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TMI Blog2016 (5) TMI 1474X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Appellant's own case for AY 2006-07. 3.2 The Ld. CIT(A) erred in law and in facts in not allowing capacity utilization adjustment which is required to bring business operations of Appellant at par with comparables to determine the appropriate arm's length profitability of CPP segment. 3.3 The Ld. CIT(A) erred by disregarding the detailed computation of adjustment for differences in capacity utilization which have been submitted during assessment proceedings by the Appellant. 3.4 The learned CIT(A) erred in facts and in law in considering the entity level margin of Hikal Limited instead of Crop Protection Segment which is relevant for comparing with Appellant's CPP segment. 3.5 The learned CIT(A) erred in facts and in law in considering Dhanuka Agritech Limited as comparable although this Company has undergone restructuring and not ought to have been considered as comparable. 3.6 The learned CIT(A) erred in facts and in law in using only single year financial data of comparables instead of multiple year financial data for determining the arm's length price of international transactions for CPP Segment. 4. Grounds for Transfer Pricing Adjustment mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately deducted taxes from payments made to AE's for services availed. 5.6 The Ld. CIT(A)erred by not taking the cognizance of the fact that the Ld. TPO has accepted the entire expense incurred for Legal Services during the assessment proceeding for AY 2009-10 and AY 2010-11. 5.7 The Ld. CIT(A)erred in accepting the CUP method as used by the Ld. TPO as the Most Appropriate Method instead of the TNMM method adopted by the Appellant although no comparables under CUP method were used by the Ld. TPO. 5.8 Without prejudiced to ground above, the Ld. CIT(A) has erred in not accepting the CUP provided by the Appellant. 5.9 The Ld. CIT(A) erred on facts in treating the Accounting and Financial services as Shareholder and/or Stewardship Services though these services have not been obtained from shareholder companies. 5.10 The Ld. CIT(A) failed to appreciate the fact that the Company has also earned income by rendering similar kind of services (for which it has expertise) to it's AE's and if inter- company services provided are considered to be as valid business income, then inter-company services that fulfill similar needs for the Company should be held to be valid busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee during the year have been tabulated as under: Nature of transaction Total Value (Rs.) Method Selected PLI CPP Segment 706,884,741 340,192,900 7,404,707 TNMM OP/0R Import of raw materials Export of FG Payment of royalty EP Segment 891,904,715 43,132,661 TNMM OP/0R Import of raw materials Export of FG OC Segment 296,055,433 113,127 TNMM OP/0R Import of raw materials Export of FG Packaging Product Segment 8,849,135 19,521,273 TNMM OP/0R Import of raw materials Export of FG Distribution of FG 3,252,842,419 TNMM OP/0R Provision of administrative support services 116,958,511 TNMM OP/0C Availment of Administrative support Services 443,197,287 TNMM OP/0C Payment of Interest on loan 1,346,980 CUP NA 5. The learned TPO rejected the TP study of the assessee. The TPO determined ALP at Rs. 66,47,47,281 regarding imports of goods in CPP segment against the ALP of Rs. 70,68,85,741 computed by the assessee. As against ALP of Rs. 29,60,55,433 computed by the assessee towards the import of goods in OC segment, the learned T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on selling price only and thus, capacity utilization adjustment should be granted to the Assessee Company for calculation of arm's length price of goods. For example, due to weak market conditions, the Appellant will not be able to sell the products at desired price and desired quantities - but this fact has no relationship with the price of raw material which is used in manufacturing the products. Accordingly, the argument of Ld. TPO as well as CIT(A) is devoid of any rational logic. * Similarly, the Ld. TPO as well as CIT(A) have cited comparison of depreciation incurred by the comparables and the Appellant. However, Depreciation also has no direct correlation with determining the price of raw materials. (b) Hikal Ltd - Segmental Margin should be used instead of Entity Level Margin * The Assessee Company is engaged in manufacturing of Crop Protection products. Accordingly, the company manufacturing similar products should be used a comparable. * Hikal Ltd was selected by the Assessee in its Transfer Pricing Study Report (TPSR) and Entity Level Margin was used. * Subsequently, the Appellant found from Annual report that Hikal Ltd operates in two segments, viz Crop P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been taken by the assessee for the first time before the ITAT hence it should not be allowed since it will require examination of facts. Similarly, the ground that Dhanuka Agritech has gone through restructuring, therefore, should be rejected as a comparable, cannot be taken for consideration since the assessee has failed to demonstrate that the amalgamation has led to increase in profits of the company. If the profile of the new company is same then it would not impact the profitability of the amalgamated company. In this regard, he placed reliance on the decision of Mumbai Bench of the ITAT in the case of Wills Processing Services India Ltd. - [IT Appeal No. 4547 (Mum.) of 