TMI Blog2020 (9) TMI 1284X X X X Extracts X X X X X X X X Extracts X X X X ..... rt prices of the assessee to be lower than the comparable prices reported by the TIPS Data Base, the remaining imports i.e.4.21% are also be considered to be at arm s length and therefore, no adjustment to ALP would be warranted in such a scenario. Disallowance of foreign exchange loss - cancellation of forward contracts - In order to mitigate the risk of foreign exchange fluctuation, the assessee enters into forward exchange contracts with the banks - assessee submitted additional evidences as Certificate from the Citi Bank along with the cross referencing of related contract copies and details of exchange gain or loss realized/ unrealized on such contract - HELD THAT:- Respectfully following the order of this Tribunal in assessee s own case [ 2019 (10) TMI 437 - ITAT MUMBAI ], we deem it fit to remand this matter to the file of the ld. AO for verification of the bank certificate and decide this issue in accordance with the aforesaid direction. Accordingly, the ground No. 10 raised by the assessee is allowed for statistical purposes. Addition in respect of sundry creditors as unexplained credit - HELD THAT:- Sundry creditors had apparently emanated out of purchases or re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so directed to furnish the entire list of mandatory deposits (as claimed by it before the ld. AO) afresh together with supporting evidences thereon to justify its contentions. The ld. AO is directed to give a factual finding in this regard. Alternative argument made by the ld. AR that assessee having sufficient own funds for the purpose of making these advances - We find that this issue is already decided by the Hon ble Jurisdictional High Court in the case of HDFC bank [ 2014 (8) TMI 119 - BOMBAY HIGH COURT ] and accordingly we direct the ld. AO to verify the availability of the own funds with the assessee. If the assessee is having sufficient own funds, then there cannot be any disallowance of interest on borrowed funds, in any case. AO is directed to give findings on all the aforesaid aspects before proceeding to make any disallowance of interest on borrowed funds. The ground raised by the assessee are allowed for statistical purposes. Disallowance of depreciation on additions made to fixed assets - HELD THAT:- We find that no proper finding has been given by the ld. AO with regard to these documents containing the day on which each of the assets were actually put t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided in this appeal is with regard to transfer pricing adjustment. In respect of import of raw materials from associated enterprises (AEs) in the sum of Rs.38,29,00,000/-. 2.1. The brief facts of this issue are that the assessee is engaged in manufacturing speciality chemicals, distribution of chemicals and undertaking marketing support activities for overseas group companies. The assessee s business operations of manufacturing speciality chemicals can be divided into the following three areas. a. Paint and coating materials b. Packaging and building materials c. Performance chemicals and biocides 2.2. Pursuant to the order of the Hon ble Bombay High Court dated 22nd January 2016, Rohm and Haas India Private Limited merged with Dow Chemical International Private Limited. The effective date of the merger is 1st April 2015.The assessee filed its Return of Income ( ROI ) for A.Y.2011-12 on 28th November 2011 declaring total income as NIL after adjusting brought forward losses amounting to INR 19,93,40,340/-. Along with its ROI, the assessee filed Accountant s Report in Form 3CEB [in accordance with section 92E) of the Income-Tax Act, 1961 ( Act)] reporting interal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP/OR 4.06% Computation of ALP: Based on the above, in relation to the manufacturing sub-division, the adjustment is worked out below: Particulars Amount Sales 558.33 Cost 535.68 Profit 22.64 Profit% 4.06% ALP Profit % 19.86% ALP Profit 110.88 ALP Cost 447.44 Non-AE Cost 303.23 ALP AE cost 144.21 Actual AE Cost 232.45 Differential 88.24 +5% 32.97 -5% 29.83 As the assessee s margin in the manufacturing function of PPT Division is less and does not fall within the +/-5% safe limits, an adjustment of Rs.88.24 Crore is to be made towards determination of ALP of the transaction done in this division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Appellant in relation to the international transaction of import of raw material. Inappropriate acceptance of non-comparable companies 4. Erred in considering non-comparable companies as comparable to the Appellant for benchmarking the international transaction of import of raw materials, without providing any cogent reason for rejecting Appellant s argument on non-comparability of these companies. Inappropriate rejection of additional comparable