TMI Blog2011 (8) TMI 620X X X X Extracts X X X X X X X X Extracts X X X X ..... al results of the assessee company which is the tested party. Hence a more direct and proximate comparable is available internally. Thus, internal Cost Plus Method used by the TPO taking GP/Direct Cost of production as the PLI is justified. Hence, the assessee's objections are rejected. - Taking all material into consideration and giving due weightage to the relevant factors as stated above including small market and credit risk, we direct to adopt 60% as profit margin mark-up on the direct cost. In view of these, grounds of the assessee are partly allowed. - IT APPEAL NO. 5224 (DELHI) OF 2010 - - - Dated:- 5-8-2011 - R.P. TOLANI, B.C. MEENA, JJ. ORDER B.C. Meena, Accountant Member. The assessee has filed this appeal against the order of Additional CIT, Range 18, New Delhi passed u/s 143(3) read with section 144C of the Income-tax Act, 1961 for the assessment year 2006-07. The grounds raised in the appeal are as under :- 1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ( Ld. AO ) under section 143(3) read with section 144(C) of the Act is bad in law and void ab-initio. 2. That on the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plies that Joyco India Private limited (amalgamating Company) existed even after October 12, 2006 although amalgamation order between Joyco India Private limited (amalgamating company) with Wrigley India Private Limited (amalgamated Company) was filed with Registrar of Companies on October 13, 2006. 4.7 That the Ld. AO, erred on facts in law, in holding that the Appellant has made a false claim of deduction under section 80-IB of the Act and had desperation to evade tax liabilities. 4.8 That the Ld. AO, erred in not appreciating that scheme of amalgamation approved by Hon'ble High Court of Delhi itself provided for rollover of benefits of section 80-IB of the Act from Joyco India Private limited to Wrigley India Private limited 4.9 That the Ld. AO, grossly erred on facts in stating that half of the six manufacturing units of the Appellant are not eligible to deduction under section 80-IB of the Act for the assessment year under consideration. 4.10 That the Ld. AO, erred on facts and in law in invoking the provisions of clause (ii) of sub section (2) of section 80-IB of the Act holding that plant and machinery belonging to Joyco India Private limited hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e limited (amalgamated Company) wherein Joyco India, a profit making entity is amalgamating with Wrigley India, a loss making entity. 5.2 That the Ld AO has erred on facts and in law by not appreciating that in case of amalgamation of a profit making company (amalgamating company) with the loss making company (amalgamated company), the losses of the amalgamated company prior to amalgamation are carried forward under section 72 of the Act and section 72A of the Act has no role to play in such a scenario. 5.3 That the Ld. AO erred on facts and in law in concluding that provisions of section 78(2) of the Act are applicable to the facts of the case under consideration. 5.4 That the Ld. AO has erred on facts and in law in concluding that the facts of the case clearly establish that amalgamation of Joyco India Private limited (amalgamating Company) and Wrigley India Private limited (amalgamated Company) is a case of organized tax evasion and is a colorable device to evade taxes. 5.5 That the Ld. AO erred on facts and in law in holding that amalgamation scheme of profit making entity with loss making entity is against the principles of commercial prudence. 5.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . is a company incorporated on 5.10.1993 under the Companies Act, 1956 and it is a wholly owned subsidiary of Wm Wrigley Jr. Co. (WWJC), USA (parent company). The company is engaged inter alia in the business of manufacture and sale of chewing gums. During the year under consideration, a company in the name of Joyco India Pvt. Ltd. (hereinafter referred to as JIPL), which is a wholly owned subsidiary of assessee's parent company, WWJC (USA), amalgamated with the appellant company. JIPL was engaged in the manufacture and sale of confectionary products, i.e. bubble gums, chewing gums, lollipops and toffees. Its amalgamation was approved by Hon'ble Delhi High Court vide its order dated 8.9.2006. The return of income for the assessment year 2006-07 was filed on 30.11.2006 declaring income at nil after claiming deduction u/s 80IB of the Income-tax Act and setting off brought forward business losses and unabsorbed depreciation. The assessment was finalized u/s 143(3) read with section 144C of the Income-tax Act and the income was assessed at ₹ 18,66,81,654/-. The additions/disallowances were made on account of denial of deduction u/s 80IB of the Income-tax Act, denial of be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from the effective date 13/10/2006 which is date of filing of the certified copy of the high court order with the ROC within five weeks of the order of the Hon'ble High Court as specified in the order of the Hon'ble High Court. Hence, the assessee submitted that the 10CCB certificate dated 10/10/2006 is perfectly valid and hence deduction u/s 80IB of the Act should be allowed. The assessee has also relied upon various judicial pronouncements. We have gone through the submission made by the assessee, the assessment order. It is seen that the deduction u/s 80IB of the