TMI Blog2023 (4) TMI 979X X X X Extracts X X X X X X X X Extracts X X X X ..... nk or companies engaged in trading activities. Further more in order to benchmark each set of transactions distinctly, it is imperative to use the segmented information of the manufacturing activity and trading activity of the appellant. On these facts we are therefore of the view that the segmented results of the appellant are required to be used for benchmarking the international transactions. We find that the Income-tax Act, 1961 has several provisions, particularly profit-linked deductions etc. wherein assessees are required to carve out and identify separate segmental information and prepare standalone accounts for the eligible unit. It is noted that preparation identification of such segmented results are not linked with AS-17 in any manner and in that view of the matter, we are of the considered view that the lower authorities were unjustified in rejecting the audited segmented results on the frivolous premise that it did not form part of financial statements. Segment results cannot be said to be unreliable. However on perusal of the transfer pricing order, we agree with the ld. DR that these segmented results were never verified by the TPO since he had out-rightly r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to as DRP ) vide its order dated 11.07.2018 passed under section 144C(5) of the Income Tax Act for A.Y. 2014-15. 2. The assessee has raised the following grounds of appeal:- (1) For that on the facts and in the circumstances of the case and in law, the transfer pricing adjustment of Rs.5,75,32,306/- made by the AO/ TPO was unjustified on facts in law and the same deserves to be deleted in full. (2)For that on the facts and in the circumstances of the case and in law, the TPO as well as the Hon ble DRP erred in rejecting the audited segmental accounts provided by the appellant without pointing out any specific defect or infirmity therein and in that view of the matter the transfer pricing adjustment made with reference to the purchase of raw materials goods from AEs and the sales made to AEs was impermissible and is liable to be cancelled. (3) For that on the facts and in the circumstances of the case and in law, the TPO as well the Hon ble DRP erred in law and on facts in rejecting the functional analysis conducted by the appellant and the comparables identified for the purposes of undertaking transfer pricing study; and instead including companies which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is against the direction of DRP upholding the addition made on account of transfer pricing adjustment of Rs.5,75,32,306/- by the ld. AO/TPO(Transfer Pricing Officer) by rejecting the audited segmental accounts, the functional analysis conducted by the assessee and by identifying the new comparables in transfer pricing study. 4. The facts in brief are that the assessee filed e-return of income declaring total loss of Rs.6,66,11,351/-, which was selected for scrutiny through CASS. The statutory notices were duly issued and served upon the assessee. During the course of assessment proceedings, the ld. Assessing Officer found that there were international transactions to the tune of Rs.84,55,49,593/- during the year and accordingly the case was referred to the ld. TPO for determination of Arm s Length Price. The ld. TPO passed order under section 92CA(3) vide order dated 24.10.2017 determined the ALP by recommending upward adjustment of Rs.18,32,12,544/ to the international transactional. Accordingly draft assessment order was framed by the ld. Assessing Officer vide order dated 22.12.2017 passed under section 144C read with section 143(3) of the Income Tax Act, 1961, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA No. 2558/KOL/2017 for A.Y. 2013-14 that the issue has been decided in favour of the assessee. The operative part of the decision is extracted below:- 18. In view of the above findings, the next issue for our consideration is whether therefore the use of segmented information qua the (a) manufacturing segment and (b) trading segment is permissible in the given facts of the present case. In the given facts of the present case, we note that the appellant has two separate distinct activities viz., manufacturing of printing inks, blankets and trading in press chemicals. It is well understood that the functions involved in manufacturing activities, risks assumed, assets employed are significantly different and higher than the trading activity. Consequently it is 19 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 generally seen that the profitability of a manufacturing enterprise is higher than the profitability of a trading enterprise. As already held earlier, the cross subsidization of the international transactions in a combined approach is impermissible since it results in distorted presentation of facts. Hence if both the manufacturing trading segments of the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isite information in respect of identifiable segments either product wise or geographical wise. The relevant definitions of the two types of segments in AS-17 read as follows: A BUSINESS SEGMENT is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. A GEOGRAPHICAL SEGMENT is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. 