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Income Tax Appellate Tribunal, “K” BENCH MUMBAI
Before: SMT. BEENA PILLAI & SHRI GIRISH AGRAWAL
O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: Both the appeals filed by the assessee are against the orders of Dispute Resolution Panel-1, Mumbai, (DRP) vide order no. ITBA/DRP/F/144C(5)/2024-25/1065466336(1), dated 07.06.2024, passed u/s. 144C(5) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), for Assessment Year 2020-21 and vide order no. ITBA/DRP/F/144C(5)/2024-25/1068919293(1), dated 20.09.2024 for Assessment Year 2021-22.
2. Grounds taken by the assessee in for Assessment Year 2020-21 are reproduced as under: “1. Ground No.1-Transfer Pricing ('TP') adjustment amounting to INR 215,39,66,832 in respect of the international transaction pertaining to export of finished goods. 1.1 That on the facts and circumstances of the case and in law, the Transfer Pricing Officer ('Ld. TPO') has erred in making and the Ld. AO/ DRP have erred in upholding the TP adjustment of INR 215,39,66,832 in respect of the international transaction pertaining to export of finished goods alleging that the same is not at arm's length. 1.2 That on the facts and circumstances of the case and in law, the Ld. TPO has erred in disregarding the aggregation approach adopted by the Appellant thereby, rejecting the application of Transactional Net Margin method ('TNMM') as the Most Appropriate Method ('MAM') to benchmark the impugned international transaction. The Ld. AO/DRP have further erred in upholding the action of the Ld. TPO. 1.3 That on the facts and circumstances of the case and in law, the Ld. TPO has erred in applying Comparable Uncontrolled Price ('CUP') method to benchmark the impugned transaction with respect to the common finished goods sold to both Associated Enterprises ('AEs') and Non-AEs. 1.4 Without prejudice to the above, the Ld. TPO has erred in ignoring the differences on account of geographical market, volume of transactions functional and risk profile of the parties involved and level of market while applying the CUP method. The Ld. AO/DRP have further erred in upholding the action of the Ld. TPO. 1.5 That on the facts and circumstances of the case and in law, the Ld. TPO has erred in applying both methods i.e., CUP and TNMM to benchmark the impugned & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 international transaction at the same time. The Ld. AO/ DRP have further erred in upholding the action of the Ld. TPO. 1.6 Without prejudice to the above, the Ld. TPO has erred in ignoring the fact that once TNMM is applied for benchmarking the transaction of export of finished goods exclusively to the AEs and the same is accepted by the Ld. TPO, it inherently also subsumes the part of the export transaction on which adjustment has been proposed by the Ld. TPO. 1.7 That on the facts and in the circumstances of the case and in law, the DRP/Ld. AO/Ld. TPO have erred in not following the orders of the Hon'ble Income Tax Appellate Tribunal ('ITAT') for AY 2013-14 and AY 2014-15 in Appellant's own case and AY 2015-16 and AY 2017-18 in case of Appellant's sister concern (Firmenich Aromatics (India) Private Limited, now merged with the Appellant).
Ground No. 2- TP adjustment amounting to INR 15,93,97,497 in respect of the international transaction pertaining to payment of royalty for availing technical know-how. 2.1 That on the facts and circumstances of the case and in law, the Ld. TPO has erred in making and the Ld. AO/ DRP have erred in upholding the TP adjustment of INR 15,93,97,497 in respect of the International transaction pertaining to payment of royalty for availing technical know-how alleging that the same is not at arm's length. 2.2 That on the facts and circumstances of the case and in law, the Ld. TPO has erred in disregarding the fact that the royalty is inextricably linked to the Appellant's manufacturing business operations and therefore, should have been benchmarked using TNMM as the most appropriate method and instead applying CUP method to benchmark the impugned international transaction. 2.3 Without prejudice to the above, while applying the CUP, the Ld. TPO erred in following the approach adopted by his predecessor in the prior assessment year: 2.3.1 For benchmarking the impugned transaction, the Ld. TPO erroneously accepted the royalty agreement entered between related parties without appreciating that the same is not comparable to the royalty agreement of the Appellant. The Ld. AO/ DRP have further erred in upholding the action of the Ld. TPO. 2.3.2 For inappropriately rejecting the royalty agreements submitted by the Appellant as part of TP Study which are comparable to the royalty agreement of the Appellant. The Ld. AO/ DRP have further erred in upholding the action of the Ld. TPO. 2.4 That on the facts and in the circumstances of the case and in law, the DRP/Ld. AO/Ld. TPO have erred in not following the orders of the Hon'ble ITAT for AY 2012-13 to 2015-16 and AY 2017-18 in the case of Appellant's sister concem (Firmenich Aromatics (India) Private Limited, now merged with the Appellant) wherein it was held that CUP is not the most appropriate method to benchmark the transaction due to geographical differences.
& 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 3. Ground No, 3: That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in considering deemed total income under section 115JB of the Act as Rs. 366,96,56,535 (i.e., assessed income as per normal provisions of the Act) as against Rs. 226,96,18,201 as per the return of income. Other grounds: 4. Ground No. 4: That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act.
5. Ground No. 5: That on the facts and circumstances of the case and in law, the Ld. AO has erred in not granting appropriate credit under section 115JAA.
6. Ground No, 6: That on the facts and circumstances of the case and in law, the Ld. AO has erred in not granting credit for tax deducted at source to the extent of Rs. 5,01,909.