companies proposed by the Appellant 5. Erred in inappropriately contending that since the additional companies were not a part of transfer pricing study report, they cannot be considered new. 6. Erred in inappropriately rejecting additional comparable companies submitted by the Appellant (on a without prejudice basis) in response to the new companies introduced by the transfer pricing officer as comparables during the course of the assessment proceedings. Non-consideration of Comparable Uncontrolled Price ( CUP ) available in the form of market prices published by Independent Chemical Information Services ( ICIS ) which reports prices based on contract between third parties and which is relied upon by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. AR, since the issue had already been decided on identical grounds by this Tribunal as there was no change in facts and circumstances during the year. 2.10. We have heard rival submissions and perused the materials available on record. At the outset, we find that the additional grounds raised by the assessee requires to be admitted as it goes to the root of the matter. We find that the entire issue, as rightly pointed out by both the parties, had already been the subject matter of adjudication by this Tribunal in assessee s own case for A.Y.2010-11 and 2014-15 vide its order dated 25/09/2019 referred to supra wherein it was held as under:- 5. The ld. AR filed additional evidences before us in respect of following aspects /transactions:- A. JUSTIFICATION OF LOSSES ON NETLEVEL The ld. AR argued that the primary reason for rejection of CPM by the ld. TPO was that assessee had incurred loss during the year. He argued that the loss had been incurred due to sales made to a third party i.e. Asian Paints Ltd. wherein the prices were very poor. The selling price offered by Asian Paints Ltd. was very poor and loss had not been incurred on account of import of raw mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prices both upwards as well as downwards for the same product during the year. The ld. DRP stated that difference in ALP by CUP method and by taking cherry picking of the transactions resulted in addition of Rs.1.29 Crores. The ld. AR reiterated his contentions that if portfolio approach is followed by the revenue, then there will only be loss of Rs.7.80 Crores and accordingly, there would be no need to make any adjustment to ALP thereon. In this regard, he also vehemently argued that the ld. DRP having accepted the fact of fluctuating prices of the product and having worked out the ALP adjustment to the tune of Rs.1.29 Crores thereon, ought not to have sustained the addition of Rs.35.45Crores. C. USE OF SEGMENTAL DATA OF COMPANIES IF TNMM IS APPLIED ON WITHOUT PREJUDICEBASIS The ld. AR also filed additional ground vide letter dated 22/10/2018 wherein he contested that even if TNMM is applied as the MAM, in respect of two comparables chosen by the ld. TPO i.e. Jubiliant Life Sciences Ltd., and Vivimed Labs Ltd., he requested for adoption of operating margin of these two companies at segment level instead of entity level. The ld. AR reiterated the fact that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of finished goods to a third party customer i.e., Asian Paints Ltd. and the same was not on account of import of raw materials from its AEs. The ld. AR placed on record the additional evidence to support this statement in page 1046 of the paper book. The ld. AR also stated that the assessee identified business opportunity in the South India market and intended to set up the ground level plan at Sriperumbudur for emulsions to cater its customer base in paints and other applications, accordingly, the assessee and Asian Paints Ltd., entered into a Memorandum of Understanding for supply of binders. Evidences in this regard were filed as additional evidence vide pages 1048 and 1049 of the paper book. Under the terms of the MOU, the assessee sold binders to Asian Paints Ltd., during the three year period from 2007 till 2009 primarily at a price linked to Asian Paints Ltd., internal cost of manufacturing the same product irrespective of market price and the actual cost of manufacture in the hands of the assessee. The said commercial arrangement with Asian Paints Ltd., (third party customer) was a primary reason for operating loss in the hands of the assessee. The assessee also submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts. It was also held by the Delhi Tribunal that the ld. TPO was in error in rejecting the information, inputs received from the TIPS software and the data base made available by the saidentity. 