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2016 (3) TMI 639 - ITAT KOLKATA

2016 (3) TMI 639 - ITAT KOLKATA - TMI - Disallowance of bad debts - Held that:- in the AY 2002-03, the AO disallowed the bad debt on the reasons that party wise break up was not furnished before him and further it was also alleged by the AO in that year that the assessee had made an ad hoc adjustment in the provision for bad debt account and further the value of the sundry debtors had not been reduced at the year end. The allegation of the AO in relation to disallowance in regard to bad debt for .....

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nt through the provision for bad debt created earlier, the details of which are filed by assessee at page 4 of assessee’s paper book and further at the year end the balance sheet of assessee has disclosed the sundry debtors at net of provision figure. In view of the facts and circumstances of the case and precedent cited above, we are of the view that bad debts claimed by the assessee are allowable and we allow accordingly. - Decided in favour of assessee

Disallowance of write off on .....

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value and question of selling the same in the next year does not arise. In view of these facts and circumstances, we are of the view that the action of the lower authorities in making addition and confirming the same in regard to provision for obsolete stock with the value of closing stock correspondingly increasing the value of opening stock in the immediate next year would lead to double taxation as the assessee company has to pay tax on the additional amount without getting the benefit of in .....

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utation of total income. The assessee during the relevant assessment year made payment of gratuity amount of ₹ 31,89,486/- to gratuity fund being maintained by LIC. This fact is very much available in the accounts and tax audit report. We find that the assessee during the course of assessment proceedings filed details in regard to gratuity payment and provision made in the books of account and difference was only to the extent of ₹ 8116/- only. In view of the above reconciliation sta .....

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disallowance by CIT (A) that no independent documentary evidence had been furnished by assesse to show that the fact of actual services having been rendered to assessee and Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence, has no leg to stand.

Disallowance of intra-group service charge under the agreement between assessee and Nalco Pacific was fixed not with reference to any particular service - Held that:- The only alterna .....

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of sales agreed between Nalco Pacific and the group companies. For instance, the assessee, under the agreement, agreed a net remittance to Nalco Pacific for the intra-group services up to a maximum of 2% of net sales for each calendar year. This method of allocation has been approved by the OECD Guidelines. Accordingly, the second ground of CIT (A) that the intra-group service charge under the agreement between the assessee and Nalco Pacific was fixed not with reference to any particular service .....

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the benefits to be received by it from entering into the aforesaid agreement with Nalco Pacific and the maximum amounts to be remitted as consultancy charge to Nalco Pacific under the aforesaid agreement. In reply, the RBI intimated their "in-principle" approval for remittance of consultancy charge to Nalco Pacific @ 2% of net sales for the calendar year 2001. In view of this, weare of the view that the aforesaid payment (Rs. 1,51,74,980/-) made to Nalco Pacific @ 2% of net sales, having been th .....

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ristics of EC3210A/198 transferred in controlled transactions between assessee and Ondeo Nalco Thailand. The TPO did not adjust the price charged by assessee in the uncontrolled transaction in order to account for the aforesaid differences between controlled transaction and uncontrolled transaction. Hence, the application of the CUP Method made by the TPO in the above case was inappropriate.the assessee was bound to sell the chemicals at low prices to its associated enterprises to recover a part .....

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ndent parties were determined by the free interplay of demand and supply forces in the open market. We further find that the TPO did not adjust the prices charged by assessee in uncontrolled transactions with Bongaigaon Refinery Petrochemicals Ltd and Haldia Petrochemicals Ltd on account of the differences in quality, reliability and availability of chemicals, volume of supply, geographical location, availability of raw material, demand and supply equation between the respective controlled trans .....

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of amalgamation should be given effect to from the AY 2001-02 and not from AY 2003-04. and held that the AO should consider the revised return filed by assessee consolidating the financial results of both the entities for AY 2001-02. In view of these facts, we are of the considered view that the allegation of the lower authorities that the assessee has not given effect to the scheme of amalgamation in AY 2001-02 and 2002-03 is without any basis and accordingly, the ad hoc disallowance made by A .....

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14/CIT(A)-XI/Cir-11/06-07/Kol/dated 21.02.2008 and 31.03.2009. Assessments were framed by ACIT, Circle-11, Kolkata u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) for Assessment Years 2003- 04and 2004-05vide his separate orders dated 31.03.2006 and 29.12.2006. 2. The first common issue in both these appeals of assessee is against the order of CIT(A) in confirming the disallowance of bad debts by the AO. For this, assessee in ITA No. 529/Kol/2008 has raised following .....

