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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM & SHRI RAHUL CHAUDHARY, JM
This is the bunch of 8 appeals in case of Cabot India Ltd (the assessee/appellant) for several years starting from assessment year 2006 – 07 to 2011 – 12 involving common issue of transfer pricing with respect to benchmarking of international transaction of Royalty expenditure and corporate taxes issues of cenvat credit, disallowance of carry forward of losses, depreciation and addition on account of non-reconciliation of ITS data. Both the parties submitted that with respect to the benchmarking of Royalty, the most appropriate method is required to be adjudicated and with respect to carry forward of losses and addition on account of non- reconciliation of ITS data only direction to the assessing officer is required. In view of this, both parties argued all the grounds together and therefore we decide these appeals by this consolidated order.
Assessee filed its return of income declaring loss of ₹ 90,023,388/– on 29/11/2006. Return of income was processed and accepted as it is, but selected for scrutiny by issue of notice under section 143 (2) of the act. As the assessee has entered into an international transaction with its associated concern on account of purchase of raw material, import and export of finished goods and on payment of royalty, reference was made to the learned transfer pricing officer for determination and computation of arm‟s-length price in relation to the international transaction as per form number 3CEB. The learned TPO passed an order under section 92CA (3) of the act on 29/10/2009 wherein he determined the arm‟s-length rate of royalty of carcass grade of product manufactured by the
Pursuance to the order of ITAT, the learned TPO passed an order under section 92CA (3) of the act on 30/1/2015. According to the TPO the assessee was asked to produce the additional evidence and documentation with regard to the royalty payment to associated enterprise along with the proof of benchmarking. The assessee has produced information from the website of the secretary of industrial assistance wherein the royalty rates have been disclosed with regard to some of the companies in the industry. The learned TPO held that none of the royalty agreements were relating to the assessment year under consideration. All the royalty agreement stated by the assessee were pertaining to the year 2000 or prior to that. Further the royalty statistics are also related to different geographical area the learned TPO held that the search could have been accepted if the entities entered in the agreement were based either in India or in the USA which is comparable with the assessee and AE. Therefore, he refused to accept the benchmarking for determining the arm‟s-length price. Accordingly, the learned TPO held that in the original assessment proceedings the assessee explained that there is no technical difference between the two rates of carbon black , assessee has also furnished technical commentaries which confirmed that there is no technical
The assessee preferred an appeal before the learned CIT – A submitting that assessee has justified the benchmarking by adopting CUP method as the most appropriate method stating that rates at which royalty was paid by other group companies of Cabot group to cabot Corporation are also in the similar range. The reserve bank of India has laid down guidelines which prescribed that royalty at the rate of 5% can be paid. Further the Secretariat For Industrial Assistance [ SIA] disclosed the royalty rates approved by it for various company in India for each industry wherein the rates are in the range of 3% to 8% and accordingly, the royalty paid at the rate of 5% on carcass grade carbon black to the associated enterprise is at arm‟s-length. The assessee further challenged that the learned AO rejected the secretary of industrial assistance royalty rates stating that they relate to year 2000 or prior to that, however those rates are pertaining for 5 years. With respect to the geography, it was stated that the royalty payer is always an Indian company. Therefore it was submitted that AO has taken the benchmarking of royalty by adopting
Therefore, assessee is in appeal before us against the appellate order in ITA number 1842/M/2016 for assessment year 2006 – 07 raising following grounds of appeal: – (Assessment Year 2006-07) “1. Both the lower authorities erred in making a Transfer Pricing adjustment restricting royalty allowable on Carcass Grade Carbon Black to 3%.
2. Both the lower authorities erred in confirming the disallowance without any material, information or documents in their possession in contravention of Section 92C(3).
3. Both the lower authorities erred in ignoring the material led by the appellant including an independent search on an external database.
7. Having regard to the facts and circumstances of the case and the provisions of law, the appellant submits that the Assessing Officer/Transfer Pricing Officer be directed to allow royalty payable on Carcass Grade Carbon Black @5% as claimed in the Return of Income.” 07. Therefore in the appeal of the assessee the only challenge is with respect to determination of the arm‟s-length price with respect to royalty paid by the assessee on carcass trade carbon black.
