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TMI Blog2019 (6) TMI 1486X X X X Extracts X X X X X X X X Extracts X X X X ..... riate Method (MAM) followed thereon are as under:- Summary of International Transactions as reported in Form No. 3CEB Sr. No. Nature of Transaction Amount (Rs.) Method 1 Import of materials 77,28,43,438 TNMM - Mfg. 2 Export of goods 20,76,21,540 3 Payment of royalty 2,83,03,595 4 Receipt of indenting commission 1,02,39,075 5 Payment of export commission 4,67,343 6 Reimbursement of expenses 1,29,37,145 7 Receipt of fee from research services 2,37,95,236 TNMM- R&D 8 Recovery of expenses 8,72,529 At Cost 2.1. The assessee had adopted Transactional Net Margin Method (TNMM in short) and submitted two separate benchmarking in the transfer pricing study report as below:- Search List of International Transactions Assessee's Margin Comparables Margin No. of Comparables Order of ld TPO Manufacturing (OP/OI) SL. No. 1 to 6 on Page 1 of order of ld TPO 3.00% (after adjustments for extra-ordinary/ non-recurring expenses) 4.75% (3 years weighted average) 32 Pages 3 & 4 R&D (OP/OC) SL. No. 7 on Page 1 of order of ld TPO 15.46% 8.39% (Single year data) 8 Pages 4 & 5 2.2. The margins of the assessee in Manufacturing function are worked out as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial economic adjustments and after aggregating R&D income with Manufacturing income as under:- Total Income 63120 Total Expenditure 64668 Net Profit before Interest and Tax -1548 Add: Economic / Functional Adjustments Stock Write Down 363 Abnormal Forex Loss 829 ------ 1192 Adjusted Operating Profit -356 Adjusted Net Profit Margin (OP / OI) % -0.56% 2.8. The ld TPO made an adjustment to ALP of Rs. 4578.73 lacs on an overall basis instead of restricting the adjustment only to international transactions of assessee as under:- Particulars Amount in Lacs Operating Income 63120 Adjusted PBIT -356 OP / OI (%) - 0.56% Arm's Length OP / OI % 6.69% Arm's Length OP 4222.73 Variation 4578.73 Transfer Price (Cost side transactions) 8016.14 5 % of TP 400.81 Adjustment 4578.73 Conclusion : Variation > 5% of TP, hence no benefit u/s 92C(2) of the Act. 3. The ld DRP observed that the assessee had undertaken an entity level benchmarking of the international transactions and had asked for various adjustments on account of stock write down, capacity underutilization, abnormal costs, exchange fluctuation etc. The ld DRP observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit from the international transaction that has to be considered for determining the ALP and not the entity level profits. The ld DRP observed that for this reason also, the segmental audited profitability of the assessee deserves to be considered. 3.2. The Ld DRP after due analysis of segment statement then proceeded to accept the audited segmental accounts of assessee by adopting Internal TNMM. The ld DRP accordingly gave the directions to the ld TPO to benchmark the AE segment of each unit with the Non-AE segment. However, an exception was made for Rasai unit since its Non-AE segment operations was considered as contract manufacturing by ld DRP. The summary of the said directions are as below:- Unit AE Margin Non-AE Margin Total Margin (AE+Non-AE) Ld DRP Directions Rasai (10.18) % (20.72)% (9.56)% Non- AE segment rejected by Ld DRP and proceeded to benchmark import transaction of Rs. 65 crores with total margin (AE+ Non-AE) of Navi Mumbai and Lote Navi Mumbai 6.08% (0.27)% 0.30% International Transactions accepted at arm's length Lote 19.08% 1.74% 7.95% International Transactions accepted at arm's length 3.2.1. The Ld DRP directions also stated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that segment wise working of ALP submitted before the ld TPO should be audited by chartered accountant of assessee. Hence we hold that the segmental profitability statement submitted by the assessee duly audited, needs to be considered for benchmarking the international transactions of the assessee with its AE. We find that the reliance has been rightly placed on the decision of Third Member of Mumbai Tribunal in the case of Technimont ICB India (P.) Ltd reported in [2012] 138 ITD 23 (Mumbai) (TM) wherein it was held that the internal comparability should be given preference over external comparability. We find that the ld DRP erred in giving directions by comparing the total margin (AE+ Non-AE) of Navi Mumbai and Lote with the AE segment margin of Rasai. It is a very clear proposition in transfer pricing regulations that a controlled transaction cannot be compared with another controlled transaction. The Third Member decision in the case of Addl CIT v. Technimont ICB India (P.) Ltd [2012] 138 ITD 23 (Mumbai) (TM) is directly on this issue. The question raised before the Hon'ble Third Member in that case was as under:- "Whether in the facts and circumstances of the case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self suggests that the price charged or paid for the property 'in a comparable uncontrolled transaction' is identified. Such price in a comparable uncontrolled transaction is adjusted on account of differences, if any. The consequential price is taken as benchmark for considering the assessee's international transactions with its AEs. The second method is 'resale price method'. The procedure for determining price under this method is given in Rule 10B(b). Under this method, the price at which property purchased or services obtained by the enterprise from an AE is resold or are provided to 'an unrelated enterprise' is identified. This method also compares the gross profit margin in a controlled transaction with the gross profit margin in an uncontrolled transaction based on specific functions performed. Next is 'cost plus method'. The modus operandi for determining of ALP under this method is provided in section 10B(c) which again refers to making comparison with 'uncontrolled transaction'. 