7. Ground No. 7: That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A, 234B and 234C of the Act.” 2.1. Grounds taken by the assessee in Assessment Year 2021-22 are reproduced as under:
“On the facts and circumstances of the case and in law, the Appellant is preferring this appeal against an order dated 27 September 2024 passed by the Assessment Unit, Income Tax Department (hereinafter referred to as 'Ld. AO') under section 143(3) r.w.s. 144C(13) and 1448 of the Income-tax Act, 1961 ('the Act') in pursuance to the directions dated 20 September 2024 issued by the Hon'ble Dispute Resolution Panel ('DRP') under section 144C(5) of the Act, on the grounds set out herein: Ground No. 1 - Transfer Pricing ('TP') adjustment of INR 159,09,17,478 in respect of the international transaction pertaining to export of finished goods: 1.1 Whether on the facts and circumstances of the case and in law, the Transfer Pricing Officer ('Ld. TPO') and the Ld. AO, under the directions of the Hon'ble DRP, have erred in making a TP adjustment of INR 159,09,17,478 in respect of the international transaction pertaining to export of finished goods. 1.2 Whether on the facts and circumstances of the case and in law, the Ld. TPO and the Ld. AO, under the directions of the Hon'ble DRP, have erred in rejecting the Transfer Pricing ('TP') analysis undertaken by the Appellant concerning the impugned transaction. 1.3 Whether on the facts and circumstances of the case and in law, the Ld. TPO and the Ld. AO, under the directions of the Hon'ble DRP, have erred in applying Comparable Uncontrolled Price ('CUP') method to benchmark the impugned transaction with respect to the common finished goods sold to both Associated Enterprises ('AEs') and Non-AEs.
& 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 1.4 Whether on the facts and circumstances of the case and in law, the Ld. TPO and the Ld. AO, under the directions of the Hon'ble DRP, have erred in ignoring the differences on account of geographical market, volume of transactions, functional and risk profile of the parties involved and level of market while applying the CUP method. 1.5 Whether on the facts and circumstances of the case and in law, the Ld. TPO and the Ld. AO, under the directions of the Hon'ble DRP, have erred in applying two methods i.e., CUP and TNMM, at the same time to benchmark the impugned transaction. 1.6 Whether on the facts and circumstances of the case and in law, the Ld. TPO and the Ld. AO, under the directions of the Hon'ble DRP, have erred in ignoring the fact that once TNMM is applied for benchmarking the transaction of export of finished goods exclusively to the AEs and the same is accepted by the Ld. TPO, it inherently also subsumes the part of the export transaction on which adjustment has been proposed by the Ld. TPΟ. Ground No. 2-TP adjustment amounting to INR 13,46,82,100 in respect of the international transaction pertaining to payment of royalty for availing technical know-how. 2.1 Whether on the facts and circumstances of the case and in law, the Ld. TPO and the Ld. AO, under the directions of the Hon'ble DRP, have erred in making a TP adjustment of INR 13,46,82,100 in respect of the international transaction pertaining to payment. of royalty for availing technical know-how. 2.2 Whether on the facts and circumstances of the case and in law, the Ld. TPO and the Ld. AO, under the directions of the Hon'ble DRP, have erred in rejecting the Transfer Pricing ('TP') analysis undertaken by the Appellant concerning the impugned transaction. 2.3 Whether on the facts and circumstances of the case and in law, the Ld. TPO and the Ld. AO, under the directions of the Hon'ble DRP, have erred in disregarding the fact that the royalty is inextricably linked to the Appellant's manufacturing business operations and therefore, should have been benchmarked using TNMM as the most appropriate method and instead applying CUP method to benchmark the impugned international transaction. 2.4 Whether on the facts and circumstances of the case and in law, the Ld. TPO and the Ld. AO, under the directions of the Hon'ble DRP, have erred in: 2.4.1 Adopting a royalty agreement entered between related parties as a comparable instance, without appreciating that the same was neither comparable to the royalty agreement of the Appellant nor did provisions of Chapter X of the Act permit it to be used a comparable instance. 2.4.2 Inappropriately rejecting the royalty agreements selected by the Appellant in its TP Study as comparable instances. Ground No. 3-Denial of deduction of INR 6,16,548 claimed as per section 80G of the Act.
& 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 3.1 Whether on the facts and circumstances of the case and in law, the Ld. AO, under the directions of the Hon'ble DRP, has erred in denying a deduction of INR 6,16,548 claimed as per section 80G of the Act. Ground No. 4-Computation of book profits as per section 115JB of the Act and credit as per section 115JAA of the Act 4.1 Whether on the facts and circumstances of the case and in law, the Ld. AO, has erred in computing the book profit as per section 115JB of the Act and has erred in not granting appropriate credit under section 115JAA. Ground No. 5-Levy of interest under sections 234A and 234B of the Act 5.1 Whether on the facts and circumstances of the case and in law, the Ld. AO, has erred in levying interest under section 234A and 234B of the Act. Ground No. 6-Initiation of penalty proceedings 6.1 Whether on the facts and circumstances of the case and in law, the Ld. AO, has erred in initiating penalty proceedings under section 270A of the Act. Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant.” 2.2. Issues involved in both the appeals are common except for change in quantum of addition / disallowance and one ground no. 3 in Assessment Year 2021-22 for denial of deduction of Rs.6,16,548/- claimed u/s 80G of the Act. Owing to commonality of the issue and facts remaining the same, we take up both the appeals together for adjudication by passing this consolidated order. We take appeal for Assessment Year 2020-21 as the lead year to draw the facts and our observations and findings for this year shall apply mutatis mutandis to the respective ground nos. in appeal for Assessment Year 2021-22. We will take up the issue relating to ground no. 3 in Assessment Year 2021- 22 separately in this order.
