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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI A.K GARODIA & SMT. BEENA PILLAI
ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals has been filed by assessee against order dated 30/12/2015 passed by Ld.AO under section 143(3) r.w.s 144C(13) of the Act. Brief facts of the case are as under: 2. It has been submitted that, assessee is a company engaged in export of standardised herbal extracts, fine chemicals, specialty chemicals, cosmeceuticals, fight or nutrients and probiotics. It carries its activities from several
Page 2 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018 units including two unit which are 100% EOU. Assessee also holds several registered patents to its credits, and is one of the few Indian companies that manufacture products in India, using agricultural produce as ingredients, and sells it internationally, through subsidiaries and associates. 2.1. For year under consideration, assessee filed its return of income on 29/09/2011 declaring loss of Rs.2,34,72,710/- Later on, return was revised on 13/12/2012 declaring loss of Rs.2,28,25,845/-. Notice under section 143(2) was issued on 03/08/2012, in response to which, representative of assessee appeared and filed various details. Ld.AO observed that, assessee has international transaction with its associated enterprises exceeding Rs.15crores, and accordingly, reference was made to Transfer Pricing officer. 2.2. On receipt of reference under 92CA, Ld.TPO called upon assessee to file economic details of international transaction in Form 3 CEB. Ld.TPO passed order proposing adjustment of Rs.19,25,91,246/-and corporate tax adjustment of Rs.96,250/-.
Aggrieved by additions proposed, assessee raised objections before DRP. DRP vide direction dated 20/11/2015 partially deleted adjustment proposed by Ld.TPO, and directed Ld.AO to give following effect: • To restrict ALP adjustment to international transaction with associated enterprises only; Page 3 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018 • To consider stock write-off Rs.545 Lacs as extraordinary expenses, and not to include as part of operating expenses for computing PLI; • To exclude excise duty from operating expenses in the computation of PLI of comparables selected by TPO; and • To apply 75% filter for export turnover instead of 25% adopted by the TPO. 3.1. On the basis of DRP directions, Ld.TPO passed order dated 15/12/2015, according to which, adjustment was increased to Rs.19,99,97,862/-. Ld.AO while passing order dated 30/12/2015, did not consider the adjustment reworked by Ld. TPO.
Against final assessment order dated 30/12/2015, assessee filed appeal before this Tribunal being 4.1. Ld.AR submitted that, on 01/06/2016 rectification order under section 154 was passed, reversing total income to Rs.17,72,68,2067/-. Against this order, assessee filed appeal before this Tribunal being ITA No. 2960/Bang/2018 along with application for condonation of delay. 4.2. Ld.AR, at the outset, submitted that issues alleged in IT(A)No.2960/Bang/2018, has been rectified vide order passed by Ld.TPO dated 07/05/2019, and accordingly, no grievance arises out of this appeal. He accordingly submitted for withdrawal of IT(A)No.2960/Bang/2018.
Page 4 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018 4.3. Ld.CIT.DR did not object for the appeal being withdrawn. On the basis of submissions made by both sides hereunder, appeal being stands dismissed as withdrawn.
Ld.AR submitted that, demand arising out of impugned order stands rectified to Rs.8,74,57,770/- by order passed by Ld.AO under section 154 of the Act, dated 07/05/2019. Grounds raised
by assessee in this appeal are as under: “The Grounds of Appeal are as given below. All the following grounds are without prejudice to each other.
1. The learned AO has acted in gross violation of the section 144C read with section 143 by completing the assessment without giving effect to the specific directions of the DRP. The following directions given by the DRP has not been given effect to: a. To restrict ALP adjustment to international transactions with Associated\Enterprises only - Para 7 of the directions. b. To consider stock write off of Rs.5.35 crores as extra ordinary expenses and not include the same as part of operating expenses for computation of PLI of your appellant. - Para 8.3 of the direction. c. To exclude excise duty from operating revenues in the computation of PLI of comparables selected by TPO. Para 9.2(u) of the direction. d. To apply 75% filter for export turnover instead of 25% adopted by the TPO. Para 9.2(iii) of the direction
2. The TPO has grievously erred in making transfer pricing adjustment of Rs.18,61,90,843/- to prices charged by your appellant.