The learned authorized representative
i. Referred to the order of the coordinate bench dated 19 December 2012 wherein the matter was remitted back to the TPO for determining the arm‟s-length price using the most appropriate method. ii. referred to its letter dated 15 January 2015 wherein the assessee adopted CUP method by conducting search on royalty source database iii. assessee also benchmarked the transaction using the TRANSACTIONAL NET MARGIN METHOD also as the alternative benchmarking methodology by comparing its profit margin with its competitor Phillips Carbon after making certain adjustments. iv. The learned transfer pricing officer rejecting all the contentions of the assessee held that 3% royalty was already allowed on trade grade carbon black and the same rate be applied for carcass grade rate thereby restricting the disallowance to 2% on carcass grade. v. Learned CIT – A confirmed the same. vi. The learned authorized representative stated that benchmarking methodology adopted by the assessee applying CUP method is the most appropriate method is correct in all respect. vii. Alternatively it was stated that the „other method‟ may be allowed to be benchmarked viii. He referred to the decision of the honourable Bombay High Court in case of CIT versus SGS India private limited dated 18 November 2015, press note number 9 of Department of Industrial Policy And Promotion issued by Ministry Of Commerce And Industry dated 8 September 2000 and further the reserve bank of India circular dated 21 July 2003 on royalty payments and 24 February 2004 on the same issue wherein the royalty payments of 5% of the local sales and 8% on export sales is allowed. ix. The learned authorized representative also placed reliance on the decision of the coordinate bench in case of 126 taxmann.com 240 in case of Dow aggroscience India private limited versus ACIT and ACIT versus DowAgroscience India private limited [ITA number 8385/M/2011 dated 20 September 2016.] x. He further relied upon the decision of the coordinate bench in case of Cararo India private limited versus DCIT 104 taxmann.com 166.
The learned departmental representative vehemently submitted that a. assessee is paying royalty on two products. There is no difference between both these products.
b. Assessee has not submitted anything which even remotely suggest that the technology with respect to both the products are different. c. Earlier assessee was paying Royalty @ 2 % now by amending agreement it has increased it to 5 %. There is no change in FAR . Therefore even otherwise the increase is unjustified. d. For one product i.e. trade grade product assessee is paying 3% royalty and for carcass grade product assessee is paying 5% royalty. Therefore, internal CUP is available. The learned TPO is correct in adopting the CUP method and adopting the comparable price of 3% royalty on trade grade e. With respect to the other method it was submitted that for the impugned assessment year same is not applicable. f. Further the RBI rates and SIA rates cannot be considered appropriate for benchmarking of the royalty. He submitted that transfer pricing provisions are Anti avoidance provision and they cannot be compared with the RBI rates and SIA rates. g. Further there is no FAR available of RBI rates or SIA rates, therefore how those are comparable is not demonstrated. h. Even in the “other method” the benchmarking based on RBI rate or SIA rates cannot be made as those are coupled with several other conditions and consideration which are not shown to be existing similarly in case of the assessee. i. With respect to the decision of Dow Agrosicence India private limited the learned DR submitted that it is not the case of the „other method‟ , further the CUP method deals with the actual price charged in comparable circumstances. Further for assessment year 2004 – 05 in that case it clearly shows that in assessee‟s own case the SIA and the reserve bank of India has approved the rates of royalty. Those j. In cup method actual transaction is required to be considered. In the case of the assessee internal cup is available which cannot be discarded. Therefore the decision relied upon by the learned authorized representative does not apply to the facts of the case.
The learned authorized representative reiterated the submissions earlier made.
We have carefully considered the rival contention and perused the orders of the lower authorities. We have also considered the decision of the coordinate bench in assessee‟s own case wherein it remanded the issue back to the file of the learned assessing officer to redetermine the arm‟s-length price of the international transaction by first determining the most appropriate method. When we look at the order of the coordinate bench for assessment year 2005 –06 of coordinate bench wherein at Para number 10 it has categorically held that the royalty rates paid by the assessee to its associated enterprise itself cannot be taken for benchmarking of the other transaction with its associated enterprises for the reason that both the transactions are controlled transactions. The learned TPO
The assessee has also used the transactional net margin method as the most appropriate method. However we do
On careful consideration of all the arguments and submission made by the both the parties as well as the orders of the coordinate bench, We are of the view that for benchmarking the royalty transaction the database of royalty source is correctly used by the assessee but the comparables are not shown before us. While adopting the most appropriate method in case of such transaction, the factors such as the nature of the relevant intangibles,
Appeal of the assessee for assessment year 2006 – 07 is allowed for statistical purposes.