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ng that the appellant should have obtained confirmation from the buyers regarding the bad debts and that the debts written off pertained to the same financial year. For AY 2004-05 in ITA No. 1256/K/2009, the assessee has raised following ground no.1: 1. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the AO in disallowing the appellant s claim for deduction of bad debts written off in the books of account for the financial year .....

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Kol/2009 for AY 2004-05 and will decide the issue in both the years on these facts. 3. Briefly stated facts are that the assessee company was engaged in manufacturing and dealing with water treatment chemicals, industrial additives and oilfield chemicals etc. The AO during the course of assessment proceedings required the assessee to file the details in respect to claim of bad debts. The assessee has claimed bad debts of ₹ 4,68,90,427/- out of provisions and also written off a sum of ͅ .....

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ds like one party Southern Petro Chemicals & Industries. According to AO, the balance of invoices are relating to January, February and March, 2004 for the year ending 31.03.2004. According to AO, these are very reputed parties like SAIL, National Fertilizers Ltd. Southern Petro Chemicals Ltd., Chambal Fertilizers & Chemicals Ltd. etc. and bad debt could have been with these parties. According to AO, the assessee is unable to fulfill the conditions prescribed and hence, he disallowed the .....

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have gone through the case records and arguments of both sides and noticed that the assessee had inter alia written off during the relevant previous year, a sum of ₹ 5,05,24,710/- being bad debts as irrecoverable in the books of accounts. Out of the said sum an amount of ₹ 4,68,90,427/- was written off through provision account and an amount of ₹ 36,34,283/- was directly written off in the Profit and Loss Account for the relevant previous year relevant to this assessment year. .....

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ver, the customers pay the amount on the basis of the production achieved by them out of the material supplied by the assessee on the basis of the pre-approved formula and if the consumption of the material supplied by the assessee for production by the customer is more than in that event proportionate reduction is made by the customer from the sale price and the reduced amount is paid to the assessee. Thus, the bad debt happen with any customer due to peculiar nature of the business carried on .....

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copy of relevant portion of books of accounts i.e. ledger account and details of bad debts written off amounting to ₹ 5,05,24,710/- have been enclosed at pages 1-13 of the assessee s paper book. The CIT (A) held that all the details relevant to allow the bad debt were produced by the assessee before the AO and further held that since the assessee fulfilled all the conditions required to be fulfilled, hence normally the deduction claimed by the assessee on account of bad debt should be all .....

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ection 36(1 )(vii) of the Act, which provides that the subject to the provisions of section 36(2) of the Act, amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year, will be allowed unless inter alia such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. On a conjoin .....

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our view, there is no dispute to the fact that the assessee had satisfied both the conditions with respect to its claim for being allowed deduction with respect to bad debts written off. The same has been accepted by CIT(A) also. The pivotal question, which falls to be adjudicated, is whether under the present position of law, the assessee is required to prove before the AO that the debt in question had actually become bad, in order to be entitled to the deduction envisaged in section 36(1) (vi .....

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in the case of Vijaya Bank v CIT 323 ITR 166 (SC) wherein Hon'ble Court has held that in order to allow the bad debt which is written off through the provision account, the only conditions that are required to be fulfilled may be stated as under: That the bad debt has to be actually written off through the provision account created earlier and That the sundry debtors balance at the year-end should be disclosed in the balance sheet as net of provision balance. 6. In the present case before us .....

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06, 2006-07, 2007-08, 2008-09 and 2009-10. We have reproduced herein below the relevant information as under: Assessment Year Bad Debt Allowed (INR'OOO) 2005-06 42992 2006-07 77593 2007-08 30355 2008-09 38915 The assessee also filed copy of Assessment Order passed by the AO for the Assessment Year2005-06 , which is enclosed at pages 22- 24 of assessee s paper book. Further, in the AY 2002-03, the AO disallowed the bad debt on the reasons that party wise break up was not furnished before him .....

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e said issue to the file of the AO with a direction to verify as to whether the provision made for bad debts had been ever claimed by assessee. The AO has also allowed the bad debt after verification as directed by Tribunal in AY 2002-03. We find from the facts in entirety that the assessee had written off actual bad debt in the profit and loss account through the provision for bad debt created earlier, the details of which are filed by assessee at page 4 of assessee s paper book and further at .....