3. The TPO has erred in rejecting the Cost Plus Method adopted by your appellant as the most appropriate method (MAM) for the determination of the Arm's Length Price (ALP) and wrongly adopting Transaction Net Margin Method (TNMM).The DRIP has erred in upholding the same.
4. The DRP and TPO has erred in not allowing any adjustment for idle costs of excess capacity of your appellant during the year.
5. The DRIP has erred in not allowing for any adjustments for the differences in the functions and risks which are not undertaken by your appellant but undertaken by the comparable companies
Page 5 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018 considering the fact that your appellant does not undertake marketing activities in respect of transactions with AEs.
The TPO has erred in rejecting the companies selected as comparable by your appellant.
The TPO has erred in selection of companies that are functionally different from your appellant as comparables, in order to determine the ALP. The TPO has wrongly selected 22 companies as comparable whose businesses and operations have nothing in, common with that of your appellant.
The TPO has erred in making apparent errors in margin computation of comparables selected by himself, despite these being pointed out by your appellant.
In the light of the binding legal provisions that prohibit charging commission on guarantees of the nature extended by your appellant, the DRP has erred in upholding guarantee commission of Rs.64,00,403/- charged by the learned TPC in his order on the contention that the guarantee could not be considered to be at arm's length since no commission was charged.
Your appellant craves leave to add, amend, alter, vary and/ or withdraw any or all of the above grounds of appeal
11. For these and other grounds that may be adduced at the time of hearing, it may be directed that the order of the learned Assessing Officer as upheld by the Hon'ble DRP be modified to the extent appealed against.” 5.1. At the outset, Ld.AR submitted that, all issues raised in this appeal stands covered by orders passed by coordinate benches of this Tribunal in assessee’s own case for assessment years 2008-09, 2009-10 and 2010-11.
6. Ld.AR submitted that, Ground No. 1 is not pressed as rectification order has been passed on these issues by Ld.AO. Accordingly, Ground No.1 raised by assessee stands dismissed. Ground No. 2 is submitted to be general in nature and therefore do not require adjudication.
7. Ground No.3 is raised against most appropriate method to be adopted for determining ALP of international transaction.
Page 6 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018 7.1. Ld.AR submitted that, this issue stands against assessee by order of this Tribunal in assessee’s own case for assessment year 2008-09 in IT(TP)A No.1197/Bang/2012, by order dated 08/05/2015. He referred to para 15 of order, wherein TNMM has been upheld as most appropriate method as under: “15. We have perused the orders and heard the rival contentions. We find that assessee in its letter dated 21/10/2011 addressed to the TPO, plays as Annexure J of the paper book, had itself stated at page 3 that expenditure like depreciation and repair cost were not considered by it in the margin analysis. Even in the TP study furnished by assessee, analysis based on gross profit margins alone has been done and page 27 of Annexure G of paper book clearly being brings out this. Assessee had considered this GP ratio of 23.36% and compared it with GP margin of companies selected by it as comparables, namely, Vivimad Labs Ltd, Anuh Pharma Ltd., and Synthite industrial chemicals Ltd., Assessee itself as mentioned therein that none of these 3 companies were fully comparable to the business of assessee. Vivmed labs Ltd was manufacturing chemicals and formulations and not herbal extracts. Anuh Pharma Ltd was manufacture of antibiotics and Symthite industrial chemicals Ltd was manufacturing essential oils, Oleoresines and spices. When assessee itself as stated in its TP study that the companies selected by it for comparison were not in the same manufacturing line and when rule 10 B of the act clearly specifies deduction of both direct and indirect expenditure for CPM, we are of the opinion that lower authorities were right in rejecting the methodology adopted by assessee and substituting it with TNMM. Ground 11 of assessee therefore stands dismissed.” Respectfully following the same, we uphold TNMM as most appropriate method for year under consideration, Accordingly, this ground raised by assessee stands dismissed.
