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TMI Blog2023 (5) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... t extent. The corresponding grounds raised by the assessee stand rejected. Complete onus, in this regard, was on assessee to demonstrate that the actual services were rendered and received by it. The assessee, in our opinion, has failed to demonstrate the same. In such a scenario, the determination of ALP by Ld. TPO as Nil could not be faulted with. On the given facts, Ld. TPO would be left with no option but to determine the ALP as Nil since in the absence of receipt of services, there would be no necessity for the assessee to pay for such services and the question of application of any prescribed method to determine the ALP would not arise at all. Assessee has failed to establish the receipt of the services which would justify revenue s stand that there was no need for the assessee to pay for such services. Case to be followed Akzo Noble India Ltd. [ 2022 (2) TMI 1301 - ITAT DELHI ] - Decided against assessee. Deduction u/s 80IB(4) - manufacturing activity or not - profit earned out of Jammu Kashmir Unit - claim denied as there was no transformation of the object. The raw material as well as finished product was flavors only. The assessee only adds certain chemic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Chny/2018 - - - Dated:- 27-4-2023 - Hon ble Shri Mahavir Singh, Vice President And Hon ble Shri Manoj Kumar Aggarwal, AM For the Appellant : Shri P.J. Pardiwalla (Senior Counsel) Shri Vikram Vijayaraghavan (Advocate) Ld. ARs For the Respondent : Dr. S. Palanikumar (CIT) Ld. DR ORDER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2014-15 arises out of final assessment order dated 26-09-2018 passed by Ld. Assessing Officer (AO) u/s 143(3) r.w.s. 144C(13) pursuant to the directions of Ld. Dispute Resolution Panel-2, Bengaluru (DRP) u/s 143(3) r.w.s. 144C(5) dated 18-09-2018. During the year, the assessee carried out certain international transactions with its Associated Enterprises (AE) which were subjected to determination of Arm s Length Price (ALP) before Ld. Transfer Pricing Officer-2(1), Chennai (TPO) vide order dated 26-10-2017. Incorporating the proposed adjustment, draft assessment order was passed by Ld. AO on 28-12- 2017 which was subjected to assessee s objections before Ld. DRP. Subsequently, final assessment order was passed by Ld. AO pursuant to the directions of Ld. DRP confirming certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the exhaustive evidences submitted by the Appellant. In doing so, the Hon'ble DRP/ Ld. AO/ Ld. TPO has neither made any sound reasons for considering the evidences to be insufficient nor asked for any specific information required for substantiating the arm's length price. 5. Without prejudice to the combined transaction approach, the Hon'ble DRP has erred in law and facts in summarily confirming the action of the Ld. AO/ Ld.TPO without considering the economic analysis presented by the Appellant, wherein the management service charges has been separately benchmarked adopting TNMM methodology. 6. The Hon'ble DRP/ Ld. AO/ Ld. TPO have erred in law and facts, by questioning the commercial expediency of the transaction entered into by the Appellant without appreciating the business necessity of the services availed and has resorted to a predetermined approach which lacks any business/commercial merit. Part C- Grounds with respect to disallowance of deduction claimed with respect to profits and gains from the undertaking set up in Jammu and Kashmir under section 801B(4) of the Act and disallowance of excess depreciation claimed with respect to UPS and el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout appreciating the fact that the resultant product is distinct in nature and not merely processed flavours. 10. Without prejudice to the above, the Ld. AO/ Hon'ble DRP ought to have appreciated that the claim of deduction under section 801B was analyzed in detail in the initial years of claim (.e. AY 2009-10 AY 2010-11) and after being satisfied that the Appellant is engaged in manufacturing in Jammu and Kashmir, the Ld. AO allowed the deduction under section 80IB for these years. Having allowed the deduction under section 801B in the earlier year, the Ld. AO has erred in disallowing the same in the current year. 11. The Hon'ble DRP has failed to appreciate the fact that the activity carried out by the Appellant in the Jammu plant has remained the same since AY 2008-09 and has erred in holding that the facts can change every year, and in light of this, the Ld. AO can take a different view in subsequent years without being influenced by the stand taken in the earlier years. 12. Without prejudice to the above, the Ld. AO/ Hon'ble DRP has failed to appreciate that even if the activities carried out by the Appellant does not amount to 'manufacture', i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent as per Appendix I of the Income-tax Rules, 1962 ( the Rules'). 2. The Ld. AO/ Hon'ble DRP ought to have appreciated that UPS forms part of the block of assets termed as Computers including computer software' and is eligible for depreciation at the rate of 60 percent as per Appendix I of the Rules. 3. The Ld. AO has erred in not considering the rectification petition that was filed by the Appellant under section 154 of the Act in relation to the double disallowance of depreciation by the Ld. AO for two (2) particular assets, the details of which have been explained in said rectification petition. 