M/S. LINDE INDIA LIMITED (FORMERLY BOC INDIA LIMITED),KOLKATA vs. JCIT, RANGE - 12, KOLKATA, KOLKATA

ITA No. 224/KOL/2016 Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) 2. This appeal was earlier decided by the Tribunal vide its order dated 19.09.2018. Thereafter assessee filed Miscellaneous Applications bearing Nos. 55 & 56/KOL/2011 in and 381/KOL/2017 in A.Ys. 2011-12 and 2012- 13. These Miscellaneous Applications were allowed by the Tribunal vide its order dated 06.11.2019. The grievance of the assessee in the Miscellaneous Applications was that Tribunal has adjudicated one part of the grievances of the assessee pleaded in certain grounds of appeals, whereas it shifts to adjudicate other issues. The Tribunal vide its order allowed the applications of the assessee and restored the appeals to their original numbers for deciding the issues, which were not adjudicated in the first round of litigation. In this way, these appeals are again listed before us.

During the pendency of these appeals, the assessee has filed application for permission to revise the grounds of appeal and also filed application for permission to plead additional evidence.

With the assistance of ld. Representatives, we have gone through these interlocutory applications and find that the main issues, which are going to be adjudicated in the present appeal, were already pleaded by the assessee. It only wants to plead certain peripheral arguments in support of the main grievance. In other words, it wants to raise specific pleas under the head of sub-grounds, which only a form of multiple submissions required to be made by the assessee during the hearing of the appeal. On due consideration of the above application, we are of the view 2 Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) that Rule 8 of ITAT Rules , 1963 does not authorize any appellant in the appeal or respondent in the Cross Objection to plead argument in the grounds of appeal

Brief facts of the case are that the assessee-company is a part of the Linde AG Group (It was earlier part of the BOC Group of UK, which has merged with the Linde AG Group). It is a subsidiary of the BOC Group Plc of UK. It is in a Project Engineering line of business, which executes turnkey contracts relating to industrial gases plants, a process gas solutions line of business etc. It has filed its return of income on 30.11.2011 declaring total income at Rs.67,29,90,296/-. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) was issued and served upon the assessee. On scrutiny of the accounts, it revealed that a report in Form 3CEB was filed by the assessee along with the return of income. A perusal of such report would reveal that certain international transactions were taken up by the assessee and therefore, a reference to the TPO was made for determining Arm’s Length Price in respect of international transactions entered by the assessee with its Associate Enterprise. Ld. TPO has passed the transfer pricing adjustment order under section 92CA(3) of the Income Tax Act on 28.01.2015. After receipt of this order, ld. Assessing Officer has passed a draft assessment order on 05.03.2015. The assessee filed objections on the draft assessment order and those objections were decided by the ld. Dispute Resolution Panel vide its order dated 21.10.2015. The ld. 4 Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) Assessing Officer has passed a final assessment order on the basis of the directions issued by the DRP on 27.11.2015 and against this order, the assessee is in appeal before the Tribunal.

A perusal of the grounds of appeal would reveal that the first issue agitated before us is, what should be the Arm’s Length Price of international transaction of purchase of raw material and sale of finished goods. In order to resolve this issue, we would refer to the TPO’s order. He made discussion on this issue from paragraph no. 22 at page 195 of the impugned order. The ld. TPO has observed that the assessee has adopted Transactional Net Margin Method (TNMM) for determining its Arm’s Length Price of international transaction. It adopted Operating Profit on sale as PLI while the purchase and sale of capital asset/fixed asset has been justified by using the PLI of return on capital employed. The ld. TPO took note of the selection of comparables made by the assessee in its TP Study Report as well as how it worked out the PLI for comparing its transaction, vis-à-vis the average margin of the selected comparables. Such details are available in paragraph no. 24 of the TPO’s order and it reads as under:-

The ld. TPO was not satisfied with the determination of Arm’s Length Price by the assessee in its T.P. Study Report. He Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) selected further comparables. The assessee has bench-marked its transactions on the basis of seven comparables, whereas ld. TPO has selected total number of comparables as 13 including those selected by assessee. He invited the explanation of the assessee, regarding those comparables, but in the show-cause notice, the ld. TPO has included Hindustan Wires Limited as one of the comparables but while finalization of the comparables, he did not select and excluded it. The final comparables selected by the ld. TPO as well as determination of ALP on this issue reads as under:-

It is to be mentioned here that the companies that have been selected as comparable which are broadly functioning in the gas industry. The major condition for Transfer Pricing Analysis is comparability criteria, thus while price Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) got affected when there are differences in products, gross margins are affected by differences in functions but net margins are comparatively less affected by the differences in products and functions. This does not mean that net margins are applicable to enterprise which carry similar functions in different market or different sectors of the company. The sectoral and market similarity is the must for the applicability of net margin and this gives a leeway for comparison with a wide range of enterprise in the same sector and market. Net profit indicators are less sensitive to the differences in the level of risks and extent and complexity of functions while doing a comparable analysis and hence as per the above criteria the companies selected as comparable are appropriate in the facts and circumstances of the case.

