TaxTMI 
TaxTMI 
2020 (9) TMI 1284
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....verseas group companies. The assessee's business operations of manufacturing speciality chemicals can be divided into the following three areas. a. Paint and coating materials b. Packaging and building materials c. Performance chemicals and biocides 2.2. Pursuant to the order of the Hon'ble Bombay High Court dated 22nd January 2016, Rohm and Haas India Private Limited merged with Dow Chemical International Private Limited. The effective date of the merger is 1st April 2015.The assessee filed its Return of Income ('ROI') for A.Y.2011-12 on 28th November 2011 declaring total income as NIL after adjusting brought forward losses amounting to INR 19,93,40,340/-. Along with its ROI, the assessee filed Accountant's Report in Form 3CEB [in accordance with section 92E) of the Income-Tax Act, 1961 ('Act)] reporting interalia, the particulars of international transactions undertaken with its Associated Enterprises ('AEs') during A.Y.2011-12. 2.3. The assessee has imported raw materials from its AEs amounting to Rs.232,45,04,170/-. The assessee benchmarked said transaction in its transfer pricing report applying Cost Plus Method (CPM) as Most Appropriate Method (MAM). The assessee stat....
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.... safe limits, an adjustment of Rs.88.24 Crore is to be made towards determination of ALP of the transaction done in this division. The above adjustment is pro-rated for the value of international transactions (AE Cost) as under: (AE Cost/ total cost)* Adjustment (232.45 / 535.68) * 88.24= Rs.38.29 Crores. 2.5. The ld. TPO did not disturb the arm's length determination of any of the other international transactions undertaken by the assessee including the export of finished goods. 2.6. Before the ld. DRP, the assessee filed various objections against determination of ALP by the ld. DRP.During the proceedings before the ld. DRP, the assessee on without prejudice basis vide its letter dated 23/09/2015 filed certain additional evidences that could be used as Comparable Uncontrolled Price (CUP) for chemicals (monomers) imported by the assessee from its AEs which worked out to 78.11% of the total raw materials from AEs. The assessee submitted details pertaining to date-wise comparison of import price with market price, in the form of Independent Commodity Information Services (ICIS) in the form of additional evidence before the ld. DRP. The ld. DRP did not comment on the acceptabili....
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....rices based on contract between third parties and which is relied upon by chemical industry to fix their prices) 7. Erred in rejecting CUP available in case of import of raw materials (i.e.monomers)(available in ICIS website), furnished by the Appellant for justifying the arm's length nature of the transaction of import of raw materials. 8. Erred in inappropriately stating that the Appellant did not provide any details of CUP justifying the high degree of accuracy in terms of comparability such as terms of contract, geographical difference, quantity details and other terms and conditions etc., 9. Without prejudice basis, erred not taking cognizance to Appellant's contention that there will be no transfer pricing adjustment in case of import of raw materials (monomers) based on comparison with market prices published by ICIS, in case the value of adjustment for each of raw materials imported is aggregated. 2.8. Assessee has also raised following additional grounds of appeal vide ground No.23 & 24 vide its letter dated 07/02/2020 filed before us. "Ground No.23: Without prejudice to other grounds of appeal, the learned AO/DRP ought to have considered CUP available in case of ....
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....unt of import of raw materials from its AEs. In support of this proposition, the ld. AR filed a letter dated 13/04/2018, wherein additional evidences were filed in this regard which are enclosed in 1044 of the paper book. The ld. AR vide letter dated 22/10/2018 had also filed additional grounds of appeal to substantiate the commercial rationale in respect of operating loss incurred in its manufacturing segment. He vehementlyarguedthatthegrossmarginsoftheassesseecannotbeignored which are derived based on commercial decisions taken by the assessee by accepting to the selling price quoted by Asian Paints Ltd., which is a third party. B. Usage of TIPS Data Base for application of CUP asMAM The ld. AR in support of application of CUP method as MAM provided data from TIPS Data Base in addition to ICIS, based on the action of the ld. TPO in the subsequent years wherein in assessee's own case, the ld. TPO alternatively applied CUP method using TIPS Data Base to benchmark the international transaction of import of raw materials, though the same was rejected by the ld. TPO as availability of data was not substantial. In view of this the assessee filed a request for admission of additiona....