4. The Ld. AO has erroneously disallowed the excess depreciation claimed of two (2) particular assets by considering the same as forming part of the block of assets termed as 'Computers including Computer software', without considering that the excess depreciation of such assets have been already disallowed under the block of assets termed as 'Plant Machinery' 5. The Ld. AO ought to have considered the directions of the Hon'ble DRP in relation to the duplication of disallowance detailed in the rectification petition filed before the Ld. AO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e copies of which have been placed on record. We have gone through the written submissions as well as the case laws as placed before us. Having considered rival submissions and after perusal of case records, our adjudication would be as under. 3. The assessee being resident corporate assessee is subsidiary of International Flavors and Fragrance Inc., USA (IFFI). The assessee is engaged in the business of manufacturing of flavours and fragrances at its plant situated at Chennai, Jammu and Chittoor. The assessee manufactures flavors and fragrances products for Indian as well as overseas markets by using speciality chemical products as raw material for its final manufactured products. The flavors business unit provide desired taste and smell to a broad range of products including soft drinks, confectioneries, dietary foods, snack foods, dairy products, pharmaceuticals and alcoholic beverages. The fragrance business unit produces fragrances which are used in wide variety of household products such as soaps, detergents, air fresheners, toiletries and incense sticks. Assessment Proceedings 4. Transfer Pricing (TP) Adjustment on account of management service charges paid by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.80% 2. Sales and Marketing Services 101.84 Lacs Sales Revenue 11.10% 3. Management Service charges 886.41 Lacs Sales Revenue 15.70% 4.5 The assessee furnished the methodology of identifying cost centres, identification of costs, mark up and allocation basis during proceedings before Ld. TPO. The mark up was stated to be undertaken on the basis of benchmarking report obtained by M/s IFF Inc. Regarding Sales and Marketing Support services, it was submitted that IFF Inc. has a team sitting in USA which constantly monitors and forecasts market trends of prices and cost of volatile products that form part of the group s finished goods. This helps in setting the prices and maintaining the margins irrespective of the change in prices. The Management Services Charges were in the nature of legal regulatory, finance treasury, procurement, QA QC, supply chain management, manufacturing operations and human resources etc. The assessee relied on sample copies of screenshots, emails, policies etc. as evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and downward adjustment of Rs.988.26 Lacs was proposed which was incorporated in the draft assessment order. 4.9 The Ld. DRP endorsed the view of Ld. TPO by observing that the onus was on assessee to prove with evidence that it actually received services and also to provide the details as to how the management fees was computed. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 5. From the facts, it emerges that the assessee has carried out various transactions of raw material, sale of goods, payment of management service charges, service charges paid / received, commission paid / received etc. and benchmarked the same on aggregate basis under TNMM method. The margins of the assessee are stated to be higher than the comparable entities and accordingly, no adjustment has been offered by the assessee in its TP study report. However, Ld. TPO opined that aggregation approach would be permitted only if the transactions were closely linked to each other and the transactions belong to a particular class of transactions, which was not the case. Accordingly, Ld. TPO proceeded to benchmark the transactions of payment of management services se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t could be noted that the assessee is stated to have been availing similar services in the past but it has chosen not to pay for these services in earlier years. 7. Before us, the assessee has filed 4 volumes of the paper-book. The same, inter-alia, contain snapshots of emails, published material, various correspondences, copies of invoices to show that the services were actually received for which a payment was required to be made by the assessee. We have gone through the same. After perusal of the same, we find that most of these emails do not pertain to this year but pertain to other years. Secondly, these emails are very general in nature which does not demonstrate that the services rendered were of specialised nature which would require separate payment of that magnitude as done by the assessee. This fact is pertinent in the background of the fact that the assessee was availing such services in earlier years also but chose not to make separate payment in that respect in earlier years up-to AY 2011-12. The assessee has started making payment for such services only from AY 2013-14 pursuant to corporate service agreement, the nature of services remaining the same. This is furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s directly with the vendors negotiating the credit terms 630 to 679 December 2014 S Mail correspondences evidencing creation approval of vendors credit terms that are divergent from IFF Group policy. 680 to 681 June 2015 U Email correspondences providing guidelines on procedures to be followed in relation to updated policies. 