CHEMINOVA INDIA LTD,MUMBAI vs. ITO 14(1)(3), MUMBAI

ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2012-13. The appeal is directed against the order dated 24.01.2017 passed by the Income Tax Officer, 14(1)(3), Mumbai( hereinafter the ‘AO’) u/s 143(3) 144C(13) of the Income Tax Act 1961, (the ‘Act’).

On the facts and in the circumstances of the case as well as in law, the AO/ Transfer Pricing officer – 1(3)(1), (‘TPO’)

Cheminova India Limited 1. erred in making a transfer pricing adjustment of Rs.4,28,76,946 to the total income of the Appellant on account of international transactions pertaining to manufacturing activity; 2. erred in rejecting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('Rules'), for determination of the arm's length price of the impugned international transactions of manufacturing activity. 3. erred in rejecting the use of three year average data of comparables and determining the arm's length operating margin for such activity using the operating margins earned by the comparables for only financial year ('FY") 2011-12. 4. erred in rejecting following companies merely because they have incurred losses in current year disregarding the fact that such companies are not a persistent loss making company and cannot be excluded as comparable.

2. Aksharchem (India) Ltd; and 3. Bhageria Dyechem Ltd. 5. erred in rejecting Sabero Organics Gujarat Ltd. on the ground that there was a merger during the year under consideration and thereby failed to appreciate that there was only share purchase agreement of shares of Sabero Organics Gujarat Ltd. which does not have implications on profitability of the company. 6. erred in rejecting Sabero Organics Gujarat Ltd. on the ground that the said comparable is not functionally comparable to the Appellant, 7. erred in rejecting only loss making comparables and retaining all profit/ super profit making comparable and thereby doing cherry picking in rejecting comparables. 8. erred in rejecting the revised comparability analysis consisting of only agrochemical companies which were more appropriate and giving more accurate comparability result;

Cheminova India Limited 9. erred in not appreciating that original comparability analysis was of broad level consisting of comparables which were not accurately comparable to the business activities of the Appellant. 10. erred in rejecting the revised comparability analysis submitted by the Appellant at DRP stage, without appreciating that comparability analysis can be submitted during the DRP stage in order to eliminate non-comparable companies which are not in the same business activities of the Appellant; 11. without prejudice to the above, erred in considering following companies as a comparable, without appreciating that the companies were engaged in pharmaceutical activities as against the agrochemical business of the appellant: • Aarti Drugs Ltd; • Avon Organics Ltd; • Divi's Laboratories Ltd; • Kopran Ltd; • Kothari Phytochemicals & Inds. Ltd; • Nectar Lifesciences Ltd. • Sai life science Ltd. • Samrat Pharmachem Ltd. • Sterling Biotech Ltd; • Sunil Healthcare Ltd. and • NGL Fine Chem Ltd. 12. erred in not granting the benefit of working capital adjustment, wherein lower authorities failed to appreciate the fact that detailed calculation of working capital adjustment along with the need and justification for carrying out such working capital adjustment was submitted by the Appellant. 13. erred in treating an amount of Rs.5,54,19,490/- received from an AE as exceptional income in nature and thereby reducing the same from operating income and thereby computing the operating margin of the appellant at 8.51 % as against 9.38 % on cost.

Cheminova India Limited 14. erred in not granting risk and other economic adjustments based on functions, assets and risk analysis, 15. erred in not providing the benefit of the variation/ reduction of 5 % from the value of the international transaction as provided in proviso to section 92C(2) of the Act, while determining the arm's length price; 16. erred in initiating penalty proceedings under section 271(1)(c) of the Act for concealment of income and furnishing of inaccurate particulars of income, without appreciating the facts and circumstances of the case.