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For this, assessee has raised following ground no.4: 4. For that the CIT(A) erred in confirming the disallowance of ₹ 60,00,622/- written off by the appellant on account of reduction in the value of the stock of goods. The CIT(A) failed to appreciate the fact that the write off was made in accordance with the established and accepted practice followed by the appellant were in accordance with the Accounting Standard and the claim made by the appellant was fully allowable and has been accep .....

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not file details of sales of the same goods next year at a reduced price as included in closing stock, the AO made addition of this provision. Aggrieved assessee preferred appeal before CIT(A), who also confirmed the action of AO by holding that the assessee has not been able to prove that such stock has zero value or reduced value. Aggrieved, assessee came in second appeal before Tribunal. 9. We have heard rival submissions and gone through facts and circumstances of the case. We find that the .....

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d in the closing stock for the relevant assessment year. Now before us, the assessee s main contention was that complete details in respect to provisions for writing off of the obsolete stock of raw material, the value of which has become nil, was filed before the AO as well as before CIT(A). Ld. Counsel for the assessee referred to page 35 and 36 of the assessee s paper book wherein certificate issued by Works Manager of the assessee company to create a provision for writing off of the stock is .....

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.03.2003 and the value of opening stock of raw material as on 01.04.2004 are given hereunder. Particulars Amount as per audited accounts (INR) Closing stock of raw materials as on 31.03.2003 Rs.7,11,12,000/- Opening stock of raw material as on 01.04.2004 Rs.7,11,12,000/- We find that the allegation of the lower authorities that the assessee company has not filed the details to substantiate that in the next year the obsolete stock of raw material were sold at reduced price as included in the clos .....

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lue of closing stock correspondingly increasing the value of opening stock in the immediate next year would lead to double taxation as the assessee company has to pay tax on the additional amount without getting the benefit of increased value of stock in the immediate next year. Accordingly, we delete this addition and allow this issue of assessee s appeal. 10. The next issue in assessee s appeal in ITA No.529/K/2008 for the AY 2003-04 is as regards to disallowance of annual contribution of grat .....

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t the AO during the course of assessment proceedings noted that the assessee has shown following payments to approved gratuity fund but according to him the provision does not tally with the provision shown by the assessee in its accounts. Payments made Payments shown in the Accounts ₹ 9,48,801/- Opening balance as on 01.04.2002 Rs.73,95,102/- Rs.10,00,000/- Add provision made during the year Rs.12,52,860/- Rs.86,47.962/- Rs.3,00,000/- Rs.22,48,801/- Less Payment during the year Rs.31,89,4 .....

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of the case. We find from the facts of the case that the assessee during the relevant previous year created a provision with respect to gratuity amounting to ₹ 12,52,861/- and provision was debited to the P&L Account for the year ended 31.03.2003 and added back the same to the computation of total income. The assessee during the relevant assessment year made payment of gratuity amount of ₹ 31,89,486/- to gratuity fund being maintained by LIC. This fact is very much available in .....

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med and balance is deleted. This issue of assessee s appeal is partly allowed. 13. The next common issue in both the appeals of assessee is as regards to the order of CIT(A) confirming the addition being the adjustment made by Transfer Pricing Officer u/s. 92CA(3) of the Act. For this, assessee in ITA No. 529/K/2008 for AY 2003-04 has raised following ground nos. 11 to 17: 11. For that the CIT(A) erred in confirming the addition of ₹ 1,25,59,000/- being the adjustment made by the Transfer .....

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the provisions of law and not covered by Chapter-X of the Act. 13. For that various findings and observations made by the TPO in his order have been arrived at without taking into consideration the relevant facts and materials filed by the appellant in this behalf and the said finding is erroneous, perverse and should be quashed. No proper, adequate and reasonable opportunity was granted by the TPO as well as by the Assessing Officer to the appellant and the order passed suffers from breach of .....

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should have quashed the order passed by the TPO and should have directed the deletion of the said sum of ₹ 1,25,59,000/-. 16. For that the CIT(A) erred in confirming the disallowance of ₹ 5,00,00,000/- on account of amalgamation of Aqua Chemicals and Systems (Mfg.) Ltd. (ACS). 17. For that no deduction of any amount was claimed by the appellant in the return of income file for the relevant assessment year in respect of the amalgamation of ACS with it and there was no question of mak .....

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the previous year relevant to the assessment year 2004-2005 in regard to the technical consultation fees paid by the appellant to its Associated Enterprise, namely, Nalco Pacific Pte Ltd, Singapore, during the period under consideration. 2(b) That on the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in confirming the aforementioned addition of INR 1,51,74,980/- without appreciating the fact the TPO/ AO cannot hold that the transaction of payment of technical f .....