Facts as culled out from the records are that assessee is engaged in the business of manufacturing and marketing of industrial flavours, fragrance and chemical specialities. Its Associated Enterprises (AE) are in the business of production and distribution of flavours and fragrances for use in products in the beauty, household, & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 pharmaceutical, food and drink industries. Details of international transactions entered into by the assessee with its AEs is tabulated as under: Sr. Nature of transaction Amount (in INR) Method applied by the No. Assessee 1 Import of raw materials 433,09,08,161 Transactional Net Margin Method (‘TNMM”) 2 Export of finished 655,50,14,588 TNMM products 3 Payment of Royalty 47,13,33,249 CUP Method 4 Payment of interest on 8,93,72,569 Other Method ECB Loan 5 Purchase of capital asset 1,10,44 Other Method 6 Recovery of expenses 26,87,591 Other Method 7 Reimbursement of 22,12,954 Other Method Expenses Total 1145,16,39,556
Assessee adopted entity level Transaction Net Margin Method (TNMM) for the following transaction i) Import of raw material - Rs. 363,42,84,582/- ii) Export of finished products - Rs. 724,55,73,023/-. Its Profit Level Indication (PLI) is Operating Profit to sales (OP/Sales) and Operating Profit to Operating Cost (OP/OC). Assessee is selected as the tested party. Assessee submitted its updated OP/OR margin in the course of assessment proceedings. It took 13 comparable for ALP benchmarking.
In respect of benchmarking of export of finished products, ld. Transfer Pricing Officer (TPO) noted that assessee had sold similar finished products to both AEs and non-AEs. Accordingly, show cause notice was issued as to why CUP method should not be applied as against TNMM. In response, assessee categorically pointed out that similar issue had come up in assessee’s own case in the preceding assessment years including A.Y. 2013-14, A.Y. 2014-15, A.Y. 2015-16, A.Y. 2017-18 which had reached before the Tribunal and the transfer pricing adjustment made in respect of export of finished products were deleted by holding that the prices at which finished products are sold to AEs cannot be compared with the prices at which such products are & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 sold to non-AEs on account of differences in geography, volume and functions performed and risk assumed by the parties. Assessee strongly contended that the transactions of export of finished product are squarely covered by the decisions of the co-ordinate bench in assessee’s own case as well as in the case of its sister concern Firmenich Aromatics India Pvt. Ltd. for A.Y. 2013-14 and 2014-15.
While making the upward adjustment in respect of transaction of export of finished goods, ld. TPO in the impugned order in para 4.5 noted that since the nature of transaction is same vis-à-vis previous year. He followed the consistency approach adopted in A.Y. 2017-18 and applied detailed reason mentioned in A.Y. 2017-18. Accordingly, he found the submission of assessee not acceptable. He thus, applied internal CUP and worked out a TP adjustment of Rs. 215,39,66,832/-.
In the proceedings before the ld. DRP, assessee reiterated its submissions substantiating the claim with documentary evidences. However, ld. DRP rejected the objection raised by the assessee who also resorted to the directions given by it in A.Y. 2017-18. It noted in para 6.3 that the facts of earlier years are similar to the facts of the year under consideration and therefore there is no reason for deviation from the decision of DRP on this issue in earlier years.
Before the Tribunal, ld. Counsel for the assessee furnished certain factual data showing details of quantitative differences in respect of sales made with AEs and non-AEs which is tabulate below:
& 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 Sr. no. Material Quantity Quantity TP adjustment AE Sales in TPO Description sold in sold in (Rs.) times of Order KGs to KGs to Non-AE Non-AEs AEs Sales 24 DAMASCENONE 635 57,515 145,90,30,026 91 TOTAL 59 NEUBUTENONE 100 47,945 29,98,39,217 471 ALPHA 107 WHITE HAZE N 4320 1,47,800 4,01,29,740 34 25 DAMASCONE 2550 58,705 3,86,86,194 23 ALPHA Total 183,76,85,177 8.1. From the above table, ld. Counsel for the assessee submitted that these comparative details account for almost 85% of the total sales made by the assessee during the year. For the 4 listed products, their significant difference in the quantity sold by the assessee to non-AEs that sold to AEs makes them not comparable.
8.2. Another set of data was furnished showing details of geographic difference in respect of sales made to AEs and non-AEs which is also tabulated below:
& 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 Sr. no. Material Non-AE AE Country TP Adjustment in TPO Description Country (Rs.) Order (non- SEZ unit) 24 DAMASCENONE China, Switzerland 145,90,30,026 TOTAL India 59 NEUBUTENONE India Switzerland 29,98,39,217 ALPHA 107 WHITE HAZE Qatar Nigeria 4,01,29,740 UN 25 DAMASCONE India Switzerland 3,86,86,194 ALPHA Total 183,76,85,177 8.3. From the above table, ld. Counsel for the assessee demonstrated in respect of four major products for which TP adjustment were made account for 85% of the total transactions to showcase the countries where non-AEs are located and the countries where the AEs are located, making the data incomparable.
8.4. He also submitted that the international transaction in relation to export of finished goods and its benchmarking is identical to the one in Assessment Years 2013-14, 2014-15, 2015-16, 2016-17 and 2017-18 and ld. TPO/Assessing Officer in the preceding Assessment Years have been making adjustment in respect of international transaction of export of finished goods by raising similar objection. In Assessment Year 2013-14, in appeal by the assessee in Firmenich Aromatics India (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 649 (Mum. Trib.) the Coordinate Bench vide order dated 23.07.2018 deleted the adjustment, holding that where the AE and non-AE are & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 located in different geographical location, the price at which products are sold to non-AEs cannot be used as CUP to determine Arm's Length Price (ALP) of the sales made to AEs. The Tribunal upheld TNMM method adopted by the assessee for benchmarking the international transaction of export of finished goods and deleted the adjustment. The Id. Authorized Representative for the assessee further submitted that in Assessment Year 2014-15 and 2015-16, the Tribunal in appeal of the assessee in Firmenich Aromatics (India) (P) Ltd. v. Asstt. CIT [2019] 106 taxmann.com 166 (Mum. Trib.) and Firmenich Aromatics Production India (P.) Ltd. v. ACIT [2021] 133 taxmann.com 98 (Mum. Trib.) ITA no. 7844/Mum/2019, took similar view as was taken in Assessment Year 2013-14 (supra).