2012]. In any case for proper verification, the matter needs to be remanded back to the file of the learned TPO. 11. Considering the above submissions, we find that the issue raised is squarely covered by the decision of the ITAT in the case of assessee itself for the assessment year 2006-07 wherein the ITAT has directed to allow capacity utilization in relation to CPP segment furnished by the assessee. The relevant para No. 7 of the said order dated 8.7.2011 of the ITAT in ITA No. 5336/Del/2010 (A.Y. 2006-07) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods. We also find substance in the contention of the Learned AR that depreciation has no direct co-relation with determining the price of the raw material used in manufacturing the products. Without prejudice to above, the authorities below, however, were not justified in rejecting comparison of depreciation incurred by the comparable Hikal Ltd. furnished by the assessee. The assessee company is engaged in manufacturing of crop protection products, similarly Hikal Ltd. operates in two segments which are crop protection segment and pharmaceutical segments. Since crop protection segment is relevant and comparable to the assessee, the financial data of this segment should have been used instead entity level data. The assessee has, however, furnished segmental reporting of Annual Report 2007 of Hikal Ltd. for the first time before the ITAT with decision of Special Bench of the ITAT in the case of Quark Systems (P.) Ltd. v. ITO (4 ITR (Trib.) 606 (S.B.) holding that a comparable can be considered even at the appellate stage for the first time. Similarly, the authorities below were not justified in selecting Dhanuka Agritech Ltd. as comparables since it has gone through restructuring as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hield Chemicals is not a persistent loss maker as it has earned profits in FY 2005-06 and has been making profits ever since FY 2008-09 (refer Page 18 of CIT(A) order). * For rejecting Sunshield as comparable, the Ld. CIT(A) wrongly relied on Annual report for FY 2004-05 &FY 2005-06, whereas the Assessee's appeal is pertaining to FY 06-07. (Refer Para 6.2.2 on Page 19 of CIT(A) order). As per the said para, the Company suffered losses as a result of its business cycle which is normal for any business. * The Company is a potentially sick company which is merely a reporting requirement as per Section 23(1) of Sick Industrial Companies (Special Provisions) Act, 1985. * As per Annual report 2009 of Sunshield Chemicals as submitted before Your Honors during the hearing, the Company ceased to be a potentially sick company (please refer Para 7). * It is settled law that a company can't be rejected merely because it is making losses. Reliance should be made on the decision in the case of Capgemini India (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 330/[2013] 33 taxmann.com 5 (Mum.). (b) Paushak Ltd. should be rejected as comparable * Paushak Ltd has incurred R&D Expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining to financial year 2006-07. In view of these submissions of the Learned AR and furnishing annual report 2009 of Sunshield Chemicals for the first time before the ITAT, we find it just and proper to set aside the matter to the file of the learned TPO to consider comparability of Sunshield Chemicals afresh after verification of above submissions of the Learned AR after affording opportunity of being heard to the assessee. 18. So far as comparability of Paushak Ltd. is concerned, we find that submissions of the Learned AR that the learned TPO himself has considered the filter of selecting company with R & D Expense less than 3% as comparable needs verification as Paushak Ltd. has incurred R & D expenditure of 3.32% on sales as claimed by the assessee. The learned TPO is accordingly directed to decide the comparability of Paushak Ltd. afresh after affording opportunity of being heard to the assessee to establish the above submissions. The ground No. 4 is accordingly allowed for statistical purposes. 19. Ground Nos. 5, 5.1 to 5.11 (Assessee) & Ground Nos. 1 & 2 (Revenue): These grounds are regarding adjustment in relation to intergroup services. The Learned CIT(Appeals) has given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Allowing only part is Arbitrary * The appellant entered into one single agreement with every concerned DuPont Group entity (please refer Paper book 2 - Page 653 -692 for agreements in relation to availing of services from Group companies and Page 730 - 734 for agreement in relation to provision of services to Group company on sample basis). It is humbly submitted that Assessee receives services under one agreement from same entity & same people and has similar contractual obligation for whatever it receives under the agreement. There is no specific categorization of services in the agreement as such but the same has been done for internal as well as tax department convenience only. Accordingly, unbundling of services and consequently rejecting the fees paid for part of services on any grounds is arbitrary and irrational. * The Ld. CIT(A) erred in allowing some of the services and rejecting others which are being part of the same agreement. Reliance in this regard should be made in the judgment by the Hon'ble Delhi ITAT in the case of Avery Dennison India (P.) Ltd. v. Asstt. CIT [2016] 65 taxmann.com 188 - Para 22. * Also reliance is also placed on the judgment of Apex C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is what has been