TMI Blog2016 (5) TMI 1474X X X X Extracts X X X X X X X X Extracts X X X X ..... ly following the decision taken on an identical issue in the case of assessee itself set aside the matter to the file of the Assessing Officer to decide the issue afresh. Rejection of comparable - Held that:- A company cannot be rejected merely because it is making losses - filter of selecting company with R & D Expense less than 3% as comparable needs verification - CIT(Appeals) was not justified in allowing some of the services and rejecting others which are being part of the same agreement. We are of the view that when nature of services provided to CPP and OC Segments is same as provided to other segments, the learned TPO ought to have adopted consistent treatment to the services utilized in CPP as well as OC Segments and services rendered to the other business segments. We are of the view that it is not the prerogative of tax authorities to ascertain the benefit received from the availment of services and the benefit received from a particular service has to be perceived from the point of view of businessman and not the tax authorities. The grievance of the assessee also remained that it had duly submitted evidences on sample basis relating to receipt of services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd consider the benefit available under proviso to section 92C of the Income-tax Act, 1961 for downward variation of 5% from the arm's length price. These grounds are thus allowed for statistical purposes. - IT Appeal Nos. 4774 & 5043 (Delhi) of 2014 - - - Dated:- 20-5-2016 - I.C. Sudhir And L.P. Sahu, JJ. Ajit Tolani, Adv. for the Appellant. Anand Kumar Kedia and Amremdra Kumar, CIT (DR) for the Respondent. ORDER I.C. Sudhir, These are cross-appeals by the parties against the first appellate order. The assessee had questioned first appellate order on the following grounds: 1. The learned Commissioner of Income Tax (Appeals) ( CIT(A) ) erred in law and on the facts of the case in upholding the order passed by the Assessing Officer, on surmises and irrelevant consideration and without considering the evidence on record for the assessment year 2007-08. 2. The Ld. CIT(A) erred on facts in stating that the Transfer Pricing Officer ( TPO ) has rejected the transfer pricing ( TP ) study of the Appellant. 3. Grounds for Transfer Pricing Adjustment made to Crop Protection ( CPP ) segment 3.1 The Ld. CIT(A) erred in disregarding the judgment passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that it should be incurred wholly and exclusively for the purpose of the business regardless of extent of benefit derived. Further, the Ld. TPO has jurisdiction only to determine the arm's length price of expenditure and not to disallow whole expense even if he is of the opinion that the expense is not necessary for business. 5.3 The Ld. CIT(A) erred in facts and law in disregarding the Rule of Consistency by not taking cognizance of the fact that these services have been provided by AEs for several years and the same were earlier assessed and accepted by the Ld. TPO during the assessment proceedings in respective years. 5.4 The Ld. CIT(A)has failed to appreciate that all the services received by the Appellant were provided by AEs under one agreement and followed an inconsistent and arbitrary approach of making value of services as NIL by way of TP adjustment as against the actual payments made for the following services: Marketing and Business Support Services Accounting and Financial Services Sourcing/Logistics/HR Services Legal Services 5.5 The Ld. CIT(A) failed to appreciate the fact that the Company is not guided by any motive to evade taxes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses related to Treasury Charges and Safety Consultancy services availed as these were already found at Arm's Length by the TPO. 2. On the facts and in the circumstances of the case and in law, the Learned CIT(Appeals) has wrongly relied on TP order for A.Y. 2010- 11 while deciding the issue of some adjustments, and the Learned CIT(Appeals) has also erred in not forwarding the new break-up of expenses relating to services availed while calling for the remand report from the TPO, as the same constituted additional evidences. 3. Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon. 4. The facts in brief are that the assessee company was set up in 1994. It manufactures products contacting many DuPont proprietary ingredients. These are science based solutions that find their application in food and nutrition, health care, apparel etc. It is also engaged in rendering inter group as well as safety consultancy services. It has manufacturing facilities in Mumbai, Tamilnadu for tynex toothbrush bristle and Teflon nonstick quoting and in sable, Gujarat for engineering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP study. 