8.5. For ground no. 1, assessee has assailed TP adjustment in relation to export of finished products, which has been benchmarked for arm’s length price (ALP) by applying TNMM. Contention of the assessee is that going through geographical and quantitative differences AS discussed above and other differences on account of level of market, function and risk profile, CUP cannot be applied.
We find that the issue contested in ground no. 1 has been dealt by the co-ordinate bench in assessee’s own case as noted in the above paragraphs with the latest order being for A.Y. 2017-18 in dated 10.03.2023, wherein decision is in favour of the assessee by placing reliance on the aforesaid orders. Relevant extract from the order in A.Y. 2017-18 on this issue is reproduced for adding reference: “8. In ground No. 1 of appeal, assessee has assailed TP adjustment in relation to export of finished products. The assessee has benchmarked the ALP of the transactions by applying TNMM. The contention of the assessee is that owing to geographical differences CUP cannot be applied. We find that the Co-ordinate Bench in assessee's own case in Firmenich Aromatics India (P.) Ltd. v. Dy. CIT [IT Appeal No. 7330 (Mum.) of 2017, dated 22-2-2019] for Assessment Year & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 2013-14 vide order dated 22/02/2019 decided similar controversy. The Bench after placing reliance on the decision of assessee's sister concern viz. Firmenich Aromaticx Production (India) (P.) Lid. v. ITO [2018] 100 taxmann.com 279 (Mum. Trib.) in decided on 13-11-2018 held as under:- "7. We have considered rival submissions and perused material on record. As far as the primary facts are concerned, there is no dispute that out of the sales turnover of finished products sold to the AE amounting to 10,13,28,211, benchmarked by the assessee applying TNMM, the Transfer Pricing Officer has accepted a major part of the sales of finished products to the AEs to be at arm's length. He has only raised objections in respect of the turnover relating to specific finished products sold both to AEs and non-AEs. Upon verifying the price charged for such products to AEs and non-AEs, he has observed that the price charged to non-AEs is more than the price charged to AEs. Thus, he has made an upward adjustment of 73,04,480, to the price charged to AEs for sale of finished products. On a perusal of Annexure-1 to the order passed by the Transfer Pricing Officer, wherein, he has made comparative analysis of price charged to AEs and non-AEs for common products, it is noticed that he has short listed eight common products which were sold both to AEs and non- AEs. On a critical examination of the details mentioned in Annexure- 1, it is noticed that except one non-AE in U.A.E., all other non-AEs are located in India. Whereas, the AEs are located outside India. Even, in respect of price charged to the solitary non-AE situated outside India, the Transfer Pricing Officer has compared it to the price charged for similar product to an AE in India. Therefore, in strict sense of the term, this particular sale of product Lemon cello to the AE in India cannot be termed as an international transaction. Be that as it may, from a perusal of Annexure-1, it becomes factually clear that sale of similar products made to both AEs and non-AEs are in different geographical locations. While the AEs are located in foreign countries the non-AEs are located in India. Therefore, the price charged to non-AEs in India cannot be used as a CUP for determining the arm's length price of the sales of finished products made to overseas AEs. One of the conditions of rule-10B(2) of the 1.T. Rules, 1962, is, while considering the issue of comparability with an uncontrolled transaction, the conditions prevailing in the markets in which the respective parties to the transaction operate including the geographical location along with other factors have to be examined. Therefore, geographical location of the party to whom sales were made is a crucial factor to be weighed in while making comparability analysis. Undisputedly, in the facts of the present appeal, the Transfer Pricing Officer has compared the price charged to non-AEs located in India with the price charged to AEs in foreign countries. Therefore, the AEs and non- AEs being situated in different geographical locations, there may be various factors/reasons which could have influenced the price charged by the assessee to the AEs and non-AEs. Hence, the price charged to non-AEs 8. ………………………………………………………………………………………… …… 9. According to us, the price at which finished products were sold to AEs are not comparable with prices at which they have been sold to Non-AEs for the below mentioned reasons:- i). Differences in volume of both the & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 transactions - It is general knowledge that volumes commands the prices. Purchase or sale of lower quantities are expensive, this is usually because of cost of transportation for deliveries and administration cost involved in handling smaller deliveries. The assessee is engaged in manufacturing of aromatic ingredients, natural and synthetic perfumery, flavoring and derivatives. Specific and majority of the products manufactured are sold to the group companies. However, in the circumstances where the group entities do not want a product then it is sold in the market at a price best negotiated by the assessee. In the table below, the assessee has provided the details of the quantitative differences in respect of Sales made to the AE and the Non-AE. Sl. No. Material Quantity Quantity Addition Value AE sales in TPO Description in KG sold in KG sold (INR) times of order to Non to AE’S Non AE AE’s Sales 59 Neobutenone 25 32,343 490,680,563 1,294 Alpha 56 Damascenone 25 19,734 490,873,437 789 Total 45 Great Heart 28,080 303,840 95,340,394 11 55 Aldehyde 245 38,528 96,920,377 157 Supra 57 Damascone 2,175 33,610 84,185,258 15 Alpha 