In view of the profit level indicator for calculating the Arm’s Length Price of the transaction of purchase of raw materials and consumables is taken as operating profit on cost as it is the cost for which the arm’s length is being determined and for sale the PLI taken is operative profit on revenue as it is the revenue for which arm’s length is determined.

Computation of ALP The arithmetic mean of the profit level indicators is taken as the arm’s length margin. Based on this, the arm’s length price of the purchase of raw materials of the taxpayer with its AE(s) is computed as under:_ For purchase of raw material operating profit/operating cost is taken as PLI Particulars Reference Amount Tested Party Operating Revenue A 964,38,57,000/- Operating Cost B 8439,943,000/- Operative Profit C=A-B 120,39,14,000/- Operating Margin D=C/B 14.26 Arithmetic mean of E 33.56% operating margin of comparable companies (operating profit by operating cost Difference in arithmetic F=E-D 19.3% mean of operating margins of comparable and the tested party’s operating margin Absolute value of G=F*B 162,89,08,999/- difference in margins Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) Total raw material 3.06% purchase from AE to total cost base 25,37,21,525 x 100 843,99,43,000 =3.06% 3.06% of the difference is 4,98,44,615/- the adjustment For sale of finished goods operating profit/operating revenue is taken as PLI Particulars Reference Amount Tested Party Operating Revenue A 964,38,57,000/- Operating Cost B 8439,943,000/- Operative Profit C=A-B 120,39,14,000/- Operating Margin D=C/B 12.48 Arithmetic mean of E 22.99% operating margin of comparable companies (operating profit by operating cost Difference in arithmetic F=E-D 10.51% mean of operating margins of comparable and the tested party’s operating margin Absolute value of G=F*B 101,35,69,370/- difference in margins Total sale to AE (sale of 0.244%% finished goods + cylinder rental charges = 1,43,37,902 + 90,28,344 = 2,33,66,246) to total revenue 2,33,66,246 x 100 9,54,15,06,000 0.244% of the difference is 24,73,109/- the adjustment The total adjustment for purchase of raw material and sale of finished goods of Rs.5,23,17,724/- = (4,98,44,615/- + 24,73,109/-) is treated as Transfer Pricing Adjustment”. Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) The ld. Assessing Officer has accepted the recommendation of ld. TPO and the same is concurred by the District Resolution Panel.

While impugning the order of the ld. Assessing Officer, ld. Counsel for the assessee has filed a brief note along with the Annexure. The note submitted by the assessee on this aspect reads as under:-

On the other hand, ld. D.R. relied upon the order of the ld. DRP and submitted that Gujarat Fluorochemicals Limited is also 12 Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) engaged in the manufacture of ‘chemicals and fluoro-chemicals and with respect to production of refrigerant gases and similarly Inox Air is also one of the concerns of the Group-GFL. Thus both these comparables are not required to be excluded.

We have duly considered the rival contentions and gone through the record carefully. With regard to inclusion of Gujarat Fluorochemicals Limited (GFL), emphasis of the ld. Counsel for the assessee is that in the assessee’s own case, ld. DRP has excluded this concern on account of its functional disparity. He made reference to the orders of the ld. DRP available in A.Ys. 2012-13, 2013-14 and 2014-15, if a comparable selected by the ld. TPO and not excluded by the ld. DRP in one year but in other three years on the basis of its functional dissimilarity excluded, then, how it can be a comparable in the earlier year. We have gone through these details available in the record and satisfied that since ld. DRP itself has excluded this comparable on account of functional non-comparable, therefore, it required to be excluded in this year.