13. A brief overview of various methods prescribed for determining ALP clearly divulges that the comparison is always sought to be made of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AEs so that the profit likely to arise from such transactions is not under-reported vis-a-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction. 15. There is one more dimension of this case. The transactions between ICB and JTS are not only controlled, but the profit margin of ICB also passed through the examination by the TPO, who declared it at arm's length. The ld. DR contended that once controlled tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an addition on account of transfer pricing adjustment in the hands of Indian company, the second situation will not permit any deduction in the declared income of the such Indian concern to that extent. It is so because if the ALP is higher than the value of the transaction recorded in the books of account, it requires making addition on account of transfer pricing adjustment. However, in the opposite situation, there is no mandate for reducing the income. In such a second situation, the receipt from the transaction recorded shall be considered at ALP, notwithstanding the fact that it is at exaggerated figure when compared with a comparable uncontrolled transaction. This is what has been laid down in sub-section (3) of section 92. Whereas sub-section (1) of section 92 provides that any income arising from an international transaction shall be computed having regard to the arm's length price, sub-section (3) provides that : 'The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense alloc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t my decision in the foregoing paras is founded on the interpretation of the relevant bare provisions of the Act and Rules, without taking any assistance from decisions cited by the rival parties on the point, which differ in their conclusion as stated by the ld. Representatives before me. 19. For the foregoing reasons I agree with the view expressed by the learned AM. The Registry of the Tribunal is directed to place this matter before the division bench for passing an order in accordance with majority view. 5.1. We find that the ld AR before us also placed reliance on the decision of co-ordinate bench of this Tribunal in the case of M/s SNC Lavalin Engineering India Pvt Ltd vs ACIT in ITA No. 287/Mum/2014 (Assessment Year 2008-09) dated 15.3.2018, wherein it was held as under:- 6. We have heard the parties on this issue and perused the record. We noticed that the assessee has not prepared segmental accounts initially and hence it could furnish only unaudited segmental accounts before TPO. Hence the TPO has rejected the same doubting about its reliability. Subsequently, the assessee has prepared proper segmental accounts and got it audited and frunsihed the same before the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following decisions of this Court:- (i) CIT v/s M/s Raitlal Becharlal & Sons (Income Tax Appeal No. 1906 of 2013) rendered on 24th November, 2015; (ii) CIT v/s Goldstar Jewellery Design (P) Ltd., (Income Tax Appeal No. 2237 of 2013) rendered on 4th February, 2016 ; (iii) CIT v/s Alstom Projects India Ltd., (Income Tax Appeal No. 362 of 2014) rendered on 14th September, 2016 ; and (iv) CIT v/s M/s. Bhansali & Co., (Income Tax Appeal No. 1066 of 2014) rendered on 9th December, 2016. (ii) Besides the aforesaid decisions of this Court, the issue also stands covered by the decision of the Delhi High Court in CIT v/s. Keihin Panalfa Ltd., (Income Tax Appeal No. 11 of 2015) rendered on 9th September, 2015. (iii) In all the aforesaid decisions, it has been held that the Transfer Pricing Adjustment is not to be done at the entity level but only in respect of international transactions of the Respondent with its Associated Enterprise (AE). This, on the application of proportionate method. (iv) In the above view, question as proposed does not give rise to any substantial question of law. Thus, not entertained. 5.3. With regard to the claim of economic adjustments in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emand and pile up of excess inventories. This fact is evident from the Excise Register placed on record. This is evident from the manufacturing details provided by the assessee for the financial years 2007-08 and 2008-09 enclosed in page 253 of the paper book. This resulted in underutilization of capacity in Rasai plant to 42% during the year and consequent shutdown cost. This is part of operational cost and hence allowance should be granted to the assessee as an economic adjustment. We direct the ld TPO accordingly. 