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....his additional ground is raised without prejudice to his earlier contention that CUP should be accepted as MAM. The ld. AR also argued that ld. DRP had also been following the proper method for selection of MAM. Before the ld. DRP, the combined profitability of both importofrawmaterialsandexportoffinishedgoodsfrom/toAE'sforlast three years were availed. The ld. DRP having accepted TNMM to be MAM cannot choose only for one transaction. This argument was advanced by the ld. AR in order to drive home the point that the ld. DRP ought to have accepted CUP as MAM using TIPS Data Base wherein 68% of comparable data were available for benchmarking the international transaction, in addition to adoption of portfolio approach thereon by considering both positive figures as well as negative figures of various dates in respect of import of materials from AEs and portfolio approach in respect of import of materials from AEs and export of finished goods to AEs to be taken together for the purpose of benchmarking the internationaltransactions. 5.1. The ld. AR argued that though assessee had followed CPM as MAM in earlier years and the same was accepted by the ld. TPO in earlier years, the assess....
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.... the segmental information with respect to its manufacturing business vide page No.1050 of paper book asunder:- a. Saleofproducts - (Primal RH - 4A, Bulk and PiramalRH-1/Bulk) to Asian Paints Ltd b. Sale of other products to Asian Paints Ltd. and sale of products to othercustomers The ld. AR also stated that assessee had incurred operating losses of 29.72% on its operating revenue with regard to sale made to Asian Paints Ltd., on account of specific business of commercial arrangement made with M/s. Asian Paints Ltd., whereas the assessee had made reasonable profits of other manufacturing business. Further the arrangement with Asian Paints Ltd. continued till F.Y.2014-15 post which, the assessee decided to change the product portfolio owing to continuous loss. The ld. AR stated that post such change in the product portfolio of the assessee, the assessee started makingprofits. 5.2. The ld. AR argued that CUP being the more direct method, the same should be preferred over other methods. He also placed reliance on the decision of Co-ordinate Bench of this Tribunal in the case of Serdia Pharmaceuticals India Pvt. Ltd. vs. ACIT reported in 44 SOT 391, Mumbai wherein it was held t....
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....prove that TNMM cannot be considered as MAM in the facts of the instant case and he also vehemently objected to the various comparables chosen by the ld. TPO. due to functional dissimilarities, among others in that regard. The said arguments are not brought out herein in this order in view of the elaborate arguments made by the ld. AR for adoption of CUP to beMAM. 5.5. Per contra, the ld. DR vehemently objected to admission of various additional evidences filed by the assessee detailed hereinabove on the ground that assessee is in the habit of filing additional evidences before the ld. DRP as well as before this Tribunal. The ld. DR vehemently argued that the reasons for incurring losses by the assessee using CPM as MAM during the year was stated to be the commercial decision taken by the assessee pursuant to MOU entered into with Asian Paints Ltd. and that this was stated for the first time before this Tribunal only by the assessee. This was never pointed out before the lower authorities. In other words, the ld. DR argued that assessee had never adduced proper reasoning before the lower authorities for incurrence of losses during the year in its manufacturing business that it wa....
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.... from the said TIPS Data Base. Hence, he submitted that the argument of the ld. AR deserves to be rejected on this grounditself. 6. We have heard rival submissions and perused the materials available on record including the judicial pronouncements relied upon by the parties before us at the time of hearing. It is not in dispute that assessee had been consistently following CPM as MAM in the earlier years. It is not in dispute that assessee had indeed adopted CPM as MAM in its TP study report and even before the ld. TPO. The said method has been rejected by the ld. TPO on the ground that assessee has incurred loss from its manufacturing business during the year under consideration. From the elaborate arguments narrated hereinabove of the ld. AR, we are convinced that the assessee had incurred losses during the year not on account of import transactions from its AEs, but on account of commercial reasons by having lower sales price realization from a third party customer i.e., Asian Paints Ltd., pursuant to MOU entered into by the assessee with Asian Paints Ltd., The reasoning given by the ld. AR in this regard for the incurrence of loss during the year are quite convincing and henc....
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.... being the direct method and being a traditional transaction method which should be preferred over traditional profit method such as RPM andTNMM. (b) TIPS Data Base maintained by the Customs Department which has also been accepted by the Delhi Tribunal in the case of Tilda RicelandPvt.Ltd. vs. ACIT reported in 161 TTJ 213 supra, should be accepted as a valid database. (c) While comparing the data at or near to the relevant date of transactions with the comparable prices using TIPS Data Base, the ld. TPO is directed to adopt portfolio approach to take both the prices that are favourable to assessee as well as that are adverse to assessee in view of a categorical finding of fluctuating prices for the same product already given by the ld. DR which is not disputed by the ld. DR before us. We hold that the revenue cannot do cherry picking of those transactions which are favouring them and ignore those transactions that are detrimental to them while benchmarking the transactions of the assessee with comparable cases. This has already been upheld by the decision of this Tribunal in the case of Boskalis International Dredging C.V vs. DDIT reported in 67 SOT 118 , which decision has bee....
