AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (5) TMI 156
X X X X Extracts X X X X
X X X X Extracts X X X X
....ating the proposed adjustment, draft assessment order was passed by Ld. AO on 28-12- 2017 which was subjected to assessee's objections before Ld. DRP. Subsequently, final assessment order was passed by Ld. AO pursuant to the directions of Ld. DRP confirming certain additions. Aggrieved, the assessee is in further appeal before us. The grounds raised by the assessee read as under: - Part A - General Ground 1. Based on the facts and circumstances of the case, the Hon'ble Dispute Resolution Panel (Hon'ble DRP) has erred in law and facts, in passing a cryptic order i.e. mere acceptance of the orders of the lower authorities (learned Deputy Commissioner of Income-Tax, Transfer Pricing Officer - 2(1), Chennai (Ld. TPO)/ learned Deputy Commissioner of Income-Tax, Large Tax Payer Unit 2, Chennai (Ld. AO) without independent reasoning and findings. Accordingly, the directions passed by the Hon'ble DRP is bad in law and needs to be disregarded. Part B - Grounds of objection pertaining to transfer pricing adjustment on payment of management service charges 1. The Hon'ble DRP/ Ld. AO/ Ld. TPO, have erred in law and in facts, by disregarding t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oach which lacks any business/commercial merit. Part C- Grounds with respect to disallowance of deduction claimed with respect to profits and gains from the undertaking set up in Jammu and Kashmir under section 801B(4) of the Act and disallowance of excess depreciation claimed with respect to UPS and electrical installations Disallowance of claim of deduction under section 801B of the Act. Specific Grounds 1. The Ld. AO/ Hon'ble DRP ought to have appreciated that the business carried out by the Appellant in the undertaking set up in Jammu & Kashmir (Jammu plant') would qualify as an 'eligible business' as per the provisions of section 801B of the Act and consequently, the profits and gains derived from the Jammu plant would be eligible for deduction under section 80IB of the Act. 2. The Ld. AO/ Hon'ble DRP failed to appreciate the fact that the business of the Appellant as carried out in the Jammu plant qualifies as 'manufacture' as defined in section 2(29BA) of the Act. 3. The Ld. AO/ Hon'ble DRP has erred in holding that the activity carried out in the Jammu plant by the Appellant does not result in a ch....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lding that the facts can change every year, and in light of this, the Ld. AO can take a different view in subsequent years without being influenced by the stand taken in the earlier years. 12. Without prejudice to the above, the Ld. AO/ Hon'ble DRP has failed to appreciate that even if the activities carried out by the Appellant does not amount to 'manufacture', it will sufficiently amount to 'production'. Since section 801B of the Act uses not only the word 'manufacture' but also the word 'production', the Ld. AO ought to have allowed the deduction claimed under section 80lB of the Act. 13. Without prejudice to the above, the Ld. AO/ Hon'ble DRP has failed to appreciate that the Appellant has obtained Central Excise registration from the Central Excise Department recognizing the business of the Appellant as 'manufacturing' which evidences that the activity carried out by the Appellant in the Jammu plant is 'manufacturing'. 14. Without prejudice to the above, the Hon'ble DRP has failed to consider that the Appellant has obtained registrations/ approvals from other statutory authorities like the D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g the same as forming part of the block of assets termed as 'Computers including Computer software', without considering that the excess depreciation of such assets have been already disallowed under the block of assets termed as 'Plant & Machinery' 5. The Ld. AO ought to have considered the directions of the Hon'ble DRP in relation to the duplication of disallowance detailed in the rectification petition filed before the Ld. AO, whereby the Hon'ble DRP has mentioned that where duplication of disallowance was found to be made, the same may be duly rectified by the Ld. AO. 6. The Hon'ble DRP ought to have considered the various judicial precedents that have been relied on by the Appellant in support of its contention that UPS would be eligible for depreciation at the rate of 60 percent as per Appendix \ of the Rules. Grounds relating to depreciation on electrical installations 1. The Ld. AO/ Hon'ble DRP has erred in considering that the 'electrical installation' is eligible for depreciation at the rate of 10 percent as per Appendix I of the Rules. 2. The Ld. AO/ Hon'ble DRP ought to have appreci....