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adopted by the appellant for justifying the arm's length nature of the transaction referred to hereinabove without assigning any valid reasons and without due consideration to the relevant factual and commercial aspects underlying the impugned transaction. 15. The facts and circumstances and issues are exactly identical, hence we will decide the issue by taking the facts from ITA No. 1256/K/2009 for AY 2004-05. Brief facts relating to this issue are that this issue is directed against the d .....

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as Ondeo Nalco Pacific Pte Ltd, Singapore (hereinafter referred to as 'Nalco Pacific') under the 'Technical and Management Assistance Agreement' (hereinafter referred to as the 'agreement') entered into between the assessee and Nalco Pacific. The relevant copy of the agreement enclosed at pages 88- 93 of the assessee s paper book. As consideration for the intra-group services provided by Nalco Pacific under the agreement, the assesse agreed for net remittance to Nalco Pa .....

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(INR) Method Used 1. Import of raw materials and intermediates 77,129,732.60 Transactional Net Margin Method ( TNMM ) 2. Export of finished goods 4,610,830.00 TNMM 3. Import of tangible movable/immovable property 2,635,016.00 TNMM 4. Particulars in respect of providing services 15,174,980.00 TNMM 5. Interest on loan received 1,603,119.00 Comparable Uncontrolled price ( CUP ) Method 6. Reimbursement of expenses 6,893,894.00 TNMM The TPO observed in his order that in response to the notice u/s 92 .....

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nature of directions/management decision/routine advice which were provided by Nalco Pacific to the assesse to take care of its own interests rather than to meet the identified needs of the assessee. b) Second objection: The TPO further noted that though some incidental benefits accrued to the assessee, yet such benefits would not be ones for which an independent enterprise would be willing to pay. c) Third objection: The TPO noted that the aforesaid international transaction was not at arm' .....

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ependent documentary evidence had been furnished by assessee to show that the fact of actual services having been rendered to assessee. He alsoheld that Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence. • Second ground: The remuneration was fixed not with reference to any particular service. It was at a fixed amount, calculated at a fixed percentage of sales of assessee, irrespective of which services were actually received by ass .....

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Ld. Counsel for the assesse first of all argued that CIT(A) s main reasoning for confirmation of addition is that no independent documentary evidence had been furnished by assesse to show that the fact of actual services having been rendered to assessee. He also held that Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence. For this he argued that the TPO proceeded to judge the reasonableness of the payment made by assesse to Nalco Pacif .....

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ns, he determined the value of the aforesaid international transaction at 'NIL' value. The CIT (A) confirmed the arm's length price computation done by the TPO in his order. Ld. Counsel at this juncture referred to section 92 of the Act provides that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price and any expense or outgoing in an international transaction is also to be computed having r .....

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d by the Board. 18. Ld. Counsel for the assesse explained that the assesse had discharged its onus by filing all the relevant data and the data used for determining the arm s length price is reliable and correct, there can be no intervention by the AO without pointing out any defect in the same. This is made clear by sub-section (3) of section 92C which provides that the AO may intervene only if he is, on the basis of material or information or document in his possession, of the opinion that: (i .....

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to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D. According to assessee, If anyone of such circumstances exists, the AO may reject the price adopted by the assessee and determine the arm's length price in accordance with the same rules. However, an opportunity has to be given to the assessee before determining such price. Thereafter, as provided in sub-section (4) of section 92C, the AO .....

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PO's order which was indicative of the existence of any of the circumstances prescribed under (a) to (d) of section 92C (3) of the Act which necessitates intervention of the AO/TPO for determination of arm's length price. But TPO, determined the arm's length price of the international transactions under review at 'NIL' value, based on his main allegation that the benefits claimed to have been received by the assesse from Nalco Pacific under the agreement would not be ones for .....

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after examining the facts of the case held as under: "19…… In CIT v. Walchand& Co. etc. [1967] 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. . . 22. Even Rule 10B(1)(a) does not authorize disallowance of .....

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e or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning ..." 20. Ld. Counsel also relied on the case of CIT v. Walchand& Co. etc. [1967] 65 ITR 381, the Hon'ble Apex Court has held that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expendit .....

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roup service charge (regarding which there was no dispute that the same was incurred wholly and exclusively for the purpose of business) from his own point of view and computed the arm's length price of the international transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assessee from Nalco Pacific under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. Hence .....