During the course of assessment proceedings, the Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act in order to determine the arm’s length price in relation to the international transactions with its Associated Enterprises (‘AE’). The TPO vide order dated 29.01.2016 passed u/s 92CA(3) made an adjustment of Rs.5,08,08,861/- to the international transactions of the appellant with its AEs. The adjustment was proposed by the TPO on account of international transactions pertaining to its manufacturing activity i.e. import of raw materials and export of finished goods. The TPO rejected certain comparable companies selected by the appellant and accordingly made the transfer pricing adjustment. The AO, after considering certain corporate adjustments and after incorporating transfer

Cheminova India Limited 14.03.2016 u/s 144C(1) r.w.s. 143(3) of the Act. Aggrieved by the draft order, the appellant filed its objections against the proposed variations made by the AO before the Dispute Resolution Panel (DRP). The DRP granted relief on certain objections and disposed off the balance objections filed by the appellant. Based on the directions of the DRP, the AO passed final assessment order dated 24.01.2017 u/s 144C(13) r.w.s. 143(3) making certain allowances/disallowances to the total income of the appellant.

In the instant case, we are concerned with transfer pricing adjustment in respect of the international transactions pertaining to manufacturing activity i.e. import of raw material and export of finished goods of Rs.4,28,76,946/- made by the TPO and affirmed by the DRP.

During the year under consideration, the appellant entered into the following international transactions with its AEs :

Sr. No. Nature of transaction Transaction value (in Rs.) 1. Import of raw material 3,26,50,998/- 2. Export of manufactured goods 68,54,67,996/- The transaction of import of raw material and export of manufactured goods have been benchmarked under a combined transaction approach as adopted in the transfer pricing study. The appellant has adopted Transactional Net Margin Method (TNMM) to be the most appropriate method for this international transaction. The operating margin earned by the appellant with respect to the manufacturing segment is 9.38%. For the companies identified as comparables, the weighted average of operating profits earned on operating costs were computed using the financial data

Cheminova India Limited 2009-10, 2010-11 & 2011-12 ( to the extent available) which was available to the appellant at the time of complying with the transfer pricing documentation requirements.

Based on the search criteria/filters adopted by the appellant, a total of 39 companies were considered as comparable with the appellant. The appellant had used operating profit/operating cost as the profit level indicator (‘PLI’).

However, the TPO did not accept the economic analysis of the appellant and rejected 3 comparable. Furthermore, the TPO rejected the use of three year average data of the comparable and determined ALP margin using single year operating margins of only previous year 2011-12.

Also the TPO rejected the working capital adjustment filed by the appellant on the reason that no documentary evidence was filed to show how the same has been worked out.

The appellant had recovered total amount of Rs.12,67,58,215/- for recovery of its fixed costs from the parent company Cheminova A/S Denmark. Out of the total recovery, the TPO considered Rs.5,54,19,490/- as non- operating on the ground that the same was on account of recovery of costs pertaining to earlier years. The TPO reduced the same from operating income of the appellant for AY 2012-13 and computed the margin at 8.51%. Accordingly, the TPO considered the unadjusted margins of the comparable companies and revised margin computation of the appellant and thus made an adjustment of Rs.4,28,76,946/-. The AO by following the direction of the DRP made an adjustment of Rs.4,28,76,946/- in the order dated 24.01.2017 passed u/s 143(3) r.w.s. 144C(13) of the Act.

It is the contentions of the Ld. counsel that the said three companies are not consistently loss making companies and in fact these three companies have earned profit during the subsequent FY 2012-13 and FY 2013-14. The details of its operating profit for the subsequent years as filed by the Ld. counsel are produced below:

Name of the Company FY 2009-10 FY 2010-11 FY 2011-12 FY 2012-13 FY 2013-14 M/s Sabero Organics 18.42% 6.94% -10.11% 8.10% 9.90% Gujarat Ltd. M/s Aksharchem 2.19% 1.68% -6.39% 5.12% 27.56% (India) Ltd. M/s Bhageria Dyechem 3.39% 4.72% -1.23% 2.20% 6.50% Ltd. Relying on the above data, the Ld. counsel submits that the aforementioned entities have earned a profit in FYs 2009-10, 2010-11, 2012- 13 and 2013-14 and incurred losses only in FY 2011-12. Stating that the word ‘Net Profit Margin’ in Rule 10B(1)(e) of Rules includes loss within its purview and hence loss reflected in net profit margin in comparable company reflects the arm’s length nature of price of goods or service transferred in such uncontrolled transaction, reliance is placed by him on the decision in Welspun