Act is denied by the AO on the other grounds also that it is manufacturing articles and things mentioned in the eleventh schedule specifically confectionary and chocolate. It is also seen that in the earlier assessment years the deduction was not allowed on this ground. The assessee has pointed out that the Hon'ble ITAT has granted the benefit u/s 80IB of the Act in the earlier years. However, since the issue is being litigated and has not attained the finality, we decline to interfere in the order of the AO. 6. Learned AR submitted that all the allegations made by Assessing Officer and by the DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessment order for assessment year 2005-06 which was passed on 31.12.2007 which is prior to the date of ITAT decision in assessment year 2003-04 which is dated 19.12.2008, therefore, the Assessing Officer cannot rely upon the assessment year 2005-06 when there is a contrary decision available from ITAT on the same issue. He also submitted that the denial of deduction on the ground that assessee is manufacturing article or things specified under Eleventh Schedule was also not justified in view of the provisions of section 80IB (4) wherein the unit set up in the backward states specified in the Eighth Schedule shall not attract the provisions of Eleventh Schedule. With regard to the Assessing Officer's observations that half of the six manufacturing units are not eligible to claim of 80IB, learned AR submitted that this is factually incorrect. He pleaded that the units were allowed deduction in the preceding years and no such dispute arose. He submitted that the unit-wise claim of deduction attached with notes to computation filed with the return of income, the same is placed at page 228 of the paper book. He finally pleaded that the denial of deduction u/s 80IB to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aded that the provisions of section 80IB (12) are only supportive in nature and cannot override the provisions of section 80IB (2)(ii). Hence there is no case of the assessee for making the claim u/s 80IB. He summarized his stand on the following three legs :- (i) No valid form 10 CCB has been filed by the assessee to claim 80-IB deduction, since the form was filed in the name of M/s Jayco India Pvt. Ltd., which has been claimed to exist till 12.10.2006. As elaborately discuss by AO in his order this certificate was deliberately manipulated to claim the deduction through the assessee company as M/s Jayco India Pvt. Ltd. could not have claimed it on its own account. The assessee cannot take conflicting stand regarding legal existence stand of M/s Jayco India Pvt. Ltd. If M/s Jayco India Pvt. Ltd. existed up to 12.10.02006, regular return should have been filed and 80-IB should have been claimed by it accordingly. However, if M/s Jayco India could not exist, there was no possibility of submitting a legal report through form 10 CCB in its name. Accordingly the claim u/s 80IB made by the assessee is not justified. And the AD s order needs to be upheld. (ii) It has been clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a situation, it would not be reasonable to say that the scheme of amalgamation took effect on and from the date of the order sanctioning the scheme. The business carried on by the subsidiary company should be deemed to have been carried on for and on behalf of the appellant-company. This was the necessary and the logical consequence of the court sanctioning the scheme of amalgamation as presented to it. The order of the court sanctioning the scheme, the filing of the certified copies of the orders of the court before the Registrar of Companies, the allotment of shares, etc., might have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be January 1, 1982. Therefore, the notices issued by the Income-tax Office were not warranted in law. In the assessee's case, the Hon'ble High Court has clearly specified and mentioned the appointed date in the amalgamation order itself. The amalgamation took effect on and from the appointed date of order, i.e. 1.4.2005. The business carried on by the subsidiary company during the intervening period from 1.4.2005 till the order of Hon'ble High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant previously used for any purpose. Assessee relied on Board instruction No.F.No.15/5/63-IT(AI) dated 13th December, 1963 to support its claim wherein provided as under:- New industrial undertaking taken over by another assessee before the expiry of five years Whether benefit of s. 84 available to successor for the remaining years The Board agree that the benefit of s. 84 of the IT Act, 1961, attaches to the undertaking and not to the owner thereof. The successor will be entitled to the benefit for the unexpired period of five years provided the undertaking is taken over as a running concern. In view of above, the assessee is entitled to deduction u/s 80IB if other conditions are satisfied. Further the ITAT has also decided the allowability of deduction u/s 80IA(8) in the case of amalgamating company while deciding the ITA No.1562/Del/2007 on 19.12.2008 wherein the ITAT held as under : 5.2 We have considered the facts of the case and rival submissions. It is clear that the provision contained in section 80IA(8) is applicable to the facts of this case. But as earlier pointed out, what is required to be found out is the market value of transferred goods on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gered