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....d therefore, no adjustment to ALP would be warranted in such a scenario. Accordingly, the ground Nos 1-9 and additional ground No.23 & 24 are allowed for statistical purposes and disposed off in the aforesaid manner. Corporate Tax Issues: 3. Ground Nos. 10 & 11 raised by the assessee are with regard to the action of the ld. DRP upholding the disallowance of foreign exchange loss amounting to Rs.8,18,29,149/-. 3.1. The brief facts of this issue are that the assessee is in the business of manufacturing and trading of chemicals.The assesseeis in the business of manufacturing and trading of chemicals. It regularly imports/ exports raw materials, traded products etc. The assessee had also taken foreign currency loan for the purpose of business which was repaid during the year under consideration. 3.2. In order to mitigate the risk of foreign exchange fluctuation, the assessee enters into forward exchange contracts with the banks. During the year under consideration, the assessee has incurred the net foreign exchange loss of Rs 8,18,29,149 on cancellation of forward contracts. The assessee has claimed the said loss as deduction in the return of income filed for AY 2011-12 since the ....
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....s under:- a) Forward contracts entered into with the Bank are purely to mitigate the foreign exchange fluctuation risk and they are purely for the purpose of its business b) The assessee is not in business of hedging forward contracts. Therefore, the exchange loss incurred on cancellation of forward contracts cannot be treated as speculation loss c) Since forward contracts were entered to safeguard against foreign exchange fluctuation and are related to business of the assessee, they are not speculative in nature. d) RBI specifically allows importer/ exporter to enter into forward contracts based on the exposure available on import/export transactions and it also allows company to hedge the foreign currency borrowings based on underlying exposure. 3.8. The ld. DRP after considering the submissions of the assessee and remand report of the ld. AO and additional evidences filed, stated that loss on cancellation of forward contracts in respect of traded goods should be allowed as deduction and accordingly directed the ld. AO to verify the forward contracts. 3.9. Pursuant to ld. DRP directions, the assessee vide letter dated 12thn January 2016 submitted a bank certificate a....
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..... The ld. AR submitted that the above-mentioned details were produced before the ld. AO/DRP. However, the ld. AO upheld the disallowance of net foreign exchange loss incurred on cancellation of forward contracts without appreciating the fact that forward contracts entered into were related to business of the assessee. 3.15. The ld. AR further submitted that as a practice, the assessee enters into foreign exchange forward contracts with the banks for a period of one month to mitigate the risk of exchange fluctuation loss while discharging the liabilities in foreign currency. Every month-end, the assessee calculates the liability in foreign currency on account of import of goods and services after netting off receivable on account of export of goods and services. The net liability in foreign currency is further split into payable within next month and payable after next month. 3.16. On the 1st day of every month the assessee enters into two separate foreign exchange forward contracts as under: a. One contract for net payable within next month. The term of this contract is for one month. This contract is honoured as per the terms of the forward contract. The assessee purchases for....
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.... contract: Based on above bank certificate, its clearly evident that forward contracts entered were related to import/ export transactions the assessee for the purpose of trades. 3.18. The ld. AR submitted that similar issue had come up in assessee's own case for AY 2010-11, wherein the Hon'ble Tribunal admitted the additional evidence filed and decided the principle issue in favour of the assesseeand remanded the matter to ld. AO for verification of the Bank certificates. The relevant extracts of this Tribunal's decision in assessee's own case for AY 2010-11, wherein it was accepted that the exchange loss on cancellation of forward contracts should be allowed as business deduction is as under: . ".......Hence, we are convinced that these additional evidences deserve,to beadmitted andaccordinglydeem it fit and appropriate lo remand this issue to the file of theld. AO todecide the impugned issue in dispute before us in the light of additional evidences filed by the assessee together with list of forward contracts on cancellation of which foreign exchange fluctuation loss had been incurred by the assessee need to be verified by the ld. AO and, if it is found by the ld....