Cheminova India Limited Zucchi Textiles Ltd. [TS-9-HC-2017(BOM)-TP], Chryscapital Investment Advisors (India) Pvt. Ltd. v. DCIT [(2015) 376 ITR 0183 (Delhi)], DCIT v. Quark Systems Private Limited [132 TTJ (Chd) (SB) (2010) affirmed by Punjab and Haryana High Court in 62 DTR 0182], Actavis Pharma Development Centre Private Limited v. DCIT [ITA No. 2224/Mum/2017, dated 9 March 2018], Goldman Sachs (I) Securities Pvt. Ltd. v. ACIT [ITA No. 7724/Mum/2011, 23 January 2013], Yum Restaurants v. ACIT [ITA Nos. 3796 & 4154 (Delhi) of 2006, 31 May 2011], ASB International (P.) Ltd. v. ACIT [IT Appeal (TP) Nos. 1978 & 2137 (Mum) of 2016], Nomura Research Institute Financial Tech (I) (P.) Ltd. v. DCIT [IT Appeal Nos. 284 and 485 (Kol.) of 2016], QAD India (P.) Ltd. v. DCIT [IT Appeal No. 1685 (Mum) of 2013].

Relying on the above decisions, the Ld. counsel explains that Sabero Organics Gujarat Ltd., Aksharchem (India) Ltd. and Bhageria Dyechem Ltd. should not be rejected as comparable. Further, it is explained by him that the AO/TPO erred in rejecting Sabero Organics Gujarat Ltd. as merged entity and not functionally comparable. The reason given by him is that the new company Coromandel International Ltd. has merely entered into share purchase agreement with Sabero Organics Gujarat Ltd. and thus it can be held that there was merely share purchase agreement that took place during the year under consideration and there was no event of merger as mentioned by the TPO.

To sum up, it is the contention of the Ld. counsel that if the above three loss making comparables rejected by the TPO are included, then the ALP of comparable companies would be 13.14%, which would fall within +/-5% range, irrespective of fact that the appellant’s margin is considered at 8.51%

Cheminova India Limited (as per TPO) or 9.38% (as per TP study). Alternatively, it is stated that if the recovery of fixed costs is considered as operating in nature, based on the submission made by the appellant, the operating margin of the appellant would be 9.38% as against 8.51% computed by the TPO.

“5.9.1 So far as rejection of Aksharchem (India) Ltd., Bhageria Dye Chem Ltd. and Sabero Organics Gujarat Ltd. by the TPO is concerned, it is seen from the order of the TPO that the assessee had himself applied filter of PBIT>0 in its transfer pricing study for selection of comparables. Therefore, elimination of these comparables by the TPO is upheld. Moreover, so far as Sabero Organics Gujarat Ltd. is concerned, on page 8 of the director's report, following has been mentioned: —

The year under review has been a difficult period in terms of sustaining production plans. The company had to contend with production capacity restraints all through the year under a continuing judicial ruling arising from a public interest litigation. These constraints have been overcome significantly by ensuring strict compliance with environmental related regulatory norms and the company managed to secure permission for capacity utilization from the zero level in April 2011 to up to 75%, as from December, 2011.

Therefore, Sabero Organics Gujarat Ltd. cannot be considered as a good comparable even functionally.”

Thus the Ld. DR supports the order passed by the AO as per the direction of the DRP.

Cheminova India Limited

The only issue before us, pertains to transfer pricing adjustment in respect of international transaction pertaining to manufacturing activity i.e. import of raw material and export of finished goods of Rs.4,28,76,946/- made by the Transfer Pricing Officer (TPO) and affirmed by the Dispute Resolution Panel (DRP) on account of the following reasons:

(i) Considering recovery of fixed cost of Rs.5,54,19,490/- as non- operating item and thereby reducing operating margin of the appellant to 8.51% as against 9.38% as per the transfer pricing study; and (ii) Selection of the comparable companies, whereby arm’s length price (ALP) is determined at Rs.14.98%.

