9911796707
TMI Blog2021 (3) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... HELD THAT:- In its aforesaid order for A.Y 2011-12 [ 2021 (1) TMI 472 - ITAT MUMBAI] , the Tribunal while vacating the transfer pricing adjustment made by the A.O/TPO as regards the intra-group services received by the assessee from its AEs had observed the details as regards the services rendered by Mr. Jeorge La Roza to the assessee, as well as the basis of the charge so raised formed part of the additional evidence that was filed by the assessee with the DRP. In fact, no adverse inference as regards the aforesaid payment made by the assessee company finds any mention in the order of the DRP. In our considered view, as there is no justifiable reason for drawing of any adverse inferences as regards the payments that were made by the assessee to the aforesaid person, we, thus, not being able to persuade ourselves to subscribe to the claim of the ld. D.R that there was no material available on record which would justify the basis of the costs to the AE, reject the same. Computation of short term capital gain - why the stamp duty valuation may not be adopted as the deemed sale consideration u/s 50C for the purpose of computing the capital gain on the sale of the property in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid grievance of the assessee. As the adjudication of the aforesaid issue would require verification of the records, we herein direct the A.O to verify the same and redress the aforesaid grievance of the assessee. Interest liability u/ss. 234A and 234B - HELD THAT:- As claimed by the assessee that as it had filed its return of income for the year in question within the due date contemplated in Sec. 139(1) of the Act thus, no interest u/s 234A was liable to be imposed on it. It is further stated by the assessee that the A.O had erred in levying interest u/s 2434B of the Act. It was submitted by the ld. A.R that the assessee s application u/s 154 in context of both the aforesaid issues was pending before the A.O. It was submitted by the ld. A.R that suitable directions may be issued to the A.O. We have given a thoughtful consideration and in the backdrop of the aforesaid claim of the assessee we direct the A.O to consider its aforesaid grievances while giving appellate effect to our order. Ground allowed for statistical purpose. - ITA No.6618/Mum/2018 - - - Dated:- 15-2-2021 - Shri S. Rifaur Rahman, Accountant Member And Shri Ravish Sood, Judicial Member For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transaction of payment of royalty. 5. Erred in rejecting the aggregation approach adopted by the Appellant using TNMM to benchmark the said international transaction and not appreciating that payment of royalty is closely connected with the main business of the Appellant in relation to manufacturing. Disregarding the commercial benefits received from the AE 6. Erred in not appreciating that the technical knowhow licensed by the AE to the Appellant was an invaluable and unique intangible which yielded commercial benefits to the Appellant. 7. Erred in not appreciating the commercial rationale of the Appellant for extending the technology agreement as well as making royalty payment to the AE and applying 'benefit test' to hold no benefit is received by the Appellant. Inappropriately considered supplementary agreement as CUP 8. Erred in considering the supplementary agreement between HERC products and CCT corporation as comparable without giving cognizance to the validity of the agreement as well as the fact that the complete information (i.e. the master agreement) is not available. 9. Without prejudice to the above, failed to appreciate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis undertaken by the Appellant using TNMM, in accordance with the provisions of the Act read with the Rules and instead using hypothetical CUP as the most appropriate method, for the determination of the arm's length price of the international transaction of payment for availing of services from AEs, without providing any cogent reasons for the same. 19. Erred in not appreciating that since costs in relation to the services availed by the Appellant were allocated to the manufacturing, trading and indenting segment which were at arm's length (based on net level margin analysis using TNMM), the transaction of availing services by the Appellant from its AEs also meets the arm's length test. Inappropriate application of CUP method to benchmark international transaction 20. Erred in not using any of the six methods prescribed under section 92C to benchmark the international transaction of payment for availing of services. 