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M/s. Bayer CropScience Limited Versus ACIT -10 (3) , Mumbai

2016 (7) TMI 28 - ITAT MUMBAI

Transfer pricing adjustment - MAM - Held that:- TP provisions were introduced in the Act to prevent the practice of transferring the profit to the AE by adopting certain dubious methods. Naturally, the target should be the transactions with the AE.s and not the all the transactions. The assessee had challenged the exclusion and inclusion of certain comparables. The DRP has not considered any of these basic issues. As stated earlier, it passed a two line order and the order is not assigning any r .....

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the DRP should have considered all the above facts and should have passed a reasoned order. In our opinion, matter needs further verification. So, in the interest of justice we are restoring back the matter to the file of the DRP who would decide the issue after hearing the assessee. It may call for comments from the TPO. - Disallowance of payment made to clubs - Held that:- The action of the AO is highly objectionable and not as per the provisions of the law. The AOs have to follow the dir .....

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at:- We find that during the year under consideration the assessee had received dividend income of ₹ 37.51 lakhs, that it explain to the AO that dividend warrants were deposited into bank accounts in a routine manner along with the other checks, that the assessee had sufficient own funds to make investment, that it had made investments in subsidy companies, that on its own it had disallowed and amount of rupees 2.33 lakhs, that the AO had not given any reason as to why the calculation give .....

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capital or revenue expenditure the basic thing to be seen is as to whether the expenditure is for running the business of the assessee smoothly. If the expenditure is incurred for day-to-day business activities of the assessee and not for acquiring some asset it has to be allowed as revenue expenditure. In the case before us, it is a fact that no new asset came into existence. Secondly, the expenditure incurred was basically for carrying out the business. Payment to government agencies would no .....

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L and to avoid future business complications. If an assessee makes payment which is compensatory nature, it has to be allowed. In the case before us, the payment was made in pursuance of an agreement and that was of compensatory nature i.e.it was not penal. The Hon’ble Calcutta High Court upheld the order of the Tribunal. It referred to the case of G Scammell & Nephew Ltd. (1939 (1) TMI 12 - COURT OF APPEAL) wherein it was held that the expenditure incurred for termination of a trading relations .....

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ng that the matter to the file of the DRP to decide the issue afresh after hearing the assessee - Adjustment of opening stock - Held that:- In our opinion the basic principle of taxation jurisprudence stipulate that no item can be taxed twice. Considering the fact and circumstance of the case, the AO is directed to make further verification and to allow the adjustment as per the provisions of section 145A of the Act. He is to ensure that assessee does not suffer taxation for the same amount .....

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micals for Plant protection, filed its return of income on 30/11/2006, declaring income of ₹ 51.18 crores. During the assessment proceedings, the AO found that assessee had entered into International Transactions (IT.s) with its Associated Enterprises(AEs). So, he made a reference to the Transfer Pricing Officer (TPO)to determine the Arm s Length Price(ALP) of such transactions. After receiving the order of the TPO, the AO sent the draft assessment order to the assessee, who challenged it .....

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of raw material 112, 95, 51, 398 2. Import of traded products 7, 75, 70, 764 3. Export of finished products 80, 60, 91, 048 4. Sale of Asset 26, 29, 000 5. Payment of indenting commission 38, 84, 001 6. Import of Software 55, 62, 236 7. Provision of SAP support services 2, 03, 49, 405 8. Recovery of expenses 48, 65, 599 9. Reimbursement of expenses 10, 38, 28, 884 He found that the assessee had used the Internal Transaction Net Margin Method(TNMM), that net profit margin(operating profits/sales) .....

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similar statement had been made in respect of the trading activities. 2.1. After going through the segmental details, filed vide letter dated 27/8/2009, the TPO held that the total income appearing in the statement was ₹ 73522.64 crores, that the income allocated between MSings(MS)and TSings(TS)included not just that total turnover(Rs. 64858.62 crores)but also other income in the nature of intending commission, intending business would vary as compared to normal trading activity, that it w .....

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been included in the total turnover for proper location of overheads and Manufacturing expenses, that it had also rendered certain manufacturing services, that the total income received in respect of the same was 700.33 crores, that the assessee had disclosed income of ₹ 22.07 crores only, that the assessee had also rendered SAP support services. The TPO asked the assessee to explain as to why the internal TNMM should not be rejected. The assessee filed by revised segmental analysis on 07 .....

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n keys, that the income pertaining to MS and TS had been identified by the company based on products sold as captured in the audited sales register, that it employed standard cost system for capturing the cost of manufactured goods sold, that in determining the standard cost the company would take into account all the budgeted material cost and manufactur -ing overheads to arrive at a standard cost per product, that the assessee s system would capture various expenses for determining the standar .....