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xpenditure can be examined by the TPO as per law and so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. But in the present case before us, the TPO judged the reasonableness of the aforesaid intra-group service charge and computed the arm's length price of the international transactions under review at 'NIL' value based on his main alle .....

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alia held that: "9. We have heard both sides and have also gone through the orders of the AO, TPO and DRP…. The evidences have been submitted before the authorities below showing rendering of the certain services against the payments made to the associated enterprises. In the arena in which the assessee company is functioning, it will be difficult to imagine a successful business entity in the global environment without receipt of the services which carries huge intrinsic and creativ .....

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otation. It is difficult to accurately measure these benefits in terms of money value separately. Therefore, we find no justification to sustain any addition in this regard on this issue. We direct to delete the addition and this ground is allowed. 22. We have gone through the case of McCann Erickson India (P.) Ltd (supra), the Delhi Tribunal has held that it is only a particular business expert who can evaluate the true intrinsic and creative value of intra-group services and in any case, the v .....

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epted the valuation of the intra-group services made by the TPO at 'NIL' value. We have observed from the facts of the case that in the instant case, the TPO determined the arm's length prices of the intra-group services claimed to have been received by assessee from Nalco Pacific at 'NIL' value without applying any of the transfer pricing methods prescribed under section 92C of the Act read with rule 10B and 10C of the Rules. In this connection, Co-ordinate bench decision of .....

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the most appropriate method and selected a set of external comparables. As per this analysis, the international transactions covered under the TNMM, were at arm's length. The aforesaid analysis by assessee was not disputed by the TPO. • The assessee was called upon by TPO to provide the basis of pricing of these transactions. The assessee was also required by the TPO to provide necessary details along with allocation keys and basis of calculation of payment made for I.T. support servic .....

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observed that the exercise of benchmarking made by the assessee to show that the price charged by its associated enterprise for providing IT support services was at arm's length had not been disputed by TPO. It was also observed by the Tribunal that the arm's length price of the internationaltransaction under review was determined by the TPO at "nil" without applying any of the prescribed methods and the entire payment made by the assessee for availing the IT support services .....

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see. In the instant case, TPO computed the arm's length price of intra-group services received by assessee from Nalco Pacific under the aforesaid agreements at 'nil' value without applying any of the transfer pricing methodologies prescribed under section 92C of the Act read with rule 10B and 10C of the Rules. Accordingly, the action of the TPO in arriving at the arm's length price of the relevant international transactions at 'nil' value without application of any transf .....

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h were placed on records. The TPO had examined the details filed by assessee and based on such examination, he held in his order that the pricing of the aforesaid agreements was justified by assessee on the basis of the TNMM. We find that the TPO did not make any adverse comments in his order upon the arm's length analysis carried out by assesse under the TNMM as per section 92C of the Act read with rule 10B of the Rules. Accordingly, we feel that TPO made proper enquiry and applied his mind .....

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o the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Britannia Industries Ltd 257 ITR 225, wherein Hon'ble Calcutta High Court has held that the Department cannot take a contrary view in respect of any issue which has been accepted by the Department for succeeding assessment year based upon the similar set of facts. Thus, by following the above principle laid down by the Hon'ble Calcutta High Court, we feel that the action of TPO in making disallowance of the intr .....

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28 2007-08 Nalco Pacific Pte Ltd 27,157 2008-09 Nalco Pacific Pte Ltd 28,120 We also find from the records that assesse submitted various evidences of receipt of intragroup services to the TPO which are enclosed in page no. 71-79, 103-124, 129-132, 133- 138, 139-140, 143-144 and 157-162 of the assessee spaper book. The assesse also furnished explanation in regard to the nature of the aforesaid services in page no. 9, 11and 12 of its first submissions. Further, in appeal before CIT(A)also assesse .....

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ach year) and the intra-group service fees charged (billing) by Nalco Pacific to various group companies including the assesse company from the year 2002 to 2004 (separately for each year). The assesse also submitted various evidences of receipt of intra-group services to CIT (A) which are enclosed in page no.195-216, 243, 249-252 of the assessee s paper book. The assesse also filed explanations in regard to the nature of the aforesaid services in page no. 10 of its first submissions. 25. In the .....

