TMI Blog2022 (8) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... controlled transactions available in TIPS data base and that too after the order of the Ld. DRP for year under consideration.We feel it appropriate to restore the matter to the AO/TPO for comparing the TIPS data with the international transactions of the assessee under CUP method of comparability as most appropriate method. In case, the CUP method fails, the Ld. AO/TPO may explore another methods including TNMM. - Ground of the appeal are accordingly allowed for statistical purposes. Nature of receipt - compensation received on termination of marketing support agreement - revenue or capital receipt - contention of the assessee that said compensation is respect of loss of source of income and therefore it is capital in nature and not chargeable to tax - HELD THAT:- As there was no restriction on the assessee to carry out his activity of marketing support services to anyone. By way of cancellation of marketing support service agreement in respect of SBH, there is no damage or impairment to the trading structure of the assessee. There was no removal of any employee of the marketing team by way of amendment in agreement and therefore there is no loss of source of income. The entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng an adjustment of Rs 24,38,56,927 to the total income of the Appellant under Section 92CA(3) of the Act on account of adjustment in the arm's length price of the international transaction of export of finished goods and on a without prejudice basis of IN 23,54,22,466 on the international transaction of import of raw materials from Associated Enterprises ('AEs'). Inappropriate rejection of Cost-Plus Method ('PM') and instead adopting Transactional Net Margin Method ('TNMM') as most appropriate method ('MAM') 3. erred in not accepting the economic analysis undertaken by the Appellant under PM. In accordance with the provisions of the Income Tax Act, 1961 ('Act') read with the Income Tax Rules, 1962 ('Rules') for determination of the arm's length price and instead adopting TNMM as the MAM. 4. erred in making an incorrect observation that the Appellant is a loss-making concern and hence has chosen PM to benchmark the international transactions of import of raw materials and export of finished goods, without appreciating the fact that appellant is not a lossmaking concern. Inappropriate rejection of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (available on TIPS database for 92.46 percent of total exports to AEs) based on comparison with market prices published by TIPS database, in case the value of adjustment for each finished product exported is aggregated. Non-consideration of separate segment for TNMM analysis for the international 12. erred in not considering Appellant's segmental results pertaining to export to AEs segment for benchmarking the international transaction of export of finished goods which is at arm's length. Objections specific to TP adjustment on import of raw materials of INR 23,54,22, 466 Alternate analysis usinq CUP data for import of raw materials Non-consideration of CUP available in the form of market prices published by Independent Chemical Information Services ( ICIS ) for import of raw materials 13 erred in inappropriately rejecting CUP in case of import of raw materials (i.e. monomers) available on ICIS website (relied upon by chemical industry), furnished by the Appellant for justifying the arm's length nature of the transaction of import of raw materials (monomers). 14. erred in not taking cognizance of Appellant's conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act 22. erred in initiating penalty proceedings u/s 271(1)(c) of the Act without appreciating the fact that the appellant has not furnished any inaccurate particulars of income. 2. In the grounds raised, the assessee is aggrieved mainly in respect of transfer pricing adjustment and compensation received treated as revenue in nature . 3. Briefly stated facts of the case are that the assessee i.e. erstwhile Rohm and Hass (I) Pvt. Ltd., was engaged in the business of manufacturing and trading of specialty chemicals i.e. Emulsion polymers and packaging adhesives. The assessee filed return of income for the year under consideration i.e. AY 2015-16, on 27/11/2015 declaring total income at Nil. The return of income filed by the assessee was selected for the scrutiny and statutory notices under the Income-Tax Act, 1961 (in short the Act ) were issued and complied with. In view of international transactions of import and export of goods amounting to ₹538,66,81,165/-carried out by the assessee with its Associated Enterprises (AEs), the Ld. Assessing Officer referred the matter of determination of arms length Price of those transactions to the Ld. Transfer Pricing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for export of finished goods. Similarly in ground No. 15 to 17, the assessee has raised the issue of not considering CUP method in view of availability of TIPS data of import of raw materials. 