60 Norlimbanol 250 10,825 73,314,292 43 1,331,314,321 Thus, we find from the facts of the case that the quantities sold to Non- AEs is significantly lower as compared with sales made to AEs. In fact the difference in quantities is to the extent of 1,294 times to 11 times. It is noteworthy that the CUP analysis of common products sold to AE and Non-AE,one of the example taken from the facts of the case is that w.r.t. product "Damascenone Total", the assessee had sold 25 kg to a Non-AE at the rate of INR 38,000 per kg and sold 1,260 kg and 16,299 kg at the rate of INR 9,800 and INR 9,664 respectively to its AE namely, Firmenich Aromatics (China) Company Limited and Firmenich SA. Similarly, the assessee has sold 50 kg of the same product at the rate of INR 36,408 to other AE. Thus, TPO erred in comparing small; quantities with large quantities, thereby ignoring the volume difference. We also noted that when the quantity sold to a Non-AE is higher than that sold to an AE, then the price charged from the AE is more than non-AE. The assessee also explained that this would show that the comparison done by the TPO is wholly erroneous." Thereafter, the Tribunal while deciding assessee's appeal for Assessment Years 2014-15 and 2015-16 deleted the adjustment by following the decision rendered in Assessment Year 2013-14 (supra). No contrary material has been placed before us to distinguish the findings of the Co-ordinate Bench in assessee's own case on the identical issue in the preceding Assessment Years. Respectfully following the decision of the Co-ordinate Bench ground No. 1 of the appeal is allowed”
& 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 10. Before us, nothing contrary has been brought on record by the revenue to distinguish the findings of the co-ordinate bench in the preceding years which have been decided in assessee’s own case. There being no change in factual matrix and applicable law, respectfully following the decisions in the preceding years, ground no. 1 raised by the assessee is allowed.
11. In respect of ground no.2, it is noted that assessee has licensed technical know-how by Fermenich SA, a Swiss based associate of the Fermenich group for the purpose of carrying out manufacturing activity. Under the license agreement, it gives nonexclusive and nontransferable rights to the assessee to use the intellectual property (IP) in order to manufacture, market, sale, distribute the products for which royalty is charged. The rate of royalty is 5% for domestic sale and 8% for export sales. Assessee has benchmarked the international transaction of royalty by selecting ‘Other Method’ as the most appropriate method by identifying comparable royalty agreement. Assessee while benchmarking had arrived that a set of comparable instances with the range of 6.33% to 10% with the median of 6.42%. Based on this, it considered the said international transaction to be at ALP. Further, assessee corroborated its benchmarking analysis with TNMM.
11.2. On this issue also ld. TPO by adopting the methodology followed in earlier years, applied CUP method and determined the ALP @ 4% which is based on the agreement between Edward H. Hall and Uplift Nutrition Inc. This resulted into an upward TP adjustment of Rs. 53,93,97,497/-. According to the assessee, selected royalty agreement by the ld. TPO is between related/connected persons. Hence, it does not qualify the basic criteria of being a comparable uncontrolled transaction for applying CUP method. Ld. DRP rejected the objection raised by the
12. Before us, ld. Counsel for the assessee reiterated that the issue had come up before the co-ordinate bench in assessee’s own case for A.Y. 2015-16, A.Y. 2017-18 and in case of its associate concern which is now merged with the assessee for A.Y. 2012-13, A.Y. 2013-14 and A.Y. 2014-15. In all these decisions, TP adjustment in respect of international transaction of payment of royalty was deleted by holding that CUP is not the most appropriate method for benchmarking the said transaction. Ld. Counsel referred to the observation of co-ordinate bench of ITAT in assessee’s own case for A.Y. 2017-18 (supra). Relevant paragraphs from the same are extracted below: “4.1 In respect of adjustment in relation to payment of royalty for availing technical know-how, the Id. Authorized Representative for the assessee submits that in Assessment Years 2012-13 and 2013-14 the TPO disallowed the payment of royalty on adhoc basis. The TPO thereafter, benchmarked the transaction of payment of royalty on the basis of certain agreements found during the search, and applied CUP. The matter travelled to the Tribunal. The Tribunal in for Assessment Year 2012-13 deleted the adjustment holding: (a) The TPO was duty bound to determine the ALP by applying any of the prescribed method. The determination of ALP on an adhoc basis is unsustainable; (b) the CUP could not have been applied as the parties to the agreement( selected by the TPO for benchmarking the transaction) were located outside India. In other words, the Tribunal rejected CUP on account of geographical differences; (c) The TPO in 2010-11 and 2011-12 accepted payment of royalty to be at arm's length which was benchmarked using TNMM after aggregating it with other international transaction. 4.2 In Assessment Years 2014-15 and 2015-16 the TPO applied CUP to benchmark the transaction. The Tribunal in for Assessment Year 2014-15 and ITA No. 7844/Mum/2019 for Assessment Year 2015-16 followed the order for the preceding Assessment Years i.e. Assessment Year 2012-13 and 2013-14. The Id. Authorized Representative for the assessee submits that the TPO in the impugned assessment year has applied CUP and corroborated it with TNMM for benchmarking the international transaction of payment of royalty. He further pointed that the TPO in the impugned assessment year has applied CUP and relied on the same agreement as was relevant to Assessment Year 2014-15 and Assessment Year 2015-16.