done." * Reliance is placed in the judgment of Apex Court in case of Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) and CIT v. Excel Industries [2013] 358 ITR 295/219 Taxman 379/38 taxmann.com 100 that the principle "res judicata" does not apply to Income Tax proceedings by virtue of each tax year being a unit and what is decided in one year may not be applicable to a subsequent year but where fundamental aspect has permeated through different years and there is no change in facts and circumstances of the current year then such proposition cannot be changed. Thus, the adjustment made by the Ld. TPO is unjustified. (e) Charge for Inter Group services were accepted as arm's length by Tax Department of other Jurisdictions * The said services have been accepted at arm's length in other jurisdictions. This is just an empirical evidence to substantiate on mechanism and quantum of charge that DuPont Group has for inter group services. (Please refer Paper book 4 - Page 1296 - 1307). * The copy of Advance Pricing Agreement for inter group services with Australian as well New Zealand tax authorities is submitted before You Honors during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the hearing. Reliance should also be placed in the judgment in the case of Hive Communication (P.) Ltd. v. CIT [2013] 353 ITR 200/[2011] 201 Taxman 99/12 taxmann.com 287 (Delhi) by Delhi High Court dated July 8, 2011 and CIT v. EKL Appliances [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 by Delhi High Court dated March 29, 2012. ♦ Services are actually shareholder or stewardship activities * It is humbly submitted that none of the services have been received from shareholder. Thus, there is no question of shareholder activity. Without prejudice to this, it is humbly submitted that each legal entity should be respected for its separate existence. In this regard, reliance should be placed on the case of Vodafone International Holdings BV. v. Union of India [2012] 341 ITR 1/204 Taxman 408/17 taxmann.com 202 (SC) wherein, the Hon'ble Supreme Court held that every legal entity and moreover a functional entity has a separate existence and their separate existence cannot be denied merely because they are part of same group. (g) Benchmarking of service transaction done as per law * The Company has duly benchmarked the Inter - Group Service Charges using TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y has duly submitted the evidences on sample basis relating to receipt of services from its AEs. ♦ Marketing and Business Support Services - Evidences relating to conducting of safety audits at Company plant and consequent generation of audit reports (Please refer Paper book 3 - Page 825-846), usage of company's product - Tyvek for mulching of grapes to generate additional sales (Please refer Paper book 3 - Page 853-856), training on various Management and Marketing tools to enhance their know how to create business opportunities under India SMC Competency (Please refer Paperbook 3 - Page 884-897) etc. were shared. Please also refer sheet - "Sample evidences for Business Support & Marketing Services" as submitted before your Honors during the course of hearing. ♦ Sourcing/Logistics/HR Services - Evidences relating to advice on warehouse management and reporting to ensure adequate controls (Please refer Paper book 3 - Page 782-783), reviewing the operation metrics of various products (Please refer Paper book 3 - Page 904-911), providing strategic direction and coordination with respect to HR Strategies and Policies (Please refer Paperbook 3 - Page 1010-1048) etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of following reasons: i. Assessee furnished its split financials along with AE. Whereas the appellant has earned profit in India, its AE has continuously sustained losses. Thus with no element of profit in the hands of the AE, in all fairness there is no case of shifting of profits, practicable or probable. ii. AE is resident in USA which has a higher tax rate in India, therefore, we see little commercial prudence to shift profit out of India." Reliance is should also be placed in the case of ITO v. L'oreal India (P.) Ltd. [2012] 53 SOT 263/24 taxman.com 192 (Mum.) wherein it accepted the method adopted by the assessee observing that AE's which supplied to the taxpayer earned only 2-4 % and hence it can't be said that there is shift of profits. The said judgment was upheld by Mumbai High Court in its judgment dated 7th November 2014 [117 DTR 460]. At the time of making payments to the AE's, adequate taxes are withheld in accordance with the statue. (Refer Paper book 4 - Page 1481) In addition to this, the company also pays Service Tax under reverse charge mechanism which increases the overall tax cost on such transactions. 22. The Learned CIT(DR) on the ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices and rejecting others which are being part of the same agreement. This view is fully supported by the decision of Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. (supra) holding that while ascertaining the legal nature of transaction, the Revenue/Court has to look at the entire transaction as a whole and not to adopt a dissecting approach. 