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... flavors business unit provide desired taste and smell to a broad range of products including soft drinks, confectioneries, dietary foods, snack foods, dairy products, pharmaceuticals and alcoholic beverages. The fragrance business unit produces fragrances which are used in wide variety of household products such as soaps, detergents, air fresheners, toiletries and incense sticks. Assessment Proceedings 4. Transfer Pricing (TP) Adjustment on account of management service charges paid by the assessee (Part B : Gr. Nos. 1 to 6) 4.1 The assessee carried out certain international transactions with its Associated Enterprises (AE) which are listed in para-4 of Ld. TPO's order. The same include purchase of raw material, sale of goods, payment of management service charges, service charges paid / received, commission paid / received etc. The assessee benchmarked these transactions on aggregate basis adopting Transactional Net Margin Method (TNMM) and did not offer any Transfer Pricing (TP) Adjustment in its TP study report. The assessee followed Comparable Uncontrolled Price (CUP) method to benchmark payment of royalty, purchase of capital assets and reimbursement of expenses etc.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nance & treasury, procurement, QA & QC, supply chain management, manufacturing operations and human resources etc. The assessee relied on sample copies of screenshots, emails, policies etc. as evidence for receipt of services. 4.6 The Ld. TPO, after evaluating the explanation and evidences furnished by the assessee, opined that the assessee could not conclusively prove the receipt of such services except for IT services. The need for soliciting such services were not substantiated and the benefit that accrued from such services was also not explained with reference to the structure of the assessee and the scale of expenditure excluding the one for which the payments were made by the assessee to its AE. The Ld. TPO held that the list of services includes every possible kind of management services. The onus was on assessee to demonstrate the fact of actual services received, the need for such services and whether such service demand payment as required under OECD guidelines. 4.7 The OECD guidelines on intra-group services, in Para 7.6, states that: - Under the arm's length principle, the question whether an intra-group service has been rendered when an activity is perf....
X X X X Extracts X X X X
X X X X Extracts X X X X
....other and the transactions belong to a particular class of transactions, which was not the case. Accordingly, Ld. TPO proceeded to benchmark the transactions of payment of management services separately under CUP method. We concur with the observations of Ld. TPO that unless the transactions are closely linked to each other and the same belong to particular class of transactions, aggregation approach could be discarded and the transactions could be benchmarked separately. It could also be seen that the assessee has applied TNMM method for certain transactions, CUP method for another set of transactions and 'other method' for certain transactions. The same would show that all the transactions have not been benchmarked under one method by the assessee himself rather the assessee has applied more than one method to benchmark the various transactions in its TP study report. Therefore, Ld. TPO was quite justified in rejecting the aggregation approach and proceed to bench-mark the impugned transactions separately under CUP method. No fault could be found in the impugned order, to that extent. The corresponding grounds raised by the assessee stand rejected. 6. Proceeding further, it co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... up-to AY 2011-12. The assessee has started making payment for such services only from AY 2013-14 pursuant to corporate service agreement, the nature of services remaining the same. This is further fortified by the fact that the profitability of the assessee has reduced substantially from AY 2013-14 onwards which is evident from the following tabulation of Ld. TPO: - No. Assessment Year Profit Margin (%) 1. 2011-12 23.10% 2. 2012-13 21.63% 3. 2013-14 15.98% 4. 2014-15 13.22% It could clearly be seen that the profits of earlier years are significantly higher than the profit of the years in which the assessee has started paying management charges to its AE. There is no change in the nature of business of the assessee. The above facts clearly support the case of the revenue. 8. In this regard, the tabulation made by Ld. CIT-DR with respect to dates of e-mail as kept in the paper-book would also support the aforesaid conclusion: - Paperbook 2 In paper book Page No. Period/Month and Year of mail E Mail correspondences raising an IT Ticket to the IT Service Desk and sorting the issue 389 to 394 August 20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the conduct of the quality trainings. 