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ered by Nalco Pacific to assessee under the agreement were similar to the services mentioned in paragraph no. 7.14 of the DECD Guidelines. In view of this, we appreciate that the services rendered by Nalco Pacific to assessee were intra-group services for which independent enterprises would have been willing to pay for or to perform in-house for themselves and hence, the value of the aforesaid services in comparable uncontrolled transactions could not be 'nil'. The paragraph no. 7.12 of .....

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will make the acquisition or terminate one of their divisions, but they may also produce economic benefits for other group members not involved in the object of the decision by increasing efficiencies, economies of scale, or other synergies. The incidental benefits ordinarily would not cause these othergroup members to be treated as receiving intra-group services because the activities producing the benefits would not be ones for which an independent enterprise ordinarily would be willing to pa .....

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te the claim for provision of actual services with documentary evidence, has no leg to stand. 27. The second ground for confirming disallowance by CIT (A)that the intra-group service charge under the agreement between assessee and Nalco Pacific was fixed not with reference to any particular service. The intra-group service charge was calculated at a fixed percentage of sales of assessee, irrespective of which services were actually received by assessee or whether any services were received by it .....

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e rendered to associated enterprises are also rendered to independent parties. If specific services are provided not only to associated enterprises but also to independent enterprises in a comparable manner and as a significant part of its business, it could be presumed that the MNE has the ability to demonstrate a separate basis for the charge (e.g. by recording the work done and costs expended in fulfilling its third party contracts). As a result, MNEs in such a case are encouraged to adopt th .....

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hods for charging for services provided by parent companies or group service centres. In such cases, the MNE groups may find that they have few alternatives but to use cost allocation and apportionment methods which often necessitate some degree of estimation or approximation, as a basis for calculating an arm's length charge. Such methods are generally referred to as indirect-charge methods. The allocation might be based on turnover, or staff employed, or some other basis. Whether the alloc .....

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ich constitute direct-charge method as provided by the OECD Guidelines. But, Nalco Pacific, having been a group service centre for Nalco Asia Pacific group companies including assessee, did not render same/similar services to third parties (i.e. independent customers) during the relevant financial year and hence, Nalco Pacific, did not have the ability to demonstrate a separate basis for the charge by recording the work done and costs expended in fulfilling its third party contracts. Hence, in v .....

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Taiwan, South Korea, Thailand, Japan, Philippines, Indonesia and India (i.e. the assessee) and the costs incurred by the respective cost centre were allocated to the group companies based on percentage of sales agreed between Nalco Pacific and the group companies. For instance, the assessee, under the agreement, agreed a net remittance to Nalco Pacific for the intra-group services up to a maximum of 2% of net sales for each calendar year. This method of allocation has been approved by the OECD .....

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irmed the addition of ₹ 1,51,74,980/- without considering that the aforesaid payments were approved by the Reserve Bank of India. Ld. Counsel referred to page no. 52 of the assessee s paper book, wherein the Reserve Bank of India (Exchange Control Department) vide letter (Reference No. 1068/03.19.0007 (XI) / 2000-01 dated 3rd April, 2001 intimated their "in-principle" approval for remittance of consultancy charges to Nalco Pacific @ 2% of net sales for the calendar year 2001. It .....

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t of 2% of contract value for manufacturing, drawing and engineering services and 5% of the selling price as royalty. The assessee company applied to the RBI seeking approval in respect of payment of royalty and technical fee through Central Bank of India. It was in pursuance to the deemed approval by RBI under the automatic approval scheme that the assessee made payment of royalty and technical fee to its associated enterprise. The Tribunal inter alia held that: "In our considered opinion, .....

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rds and the orders of the revenue authorities, we find that in so far as the payment of royalty on technical knowhow concerned, the assessee has been paying to its parent AE right from 1993, as, other group companies are paying across the globe Besides this, the payment is made as perthe approval given by the RBI and SIA, Government of India. Hence there cannot be any scope of doubt that the royalty payment on technical knowhow is not at arm's length." In the aforesaid decisions, Mumbai .....

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receivable from Nalco Pacific under the aforesaid agreement, the benefits to be received by it from entering into the aforesaid agreement with Nalco Pacific and the maximum amounts to be remitted as consultancy charge to Nalco Pacific under the aforesaid agreement. In reply, the RBI intimated their "in-principle" approval for remittance of consultancy charge to Nalco Pacific @ 2% of net sales for the calendar year 2001. In view of this, weare of the view that the aforesaid payment (Rs. .....