8. Ground No. 4 is raised by assessee for not allowing adjustment for idle cost of excess capacity.
Page 7 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018 8.1. Ld.AR submitted that, this issue stands settled by order of this Tribunal in assessee’s own case for assessment year 2008-09 in IT(TP)A No.1197/Bang/2012, by order dated 08/05/2015. He referred to para 25 of order that reads as under: “25. There also is much strength in the argument of assessee that the margins of the comparables worked out by the AU required to be adjusted for discrepancy in stock, excessive R & D expenditure etc., Similarly, coordinate bench of this Tribunal has held in the case of Trilogy B Business Software India P. Ltd., v. DCIT (2013) 140 lTD 540, that forex gain relating to export business were part of the operating revenues and had to be considered while working out the ALP of the international transactions undertaken by it. Lower authorities have also not verified the claim of assessee that non-operating expenditures were not excluded while working out the operating expenditure. Similarly its claim that TP adjustment has to be confined to the international transaction with AE is also justified in view of the decision of the coordinate bench in the case of Kirloskar Toyota Textiles Machinery P. Ltd. V. ACIT [IT(TP)A No.4O1/Bang/2010, dt 14.11.20 14]. On the other hand, we find that the working out of idle cost done by assessee was not based on any scientific Principles. It took a presumption that fixed costs varies with turnover. Reduction in turnover can be due reduction in prices and need not always be due to reduction in production. Idle capacity can be worked out only based on machine capacities and utilisation of the machines in manufacturing sector. Exercises done by the assessee for working out the fixed cost attributable to idle capacity at 31% was incorrect. However, if assessee is able to show that there was any idle capacity, then proper adjustment has to be carried out for it, in accordance with Rule 1 OB of the Act. Therefore, even while accepting TNNM adopted by the TPO, we are of the opinion that analysis of the transfer pricing of the international transactions requires a fresh look by the TPO / AO by considering all the averments taken by assessee in detail. We, therefore, set aside the orders of the authorities below and remit the issue with regard to fixing of ALP of the international transactions, back to the file of TPO / AO for consideration afresh in accordance with the directions given above. No doubt, if the study made afresh show that the margin of the assessee on the cost was within + / - 5% of the arithmetic mean, the AO shall not make any adjustment.”
Page 8 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018 8.2. Ld.CIT.DR placed reliance on orders passed by authorities below. We have perused submissions filed by both sides in light of records placed before us. 8.3. Nothing has been brought on record by revenue to establish any factual changes. Therefore we do not find any reason to deviate from consistent view taken by this Tribunal in assessee’s own case. 8.4. Respectfully following the same, we remand the issue back to Ld.TPO for considering it afresh, in light of observations made by this Tribunal in assessee’s own case for assessment year 2008-09 (supra), in accordance with law. Needless to say that proper opportunity of being heard is to be granted to assessee. Accordingly, this ground raised by assessee stands allowed for statistical purposes
9. Ground No. 5 is raised for not allowing adjustment for differences in functions and risks that are not undertaken by assessee but undertaken by comparable companies. 9.1. Ld.AR submitted that, this issue has been decided by this Tribunal in assessee’s own case for assessment year 2008-09 in IT(TP)A No.1197/Bang/2012, by order dated 08/05/2015. He referred to para 15 of order, that reads as under:
15. We have considered the rival submissions. First of all, we reproduce paras 17 and 18 from the Tribunal order which is available on page no. 353 of paper book. The same reads as under. "
Ground No.6 is regarding risk adjustment.
Page 9 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018
We have heard the learned A. R. as well as learned D, R. and considered the relevant material on record The assessee is claiming the risk adjustment because of the majority of the sale to the AE in comparison to the comparables making sales to the third party. The Id. AR of the assessee has submitted that the assessee has furnished all the requisite details. Risk adjustment is one of the component to be taken into account for FAR analysis. Therefore the TPO/A.O./A.O is directed to consider the claim of risk adjustment on the basis of the details to be furnished by the assessee." 16. From the above pares reproduced from the Tribunal order, it is seen that in the AO/TPO were directed to consider the claim of risk adjustments of the details to be furnished by the assessee. Hence in the present year also, we restore this matter back to AOJJPO with similar directions. Ground no. 8 is also allowed for statistical purposes.” 9.2. He submitted that, this Tribunal relied on observations of coordinate bench in assessee’s own case for assessment year 2009-10, which is placed at page 148-165 of paper book volume 1. 9.3. Ld.CIT.DR placed reliance on orders passed by authorities below. However, he also could not place on record, any distinguishing feature for year under consideration on facts. 9.4. Respectfully following the same, we direct Ld.AO/TPO to consider claim of risk adjustment on the basis of details furnished by assessee, as directed by this Tribunal in earlier years in assessee’s own case. Accordingly this ground raised
by assessee stands allowed for statistical purposes.
