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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 ..... sment 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 certain additions. Aggrieved, the assessee is in further appeal before us. The grounds raised by the assessee read as under: - Part A - General Ground 1. Based on the facts and circumstances of the case, the Hon'ble Dispute Resolution Panel (Hon'ble DRP) has erred in law and facts, in passing a cryptic order i.e. mere acceptance of the orders of the lower authorities (learned Deputy Commissioner of Income-Tax, Transfer Pricing Officer - 2(1), Chennai (Ld. TPO)/ learned Deputy Commissioner of Income-Tax, Large Tax Payer Unit 2, Chennai (Ld. AO) without independent reasoning and findings. Accordingly, the directions passed by the Hon'ble DRP is bad in law and needs to be disregarded. Part B - Grounds of objection pertaining to transfer pricing adjustment on payment of management service charges 1. The Hon'ble DRP/ Ld. AO/ Ld. TPO, have erred in law and in facts, by disregarding the arm's length analysis / economic analysis undertaken by the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 electrical installations Disallowance of claim of deduction under section 801B of the Act. Specific Grounds 1. The Ld. AO/ Hon'ble DRP ought to have appreciated that the business carried out by the Appellant in the undertaking set up in Jammu & Kashmir (Jammu plant') would qualify as an 'eligible business' as per the provisions of section 801B of the Act and consequently, the profits and gains derived from the Jammu plant would be eligible for deduction under section 80IB of the Act. 2. The Ld. AO/ Hon'ble DRP failed to appreciate the fact that the business of the Appellant as carried out in the Jammu plant qualifies as 'manufacture' as defined in section 2(29BA) of the Act. 3. The Ld. AO/ Hon'ble DRP has erred in holding that the activity carried out in the Jammu plant by the Appellant does not result in a change in the character and the utilization of the raw materials used in manufacturing the final product. 4. The Ld. AO/ Hon'ble DRP has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout 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', it will sufficiently amount to 'production'. Since section 801B of the Act uses not only the word 'manufacture' but also the word 'production', the Ld. AO ought to have allowed the deduction claimed under section 80lB of the Act. 13. Without prejudice to the above, the Ld. AO/ Hon'ble DRP has failed to appreciate that the Appellant has obtained Central Excise registration from the Central Excise Department recognizing the business of the Appellant as 'manufacturing' which evidences that the activity carried out by the Appellant in the Jammu plant is 'manufacturing'. 14. Without prejudice to the above, the Hon'ble DRP has failed to consider that the Appellant has obtained registrations/ approvals from other statutory authorities like the Directorate of Industries & Commerce, Pollution Control Board, VAT authorities and Central Sales Tax authorities which provide that the business of the Appellant is manufacture of flavours and fragrances. General Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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, whereby the Hon'ble DRP has mentioned that where duplication of disallowance was found to be made, the same may be duly rectified by the Ld. AO. 6. The Hon'ble DRP ought to have considered the various judicial precedents that have been relied on by the Appellant in support of its contention that UPS would be eligible for depreciation at the rate of 60 percent as per Appendix \ of the Rules. Grounds relating to depreciation on electrical installations 1. The Ld. AO/ Hon'ble DRP has erred in considering that the 'electrical installation' is eligible for depreciation at the rate of 10 percent as per Appendix I of the Rules. 2. The Ld. AO/ Hon'ble DRP ought to have appreciated that 'electrical installation' would be eligible for depreciation at the rate of 15 percent as per Appendix I of the Rules. 3. The Hon'ble DRP ought to have considered the various judicial precedents that have been relied on by the Appellant in support of its contention that 'electrical installation' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd incense sticks. Assessment Proceedings 4. Transfer Pricing (TP) Adjustment on account of management service charges paid by the assessee (Part B : Gr. Nos. 1 to 6) 4.1 The assessee carried out certain international transactions with its Associated Enterprises (AE) which are listed in para-4 of Ld. TPO's order. The same include purchase of raw material, sale of goods, payment of management service charges, service charges paid / received, commission paid / received etc. The assessee benchmarked these transactions on aggregate basis adopting Transactional Net Margin Method (TNMM) and did not offer any Transfer Pricing (TP) Adjustment in its TP study report. The assessee followed Comparable Uncontrolled Price (CUP) method to benchmark payment of royalty, purchase of capital assets and reimbursement of expenses etc. The main adjustment arose