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o associated enterprises valued ₹ 39,78,196/-. . For this, assessee has raised following ground nos. 3(a) and 3(b): 3(a) That on the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in confirming the addition made by the TPO/ AO amounting to ₹ 39,78,196/- to the returned income of the appellant for the previous year relevant to the assessment year 2004-2005 in regard to export of chemicals by the appellant to its associated enterprises during the peri .....

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ical functional, risk and geographical differences in-between such transactions which would have otherwise rendered the application of CUP method to be inappropriate and unreliable under the provisions of section 92C(2) of the ITA read with rule 10C of the ITR and further, erred in rejecting the method and approach adopted by the appellant for justifying the arm's length nature of the transactions with Associated Enterprises referred to hereinabove, without assigning any valid reasons whatso .....

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to Nalco Hong Kong Limited (associated enterprise) @ INR 105.96 per unit. The assessee sold 2880 units of EC5300A/180 to Bongaigaon Refinery Petrochemicals Ltd, which is an independent customer, @ INR 190 per unit. The assessee sold 990 units of chemical named EC3210A/198 to Ondeo Nalco Thailand (associated enterprise) @ INR 86.37 per unit. The assessee sold 792 units of chemical named EC3210A/198 to Haldia Petrochemicals Ltd, which is an independent customer, @ INR 450 per unit. The assessee a .....

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ed justification for the aforementioned price differentials. But TPO applied the Comparable Uncontrolled Price ('CUP') Method to determine the arm's length prices to the aforesaid international transactions with reference to the uncontrolled transactions between assessee and the third party customers such as Bongaigaon Refinery Petrochemicals Ltd and Haldia Petrochemicals Ltd. Accordingly, an adjustment of ₹ 39,78,196/- was recommended to the income of assessee. 32. Assessee be .....

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tion / adjustment to income made by the AO based on the recommendation of the TPO. Aggrieved, assessee preferred an appeal before Tribunal. 33. Before us, Ld. Counsel for the assessee argued that there was rationale for price differentials between controlled and uncontrolled transactions. He referred to page no. 56 of assessee s paper book, the assessee vide letter dated 20.11.2006 stated that the product EC5300A/180 was manufactured to cater to the Indian customers but in course of time the dem .....

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or needed to be disposed of. The dictionary meaning of 'shelf life' is the period during which a good remains effective and free from deterioration, and thus saleable. Jayanta Guha sought for the advice of Swapan Paul in regard to re-work or disposal of the chemical. Swapan Paul forwarded the e-mail to Jaideep Gupta with a request to look into the matter as there was difficulty in disposal of the aforesaid chemical (written by hand on the copy of the email). In reply, Jaideep Gupta wrote .....

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at that point of time. It was further mentioned in the e-mail that the chemical was going to expire soon. Jayanta Guha was seeking for the advice of Swapan Paul as to whether the chemical could be used in some way or to dispose it off. Swapan Paul forwarded the e-mail to Jaideep Gupta with a request to consider whether the chemical could be sold at a low/discounted price or scrap value as it was not feasible to re-work the same or to re-blend the same in any other formulation (written by hand o .....

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fic attention was invited to rule 108(1)(a) of the Rules, which interalia reads as under: "Determination of arm's length price under section 92C 10B.(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for prope .....

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pect of the property transferred or services provided in the international transaction; ... Further, attention was invited to paragraph no. D.1.2.1 of page 44of Chapter I of the OECD Guidelines, wherein clarification on the terms 'characteristics of property or services' which is briefly given as under: "D.1.2.1 Characteristics of property or services 1.39 Differences in the specific characteristics of property or services often account, at least in part, for differences in their va .....

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g on the transfer pricing method, this factor must be given more or less weight. Among the methods described at Chapter 11 of these Guidelines, the requirement for comparability of property or services is the strictest for the comparable uncontrolled price method…… " Further, attention was invited to paragraph no. 2.15 of page no. 63 of Part 11 of Chapter 11, which inter alia reads as under: "2. 15 It may be difficult to find a transaction between independent enterprises .....

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d that 'characteristics of property' that may be important to be considered in the case of transfer of tangible property are the physical features of the property, its quality and reliability, and the availability and volume of supply. The OECD provides that the requirement for the aforesaid factor of comparability is the strictest under the CUP Method. The OECD also provides that it may be difficult to find a transaction between independent enterprises that is similar enough to a contro .....