5.3. The ld. AR with regard to his statement of adopting portfolio approach in CUP method by using TIPS Data Base, placed reliance on the decision of this Tribunal in the case of Boskalis International Dredging C.V vs. DDIT reported in 67 SOT 118. The ld. AR also submitted that this decision of Mumbai Tribunal in the case of Boskalis International Dredging C.V, supra had been upheld by the Hon ble Jurisdictional High Courtwhich is reported in TS-1310-HC-2018 (MUM). The ld. AR also submitted that in the recently released OECD final deliverables on the Base Erosion and Profit Shifting (BEPS), Action Plan 8 to 10 on Aligning Transfer Pricing TP outcomes as with Valuation Creation specifically contains the chapter of commodity transactions, wherein the OECD as profit guidance with price obtained from a recognized and transparent price reporting or statistical agencies or from Governmental price setting agencies can be considered to be valid for CUPmethod. 5.4. The ld. AR also made sev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marking international transactions carried out by the assessee. He further argued that even if the TIPS Data Base is to be accepted, the data on the relevant date of transaction is to be compared. He vehemently opposed the acceptance of bundled approach carried out by theassessee. 5.9. With regard to acceptability of TIPS software by the ld. TPO in A.Y.2014-15, the ld. DR argued that the same was just used by the ld. TPO for his own purposes and has been taken by the ld. TPO for A.Y.2014-15 cannot be applied for A.Y.2010-11 i.e. year under appeal. The ld. DR vehemently opposed for admission of additional evidences filed by the assessee for usage of TIPS Data Base which covers 94.69% of the total import transactions from AEs, and opposed for remanding the same for verification to the file of the ld. TPO on the grounds that assessee cannot be given a second chance to improve its case. The ld. TPO finally submitted that even in TIPS Data Base, the data on the relevant date of transaction is to be considered or at least to the nearby dates. Hence, the claim of the assessee is that 94.69% of the total import transactions gets covered using TIPS Data Base is not correct and only 70% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of additional evidences had produced comparable data using TIPS Data Base which covers even more higher percentage of total value of import transactions from the AEs. We hold that CUP is a direct method. We find that assessee has raised additional grounds of appeal for adoption of CUP to be MAM which we are inclined to accept in the facts of the instant case. We find that assessee had also filed additional evidences before us by producing data from TIPS Data Base maintained by the Customs Department, for the purpose of comparability of the prices of import transactions carried out by the assessee vis- -vis comparable prices on the relevant date or nearer to the date of transactions. This according to the ld. AR covers 94.69% of the total value of import transaction from AEs, which according to the ld. DR covers only 70% of the total transactions. We hold that in either case, substantial amount of transactions gets covered using TIPS Data Base under CUP method. Hence, we admit the entire additional evidences filed by the assessee before us in this regard and deem it fit and appropriate to restore the entire issue to the file of the Ld. AO with the followingdirections:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 25/09/2019 referred to supra had admitted those additional evidences and remanded the matter back to the file of the ld. TPO for determination of arm s length price for the purpose of making adjustment, if any, in respect of import of raw materials made from AEs. Respectfully following the decision rendered by this Tribunal vide its order dated 25/09/2019 in assessee s own case, we hold that CUP must be the Most Appropriate Method for benchmarking the international transaction of import of raw materials in view of the fact that direct comparable prices are available of TIPS Data Base for 95.79% of the total raw material imports from AEs by using the portfolio approach. The ld. TPO is directed to verify the additional evidences filed before this Tribunal by the assessee providing CUP data on the TIPS data base. Needless to mention that CUP method and comparable prices available in TIPS Data Base using portfolio approach covers 95.79% of total import of raw materials transaction from its AEs, if on verification, it is found by the ld. TPO that the import prices of the assessee to be lower than the comparable prices reported by the TIPS Data Base, the remaining imports i.e.4.21% are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss on cancellation of forward contracts ina tabular format along with sample copies of forward contracts filed vide submission dated 11 February 2015 b. Master Circular of RBI which states that companies are allowed to enter into forward contracts to mitigate the foreign exchange fluctuations 3.5. However, the AO held that the assessee failed to