21. Without prejudice to the above, erred in computing the arm's length price by applying some ad-hoc man hour rate to some ad-hoc number of man hours (so called CUP) which is not in accordance with the transfer pricing regulations pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 139(1) of the Act. IV. Lew of interest under section 234B of the Act 32. Erred in levying interest of ₹ 7,74,50,634 under section 234B of the Act. V. Initiation of proceedings under section 271(1)(c) of the Act 33. Erred in initiating the penalty proceedings under section 274 read with section 271 (1)(c) of The appellant craves leave to add, alter, amend, delete or withdraw any or all of the grounds of lat or before the hearing of the appeal so as to enable the Income tax Appellate Tribunal s the appeal according to law. 2. Briefly stated, the assessee company which is engaged in the business of manufacturing and trading of pesticides, agro chemicals seeds had e-filed its return of income for A.Y. 2014-15 on 28.11.2014, declaring its total income at ₹ 66,91,50,480/-. The case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. Observing that the assessee company had during the year under consideration entered into international transactions with its Associate Enterprises (for short AEs ), the A.O made a reference under Sec. 92CA(1) of the Act to the Dy. Commissioner of Income-tax (TP)-1(2)(2), Mumbai (herei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Sec. 144C(5), dated 04.09.2018 the A.O framed the assessment under Sec. 143(3) r.w.s 144C(13), dated 19.09.2108 and determined the total income of the assessee company at ₹ 99,44,02,390/-. 7. Aggrieved, the assessee has assailed the assessment order passed by the A.O under Sec. 143(3) r.w.s 144C(13), dated 19.09.2018 in appeal before us. As observed by us hereinabove, the assessee is aggrieved with the assessment order on account of the aforesaid two transfer pricing adjustments carried out by the A.O/TPO, viz. (i) transfer pricing adjustments as regards the transaction of payment of royalty by the assessee to its AE viz. Dow AgroSciences BV : ₹ 5,40,32,169/-; and (ii) transfer pricing adjustment as regards the intra-group services: ₹ 24,42,84,844/-. 8. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. At the very outset of the hearing of the appeal it was submitted by the ld. Authorised representative (for short A.R ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /DRP as regards the determination of the ALP of the royalty paid by the assessee to its AE, viz. Dow AgroSciences BV. As observed by us at length hereinabove, the TPO/DRP were of the view that as per the Process Technology Agreement, dated 23rd January, 1997, the assessee was obligated to pay royalty to its AE viz. Dow AgroSciences BV on manufacturing of Chlorpyrifos for a period of only 7 years. Lower authorities were of the view that as per Clause 11.1 of the aforesaid agreement , the assessee after fully meeting all its obligations provided in the agreement would be vested with a fully paid, non-assignable and non-exclusive right for the process utilizing technology received prior to consummation of the same. Further, it was observed by the lower authorities that as per Clause 11.1 a fresh agreement was to be entered into only in the event new technology was received by the assessee company. Being of the view that as the assessee had not received any new technology from its AE, the TPO/DRP held a conviction that the assessee was under no obligation to pay any royalty to the AE beyond the aforesaid stipulated period of 7 years. Backed by their aforesaid conviction, the TPO/D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee subsequent to consummation of the aforesaid agreement wished to receive from the licensor i.e its AE, viz. Dow AgroSciences BV any additional technical information related to the production of product or to use technology received under the aforesaid agreement, it would be required to negotiate a new technology license agreement with the aforesaid licensor. It is the claim of the ld. A.R that the lower authorities had erred in drawing adverse inferences as regards the royalty paid by the assessee to its AE during the year under consideration, for the reason, that they were of the view that as the assessee had not received any new technology from the AE during the year, it was, thus, not obligated to pay any royalty to its AE. Rebutting the aforesaid observations of the lower authorities, it was submitted by the ld. A.R that the TPO vide his remand report , dated 14th, November, 2014 had accepted that the assessee had received technical assistance from its AE. However, the TPO observed that as the technical assistance received by the assessee from its AE was general in nature and no new technology was received from the AE, therefore, the assessee was not obligated to pay any r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e the AE any additional technical information related to the production of product or to use technology received under the terms of the said agreement, it was required to negotiate a new technology