21. It is thus noted that the AS-17 does not define or identify reportable segment based on the company's function or activity i.e. manufacturing or trading which is carried out in the same/similar products in the same geographical environment and hence there was no occasion for the appellant to have reported its identifiable manufacturing and trading segment in its financial statements since it did not satisfy the criteria laid down in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the fact remains that the assessee had furnished the segmental data. The Mumbai Tribunal in the case of Addl. CIT v. Technimont ICB India (P) Ltd. 148 TTJ (Mumbai) (TM) 547 had held that where the segmental data was furnished rejection of such cases as comparable is not justified. It was further held by both the lower authorities that bad debts written off cannot be allowed as operating cost. The Assessee respectfully submits that bad debts written off forms part of operating cost. In this connection, reliance is placed on the decision of Almatis Alumina Pvt. Ltd. ITA Nos.726 2361/Kol/2017 Assessment Years:2012-13 2013-14 Page|23 Tribunal in the cases of CA Computer Associates (P.) Ltd. v. Dy. CIT [2010] 37 SOT 306 (Mum.Tribunal) and Dy. CIT v. Vertex Customer Services India (P.)Ltd. [2009] 34 SOT 532 (Delhi). 34. The DR submitted that segmental total cost not available and that the subsidiary in India incurred a loss due to which the entire investment as well as recoverable advance had been fully provided for in the books of account. Being so it is not comparable with the assessee company. 35. We have considered the arguments of both the parties. In our considered view for compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Ltd. v. Asstt. CIT reported in [2014] 42 taxmann.com 223/64 SOT 118 (Chennai - Trib.) wherein the Chennai Tribunal, placing reliance on the decision rendered in the matter of 3iInfotec Ltd. v. ITO reported in [2013] 35 txmann.com 582 (Chennai - Trib), held that even if such segmental results were not shown in the audited financial accounts, they had to be accepted. The Coordinate Bench in the matter of Infotec Ltd. v. ITO (supra) held that there was no legal requirement that the segment wise working submitted before the TPO should have been audited by the Assessee's Chartered Accountant. The Coordinate Bench Delhi Tribunal further placed reliance on the decision rendered in the matter of Lummus Technology Heat Transfer BV v. Dy. CIT reported in [2014] 42 taxmann.com 342/64 SOT 47(URO) (Delhi - Trib) wherein it was held that segmental results could not be rejected on the ground that the same was not audited. The TPO/DRP was required o examine the segmental results if the same were maintained in the ordinary course of business. On perusal of, inter alia, the aforesaid decisions, the Coordinate Bench Delhi in the matter of CSR Technology (India) (P.) Ltd vs. ACIT (supra)held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparison under RPM to benchmark the transactions. We find that on detailed examination of segmented information, this Tribunal had found the transactions involving purchase of traded goods to be at ALP under internal RPM. The relevant extracts of the decision is as follows: From the submission we find that the assessee had imported printing inks from AEs worth Rs. 7.06 crores which was sold to unrelated parties for Rs. 8.09 crores resulting in gross profit margin of 13%. Correspondingly the assessee had imported press chemicals from unrelated parties worth Rs. 1.75 crores which was sold to unrelated parties for Rs. 2.02 crores yielding profit margin of 14%. Without prejudice to the assessee's contention that the aforesaid margins would require turnover adjustment and working capital adjustment, it was 24 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 observed that the margin was 13% earned from transactions with related parties was found comparable to margin of 14% earned from uncontrolled transactions and was therefore held to be at arm's length by the CIT(Appeals). The difference in margin of 1% was well within the permitted range of +/- 5% allowed in seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2017 DIC India Limited, AY- 2013-14 following four companies which were engaged in manufacture of printing inks and found to be comparable, having regard it its FAR profile. (a) Rex-Tone Industries Limited (b) Sakata Inx (India) Ltd (c) Tirupati Inks Ld (d) Organic Coatings Ltd 28. It is noted that comparables (a) to (c) are not in dispute in as much as all of them have been accepted and retained both by the TPO as well as the DRP. With regard to the comparable (d), M/s Organic Coatings Limited, it is noted that although the appellant had contended for its inclusion before the lower authorities but no reasons are found to have been given either by the AO or the DRP to reject the same. Instead we find that the DRP's order is conspicuously silent about this comparable. It was brought to our notice by the ld. AR that this company, M/s Organic Coatings Ltd was found to be functionally comparable and engaged in the same line of business by the DRP, Delhi in the appellant's own case in the earlier AY 2012-13 and thereafter it was also accepted by the TPO to be a comparable. On these facts and in view of the DRP's order for AY 2012-13, we do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 5 Meghmani Organics Ltd. Selected by TPO The company is involved in manufacturing of diverse items such as pigments, agrochemical, power and not printing inks. The company being into the manufacture of the pigments, is held as a good comparable and to be retained. 