TaxTMI 
TaxTMI 
2023 (4) TMI 979
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....ll. (2)For that on the facts and in the circumstances of the case and in law, the TPO as well as the Hon'ble DRP erred in rejecting the audited segmental accounts provided by the appellant without pointing out any specific defect or infirmity therein and in that view of the matter the transfer pricing adjustment made with reference to the purchase of raw materials & goods from AEs and the sales made to AEs was impermissible and is liable to be cancelled. (3) For that on the facts and in the circumstances of the case and in law, the TPO as well the Hon'ble DRP erred in law and on facts in rejecting the functional analysis conducted by the appellant and the comparables identified for the purposes of undertaking transfer pricing study; and instead including companies which were functionally different, to be 'comparable' to the appellant company. (4) For that on the facts and in the circumstances of the case and in law, the assessee was engaged in the business of manufacture of printing inks and in that view of the matter the TPO as well the Hon'ble DRP erred in law and on facts in applying a broad comparable strategy and thereby adopting companies engaged in....
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....essee filed e-return of income declaring total loss of Rs.6,66,11,351/-, which was selected for scrutiny through CASS. The statutory notices were duly issued and served upon the assessee. During the course of assessment proceedings, the ld. Assessing Officer found that there were international transactions to the tune of Rs.84,55,49,593/- during the year and accordingly the case was referred to the ld. TPO for determination of Arm's Length Price. The ld. TPO passed order under section 92CA(3) vide order dated 24.10.2017 determined the ALP by recommending upward adjustment of Rs.18,32,12,544/ to the international transactional. Accordingly draft assessment order was framed by the ld. Assessing Officer vide order dated 22.12.2017 passed under section 144C read with section 143(3) of the Income Tax Act, 1961, which was challenged before the ld. DRP by the assessee and the ld. DRP vide order dated 11.07.2018 partly allowed the appeal by restricting the addition to Rs.5,74,32,036/- in respect of transfer pricing adjustment. 5. At the outset, ld. Counsel for the assessee submitted before the Bench that this issue is squarely covered by the decision of the Coordinate Bench of this Trib....
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....cts of the present case. In the given facts of the present case, we note that the appellant has two separate & distinct activities viz., manufacturing of printing inks, blankets and trading in press chemicals. It is well understood that the functions involved in manufacturing activities, risks assumed, assets employed are significantly different and higher than the trading activity. Consequently it is 19 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 generally seen that the profitability of a manufacturing enterprise is higher than the profitability of a trading enterprise. As already held earlier, the cross subsidization of the international transactions in a combined approach is impermissible since it results in distorted presentation of facts. Hence if both the manufacturing & trading segments of the appellant are aggregated, the combined profit margin would throw up an inappropriate result in as much as it cannot be compared either with companies engaged in manufacture of printing ink or companies engaged in trading activities. Further more in order to benchmark each set of transactions distinctly, it is imperative to use the segmented information of the manufacturing act....
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....subject to risks and returns that are different from those of other business segments. A GEOGRAPHICAL SEGMENT is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments." 21. It is thus noted that the AS-17 does not define or identify reportable segment based on the company's function or activity i.e. manufacturing or trading which is carried out in the same/similar products in the same geographical environment and hence there was no occasion for the appellant to have reported its identifiable manufacturing and trading segment in its financial statements since it did not satisfy the criteria laid down in AS-17. We are accordingly of the considered view that there was valid reason for nondisclosure of segment reporting in the audited accounts of the assessee company. At the same time however it is an undisputed fact that the appellant indeed has two identifiable segments i.e. manufacturing & trading which have significantly different FAR profile. The audited ....