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....2 sundry creditors account in respect of 2 creditors. This goes to prove that these sundry creditors had apparently emanated out of purchases or revenue expenses incurred by the assessee. We find that nowhere in the orders of the lower authorities, the revenue has brought out the fact that the corresponding purchases / expenses to the sundry creditors were either ingenuine or were incorrect. Once, the purchases made from the parties involved has been accepted by the revenue, there cannot be any addition in respect of closing balance of the very same sundry creditor by treating it as unexplained credit within the meaning of Section 68 of the Act. Reliance in this regard is placed on the decision of the Hon'ble Delhi High Court in the case of Ritu Agarwal in ITA No.325/2008 dated 22/07/2008, copy of this decision has been placed on record wherein it was held as under:- "The finding of AO remained undistributed before the CIT(A) as well and has been accepted by the ITAT Proceedings on the basis, the ITAT observed that the sales, purchases as well as gross profits as disclosed by the assessee have been accepted by the Assessing Officer. Once this is accepted, we are of the opinion th....
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....with the relevant details to the extent of Rs.5,24,61,045/- in the form of additional evidences before the ld. DRP vide letter dated 23/07/2015. Further, the assessee had also submitted additional evidences vide its letter dated 11/02/2020 before us by enclosing the details of legal and professional fees incurred for the parties above Rs.2,00,000/- which alone aggregated to Rs.6,68,28,187/- together with PAN of the parties. From the said details, it could be seen that most of the payments were made for securing services in respect of tax audit and other professional work from various parties. However, these evidences require factual examination of the ld. AO and hence, in the interest of justice and fair play, we deem it fit to remand this issue to the file of the ld. AO for denovo adjudication in the light of various additional evidence submitted by the assessee which are admitted herein and the ld.AO is directed to decide the issue in accordance with law. The assesseeis hereby given liberty to furnish further evidence, if any, in support of its contention. If no discrepancy has been found by the ld. AO, in respect of additional evidences submitted to the extent of Rs.6,68,28,187/....
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....ot touched for the same. Accordingly, it was pleaded that no disallowance of interest could be made in the facts of the instant case. 6.3. The ld. DRP directed the ld. AO to verify the nature of advance of Rs.70,31,18,515/-, whether there are mandatory deposits or not and also directed that if those deposits were found to be mandatory deposits, the same may be treated as deposits made for the purpose of business. Further, the ld. DRP directed the ld. AO to verify the evidences aggregating to Rs.3,81,75,397/- whether the same are for purchase of raw material and directed the ld. AO to delete the disallowance to the extent of evidences filed by the assessee in this regard. 6.4. Pursuant to the directions of the ld. DRP, the assessee submitted the following details with the ld. AO before passing of the final assessment order:- (a) Partywise details of net loans and advances together with the address of parties and nature of such advances. (b) Ledger account for these all four vendors on sample basis amounting to Rs. 1,91,88,845/- to justify the fact of trade advance for purchase of raw materials. (c) To establish the mandatory deposits of Rs.70,31,18,515/-, the assessee submit....
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....e find that this issue is already decided by the Hon'ble Jurisdictional High Court in the case of HDFC bank reported in 366 ITR 505 and accordingly we direct the ld. AO to verify the availability of the own funds with the assessee. If the assessee is having sufficient own funds, then there cannot be any disallowance of interest on borrowed funds, in any case. 6.8. The ld. AO is directed to give findings on all the aforesaid aspects before proceeding to make any disallowance of interest on borrowed funds. The ground No.15-17 raised by the assessee are allowed for statistical purposes of deposits in the aforesaid manner. 7. The ground No.18 raised by the assessee is with regard to upholding the disallowance of depreciation of Rs.2,67,84,398/- on additions made to fixed assets. 7.1. During the year under consideration, the assessee had made addition of Rs.14,40,89,459/- to the fixed assets. During the assessment proceedings, the assessee furnished copy of audited profit and loss account and balance sheet alongwith its schedules and tax audit report vide its submission dated 13/09/2012. The assessee also furnished details of fixed assets vide letter dated 11/11/2014. For want of req....
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....ions to fixed assets had been submitted and sample copies of invoices before the ld. AO vide letter dated 12/11/2015 and 22/01/2016. We find that the ld. AR vehemently argued that details of assets being put to use for the purpose of business is reflected in point No.14 of the tax audit report filed by the assessee after due verification and certification of the tax auditor. He also drew our attention to the relevant extract of the said tax audit report which are enclosed alongwith fact sheet submitted before us. We find that no proper finding has been given by the ld. AO with regard to these documents containing the day on which each of the assets were actually put to use. From the details of each of the assets being put to use, we find that innumerable assets were purchased during the year from various parties. The ld. AO should also be practical in understanding the business model of the assesseeand without the existence of these innumerable assets, the assessee could not have conducted its manufacturing activities by producing the finished goods and generating sales thereon, which has been duly offered to tax. Hence. We deem it fit and appropriate in the interest of justice and....