TaxTMI 
TaxTMI 
2023 (4) TMI 979
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....tances 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 business of manufacture of pigments, detergents & other chemicals e....
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....rough 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 Tribunal in assessee's own case in ITA No.2558/KOL/2017 for A.Y. 2013-14, wherein the identical issue has been de....
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....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 activity and trading activity of the appellant. On these facts we are therefore of the view that the segmented results of t....
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....onent 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 segmental information as furnished before the TPO & DRP is available at Pages __ to __ of the paper book. For the reasons as set out in the foregoing,....
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....d 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 enterprises in respect of transactions carried on by the assessee. This view of ours is also supported by the order of the Hyderabad Bench of the Tribunal in the case of Foursoft Ltd.....
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....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 the assessee company and submission of segment reporting before the TPO. Therefore, the allegation made by the Revenue in this regard needs to be rejected." 23. For the reasons set out abo....
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....ls 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 of internal RPM for benchmarking the international transactions involving purchase of press chemicals from AEs. We accordingly direct the TPO/AO to consider the assessee's audited trading segment results and to co....
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....ellant 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 functional analysis conducted by the DRP and the remarks given for retaining them are reproduced hereunder: Sr.No Comparable TPO Assessee DRP 1 Asahi Songwon Colours Ltd Selected by TPO FAR being same The company is engaged in pigment Indust....
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....panies 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 different applications and uses in different industries. As a consequence it is noted the price elasticity of the pigments is also very wide, depending it on its variety and actual use. It is also noted that the markets catered by pigment manufacturers, economic forces faced and other commercial factors are also significantly different ....
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....te 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 sales made e during the tenure of the agreement. The ld. A.R. submitted that the rights over the technical/licensed information would end upon termination of agreement and the assessee has no right to use the technical/licensed information beyond that period after the termination of the agreement, whereas the ld. Assessing Officer observed that there was no ....
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....ing 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 compliance with local laws relating to use of such names and marks. 1.4. Licensed Information means such technical information in possession of, and at free disposal of , DIC, on the Effective Date of the Agreement in relation to the Products towards manufacturing, formulation and application and shall also include formulation, production process, quality control, sourcing ....
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....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 Licensed Information COATES shall deliver up to DIC all such Licensed Information in tangible form which may then be in its possession and will keep no copies thereof. 9.1. We find from pages 27 to 29 of the Paper Book, a copy of the approval, from Government of India, Ministry of Commerce & Industry , Department of Industrial Policy & Promotion Secretariat for Industrial Assistance vide approval No. 8(2001)/719(2000)/PAB-IL , New Delhi dated 3.1.2001 , of technical collaboratio....
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.... 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. CIT merely made a bald statement by stating that the assessee by using the licensed information had entered into new dimensions of business from time to time and hence the payment of royalty could. not be equated with the nature of royalty paid in earlier years, which statement is absolutely without any basis and without any material on record. The assessee had submitted before the ld. CIT that the royalty was paid in respect of licensed information obtained from DIC Asia Pacific P....
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....lverine 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 products were not to be manufactured nor was its trademarks to be used and all to be returned to the licensor. It was the submission that in view of the decision of the Hon'ble Calcutta High Court in the case of CIT vs Hindusthan Motors Ltd. 192 ITR 619 it clearly ITA Nos1826-1828/Kol/2012 & C.O.Nos.10&11/Kol/2013 5 DCIT, Circle-2, Kolkata vs M/s. Bata India Ltd..A.Yrs.2005-06 & 2006-07 shows that this royalty payment was a revenue expenditure as no capital assets came into being in the hands of the as....
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....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 ld. AR argued that the issue of royalty payment had been duly examined by the subordinate authorities and the ld. AO had also made an addition of Rs 82,88,935/- attributed towards royalty which is included in the total TP addition of Rs. 4,87,70,886/- and accordingly the same cannot be construed as "lack of enquiry‟ warranting revision u/s 263 of the Act. In this regard, we hold. that the scope of enquiry as envisaged in the statute by the ld. TPO and by the ld. AO are totally different. The scope of the ld. TPO is restricted only to d....
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....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 improvement of the existing business and should., therefore, be held. to be a revenue expenditure. Reference may also be made to the observations of this Court in CIT v. CIBA of India Ltd." 6. Mr.Majumdar also relied upon a judgment in the case of CIT v. I.A.E.C. (Pumps) Ltd. [1998] 232 ITR 316 (SC), wherein Their Lordships of the Supreme Court agreed with the views of the High Court holding that "we are of the opinion that the above features clearly establish that what was obtained by the assessee is only a licence and what was paid by the assessee....
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....g 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 continues to exploit the technology for the agreed period of time, the assessee will be entitled to take the benefit thereof. But in case it does not do so, the payment made is irrecoverable. It is in this sense that the matter was looked into by the High Court of Madras and was endorsed by the apex Court in the case of IAEC (Pumps) Ltd. (supra). The point as a matter of fact is covered by the aforesaid judgment. Nothing really is left for us to do in the matter. 11. We are, therefore, of the opinion that the question has to be answered in the affirmative and in favour of the assessee. 12. ....