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TMI Blog2017 (2) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... arties to benchmark the ALP of ‘royalty payment’. In case, the Internal CUP are not available or the comparability analysis is not possible then External CUP can be explored by looking into the ‘Royalty Stat Data’ available for the Indian comparables working under the similar kind of technical agreements and conditions for which royalty is being paid. Thus, with this direction, the issue of royalty is being sent back to the file of the AO/TPO for re-adjudication in line of the direction given herein above. Transfer Pricing Adjustment on account of ‘location savings’ - addition made by the TPO on the reasoning that assessee has not received any compensation from the AE on account of the advantage of location, that is, operating in India has led to a lower cost saving on account of cheap labour, etc. - Held that:- Comparison of the transactions with an uncontrolled transaction is the key factor and primary requirement under our Transfer Pricing Laws before resorting to any kind of adjustment of the ALP. It is also not clear whether the TPO has treated the location saving as an independent international transaction or it is just an adjustment on the determination of profit of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable transactions with the local comparables cannot be sustained. The TPO has not demonstrated as to how and under what comparability analysis he has found that assessee has got the benefit of environmental/green costs savings and it is materially affecting the price under arms length conditions. Our finding and observations given with regard to location saving adjustment in the foregoing paragraphs will also apply here. Accordingly, we do not find any reason and justification for such adjustment and same is directed to be deleted. Setting off the brought forward loss pertaining to Profenofos unit against the profits of the current year while computing deduction under Section 80-IB - Held that:- Each undertaking or unit is to be treated as independent and separate unit and it is those industrial undertaking which have a profit or gain are to be considered for computing the deduction. The loss making industrial undertaking would not come into picture at all. Thus we allow the claim of the assessee. Addition of closing stock on account of un-utilized CENVAT credit - Held that:- Restore the matter to the file of the Assessing Officer for deciding this issue in line with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on issues are involved in all the appeals arising out of identical set of facts, therefore, the same were heard together and are being disposed off by way of this consolidated order. The various transfer pricing issues involved in all the appeals at a glance are highlighted as under:- Sl. No. Issue under Appeal AY 2009-10 AY 2010-11 AY 2011-12 1 Adjustment in contract Manufacturing segment Departmental Appeal (Computation of 5% Range working as per Proviso to section 92C(2) of the Income tax Act, 1961 ( Act‟) Rs.26,08,53,000 NA NA 2 Disallowance of royalty Payment (Assessee s Appeal) Rs.4,79,44,806 (Ground Nos. 3 3.1) Rs.6,13,25,824 Ground Nos. 3 3.1 Rs.5,53,93,209 Ground Nos.3 3.1 3 Adjustment on account of location savings- ( Assessee s appeal ) Rs54,69,43,636 Rs60,45,21,233 Ground No.4 and 4.1 Rs.65,26,11,480 Ground No.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing and contract manufacturing activities based on conjectures and surmises and further erred in not appreciating that the same was not an international transaction amenable to transfer pricing ( TP ) provisions. 4.1 Without prejudice and not withstanding to the above, the learned AO/ TPO erred in wrongly computing and not restricting the adjustment on account of location saving to Appellants contract manufacturing activities i.e. ₹ 45,88,53,296, in accordance with the directions of DRP. 5. Based on the facts and circumstances of the case and in law, the learned AO/ TPO pursuant to the directions of the DRP, erred in making arbitrary adjustment of ₹ 1,47,27.846 based on conjectures and surmises in relation to environment/ green cost savings and further erred in not appreciating that the same was not an international transaction amenable to TP provisions. 6. That the learned AO/ TPO erred on the facts and circumstances of the case and in law in not granting the benefit of economic and risk adjustments Corporate-tax grounds: 7. Based on the facts and circumstances of the case and in law, the learned AO, pursuant to the directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormulates crop protection chemicals which are manufactured majority through job workers and the sold primarily in the domestic market; (ii) Contract manufacturing Under this segment, the assessee is engaged in the contract manufacturing of active ingredient Thiamethoxam ( TMX ) and products containing TMX. This involves imports of raw materials from Syngenta Asia Pacific Pte Ltd ( SAPL ) and sale of finished goods to SAPL. The assessee has a