license agreement with the licensor. At the outset, we may herein observe that we are unable to persuade ourselves to subscribe to the construing of Clause 11.1 of the original agreement by the DRP. As observed by us hereinabove, if the assessee after the consummation of the original agreement wished to receive any additional technical information related to the production of the product or to use the technology received under the said agreement , then, it was required to negotiate a new technology license agreement with the licensor i.e the AE. On a perusal of the remand report of the TPO, we find that he had accepted that the assessee had during the year under consideration received technical assistance from its AE. We may herein observe that it is the claim of the assessee that as it does not carry any research activity in respect of the product viz. Chlorpyrifos manufactured by it, and for the technology support is completely dependant on its AE which carries out the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal know-how and assistance received by the assessee from its AE, it could not during the year in question i.e A.Y 2010-11 assail the validity of the said agreement . Admittedly, the aforesaid supplementary royalty agreement , dated 08th June, 2005 (effective from 01st June, 2004) had been accepted by the department for the period A.Y 2005-06 to A.Y 2009-10. Apropos the rejection of the supplementary royalty agreement which remains the same during the year under consideration, we are of the considered view that the department by so doing is trying to approbate and reprobate the same i.e quod approbo no reprobo , which is not permissible . On the basis of our aforesaid observations, we not being able to persuade ourselves to subscribe to the view taken by the TPO/DRP that the assessee after consummation of the original agreement was not obligated to pay any royalty to its AE, vacate the same. 14. We shall now deal with the observation of the TPO/DRP that the approval provided by the RBI would not constitute a valid CUP data, since the RBI does not take into account the transfer pricing provisions to determine the appropriate rates which can be considered as the arm s leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment of India, then, the same can be considered as being at arm s length. In fact, we find that the DRP in the assessee s own case for A.Y 2012-13 by relying on the judgement of the Hon ble High Court of Bombay in the case of SGS India Pvt. Ltd. (supra) had though accepted that the issue as regards determining of the arm s length price of the royalty transaction was in favour of the assessee, however, only for the purpose of keeping the issue alive it had declined to accept the said claim of the assessee. Also, a similar view had been taken by the Tribunal in the assessee s own case for A.Y. 2004-05 to A.Y 2009- 10, and it has been held that the royalty paid by the assessee to its AE having been approved by the Government of India/RBI and being as per the rates prescribed in the Press Note No. 2 (2000 series) was to be taken as being at arm s length. In the backdrop of the aforesaid facts, we adopt a similar view and conclude that as the royalty paid during the year under consideration by the assessee to its AE @ 8% of its net exports was approved by the Government of India and RBI, and also, in conformity with the rates prescribed in Press Note No. 2 (2003 series), thus, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een two group companies of the assessee i.e Dow UK King Lynn Plant (Dow, UK) with Dow BV (Dow Netherland), whereby Dow, UK had paid royalty @ 3% of its domestic sales and @ 5% of its export sales for manufacture and sale of Chlorpyrifos . Adopting the aforesaid comparable, the TPO by considering the royalty @ 5% of the export sales as being at arm s length had suggested an alternate adjustment of ₹ 1,37,52,774/-. As per the TPO, the aforesaid alternate adjustment was to be invoked if the primary adjustment i.e determining of the ALP of royalty paid by the assessee to its AE at nil was deleted by the appellate authorities. As observed by us hereinabove, the DRP had also upheld the determining of the alternate adjustment of the ALP by the TPO. 17. We have deliberated at length on the aforesaid issue and are unable to persuade ourselves to accept the determining of the alternate transfer pricing adjustment of 5% of the export sales made by the TPO. Admittedly, the aforesaid transaction acted upon by the TPO for benchmarking the royalty paid by the assessee to its AE is a transaction between two AE s and hence, the same by no means could have been regarded as a valid compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, the aforesaid view of the TPO was also approved by the DRP. 19. The ld. A.R had objected to the adoption of the royalty agreement between the aforesaid third