9. In ground No. 2 of appeal, the assessee has assailed TP adjustment in relation to payment of royalty for availing technical know-how, The assessee has paid royalty of Rs. 30,35,02,137/- for the use of technical know-how to its & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 AE Firmenich SA Switzerland @ 5% on local sale and 8% on export sale, Royalty has been paid by the assessee for the use of technical know-how of AE's secret formula, process, manufacturing procedure, etc. The TPO following the order for Assessment Year 2016-17 applied CUP and determined the rate of royalty at 4%. The TPO for applying CUP adopted comparable royalty rate based on the royalty agreement of Edward H. Hall and Uplift Nutrition Inc. The objection of assessee against use of said comparable by the TPO are: (i) Both the parties to agreement are located outside India and hence, are not governed by India Rules and Regulations; (ii) The Licensor is an individual; (iii) The Intellectual Property (IP) covered in comparable agreement differs from the IP covered in assessee's Technical Licence Agreement. The comparable agreement is only for 'patent', whereas the agreement in the case of assessee is for granting licence to IP such as secret formulae, trade secrets, etc. along with patents and copy rights; (iv) The comparables are functionally different.”
On the above, nothing contrary has been brought on record to distinguish the findings arrived at by the co-ordinate bench in preceding years in assessee’s own case. Further, it is not in dispute that the royalty is paid to AE in accordance with the same technical assistance and know-how agreement as was in the preceding assessment years. Accordingly, there being no change in the factual matrix and applicable law in the present case, following the decision of co-ordinate bench in assessee’s own case for the preceding years, ground no. 2 taken by the assessee is allowed.
Ground no. 3 is in respect error committed in the computation sheet annexed with the final assessment order, whereby inadvertently TP adjustments have been added to the book profit u/s. 115JB of the Act. For this, ld. Counsel of the assessee referred to the computation sheet placed on record. It is noted that the final assessment order records the correct finding. However, inadvertently an error crept in the computation sheet while working out the book profit u/s. 115JB wherein TP adjustments are added. Considering the fact on record, we & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 direct the AO to rectify the computation sheet annexed to the impugned final assessment order in respect of addition of TP adjustment while working out the book profits as per the provision of section 115JB of the Act so as to be in synch with the final assessment order passed. Accordingly, ground no. 3 is allowed.
Ground nos. 5 and 6 are in respect of non-granting of credit u/s. 115JAA and short granting of credit for TDS claimed by the assessee in its return. These claims are subject matter of verification and examination of the relevant records by the ld. AO. Accordingly, we direct the ld. AO to grant appropriate credit both in respect of section 115JAA and TDS, after due verification of records and as available to the assessee. To this extent, ground nos. 5 and 6 are remitted back to the file of ld. AO. Accordingly, the same are allowed for statistical purposes.
Ground nos. 4 and 7 are consequential in nature and therefore do not need separate adjudication except in respect of interest charged u/s. 234C which is relevant to ground no. 7, whereby the interest is chargeable on the returned income as contained in the provisions of section 234C of the Act. To this extent, ld. AO is directed to compute the chargeability of interest u/s 234C on the returned income after taking into account the taxes paid by the assessee as per the returned income. Accordingly, ground no. 7 to this extent is partly allowed.
In appeal for Assessment Year 2021-22, grounds raised are identical to those for Assessment Year 2020-21 except for change in their quantum, numbering of the grounds and Ground no. 3 which is specific to this Assessment Year 2021-22. There being no change in factual matrix and applicable law and nothing brought on record to distinguish the applicability of jurisprudence available in assessee’s & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 own case, our observations and findings in Assessment Year 2020-21 applies mutatis mutandis to relevant grounds of appeal in Assessment Year 2021-22.
18. We now take up ground no. 3 in appeal for Assessment Year 2021- 22 which is in respect of disallowance of claim of Rs. 6,16,548/- u/s. 80G made out of Corporate Social Responsibility fund (CSR). Claim of assessee is that it made three donations of Rs. 7,10,000/-, Rs. 5,16,906/- and Rs. 7,000/- to discharge its CSR obligation under the Companies Act, 2013. Relevant documentary evidences for these donations are placed on record. These were claimed as a deduction u/s. 80G which according to the ld. AO is not permissible. According to the assessee, it is not barred from claiming deduction u/s. 80G in respect of donation made to the approved institutions, even though the same were made in discharge of its CSR obligation. The issue raised in this ground is no longer res integra in view of long line of decisions of co- ordinate bench, whereby it has been allowed in favour of the assessee. Some of the judicial precedents are listed below: a) L & T Finance Ltd. v. DCIT [2024] 167 taxmann.com 503 (Kolkata - Trib.) b) Advik Hi Tech (P.) Ltd. v. DCIT [2024] 168 taxmann.com 587 (Pune - Trib.) c) Optum Global Solutions (India) (P.) Ltd. v. DCIT [2023] 154 taxmann.com 651 (Hyderabad - Trib.) d) Power Mech Projects Ltd. vs. DCIT [2023] 156 taxmann.com 575 (Hyderabad - Trib.) e) Alubound Dacs India (P.) Ltd. v. DCIT [2024] 163 taxmann.com 536 (Mumbai - Trib.) f) FDC Ltd. v. PCIT [2023] 157 taxmann.com 387 (Mumbai - Trib.)