manufacturing unit at Goa where it manufactures such active ingredients (i.e. TMX and its derivate products). The assessee has reported its segmental accounts in the following manner:- Segment Crop Protection Segment Seeds Total Sub- segment I Sub- Segment-II Crop Protection- Total Particulars Crop Protection Licensed Manufacturing Crop Protection Contract Manufacturing Gross sales 79,96,232 38,93,619 1,18,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om matter was referred to by the AO to examine the ALP of the international transactions, first of all noted the past history of royalty transaction and observed that in assessment years 2007-08 and 2008-09 the TPO had concluded that, firstly, there is no transfer of technology from AE to the assessee or to the contract manufacturer; and secondly, the corn and sunflower seeds were not patented products. Accordingly, it was held that there is no justification for payment of royalty and disallowed payment for technology royalty albeit the brand royalty was allowed. In this year also following the same reasoning the TPO made the adjustment on following grounds / reasons:- a) There is no justification for payment of royalty, since no transfer of technology from AE to Assessee was evidenced; b) Corn and Sunflower seeds are not patented products and therefore, there is no legal requirement for the assessee to pay the royalty; and c) Arm s Length Price ( ALP ) for payment of royalty has to be @ 1% for domestic sales and 2% for export sales which would be at par with other seeds . In view of the above observation, the TPO treated the ALP for payment of royalty @ 1% f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Domestic Sales Export Sales Royalty (5% on domestic 8% on export) 3,37,63,263 74,25,821 1,73,73,237 19,55,009 Total Royalty 4,11,89,083 1,93,28,226 Allowed 1% and 2% 67,52,653 18,56,455 34,74,643 4,88,752 Disallowed 2,70,10,610 55,69,365 1,38,98,574 14,66,257 1,25,72,503 Brand Name License Fees on corn and sunflower 4,79,44,806 Disallowed item royalty paid on corn and sunflower 6,05,17,309 Total royalty 6. The DRP upheld the disallowance of the royalty payment and also rejected the assessee s contention regarding Internal CUP which was available in the case of the assessee with similar agreement with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26.10% 16.83% 2011-12 22.39% 17.11% He submitted that once the operating profit margin is far higher than the comparable companies, then no separate adjustment on account of Royalty should be made as it gets subsumed under the TNMM. Further justifying the royalty payments on merits, Mr. Bhutani submitted as under:- a) SSAG has been supplying plant material / basic seed to the assessee, which then carries out its own processes and modifications to suit Indian climatic conditions. The final product is a commercial hybrid sunflower seed obtained from basic seed . It is this basic seed/plant material and trademark of SSAG, in respect of which royalty is paid by the assessee; b) The benefits received by the assessee under the agreements with SSAG, inter alia, are as follows: Syngenta technology has enabled the Assessee in breeding and multiplication of seeds and to exploit it in the domestic and export markets; Access to technology, helps in increasing the productivity, yield and/or provides disease resistant product to the farmers and thereby increase in sales and market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8% for domestic and export sales respectively 1% and 2% for Domestic and export sales respectively 2 Purpose of payment Royalty for technology. No separate BNLF paid Brand name only 3 Rights granted As per Agreement 2.1 License to use or utilize any of the PROPRIETORY RIGHTS, PROPRIETORY INFORMATION and TRADEMARKS in order to produce, promote and commercialize seed within the territory . Section 2.1 License to use the Syngenta Brand He submitted that, the TPO without brining on record any specific reason has erred in benchmarking the royalty rate for payment of royalty under the Technology Agreement for Hybrid and Secondary seeds with BNLF rate paid on other seeds by the assessee without appreciating that both the royalties paid were for different purpose. So far as reliance on internal CUP, it was submitted that this issue has been accepted by the Tribunal in the earlier years and specifically in the assessment years 2007-08 and 2008-09. Before us, he pointed out that there were various other royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent geographical regions, however, the geographical circumstances will not make a difference because the terms of technology transfer being the same. Even if one goes by Royalty Stat Database , then also the comparables drawn are mostly from different geographical regions. 