5.3.1.3. Professional charges for search of new MD of Rs. 58 lacs: This is a non-recurring item and extra-ordinary in nature. It is not that a new MD is appointed in normal course of business every year. During the year, the assessee company had paid this fees to recruitment agency in search of MD and claimed the same as an extraordinary economic adjustment. Accordingly, we direct the ld TPO to consider the amount spent on professional charges for search of new MD to be allowed as an economic adjustment while computing the margins of AE segment for the purpose of comparability. 5.4. The Transfer Pricing Grounds raised by the assessee as well as by the revenue are di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral in nature and does not require any specific adjudication. 9. We are now left with Ground No. 2 in Revenue's appeal in ITA No. 1307/Mum/2014 , wherein the revenue had challenged the action of the ld DRP in deleting the addition of Rs. 30,22,002/- made on account of capital expenditure on scientific research centre. 9.1. The brief facts of this issue are that the assessee had in-house R&D Unit recognized / approved by Department of Scientific and Industrial Research (DSIR). The said approval was valid until 31 March 2007. On 18.12.2006, the assessee had made an application to DSIR for renewal of the approval beyond 31.3.2007. However, the approval had not been received until the completion of the assessment proceedings. During the year under appeal, the assessee had incurred capital expenditure of Rs. 30.22 Lacs on scientific research which was claimed as a deduction under section 35(1)(iv) of the Act (deduction of 100% of expenditure and not weighted deduction). The ld AO in the draft assessment order proposed to disallow the said expenditure in the absence of DSIR approval for the year under appeal. Before the ld DRP, the assessee submitted that deduction of expenditure to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproved by DSIR. It is the contention of the learned AR that approval of DSIR as envisaged u/s 35(2AB) is only confined to deduction claimed under that section. Such approval is neither necessary to decide whether expenditure is in the nature of revenue or capital nor it is relevant for considering assessee's claim under any other provisions of the Act. We find force in the contention of the learned AR. On a reading of the provision contained u/s 35 as a whole and section 35(2AB) in particular and on perusal of form No. 3CL, we are of the view that approval of DSIR as contemplated is only in respect of weighted deduction to be claimed u/s 35(2AB) of the Act. It has no relevance for determining whether the expenditure claimed is allowable under any other provisions of the Act. The only condition prescribed u/s 35(2AB) is, if the claim of the assessee is allowed u/s 35(2AB) it will not be allowable under any another provision. In the present case, no material has been brought on record by the department to controvert assessee's claim that it has incurred towards salary and wages of employees engaged in revenue expenditure of Rs. 1,31,87,576/-, R&D and capital expenditure of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the expenses of Rs. 611.78 lakhs relating to materials/consumables/spares, it is not the case of the AO that the said material was not consumed in the R&D process and some part thereof was remaining in the closing stock. Therefore, these expenditure incurred on material used for lab trials cannot in any manner be considered as expenditure being in the nature of capital. The next item is "other expenditure directly related to R&D". With regard to these expenditure the finding of fact has been recorded by CIT(A) that these have been incurred by the assessee for registration of products in other countries or towards obtaining technical know-how fee for producing new drugs etc. He has recorded in his order that he has called for and perused the agreements between the assessee company and IS Ltd. (which is the major sum of Rs. 1 crore comprising of two items of Rs. 50 lakhs each) for transfer of technical know-how. He has also observed that AO has not given any adverse comment in his report regarding this agreement and such types of agreements for transfer of technical know-how are quite common in pharmaceutical industry due to commercial exigency. These findings of fact have not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on a programme which has been approved by the authority prescribed under s. 35(2B), which can be claimed as deduction under that provision. The capital expenditure on the acquisition of land or building whether acquired or constructed cannot be claimed under s. 35(2B). The benefit of s. 35 (1)(iv) can be availed by the assessee in respect of expenditure of a capital nature on scientific research if that research is related to the business carried on by the assessee. The approval of the authority prescribed under s. 35(2B) is not an essential prerequisite for claiming the allowance unders. 35(1)(iv) if it is found that a part of the claim falls within the ambit of s. 35(1)(iv). The mere fact of a claim not having been found admissible under s. 35(2B) will not constitute a bar to allowing an expenditure under s. 35(1)(iv) if that expenditure is capital expenditure and falls squarely within the ambit of s. 35(1)(iv). Capital expenditure incurred on the acquisition of land or construction of building which is excluded by the very terms of s. 35(2B) can be claimed under s. 35(1)(iv). 9. Following the ratio laid down as above, we hold that assessee is eligible for deduction in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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