708to 709 ` July 2015 V Mail correspondence evidencing training conducted for Finance Personnel-Attached the training material 710 to 733 December 2014 X Mail correspondence evidencing training for improvement of process payments and Blocked invoice procedures Attached the presentation 735 to 753 November 2012 and December Z Mail correspondences evidencing sharing of guidelines for preparing the budges 761 to 767 August 2017 ad Email correspondence relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and fragrances 1077 to 1078 March 2013 9. We are of the considered opinion that the complete onus, in this regard, was on assessee to demonstrate that the actual services were rendered and received by it. The assessee, in our opinion, has failed to demonstrate the same. In such a scenario, the determination of ALP by Ld. TPO as Nil could not be faulted with. On the given facts, Ld. TPO would be left with no option but to determine the ALP as Nil since in the absence of receipt of services, there would be no necessity for the assessee to pay for such services and the question of application of any prescribed method to determine the ALP would not arise at all. 10. The Ld. Sr. Counsel has submitted that there was proper method of cost allocation which was based on sales and head-counts and the allocation was based on report of independent auditor as obtained by the overseas entity. However, this fact would not be of much relevance in the light of our finding that the assessee has failed to establish the receipt of the services which would justify revenue s stand that there was no need for the assessee to pay for such services. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lacs against profit earned out of Jammu Kashmir Unit. A commission u/s 131(1)(d) was issued to ACIT, Jammu during the year 2014 for AY 2011-12 to examine the facts as applicable to claim so made by the assessee. The outcome of field enquiry, as enumerated by Ld. CITDR, in the written submissions, was as under: - a. The ITI could found machinery and Plants like blender and air compressor that were old one transferred from Chennai and Chittoor to Jammu. b. The bills submitted in respect of those machineries could not be cross tallied or cross verified with actual fixed assets. c. No books of accounts were maintained in the factory premise and there were all maintained in Head Office, Chennai. d. It was reported that they were in the process of grinding, blending, mixing natural ingredients like salt, onion powder, sugar and other ingredient to form mixed flavour in dry and liquid form. e. In nutshell they were only mixing and blending different dry powder received from different vendor and packed them for other agencies like Pepsi and to be used by them as sprinkle powder. Hence, it is more of blending and mixing rather than anu manufacturing activity. f. It was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke more unique notes of flavors that would finally be sold. The production of such material in the form of essence either in liquid or in powder format is happening in places located in Chennai and other states. In this way, the activities taking place in Jammu Unit were found to be not manufacturing but only trading in flavors. The assessee was merely buying various edible flavors, mixing it and selling it in the market. The assessee simply mixes the various ingredients to bring in different tastes, colour and strength. The assessee was not in the manufacturing but it was only applying the process to make different flavors which are marketable. Blending of different flavors may on blending result in bringing into masala flavors of particular specification but it could not be held to involve the process of manufacture because the flavors, which is derived as a result of blending activity, could not be regarded as a commercially new commodity. What is produced as a result of blending is commercially the same product namely flavours though with different combinations than those which are blended and hence, it could not be said that any process of manufacture is involved in blending o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee in AYs 2009-10 2010-11 whereas it has been denied only in subsequent years. The Ld. Sr. Counsel further argued that the flavours manufactured by the assessee are clearly a different product which would require mixing of 25 to 30 different raw materials in different proportions. The raw material as well as finished product falls under different excise tariff headings. Similarly dry mix would be having 10 to 25 different ingredients / material falling under different excise tariff headings. The details of tariff heading of major raw material and finished products have been placed on page no.1672 of the paper book. The assessee also placed a note on manufacturing / blending of raw material which is kept on page no.1660 of paper-book. It was further submitted that the original ingredients could not be retraced and the final product would, in fact, be passing through different stages of manufacturing. Reliance has been placed on various judicial decisions including the decision of Hon ble Madras High Court in CIT vs. Vinbros Co. (177 Taxman 217; SLP dismissed by Hon ble Supreme Court which is reported as 25 Taxmann.com 367); decision of Hon ble Supreme Court in CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they were all maintained in Head office, Chennai. d. It was reported that they were in the process of grinding, blending, mixing natural ingredients like salt, onion powder, sugar and other ingredient to form mixed flavour in dry and liquid form. e. In nutshell they were only mixing and blending different dry powder received from different vendor and packed them for other agencies like Pepsi and to be used by them as sprinkle powder. Hence, it is more of blending and mixing rather any manufacturing activity. f. It was also reported that blender, storage tanks in the business premise were old one and did not bear any manufacturing mark. 2. This led to a conclusion that they used to blend some of the ingredients like salt onion powder sugar to form mixed flavour in dry as well as liquid formulations and it cannot be claimed as manufacture of Article or thing. The AO recorded the same fact in page No. 5 of the assessment order. 