9. On the other hand, Ld. DR submitted that, the royalty has to be benchmarked separately as it may not be covered under the PLI worked under the TNMM. In support he strongly relied upon the decision of Hon ble P H High Court in the case of CIT vs. Knorr Bremise India Pvt. Ltd., Income-tax Appeal No.182 of 2013 judgment dated 06.11.2015. Objecting to the Internal CUP based on different agreement by the AE at different geographical locations, he submitted that, it is one of the major factor which makes a difference while carrying out the comparability analysis and that is why it has been kept as part of Rule 10B(2). He submitted that, if at all CUP method is to be applied, then external CUP should be looked into and for that purpose Royalty Stat Data can be used as it is now available in India also wherein Indian comparables are also there. 10. In rejoinder, Mr. Mukesh Bhutani submitted that, in so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee based on such proprietary rights, proprietary information, valuable technical knowhow and trademarks owned by AE carries out to produce, promote, and commercialize corn and sunflower seeds in the domestic market through its own process and modification to suit to Indian climatic condition. It bears the trademark of the AE in respect of which the royalty is being paid. The benefits derived by the assessee under the agreement and also the use of technology in the form of basic seeds have already been discussed above. The issue of royalty payment has chequered history, that is, similar payment in terms of same technical collaboration agreement has been made to the AE in the earlier years also. In the assessment year 2007-08 this issue has been dealt by the Tribunal after discussing the entire facts in the following manner:- 29. We have heard the rival submissions and perused the relevant finding given in the impugned orders as well as material placed before us. It is an undisputed fact that assessee had entered into technical collaboration agreement with Syngenta AG Switzerland for the use of proprietary rights; proprietary information; valuable technical know-how; trademar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed huge returns during carrying out its activity by exploiting these intangibles. 30. Once we hold that the royalty payment cannot be computed at Nil , the next issue which comes before us is how to compute the Arm s Length Price of such a transaction. The Ld. Counsel before us has contended that, there is an Internal-CUP which is based on agreement dated 13th August, 1995 with the third parties namely, HSAL Sandoz India Ltd. The third party data have been rejected on the ground that, the agreement relates to the year 1995, whereas the payment has been made in 2006 by the assessee to its AE. However, we fail to understand if the terms of the agreement are still in force and has not been terminated then how the year of agreement will make a difference. If a similar payment has been made to the third party in this year, then, if other attributes of CUP are fulfilled then same has to be considered for the comparability analysis to benchmark the ALP of the payment. What is required to be seen is, whether the terms and conditions of the agreement with the third party and the terms and conditions of the agreement with the AE are similar or not. If they are similar, then definite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith third parties in the different geographical regions. Therefore, no exception should be carved out in this year and accordingly, these agreements can be examined or analyzed by the TPO if the geographical location does not have any material effect on the determination of the prices. Thus, we direct the TPO/AO that while carrying out the comparability analysis under CUP method, should also examine these agreements as referred to above by different AE s with third parties to benchmark the ALP of royalty payment . In case, the Internal CUP are not available or the comparability analysis is not possible then External CUP can be explored by looking into the Royalty Stat Data available for the Indian comparables working under the similar kind of technical agreements and conditions for which royalty is being paid. Thus, with this direction, the issue of royalty is being sent back to the file of the AO/TPO for re-adjudication in line of the direction given herein above. 12. The next issue for our consideration is Transfer Pricing Adjustment on account of location savings which has been made by the TPO on the reasoning that assessee has not received any compensation from the AE o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yed keeping in view the locational advantage of a particular location to give rise to the saving with respect to one or many of the factors of production, like cheap finance, cheap labour, cheap raw materials etc. He also referred to India s position on United Nations Transfer Pricing Draft in this regard; secondly, in case of India, cheap manpower is clear and distinguishing factor and, therefore, in terms of Draft United Nations Model, India has a clear location advantage vis- -vis the labour supply; lastly, as regards the decision of ITAT Delhi Bench, he submitted that the said decision is being further challenged by the Department and in fact there is another decision of Co-ordinate Bench of ITAT Delhi Bench in the case of Li-Fang, which