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TMI Blog2012 (9) TMI 583X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 143(3) read with section 92CA(3) for the assessment year 2002-2003 on the following grounds of appeal:- "1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of Rs. 5,13,99,552/- made on account of computation of arms' length price in terms of provisions of Section 92C of the IT Act, 1961. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the SH Kelkar & Co. be eliminated fro the list of comparables and to consider the final comparables considered by the assessee in its Transfer Pricing Study Report as the correct comparables. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not confirming the findings in the Transfer Pricing Officer as contained in the Order u/s.92CA(3) of the IT Act, 1961. 4. Further, placed in the above factual and legal scenario, the impugned order of the Ld. CIT(A) is, the appellant prays, patently perverse and contrary to law and consequently merits to be set aside and that of the Assessing Officer be restored. The appellant craves leave to amend or alter any ground or add a new ground which may be necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of CIT(A) and is not before us. The only issue for adjudication in this case is with regard to addition of Rs. 5,13,99,522/- in respect of international transaction of import of raw materials and exports of finished goods to AEs. 4. The brief facts apropos this addition are that, the assessee had filed Transfer Pricing Study Report (TPR), wherein it has bench marked various international transactions relating to manufacturing activities for determining its international transactions. The most appropriate method adopted in the TPR was 'Transaction Net Margin Method' ('TNMM'). For identifying the comparable companies, the assessee carried out extensive search process and identified the companies engaged in business of manufacturing of fragrances. Bench marking process was based on data of the comparable companies for the immediate previous financial year i.e. March 2000 and March 2001. In the search process, initially the assessee identified list of thirty-five companies and after filtering down, following five companies were finally identified as the comparables :- "(i) AVT Natural Products Ltd. (ii) Fem Care Pharma Ltd. (iii) Goldfield Fragrances Ltd. (iv) J K Helene Curti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supported by any evidence. 6. Before the CIT(A), the assessee submitted that it is manufacturing industrial fragrances and flavours and catering to customers like Hindustan Lever Ltd., Henkel India Ltd., Coca Cola India Pvt. Ltd. and Colgate Palmolive India Ltd., all of them are FMCG and MNC clients. It prepares compounds industrial fragrances and flavours from the raw materials supplied by various third parties i.e. locally and also importing it from its affiliates. These fragrances and flavours are compounded, using the proprietary formula developed by the Firmenich Group. Each product is unique and tailed made to the requirements of the clients and is used for manufacturing specific soaps, detergents, cosmetics, toiletries, foods beverages, drugs, tobaccos, pharmaceuticals, etc. It was after intensive research of similar type of companies, the assessee has identified 35 comparable companies and after filtering it down and taking into consideration various parameters, only five companies were ultimately identified as comparable companies for evaluating its arms' length price for the international transactions. The operating margin of the five comparable companies was worked out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany like it, to command better prices from customers being smaller in size, whereas the assessee supplies to big MNCs in bigger volumes. Therefore, the profitability of SH Kelker is far more than the assessee. Further the SH Kelkar Company has huge dealer network all over India and its representative are placed in various cities, whereas the assessee is only catering to few multinational companies. (f) There is also product segment difference as almost half of the sales of the Kelkar company is from sales of Aromatics chemicals (raw materials) which are essential to manufacture industrial fragrances. The Kelkar company has installed capacity for manufacturing aromatics chemicals of more than 700 MT and for manufacturing fragrances around 90 MT, as compared to the assessee which does not manufacture aromatics chemicals and does not have any advantage on that account. (g) There is financial and other differences like Kelkar has net worth of Rs. 1068 millions with loan funds of Rs. 129 millions and further it has invested Rs. 356 millions in assets and its turn over is Rs. 1241 millions out of which material cost is 759 millions and in terms of percentage it is 61%. As compared t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actor, cannot be accepted as the age cannot be the criteria for inclusion or exclusion for comparability analysis. If this is the criteria then most of the companies identified by the assessee are also very old, for example JK Helen Curtis Ltd, is more than 40 years old and other companies are also have substantial years of experience. Thus, the age cannot be the relevant factor. Regarding basic functional difference relating to R&D activities, he submitted that in assessee's case R&D is taken by the parent company which is supplying raw materials and the purchase price includes R & D also and, therefore, it is included in the cost of purchase price. Similarly, the operational, know how and technical differences, he submitted that the same is also embodied in the cost price of the material supplied by the parent company. For the other difference like product segment difference, the marketing and customers buyers difference, he submitted that nothing is borne out from the records in support of the assessee's contention. Lastly, regarding book share value of the company, it was submitted that how book value of shares can be applied for comparability analysis and such a contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been filed along with the paper book from pages 63 to 65) has not been considered at all. Thus, there was no occasion to determine the arms length price for the international transaction in the case of the assessee. 