6. The assessee has questioned first appellate order sustaining the order passed by the learned TPO rejecting the transfer pricing study of the assessee. 7. Ground Nos. 1 and 2: These grounds are general in nature, hence, do not need independent adjudication. 8. In ground Nos.3, 3.1 to 3.6, the issue raised is as to whether the Learned CIT(Appeals) has erred in sustaining the order of the learned TPO in not accepting working capacity utilization furnished by the assessee in relation to CPP segment. 9. In support of these grounds, the Learned AR made following submissions: (a) Capacity utilization was not granted by Ld. TPO The Hon'ble ITAT in Appellant's own case for AY 06-07 allowed Capacity Utilisation-the copy of Order is placed at Paperbook 1 - Page 122 - Para 7 for your kind consideration. Detailed submission along with relevant data, was made before Ld. TPO as well as CIT(A) in relation to working of capacity utilization - (Please refer Paper book 1 - Page 138 tol40). Capacity utilization is a valid adjustment as per Rule 10B (specifically 10B(3) read with Rule 10B(l)(e)). Assessee places reliance on the judgment in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al report 2007 of Hikal Ltd. as submitted during the course of hearing before Your Honors. This argument is raised by the Appellant for the first time before the Hon'ble Tribunal. In view of decision of Hon'ble Special Bench in case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (Chd) (SB), the Appellant prays Your Honors to accept it and grant appropriate relief. (c) DhanukaAgritech Ltd - The company should be rejected as it underwent restructuring during the year Dhanuka Agritech should be rejected as the Company went into restructuring (please refer Director's report from Annual report 2006-07 as submitted during the course of hearing before Your Honors). It may be noted that during the year under consideration, the Sales of Dhanuka went up by 260%, profits went up by 152% whereas the overall profit margins dipped by nearly 3% as compared to earlier year. This argument is raised by the Appellant for the first time before the Hon'ble Tribunal. In view of decision of Hon'ble Special Bench in case of Quark Systems (P.) Ltd. (supra), the Appellant prays Your Honors to accept it and grant appropriate relief. 10. The Learned CIT(DR) on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The essential features are that there is no dispute regarding the most appropriate method or the PLI between the parties. The Assessing Officer has accepted the comparable cases furnished by the assessee with the difference that he has used the data of the current year. No dispute is raised before us in this matter, which is in accordance with Rule 10B(4). It is a fact that the turnover of the assessee has declined significantly in respect of the product named Avaunt . This has happened because of utilization of BT cotton seeds by the farmers, which require very few sprays for controlling bollworms. It is a matter of fact that fixed costs remain the same even when there is under utilization of capacity. Therefore, the case of the assessee and the comparable cases have to be examined in respect of capacity utilization so as to make the controlled and uncontrolled transactions comparable. The assessee had taken up this point before the learned DRP and even before the TPO, as discussed above. However, requisite adjustment has not been made to the PLI of the assessee. In fact, no attempt has been made by any of the lower authorities to work out the adjustment to be made on this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt has been raised by the assessee before the ITAT for the first time. Since facts of the case for the assessment year under consideration are similar to the facts in the case for the assessment year 2006-07, we respectfully following the decision taken on an identical issue in the case of assessee itself set aside the matter to the file of the Assessing Officer to decide the issue afresh as directed by the ITAT vide para No. 7 of the order reproduced hereinabove, keeping in mind our above finding and after affording opportunity of being heard to the assessee. The grounds are accordingly allowed for statistical purposes. 13. Ground Nos. 4, 4.1 to 4.3: In these grounds, the grievance of the assessee is regarding rejection of companies; (i) Gujarat Carbon Industries Ltd. (ii)Sunshield Chemicals Ltd. as comparables for making transfer pricing adjustments to organic chemicals (OC Segment) and in selecting Paushak Ltd. as a comparable by the Learned CIT(Appeals) for OC Segment. The further grievance of the assessee is that the Learned CIT(Appeals) has erred in using only single year financial data of comparables instead of multiple years financial data for determining the arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Page 20 of TPO's order). The Ld. CIT(A) in the case of Manali Chemicals has himself considered the company as comparable only if it incurs R D expenditure below 1% (please refer Para 6.2.2 on Page 20 of CIT(A)'s order). 