parties, viz. AARC Corporation and CCT Corporation for benchmarking of the royalty paid by the assessee to its AE. In order to drive home his claim that the aforesaid agreement could not be considered for the purpose of benchmarking, the ld. A.R had drawn our attention to the aforesaid agreement , Page 1983 of APB. 20. We have given a thoughtful consideration to the objections raised by the ld. A.R as regards selection of the aforesaid agreement for benchmarking the royalty paid by the assessee to its AE and find favour with the same, for the reasons culled out as under : (i) On a perusal of the records, we concur with the ld. A.R that what has been relied and acted upon by the TPO is only an amendment agreement and as the full agreement is neither available in the Royaltstat database nor in the public domain, therefore, in the absence of the terms and conditions being available the same could not have been adopted for benchmarking the payment of royalty by the assessee to its AE. (ii) As per the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arm s length price of the royalty paid to its AE by applying the TNM method. As stated by the assessee, since the royalty transaction is clearly linked to the manufacturing activity, it had, therefore, analyzed the same alongwith the manufacturing transaction using a combined transaction approach. As the margin earned by the assesee from the manufacturing activity (after considering the amount of expense on royalty payment) was much higher (19.09%) than the margins earned by the other comparables (10.30%), the margin earned from the manufacturing activity was held to have met the arm s length test. Accordingly, the assessee had concluded that the royalty payment being the operating cost for the manufacturing segment was at arm s length. On a perusal of the orders of the lower authorities, we find that they had accepted the benchmarking analysis applying the TNM method for all other transactions. We find that the CUP method cannot be applied as the TPO has not been able to find a similar transaction which could be compared with the transaction of the assessee company. As regards the remaining methods, viz. Resale Price Method (RPM), Cost Plus Method (CPM) and Profit Split Method ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. We shall now advert to the grievance of the assessee that the lower authorities had erred in making a transfer pricing adjustment of ₹ 24,42,84,844/- as regards the Intra-Group Services received by the assessee from its AEs, viz. information technology services, financial and treasury support services, financial and accounting support services and legal and administrative support services. As observed by us hereinabove, the DRP while rejecting the objection that was raised by the assessee before it w.r.t the transfer pricing adjustment made by the TPO as regards the intra-group services received by the assessee from its AEs, had merely followed the view that was taken by the panel while disposing off the assessee s objections in context of the said issue in A.Y 2011-12. As pointed out by the ld. A.R, the order passed by the A.O u/s 143(3) r.w.s 144C(13), dated 24.01.2017 for A.Y 2011-12 as regards the transfer pricing adjustment w.r.t the intra-group services received by the assessee from its AEs had thereafter been vacated by the Tribunal vide its order passed in ITA No. 203/Mum/2016, dated 11.01.2021. We have perused the aforesaid order of the Tribunal and find the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apart from that, we find, that it was observed by the TPO that the assessee had not provided quantification of the services in terms of actual expenditure incurred and the benefits derived there from. It was observed by the DRP that the additional evidence produced by the assessee in the form of e-mails, templates and screen shots were general in nature and did not prove the amount of contribution the AEs would have made by rendering the services to the assessee company. Also, it was observed by the DRP that the assessee had not submitted evidence relating to the cost that was incurred by the AEs and the commensurate benefit derived there from on the basis of which it could be held that the payments made by the assessee were found to be at arm s length. Further, the DRP rejected the benchmarking carried out by the assessee by applying the TNM method and upheld the determination of the arm s length price of the intra-group services received by the assessee from its AEs at Nil by the TPO. 26. On a perusal of the orders of the lower authorities and the records before us, we find that it is a matter of fact borne from records that the TPO by calling upon the assessee on 25th Janu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same intra-group services from the same AEs as being at arm s length price in the case of the other group companies in