9. Before, we proceed to adjudicate the issue in dispute, it is relevant to discuss the brief facts related to transfer pricing adjustment of the assessee. 10. The Ld. TPO observed total international transactions of ₹538,81,08,550/-, which he has reproduced in para-4 (four) of the transfer pricing order dated 31/10/2018. The Ld. TPO chose transactions at serial No. one and two of the said list i.e. purchase of raw material and sale of finished goods amounting to ₹294.30 crores. The assessee adopted Cost Plus Method (CPM) taking profit level indicator (PLI) as gross profit/sales and gross profit was arrived after considering direct and indirect cost of production. The assessee worked out PLI of its manufacturing segment at 20.06%. The assessee chosen 11 comparables, but taken operating profit/operating income as PLI and computed mean PLI of those comparables at 6.64% and accordingly, the assessee was of the view that the transactions of purchase of raw material and finishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the analysis of the assessee has been examined by the TO before arriving at an opinion regarding the study carried out by the assessee. With respect to use of gross margin in assessee's study, it is noted that the assessee is a full risk manufacturer and has significant below the line expenses which need to be compensated. Hence, a TP study using gross margins in the case of the assessee is totally incorrect and has rightly been rejected. The assessee, keeping in view its FAR needs to be benchmarked at operating margin level. Hence, the TPO was right in rejecting gross margin as a PL , Gross margins are proper only when the use of assessee's own capital assets or employee is minimal and does not contribute to value creation. Such is not the case here. The TPO has pointed out several issues with the benchmarking and has clearly brought out the fact that the companies selected by the assessee were not functionally comparable with the assessee. The IPO has also commented on the search process and the use of multiple year data. He has dealt with each of the comparable selected by the assessee and has pointed out the defects in them. The TPO has after detailed analysis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order sheet dt. 24/09/2018. 4. As regards the segmental analysis the TPO has stated that the all the transactions of the assessee are interlinked and as such the PLI needs to be worked out at entity level, however the adjustment has been worked out by considering the transactions with AE only. The TPO has rejected the bifurcation of the segments by the assessee by noting that the expenses have been bifurcated on the revenue basis and the data submitted by the assessee was not reliable. The claim of the assessee that the data is derived form SAP which captures the data correctly has not been accepted by the TPO for the reason that the products sold to AF and non AF are same. The assessee has objected to the findings of the PO in the remand report but has not been able to meet the deficiencies pointed out by the TPO in the remand report and for this reason the contentions of the assessee are rejected. 13. In view of the above observation, the Ld. DRP rejected the contention of the assessee for considering CUP method, as under: 5.2.1 Import of Raw materials We have considered the facts of the case and submissions made by the assessee. The assessee in its submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Cost Plus Method on account of non comparability of the selected companies at the entity level. Further, since the assessee was making loss, it had adopted CPM so as to make comparability of gross margin with the comparables. The assessee is in gross error in trying to use cost plus method in case of an entrepreneur who is a manufacturer. 5.2.6 We have also noted that in the assessee's own case PM was rejected in A Y 2010-2011 A Y 2011-2012, A.Yr. 2012-13 and A.Yr. 2014-15 by the DRP. Since the issue is covered against the assessee, we dismiss the ground of objection of the assessee. (emphasis supplied externally) 14. The Ld. DRP, then discussed the selection of comparables under the TNMM. The Ld. DRP upheld selection of one comparable by the Ld. TPO as under: 7.2 Discussions Directions of the DRP: It is noted that the TO, in his order, has adopted 4 companies (Jupiter Bioscience Limited, Fineotex Chemical Limited, Jubilant Life Sciences Limited, Vivimed Labs Limited) engaged in products which are in the manufacture of specialty chemicals as comparable companies. During the course of the transfer pricing assessment proceedings, the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice for import of Raw Materials. The assessee has compared its purchase price with the dala spread over a few weeks and months available on the ICIS. The assessee in its submission has further stated that the TO has rejecled the CUP Method applied by the assessee in arriving at the Arms Length Price without giving a valid explanation. The assessee submitted that the method applied by it was most appropriate. 