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sold to Ondeo Nalco (Sanghai) Trading Co. Ltd and Nalco Hong Kong Ltd on the account of the following reasons: • Difference in Quality, Reliability and Availability: EC5300A/180 became part of obsolete stock, had shelf life issues and therefore was not in normal saleable condition in the market when the same was transferred to Ondeo Nalco (Sanghai) Trading Co. Ltd and Nalco Hong Kong Ltd. The personnel of the appellant company were planning to sell the obsolete chemical at a discounted rate .....

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so 14,400 units of EC5300Al180 @ INR 105.96 per unit to Nalco Hong Kong Ltd. This significant difference in quantity sold to independent customer (i.e. 2,880 units) from the quantity sold to associated enterprises (i. e. 42840 units) justified the action of the appellant company in granting quantity discount to the associated enterprises. 36. In view of the above differences, we can easily assume that the characteristics of EC5300A/180 transferred in the uncontrolled transaction between assessee .....

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on of the CUP Method made by the TPO in the above case was inappropriate. In the instant case, the characteristics of EC3210A/198 sold to Haldia Petrochemicals Ltd were significantly different from those of EC3210A/198 sold to Ondeo Nalco Thailand on the account of the following reasons: Difference in Quality, Reliability and Availability: EC3210A/198 had no requirement in the local market and it was on the verge of expiry when the same was transferred to Ondeo Nalco Thailand. Hence, the chemica .....

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A/198 transferred in the uncontrolled transaction between assessee and Haldia Petrochemicals Ltd were not at all comparable to the characteristics of EC3210A/198 transferred in controlled transactions between assessee and Ondeo Nalco Thailand. The TPO did not adjust the price charged by assessee in the uncontrolled transaction in order to account for the aforesaid differences between controlled transaction and uncontrolled transaction. Hence, the application of the CUP Method made by the TPO in .....

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e of determining ALP under CUP method is to ensure that the price charged by the Indian Enterprise from its AE should be consistent with that charged from unrelated parties under similar circumstances. The importance of the similar circumstances" cannot be lost sight of in this context because a round cannot be compared with a square and a rectangle with a triangle. In other words the uncontrolled transactions which are contemplated for comparison should be alike, if not identical. Similari .....

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particular commodity or its raw material may have lower sale price incomparison with the country which is short of such natural resources. Similarly the price may vary from one country to another depending upon climatic conditions and the demand and supply factors…. " 38. In view of the above decision, we find that apart from differences in quality, grade and quantity of materials, the difference in such factors like the geographical location of the parties, availability of raw mate .....

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ould not find any local customer for the chemicals. The chemicals could not be re-worked or re-blended with any other formulation. Hence, the assessee was bound to sell the chemicals at low prices to its associated enterprises to recover a part of the costs incurred in manufacturing the chemicals. Thus there was no room for the prices of the aforesaid chemicals to be determined by the free interplay of demand and supply forces in the open market. On the other hand, EC5300A/180 was sold to Bongai .....

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ia Petrochemicals Ltd on account of the differences in quality, reliability and availability of chemicals, volume of supply, geographical location, availability of raw material, demand and supply equation between the respective controlled transactions and the uncontrolled transactions in chemicals EC5300A/180 and EC3210A/198.Hence, we delete the addition/adjustment of ₹ 39,78,196/- made by the AO and confirmed by CIT (A). 39. The next issue in the appeal of assessee in ITA No.529/kol/2008 .....

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on ble Madras High Court vide its order dated 2.9.2002 effective from 1.4.2000. The assssee-company filed its revised return for the AY 2001-02 on 28.03.2003 incorporating the effect of this amalgamation and assessment was framed on the same under section 143(3) of the Act. In the immediate next year, i.e. AY 2002-03 the assessee-company filed a consolidated financial statement before the AO taking into account the financial results of Acqa Chemicals & Systems (Mfg.) Ltd. to arrive at a cons .....

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ation should have been from AY 2001-02 and not in the AY 2003-04, without understanding the facts that the assessee company had already given effect to the amalgamation w.e.f. 1.4.2000 in the return of income filed along with financial statements of Acqa Chemicals & Systems (Mfg.) Ltd. and AO has also assessed on the same. The AO without noticing these facts made ad hoc addition for an amount of ₹ 5 Cr. In the total income of the assessee and ld. CIT(A) also confirmed the addition made .....

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second appeal before Tribunal on this issue. 41. We have heard rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee company received the amalgamation order from Hon ble High Courts of Calcutta and Madras in FY 2002-03 relevant to AY 2003-04 and immediately on receiving the amalgamation order, the revised return consolidating the financial results / accounts was filed incorporating the effect of amalgamation. The assessee .....

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