We have gone through the submissions made by the AR. It is seen that the AO has extensively discussed this issue on pages 25 to 34 of the order. The AO has stated that the intention of the legislature is not to give benefit to a reverse case of amalgamation when profit making companies amalgamate into a loss making company. Though we do not agree with the AO about the applicability section 79 of the Act as more than 51% of the shareholding has remained the same but it is pertinent to note that Jayco India Pvt. Ltd. has exhausted the claim u/s 80IB of the Act has many of its undertakings have completed more than 10 years which is the statutory limit for claiming the deduction and therefore, its profits are liable to taxed as discussed by the AO on page 31 of the order. We agree with the AO that the Hon'ble Delhi High Court has approved the scheme of amalgamation for the purpose of company Act, 1956 and not for the purpose of I. T. Act, 1961. The AO has also stated that the assessee company being the amalgamated company has not proved that the amalgamation is for a genuine business purposes and it is nothing but a colorable device to evade taxes. He has also relied upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same cannot be extended to benefit any other situation which has not been mentioned in the Act itself. (ii) In the present case from the facts it is clear that the assessee company has been making regular losses from 96-97 to 2005-06, whereas the amalgamating company, M/s Jayco India Pvt. ltd. has been making profits for various years and claiming deduction u/s 80-IB. The assessee has not been able to justify as to how the claim u/s 72A has been made in a reverse situation of the amalgamated company having sustained losses, while the amalgamating company has been having regular profit. The DRP has also approved the observation and findings of the Assessing Officer and reiterated that the assessee had not amalgamated for a genuine purpose, but for evading taxes (page 35 36 of the assessment Order). Accordingly, the assessee has no case for claiming the benefit u/s 72A of the Income-tax Act. The order of the Assessing officer/DRP therefore deserves to be upheld, so far as the disallowance under section 72A has been made. 13. After hearing both the sides, we hold that the provisions of section 72A are applicable when the amalgamating company is engaged in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprises. The income has been enhanced on this count by ₹ 2,70,35,000/-. 15. The Transfer Pricing Officer has decided the adjustment to the international transaction to bring it to the arm's length price as under :- 3. International transactions The company has reported following major international transactions in form 3CEB S.No. International Transaction Method used By Assessee Value in transaction 1. Import of material TNMM 23,258,028 2. Export of manufactured products TNMM 102,101,495 3. Intra group services received TNMM 16,174,976 4. Export of machinery CUP 774,668 5. Interest on loan CUP 472,508 6. Cost reimbursement received On actual Exp as per management 2,78 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmark the international transactions. This is the method which has been used in the last two assessment years. Vide order sheet noting dated 13.1.2009 the assessee was asked to show cause why the same method should not be used in this assessment year as well. 6. Assessee filed its reply on 12.3.2009. The gist of the submissions of the assessee is as follows: ''(a) Applicability of Cost plus method : Herein, we would like to bring to the notice of your good self that even as per OECD guidelines a cost plus method is more suitable where semi-finished goods are sold between related parties. However, in the instant case, your good self would appreciate the fact that most goods exported by the assessee are in completely finished form which are resold by the AE in their domestic market hence, use of cost plus method in case of assessee would not be appropriate. (b) Significant Related Party Transactions: Herein, it may also be noted that as per the segmented financial used by the Ld. TPO during the previous year, most of the purchases even in the case of domestic segment were from associated enterprises. Thus, the gross margins earned in the domestic segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment, most of the sales are made to the associated enterprise; the assessee need not incur any amount on marketing the products. ** ** ** The above discussion clearly depicts that the functional profile of the assessee under its domestic and export segment are completely different. The assessee performs additional functions and assumes additional risk under its domestic segment and is bound to have different pricing basis under the two markets. Thus, domestic and export segment of the assessee are incomparable. 