressed into service by them to drive home their respective contentions. On a perusal of the records, we find that the TPO at the fag end of the proceedings on 25th January, 2014 [i.e 5 days before the expiry of the time limit for passing the order under Sec. 92CA(3)] had called upon the assessee to furnish the details of the services which were rendered by its AEs. As the assessee was allowed insufficient time, therefore, it had vide its letter dated 29th January, 2014 submitted the details as regards the services rendered by the AEs to the extent the same at the relevant point of time were readily available with it. After perusing the details furnished by the assessee, it was observed by the TPO that the assessee had failed to establish the services rendered by its AEs on the basis of supporting documents and evidence which were required to be maintained. Also, it was observed by the TPO that the assessee could not produce any evidence relating to direct and tangible benefits that was received by it from the services rendered by the AEs. Backed by his aforesaid observations, the TPO determined the arm's length price of the aforesaid services ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee from its AEs, however, it was observed by him that the benefit which was received from availing the said services could not be shown by the assessee. DRP vide its order dated 26th November, 2014 though accepted that the assessee company had received services from its AEs, but then, it held that the services so received were general in nature. 27. We find that in the backdrop of the aforesaid facts the assessee in order to further substantiate the receipt of intra-group services from its AEs had vide its letter dated 09th April, 2015 submitted supporting documents as "additional evidence" before us, viz. emails, screenshots, manuals, CPA certificates etc. In our considered view, as the assessee was not afforded sufficient opportunity to produce the aforesaid documentary evidence in the course of the proceedings before the lower authorities, and the same would have a bearing on the adjudication of the issue under consideration, therefore, the same in all fairness merits to be admitted. It is stated by the ld. A.R before us that after perusing similar evidence that was submitted by the assessee with the TPO/DRP in the immediately succeeding years i.e A.Y. 2011-12 and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e the income received by the AEs had already been taxed on the basis that the services had been rendered by them. Adverting to the determining of the arm's length price of the intra-Group services, it was stated by the ld. A.R that the lower authorities had observed that on application of CUP method the arm's length price of the intra-Group Services was determined by the TPO at nil. However, it was stated by the ld. A.R that the TPO without bringing a single comparable on record, and without following any of the method provided in Sec. 92C of the Act had determined the arm's length price of the services received by the assessee from its AEs at Nil. Reiterating the contentions that were advanced while assailing the determination of the ALP of royalty paid by the assessee to its foreign AE at nil by the TPO without following any of the prescribed method provided in Sec. 92C, the ld. A.R had on the same count challenged the validity of the jurisdiction assumed by the TPO for making the transfer pricing adjustment regarding the intra-group services received from its AEs. On the basis of the aforesaid facts, it was submitted by the ld. AR that the TPO/DRP had not only erred on facts in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ernational transaction had resulted into an economic benefit or not, for the reason, that the same would depend on various factors and would be beyond the control of the assessee. Apart from that, whether a benefit is obtained is a matter of perception for a businessman, and it is not open for the revenue to sit in judgment over this exercise. Accordingly, we are unable to subscribe to the rejection of the benchmarking analysis by the TPO/DRP, for the reason, that the assessee had failed to demonstrate the benefits which were derived by it from rendition of the services by its AEs. Our aforesaid view is fortified by the following judicial pronouncements: "(a) CIT vs. Lever India Exports (78 taxmann.com 88) (Bom.) (b) PCIT vs. RAK Ceramics (78 taxmann.com 230) (AP) (c) AWB India P. Ltd. Vs. DCIT (50 taxmann.com 323) (d) Emerson Climate Vs. DCIT (ITA No. 2182/Pun/2013) (e) Merck Ltd. Vs. DCIT (69 taxmann.com 45) (f) Schneider Electric India P. Ltd. Vs. DCIT (82 taxmann.com 364) (g) Sabic Innovative Plastics India P. Ltd. Vs. ACIT (88 taxmann.com 810) Also, we are unable to persuade ourselves to subscribe to the d....