upholds the principle of locational saving. He proposed to calculate the location saving on export business of the assessee as per the following formula:- Location Savings Cost of per employee Globally (A) Less: Cost of per employee in India (B) Difference C= (A) (B) Value of Adjustment = (C)* no. of employees in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng bifurcated in 50:50 ratio. This view is also supported by India s position before different international fora that arm s length compensation for cost savings and location rents should be such that both parties would benefit from participating in the transaction. In other words, it should be not less than zero and not greater than the value of cost savings and locations rents; it should also reflect an appropriate split of the cost savings and location rents between the parties. Accordingly, the adjustment is being made at 50% of the savings which is ₹ 56,83,40,074/- summarized in the table below: Location Savings - Licensed Manufacturing Segment ₹ 8,80,90,340 - Contract Manufacturing Segment 45,88,53,296 - Seeds Segment 2,13,96,438 Total 56,83,40,074 14. The Ld. DRP upheld the contention of the TPO, however, gave part relief by restricting the adjustment of locational saving only to the Goa Pant of the assessee and accordingly the adjustment has been marginally reduced to ₹ 54,69,636/- out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having regard to the ALP. Section 92 of the Act, which triggers the applicability of TP provisions, contemplates the existence of an income arising from an international transaction. Thus, the scheme of transfer pricing essentially requires three conditions, all of which have to be cumulatively satisfied: i) Existence of an international transaction between two AEs; ii) Existence of income arising from such international transaction; and iii) Such income to be computed having regard to the ALP of the transaction. b) From the perusal of the provisions it can be inferred that TP regulations would be applicable to any transaction being an arrangement, understanding or action in concert in relation to purchase, sale or lease/ use of tangible / intangible property or any other transaction having bearing on profits, income, losses or assets of such enterprises. In other words, to be an international transaction it should be pursuant to an arrangement, understanding or action in concert; c) Thus, the pre-requisite for invoking TP provisions is that there must be an international transaction within the meaning of the Act between two AEs and there must exist an income arisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that recently, the CBDT has issued Instruction No. 3 / 2016 dated March 10, 2016, whereby it has been clarified that it is the AO who has to record satisfaction and make a reference for computing the ALP of an international transaction. In absence of the same, the TPO cannot suo-moto pick-up a transaction for characterizing the same as an international transaction and compute its ALP. He referred to para-3 of the said instructions, which lays down the detail procedure in this regard. In the instant case, no such reference qua location saving was made by the AO to the TPO. The alleged location savings was held to be an international transaction and benchmarked as a unilateral action by the TPO. In view of the above, such a unilateral action by the TPO makes the TP order on this account bad in law. Lastly, he submitted that, locational saving is, in fact, embedded in the operating margins of the comparables. He pointed out that, assessee operates in a perfectly competitive market and in such a market, a manufacturer will have to pass on any location specific advantages (if any), to the customers to remain competitive. Accordingly, it would not be able to earn more than what the thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, assessee should have received compensation for it from the AE. From the reading of the order of the TPO as well as the order of the DRP, we are at the outset, unable to apprehend as to under which existing Transfer Pricing provisions enunciated in our Income-tax Act or the Income-tax Rules, such a transaction has been reckoned as separate international transaction which warrants separate benchmarking especially when the overall profit margin of the entire transaction with the AE under the TNMM vis- -vis the comparables has been accepted. No provision or precedence has been referred by the Revenue authorities, whether our existing Transfer Pricing provisions suggest any such kind of an adjustment or is there any settled judicial principle that location costs requires to be adjusted while measuring the allocation of the profits of the Group entities/associated enterprises operating in different tax jurisdiction and such a location cost advantages needs to be factored in while determining the Arm s Length Price. The locational savings alludes to a concept of a location specific advantage with reference to specific market features and/or factors of production that enables MNE to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osts