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....ts written off cannot be allowed as operating cost. The Assessee respectfully submits that bad debts written off forms part of operating cost. In this connection, reliance is placed on the decision of Almatis Alumina Pvt. Ltd. ITA Nos.726&2361/Kol/2017 Assessment Years:2012-13&2013-14 Page|23 Tribunal in the cases of CA Computer Associates (P.) Ltd. v. Dy. CIT [2010] 37 SOT 306 (Mum.Tribunal) and Dy. CIT v. Vertex Customer Services India (P.)Ltd. [2009] 34 SOT 532 (Delhi). 34. The DR submitted that segmental total cost not available and that the subsidiary in India incurred a loss due to which the entire investment as well as recoverable advance had been fully provided for in the books of account. Being so it is not comparable with the assessee company. 35. We have considered the arguments of both the parties. In our considered view for computing the net margin of the assessee for the purpose of transfer pricing only the cost related to the transaction with the AEs has to be considered and accordingly, we agree with the argument that segmental financial data is to be considered for the purpose of arriving at the net margin on an international transaction with the assessee's ent....
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....ccounts, they had to be accepted. The Coordinate Bench in the matter of Infotec Ltd. v. ITO (supra) held that there was no legal requirement that the segment wise working submitted before the TPO should have been audited by the Assessee's Chartered Accountant. The Coordinate Bench Delhi Tribunal further placed reliance on the decision rendered in the matter of Lummus Technology Heat Transfer BV v. Dy. CIT reported in [2014] 42 taxmann.com 342/64 SOT 47(URO) (Delhi - Trib) wherein it was held that segmental results could not be rejected on the ground that the same was not audited. The TPO/DRP was required o examine the segmental results if the same were maintained in the ordinary course of business. On perusal of, inter alia, the aforesaid decisions, the Coordinate Bench Delhi in the matter of CSR Technology (India) (P.) Ltd vs. ACIT (supra)held that the AO/TPO/DRP erred in disregarding the segmental result of the taxpayer by proceeding to consider the margin of the taxpayer at the entity level for the transfer pricing analysis. In view of above judgments of coordinate benches, we note that there was valid reason for non-disclosure of segment reporting in the audited accounts of....
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....had imported printing inks from AEs worth Rs. 7.06 crores which was sold to unrelated parties for Rs. 8.09 crores resulting in gross profit margin of 13%. Correspondingly the assessee had imported press chemicals from unrelated parties worth Rs. 1.75 crores which was sold to unrelated parties for Rs. 2.02 crores yielding profit margin of 14%. Without prejudice to the assessee's contention that the aforesaid margins would require turnover adjustment and working capital adjustment, it was 24 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 observed that the margin was 13% earned from transactions with related parties was found comparable to margin of 14% earned from uncontrolled transactions and was therefore held to be at arm's length by the CIT(Appeals). The difference in margin of 1% was well within the permitted range of +/- 5% allowed in second proviso Section 92C of the Income-tax Act, 1961. In view of above we do not find any infirmity in the order of the ld. CIT(A). Hence we allow assessee's ground." 25. Following the ratio laid down in the above decision rendered in appellant's own case and the given facts of the case, we uphold the application o....
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.... 28. It is noted that comparables (a) to (c) are not in dispute in as much as all of them have been accepted and retained both by the TPO as well as the DRP. With regard to the comparable (d), M/s Organic Coatings Limited, it is noted that although the appellant had contended for its inclusion before the lower authorities but no reasons are found to have been given either by the AO or the DRP to reject the same. Instead we find that the DRP's order is conspicuously silent about this comparable. It was brought to our notice by the ld. AR that this company, M/s Organic Coatings Ltd was found to be functionally comparable and engaged in the same line of business by the DRP, Delhi in the appellant's own case in the earlier AY 2012-13 and thereafter it was also accepted by the TPO to be a comparable. On these facts and in view of the DRP's order for AY 2012-13, we do not find any reason to exclude the company, M/s Organic Coatings Limited from the list of comparables and hence direct the TPO/AO to consider the same. 29. Now we proceed to examine the six comparables, which were identified by the TPO and retained by DRP, but have been disputed by the appellant. The ....
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....anies are engaged in manufacture of pigments, which in DRP's opinion is an essential raw material in manufacture of printings inks. According to the DRP therefore these companies could be considered as good comparables. We are however unable to agree with this analysis of the DRP. It is an admitted position that each of the above companies manufacture pigments as their final product. None of them manufacture printing inks. It is also not in dispute that the pigments, are used as a raw material along with dyes, resins, solvents & additives to manufacture the printing inks. The use of pigments in the manufacturing process is limited to colour the ink and make it frosted. Accordingly, it is evident that the manufacturing process& assets employed for producing pigments is materially different than the manufacturing process and assets employed for producing printing inks by consuming various components/materials inter-alia including pigments, dyes, resins, solvents & additives etc. In our considered view therefore it is incorrect to hold the supplier of one raw material functionally comparable with the manufacturer. It is further observed that the pigments are of wide variety having....
