DCIT (LTU)-2, MUMBAI vs. S I GROUP INDIA LTD, NAVI MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “J”, MUMBAI BEFORE SHRI C.N. PRASAD, HON'BLE JUDICIAL MEMBER AND SHRI G. MANJUNATHA, HON'BLE ACCOUNTANT MEMBER ITA NO.3306/MUM/2015 (A.Y: 2008-09) Dy. Commissioner of Income-tax v. M/s. SI Group India Limited Large Taxpayer Unit – 2 Plot No: D-2/I, TTC Industrial Area World Trade Centre Thane – Belapur Road Centre 1, 29th Floor, Cuffe Parade Opp. Juinagar Railway Station Mumbai – 400 005 Navi Mumbai – 400 705 PAN: AAACH7323L (Appellant) (Respondent) ITA NO.3431/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited v. Assistant Commissioner of Income-tax Large Taxpayer Unit Plot No: D-2/I, TTC Industrial Area Mumbai Thane – Belapur Road Opp. Juinagar Railway Station Navi Mumbai – 400 705 PAN: AAACH7323L (Appellant) (Respondent) Assessee by : Shri Ajit Kumar Jain & Shri Siddhesh Chaugule Department by : Shri Vivek A. Perampura

Date of Hearing : 31.07.2019 Date of Pronouncement : 16.10.2019

2 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited O R D E R PER C.N. PRASAD (JM) 1. These two appeals are filed by the Revenue and assessee against the order of the Ld. Commissioner of Income-tax (Appeals) – 58, Mumbai [hereinafter for short “Ld. CIT(A)”] dated 04.03.2015 for the A.Y. 2008-09.

3 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited No. 447 of 2017 dated 03.06.2019. Ld. Counsel for the assessee submits that facts being identical this year, the same may be followed.

4 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited price on that basis. It was not open to him to simply brush aside the benchmarking done by the assessee and adopt the NIL value. That is not a scientific method of determining the arm’s length price and it cannot meet any judicial approval. In this view of the matter, and also having regard to a series of judicial precedents from the co-ordinate benches holding that even Reserve Bank of India’s approval of royalty can be a reasonable CUP input for determining arm’s length price – such as in the case of DCIT vs. Owens Corning Industries (India) Pvt. Ltd., and vice versa (ITA Nos. 549 & 595/Hyd/2014). We consider it appropriate to uphold the grievance of the assessee, and delete the impugned adjustment of Rs.2,71,11,495/-. The assessee gets the relief accordingly.” 9. As regards Hon’ble Punjab & Haryana High Court’s judgment in the case of Coca Cola India Inc. vs. ACIT [(2009) 221 CTR 225 (P&H)] relied upon by the learned CIT(A) holding that RBI approval will not be determinative factor, we may only point out that this view has not found favour with Hon’ble Supreme Court in the sense that Hon’ble Supreme Court has, in the case of Coca Cola Inc. vs. ACIT [(2011) 336 ITR 1 (SC)] set aside this order, and directed the authorities to “decide the matter uninfluenced by any of the observations made in the impugned judgement”. 10. In any event, learned Departmental Representative has not been able to controvert very well-reasoned findings of the learned CIT(A). In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. As for the issue raised in the Cross Objection, though academic, it has been held to be in favour of the assessee for the assessment year 2006-07 and we see no reasons to take any other view of the matter now as well. Leaned CIT(A)’s conclusions are approved for this reason as well.”

5 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited Tribunal confirming the decision of the CIT (Appeals). The Transfer Pricing Officer could have applied any of the specified methods for determining Arm's Length Price of the transaction, in case he was of the opinion that the purchase of knowhow made by the assessee from the associated enterprise was not at Arm's Length. Instead of carrying out any such scientific exercise, the Transfer Pricing Officer went on to the justification of the purchase made in the context of the incremental benefit earned by the assessee out of such knowhow. This was clearly not within the purview of the Transfer Pricing Officer. The Transfer Pricing Officer could not replace the assessee and question its business decision. In the context of the purchase being at Arm's Length, the CIT(Appeals) had permitted the assessee to produce additional evidence which was taken on record after remand report and such evidence proved that the price paid by the assessee was at Arm's Length. No question of law arises. Income Tax Appeal is dismissed.”

