TMI Blog2019 (6) TMI 1486X X X X Extracts X X X X X X X X Extracts X X X X ..... e is to be evaluated under same conditions. We hold that the ld TPO having allowed the same in Non-AE segment to the tune of ₹ 363 lacs, ought not to have taken a divergent stand in respect of AE segment in the sum of ₹ 846 lacs. Accordingly, we direct the ld TPO to allow the same as an economic adjustment while computing the margins of the AE segment for the purpose of comparability. Capacity Underutilization (Rasai Plant) and Shutdown Cost (Rasai Plant) - It is not in dispute that the Rasai plant was closed down for a period of 4 months from November 2008 to February 2009 due to lack of demand and pile up of excess inventories. This fact is evident from the Excise Register placed on record. This is evident from the manufacturing details provided by the assessee for the financial yea₹ 2007-08 and 2008-09 enclosed in page 253 of the paper book. This resulted in underutilization of capacity in Rasai plant to 42% during the year and consequent shutdown cost. This is part of operational cost and hence allowance should be granted to the assessee as an economic adjustment. Professional charges for search of new MD - This is a non-recurring item and extra-ordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is engaged in the manufacture and sale of organic chemicals and phenolic resins having a wide range of industrial applications. The assessee is a subsidiary of Schenectady (India) Holdings Pvt. Ltd. which in turn is a wholly owned subsidiary of SI Inc., USA. The list of international transactions carried out by the assessee and the Most Appropriate Method (MAM) followed thereon are as under:- Summary of International Transactions as reported in Form No. 3CEB Sr. No. Nature of Transaction Amount (Rs.) Method 1 Import of materials 77,28,43,438 TNMM Mfg. 2 Export of goods 20,76,21,540 3 Payment of royalty 2,83,03,595 4 Receipt of indenting commission 1,02,39,075 5 Payment of export commission 4,67,343 6 Reimbursement of expenses 1,29,37,145 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars Amount (Rs. In Lacs) Amount (Rs. In Lacs) Adjusted Operating Profit 1786 Adjusted Net Profit Margin (%) 3.00 2.3. The margins of the assessee in Research Development (R D) services are worked out as under:- Particulars Amount (Rs. In Lacs) Service Income 237.95 Expenditure 206.09 Operating Profit 31.86 NCP% (OP/OE) 15.46 2.4. However, the ld TPO rejected separated benchmarking of R D and proceeded to benchmark the international transaction of research fees in aggregation to other international transactions in manufacturing search. 2.5. The assessee submitted segmental profitability for AE and Non-AE for all the units during the course of TP assessment proceedings. However, the ld. TPO rejected the segmental (Internal TNMM) on the ground that it was not audited and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount in Lacs Operating Income 63120 Adjusted PBIT -356 OP / OI (%) - 0.56% Arm s Length OP / OI % 6.69% Arm s Length OP 4222.73 Variation 4578.73 Transfer Price (Cost side transactions) 8016.14 5 % of TP 400.81 Adjustment 4578.73 Conclusion : Variation 5% of TP, hence no benefit u/s 92C(2) of the Act. 3. The ld DRP observed that the assessee had undertaken an entity level benchmarking of the international transactions and had asked for various adjustments on account of stock write down, capacity underutilization, abnormal costs, exchange fluctuation etc. The ld DRP observed that the assessee had worked out an adjusted net profit margin of 3% by converting loss of ₹ 1580 lacs into an income of ₹ 1786 lacs after making these adjustments. The assessee chose 32 comparables whose average profit margin was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee deserves to be considered. 3.2. The Ld DRP after due analysis of segment statement then proceeded to accept the audited segmental accounts of assessee by adopting Internal TNMM. The ld DRP accordingly gave the directions to the ld TPO to benchmark the AE segment of each unit with the Non-AE segment. However, an exception was made for Rasai unit since its Non-AE segment operations was considered as contract manufacturing by ld DRP. The summary of the said directions are as below:- Unit AE Margin Non-AE Margin Total Margin (AE+Non-AE) Ld DRP Directions Rasai (10.18) % (20.72)% (9.56)% Non- AE segment rejected by Ld DRP and proceeded to benchmark import transaction of ₹ 65 crores with total margin (AE+ Non-AE) of Navi Mumbai and Lote Navi Mumbai 6.08% (0.27)% 0.30% International Transactions accepted at arm s length Lote 19.08% 1.74% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h decision of Chennai Tribunal in the caes of 3i Infotech Limited reported in 35 taxmann.com 582 (Chennai Trib.) wherein it was held that there is no legal requirement that segment wise working of ALP submitted before the ld TPO should be audited by chartered accountant of assessee. Hence we hold that the segmental profitability statement submitted by the assessee duly audited, needs to be considered for benchmarking the international transactions of the assessee with its AE. We find that the reliance has been rightly placed on the decision of Third Member of Mumbai Tribunal in the case of Technimont ICB India (P.) Ltd reported in [2012] 138 ITD 23 (Mumbai) (TM) wherein it was held that the internal comparability should be given preference over external comparability. We find that the ld DRP erred in giving directions by comparing the total margin (AE+ Non-AE) of Navi Mumbai and Lote with the AE segment margin of Rasai. It is a very clear proposition in transfer pricing regulations that a controlled transaction cannot be compared with another controlled