6 Ultramarine and pigments Ltd. (seg) Selected by TPO The company is engaged in manufacturing of organic colouring matter and not printing inks This company being predominately into pigments is directed to be retained as a comparable as in above companies. 30. On perusal of the above, it is noted that each of the above companies are engaged in manufacture of pigments, which in DRP's opinion is an essential raw material in manufacture of printings inks. According to the DRP therefore these companies could be considered as good comparables. We are however unable to agree with this analysis of the DRP. It is an admitted position that each of the above companies manufacture pigments as their final product. None of them manufacture printing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers or suppliers. In our considered view therefore none of the above mentioned six comparables retained by the DRP are good comparable and hence stands rejected/ excluded. 31. With these findings, the AO/ TPO is directed to re-compute the ALP margin taking into consideration the above discussed four comparables and accordingly benchmark the international transactions involving purchase of raw materials and export of finished goods using the segmental data of the appellant. 32. In the result, the appeal of assessee stands partly allowed for statistical purposes. 8. Since the facts before us are materially same, we, accordingly, set aside the direction of the DRP and direct the AO/TPO to delete the addition. Consequently Grounds No. 1 to 7 are allowed. 9. The issue raised in Grounds No. 8 9 is against the disallowance of royalty to the tune of Rs.9,83,66,198/- by the ld. Assessing Officer as well as ld. DRP by treating the same to be capital in nature. 10. At the outset, ld. Counsel for the assessee submitted that the issue is covered in favour of the assessee by the decision of Coordinate Bench of this Tribunal in assessee s own case in ITA No.126/KOL/2017 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erative part in ITA No.126/KOL/2017 for A.Y. 2010-11 is extracted below:- 9. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find Coates of India Limited was the erstwhile name of DIC India Limited (assessee herein) . We find from the technical collaboration agreement entered into between assessee and DIC Corporation, Japan on 5.12.2000 that assessee is engaged in the business of manufacturing of printing inks and allied products in India in its various factories located at Calcutta, Delhi, Mumbai, Chennai, Noida and Ahmedabad. assessee was desirous of upgrading its overall technology and introduction of new technology for manufacturing printing inks and allied products of all types viz., manufacturing of flushed pigments, sheetfed offset inks, gravure inks, web offset inks, news inks, screen printing inks, varnishes of all types including flush varnish, adhesives including packaging adhesives on a continuous basis. The assessee had approached DIC Japan to make available to it the said technical knowhow for the purpose of upgrading its manufacturing technology for the existing as well as futur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t plus reasonable profit margin. Provided however COATES shall be under no obligations to accept such orders from DIC or its associates and DIC shall not be entitled to any royalty on such transactions. ....................................... 7. SECRECY 7.1. COATES agree to keep the Licensed Information provided hereunder by DIC as secret and confidential and agrees not to disclose it to any third party provided that the information of the following nature shall be excluded from these secrecy obligations: (a) Information that is in public domain. (b) Information that COATES has in its possession at the Effective date which is not subject to an Agreement of Confidentiality. (c ) Information which COATES has received rightfully from other sources before or after at the Effective Date. 7.2. The obligation under this article shall survive any termination of this Agreement for ten (10) years. 9. Period of Agreement 9.1. This Agreement will remain in force for 7 years from the Effective Date, provided that DIC, directly or indirectly, owns more than fifty (50) percent of the shares of COATES. 9.2. One (1) year prior to the expiration of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the business / commercial rights have been obtained for a period of seven years only. Admittedly the licensed information has been obtained for a period of seven years by the assessee and hence there cannot be any question of acquisition of such licensed information by the assessee. We have gone through the agreement entered into between the assessee and DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan and we find that nowhere it was mentioned that the assessee had acquired the business/ commercial rights of IPR so as to fall within the ambit of an asset having enduring nature in the capital field.. On the contrary it is very clearly stated in both the agreements that DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan has granted license to use technology, know how and other license