6 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited 10. We have heard the rival submissions and perused the orders of the authorities below. We find that the Tribunal allowed the claim of the assessee by affirming the order of the DRP in respect of deduction u/s.35(1)(iv) of the Act observing as under: - “9.1. The brief facts of this issue are that the assessee had in- house R&D Unit recognized / approved by Department of Scientific and Industrial Research (DSIR). The said approval was valid until 31 March 2007. On 18.12.2006, the assessee had made an application to DSIR for renewal of the approval beyond 31.3.2007. However, the approval had not been received until the completion of the assessment proceedings. During the year under appeal, the assessee had incurred capital expenditure of Rs. 30.22 Lacs on scientific research which was claimed as a deduction under section 35(1)(iv) of the Act (deduction of 100% of expenditure and not weighted deduction). The ld AO in the draft assessment order proposed to disallow the said expenditure in the absence of DSIR approval for the year under appeal. Before the ld DRP, the assessee submitted that deduction of expenditure towards scientific research cannot be denied once the requirements are fulfilled. It was argued that since the assessee has filed the renewal application and only procedural requirement is pending, the deduction should be allowed. The assessee relied on the decision of Hon’ble Delhi High Court in the case of Sandan Vikas (India) Ltd reported in 22 taxmann.com 19 (Delhi) in support of its contentions. The ld DRP allowed the assessee’s claim and directed the ld AO to delete the proposed disallowance. Aggrieved, the revenue is in appeal before us. 9.2. We have heard the rival submissions. We find that the only grievance of the revenue is that since the assessee had not obtained renewed its approval from DSIR, the assessee is not entitled for deduction. We find lot of force in the alternative claim of the ld AR before us that the assessee is entitled for deduction of such capital expenditure in entirety in view of specific provisions contained in section 35(1)(iv) of the Act, wherein there is no condition for having DSIR approval for deduction under this Section. We find that the ld AR placed reliance on the following decisions wherein it has been held that approval of DSIR is not a pre-requisite for claiming deduction under Section 35(1)(iv) of the Act: -  Tube Investments of India Ltd. v. CIT [2002] 125 Taxman 421 (Madras HC)  Shree Pacetronics Ltd. ACIT [2011] 10 Tamann.com 118 (Indore Trib.)  Coromandel International Ltd. v. ACIT (ITA No. 101/HYD/2012)