demonstrate that the forward contracts were entered into in relation to its business. Further, the learned AO stated that foreclosure or cancellation of forward contract is a characteristic of speculation activity. Thus, the AO proposed to disallow the impugned loss incurred on cancellation of forward contacts for the reason that it was not related to business activity. Without prejudice, the AO also held that had the loss on cancellation of forward contracts even if allowed, it would be allowed as speculation loss and not normal business loss. 3.6. Aggrieved by the action of AO, the assessee filed objections before the ld. DRP. During the ld. DRP proceedings, the assessee made detailed submissions as to why loss incurred on cancellation of forward contracts are related to the business activity along with furnishing the subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange loss of Rs 8,18,29,149 incurred on cancellation of forward contracts. The details of the same are tabulated as under: Sr No. GI Code Name Amount 1 8056001 Exchange Loss Unrealized -95,02,145.16 2 8057000 Exchange Loss Realized -4,87,932.01 3 8057001 Exchange Loss Realized 18,37,36,516.22 4 8057001 Exchange Loss Realized 13,98,97,980,46 5 8056003 FX Exchange Gain/Loss Unrealized 1,02,12,000.00 6 8256001 Exchange Gain Unrealized 3,25,84,737.22 7 8257000 Exchange Gain Realized -6,61,621,49 8 8257001 Exchange Gain Realized -27,39,50,384.94 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls this contract and in next two days rebook the contract for net payable after next month calculated at the end of that month. The ld. AR explained below the contract type 'b' from one of the forward contracts submitted: Contract No Contract booking date Currency Contract Value Rate of Booking Maturity Date Cancellation Date Rate on cancellation Exchange gain/ (loss) Paper Book Ref 10005 71035 26-Feb-2010 USD 1,08,00,000 46.3725 06-April- 2010 31-March- 2010 45.1400 (1,33,11,000) 302 The above process is followed month on month. Accordingly, loss is on account of difference between the exchange rate on the date of entering into the contract and the exchange rate on the date of cancellation. The net foreign currency exchange gain/ loss arises on cancellation of forward contract is debited/ credited to profit and loss account as foreign curre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the ld. AO and, if it is found by the ld. AO, that the forward contract was indeed entered for trading purposes, then the exchange fluctuation loss should be allowed as deduction for the assessee. With these directions, the revised ground Nos. 9 10 and additional Ground (revised Ground No.23) are allowed for statistical purposes. In view of the above documentary evidences, the Appellant submits that net foreign exchange loss on cancellation of forward contracts is allowable expenditure as the same is related to business of the Appellant. 3.19. Respectfully following the order of this Tribunal in assessee s own case in ITA No.2199/Mum/2015 for A.Y.2010-11 and ITA No.6577/Mum/2018 for A.Y.2014-15 dated 25/09/2019, we deem it fit to remand this matter to the file of the ld. AO for verification of the bank certificate and decide this issue in accordance with the aforesaid direction. Accordingly, the ground No. 10 raised by the assessee is allowed for statistical purposes. 3.19. In view of our disposal of ground No.10 above, the adjudication of ground No.11 does not arise. 4. The ground No.12 13 raised by the assessee is with regard to the action of the ld. DRP c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer. Once this is accepted, we are of the opinion that the approach of the ITAT was correct in as much as the Assessing Officer did not consider this aspect while making additions of the sundry creditors under section 68 of the Income Tax Act. As there was no case for disallowance for corresponding purchases, no addition could be made under section 68 in as much as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the AO. We are therefore, of the opinion that no substantial question of law arises for consideration in this case. The Appeal is accordingly dismissed. 4.4. Respectfully following the said decision, we direct the ld. AO to delete the addition made in the sum of Rs.6,78,403/- in respect of sundry creditors balance outstanding at the end of the year. Accordingly, the ground Nos.12 13 raised by the assessee are allowed. 5. The ground No.14 raised by the assessee is with regard to upholding the disallowance of legal and professional fees of Rs.1,41,67,242/- on adhoc basis. 