24. We also find substance in the grievance of the assessee against the action of the authorities below in allowing the proportionate charge of services received for CPP and OC Segments and rejecting for remaining segments without any reason. The learned TPO while concluding his order has allowed services received and utilized in CPP as well as OC Segments and disallowed the proportionate amount of services rendered to other business segments in the assessment year under consideration. We are of the view that when nature of services provided to CPP and OC Segments is same as provided to other segments, the learned TPO ought to have adopted consistent treatment to the services utilized in CPP as well as OC Segments and services rendered to the other business segments. 25. The further grievance of the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) for rejecting intergroup service charge for part of services. The Learned CIT(Appeals) has disallowed some of the services on the grounds that (i) services are duplicate in nature; (ii) no benefit has been received; and (iii) services are actually shareholder or stewardship activities. On consideration of submissions of the assessee in this regard, we find that the claim of the assessee that none of the services received by the assessee are duplicative of functions performed in house by the assessee requires fresh verification. The Learned AR has tried to make his case in this regard by furnishing an example as the assessee has lawyer on his pay roll but the assessee also chooses to appoint outside lawyers to represent the assessee in the court of law. The view taken by the authorities below that assessee's use of outside lawyer tantamount to duplication of services and hence the fees paid to outsider lawyers should be rejected as duplicated expense cannot be accepted as it is devoid of substance. Even otherwise, what is required under the Act is to see whether the services were received for the purpose of business or not as the Income-tax Act, 1961 does not prohibits the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evance of the assessee is that both the authorities below rejected the corroborative analysis without giving any cogent reasons. It was submitted that since the business segment, other than CPP and OC for which no adjustment was proposed by the learned TPO on intergroup services, have been held at arm's length by the learned TPO, the service fees allocated to segments should be held at arm's length price. Reliance has been placed on the decision of Delhi Bench of the ITAT in the case of Avery Dennison India P. Ltd. (supra). The learned TPO is directed to look into these submissions of the assessee while deciding the issue afresh. 30. The grievance of the assessee also remained that it had duly submitted evidences on sample basis relating to receipt of services from its AEs. These services were (i) marketing and business support services; (ii) sources/logistics/HR services; (iii) legal services; & (accounting and financial services). A detailed submission in this regard made on behalf of the assessee has been reproduced hereinabove while discussing submissions made by the Learned AR. It was submitted that in reference to some additional evidences, remand report was obtained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e itself for the assessment year 2010-11 under the similar set of facts. 35. Having gone through the orders of the authorities below, we find that the Learned CIT(Appeals) has dealt with the issue in detail and following the decisions relied upon before him and this material aspect that in the assessment year 2010-11, the TPO has accepted the submission of the assessee on the issue, the Learned CIT(Appeals) has come to the conclusion that no adjustment should be made on account of treasury charges services, process safety management services, international audit services, product technical services and information system services. He accordingly restricted the transfer pricing adjustment to Rs. 13,03,63,208 instead of Rs. 27,23,33,145 computed by the Assessing Officer and the ALP of the transaction of inter group services was determined at Rs. 18,18,46,031 as against Rs. 3,98,76,094 computed by the TPO. It resulted into relief of Rs. 14,19,69,937 to the assessee which has been questioned. Regarding treasury charges services, the Learned CIT(Appeals) has dealt with the issue in para No. 7.2.10 of the first appellate order. He has noted that agreement with DuPont Singapore Pte. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... safety management (PSM) is the application of management system and controls (program, procedure, audits, evaluation) to a manufacturing or chemical process in a way that process hazards are identified, understood and controlled so that process related injures and incidents are prevented. DuPont India provides the services to a number of industries including construction, oil and gas, steel, transportation etc. in order to render these services, DuPont India has an In house Team which reaches out to its prospective clients. The assessee clarified that during the year, the charges made towards safety consultancy services are essentially payments made to independent enterprises, incurred by the A.Es. on behalf of the assessee company and subsequently recovered from DuPont India. Thus, the charges so paid are in fact the cost of services for the safety consultancy business and the payments for safety consultancy business are essentially reimbursement paid by the assessee company and not a payment for services to DuPont entities but to the external consultants. It was stated that the assessee had earned a net operating margin of 17.83% from this segment. It was also submitted that TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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