7 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited  Ayushakti Ayurved P. Ltd. v. ACIT [2010] 37 SOT 313 (Mumbai Trib.) 9.3. We find that the co-ordinate bench decision of Hyderabad Tribunal in the case of Coromandel International Ltd vs Addl CIT in ITA No. 101/Hyd/2012 dated 28.8.2014 is directly on this impugned issue wherein it was held that :- “7. We have considered the arguments of the parties and perused the materials on record as well as the orders of the Revenue authorities. We have also carefully applied our mind to the decisions relied upon by the parties. It is a fact on record that out of the total deduction of Rs. 4,73,31,953/- claimed by the assessee towards R&D expenditure on capital field, DSIR in its approval in form No. 3CL allowed the claim to the extent of Rs. 4,71,08,743 and in the process disallowing the amount of Rs. 2,23,215/-. Whereas the entire revenue expenditure of Rs. 1,31,87,576/- was not approved by DSIR. It is the contention of the learned AR that approval of DSIR as envisaged u/s 35(2AB) is only confined to deduction claimed under that section. Such approval is neither necessary to decide whether expenditure is in the nature of revenue or capital nor it is relevant for considering assessee's claim under any other provisions of the Act. We find force in the contention of the learned AR. On a reading of the provision contained u/s 35 as a whole and section 35(2AB) in particular and on perusal of form No. 3CL, we are of the view that approval of DSIR as contemplated is only in respect of weighted deduction to be claimed u/s 35(2AB) of the Act. It has no relevance for determining whether the expenditure claimed is allowable under any other provisions of the Act. The only condition prescribed u/s 35(2AB) is, if the claim of the assessee is allowed u/s 35(2AB) it will not be allowable under any another provision. In the present case, no material has been brought on record by the department to controvert assessee's claim that it has incurred towards salary and wages of employees engaged in revenue expenditure of Rs. 1,31,87,576/-, R&D and capital expenditure of Rs. 4,73,31,953/- on R&D activities. That being the case unapproved revenue expenditure of Rs. 1,31,87,576/- if not allowable u/s 35(2AB) of the Act, in absence of approval from DSIR, certainly can be allowed as deduction u/s 35(1)(i) and 37(1) of the Act as the case may be. ITAT, Delhi Bench in case of ACIT Parabolic Drugs Ltd. (supra) while considering the issue held as follows: "28. Sec. 35(1)(i) falls under Chapter IV under the head "Computation of business income". It describes the allowability of the expenditure in case where business income is computed. It deals with the expenditure incurred

8 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited by the assessee on scientific research. It has been prescribed therein that in respect of expenditure on scientific research the same will be allowed if the said expenditure has been laid out or expended on scientific research related to the business. It is not the case of anybody that Explanation to s. 35(1)(i) is applicable to the facts of the case. Therefore, the case of the assessee has to be seen in the light of provisions contained in s. 35(1)(i) without application of Explanation. The business of the assessee is of manufacturing of bulk drugs and fine chemicals etc. In the process of its manufacturing of drugs it has to make R&D so to make the drug more effective and also to bring down the cost. No material has been brought on record to suggest that by incurring these expenditure the assessee has entered into any new activity of manufacturing or new activity of trade. In the business of manufacturing of drug, process of R&D is continuous process which augments the business of the assessee. These expenses are not in the nature of any personal expenditure as no such allegation has been made. Therefore, the remaining criteria to consider the allowability is only the thing to be seen is that whether the expenditure is incurred by the assessee is capital in nature. So as it relates to capital expenditure of Rs. 44.41 lakhs, the assessee itself has claimed the said expenditure as being capital in nature. Therefore, there is no dispute with regard to that. So as it relates to expenses of Rs. 19.57 lakhs on salary and wages the same cannot be considered to be expenditure of being capital in nature as the said salary and wages are paid to the manpower deployed for carrying out the R&D activity which is part and parcel of the business of the assessee. 29. Now coming to the expenses of Rs. 611.78 lakhs relating to materials/consumables/spares, it is not the case of the AO that the said material was not consumed in the R&D process and some part thereof was remaining in the closing stock. Therefore, these expenditure incurred on material used for lab trials cannot in any manner be considered as expenditure being in the nature of capital. The next item is "other expenditure directly related to R&D". With regard to these expenditure the finding of fact has been recorded by CIT(A) that these have been incurred by the assessee for registration of products in other countries or towards obtaining technical know-how fee for producing new drugs etc. He has recorded in his order that he has called for and perused the agreements between the assessee company and IS Ltd. (which is the major sum of Rs. 1 crore comprising of two items of Rs. 50 lakhs each) for transfer of technical know-how. He has