An examination of the accounts clearly indicates that Sabero Organics Gujarat Ltd., Aksharchem (India) Ltd. and Bhageria Dyechem Ltd. have earned a profit in FYs 2009-10, 2010-11, 2012-13 & 2013-14 and incurred losses only in FY 2011-12. Thus it can be construed that the variation in profitability is due to cyclical business reasons.

In the case of Welspun Zucchi Textiles Ltd. (supra), the Hon’ble Bombay High Court has held that “where revenue had not shown that comparables excluded by it were consistent loss making concerns, further examination would be required to ascertain whether loss was a symptom of reference points mentioned in Rule 10B(2) of Rules making it non-comparable”.

Cheminova India Limited In Chryscaptil Investment Advisors (India) Pvt. Ltd. (supra), the Hon’ble Delhi High Court has held that : the mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an inquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable.

In Dover India (P.) Ltd. v. DCIT (2017) 88 taxmann.com 115 (Pune-Trib.), it is held that “where a company was performing similar functions with that of the assessee, in absence of revenue establishing that said concern was persistent loss making concern, merely because said concern during relevant year had shown losses, could not be a valid reason for excluding same from list of comparables.”

We are of the considered view that the principles laid down in the above decisions are applicable to the instant case. A fortiori Sabero Organics Gujarat Ltd., Aksharchem (India) Ltd. and Bhageria Dyechem Ltd. have earned profit in FYs 2009-10, 2010-11, 2012-13 & 2013-14 and incurred losses only in FY 2011-12. Such fluctuations are normal in competitive business environment and the same cannot be considered as a reason for rejecting the aforesaid comparables. These three comparables are definitely not persistent loss making companies.

Cheminova India Limited Also we find that the new company Coromandel International Ltd. has merely entered into share purchase agreement with Sabero Organics Gujarat Ltd. This is evident from the document placed at page 273 to 275 of the Paper Book filed by the appellant before us as well as before the taxing authorities. The introductory paragraph reads as under :

Hyderabad, May 31, 2011: Coromandel International Limited, India’s leading manufacturer of a wide range of fertilizers, Crop protection products and Speciality Nutrient products, has signed definitive share purchase agreement to acquire promoters stake in ‘Sabero Organics Gujarat Ltd.’, an establishment agrochemical manufacturer headquartered in Mumbai, India.

In view of the above factual scenario, we direct the AO/TPO to include Sabero Organics Gujarat Ltd., Aksharchem (India) Ltd. and Bhageria Dyechem Ltd. as comparable and compute the arithmetic mean margin and pass consequential order. Needless to say, the AO would give a reasonable opportunity of being heard to the appellant before passing the order.

In view of our above findings, the other grounds of appeal become academic in nature.

Cheminova India Limited and this lockdown was extended from time to time. As a matter of fact, even before this formal nationwide lockdown, the functioning of the Income Tax Appellate Tribunal at Mumbai was severely restricted on account of lockdown by the Maharashtra Government, and on account of strict enforcement of health advisories with a view of checking spread of Covid-19. The epidemic situation in Mumbai being grave, there was not much of a relaxation in subsequent lockdowns also. In any case, there was unprecedented disruption of judicial work all over the country. As a matter of fact, it has been such an unprecedented situation, causing disruption in the functioning of judicial machinery, that Hon'ble Supreme Court of India, in an unprecedented order in the history of India and vide order dated 6.5.2020 read with order dated 23.3.2020, extended the limitation to exclude not only this lockdown period but also a few more days prior to, and after, the lockdown by observing that "In case the limitation has expired after 15.03.2020 then the period from 15.03.2020 till the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown". Hon'ble Bombay High Court, in an order dated 15th April 2020, has, besides extending the validity of all interim orders, has also observed that, "It is also clarified that while calculating time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly", and also observed that "arrangement continued by an order dated 26th March 2020 till 30th April 2020 shall continue further till 15th June 2020".

Cheminova India Limited The Hon’ble Bombay High Court itself has, vide judgment dated 15th April 2020, held that "while calculating the time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly".

Viewed thus, the exception to 90 day time limit for pronouncement of orders inherent in Rule 34(5)(c) clearly comes into play in the present case.