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....lowed. 9. The issue raised in Grounds No. 8 & 9 is against the disallowance of royalty to the tune of Rs.9,83,66,198/- by the ld. Assessing Officer as well as ld. DRP by treating the same to be capital in nature. 10. At the outset, ld. Counsel for the assessee submitted that the issue is covered in favour of the assessee by the decision of Coordinate Bench of this Tribunal in assessee's own case in ITA No.126/KOL/2017 for A.Y. 2010-11, ITA No. 1363/KOL/2017 for A.Y. 2011-12 and ITA No. 552/KOL/2017 for A.Y. 2012-13, in which the issue has been decided in favour of the assessee. The ld. A.R. submitted that the assessee has granted nonexclusive limited rights to use the technical/licensed information and has also provided that the licensor shall grant training to the personnel of assessee to enable it to use the technical/licensed information besides providing marketing assistance to the assessee and to access to their global customer base. The ld. A.R. submitted that under the agreement, the assessee cannot sell technical /licensed information to any third party and in consideration the assessee would pay royalty every year at the specified rate as a percentage of its net sale....
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....s of all types viz., manufacturing of flushed pigments, sheetfed offset inks, gravure inks, web offset inks, news inks, screen printing inks, varnishes of all types including flush varnish, adhesives including packaging adhesives on a continuous basis. The assessee had approached DIC Japan to make available to it the said technical knowhow for the purpose of upgrading its manufacturing technology for the existing as well as future products relating printing inks and allied products on a continuous basis in its plants located at Calcutta, Mumbai, Noida, Ahmedabad , New Delhi , Madras or any other future place as may be determined by assessee from time to time. It is further stated that the DIC Japan would. make available to assessee the technical knowhow as aforesaid and the right to use the trade names and brand names. In this regard, the following clauses in the said agreement would. be relevant:- 1.3. "Products" will also include the right of COATES to use the Trade Names, Brand Names relevant to the Products, whether the same be registered or otherwise (hereinafter referred to as "Trademarks"), provided, however, it shall be the responsibility of COATES to ensure compli....
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....ich COATES has received rightfully from other sources before or after at the Effective Date. 7.2. The obligation under this article shall survive any termination of this Agreement for ten (10) years. 9. Period of Agreement 9.1. This Agreement will remain in force for 7 years from the Effective Date, provided that DIC, directly or indirectly, owns more than fifty (50) percent of the shares of COATES. 9.2. One (1) year prior to the expiration of this Agreement, the parties shall meet and shall decide jointly either to renew this Agreement for the further period of five (5) years at the expiration of this Agreement or whether it shall not be renewed after the normal date of expiration. 10. Termination 10.1. Either party may terminate this Agreement forthwith: (1) if the other party is in breach of any of the provisions of this Agreement and fails or is unable to remedy the same within 30 days after receiving notice in writing thereof from the other party. (2) if the other party becomes insolvent, bankrupt or is placed liquidation. 10.2. If under the provisions of this Agreement COATES ceases to be entitled to use the Licen....
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....ific Pte Ltd, Singapore and DIC Corporation, Japan has granted license to use technology, know how and other license information for a specified period and hence it cannot be said that the assessee had acquired any business / commercial rights thereon. We find that the ld. CIT had persuaded himself to incorrect assumption of facts that assessee by using the licensed information obtained from DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan had upgraded its P&M and also changed the setting up of P&M to make its finished products viable for the market. This assumption is factually incorrect and does not emanate out of the jurisdictional facts on record. The ld. CIT had not brought any material evidence on record to justify this incorrect assumption thereby leading to incorrect conclusion. We find that the assessee had all along been in the business of manufacture of printing inks and it had not ventured into any new business as could. be evident from its financial statements. We find that the knowhow was provided for upgrading the existing business. This payment of royalty has been allowed as a revenue expenditure in the past by the ld. AO u/s 143(3) of the Act. The ld.....