7. The submissions of the assessee are careful1v examined and not found acceptable as per discussion below : The assessee's argument that OECD guidelines provide that CPM should be applied in the case of semi-finished goods only is neither acceptable nor binding. The IT Rules clearly provide that if gross profit margins between closely identifiable transactions can be determined then CPM is the most appropriate method. The relevant provision is produced below :- Cost plus method is one by which (i) The direct and indirect costs of production incurred by the enterprise in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the margins between the sales in the domestic market and the export based on the differences in the market. Regarding the assesses argument that its return in the domestic market is better than the export market because it bears market risk which involves incurring huge expenditure towards marketing and advertising its product in domestic market does not make much business sense. Normally, incurring of expenditure on marketing and advertising would have the impact of reducing the profitability of an enterprise rather than the opposite. Secondly we are comparing the gross profit margins of both the segments which does not take into account expenses on marketing and advertising. Such expenses would have an impact on the net profit margins. In calculating the gross profit the same expenses are taken into account for manufacturing the product. The assessee has not been able to justify why there is a huge difference in the GP rate in the export and domestic segment. The low GP rate in the export segment clearly shows that the transactions is not at arm's length. Lastly it is a specious argument by the assessee that it uses un-utilised capacity only for export purposes. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53,241 Contribution 906,685 854,306 52,379 Contribution % 52.4% 52.5% 49.6% Fixed Costs - Labor Benefits - Direct Manufacturing Exp. - Factory Overheads (Stores Spares) - Research Development - Depreciation - (Accr) Decr: FG WIP - Increase in FG 42,472 49,429 10,021 1,738 146,386 (3,667) - 40,416 45,985 9,163 1,666 125,242 (3,667) - 2,055 3,444 858 72 21,143 - Actual Actual Actual Actual Actual Actual Sub Total 246,378 218,806 217,572 Total Variable Fixed Costs 1,071 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross margin from domestic/exports sales cannot be similar as the functional and risk profile of the assessee under these two segments are significantly different. The assessee has also submitted that the TPO has arbitrary rejected the economic adjustment for excess advertisement cost incurred by the assessee to bring it at par with the comparables companies. We have carefully considered the submissions made, the TPO's order and the relevant records. The TPO while justifying the adoption of CPM has stated that the entire export is to the related parties and the products are manufactured in the same factory. Hence, using the direct cost of the production, GP margin can be easily worked out. Cost base of the assessee is by and large with the unrelated parties. Compare to the export to the unrelated parties the import of raw material from the related party is less than 15%. It is seen that this method has been consistently used by the TPO in the last two assessment years. The TPO asked the assessee vide order sheet noting dated 13/01/2009 to show cause why the same method should not be used in this assessment year also. We have noticed that similar submissions were made befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee under these two segments are significantly different The assessee has also submitted that the TPO has arbitrary rejected the economic adjustment for excess advertisement cost incurred by the assessee to bring it at par with the comparables companies. We have carefully considered the submissions made, the TPO's order and the relevant records. The TPO while justifying the adoption of CPM has stated that the entire export is to the related parties and products are manufactured in, the same factory. Hence, using the direct cost of the production, GP margin can be easily worked out. Cost base of the assessee is by and large with the unrelated parties. Compare to the export to the unrelated parties the import of raw material from the related party is less than 15%. It is seen that this method has been consistently used by the TPO in the last two assessment years. The TPO asked the assessee vide order sheet noting dated 13/0112009 to show cause why the same method should not be used in this assessment year also. We have noticed that similar submissions were made before the TPO which are discussed by him in details in para 6 and 7 of the order. We agree with the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial plus packing material consumed was of ₹ 74.2 crores and out of which the imported was of ₹ 10.7 crores which comes to 14% of the raw material consumed. The domestic sales of the assessee were to the unrelated parties. The exported goods were completely in finished form. The export of goods were made to following as under :- Wrigley Dubai (U.A.E.) ₹ 7,02,43,130/- Wrigley Spain ₹ 1,54,35,954/- And others ₹ 1,80,69,092/- Thus, majority of exports around 82% were to U.A.E. and Spain. The goods sold in domestic market to unrelated parties and the export made to related parties have been manufactured by the same raw material in the same factory. The assessee adopted the TNMM (Transactional Net Margin Method) method to determine the arms length price. The transfer pricing authority has adopted the cost plus method to work out the arms length price. 