9 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited also observed that AO has not given any adverse comment in his report regarding this agreement and such types of agreements for transfer of technical knowhow are quite common in pharmaceutical industry due to commercial exigency. These findings of fact have not been controverted by the Revenue by brining any material on record to suggest that such findings of CIT(A) are contrary to the facts existing on record. If it is so, then we find no infirmity in the findings recorded by learned CIT(A), whereby following the decisions of Delhi Tribunal in the cases of Jt. CIT Vs. Modi Olivetti Ltd. (supra) and Asst. CIT Vs. Medicamen Blotech Ltd. (supra), he has allowed the relief to the assessee. 30. In view of the above discussion, it has to be held that all of these expenditure were incurred by the assessee in the course of its business and none of the expenditure can be classified as expenditure in the nature of capital. Therefore, no infirmity is found in the order of CIT(A) vide which the assessee has been held eligible for deduction of these expenditure under both the sections either under s. 35(1)(i) or under s. 37(1). We decline to interfere in such deletion and this ground of revenue is dismissed. 8. In the present case, the department has not disputed the fact that expenditure incurred was towards salary and wages. That being the case, the expenditure is allowable u/s 35(1)(i) or u/s 37(1) as held by ITAT Delhi Bench (supra). So far as disallowance of capital expenditure of Rs. 2,23,215 is concerned, undisputedly, no material has been brought on record by the department to controvert assessee's claim that such expenditure incurred was towards scientific research. Disallowance was only for the reason that it is not approved by DSIR. However, even in absence of approval from DSIR though assessee may not be eligible for deduction u/s 35(2AB), still assessee can claim the deduction u/s 35(1)(iv). In this context we refer to the decision of Hon'ble Madras High Court in case of Tube Investments of India Ltd. Vs. CIT (supra) wherein it is held as under: "Sec. 35 of the Act deals with expenditure on scientific research. Section 35(1)(iv) refers to expenditure of a capital nature on scientific research related to the business carried on by the assessee. Sec. 35(2B) refers to expenditure, other than capital expenditure incurred on the acquisition of any land or building or construction of any building, on scientific research undertaken under a programme approved in that behalf by the prescribed authority, having regard to the social, economic and

10 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited industrial need of India. It is only such expenditure as is incurred on a programme which has been approved by the authority prescribed under s. 35(2B), which can be claimed as deduction under that provision. The capital expenditure on the acquisition of land or building whether acquired or constructed cannot be claimed under s. 35(2B). The benefit of s. 35 (1)(iv) can be availed by the assessee in respect of expenditure of a capital nature on scientific research if that research is related to the business carried on by the assessee. The approval of the authority prescribed under s. 35(2B) is not an essential prerequisite for claiming the allowance unders. 35(1)(iv) if it is found that a part of the claim falls within the ambit of s. 35(1)(iv). The mere fact of a claim not having been found admissible under s. 35(2B) will not constitute a bar to allowing an expenditure under s. 35(1)(iv) if that expenditure is capital expenditure and falls squarely within the ambit of s. 35(1)(iv). Capital expenditure incurred on the acquisition of land or construction of building which is excluded by the very terms of s. 35(2B) can be claimed under s. 35(1)(iv). 9. Following the ratio laid down as above, we hold that assessee is eligible for deduction in respect of revenue expenditure of Rs. 1,31,87,576 and capital expenditure of Rs. 2,23,215/-. Thus, ground nos. 2 & 3 are allowed.” 9.4. Respectfully following the same, we hold that the assessee is entitled for deduction u/s 35(1)(iv) of the Act. Accordingly, the Ground No. 2 raised by the revenue is dismissed.

11 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited 13. Ground No.2 of grounds of appeal is in respect of addition of ₹.99,52,426/- made u/s. 92CA(3) of the Act in respect of import of product Propelene Tetramer by the assessee from its Associate Enterprises [for short “AE”].