17. Further the specific objection to the transactions of sale of finished goods were rejected by the Ld. DRP observing as under: 11.2 Discussions Directions of the DRP: Sale of Finished Goods 11.2.1 We have considered the facts of the case and submissions made by the assessee. The assessee in its submission argued that the TPO had rejected the cost plus method applied by the assessee for arriving at the Arms Length Price for sale of finished goods. The assessee in its submission has further stated that the TPO has rejected the Cost Plus Method applied by the assessee in arriving at the Arms Length Price without giving a valid explanation. The assessee also submitted that the method applied by the assessee was most appropriate. 11.2.2 We have go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... availability of TIPS data and matter was restored back to the Ld. AO/TPO for comparing the international transactions of the assessee with TIPS data. The assessee contended that in said assessment year also 94.23% of the total value of transactions was covered under the TIPS data for comparison. He further submitted that in compliance with the order of the Tribunal (supra), the Ld. TPO vide order dated 17/01/2022 after examining the additional evidences as directed by the Tribunal, has accepted the value of the transactions reported by the assessee at arm s length and no adjustment has been proposed. Accordingly the Ld. counsel of the assessee submitted that in the year under consideration also the matter may be restored back to the Ld. AO/TPO for deciding afresh in view of the order of the TPO dated 17/01/2022. 20. On the contrary, the Ld. DR submitted that as far as applicability of CUP method is concerned, the comparable transactions should be uncontrolled and should be transactions of same time zone and same market in similar conditions. He submitted that information whether the transactions reported in TIPS data is a related party transactions, is not available and in such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the ld. TPO, we deem it fit and appropriate to remand this issue to the file of the ld. TPO in the same directions as was given by us for import of raw materials from AEs for A.Y.2014-15 supra. 21.1 We find that in assessment year 2014-15, factual examination of the comparable price was required and therefore matter was restored to the Ld. TPO. The Ld. TPO wide order dated 17/01/2022 has adjudicated the issue as under: 5. Determination of Arm's Length Price: Notice u/s 92 CA(2) of the 1. T. Act dated 09/11/2021 and u/s 92 D(3) dated 27/12/2021 were issued to the assessee calling for details and documents along with documentary evidences in respect of international transactions entered into by the assessee in respect of import of raw materials and export of finished goods from its Associated Enterprises (AEs). In response to the notices, the assessee submitted its reply vide letter dated 11/01/2022. After considering the submissions and explanations of the assessee, the international transactions entered into by the assessee for import of raw materials and export of finished goodswith its associated enterprises during F.Y. 2013-14 relating to A.Y 2014-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. The assessee also raised the issue of non-consideration of adjustment on account of functional and risk differences. The ground No. 12 to 14 are also in respect of TNMM method applied by the Ld. TPO. 23. As, we have already restored the matter of determination of arm s length price of the international transactions of the assessee to the Ld. TPO for applying the CUP method as most appropriate method, the grounds challenging the TNMM method are rendered academic only. The Ld. counsel of the assessee has also not argued these grounds. In the circumstances, we are not adjudicating these grounds at this stage. The ground Nos. 1 to 9 and 1 to 14 of the appeal are accordingly treated as infructuous. 24. The ground No. 18 and 19 of the appeal relate to compensation received of ₹17,87,49,236/-on termination of marketing support agreement, which is held as revenue in nature by the Ld. Assessing Officer. 