5.1. During the year under consideration, the assessee had incurred legal and professional fees of Rs.7,08,36,209 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of additional evidences submitted to the extent of Rs.6,68,28,187/- towards legal and professional fees, then considering the facts that no adverse report has been given by the tax auditor in its tax audit report in respect of incurrence of the expenditure for the purpose of business of the assessee, no disallowance of the legal and professional expenditure should be made. 5.4. The ground No.14 raised by the assessee is disposed off in the aforesaid manner. 6. The ground No.15-17 raised by the assessee is with regard to disallowance of interest of Rs. 3,80,21,868/- u/s.36(1)(iii) of the Act which includes bank charges of Rs.32,23,260/-. 6.1. During the year under consideration, the assessee had given loans and advances aggregating to Rs.74,12,93,913/-. The entire details of loans and advances given by the assessee were submitted before the ld. AO by the assessee. The ld. AO observed that certain loans and advances were given interest free by the assessee. Accordingly, he show caused the assessee as to why the interest paid on borrowed funds should not be proportionately disallowed to the expenditure of interest free advances given by the assessee. 6.2. The ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erials. (c) To establish the mandatory deposits of Rs.70,31,18,515/-, the assessee submitted proof of mandatory deposits vide its submission dated 22/01/2016. The ld. AO was not convinced by the details filed by the assessee and proceeded to disallow the entire interest of Rs.3,80,21,068/- for want of supporting documents. 6.5. Aggrieved, the assessee is in appeal before us. 6.6. We have heard rival submissions and perused the materials available on record. We find that assessee had submitted the additional evidence before us vide letter dated 07/02/2020 giving a statement giving the details of movement of vendor advance exceeding Rs.5,00,000/- aggregating to Rs.3,23,18,547/- out of the total trade advance of Rs.3,81,75,397/- during the year under consideration and settlement of the same in subsequent period. These additional evidences require factual examination by the ld. AO and we deem it fit and appropriate in the interest of justice and four play to remand this aspect of the issue to the file of the ld. AO that is for the purpose of verification of trade advance portion afresh in accordance with law. We find from the perusal of the final assessment order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13/09/2012. The assessee also furnished details of fixed assets vide letter dated 11/11/2014. For want of requisite details, the. Ld. AO disallowed the depreciation in respect of said additions to the fixed assets totaling to Rs.2,67,84,398/- in the draft assessment order. Before the ld. DRP, theassessee submitted that books of accounts were audited by the Statutory Auditors under the Companies Act and by Tax Auditors under the Income Tax Act and the Auditors had not given any adverse comments on the genuineness of additions made to fixed assets and its fact of being put to use thereon. The assessee also filed additional evidences vide letter dated 23/07/2015 before the ld. DRP by furnishing copy of invoices for additions to fixed assets on sample basis. Accordingly, the ld. DRP directed the ld. AO to verify those additional evidences and consider the claim of depreciation on additions to fixed assets subject to verification. The assessee again submitted sample copy of invoices for the additions to fixed assets before the ld. AO vide letter dated 12/01/2016. The ld. AO observed that the claim of the assessee could not be allowed merely on the basis of furnishing of invoices and and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the business model of the assesseeand without the existence of these innumerable assets, the assessee could not have conducted its manufacturing activities by producing the finished goods and generating sales thereon, which has been duly offered to tax. Hence. We deem it fit and appropriate in the interest of justice and fair play to set aside this issue to the file of the ld. AO for denovo verification in accordance with law. The assessee is directed to furnish the details of each of the additions which were being put to use as certified by the Tax Auditor (which are filed before us alongwith the fact sheet). The ld. AO is directed to examine the same in accordance with law and grant depreciation on additions to fixed assets as per law. Accordingly, the ground No.18 raised by the assessee is allowed for statistical purposes. 8. The ground No.19 raised by the assessee is with regard to the action of the ld. AO for not granting of set off of brought forward unabsorbed business losses of A.Y.2008-09 and 2009-10. 8.1. We have heard the rival submissions. This matter requires factual verification from final assessment records of the relevant assessment year. Hence, we direct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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