India, therefore, it could not be allowed to take a contrary stand while framing the assessment in the case of the assessee company. Further, it was submitted by the ld. A.R that similar services were rendered by the AEs in the earlier assessment years, i.e A.Y 2006-07, A.Y 2007-08, A.Y 2008-09 and A.Y 2009-10, and the TPO in his orders passed for the said respective years under Sec. 92CA(3) of the Act holding the services to be at arms length had not made any adjustment as regards the same. It was averred by the ld. A.R that as there was no change in the facts and circumstances of the assessee s case as in comparison to those of the preceding years, therefore, the TPO was not entitled to adopt a contrary view and draw adverse inferences during the year under consideration. It was submitted by the ld. A.R that the AEs of the assessee company had filed their returns of income and had offered the amount received from the assessee company to tax, and the same had been accepted by the department. In fact, it was submitted by the ld. A.R that in case of one of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew that substantial evidence/ material had been placed on record by the assessee to substantiate the fact that it had during the year under consideration received intra-group services from its AEs. In fact, we find that both the lower authorities had admitted that intra-group services were received by the assessee from its AEs. On a perusal of the remand report , dated 13.11.2014, we find that the TPO had though accepted that services were received by the assessee from its AEs, but, had observed, that the benefit received from availing of such services had not been substantiated by the assessee company. Adopting a similar view, we find that the DRP in its order had held that though the assessee had received the services from its AEs, but then, the same were general in nature. In the backdrop of the aforesaid facts, we find that it is a matter of an admitted fact borne from records that the assessee had received intra-group services from its AEs during the year under consideration. In our considered view, now when it is an undisputed fact that services were rendered by the AEs to the assessee, it was, then, obligatory on the part of the TPO to have benchmarked the said services by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. RAK Cermics (78 taxmann.com 230) (AP) (d) CIT vs. Johnson Johnson (80 taxmann.com 269) (Bom.) (e) Firmenich Aromatics Vs. DCIT (ITA No. 2590/Mum/2017) Accordingly, in the backdrop of our aforesaid deliberations, the transfer pricing adjustment carried out by the TPO as regards the intra-group services received by the assessee from its AEs cannot be sustained and is liable to be struck down. 29. Although, we have struck down the transfer pricing adjustment in respect of the intra-group Services received by the assessee from its AE, however, for the sake of completeness we shall deal with the claim of the assessee that no such adjustment was even otherwise called for on the merits of the case. It is the claim of the assessee that now when the intra-group services received by its group companies in India from the aforementioned AEs had been held to be at arm s length price, therefore, a contrary stand in the case of the assessee could not have been drawn. Although, we are principally in agreement with the aforesaid claim of the assessee, however, in the absence of the relevant details which would reveal rendition of similar services by the AEs to the other group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y comparable transaction to benchmark the said transaction. In our considered view, there is substantial force in the claim of the assessee that as on the one hand, in the absence of any comparable transaction the CUP method could not have been applied, while for on the other hand the other methods i.e Resale Price Method (RPM) Cost Plus Method, (CPM) and Profit Split Method (PSM) are not applicable to the transaction under consideration, therefore, TNM was the only method that could have been applied to benchmark the aforesaid transaction. Our aforesaid view that in case the TPO is not able to bring comparables on record by applying CUP method, then, the TNM method applied by the assessee is to be accepted is supported by the following judicial pronouncements: (a) Knorr Bremse vs. ACIT (77 taxmann.com 101) (Delhi) (b) AWB India P. Ltd. vs. DCIT (50 taxmann.com 323) (c) Emerson Climate Vs. DCIT (ITA No 2182/Pun/2013) (d) Merck Ltd. Vs. DCIT (69 taxmann.com 45) (e) TNS India Vs. ACIT (48 taxmann.com 128) (f) Schneider Electric India P. Ltd. Vs. DCIT (82 taxmann.com 364) (g) Sabic Innovative Plastic India P. Ltd. Vs. ACIT (88 taxmann.com 810) Apart from that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , wherein at Page 469-470 the details as regards the payment made to Mr. Jeorge La Roza were stated. 