25. The facts in brief qua, the issue in dispute are that the assessee credited a sum of ₹17,87,49,236/- in profit and loss account towards compensation for termination of contractual rights but reduced the same while computing total income, claiming the same to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that agreement was effective from 04/12/2014 to 23/01/2015 i.e. for a period of 50 days only. The Ld. AO noted that the contract/agreement was for one year and renewable on year-to-year basis and therefore assessee cannot derive any capital rights from this contract agreement as it was an ongoing contract. Ld. AO rejected the contention of the assessee holding that termination of the contract for market support service has not resulted into termination or extinguishment of any unborn capital right of the assessee. 29. The Ld. DRP also rejected the contention of the assessee relying on the decision of the Hon ble Bombay High Court in the case of Blue Star Ltd (supra) observing as under: 12.2 Discussion Direction of the DRP: We have gone through the order of the AO/TO and the submissions of the assessee made in this regard. It is noted that the AO has held that the compensation of INR 17,87,49,236 received on termination of marketing support agreement for the SBH productis revenue in nature chargeable to tax as per section 28 of the Act. It is submitted that the AO has made addition without appreciating the fact that it resulted in loss of profit-making ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure of the assessee was impaired or such cancellation resulted in loss of source of the assessee's income. Considering the nature of the said agreement and perusing the various clauses contained therein in our view, the said agreement culminating in a contract between the assessee and BME was in the nature of normal trading contract entered into in the ordinary course of the assessee's business. The assessee carried on widespread business activities as is evident even from the assessment order for the relevant assessment year showing the taxable income of the assessee at more than Rs. 86 lakhs. The agency agreement of the assessee with BME as borne out from the said agreement was only one of the many activities of the assessee. The widespread nature of business activities carried on by the assessee were not adversely affected by the termination of the said agreement and in the facts of the case, it cannot be said that there was cessation of business resulting in destruction of the source of income so far as the assessee is concerned. The said agency agreement was entered into by the assessee in the normal course within the framework of the normal business of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customer dealings are done by the Dow Singapore and the contract is signed and concluded with the Dow Singapore . Hence, the compensation received is not for termination of an agency contract but forgoing its market supporting rights vested for promoting SBH productions since 1997 in particular territory and therefore ratio in the case of Blue Star Ltd s (supra) does not apply to the facts of the instant case. 31. The Ld. counsel also relied on the decision of the Hon ble Supreme Court in the case of Kettlewell Bullen and Co. Ltd (53 ITR 261). 32. The Ld. counsel filed a chart of cases against and in favour of the assessee, which are reproduced as under: Case laws against the assessee: 1. S. Kumars Tyre Mfg. Co. Ltd. 61 ITD 326 (Indore Tribunal) 2. Elegant Chemicals Enterprises (P) Ltd. 91 ITD 85 (Hyderabad Tribunal) 3. Hinditron Services (P.) Ltd. 99 ITD 479 (Mumbai Tribunal) 4. Ansal Properties Industries Ltd. 19 SOT 391 (Delhi Tribunal) 5. IIT Corporate Services Ltd. 4 ITR (T) 147 (Mumbai Tribunal) 6. Bayer (India) Ltd. 20 taxmann.com 313 (Mumbai Tribunal) 7. Kochi Refineries Ltd. 4 ITR (T) 95 (Mumbai Tribunal) 8. Ion Exchange (India) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... team of marketing support as capable of rendering services as was before the termination of market support of SBH. Moreover, the marketing team was providing marketing support in respect of other product after termination of assessment for SBH. In the case of Kettlewell Bullen Co. Ltd. (supra) also it is held that where payment is made to compensate the person for cancellation of the contract, which does not affect the trading structure of his business or deprive him of what in substance is a source of income, termination of the contract being a normal incident of the business and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue. 35. In our opinion, the Ld. DRP has followed a binding precedent of the jurisdictional High Court, and therefore we do not find any error in the impugned order on the issue in dispute, and accordingly we uphold the same. The ground Nos. 18 and19 of the appeals are accordingly dismissed. 36. The ground No. 20 is in respect of charging of interest of ₹7,94,439/- under section 234A of the Act. 37. Before us the Ld. counsel of the assessee has contended that the assessee filed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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