ITA number 2539/M/2014 for assessment year 2007 – 08 is filed by the assessee wherein the adjustment with respect to the arm‟s-length price of the royalty payment to its associated enterprise of carcass grade carbon black was made by proposing an adjustment of ₹ 24,540,961. The facts and circumstances of the case for assessment year 2007 – 08 are identical to the facts and circumstances of the case for assessment year 2006 – 07. As we have decided the appeal of assessee for that year, with similar directions we set-aside this appeal also back to the file of the learned TPO.
In the result ITA number 2539/M/2014 filed by the assessee for assessment year 2007 – 08 is allowed for statistical purposes.
With respect to the ground number 1 of unutilized cenvat credit against addition under section 145A of ₹ 25,397,539, it is the claim of the assessee that this issue is covered in favour of the assessee by the order of the coordinate bench in assessee‟s own case for assessment year 2001 – 02, 2002 – 03 and also confirmed by the honourable Bombay High Court for assessment year 2002 – 03. Further, the learned AO himself has accepted the same in subsequent year.
The learned departmental representative did not challenge the same.
Accordingly we direct the learned assessing officer to delete the addition made by invoking provisions of section 145A of ₹ 25,397,539/–. Accordingly ground number 1 – 4 of the appeal are allowed.
Ground number 8 is with respect to allowance of brought forward losses from earlier years. The assessee stated that
After hearing the parties, we set-aside the issue back to the file of the learned assessing officer with a direction to assessee to submit before the learned assessing officer the chart of allowability of carry forward of depreciation and business losses, the learned AO may examine the same and if it is found in accordance with the law, grant same. Accordingly ground number 8 and additional ground of appeal are allowed with above direction.
In the result ITA number 7496/M/2012 filed by the assessee for assessment year 2008 – 09 is partly allowed.
ITA number 6318/M/2014 is filed by the assessee for assessment year 2009 – 10 wherein the assessee has challenged the order of The Commissioner Of Income Tax Appeals – 15 Mumbai dated 30/7/2014.
Ground number 1 – 3 of the appeal is with respect to the adjustment under section 145A ₹ 37,766,689/–. Both the parties confirmed that this is identical to ground number 1 – 3 of the appeal of the assessee for assessment year 2008 – 09. The learned departmental representative could not show us any reason to uphold the above addition. As
Ground number 7 – 11 of the appeal are against the determination of the arm‟s-length price of the royalty expenditure at Rs Nil whereas the assessee has paid a sum of ₹ 84,779,185/–.
Both the parties confirmed that for this year also the learned transfer pricing officer has determined the arm‟s- length price of the royalty expenditure at Rs Nil holding that there is no new technology, the direct benefit was not demonstrated and the royalty payments are therefore not justified.
Identical issue arose in case of the assessee for assessment year 2008 – 09 wherein we have set-aside the issue back to the file of the learned assessing officer/transfer pricing officer with a direction to the assessee to benchmark the royalty transaction and demonstrate before the lower authorities that it is carried out at arm arm‟s-length. With similar direction we also set-aside these grounds of appeal for assessment year 2009 – 10 to the file of the learned TPO/AO. In the result these grounds are allowed for statistical purposes.
29. No other grounds are pressed for assessment year 2009 – 10 and therefore the appeal of the assessee for
For assessment year 2010 – 11 the assessee has filed appeal in ITA number 2108/M/2016 and the learned assessing officer has filed appeal in ITA number 2595/M/2016 against the appellate order passed by the Commissioner Of Income Tax (Appeals) – 55, Mumbai dated 30/11/2015.
In assessee‟s appeal in ITA number 2108/M/2016 the assessee has raised all the grounds of appeal
starting from 1 – 9 against the benchmarking of the international transaction of the payment of royalty. The assessee has made a royalty payment of ₹ 98,745,449/– the learned transfer pricing officer has determined the arm‟s-length price of the royalty at Rs. Nil. The reasons given are similar as in assessment year 2008 –
09. The learned CIT – A has determined the arm‟s-length price of the royalty payment at the rate of 3% in case of carcase grade carbon black and also in case of trade grade carbon black at the same rate. Thus the learned CIT – A has restricted the arm‟s-length price adjustment on carcase grade carbon black royalty payment by 2% as held in earlier years. The ld AO is also in appeal against that appellate order.