are significantly lower. The enterprise in Country A retains the rights on the brand name and continues designing the clothes. Further to this restructuring, the clothes will be manufactured by the affiliate in Country B under a contract manufacturing arrangement. The arrangement does not involve the use of any significant intangible owned by or licensed to the affiliate or the assumption of any significant risks by the affiliate in Country B. Once manufactured by the affiliate in Country B, the clothes will be sold to the enterprise in Country A which will on-sell them to third party customers. Assume that this restructuring makes it possible for the group formed by the enterprise in Country A and its affiliate in Country B to derive significant location savings. The question arises whether the location savings should be attributed to the enterprise in Country A, or its affiliate in Country B, or both (and if so in what proportions); 9.151 In such an example, given that the relocated activity is a highly competitive one, it is likely that the enterprise in Country A has the option realistically available to it to use either the affiliate in Country B or a third party ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the subsidiary in Country Y has developed a valuable intangible corresponding to its technical know-how. Such an intangible would need to be taken into account in the determination of the arm's length remuneration for the sub-contracted services. In appropriate circumstances (e.g. if there are significant unique contributions such as intangibles used by both the enterprise in Country X and its subsidiary in Country Y), the use of a transactional profit split method may be considered . Thus, under OECD, the locational saving costs has been recognized only when there is either reallocation of activities or business restructuring whereby MNE Group, Multinational Enterprises reallocates some activities or business to a place where costs are lower than the location where such activities or business was initially performed. Whether under various circumstances, locational savings may arise or not and whether under the TP analysis such an adjustment can be made has been elaborately dealt in the examples explained in para 9.150 to 9.153. 18. The key factor which is required to looked into while considering the location cost advantage to an entity working in low cost jurisdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd benchmarking by using the results/profit margin of such local comparable companies will determine the ALP of a transaction with a related party in a low cost jurisdiction. If good local comparables are available then the benefits of locational savings can be said to have been captured in the ALP so determined. However, if good local parties are not available, or whether the overseas AE is chosen as a tested party, then the problem of capturing the benefit of location savings would remain an issue for determination the ALP. The Indian Chapter has also aligns with the position advocated by BEPS Action 8 Report. However under the BEPS also such an adjustment is not required to be made separately if reliable local market comparables are available. In case, reliable local market comparables are not present, then various aspects have been highlighted for making the adjustment. But, whether such an Action Plan as enunciated in the BEPS Guidelines has been captured in our present TP provision? Till now, at least nothing has been brought on record before us, that the Action Plan as enunciated in the BEPS has been captured in our current TP laws /provisions. Therefore, the manner in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... key factor and primary requirement under our Transfer Pricing Laws before resorting to any kind of adjustment of the ALP. It is also not clear whether the TPO has treated the location saving as an independent international transaction or it is just an adjustment on the determination of profit of the assessee. If it is an independent international transaction, then it needs to be benchmarked with uncontrolled transaction by carrying out comparability analysis under prescribed methods. On the other hand, if it is an adjustment on the profit of the assessee, then the TPO has to demonstrate that firstly, the profit margin of the assessee, under TNMM is incapable of determining the Arm s Length Prices and in the case of the assessee there are no independent local comparables in India to carry out the comparability analysis for determining of the ALP. Such an arbitrary adhocism for making such huge adjustment in the profit sans any Transfer Pricing analysis under the prescribed provisions cannot be sustained. Hon ble Delhi High Court in Li and Fung India Pvt. Ltd (supra) too has observed that. Tax authorities should base their conclusions on specific facts and not on vague generalitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause notice, the assessee submitted it fully complies with the local environmental laws and regulations applicable in the country. The assessee