3. The AO had also recorded that during the course of assessment proceedings for AY 2012-13 the senior scientist of the appellant company was also examined to understand about the process. 4. After examination of the scientist, the AO conclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, our adjudication would be as under. Our findings and Adjudication 15. We find that the assessee has established Jammu Unit in the year 2007 and started claiming impugned deduction from AY 2009-10 onwards. This deduction was claimed for AYs 2009-10 and 2010-11 and the same was allowed by revenue also. However, based on assessment of subsequent years and the in light of commission issued by the department, the case was reopened to deny the same. The assessee challenged the reopening on legal grounds before Hon ble High Court of Madras vide WP Nos.309 44102 of 2016 ors. dated 19.05.2020, a copy of which is on record. The Hon ble Court considered the factual matrix as well as the reasons recorded by revenue to reopen the case. In para 17, it was observed that Chapter 21 of Central Excise Tariff Act, 1985 deal with miscellaneous edible preparations. The products falling under the aforesaid tariff labelling or relabelling of containers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the customer would also amount to manufacture. Heading 2103 specifically deals with sauces and preparations and sub hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er that Act, remains undisturbed before us. In other words, it is accepted position before the Excise department that the various activities undertaken by the assessee would fall under different tariff headings and these activities would amount to manufacture. It was further held by Hon ble Court that the definition provided u/s 2(29BA) was much broader. The aforesaid observations clearly support the case of the assessee that the assessee was engaged in manufacturing activity. The case law of Hon ble High Court of Delhi in CIT vs. Flakes-N-Flavourz (48 Taxmann.com 90) as well as the decision of Kolkata Tribunal in Binay OPTO Electronics Pvt. Ltd. Vs ACIT (49 Taxmann.com 325) also support this proposition. The Kolkata Tribunal held that the fact that the Central Excise Department recognised assessee as manufacturer and collected excise duty, the claim of deduction u/s 80-IB was to be allowed. This decision has followed the decision of Hon ble Supreme Court rendered in Ujagar Prints vs. UOI (179 ITR 317). Therefore, the case of the assessee has to succeed on this score only. 17. Proceeding further, the term manufacture as defined in Sec.2(29BA) read as under: manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blending and bottling of Indian Manufactured Foreign Liquor (IMFL) would amount to manufacture for claiming deduction u/s 80IB. The allegation of the revenue was that the assessee was merely into blending and bottling of various brands. The Tribunal relying upon various decisions allowed the claim of the assessee by observing that the raw material though not manufactured by the assessee yet there was nexus of process of blending to make it saleable commodity totally different from that of originally obtained. The Hon ble Court concurred with the decision of the Tribunal. The Special Leave Petition filed by the department against this decision has been dismissed by Hon ble Supreme Court which is reported as 25 Taxmann.com 367. This case law also consider the decision of Pio Food Packers (1980 Taxmann.com 116). In the case of CIT vs. Darshak Ltd. (118 Taxman 863), Hon ble High court of Karnataka has held that transforming plain glassware into decorative glass with a process which is irreversible and end product being different in character, the same would be entitled for deduction u/s 80I. Similarly, Mumbai Tribunal in CIT vs Empire Spices Foods Mumbai Ltd. (188 Taxman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercially distinct commodity and it cannot be held that such foodstuff is manufactured or produced. However, in the present case, the assessee is mixing various raw materials to manufacture different commodity which fall under separate excise tariff heading. Therefore, these case laws are factually distinguishable. 21. Considering the entirety of facts and circumstances, the assessee would succeed on this issue and it was to be held that the assessee was eligible to claim impugned deduction. We order so. 22. Depreciation on UPS (Ground Nos.1 to 6) The assessee claimed higher depreciation of 60% on uninterrupted power supply (UPS) equipment. The Ld. AO, treating the same as Plant Machinery, granted depreciation of 15% and added the differential of Rs.0.66 Lacs to the income of the assessee. The Ld. DRP directed Ld. AO to consider rectification application of the assessee and double disallowance as argued by the assessee was directed to be rectified. Pursuant to the same, Ld. AO re-worked excess depreciation to Rs.0.34 Lacs. We are of the opinion that UPS, if used along with computer system, would be integral part of computer system and would be eligible for same ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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