The next comparable is Inox Air Products Limited. We have perused the finding of the ld. TPO on page 231, whereby he recorded his reasons for rejecting the objection of the asessee. The reasoning assigned by the ld. TPO reads as under:-

The detailed objection of the assessee has been summarized before us and we have reproduced this submission while taking note of the brief summary of assessee’s argument (extracted supra). The main contention of the assessee is that it is not specifically in the lines of manufacturing of gases. It has host of other activities. The ld. TPO has not examined its segmental accounts and not worked out how much component of its revenue generation is from same area of operation as the assessee is engaged. We find that the ld. TPO has summarily rejected the objection of the assessee without analytically comparing with any item. Thus to our mind, this comparable is not required to be included in the list of comparables for determining the PLI. The next objection pointed out by the assessee is that true segmental accounts have not been examined by the ld. TPO while determining the ALP of comparables, vis-à- vis the assessee. It is also the contention of the assessee that ld. Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) TPO has taken the figures from the internet and not from internal accounts of these companies. He failed to compute true operating profit margins as well as considering the adjustment for working capital before adopting true percentage of margin for compare. We find that ld. TPO has not carried out this exercise though his order is elaborate but it is on the basis of theory of the procedural aspect instead of analysis of specific material. Therefore, we deem it appropriate to remit it back to ld. Assessing Officer for re-examination. Our directions are very specific that out of twelve comparables finalized by the ld. TPO, exclude GFL and Inox. Thereafter ld. TPO would take the PLI of the comparables. He also examined the working capital adjustment in all these comparables, vis-à-vis of the assessee and look into true operating profit margins of these companies. After carrying out its exercise, he will re-determine the adjustment, if any, required to be made or not made in the Arm’s Length Price of raw material purchased and finished goods sales. The ld. Assessing Officer may take the help of ld. TPO in carrying out this exercise. Apart from this exercise, no other aspect of this issue will be required to be examined which may prolong the litigation of second round.

With regard to the next item, ld. Assessing Officer has made adjustment on sale of capital/fixed assets. His finding on this aspect is available from paragraph no. 41 to 41.5 of the impugned order on pages no. 240 to 244 of the ld. TPO’s order. Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) The case of the assessee is that it has purchased two second- hand nitrogen generating plants from an old customer namely Moser Baer. These plants were manufactured in United Kingdom but installed in China. The assessee purchased them. The cost of each plant was worked out at Rs.6,42,17,605/-, which does not include fluctuation gain of Rs.8,45,511/-. The assessee has to pay customs duty on purchase of this plant. In respect of the purchase of this plant, no adjustment was made for the T.P. purposes. One of the plants was set up and actually installed for Moser Baer and put to use. However, second plant could not be put to use. The assessee has ultimately sold this plant to one of its Associates Enterprises in Indonesia. The company had realized Rs.7,24,04,190/- from sale of the second plant. It paid import duty at that point of time.

The ld. TPO made adjustment in the Arm’s Length Price of purchase and sale of capital assets. The ld. DRP concurred with the conclusions of the ld. TPO.

Before us, ld. Counsel for the assessee submitted that the assessee had paid customs duty of Rs.1,53,06,109/- at the time of import of this plant. On sale it is a loss. Nobody had consider the effect of Customs duty paid by the assessee. Similarly all other factors are not looked into by the ld. TPO, in his order. The assessee has also failed to produce all the details before the ld. TPO. This is the reason an application for permission to lead additional evidence is being made before the Tribunal. As we 16 Assessment Year: 2011-2012 M/s. Linde India Limited (formerly BOC India Limited) observed in the earlier part of this order, the assessee sought to place on record the documents, which are placed in the second paper book, which basically contains earlier impugned orders of this year. Some of the material is available in the appeal-folder i.e. TPO’s order, AO’s draft order, DRP order, A.O’s final order, etc. In the paper book (volume 2) for A.Y. 2011-12, the assessee has placed on record copies of the additional documents.

On the other hand, ld. D.R. submitted that the assessee ought to have raised all these things before the ld. TPO and cannot lead an additional evidence. We find that without considering these actual details, ld. TPO has determined the Arm’s Length Price only on the basis of returns received on employment of capital by the assessee, vis-à-vis the comparable companies. To our mind, it does not reflect the realistic picture. It is a general study about actual deployment of capital by different comparables, which resulted certain gain. In the present transaction, there is a specific instance of purchase and sale of a plant. It is such an item for which it is quite difficult to find out a comparable whether, it has any utility in international market or not. It is a specific item for whom very limited customer would be there. Therefore, we remit this issue also for reexamination at the level of ld. Assessing Officer. The ld. Assessing Officer will look into the element of customs duty paid and thereafter find out whether this plant could claim higher return or not. With the above direction, this ground of appeal