& 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 18.1. We refer to the decision of co-ordinate bench of ITAT Mumbai in the case of ACIT vs. Blue Dart Express Ltd. in where the Tribunal observed as under: “9. We have heard both the parties and also perused the relevant material referred to before us. First of all from the perusal of the re-assessment order which is the subject matter of revision u/s.263 by the ld. PCIT, we find that this was one of the ground for reopening and ld. AO has raised specific query as noted above on exactly same issue. The assessee has given its detailed reply and after examining those replies, the ld. AO has allowed the deduction u/s.80G holding that assessee has already disallowed CSR expenses u/s.37(1), and there is no bar for claiming deduction u/s.80G unless the same is not in accordance with the provision of the Section 80G and there is no issue of mutual exclusiveness of the claim found in this regard. Ld. PCIT has not brought on record any law or judicial precedence that such an observation and finding of the ld. AO is incorrect in law. Once the ld. AO has taken a possible view and there is no contrary law, then to take a different view in a revisionary jurisdiction u/s.263, cannot be held that the order of the ld. AO is erroneous and prejudicial to the interest of the Revenue. There is no case of invoking Explanation 2 to Section 263 which ld. PCIT has done, because ld. AO has made his enquiry and verification on the same issue. Ld. PCIT cannot cancel the assessment order to re-examine the same issue without finding any defect in such order that how the claim made u/s.80G is unsustainable in law.
On merits also, we find that view of ld. AO is correct in law. Claiming a deduction from computation of business income as provided from sections 28 to 44DB is different from claiming a deduction under chapter VIA of the Act which is allowed from Total Income. As per Explanation 2 to Section 37, CSR expenditure is not allowable as deduction while computing the business income under the provision of Section 28-44DB, whereas deduction u/s.80G is allowed while computing the total income under Chapter VIA. There is no pre-condition that claim for deduction u/s.80G on a donation should be voluntary. It is independent of computation of business income as it is allowed from Gross Total Income. The assessee had disallowed the CSR expenses while computing business income. Further, there is no dispute that the assessee has filed complete details of donation and also filed the certificate u/s.80G which was enclosed before the AO. Section 80G (1) of the Act provides that in computing total income of the assessee, they shall be deducted in accordance with the provision of Section, such sum paid by the assessee in the previous year as a donation. Deduction under Chapter VIA provides deduction from the gross total income which is computed after making necessary allowances / disallowances in accordance with Section 28-44BB of the Act including Explanation to Section 37(1). Thus, Section 37(1) and Section 80G of the Act are independent and the principles governing what is not allowable u/s. 37(1) have been provided in the section itself. Even in section 80G also, what is not allowable has also been provided under the Act. For instance, Section 80G specifically mentions two clauses, viz., section 800(2)(a)(iihk) and (iiihl), i.e., contributions towards „Swacha Bharat Kosh‟ and „Clean Ganga Fund‟, where donation in the nature of CSR Expenditure is not allowable as deduction under section 80G of the Act. Therefore, the disallowances for deduction under section 80G vis-à-vis CSR can be restricted to contributions made to these Funds mentioned in Section 800(2)(a)(iiihk) and (iiihl) only. It is an undisputed fact that the assessee has not & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 claimed any deduction against the aforesaid clauses of 80G (2)(a) of the Act and as such entire donation claimed by the assessee is allowable u/s 80G. The Ministry of Corporate Affairs ("MCA") has issued "FAQs" through General circular no. 01/2016 dated January 12, 2016 (FAQ No. 6) and has clarified on the issue as follows: "Question No. 6: What tax benefits can be availed under CSR? Answer: No specific tax exemptions have been extended to CSR expenditure per se. The Finance Act, 2014 also clarifies that expenditure on CSR does not form part of business expenditure. While no specific tax exemptions have been extended to expenditure incurred on CSR, spending on several activities like Prime Minister's Relief Fund, scientific research, rural development projects, skill development projects, agriculture extension projects etc, which fund place in Schedule VII, already enjoys exemptions under different sections of the Income-tax Act, 1961."
This clarification being issued by the Ministry of Corporate Affairs, Government of India clarifies that donation covered under CSR Expenses which not are eligible for the deduction under section 80G of the Income-tax Act, 1961, but are allowed under different sections. Ergo, there is nothing that if any expenditure is disallowable u/s 37 the same cannot be allowed under other provisions of Act, if the conditions of allowability are satisfied. Thus, allowing the claim of deduction u/s.80G by the ld. AO cannot be held to be unsustainable in law or amounts to erroneous and prejudicial to the interest of the Revenue. Thus order of the Ld. PCIT is reversed on this point.
Thus, we hold that ld. PCIT is not correct in law in cancelling the assessment order by the ld. AO on this issue. Accordingly, the order of the ld. PCIT is quashed. Consequently, the appeal of the assessee is allowed.