10. Ground No.6 is in respect of rejecting one comparable alleged by assessee for inclusion. 10.1. We note that there is no specific comparable that has been raised in the ground. However, Ld.AR relied on written
Page 10 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018 submissions filed before us, wherein, assessee alleges exclusion of Indfrag Ltd. He submitted that, objection was raised before DRP, however, DRP passed cryptic order without giving any specific reason upholding its exclusion. 10.2. Ld.CIT.DR relied on orders passed by authorities below. We have perused order passed by DRP. We note that, DRP did not give any specific reason upholding exclusion of this comparable by Ld.TPO. We also note that submissions made by assessee have not been considered. 10.3. In the light of such situation, we deem it fit to remand this comparable back to DRP to adjudicate it afresh. DRP is directed to pass a reason order in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly, this ground raised by assessee stands allowed for statistical purposes.
11. Ground No.7-8 is in respect of certain comparables for exclusion. 11.1. Ld.AR submitted that, objection was raised in respect of certain comparables for exclusion before DRP, however, DRP failed to adjudicate Objection ‘E’, more particularly mentioned in DRP direction. 11.2. Ld.CIT.DR relied on orders passed by authorities below. We have perused order passed by DRP and noted the manner in which the issue has been dealt with. We note
Page 11 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018 that, there is no comparable specific ground, raised by assessee alleging exclusion. However, Ld.AR relied on written submissions filed before us, wherein, assessee alleges exclusion of AVT Natural Ltd., Shilpa Medicare Ltd., Vinati Organics Ltd., Glenmark Generic Ltd. We note that DRP did not deal with any of these comparables objected by assessee. 11.3. In the light of such situation, we deem it fit to remand this comparable back to DRP to adjudicate it afresh. DRP is directed to pass a reasoned order, in accordance with law. Needless to say that, proper opportunity of being heard must be granted to assessee. Accordingly, this ground raised by assessee stands allowed for statistical purposes.
12. Ground No.9 is regarding addition of Guarantee Commission at 3%. 12.1. It has been submitted by Ld.AR that this issue stands settled by orders of this Tribunal in earlier assessment years. He referred to order passed by this Tribunal in assessment year 2010-11(supra), wherein, this Tribunal followed view taken in AY 2009-10, and held as under: “17. Regarding ground no. 9 also, it was submitted that para no. 20 of the same Tribunal order in assessee's own case for Assessment Year 200910 is relevant and in that year, the AO/TPO were directed to adopt the arm's length commission of corporate guarantee at 0.5%. The Id. DR of revenue could not point out any difference in facts in the present year. Hence respectfully following this Tribunal order in assessee's own case, we direct the AO/TPO to adopt the arm's length commission of corporate guarantee at 0.5%. Ground no. 9 is allowed.”
Page 12 of 14 IT(TP)A No.248/Bang/2016 IT(TP)A No.2960/Bang/2018 12.2. Ld.CIT.DR placed reliance on orders passed by authorities below. We have perused submissions filed by both sides in light of records placed before us. 12.3. Nothing has been brought on record by revenue to establish any factual changes. Therefore we do not find any reason to deviate from consistant view taken by this Tribunal in assessee’s own case. Based on the above observations by this Tribunal in assessee’s own case, we direct Ld.AO/TPO to adopt arms length commission at 0.5%. Accordingly, this ground raised by assessee stands allowed.
13. Ground No.11 is general in nature and do not require any adjudication. In the result, IT(TP)A No.248/Bang/2016 stands partly allowed as indicated hereinabove, and IT(TP)A No.2960/Bang/2018, stands dismissed as withdrawn. Order pronounced in the open court on 25th Aug, 2020.