999 to 1000 Date at Mail correspondence indicating contamination and care to be-taken-in-elation to the certain material 1015 August 2017 ax Mail correspondence explaining the best practices suggested by the regional manager 1049 to 1051 June 2015 and July 2015 az Mail correspondences evidencing production being directed to another plant due to capacity availability/ unavailability 1053 to 1056 January 2017 and May 2017 bh Mail correspondence of consumer feedback (consumer sensory survey) 1073 March 2012 bi Mail correspondence of visit made by employees of IFF Inc. in relation to the same. Along with their schedules 1074 to 1075 March 2012 bj Mail correspondence evidencing support from regional team on the technology used in the manufacturing the flavours and fragrances 1077 to 1078 March 2013 9. We are of the considered opinion that the complete onus, in this regard, was on assessee to demonstrate that the actual services were rendered and received by it. The assessee, in our opinion, has failed to demonstrate the same. In such a scenario, the determination of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ITA No.732/Chny/2015 dated 31.10.2022) as well as the decision in M/s Diab Core materials Pvt. Ltd. Vs. DCIT (ITA No.2176/Chny/2017 dated 18.05.2022) is fact / evidence-based decision and rendered on particular facts of those cases wherein the assessee could demonstrate rendering / receipt of services which is not the case here. Therefore, these case laws as well as other case laws as placed on record do not apply to the facts of present case. 13. In the light of above stated facts and circumstances, the adjudication of lower authorities, on this issue, could not be faulted with. By confirming the same, we dismiss all the corresponding grounds raised by the assessee in Part-B. 14. Assessee's Claim of Deduction u/s 80IB(4) (Part C: Gr. Nos. 1 to 19) 14.1 The assessee claimed deduction u/s 80IB(4) for Rs.379.15 Lacs against profit earned out of Jammu & Kashmir Unit. A commission u/s 131(1)(d) was issued to ACIT, Jammu during the year 2014 for AY 2011-12 to examine the facts as applicable to claim so made by the assessee. The outcome of field enquiry, as enumerated by Ld. CITDR, in the written submissions, was as under: - a. The ITI could found machinery and Plants l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll as the finished goods was consumable and both were flavors only and therefore, it could not be said that finished goods was new and distinct product. As per definition of manufacture u/s 2(29BA), the transformation in the article should result in different name, character and use. In the present case, mixing of raw materials does not change the character and end-use of the product. The Ld. AO also appreciated the production process as furnished by the assessee during assessment proceedings of AY 2012-13. It was noted that a customer would approach the assessee with specific request to produce the flavors and fragrances as per its requirements. The assessee would identify the different combinations and develop the final product which is to be approved by the customer. The customer may, in his own manufacturing facility, add additional ingredients to make more unique notes of flavors that would finally be sold. The production of such material in the form of essence either in liquid or in powder format is happening in places located in Chennai and other states. In this way, the activities taking place in Jammu Unit were found to be not manufacturing but only trading in flavors. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or thing would come into existence. Similarly, in the case of Pio Food Packers (1980 Taxmann.com 116), it was held that cutting of pineapple and selling them in sealed cans do not amount to manufacture. In the case of Indian Hotels Co. Ltd. Vs. ITO (112 Taxman 46), it was held that when food articles are prepared by cooking or by any other process from raw materials likes cereals, vegetables, meat etc., it would not amount to manufacture of new article or thing. In Chillies Exports House Ltd. Vs CIT (225 ITR 814), it was held that processing of chillies by subjecting them to sorting, grading, clipping etc. would not amount to manufacture. Accordingly, the impugned deduction was denied to the assessee against which the assessee is in further appeal before us. 14.6 The Ld. Sr. Counsel has submitted that the impugned deduction has been allowed to the assessee in AYs 2009-10 & 2010-11 whereas it has been denied only in subsequent years. The Ld. Sr. Counsel further argued that the flavours manufactured by the assessee are clearly a different product which would require mixing of 25 to 30 different raw materials in different proportions. The raw material as well as finished product fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f following facts: 1. Carrying out filed Enquiry: During the course of Assessment proceeding for AY 2011-12, field verification was carried out by issuing commission u/s131(l)(d) of the IT Act to ACIT- Circle (1), Jammu with a request to enquire the various aspects of the Jammu Plant. This enquiry report was received by the AO during the course of Assessment proceeding for AY 2011-12. It is placed in page no 1681 to 1684 of paper book 4 of the appellant. The outcome of field enquiry is as under: a. The ITI could found machinery and plants like blender and air compressor that were old one transferred from Chennai and Chittoor to Jammu. b. The bills submitted in respect of those machineries could not be cross tallied or cross verified with actual fixed assets. c. No books of account were maintained in the factory premise and they were all maintained in Head office, Chennai. d. It was reported that they were in the process of