12 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited 15. Ld. Counsel for the assessee submitted that before the Ld.CIT(A) assessee contended that for CUP to be applied there has to be the following strict comparability analysis. (i) Quality: Please find the Certificate of Analysis by the AE as well as the Third Party in respect of quality of' Tetramer attached as Annexure 13. (ii) Quantity: The TPO, in his TP order has compared an AE purchase of 1019.131 vis-à-vis the third party purchases of 156.1 MT from Janex SA and 189.650 MT from Akin Chemicals. This clearly shows that there is a huge variance in the quantity purchases. (iii) Date of purchase order: The appellant has purchased the product from AE 22 Jan 2008 vis-a-vis the purchase from third parties dated 18 Jan 2007 for Janex SA and 11 Mar 2008 for Akin Chemicals. Please find attached the invoices in respect of these purchases as Annexure 14. This clearly shows that there is a huge time lag in the product purchased. (iv) Place of Purchase/Shipment: The appellant has purchased the product from USA compared to the other purchase from India and Switzerland. (v) Other contractual terms: Further, the other material contractual terms also need to be compared with while considering the Cup analysis.

13 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited international transaction by applying TNMM method. As per the TNMM analysis, the assessee earned NPM of 5.29 percent while compared with broadly comparable companies ranging from -1.13 percent to 4.54 percent with arithmetical mean of 1.97 percent. Therefore, it was submitted that based on the above analysis, the import transactions of the administrative expenses meet the arm’s length standard, hence the adjustment on account of imports from AE is to be deleted.

14 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited by the TPO, under the given circumstances of the assessee’s CUP fails as there should be strict comparables. Referring to the Page Nos. 72, 73 and 76 of the Paper Book which are the copies of invoices for the imports Ld. Counsel for the assessee submits that there are geographical differences in importing of materials as the assessee imported from its AE from USA and from third parties purchases from India and Switzerland and therefore, CUP method fails. Ld. Counsel for the assessee also placed reliance on the decision of the Hon'ble Bombay High Court in the case of Pr. CIT v. M/s. Amphenol Interconnect India Pvt. Ltd., in Income Tax Appeal Nos. 1131 of 2015, 1102 of 2015 and 1100 of 2015 dated 07.03.2018 and submits that the Hon'ble High Court upheld the order of the ITAT in holding that in view of the finished goods are customized goods and the geographical differences, volume differences, timing differences, risk differences and functional differences, the CUP method would not be the most appropriate method to determine the arm’s length price and upheld the stand of the assessee that Transactional Net Margin Method (TNMM) is the most appropriated method to arrive at arm’s length price. Ld. Counsel for the assessee submits that following this decision of the Hon'ble Bombay High Court the Mumbai Bench of the Tribunal in the case of Firmenich Aromatics (India) Pvt. Ltd., v. ACIT in ITA.No. 6081/Mum/2018 dated 07.06.2019 held that geographical location of the party to whom sales were made is a crucial factor to be weighed in while

15 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited making comparable analysis. Ld. Counsel for the assessee submits that the Tribunal held that the AE’s 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 AE’s and Non- AE’s. Therefore, price charged to Non-AEs cannot be considered to be CUP to determine the arm’s length price of the price charged for finished products to the AE’s. Therefore, he submits that the ratios of the above decisions squarely applicable to the facts of the assessee case as the assessee made imports from AEs and Non-AE’s, AEs located in USA and Non-AEs located in India and Switzerland and due to geographical differences the CUP method fails.

16 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited is found that by adopting one of the prescribed methods other than the chosen earlier the most appropriate arm’s length price can be determined, the lower authorities as well as the appellate authorities should take into consideration such a plea before them. Therefore, Ld. Counsel for the assessee submits that since CUP method fails in the given circumstances of the case of the assessee, the assessee shall fall back to TNMM for benchmarking the international transactions of imports.

17 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited AE purchases Party Value (Rs.) Quantity Rate (Rs.) SI Group Inc 7,94,46,969 1019.131 77,956 Purchases from third parties outside India Janeze SA 1,09,96,945 156.251 70,380 Akin Chemicals 1,25,16,900 189.650 66,000 2,35,13,845 345.901 68,190 It is noticed that the assessee purchased this product at a higher price than the average price at which it had imported from the third parties. The average price from third parties of Rs.68,190/- is taken to be the ALP price. The assessee should have paid the ALP price of Rs.6,94,94,543/- instead of the transaction price of Rs.7,94,46,969/-. Hence the difference of Rs.99,52,426/- is to be adjusted towards determination of ALP of import of raw material from AE.”

