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TMI Blog2012 (9) TMI 583X X X X Extracts X X X X X X X X Extracts X X X X ..... bles. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not confirming the findings in the Transfer Pricing Officer as contained in the Order u/s.92CA(3) of the IT Act, 1961. 4. Further, placed in the above factual and legal scenario, the impugned order of the Ld. CIT(A) is, the appellant prays, patently perverse and contrary to law and consequently merits to be set aside and that of the Assessing Officer be restored. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 2. The solitary issue involved in this case relates to addition of Rs. 5,13,99,552/- made on account of computation of 'arms length price' (ALP) in terms of section 92C. The brief background of the case are that, the assessee is a joint venture company, which was founded by virtue of joint venture agreement dated 21-8-1987. It is engaged in business of manufacturing of industrial fragrance, flavours and chemical specialities. These are used for manufacturing of soaps, detergents, cosmetics, toiletries, foods, pharmaceuticals etc. The major customers of the company are Hindustan Lever, Coca Cola India Pvt. Ltd., Dab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparable companies, the assessee carried out extensive search process and identified the companies engaged in business of manufacturing of fragrances. Bench marking process was based on data of the comparable companies for the immediate previous financial year i.e. March 2000 and March 2001. In the search process, initially the assessee identified list of thirty-five companies and after filtering down, following five companies were finally identified as the comparables :- "(i) AVT Natural Products Ltd. (ii) Fem Care Pharma Ltd. (iii) Goldfield Fragrances Ltd. (iv) J K Helene Curtis Ltd. (v) Synthite Industrial Chemicals Ltd." 4.1 The arithmetic mean of the operating profit of these comparable companies were audited at 10.19%, as against of 9/94% of the assessee. 5. The TPO, however, rejected most of the comparable companies identified by the assessee, except for Goldfield Fragrances Ltd. which was taken as a comparable entity. He further included SH Kelkar & Co. Ltd. as a comparable company and worked out the arithmetic mean of the operating margin of two comparable companies at Rs. 16.085% as compared to operating margin of 9.94% of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mula developed by the Firmenich Group. Each product is unique and tailed made to the requirements of the clients and is used for manufacturing specific soaps, detergents, cosmetics, toiletries, foods beverages, drugs, tobaccos, pharmaceuticals, etc. It was after intensive research of similar type of companies, the assessee has identified 35 comparable companies and after filtering it down and taking into consideration various parameters, only five companies were ultimately identified as comparable companies for evaluating its arms' length price for the international transactions. The operating margin of the five comparable companies was worked out at 10.19% whereas the company has earned a profit margin on 9.97% on the sales. Therefore, its arms length price of its international transactions was fully acceptable. The reasoning given by the TPO that comparable companies do not deal in same products was wholly erroneous as the product similarity is not the sole criteria for inclusion or exclusion of comparable case. There are other parameters which are to be taken into consideration. Regarding inclusion of 'SH Kelker Company Ltd.', the assessee submitted that the same is not comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales of Aromatics chemicals (raw materials) which are essential to manufacture industrial fragrances. The Kelkar company has installed capacity for manufacturing aromatics chemicals of more than 700 MT and for manufacturing fragrances around 90 MT, as compared to the assessee which does not manufacture aromatics chemicals and does not have any advantage on that account. (g) There is financial and other differences like Kelkar has net worth of Rs. 1068 millions with loan funds of Rs. 129 millions and further it has invested Rs. 356 millions in assets and its turn over is Rs. 1241 millions out of which material cost is 759 millions and in terms of percentage it is 61%. As compared to this the assessee has net worth of Rs. 118 millions, with loan funds of Rs. 204 millions and has invested Rs. 97 millions in assets. The turn over of the assessee is 749 millions, which is almost half of the Kelkar Company. (h) Lastly, there is book share value difference between the two. Various other factors were also highlighted which have been incorporated in detail in the appellate order. 7. Learned CIT(A) after considering the submissions of the assessee, held that four comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the parent company which is supplying raw materials and the purchase price includes R & D also and, therefore, it is included in the cost of purchase price. Similarly, the operational, know how and technical differences, he submitted that the same is also embodied in the cost price of the material supplied by the parent company. For the other difference like product segment difference, the marketing and customers buyers difference, he submitted that nothing is borne out from the records in support of the assessee's contention. Lastly, regarding book share value of the company, it was submitted that how book value of shares can be applied for comparability analysis and such a contention of the assessee is wholly absurd and not at all relevant in transfer pricing. He, thus, submitted that the reasoning given by the TPO is absolute correct. 9. On the other hand, learned Senior counsel on behalf of the assessee submitted that the assessee's operating margin of 9.94% is fully comparable with the ALP of assessee's international transactions and transfer pricing for the various years. In support of this, a chart was furnished showing the operating margin from the assessment years 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate method for determining 'arms length price' is 'Transactional Net Margin Method' (TNMM), wherein the 'arms length price' is determined by comparing the operating profit relative to an appropriate base i.e. cost, sales, assets of the tested parties with the operating profit of an uncontrolled party engaged in comparable transactions. The assessee in his TP report has finally identified five comparable companies after filtering down various parameters. Out of such five companies, four has been rejected by the TPO and one company i.e. SH Kelkar and company has been included which has been objected to by the assessee. Once the assessee in its TP report has accepted the TNMM as most appropriate method and after carrying out intensive search of comparable companies, have short listed five companies for comparability analysis, then we do not find any merits in the contention of the learned Senior Counsel that the operating profit shown by the assessee should be accepted solely on the ground that in subsequent years the TPO has accepted the operating margin shown by the assessee or there is no need for making any adjustment in arms length price on the ground that the transactions with u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rried out by this company, vis-à-vis the assessee. On these facts, we do not find any reason to include this company into comparable case for comparability analysis. Hence, we uphold the finding of the TPO in rejecting this company from list of comparables. 10.3 Goldfield Fragrances Ltd. - There is no dispute regarding inclusion of this company as a comparable case. Hence, the same is accepted in the list of comparable case. 10.4 J.K. Helen Curtis Ltd. - This company is basically engaged in manufacturing of perfumes, sprays, body deodorants, room freshners, cologne, etc. All these products are marketed under the brand name of 'Park Avenue'. All these brands have a high premium value and has a very niche market. Thus, not only the products are different but also the functions performed and the nature of business are also different as compared to the assessee which is manufacturing products like fragrances, flavours and other compounds only to certain multinationals companies. The profile of this company, as placed before us, reflects that functional attributes are entirely different from the assessee, therefore, we do not find any reason to include this company for comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D back up with continued backward integration. In the case of assessee, R&D is taken by the parent company, which is supplying raw materials. Thus, the purchase price of raw materials procured from parent company does have the element of R & D which is embodied in it. However, the assessee's contention that there is a substantial cost advantage on account of backward integration and to some extent of research and development has some merits. We, accordingly, direct that some reasonable adjustment for backward integration and element of research and development on the cost should be made. Therefore, we direct the TPO to make suitable and reasonable adjustment on account of R&D and backward integration. The next difference which has been pointed out is operational difference as the SH Kelkar & Company Ltd, is involved in manufacturing of flavours, fragrances and aromatics chemicals, whereas in the case of assessee most of the materials are supplied by the third parties. This contention of the assessee also seems to have some merit and, therefore, we direct the TPO to make a suitable and reasonable adjustment for the raw materials also. The other difference which has been identified b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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