10. We have carefully considered the rival submissions of the parties and also gone through the finding of the CIT(A) as well as the TPO and the materials as have been relied upon by the parties at the time of hearing. There is no dispute that here in this case, most appropriate method for determining 'arms length price' is 'Transactional Net Margin Method' (TNMM), wherein the 'arms length price' is determined by comparing the operating profit relative to an appropriate base i.e. cost, sales, assets of the tested parties with the operating profit of an uncontrolled party engaged in comparable transactions. The assessee in his TP report has finally identified five comparable companies after filtering down various parameters. Out of such five companies, four has been rejected by the TPO and one company i.e. SH Kelkar and company has been included which has been objected to by the assessee. Once the assessee in its TP report has accepted the TNMM as most appropriate m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is engaged in the manufacturing of creams, ointments, liquids, tablets and chemicals. It is also involved in pharmaceuticals and chemicals, which is entirely different not only in function and nature of business but also in the products manufactured by the assessee company which is mostly fragrances and flavours. The profile of the comparable company as made available at the time of hearing shows that there is a vast difference in the functions, the nature of business and other attributes carried out by this company, vis-à-vis the assessee. On these facts, we do not find any reason to include this company into comparable case for comparability analysis. Hence, we uphold the finding of the TPO in rejecting this company from list of comparables. 10.3 Goldfield Fragrances Ltd. - There is no dispute regarding inclusion of this company as a comparable case. Hence, the same is accepted in the list of comparable case. 10.4 J.K. Helen Curtis Ltd. - This company is basically engaged in manufacturing of perfumes, sprays, body deodorants, room freshners, cologne, etc. All these products are marketed under the brand name of 'Park Avenue'. All these brands have a high premium value an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason based on age and formation is not accepted. The second difference is of basic function. It has been stated that the 'M/s S H Kelkar & Company' undertakes research development activities and has continued backward integration and it uses state of art and technology. However, there is no dispute that the assessee and 'SH Kelkar' are engaged by and large in similar products and the functions performed are also quite similar. The only reason given by the assessee is that it has a huge R& D back up with continued backward integration. In the case of assessee, R&D is taken by the parent company, which is supplying raw materials. Thus, the purchase price of raw materials procured from parent company does have the element of R & D which is embodied in it. However, the assessee's contention that there is a substantial cost advantage on account of backward integration and to some extent of research and development has some merits. We, accordingly, direct that some reasonable adjustment for backward integration and element of research and development on the cost should be made. Therefore, we direct the TPO to make suitable and reasonable adjustment on account of R&D and backward integ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion, the TPO has rightly considered 'M/s SH Kelkar & Company' as a comparable case for performing comparability analysis for determining arms length price and in taking the operating profit. However, while drawing the comparability analysis, suitable and reasonable adjustment on account of backward integration, research and development and cost of raw materials should be made. Accordingly, the TPO is directed to work out the operating profit after making these adjustments. 12. In view of the finding given above, we direct the TPO to work out the operating profit and take the "arithmetic mean" of the final four comparable cases i.e. 'AVT Natural Products Ltd.'; 'Goldfield Fragrances Ltd.'; 'Synthite Industrial Chemicals Ltd.' and 'S H Kelkar & Company Ltd.' with certain adjustments. The TPO is accordingly directed to work out the arithmetic mean of these four companies for determining the arms length price of the assessee company for the international transactions. It is also made very clear that the TPO will restrict the adjustments to the transactions with the AEs only and not to whole of the transactions/turn over. Further, while arriving at the arithmetic mean of the operati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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