16. Learned CIT(DR) on the other hand placed reliance on the orders of the authorities below. He contended that the authorities below have rightly rejected Sunshield Chemicals since it is a persistent loss maker and it is a potentially sick company. Result of some shield chemical for the year subsequent to assessment year 2007-08 cannot be looked into. Only prior year results are relevant. Annual report of the company also highlights that the company has been badly impacted by massive fall in petroleum prices and it is an exceptional year. Therefore, this company should not be taken as comparables. Regarding selection of Paushak Ltd. as comparable, he justified the action of the authorities below with the submissions that this company has spent only ₹ 68.12 lacs in financial year 2006-07 and ₹ 22.97 lacs in the preceding year on research and development. On the basis of this expenditure, it cannot be said that the company has developed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received services of ₹ 44,31,97,287. The assessee company has a mechanism wherein services are received as well as provided to DuPont Group entities in order to leverage on the expertise of employees which is available within the DuPont Group, which may not be necessarily available within the companies as well as locally. 21. The submissions of the Learned AR in support of the grounds of the appeal preferred by the assessee remained that the Learned CIT(Appeals) has erred in giving partial relief on account of adjustment with respect to administrative and business support services (IGS) availed by the company from its associated enterprises (AEs). He made following submissions in details on the issue: (a) Background The Company has a mechanism wherein services are received as well as provided to DuPont Group entities in order to leverage on the expertise of employees that is available within the DuPont Group, which may not be necessarily available within the Company as well as locally, During the year under consideration, the appellant provided services to DuPont entities of ₹ 116,958,511 and received services of ₹ 443,197,287. The detail of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to adopt a dissecting approach. (c) Proportionate Charge of Services Received for CPP and OC Segment were allowed and rejected for remaining segments without any reason It is important to note that the Ld. TPO, at the end of his order, allowed the services received utilized in CPP as well as OC segment and disallowed the proportionate amount of services rendered to the other business segments in the assessment year under consideration, (please refer Para 7.9 8 on Page 41-42 of TPO's order). It is humbly submitted that the nature of services provided to CPP and OC segment is same as provided to other segments. Once the TPO allows the services to CPP and OC segments, a consistent treatment must be adopted for other segments as well and the amount of services rendered should be allowed for other segments as well. (d) Charge for Inter Group services were allowed by Tax Department in earlier years and in future years. The agreement has been entered in 2003. The Ld. TPO has accepted the said services from AY 2002-03 to AY 2006-07. Detailed submission was made before the TPO in AY 04-05 on the said services and no adjustment was proposed after due examination (plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated from Para 7.2.1 to 7.2.12 on Page 43 - 48 of his order that the Company has received the services from its group companies. He has disallowed some of the services on following grounds:- Services are Duplicative in nature As per the evidences made available, the Ld. CIT(A) erred in making the given statement. None of the services received by DuPont India are duplicative of functions performed in house by the appellant. Without prejudice to this, the Income Tax Act does not prohibit the receipt of similar services from a number of consultants and what is required under the Act is to see whether the services were received for the purpose of business or not. The businessman has a right to decide on how many service provider he needs for rendering a particular service. For example, the appellant has a Lawyer on his pay roll but the appellant also chooses to appoint outside lawyers to represent the appellant in the court of law. As per the Ld. TPO and CIT(A), the appellant's use of outside lawyer tantamount to duplication of services and hence the fees paid to outside lawyer should be rejected as duplicative expense. This view is completely abstract and devoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benchmarking exercise without giving cogent reason for the same. The Company put reliance in the