grinding, blending, mixing natural ingredients like salt, onion powder, sugar and other ingredient to form mixed flavour in dry and liquid form. e. In nutshell they were only mixing and blending different dry ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....age no. 8 and held that the company had only blenders and vessels used for mixing ingredients: It was also recorded by DRP that essential elements giving rise to various flavours are produced outside Jammu units in places like Chennai and Chittoor and their ingredients are mixed or blended in Jammu unit based on the requirement of the customer. DRP also recorded that essential flavours are not directly prepared by the assessee but they are purchased and used by mixing or blending. This process does not constitute manufacture or production of new article or thing as per sec 80IB In view of the above, it is evident that the appellant's unit at Jammu was not into manufacture of article or thing as contemplated in section 80IA(4). Hence it is prayed that the order of the AO may kindly be upheld. 14.9 Having considered rival submissions and upon perusal of case records as well as case laws cited before us, our adjudication would be as under. Our findings and Adjudication 15. We find that the assessee has established Jammu Unit in the year 2007 and started claiming impugned deduction from AY 2009-10 onwards. This deduction was claimed for AYs 2009-10 and 2010-11 and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ged in the manufacture of excisable goods which were eligible for exemption under Notification No.56 of 2002-CE dated 14.11.2002 as amended by Notification No.34 of 2008-CE dated 10.06.2008, Therefore, a change of opinion based on report of Asst. Commissioner of Income Tax, Circle 1, Jammu under Section 131 of the Income Tax Act, 1961 cannot amount to failure on the part of the an assessee to truly and fully disclose information / documents required for the purpose of completing the assessments. Accordingly, the reassessment proceedings on the issue of deduction u/s 80IB were set-aside. Thus, so far as the assessee is concerned, this issue has attained finality in assessee's favour for first two years. 16. The above stated fact that the excise department has accepted the fact that the petitioner was engaged in the manufacture of excisable goods which were eligible for exemption under different notifications under that Act, remains undisturbed before us. In other words, it is accepted position before the Excise department that the various activities undertaken by the assessee would fall under different tariff headings and these activities would amount to manufacture. It was fu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....asses through various production stages. The flavouring essences would also be made in emulsion form which is also manufactured in similar fashion. The dry-mix would be manufactured by mixing various spice extracts and spice powders with various additives and passes through various stages of blending. It is undisputed fact that the raw material could not be traced back from finished product. Considering the same, it could be concluded that there was transformation of raw material and a new product emerges which would have different use though chemical composition or integral structure may not have changed. The same is supported by the fact that the tariff heading for final product fall under different sub-heading than that of raw material under Central Excise Act. All these facts further support the case of the assessee. 18. The Hon'ble High Court of Madras in the case of CIT vs. Vinbros & Co. (177 Taxman 217) held that blending and bottling of Indian Manufactured Foreign Liquor (IMFL) would amount to manufacture for claiming deduction u/s 80IB. The allegation of the revenue was that the assessee was merely into blending and bottling of various brands. The Tribunal relying upon ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... same were not prepared directly but purchased by the assessee, would also not be of much relevance since nowhere it is a condition that the raw material should also be produced by the assessee before it could be said to be engaged in manufacturing. 20. The case law of Appejay (P) Ltd. Vs CIT (77 Taxman 208), as referred to in the assessment order, deal with mixing of different varieties of tea wherein raw material as well as end product remain the same. The decision of Indian Hotels Co. Ltd. Vs. ITO (112 Taxman 46) has been rendered in the context of Sec. 80J which enable an assessee to claim deduction from an industrial undertaking whereas the assessee was engaged in hotel business. In the context of Sec. 32A and Sec.80J, it was held by Hon'ble Court that the foodstuff prepared by cooking or by any other process from raw materials such as cereals, pulses, vegetables, meat or the like cannot be regarded as commercially distinct commodity and it cannot be held that such foodstuff is manufactured or produced. However, in the present case, the assessee is mixing various raw materials to manufacture different commodity which fall under separate excise tariff heading. Therefore, the....