s contention before the TPO was that; The assessee company has a valid consent to operate from Goa State Pollution Board, a statutory board constituted to plan a comprehensive programme for the prevention, control or abatement of pollution. The assessee has submitted the consent to operate the manufacturing facilities for:- (i) Water, (ii) Air and (iii) to handle hazardous waste. Thus, it can be concluded that SIL has complied with the local environmental laws; and SIL has never been fined/ penalized by any competent court in India in relation to claims for environmental damages. Apart from that, it was submitted that, the return for assuming the environmental risk is already embedded in the margins earned by comparable companies which also carries this risk and since the operating margins earned by the assessee for its business activities are more than profit margin earned by the comparable companies, therefore, there is no question of assessee being separately compensated for environmental degradation. It was further pointe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance costs among different parts of the world is recognized. In assessee's case this saving needs to be recognized in financial terms; In so far as assessee providing details of its AE costs etc. as queried by TPO are concerned, under the Indian Income Tax provisions esp. those for Transfer Pricing, the primary onus lies on the assessee to establish that its pricing is at ALP in all aspects. The assessee cannot escape the TPO's demand for information merely because assessee does not consider this information relevant for determination of ALP (assessee's submissions supra). Thus the primary onus is not discharged. In the circumstances, TPO's calculation is based on information collected from public domain; Additionally, as discussed by TPO, there is one unit of production devoted entirely to export of goods to AEs of assessee. This being the case, it is evident that benefits in respect of those exports are clearly transferred to the AE's. The pollutant unit was established in India for exporting assessee's production to AE's abroad including those in developed countries; The environment being impacted due to the entire production and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence nor demonstrated that the assessee has degraded the environment due to its activities. The TPO assumed that the environmental norms in India are softer while the environmental norms in western countries are stringent. No document for making such assumptions was ever put on record; d) The assessee has complied with the Indian Environmental norms and thus, there is no environmental degradation; e) Syngenta has globally adopted its own Health, Safety and Environment ( HSE ); f) The assessee has been complying with the highest level of quality standards while carrying out its business activities and also has sufficient data to support that the assessee has complied with all the environmental norms in terms of: Submission of returns regarding disposal of hazardous waste in Form 4 submitted to State Pollution Control Board or Committee, Monitoring Reports by independent agencies; and Renewal letter of consent to operate from Goa State Pollution Board g) The TPO failed to provide a rationale for taking provision for environmental compliance of Syngenta AG (refer Form 20F) as a base for determining the adjustment on account of green cost savings; h) The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has complied with the prescribed Indian Environmental norms and thus, there is no environmental degradation caused by the assessee. The compliances followed by the assessee in India were briefly stated to be as follows: a) The manufacturing activity is carried out in accordance with Syngenta s global manufacturing procedures and standards (GMPS); b) The crop protection products are subject to rigorous registration procedures aimed at ensuring safe product usage in the field. Further, Syngenta has globally adopted its own Health, Safety and Environment management system; c) Assessee has regularly complied with all the standards / norms laid down by the Ministry of Environment and Forests, Government of India who is entrusted with notifying the environment standards in India; d) Submission of returns regarding disposal of hazardous wastes in Form 4 submitted to State Pollution Control Board, performance reports of effluent treatment plant, air quality and meteorological data, etc. Further, the comparables selected by assessee are local Indian comparables operating in similar economic circumstance as the assessee itself, and thus all comparable companies in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual Costs mentioned At (C) incurred by Assessee is Significantly Higher than Figure Mentioned at (D),there are no savings) Nil (Since, actual Costs mentioned At (C) incurred by Assessee is Significantly Higher than figure Mentioned at (D), there are no savings) Apart from that, the legal submissions which were made in respect of location cost saving were reiterated. 