19. We have considered the pleadings of the assessee with regard to method adopted and had also gone through the order of ITAT, L Bench, Mumbai in ITA No.3557/Mum/2006 in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot adopted the correct method of determination of TNMM. Therefore, the issue is set aside to the file of the AO for fresh adjudication in accordance with law. Thus, Assessing Officer had applied the adjustment made by the TPO by comparing between the assessee's international transaction with its domestic transaction and the same is held against statutory requirement and on this basis, the matter was remanded to Assessing Officer for fresh adjudication. We have gone through the decision and from the decision, we find that the assessee has made a plea in the submissions that the comparison of the domestic margin on the domestic sales with the margin of export sales while passing the order u/s 92CA(3) is against the law and statute. In this case, the method adopted by both TPO and assessee to compute the arm's length price (ALP) was TNMM. Assessee had not demonstrated how this method was against the law and statute and it has also not been elaborated. The ITAT Bench has also not elaborated, how the comparison between international transactions with related parties and unrelated domestic transactions are not as per statutory requirement. Moreover, in this case, the method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit markup in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise In this method, the direct and indirect costs of production incurred by the enterprises in respect of property transferred or services provided to an associated enterprise are determined and the amount of normal gross profit mark-up to such costs arising from the transfer or provision of the same or similar property or services by the enterprises or by an unrelated enterprise in a comparable uncontrolled transaction. In the assessee's case, the products which have been sold in the domestic market to the unrelated parties a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rritories, therefore, we have considered this aspect for making some adjustments as provided in Rule 10B(1)(c)(iii). The credit risk in transaction with unrelated parties in the domestic market and the transactions to the related associated enterprises are not having any very significant difference which may materially affect the determination of the gross profit mark-up on the cost. Credit sales are also made to associate enterprises for 30 days. However, a small adjustment to profit mark-up as provided in the Rules is being made for this aspect. As regarding the claim in respect of the locations of the different related associated enterprises and different geographical market, we would like to state that the majority of the exports were made to the Middle East UAE and Spain (around 82%) where the per capita income is much higher than the India. The goods produced by the assessee are the goods which are not the necessity of life but these are the goods which are normally consumed by the middle or upper strata of the society. The per capita income of countries where these associated enterprises are located are better than India. In our considered view, the geographical location of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f arm's length price. In our considered view, this +/- 5% safe harbor was available to the taxpayer only if the value of international transaction is within +/- 5% from the arithmetical mean. If the value of the international transaction is beyond +/- 5% from arithmetical mean, the transfer pricing adjustment has to be made from the arithmetical mean of prices as determined by the most appropriate method. When the variation exceeds 5% of the arm's length price the assessee shall not get benefit. The ITAT, Visakhapatnam Bench in the case of ACIT, Circle 3 (1) v. Essar Steel Limited, 131 ITD 22 (Visakh.) had considered the issue in the light of Board Circular and amendments by Finance Act, 2002 and held as under :- It can be seen that the Finance Act, 2001 has inserted new sections 92 and 92A to 92F in the place of old section 92. The above said circular has been issued in order to explain the amendment from the assessment year 2002-03 onwards. Under the proviso to section 92C(2) as inserted by the Finance Act, 2001, only arithmetical mean of the prices has to be taken and the statute did not provide for any concession. Hence, considering the practical difficulties, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken as the ALP. However, the assessee shall have an option to adopt a price which may very from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. In the instant case, only one price had been determined under 'most appropriate method'. Hence, the question of application of the proviso did not arise. Accordingly, the assessee was entitled to the concession, as prescribed in the proviso to section 92C(2). Accordingly, the order of the Commissioner (Appeals) was to be revised and the order of the Assessing Officer was to be restored. In view of these facts, we hold that the assessee's plea has no merits. 22. Taking all material into consideration and giving due weightage to the relevant factors as stated above including small market and credit risk, we direct to adopt 60% as profit margin mark-up on the direct cost. In view of these, grounds of the assessee are partly allowed. 21. In the ground no.7, the assessee has challenged the levy of interest u/s 234A, 234B and 234C of the Income-tax Act, 1961. 22. We have heard both the sides and we find that the levy of interest is mandatory and consequential to the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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