We have already set-aside the issue back to the file of the learned assessing officer for the earlier years with respect to the benchmarking of the royalty transaction, where the assessee is directed to first benchmark Royalty payments by adopting CUP as the Most appropriate method and then
In the result ITA number 2108/M/2016 filed by the assessee is allowed for statistical purposes.
ITA number 2595/M/2016 is filed by the learned assessing officer for assessment year 2010 – 11 wherein the solitary ground is with respect to the direction of the learned CIT – A who has accepted that the royalty payment made by the assessee with respect to the carcase grade carbon black and trade grade carbon black at the rate of 3% si at arm‟s length. He confirmed the adjustment of 2% with respect to the carcase grade carbon black royalty payment. Therefore the learned that AO is in appeal before us against the relief granted by the learned CIT – A.
As we have set-aside the appeal of the assessee to the file of the learned transfer pricing officer wherein similar grounds of benchmarking of the royalty transactions are involved, the grounds of appeal filed by the learned assessing officer are also restored back to the file of the learned AO/TPO. Accordingly the appeal filed by the
In the result appeal filed by the learned assessing officer in ITA number 2595/M/2016 for assessment year 2010 – 11 is allowed for statistical purposes.
ITA 2586/M/2016 is filed by the assessee and ITA number 1911/M/2016 is filed by the learned assessing officer for the assessment year 2011 – 12 against the assessment order passed by the learned assessing officer under section 143 (3) read with section 144C (13) of the act dated 29/1/2016 against the returned income filed by the assessee on 25/11/2011 at a loss of ₹ 312,278,296 is assessed at loss of ₹ 284,077,536.
The appeal of the assessing officer is against the direction of the learned Dispute Resolution Panel of deleting the addition of ₹ 77,043,394/– on account of depreciation on retired assets.
The appeal of the assessee is with respect to the assessment order wherein the arm‟s-length price of the royalty payment made by the assessee of ₹ 28,200,762/– is considered at Rs Nil. The assessee is also aggrieved with the partial grant of credit for carry forward of losses.
We find that with respect to the royalty the issue involved is identical to the issue involved in the appeal of the assessee for assessment year 2008 – 09. We have set- aside that appeal of the assessee back to the file of the learned assessing officer with specific direction, we also for
With respect to the carry forward of losses, we direct the learned assessing officer to grant assessee the correct amount of carry forward losses after examining the necessary detail submitted by assessee. In the result ground number 1 – 9 of the appeal of the assessee are allowed with the direction and ground number 10 and 11 of the appeal are allowed.
In the result ITA number 2586/M/2016 filed by the assessee is allowed for statistical purposes.
Coming to the appeal of the learned assessing officer in ITA number 1911/M/2016 , we find that during the course of the assessment proceedings the learned assessing officer noted that schedule 5 of the profit and loss account relating to the claim of depreciation on fixed assets viz that the assessee company has reduced ₹ 157 crores from different block of assets. Further note number 2 of the said schedule reads the assets aggregating to ₹ 147 crores have been retired from active use and are held for sale. Further the depreciation chart furnished by the assessee along with the tax audit report was also perused. The AO was of the view that there is a difference in the deletion of the assets as per accounts and as per the tax audit report. Therefore, he examined the claim of the depreciation made by the assessee of ₹ 77,043,394. The learned assessing officer noted that though the assessee company
Against which the assessee preferred an objection before the learned Dispute Resolution Panel. The learned DRP following the decision of the honourable jurisdictional Bombay High Court in case of Sonic Biochem And Extractions Private Limited, allowed the claim of the assessee. Accordingly, following the direction of the learned Dispute Resolution Panel, disallowance of depreciation was deleted but the learned assessing officer is in appeal before us.
After hearing the parties, we find that the learned dispute resolution panel has followed the decision of the honourable Bombay High Court. The learned departmental representative could not show us any reason that why the decision of the honourable Bombay High Court is not applicable in the facts of the case. In view of this, we do not find any infirmity in the direction of the learned dispute resolution panel and dismiss the solitary ground of appeal.
In the result ITA number 1911/M/2016 filed by the learned assessing officer for assessment year 2011 – 12 is dismissed.
Order pronounced in the open court on 21.08.2023.