27. On the other hand, Ld. CIT DR relied upon the order of the TPO as well as DRP and submitted that environment saving costs needs to be factored in determination of ALP. 28. We have heard the rival submissions and perused the relevant finding given in the impugned order. With regard to green cost adjustment, the TPO has proceeded with the hypothesis that manufacturing activity of the assessee is leading to serious environmental impact upon land, water and air in India. Since, the norms in India are softer as compared to the western countries where laws and compliances are stringent, therefore, the assessee has saved compliance cost relating to environment, for which it needs to be compensated. On this score also we are unable to apprehend as to when under the TNMM once a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompliances. The working of the environmental cost attributed by the assessee has already been incorporated above, which has not been rebutted by any of the authorities. The TPO and the DRP without referring to any comparable data or carrying any kind of comparability analysis with local Indian comparables operating in similar economic circumstance as the assessee itself, where all the comparable companies in the similar industry carry similar risk has proceeded to make the adjustment on account of environment saving or green costs in the ALP which again is against the Transfer Pricing principles as enshrined in our Income-tax provisions. Any such savings if at all is embedded in the margin of the comparables and there cannot be any additional attribution. Such an ad-hoc adjustment in an arbitrary manner sans any sanction or authority under the Income-tax provisions and that to be without there any comparable transactions with the local comparables cannot be sustained. The TPO has not demonstrated as to how and under what comparability analysis he has found that assessee has got the benefit of environmental/green costs savings and it is materially affecting the price under arms le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and losses of all the units. Since the above losses are included in the profit or loss of the assessee company, its taxable income is already reduced to that extent. Even the AR admits to that in above submission. In such a situation on one hand the taxable profit of the company is reduced by these losses and on the 80IB. Thus, the deduction u/s 80IB is inflated to that extent. The assessee is claiming double benefit. This was certainly not the intention of the legislature. When the total income of the assessee is reduced by the loss of an eligible unit, profits of other eligible unit before calculation of deduction u/s 80IB . 3.4.3 The decisions relied on by the AR cannot be applied to the case of the facts are different. These decisions are based on the facts and documents of the relevant cases and the accounting treatment given by the assessee in those circumstances. It also depends on whether the loss in question is of eligible units or not. For example, in the above illustration, if the assessee keeps the loss of an eligible unit separate and does not consider it in arriving at the total deduction available will be ₹ 50 and taxable income will be ₹ 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d-29 SOT 177(All); h) Jindal Alluminium Ltd [2012] 19 ITR(T) 255 (Bang Trib); i) Nishikant S Shirodkar ITA No.7626/M/2013 (Mum Trib). 39. On the other hand, Ld. DR strongly relied upon the order of the AO. 40. After considering the relevant finding given in the impugned orders as well as various decisions relied upon by the Ld. Counsel, we find that so far as the issue of claim of deduction under section 80IB, the profit and loss for 4 units for the year as well as profits eligible for deduction as per the assessee and as per the revenue is as under: Particular Multipurpose Thiamethoxam Unit Topik Unit Profenofos Unit Total Profit/loss for the year 20,00,51,614 2,19,69,406 (2,31,03,440) (49,83,380) As per Assessee : Profits Eligible for deduction 20,00,51,614 2,19,69,406 -- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be considered for computing the deduction. The loss making industrial undertaking would not come into the picture at all. The plain reading of the provision suggests that the loss of one such industrial undertaking cannot be set off against the profit of another such industrial undertaking to arrive at a computation of the quantum of deduction that is to be allowed to the assessee under s. 80-1(1) of the said Act. 9. In this regard, we may refer to the decision of this Court in the case of Dewan Kraft System (P) Ltd. (supra), which considered the pari-materia provisions of s. 80-IA(7) of the said Act. In that case, the question arose with respect to computation of the deduction in relation to three units - the Kalamb unit, the Delhi unit and the Noida unit. This Court held that while computing the deduction under s. 80-IA of the said Act, the profits and gains of the Kalamb unit for the purposes of determining the quantum of deduction under s. 80-IA(5) was to be computed as if such eligible business