case of Li and Fung India (P.) Ltd. [2013-TII-18-HC-DEL-TP] by Delhi High Court dated December 16, 2013 and Delhi ITAT Judgment in the case of Frigo glass India (P.) Ltd. v. Dy. CIT [2014] 149 ITD 429/45 taxmann.com 101 (Delhi - Trib.) holding that - Once assessee has given a methodology for working of ALP on selection of a particular method supported by appropriate comparables, the working can be dislodged by TPO on the basis of cogent reasons and objective findings. In this case except theoretical assertions and generalized observations, no objective findings have been given to come to a reasoned conclusion . . . . . . . . . . Thus the rejection of methods by TPO as adopted by assessee is bereft of any cogency and objectivity. The Ld. TPO also erred in applying the CUP method in accordance with rule 10B of the Income Tax Rule, 1962. The Ld. TPO erred in justifying how CUP is the most appropriate method in the given circumstance as required under section 92C of the Income Tax Act, 1961. Without prejudice to above, even if it is accepted that CUP is right method to benchmark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f HR Transformation effort was shared vide our submission dated 7th June, 2012 before the Ld. CIT(A). Please also refer sheet - Sample evidences for Sourcing/Logistics/HR Services as submitted before your Honors during the course of hearing. Legal Services - Evidences relating to vetting of legal contracts, sharing global templates for entering into commercial contracts, helping on identifying opportunities to recover amounts that might otherwise be overlooked (Please refer Paper book 2 - Page 422-471) were shared. Please also refer sheet - Sample evidences for Legal Services as submitted before your Honors during the course of hearing. Accounting and Financial services - Evidences relating to guidance on regular basis as to the recording of transaction into SAP Accounting package (refer Paper book 3 - Page 860-866), rendering of costing and inventory management services (Please refer Paper book 3 - Page 821-822) were shared. Please note that there was no separate team in DuPont India for compilation of the costing inventory data. All the information relating to costing of products etc. are shared by Erika team only. Please also refer sheet - Sample evidences for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, he submitted that the learned TPO has failed to benchmark the transaction. He submitted further that it has been held in many cases that it is the Assessing Officer who has to determine as to how much amount has been incurred for the purpose of business. Therefore, the matter may be remanded back. In this regard, he placed reliance on the following decisions: (i) Knorr Bermse India (P.) Ltd. v. Asstt. CIT [2016] 380 ITR 307/236 Taxman 318/[2015] 63 taxmann.com 186 (Punj. Har.) (ii) CIT v. Cushman Wakefield [2015] 233 Taxman 250/60 taxman.com 168 (Delhi) (iii) Bombardier Transportation India (P.) Ltd. v. DIT IT Appeal No. 2626 (Delhi) of 2015, dated 04.10.2015. 23. Considering the above submissions regarding adjustment in relation to inter-group services, we concur with the suggestion of Learned CIT(DR) that it is a fit case to set aside the matter for fresh consideration to the file of the learned TPO and to decide the issue afresh after affording opportunity of being heard to the assessee for verification of those submissions of the assessee, which have been made above for the first time before the ITAT. The submission of the Learned AR remained that the detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 2003 and learned TPO accepted the similar services from assessment years 2002-03 to 2006-07. Detailed submissions was made before the learned TPO in assessment year 2004-05 on the said services and no adjustment was proposed after due examination. The learned TPO allowed the similar services from other than Asia Pacific Entities in the assessment year under consideration without giving any notable reasons. It remained the further arguments of the Learned AR that the same TPO who did assessment in the year under consideration again framed assessments for assessment year 2011-12 and completely changed his stand on the principal issues and point of law. We are in agreement with the contention of the assessee which is also supported by the decision of Hon'ble Supreme Court in the case of Radhaswami Satsang (supra) holding that principle of 'res judicata' does not apply to income-tax proceedings by virtue of each tax year being a unit and what is decided in one year may not be applicable to a subsequent year but where fundamental aspects has permeated through different years and there is no change in facts and circumstances of the current year than such proposition cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We are of the view that it is not the prerogative of tax authorities to ascertain the benefit received from the availment of services and the benefit received from a particular service has to be perceived from the point of view of businessman and not the tax authorities. This view is supported by the decisions of Hon'ble Delhi High Court in the cases of Hive Communication (P.) Ltd. (supra) and EKL Appliances (supra). 