out of management charges paid by the assessee to its AE. 4.2 It transpired that the assessee paid management service charges aggregating to Rs.2004.83 Lacs pursuant to contractual terms to its ultimate parent AE i.e., M/s IFF USA. The same was questioned by Ld. TPO due to the fact that such charges were not paid in earlier years and profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services. The need for soliciting such services were not substantiated and the benefit that accrued from such services was also not explained with reference to the structure of the assessee and the scale of expenditure excluding the one for which the payments were made by the assessee to its AE. The Ld. TPO held that the list of services includes every possible kind of management services. The onus was on assessee to demonstrate the fact of actual services received, the need for such services and whether such service demand payment as required under OECD guidelines. 4.7 The OECD guidelines on intra-group services, in Para 7.6, states that: - Under the arm's length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or social value to enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions could be benchmarked separately. It could also be seen that the assessee has applied TNMM method for certain transactions, CUP method for another set of transactions and 'other method' for certain transactions. The same would show that all the transactions have not been benchmarked under one method by the assessee himself rather the assessee has applied more than one method to benchmark the various transactions in its TP study report. Therefore, Ld. TPO was quite justified in rejecting the aggregation approach and proceed to bench-mark the impugned transactions separately under CUP method. No fault could be found in the impugned order, to that extent. The corresponding grounds raised by the assessee stand rejected. 6. Proceeding further, it could be seen that the assessee has started paying management service charges to its ultimate parent company pursuant to a Corporate Service Agreement, a copy of which is on record. The terms of this agreement are effective from 01.04.2012 for a period of 3 years. As per the terms, service provider agrees to provide certain services to service recipient and the ambit of such services could be modified from time to time according to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012-13 21.63% 3. 2013-14 15.98% 4. 2014-15 13.22% It could clearly be seen that the profits of earlier years are significantly higher than the profit of the years in which the assessee has started paying management charges to its AE. There is no change in the nature of business of the assessee. The above facts clearly support the case of the revenue. 8. In this regard, the tabulation made by Ld. CIT-DR with respect to dates of e-mail as kept in the paper-book would also support the aforesaid conclusion: - Paperbook 2 In paper book Page No. Period/Month and Year of mail E Mail correspondences raising an IT Ticket to the IT Service Desk and sorting the issue 389 to 394 August 2016 H Mail correspondence evidencing the global contract entered by the group to realize cost savings 480 to 481 May 2017 I Mail correspondence evidencing conducting the back-ground check of the suppliers 482 to 484 October 2015 J Mail correspondences evidencing the support of IFF Inc. In screening the local vendors for IFF India 564to 570 September 2015 0 Mail correspondence evidencing where IFF India leverages on the central procurement team for purchase of Capex 61 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the same. Along with their schedules 1074 to 1075 March 2012 bj Mail correspondence evidencing support from regional team on the technology used in the manufacturing the flavours 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 fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's Claim of Deduction u/s 80IB(4) (Part C: Gr. Nos. 1 to 19) 14.1 The assessee claimed deduction u/s 80IB(4) for Rs.379.15 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 use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be approved by the customer. The customer may, in his own manufacturing facility, add additional ingredients to make 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 combination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal before us. 14.6 The Ld. Sr. Counsel has submitted that the impugned deduction has been allowed 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d assets. c. No books of account were maintained in the factory premise and 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 abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usal of case records as well as case laws cited before us, 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 specificall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption under different notifications under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxman 217) held that 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 rate of de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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