33. We have perused the documents to which our attention was drawn by the ld. A.R, and find, that the details as regards the services rendered by Mr. Jeorge La Roza to the assessee, as well as the basis of the charge so raised formed part of the additional evidence that was filed by the assessee with the DRP. In fact, no adverse inference as regards the aforesaid payment made by the assessee company finds any mention in the order of the DRP. In our considered view, as there is no justifiable reason for drawing of any adverse inferences as regards the payments that were made by the assessee to the aforesaid person, we, thus, not being able to persuade ourselves to subscribe to the claim of the ld. D.R that there was no material available on record which would justify the basis of the costs to the AE, reject the same. 34. In the backdrop of our aforesaid deliberations, we herein vacate the transfer pricing adjustment of ₹ 3,99,95,779/- made by the AO/TPO as regards the intra-group services received by the assessee from its aforesaid AEs. The Grounds of appeal No(s).14 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act provide for a separate mechanism for the computation of capital gains arising on sale of land and the capital gains arising on sale of building, while for as regards the sale transaction in question a lump sum amount was received for the entire property; (ii). that in the backdrop of a separate mechanism for computing of the capital gains on land and building the entire sale consideration of ₹ 1,25,00,000/- could not be compared with the stamp duty value of ₹ 4,07,06,000/-; (iii). that though as per the valuation report, dated 10th April 2013 of a government approved valuer the value of the building was ₹ 89,07,342/- however, the same as per the stamp duty valuation report was valued at ₹ 3,58,42,240/-; and (iv). that as per Sec. 50C the A.O was required to make reference to a valuation officer as defined in and per the provisions of the Wealth tax act, 1957. On the basis of his aforesaid reply, it was submitted by the assesee that the valuation of the government approved valuer be considered as the full value of consideration while computing the capital gains arising on the sale of building. However, the aforesaid claim of the assessee did not find fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the value adopted or assessed by the stamp valuation authority under sub-section (1) i.e in respect of the aforesaid property for the purpose of payment of stamp duty exceeds the fair market value of the property as on the date of transfer, the A.O may refer the valuation of the capital asset to a Valuation Officer. Further, as per sub-section (3) to Sec. 50C, where the value ascertained under sub-section (2) i.e by the Valuation Officer on a reference made by the A.O exceeds the value adopted or assessed by the stamp valuation authority then, the value so adopted or assessed by such authority shall be taken as the full value of consideration received or accruing as a result of the transfer. In our considered view, in a case where the assessee had neither disputed the value so adopted by the stamp duty valuation authority for the purpose of payment of stamp duty in respect of a capital asset, being land or building or both, in any appeal or revision nor made any reference before any other authority, court or the High Court then, on an objection raised by the assessee to the adoption of the stamp duty valuation as the deemed sale consideration for the purpose of computing of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid grievance of the assessee. As the adjudication of the aforesaid issue would require verification of the records, we herein direct the A.O to verify the same and redress the aforesaid grievance of the assessee. The Ground of appeal No. 30 is allowed for statistical purposes. 18. As regards the Grounds of appeal Nos. 31 and 32, we find that it is the claim of the assessee that the A.O had erred in computing the respective interest liability u/ss. 234A and 234B of the Act. It is claimed by the assessee that as it had filed its return of income for the year in question within the due date contemplated in Sec. 139(1) of the Act thus, no interest u/s 234A was liable to be imposed on it. It is further stated by the assessee that the A.O had erred in levying interest u/s 2434B of the Act. It was submitted by the ld. A.R that the assessee s application u/s 154 in context of both the aforesaid issues was pending before the A.O. It was submitted by the ld. A.R that suitable directions may be issued to the A.O. We have given a thoughtful consideration and in the backdrop of the aforesaid claim of the assessee we direct the A.O to consider its aforesaid grievances while giving app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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