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....nt entered into by the assessee herein. The Tribunal after examining the relevant clauses of the agreement held. as below:- 16. The ld. AR drew our attention to the royalty agreement which was at pages 8 to 28 of the paper book. He drew our attention to para 2.5 of the agreement which specifically says that all the drawings and other documents comprising the technical knowhow and all notes and copies made there from by licensee shall be marked with the words "Secret and Confidential-property of Wolverine World Wide, Inc.". He further drew our attention to Article 6.1 wherein it has been agreed that the technical know-how imparted to licensee is and shall remain the exclusive and valuable secret property of licensor. He drew our attention to para 6.5 wherein it has been specifically mentioned that on termination of the agreement the technical know-how papers, instruments, documents etc. both original and all copies and translations thereof and all shop or working notes shall be returned to the licensor. He further drew our attention to Article 11.6 when specified the effects of the termination to show that in the event of termination or expiry of the agreement the licensed ....
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....luded payment of subject mentioned Royalty to its AE which was certified to be at Arm's Length by the Chartered Accountant. The assessee benchmarked its royalty transactions by following CUP method and by comparing the royalty percentage made by the comparable companies and arrived at the arithmetic mean of 8.55% on sales. Since assessee paid only 2% as royalty on sales, the assessee justified its royalty payment to be at Arm's Length. The Transfer Pricing Documentation in this regard was also filed during the hearing wherein at pages 44 to 54 of the TP Study Report, the details of benchmarking of royalty and justification of ALP for the same is reflected. The case was referred to the ld. Transfer Pricing Officer u.s 92CA of the Act after obtaining the prior approval of the ld. CIT. The ld. TPO found that the CUP method is not the suitable method for benchmarking the Royalty Payment and other international transactions and adopted Transaction Net Margin Method (TNMM) and made an upward adjustment of Rs 4,87,70,886/- on various international transactions of the assessee including the payment of royalty. Based on this ld. TPO order examining the aspect of ALP of royalty payment, the ....
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.... royalty as revenue expenditure was considered by the Hon'ble Calcutta High Court in the case of Timken India Ltd vs CIT reported in (2014) 51 taxmann.com 184 (Calcutta) dated 30.7.2014 which considered the decisions relied upon by the ld. AR [i.e CIT vs I.A.E.C. (Pumps) Ltd- 232 ITR 316 (SC) and ld. DR (i.e Alembic Chemical Works Co. Ltd vs CIT - 177 ITR 377 (SC) ]. The Hon'ble Calcutta High Court held. as under:- 5. Mr.Majumdar, learned advocate appearing in support of the appeal, submitted that the facts and circumstances of the present case are identical with those in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 (SC). The assessee company, he contended, was already in existence and the assessee was also engaged in the business of ball bearings. The assessee entered into an agreement with the foreign company for the purpose of acquiring a new technology. In an identical situation in the aforesaid case of Alembic Chemical Works Co. Ltd. (supra), the Apex Court held. that "it appears to us that the answer to the questions referred should. be on the basis that the financial outlay under the agreement was for the better conduct and....
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....s to continue to benefit the assessee for a period of six years. It was, as such, a plain case of a capital expenditure on which the assessee was entitled to claim depreciation. The assessee has already been allowed depreciation at the rate of 25%. Accordingly, more than just treatment was given to the assessee and this court should. refrain from interfering with the order under challenge. 10. We have considered the rival submissions of the learned advocates for the parties. The submissions advanced by Ms.Gutgutia are no doubt meritorious and certainly represent one way of looking at the things. Sight cannot however be lost of the fact that the payment made by the assessee is on account of license fee. By making such payment, the assessee has got a permission to use the technology. The money paid is irrecoverable. In case the business of the assessee for some reason or the other is stopped, no benefit from such payment is likely to accrue to the assessee. The license is not transferable. Therefore, it cannot be said with any amount of certainty that there has been an accretion to the capital asset of the assessee. In case, the assessee continues to do business and continue....