transaction. The Third Member decision in the case of Addl CIT v. Technimont ICB India (P.) Ltd [2012] 138 ITD 23 (Mumbai) (TM) is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method is 'comparable uncontrolled price method'. Procedure for determining ALP under this method is given in Rule 10B(a). As the very name of the method itself suggests that the price charged or paid for the property 'in a comparable uncontrolled transaction' is identified. Such price in a comparable uncontrolled transaction is adjusted on account of differences, if any. The consequential price is taken as benchmark for considering the assessee's international transactions with its AEs. The second method is 'resale price method'. The procedure for determining price under this method is given in Rule 10B(b). Under this method, the price at which property purchased or services obtained by the enterprise from an AE is resold or are provided to 'an unrelated enterprise' is identified. This method also compares the gross profit margin in a controlled transaction with the gross profit margin in an uncontrolled transaction based on specific functions performed. Next is 'cost plus method'. The modus operandi for determining of ALP under this method is provided in section 10B(c) which again refers to making comparison with 'uncontrolled tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AEs so that the profit likely to arise from such transactions is not under-reported vis-a-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction. 15. There is one more dimension of this case. The transactions between ICB and JTS are not only cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuation, the receipt from the transaction recorded in India will be higher but the benchmark price will be lower. Whereas the first situation will necessitate the making of an addition on account of transfer pricing adjustment in the hands of Indian company, the second situation will not permit any deduction in the declared income of the such Indian concern to that extent. It is so because if the ALP is higher than the value of the transaction recorded in the books of account, it requires making addition on account of transfer pricing adjustment. However, in the opposite situation, there is no mandate for reducing the income. In such a second situation, the receipt from the transaction recorded shall be considered at ALP, notwithstanding the fact that it is at exaggerated figure when compared with a comparable uncontrolled transaction. This is what has been laid down in sub-section (3) of section 92. Whereas sub-section (1) of section 92 provides that any income arising from an international transaction shall be computed having regard to the arm's length price, sub-section (3) provides that : 'The provisions of this section shall not apply in a case where the computation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his contention that a controlled transaction can also be considered for benchmarking. I do not propose to embark upon these cases separately for discussion, I clarify that my decision in the foregoing paras is founded on the interpretation of the relevant bare provisions of the Act and Rules, without taking any assistance from decisions cited by the rival parties on the point, which differ in their conclusion as stated by the ld. Representatives before me. 19. For the foregoing reasons I agree with the view expressed by the learned AM. The Registry of the Tribunal is directed to place this matter before the division bench for passing an order in accordance with majority view. 5.1. We find that the ld AR before us also placed reliance on the decision of co-ordinate bench of this Tribunal in the case of M/s SNC Lavalin Engineering India Pvt Ltd vs ACIT in ITA No. 287/Mum/2014 (Assessment Year 2008-09) dated 15.3.2018, wherein it was held as under:- 6. We have heard the parties on this issue and perused the record. We noticed that the assessee has not prepared segmental accounts initially and hence it could furnish only unaudited segmental accounts before TPO. Hence the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Bombay High Court as under:- 3. Re. Question (a):- (i) It is an agreed position between the parties that the issue raised herein stands concluded against the Revenue by the following decisions of this Court:- (i) CIT v/s M/s Raitlal Becharlal Sons (Income Tax Appeal No. 1906 of 2013) rendered on 24th November, 2015; (ii) CIT v/s Goldstar Jewellery Design (P) Ltd., (Income Tax Appeal No. 2237 of 2013) rendered on 4th February, 2016 ; (iii) CIT v/s Alstom Projects India Ltd., (Income Tax Appeal No. 362 of 2014) rendered on 14th September, 2016 ; and (iv) CIT v/s M/s. Bhansali Co., (Income Tax Appeal No. 1066 of 2014) rendered on 9th December, 2016. (ii) Besides the aforesaid decisions of this Court, the issue also stands covered by the decision of the Delhi High Court in CIT v/s. Keihin Panalfa Ltd., (Income Tax Appeal No. 11 of 2015) rendered on 9th September, 2015. (iii) In all the aforesaid decisions, it has been held that the Transfer Pricing Adjustment is not to be done at the entity level but only in respect of international transactions of the Respondent with its Associated Enterprise (AE). This, on the application of proportionate method. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (Rasai Plant) of ₹ 935 lacs and Shutdown Cost (Rasai Plant) of ₹ 53 lacs: It is not in dispute that the Rasai plant was closed down for a period of 4 months from November 2008 to February 2009 due to lack of demand and pile up of excess inventories. This fact is evident from the Excise Register placed on record. This is evident from the manufacturing details provided by the assessee for the financial years 2007-08 and 2008-09 enclosed in page 253 of the paper book. This resulted in underutilization of capacity in Rasai plant to 42% during the year and consequent shutdown cost. This is part of operational cost and hence allowance should be granted to the assessee as an economic adjustment. We direct the ld TPO accordingly. 