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9;000) Transactions with third parties Transactions with Associated enterprise (AE) Total Transactions with third parties Transactions with associated enterprise (AE) Total Grand Total Income 3, 665, 556 3, 233, 617 6, 899, 173 342, 031 111, 060 453, 091 20, 350 7, 372, 614 Expenses 3, 318, 08 2 2, 868, 860 6, 186, 942 343, 070 109, 232 452, 302 (6, 655, 728) Net operation profit 347, 474 364, 757 712, 231 (1, 039) 1, 828 789 3, 866 716, 886 Net operation profit (%) 9.48 11.28% 10.32% -0.30% 1.6 .....

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te of 0.30%, that the ITs of TS were at arm s length. The assessee had compared the margin of non-AE TS results with external comparables and even on that basis it was claimed that IT.s of TS were at arm s length. 2.2. However, the TPO was not convinced with the explanation. The TPO held that for a proper internal comparison between the margins of AE or non-AE segment it was necessary that there should be identity of products, that a high percentage of higher margin items in the AE segment would .....

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separate books of accounts were maintained in respect of the direct and indirect costs and a location had been made in respect of the head office expenses, that an absorption costing system could be used where each cost was absorbed accurately and allocated to a product, that in absence of the same allocations on the basis of turnover had to be rejected, that the variation on account of contract manufacturing , rendering manufacturing services, sourcing services the internal TNMM could not ensu .....

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at Ltd. 28.38 12.30 Prowess Dhoot Industrial Finance Ltd. 54.08 -0.43 Annual Report Guljag Industries Ltd. 65.61 3.97 Prowess Hiran Orgochem Ltd. 39.95 0.72 Annual Report Indokem Ltd. 42.37 6.17 Annual Report K.P.L International Ltd. 26.43 17.26 Annual Report Nikhil Adhesives Ltd. 28.41 1.65 Annual Report P.H. Trading Ltd. 49.11 2.50 Annual Report Priya International Ltd. 4.18 -3.06 Annual Report Roselabs Ltd. 1.0 3.29 Annual Report Arithmetic Mean 4.06 As per the TPO ACEL, PIL and RL had very l .....

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port Nikhil Adhesives Ltd. 28.41 1.65 Annual Report P.H. Trading Ltd. 49.11 2.50 Annual Report Arithmetic Mean 6.37 Considering the above, he held that margins of comparable companies engaged in trading of chemicals was 6.37 as against the margin shown by the assessee at 0.17%, that TP adjustments were to be made at ₹ 2.80 cores. In his draft order, the AO made an addition of the said amount to the total income of the assessee. 2.3. Aggrieved by the draft order of the AO, the assessee file .....

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essee. 2.4. Before us, the Authorised Representative(AR)submitted that the assessee had applied turnover criteria of greater than ₹ 1 crores, that the TPO on an ad hoc basis rejected companies stating little turnover, that he did not dispute the functional similarity of the comparables, that he wrongly rejected companies in the range of ₹ 4 to ₹ 6 crores despite turnover of TS of assessee being ₹ 11crores without appreciating that this range of turnover was in fact quiet .....

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st of the arguments were similar to the arguments advanced for the first comparable. He stated that if ACEL, PIL and RL were included in the final seven comparables of the TP order the margin of the 10 comparables would work out to be 4.51% even if combined trading margin of the assessee i.e.0.17% was considered, that the same would fall within +5% range, that internal TNMM was the MAM, that Dhoot was into trading of chemicals and other products, that while applying TNMM product similarity was n .....

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s (0.17%)was considered, that the same would fall within ± 5% range. On the proposition that Product similarity not relevant in TNMM, he relied upon the cases of GE India Technology Centre (P) Ltd. (30 taxmann.com 249)and Diageo India (P) Ltd. 34taxmann.com 284). He further argued that the DRP erred in upholding the action of TPO in rejecting segmental accounts of TS prepared by assessee and thereby disregard - ing internal TNMM & adopting external TNMM, that the assessee's segmen .....

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ransaction of special nature, that the transaction pertaining to toll manufacturing was more closely aligned to manufacturing activity and trading activity as it pertained to goods manufactured by a toll manufacturer appointed by the assessee to manufacture certain specified goods under its direction and supervision, that the goods were received from the toll manufacturer in a completed state the same had been classified as cost of traded goods in the financial statements, that based on the actu .....

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gether, that on the total level the net profit was tying up with financials, that standard costs were used for the purpose of segmentation variance, that COGS was based on Standard and Actual. He referred to paragraph 13 of AS-17 and argued that the assessee had fairly and reasonably prepared the segmental profit and loss account between the manufacturing and TS based on the financial information captured by the internal financial reporting system of the Company for those segments, that the asse .....