18.2. Also, in the case of ACIT vs. Sikka Ports and Terminals Ltd. in on similar issue, it was held as under:- “The assessee during the year disallowed a sum of Rs.33.85 crores under section 37 towards the CSR Spend in compliance with section 135 of the Companies Act. Since the institutions to which the said amounts are given are registered under section 80G, the assessee claimed 50 per cent i.e. Rs.16.93 crores of the same as deduction. The argument of the revenue is that the payment are made to comply with the mandate under the Companies Act, and therefore it cannot be treated as donations which are "voluntary" payments. The further argument of the revenue is that when the statute has denied the direct claim of the CSR spend under section 37, the assessee claiming the deduction indirectly under section 80G is against the intention of the legislature and cannot be allowed. The assessee's contention is that there is no restriction under section 80G to the effect that the contribution should be voluntary and that the CSR spend is an application of income which is eligible for deduction from the gross total income of the assessee as per the provisions of section 80G. Now coming to the intention of legislature while amending the provisions of ▪ section 37 whereby the CSR spend are not allowed to be claimed as a deduction under the said section. Finance (No.2) Act, 2014 brought in the amendment to section 37 by inserting Explanation 2 to the said section with effect from 1-4-2015 & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 The "Explanatory Notes to the provisions of Finance (No.2) Act, 2014" issued ▪ by the Central Board of Direct Taxes vide its Circular No.01/2015 dated 21- 1-2015 explaining the aforesaid amendment, clarifies that the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold and that if such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure. However, it is pertinent to note that though, the expenditure incurred towards CSRs is not an expenditure incurred for the purpose of business, if the spend is of the nature described in sections 30 to 36 deduction shall be allowed under those sections subject to fulfilment of conditions, specified therein. For example if the contribution is made to a scientific research association, or to a university or to a college or other institution to be used for scientific research etc., which are approved under section 35 as part of CSR spending then deduction can be allowed subject to the fulfilment of conditions prescribed under section 35. This explanatory note though self-contradictory i.e. denying deduction under section 37 but allowing the assessee to claim deduction under sections 30 to 36, also makes it clear that there is no bar regarding the admissibility of CSR expenditure under any other provision of the Act, except under section 37(1). In other words, the intention of the legislature is not to restrict the right of the assessee to claim deduction towards the CSR spend if the payment is otherwise allowable under a specific provision of the Act. Further wherever the intention is to restrict the claim of deduction under any other provisions of the Act the same is explicitly provided for to that effect by the legislature. This view is supported by the Explanatory Memorandum to Finance Bill 2015 which brought in the specific restriction for claiming deduction under section 80G towards the CSR spend towards donation to Swachh Bharat Kosh and Clean Ganga Fund. Therefore, the contention that the CSR spend being claimed as a deduction under section 80G is against the intention of the legislature which restricts the same to be claimed as a deduction under section 37 cannot be appreciated. The next issue is whether the impugned payments are otherwise eligible for ▪ deduction under section 80G. It has already been established that the payments made by the assessee are donations and therefore if the other conditions for the deduction under section 80G are fulfilled then there should not be any restriction for the assessee to claim the deduction. Before holding so the contention of the revenue that the payments made towards CSR spend are monitored and controlled by the assessee and are not voluntary is addressed. In this regard it is relevant to note that though there is a statutory obligation of CSR expenditure under section 135 of Companies Act 2013, there are many prescribed modes and activities under Schedule VII of the Companies Act for spending the CSR expenditure, (the list is not exhaustive but inclusive). Further neither section 135 of the Companies Act nor Schedule VII to the Companies Act nor the CSR Rules, mandates donations to the institutes/funds prescribed under section 80G. Therefore, there is merit in the submission of the assessee that though the quantum of CSR spend is mandatory there is no mandate on how amount is to be spent or to whom the contribution is to be made. Accordingly the act of the assessee to choose to Reliance Foundation and Shyam Kothari Foundation which are eligible to accept donations under section 80G is voluntary and is not mandated by section 135 of the Companies Act 2013. Further from the & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 perusal of CSR Rules as applicable in assessee's case, it is noticed that the monitoring of the CSR spend is to ensure that the same is as per the CSR policy of the company and it does not provide for monitoring the utilization of the funds by the third party donees. In any case the donations made for a specific cause does not result in denial of deduction which is otherwise allowable as per the provisions of section 80G. ▪ One more point that needs to be considered while deciding the deduction under section 80G for CSR spend is that the restriction on the allowability of the said spend as provided in Explanation 2 to section 37 is for computing the business income under the provision of section 28-44DB whereas the deduction under section 80G is claimed under Chapter VIA i.e. after computing the Gross Total Income. The provisions of section 80G does not impose any condition that the contribution should be voluntary and therefore when the CSR spend is evaluated independently under the provisions of the Act, it is viewed that there is no restriction for the assessee to claim deduction under section 80G provided the CSR spend meets the conditions specified therein. In other words, the provisions of section 37 is computation provision whereas section 80G is a beneficial provision which allows deduction towards payments made by the assessee for charitable purposes and therefore these two sections are independent of each other. For example, when a company which is not required to comply with the provisions of section 135 of the Companies Act 2013 makes a donation or a company makes donations in excess of 2 per cent even then the payment may get disallowed under section 37 but in that case the revenue would not impose any restriction to evaluate the payment for claiming deduction under section 80G. If the same analogy is applied to the CSR spend it is viewed that the assessee should be able to claim deduction under section 80G if the other conditions are fulfilled. Denying the claim for the reason that there is a specific mention under section 37 for disallowance and that the payments are made in compliance with section 135 of the Companies Act is not legally tenable unless there is an explicit provision for e.g. contributions towards „Swacha Bharat Kosh‟ and „Clean Ganga Fund‟. ▪ In view these discussions and considering the judicial precedence in this regard, it is viewed that there is no infirmity in the order of the Commissioner (Appeals) in allowing the deduction under section 80G to the assessee towards donations made to Reliance Foundation and Shyam Kothari Foundation. Accordingly the grounds raised by the revenue are dismissed.”
Considering the facts on record where there is no dispute on making of donations by the assessee except that it has been made out of CSR fund, we find that there is no statutory bar in claiming the deduction u/s. 80G. Donations made by the assessee do not fall under specified exception and therefore assessee is entitled to deduction claimed u/s. 80G. There is no embargo in claiming such expenditure as a deduction under Chapter VI-A, including section 80G, provided the & 6100/Mum/2024 Firmenich Aromatics Production (India) Pvt. Ltd. A.Y. 2020-21 and 2021-22 conditions stipulated therein are satisfied. Contention of the ld. CIT(A) DR that such donations lack voluntariness solely because they form part of CSR obligation is misconceived in law. The choice of recipient of such CSR donations is always with the assessee alone. As long as the donations are made to institutions approved under section 80G and all the requisite documentary compliances are in place, the deduction cannot be denied merely because the payment also satisfies the CSR requirement under the Companies Act. Accordingly, disallowance made by the ld. Assessing Officer on this count is deleted. Ground no. 3 raised by the assessee is allowed.
In the result, both the appeals of the assessee are partly allowed.