information for a specified period and hence it cannot be said that the assessee had acquired any business / commercial rights thereon. We find that the ld. CIT had persuaded himself to incorrect assumption of facts that assessee by using the licensed information obtained from DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan had upgraded its P M and also chang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould. be safely concluded that the ld. AO had arrived at one possible conclusion in the given set of facts and circumstances and had taken one possible view. The ld. CIT is only trying to substitute his own view on the same set of facts and circumstances by invoking his revisionary powers u/s 263 of the Act which in our considered opinion is not permissible in law. 9.3. We find that similar issue was addressed by the co-ordinate bench of this tribunal in the case of DCIT vs Bata India Ltd in ITA Nos. 1826 to 1828/Kol/2012 dated 23.5.2013. In this case also, it had secrecy confidentiality clause and termination clause similar to what is present in the technical collaboration agreement entered into by the assessee herein. The Tribunal after examining the relevant clauses of the agreement held. as below:- 16. The ld. AR drew our attention to the royalty agreement which was at pages 8 to 28 of the paper book. He drew our attention to para 2.5 of the agreement which specifically says that all the drawings and other documents comprising the technical knowhow and all notes and copies made there from by licensee shall be marked with the words Secret and Confidential-property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... So far as question nos. (iv) and (v) are concerned we find from the order of the CIT(A) the assessee did not derive any enduring benefit for payment of lumpsum royalty as the agreement was for non-transferable license to manufacture licensed products in India. Out of several questions raised by the revenue before the Hon ble Calcutta High Court, only question no. (iv) was admitted by the Court and all other questions were either disposed of on merits or on the ground that they do not involve any substantial question of law. 9.4. We find that the assessee had filed chartered certificate in Form 3CEB for its international transactions which included payment of subject mentioned Royalty to its AE which was certified to be at Arm s Length by the Chartered Accountant. The assessee benchmarked its royalty transactions by following CUP method and by comparing the royalty percentage made by the comparable companies and arrived at the arithmetic mean of 8.55% on sales. Since assessee paid only 2% as royalty on sales, the assessee justified its royalty payment to be at Arm s Length. The Transfer Pricing Documentation in this regard was also filed during the hearing wherein a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t amounts to application of mind by the ld. AO. We find that the international transactions carried out by the assessee would. be both on capital as well as on revenue account. The entire international transactions would have to be referred by the ld. AO to the ld. TPO u/s 92CA of the Act. As we had already stated that the scope of enquiry of the ld. TPO is merely restricted to determination of ALP of international transactions which would. be both on capital and on revenue account. Hence the order of ld. TPO on royalty payment and addition made thereon would. not come to the rescue of the assessee. 9.5. We also find that the issue of allowability of royalty as revenue expenditure was considered by the Hon'ble Calcutta High Court in the case of Timken India Ltd vs CIT reported in (2014) 51 taxmann.com 184 (Calcutta) dated 30.7.2014 which considered the decisions relied upon by the ld. AR [i.e CIT vs I.A.E.C. (Pumps) Ltd- 232 ITR 316 (SC) and ld. DR (i.e Alembic Chemical Works Co. Ltd vs CIT - 177 ITR 377 (SC) ]. The Hon ble Calcutta High Court held. as under:- 5. Mr.Majumdar, learned advocate appearing in support of the appeal, submitted that the facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee may have already had an existing plant and machinery. It may also be true that the assessee was pursuing the same line of business, but it cannot be denied that by paying the sum of USD 200,000 the assessee acquired a new technology. There was as such accretion to the capital of the assessee in the sense that the company became better equipped to do its business with the help of technology. Therefore, the expenditure has to be treated as a capital expenditure. On the top of that, from the agreement entered into between the assessee and the non-resident it would. appear that the benefit of such payment is of an enduring nature which is to continue to benefit the assessee for a period of six years. It was, as such, a plain case of a capital expenditure on which the assessee was entitled to claim depreciation. The assessee has already been allowed depreciation at the rate of 25%. Accordingly, more than just treatment was given to the assessee and this court should. refrain from interfering with the order under challenge. 10. We have considered the rival submissions of the learned advocates for the parties. The submissions advanced by Ms.Gutgutia are no doubt meritorious and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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