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e of agro chemicals, that both the segment under the manufacturing function were functionally similar, that the internal TNMM analysis conducted by the assessee was correct. , that the TPO had accepted the broad segmentation of the assessee between Manufacturing and Trading activities, that on the very same basis it had further dissected the Manufacturing and Trading activities into AE (associated enterprises) and Non AE segments, that he did not considered the AE and Non AE segmentation made by .....

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s the assessee had classified the indenting commission under the TS and the TPO had accepted the same, that in case of comparables indenting commission was considered to arrive at their margins, that the figures reported in TPO s order about manufactur -ing services were incorrect, that the total income received was ₹ 70.33 crores and the profit disclosed was ₹ 22.07 lakhs, that separate books of accounts were maintained in SAP system by the assessee for the manufacturing services, t .....

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ansaction had been allocated to MS, that export incentives were part of MS, that in case of trading the assessee would import from AEs and would sell locally, that the argument of the TPO that AE segmented export incentive was factually incorrect, that with regard to following of the standard costing system it is found that the assessee had given a proper reconciliation to the TPO of the profit as per the segment of financial split and the profit as per audited financials, that the reconciliatio .....

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rial to vitiate the segmental profitability, that the correct figure of manufacturing services was 70.33 crores and not 700.33 crores as reported by the TPO, that the profit disclose was ₹ 22.07 lakh and not 22.07 crores as held by the TPO, that separate books of a/c.s were maintained for the manufacturing services, that same had been separately disclosed in segmental results, that the TPO and the DRP had accepted the IT.s. of MS, that no addition has been made for SAP services, that the T .....

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specifically advanced the issue that if any adjustment was to be made it should have been restricted to the Transaction with the AE.s, not for the entire segment. In our opinion, the argument is very basis of TP adjustments. The TP provisions were introduced in the Act to prevent the practice of transferring the profit to the AE by adopting certain dubious methods. Naturally, the target should be the transactions with the AE.s and not the all the transactions. The assessee had challenged the ex .....

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w. The DRP has not considered this vital issue. We agree that res-judicata is not applicable to the taxation proceedings, but, rule of consistency is very much applicable. Therefore, the DRP should have considered all the above facts and should have passed a reasoned order. In our opinion, matter needs further verification. So, in the interest of justice we are restoring back the matter to the file of the DRP who would decide the issue after hearing the assessee. It may call for comments from th .....

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re. In his draft order he proposed the addition. The assessee filed objections before the DRP. In its order the DRP directed the AO that to examine the details of expenditure and to allow expenditure on account of subscription and club membership. However, in the final order the AO held the expenditure of capital nature and disallowed it. 3.1. Before us, the AR stated that the DRP had directed the AO to allow expenditure on account of subscription and club membership as a deduction after examini .....

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nd wholly for the purpose of business, that club membership only facilitated assessee to conduct its business more smoothly and efficiently. He relied upon the cases of Otis Elevators Company (India)Ltd. (195ITR682), Samtel Colour Ltd. (326 ITR 425), Infosys Technologies Ltd. (349 ITR 582). The DR left the issue to the discretion of the Bench. 3.2. We have heard the rival submissions and perused the material before us. We find that the assessee had claimed expenditure towards payments made to cl .....

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r the provisions of the law. The AOs have to follow the directions of the DRP-they had no choice as far as following the directions of the DRP is concerned. They are authorised to challenge the directions before the Tribunal but they cannot refuse to carry out the directions. Therefore, only on this count the appeal of the assessee has to be allowed. But, even on merits the issue is covered in favour of the assessee by several judgements relied upon by the assessee. We would like to refer to the .....

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a pure business expense. Respectfully following the above judgement, ground number 12 is decided in favour of the assessee. 4. Next ground deals with disallowance made u/s. 14A r.w.r.8D of the Income Tax Rules, 1962(Rules), amounting to ₹ 22.87 lakhs. In the draft assessment order, the AO had proposed to make disallowance as per the provisions of section 14A of the Act. The assessee filed objections before the DRP who gave partial relief to the extent of ₹ 6.65 lakhs. It deleted the .....

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vestment and amount of ₹ 2.58 crores was in a subsidiary, that an investment of ₹ 20.48 lakhs were made out of compulsion, that those investments were made as per the requirements of the local authorities, that the investments were made out of commercial expediency and not with intention of exempt income, that the assessee itself disallowed a sum of ₹ 2.80 lakhs as expenditure incurred towards earning of exempt income, that the AO had neither controverted not recorded any objec .....

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deration the assessee had received dividend income of ₹ 37.51 lakhs, that it explain to the AO that dividend warrants were deposited into bank accounts in a routine manner along with the other checks, that the assessee had sufficient own funds to make investment, that it had made investments in subsidy companies, that on its own it had disallowed and amount of rupees 2.33 lakhs, that the AO had not given any reason as to why the calculation given by the assessee was not acceptable. He had .....