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... brought to tax in the hands of the AE's as fees for services rendered as per the rates provided for in the relevant article in the tax treaty dealing with fees for technical support services, then, it would not be open for the department to take a contrary stand in the case of the assessee, and contend, that no services had been rendered by the AEs, for the reason, that the said income received by the AEs had been taxed on the basis that the services were rendered by them. Again, we though are principally in agreement with the aforesaid claim of the assessee, however, we find that though the assessee during the year under consideration was in receipt of intra-group services from its various AEs but documentary evidence to support its claim that returns of income had been filed by the AEs and the amounts received from the assessee had been brought to tax in their hands is available before us only in respect of one such AE, viz. Dow Chemical Pacific Singapore Pte. Ltd., and no such details in respect of the remaining AEs had been brought to our notice. Accordingly, in the backdrop of the fact that complete details in respect of the remaining AEs supporting the aforesaid claim of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... transaction and subject it to separate analysis, reliance is placed on the following judicial pronouncements : (a) Magneti Marelli Powertrain India P. Ltd. (75 taxmann.com 213) (Del.) (b) Woodward India Pvt. Ltd (ITA No. 916/Del/2015) (Para 5.3-5.5 Pg. 1633- 1635 of Compilation). Accordingly, in the backdrop of our aforesaid deliberations, we are of the considered view that in light of the aforesaid peculiar facts of the case, the benchmarking of the intra-group services received by the assessee from its AEs by applying TNM method could not have been faulted with by the lower authorities. 32. We may herein observe that the ld. D.R had stated that majority of the payments were made by the assessee to a Chinese AE, which primarily comprised of a payment stated to have been made in respect of services of a person, viz. Mr. Jeorge La Roza who is stated to be responsible for overall commercial performance of the region. It was submitted by the ld. D.R that the assessee except for filing the copies of the e-mails which only revealed the involvement of the aforesaid person in managerial support survives, had however, failed to demonstrate the basis of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing with the view therein taken respectfully follow the same. Accordingly, the A.O/TPO are herein directed to vacate the transfer pricing adjustment of Rs. 24,42,84,844/- made towards intra-group services received by the assessee from its AEs. The Grounds of appeal Nos. 17 to 25 are allowed in terms of our aforesaid observations. 13. We shall now deal with the grievance of the assessee that the A.O had erred in computing the Short Term Capital Gain (for short "STCG") on sale of building at Rs. 3,05,52,648/- as against Rs. 36,17,750/- reflected in the return of income. The controversy involved in respect of the aforesaid issue lies in a narrow compass. As is discernible from the orders of the lower authorities, the assessee company had during the year in question entered into an agreement with Nisarg Co-operative Housing Society Ltd. for sale of building and land appurtenant thereto situated at Chiplun, Maharashtra in June, 2013. In the course of the assessment proceedings, it was observed by the A.O that though the sale price of the property as per the 'agreement' was Rs. 1,25,00,000/- however, the same as per the stamp duty valuation/market value was Rs. 4,07,06,000/-. It wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as the deemed sale consideration within the meaning of Sec. 50C of the Act, the same was rejected by the A.O, for the reason, that as the assessee had not raised any objection as regards the valuation of the property at the time of registration of the sale documents. 14. Before us, it was submitted by the ld. A.R that as the assessee being aggrieved with the refusal of the A.O to make a reference to the valuation cell had filed an appeal with the CIT(A). It was submitted by the ld. A.R that a direction may be given that sale consideration for the purpose of Sec. 50C be adopted as would be so directed by the CIT(A). 15. Per contra, the ld. D.R relied on the orders of the lower authorities. 16. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record in context of the aforesaid issue in question. Admittedly, the assessee had vide its letter dated 11.12.2017 objected to the adoption of the stamp valuation rate as the deemed sale consideration for the purpose of computing the capital gain within the meaning of Sec. 50C of the Act. However, as noticed by us hereinabove, the A.O had scrapp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... its right to seek reference to the Valuation Officer for valuation of the property in question. At the same time, we are unable to comprehend as to on what basis an appeal had been filed by the assessee with the CIT(A) against the refusal on the part of the A.O to make a reference to the Valuation Officer. No such right to prefer an appeal against a declining on the part of the A.O to make a reference to the Valuation Officer within the meaning of Sec. 50C of the Act can be deciphered from Sec. 246A of the Act. Be that as it may, our aforesaid observations are in context of the submission of the ld. A.R that a direction may be given to the A.O to adopt the sale consideration as would be directed by the CIT(A), which being beyond our comprehension is herein rejected. However, in the backdrop of the fact that the assessee before us had neither disputed the value so adopted by the stamp duty valuation authority for the purpose of payment of stamp duty in respect of the property in question, in any appeal or revision nor made any reference before any other authority, court or the High Court, had however, admittedly objected to the adoption of the stamp duty valuation as the deemed sal....