5.3.1.3. Professional charges for search of new MD of ₹ 58 lacs: This is a non-recurring item and extra-ordinary in nature. It is not that a new MD is appointed in normal course of business every year. During the year, the assessee company had paid this fees to recruitment agency in search of MD and claimed the same as an extraordinary economic adjustment. Accordingly, we direct the ld TPO to consider the amount spent on profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that due to smallness of the amount involved in this issue, the same is not pressed. The same is reckoned as a statement from the Bar. Accordingly, these additional grounds are dismissed as not pressed. 8. The Additional Ground No. 3.1. is general in nature and does not require any specific adjudication. 9. We are now left with Ground No. 2 in Revenue s appeal in ITA No. 1307/Mum/2014 , wherein the revenue had challenged the action of the ld DRP in deleting the addition of ₹ 30,22,002/- made on account of capital expenditure on scientific research centre. 9.1. The brief facts of this issue are that the assessee had in-house R D Unit recognized / approved by Department of Scientific and Industrial Research (DSIR). The said approval was valid until 31 March 2007. On 18.12.2006, the assessee had made an application to DSIR for renewal of the approval beyond 31.3.2007. However, the approval had not been received until the completion of the assessment proceedings. During the year under appeal, the assessee had incurred capital expenditure of ₹ 30.22 Lacs on scientific research which was claimed as a deduction under section 35(1)(iv) of the Act (deduction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee towards R D expenditure on capital field, DSIR in its approval in form No. 3CL allowed the claim to the extent of ₹ 4,71,08,743 and in the process disallowing the amount of ₹ 2,23,215/-. Whereas the entire revenue expenditure of ₹ 1,31,87,576/- was not approved by DSIR. It is the contention of the learned AR that approval of DSIR as envisaged u/s 35(2AB) is only confined to deduction claimed under that section. Such approval is neither necessary to decide whether expenditure is in the nature of revenue or capital nor it is relevant for considering assessee's claim under any other provisions of the Act. We find force in the contention of the learned AR. On a reading of the provision contained u/s 35 as a whole and section 35(2AB) in particular and on perusal of form No. 3CL, we are of the view that approval of DSIR as contemplated is only in respect of weighted deduction to be claimed u/s 35(2AB) of the Act. It has no relevance for determining whether the expenditure claimed is allowable under any other provisions of the Act. The only condition prescribed u/s 35(2AB) is, if the claim of the assessee is allowed u/s 35(2AB) it will not be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it relates to expenses of ₹ 19.57 lakhs on salary and wages the same cannot be considered to be expenditure of being capital in nature as the said salary and wages are paid to the manpower deployed for carrying out the R D activity which is part and parcel of the business of the assessee. 29. Now coming to the expenses of ₹ 611.78 lakhs relating to materials/consumables/spares, it is not the case of the AO that the said material was not consumed in the R D process and some part thereof was remaining in the closing stock. Therefore, these expenditure incurred on material used for lab trials cannot in any manner be considered as expenditure being in the nature of capital. The next item is other expenditure directly related to R D . With regard to these expenditure the finding of fact has been recorded by CIT(A) that these have been incurred by the assessee for registration of products in other countries or towards obtaining technical know-how fee for producing new drugs etc. He has recorded in his order that he has called for and perused the agreements between the assessee company and IS Ltd. (which is the major sum of ₹ 1 crore comprising of two items of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, other than capital expenditure incurred on the acquisition of any land or building or construction of any building, on scientific research undertaken under a programme approved in that behalf by the prescribed authority, having regard to the social, economic and industrial need of India. It is only such expenditure as is incurred on a programme which has been approved by the authority prescribed under s. 35(2B), which can be claimed as deduction under that provision. The capital expenditure on the acquisition of land or building whether acquired or constructed cannot be claimed under s. 35(2B). The benefit of s. 35 (1)(iv) can be availed by the assessee in respect of expenditure of a capital nature on scientific research if that research is related to the business carried on by the assessee. The approval of the authority prescribed under s. 35(2B) is not an essential prerequisite for claiming the allowance unders. 35(1)(iv) if it is found that a part of the claim falls within the ambit of s. 35(1)(iv). The mere fact of a claim not having been found admissible under s. 35(2B) will not constitute a bar to allowing an expenditure under s. 35(1)(iv) if that expenditure is capital ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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