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expenditure. After considering the submission of the assessee, the AO held that the expenses pertained to new product development/ trial expenses, that same were in the nature of capital expenditure which would give enduring benefit the assessee. He proposed to treat it a capital expenditure and to disallow the same. 5.1. Aggrieved by the draft order of the AO, the assessee filed objections with the DRP. Before it, the assessee made elaborate submissions. After considering the available material .....

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llowed under section 37 (1) of the Act. 5.2. Before us, the AR contended that the assessee had incurred expenses to test as to whether any of its existing products could be used for certain other crops , that the exercise was taken before selling the goods in the market, that the products were sold in the past for a specific crop, that if those products were to be used for other crops same were to be tested for/on product quality, bioefficacy and toxicology, that expenditure related to testing c .....

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s of section 35 of the Act. The DR argued that assessee was not carrying out the research activities itself, that the government approved institutions were doing the job on behalf of the assessee, that expenditure could not be allowed as revenue expenditure. 5.3. We have heard the rival submissions and perused the material before us we find that while dealing with the objections filed by the assessee for the a why 2007-08 the DRP had allowed the direction under section 35 of the Act. In our opin .....

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out the business. Payment to government agencies would not make any expenditure capital/revenue. Therefore, reversing the order of the AO, GOA -14 is decided in favour of the assessee. 6. Next ground is about disallowance of ₹ 2.25 lakhs, being computer software expenses. During the assessment proceedings, the AO found that assessee had claimed the said expenditure as revenue expenditure. He proposed to disallow the same treating as capital expenditure. It filed objections before the DRP, .....

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cases of Asahi India Safety Glasses Ltd. (ITA 1110/2006 and 1111/2006 of Hon ble Delhi High Court), Raychem RPG Ltd. (ITA 476 of 2009 of Hon ble Bombay High Court) GE Capital Services Ltd (300 ITR 420). The DR stated that matter could be decided on merits. 6.2. We have heard the rival submissions and perused the material before us. We find that in the case of Asahi India Safety Glasses Ltd. the Hon ble Delhi High Court has held as under: Software is nothing but another word for computer programs .....

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uters to communicate with each other, while language software provides the tools required to write programs. The aforesaid boat show that what the assessee required through A was and application software which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance. The fact that the application software would have to be updated from time to time based on the requirements of the assessee in the context of advancement of its amendments by law or by professional .....

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e incurred in the field of software applications, it cannot be said that either the extent of the expense or the expense being incurred in close proximity, in the subsequent years, would be conclusively determinative of its nature. The Assessing Officer has erred precisely for these very reasons. The contention of the revenue that in the books of accounts the assessee had not written off the expenses in issue while in succeeding assessment year only a part of the expense had been written off and .....

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re, the tribunal was correct in law in holding that the expenditure incurred by the assessee on account of software and professional expenses was revenue expenditure. Respectfully, following the above judgment we allow the ground is by the assessee. 7. Ground 16 is about disallowance of ₹ 2.96 crores, being compensation paid by the assessee to Punjab Pesticides Industrial Corporation Society Limited (PPICSL). During the assessment proceedings, the AO found that the assessee had made the pa .....

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admission, had been made to ensure goodwill and continued relationship, that it was in the nature of generating the goodwill, that it could not be considered to be a revenue expenditure, that the goodwill not being a depreciable assets depreciation was also not allowable. 7.2. During the course of hearing before us, the AR submitted that PPICSL was closely associated with the assessee is a tolling unit for over 30 years, that it made a huge investment in plant in 2002 in order to meet desired q .....

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nt of ₹ 2.96 crores was determined as a compen - sation to terminate the agreement on mutual consent, that the compensation was paid for non-lifting of agreed quantity of raw material from PPICSL, that the payment was of revenue nature, that the expression wholly and exclusively did not mean necessarily, that the expenditure was incurred for furthering that rate/business interest of the assessee. He relied upon the cases of Jamna Auto Industries(167 Taxman 192), Indo Asian Switchgears Priv .....

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pital expenditure. In our opinion, for allowing/ disallowing any expenditure u/s. 37 of the Act the basic thing to be seen as to whether the expenditure was incurred for furtherance of business interest of the assessee or not. It is a fact that in this case because of the expenditure incurred no new assets came into existence. The expenditure was incurred considering the old relation with the PPICSL and to avoid future business complications. If an assessee makes payment which is compensatory na .....

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opped purchasing the goods from March 1975 though there was no breach of contract on part of the supplier, that the assessee paid compensation. The AO and the FAA held that amount of compensation paid by the assessee was an expenditure of capital nature. The Tribunal reverse the order of the FAA and held that the payment was made as a result of the business expediency and was a revenue expenditure. The Hon ble Calcutta High Court upheld the order of the Tribunal. It referred to the case of G Sca .....

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