28. Against the finding of the authorities below that services were actually received from shareholder or Stewardship activities, the grievance of the assessee remained that none of the services have been received from shareholders. Hence, there was no question of shareholder activities. This claim is also required to be verified by the learned TPO while deciding the issue afresh. 29. The further grievance of the assessee remained that the assessee has duly benchmarked the intergroup service charges using TNMM method in accordance with the provisions of the Income-tax Act, 1961. The learned TPO has rejected the benchmarking exercise without giving cogent reason for the same. Reliance has been placed on the decision of the Hon'ble Delhi High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the issue, he is also directed to verify the above grievance and consider the same while deciding the issue. 31. Further contention of the Learned AR remained that the assessee company has no intention to shift profits from India to other jurisdiction having regard to the fact that it is some of service provider countries, the corporate tax rate is as high as 41% (Japan) and 30% (Australia, Newzeland and Thailand) which is more than or closed to the corporate tax rates in India. Reliance has been placed on several decisions in this regard including the decision of Hon'ble Bombay High Court in the case of Loreal India Pvt. Ltd. (supra) approving the decision of ITAT accepting the method adopted by the assessee observing that AE's which supplied to the tax-payers earned only 2-4%, hence, it cannot be said that there is set of profits. 32. As discussed above, the learned TPO is directed to decide the issue of adjustment in relation to intergroup services afresh after affording opportunity of being heard to the assessee on the grievances discussed above. The ground Nos. 5, 5.1 to 5.11 of the appeal preferred by the assessee are thus allowed for statistical purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowings, foreign exchange etc., arrangements for raising short term borrowings, arrangements for investing cash as per the company's preferences and policies etc. Besides, these services, DuPont Singapore also provides a sub-license to the company for the use of software which is a proprietary property of sun-guard treasury system, and unrelated enterprise. The Learned CIT(Appeals) has noted that it is a software application used for cash flow management. The treasury experts of DuPont Singapore analysis and evaluate the funding and financing requirements of DuPont India and negotiates with bank and financial institution on lines of credits, interest rate etc. Whenever, DuPont India requires any funds to meet its working capital or any CAPEX requirement, necessary details is communicated to A.E. in the form of financing plant. DuPont Singapore helped in the preparation of such plans and also evaluated the same. The Learned CIT(Appeals) has noted further that appropriate funding is arranged by DuPont Singapore from internal and/or external sources depending upon the cost of borrowings. DuPont Singapore also held in setting up India Cash Management Integration Project. Under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned CIT(A) has cited the decision of Delhi Bench of the ITAT in the case of Knorr-bremse India Pvt. Ltd. (supra) holding that incidental and passive association benefit was provided by the associate enterprise, hence, there could neither be any cost contribution or cost reimbursement nor payment for such services to the A.E. The TPO, therefore, had rightly adopted nil value for benchmarking the arms length price in respect of both these services. The ITAT, therefore, did not find any reason to interfere with the conclusion reached by the Assessing Officer on this count. Following this decision, the Learned CIT(Appeals) came to the conclusion that the TPO had correctly determined the ALP of the marketing services and business supports services as nil against ₹ 5,41,87,734 shown by the assessee before the TPO. Under the above facts discussed by the Learned CIT(Appeals) which also remain unrebutted before the ITAT, we are of the view that the Learned CIT(Appeals) has rightly come to the conclusion that no adjustment should be made on account of treasury charges services, process safety management services etc. resulted in the relief of ₹ 14,19,69,937 to the assessee. The f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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