of the said unit was the only source of income of the assessee. This Court observed that the AO had erroneously mixed the profits of the Delhi and Noida units and had thereby r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 80-13(5) which deal with the manner in which the gross total income is to be considered. The Supreme Court observed as under:- 13.While computing the quantum of deduction under s. 80-1(6), the AO, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income in order to arrive at the deduction under Chapter VI-A. However, this Court finds that the non obstante clause appearing in s. 80-1(6) of the Act, is applicable only to the quantum of deduction, whereas, the gross total income under s. 80B(5) which is also referred to in s. 801(1) is required to be computed in the manner provided under the Act which presupposes that the gross total income shall be arrived at after adjusting the losses of the other division against the profits derived from an industrial undertaking. If the interpretation as suggested by the appellant is accepted it would almost render the provisions of s. 80A(2) of the Act nugatory and, therefore, the interpretation canvassed on behalf of the appellant cannot be accepted. It is true that under s. 80-1(6) for the purpose of calculating the deduction, the loss sustained in one of the units, cannot be taken into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Supreme Court clearly held that while computing the quantum of deduction under s. 80-1(6), the AO, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income of the assessee in order to arrive at a deduction under Chapter VI-A. The Supreme Court also held that under s. 80-1(6), for the purposes of calculating the deduction, the loss sustained in one of the units is not to be taken into account because sub-s. (6) contemplates that only the profits shall be taken into account as if it were the only source of income. 13. The above discussion makes it absolutely clear that the Supreme Court decision sought to be relied upon by the learned counsel for the appellant/Revenue, rather than deciding the issue in favour of the Revenue, clinches the matter in favour of the assessee. In view of the foregoing discussion, the substantial question of law, referred to above, is decided in favour of the assessee and against the Revenue. The appeals are dismissed. 41. In the light of the aforesaid decision, we hold that each undertaking or unit is to be treated as independent and separate unit and it is those industrial undertaking whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d supported the orders of authorities below and placed reliance on the finding given in the respective orders. 2.3.2 We have perused the records and considered the matter carefully. The dispute is regarding addition on account of duty to the closing stock value. Under the provisions of section 145A, the valuation of purchase and sale and inventories for the purpose of determining the income is required to be made in accordance with the method of accounting regularly employed by the assessee and further adjustment is required to be made to include the amount of any tax duty, cess or fee by whatever name called actually paid or incurred by the assessee to bring the goods at place of its location and conditions as on the date of valuation. Therefore, the addition u/s 145A on account of duty is required to be made both in the valuation of purchase and sales as well as inventories. Hon'ble High Court of Delhi in case of Mahabir Aluminium (297 ITR 77) have held that adjustment on account of duty etc u/s 145A is required to be made to the opening stock. Therefore, adjustment on account of duty u/s 145A is required to be made at all stages including opening stock purchase and sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the case and in Law, in invoking TNMM method in cost plus scenario, where in agreement with Associated Enterprises, the profit margin on cost is determined, the second proviso to Section 92C(2) of the Act has necessarily to be invoked on profit margin to the exclusion of sale price /sale proceeds, the latter being irrelevant secondary calculation for determining the tolerance limit envisaged in the second proviso . 38. As regards the Departmental appeal, it has been submitted that by the ld. Counsel that the TPO has made adjustment to Arm s Length Price to the transaction pertaining to sale of finished goods made to AEs in the crop protection-contract manufacturing segment to the tune of ₹ 26,08,53,000. This was done by re-characterizing the activities of the assessee to that of a toll manufacturer to a contract manufacturer. Subsequently, a search process was carried out with the functional profile of the assessee characterized as a contract manufacturer where a set of 6 comparables were finalized. The assessee agitated the inclusion of only one comparable company, that is, M/s Elder Projects on the ground that it was having significant related party transa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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