18 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited terms have not been on record, so not verifiable thus the adjustment made by the TPO is to be deleted. From the copies of invoices furnished we observe that the assessee imported materials from AE’s from USA and from Non-AEs’ from India and Switzerland. We also observe that there is a huge difference in quantities purchased by the assessee from AEs and Non-AEs.

19 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited in light of the facts brought out by the AO and rule 10B of I.T. Rules, 1962 and held that while considering the issue of comparability with an uncontrolled transaction, the condition prevailing in the market for which the respective parties to the transaction operate, including the geographical location alongwith other factors relevant to decide which method is suitable for benchmarking transaction. “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 Lemoncello 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 I.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

20 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited 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 cannot be considered to be a CUP to determine the arm's length price of the price charged for sale of finished products to the AEs. 3. The Co–ordinate Bench, while deciding an appeal relating to assessee’s sister concern viz. Firmenich Aromatics Production (India) Pvt. Ltd., in ITA no.7145/ Mum./2017, dated 13th November 2018, had an occasion to deal with identical issue relating to comparability of the price charged to AEs and non–AEs situated in different geographical locations. The Tribunal held that in such circumstances CUP cannot be applied as the most appropriate method. In this regard, the detailed finding of the Co–ordinate Bench is reproduced hereunder: – “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 Lemoncello 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

21 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited 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 I.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 cannot be considered to be a CUP to determine the arm's length price of the price charged for sale of finished products to the AEs. 8. The Co–ordinate Bench, while deciding an appeal relating to assessee’s sister concern viz. Firmenich Aromatics Production (India) Pvt. Ltd., in ITA no.7145/ Mum./2017, dated 13th November 2018, had an occasion to deal with identical issue relating to comparability of the price charged to AEs and non-AEs situated in different geographical locations. The Tribunal held that in such circumstances CUP cannot be applied as the most appropriate method. In this regard, the detailed finding of the Co-ordinate Bench is reproduced hereunder: - "8. First of all it is pertinent to consider that the price at which finished products are exported to AEs are not comparable with the domestic prices for the following reasons: * differences in the level of market of the product by either parties (i.e. traders/manufacturers); and * difference in functional and risk profiles; * differences in volume of both the transactions; * differences in the geographic markets; The reasons of difference in prices is tabulated below:

22 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited Local Sales to third Reasons for difference Export to AE parties Level of Market There are different levels of market in the entire value chain. The Appellant sells manufactured products to third parties who are in the last step of the entire value chain vis-a-vis group companies who are in the second last step of the value chain. Functional differences Appellant is not required to undertake marketing functions, distribution and other sales related functions vis-a-vis sales to third parties where the intensity of such functions are high very Risks differences The market risk, business risk, inventory risk and capacity utilization risk (on account of large orders) and credit risk (supply to group company) in case of transactions with AE's are significantly lower as compared to the transactions with third parties. Therefore, considering the risk differences, the prices charged to third parties are higher than the prices charged to AEs in certain cases. Volume differences High volume (large bulk Lower volume (small orders catering the orders specific to the group's requirement requirement of each results better customers) management of production supply chain and resource management. Geographic al difference Export prices of same products are bound to be different in different geographical locations / markets, as these prices are factor of buying power, market sensitivity and local competitions etc. Thus it would not be economically right to compare export prices of different market of locations.

23 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited 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. AE Quantity sales Sr.No Quantity in KG times in Material in KG Addition Value sold to of TPO Description sold to (INR) A/on A/on Order AE's AE's AE 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 Damascene 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 assesee 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.

24 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited 10. Further according to us, differences in the geographic markets – export prices of same products are bound to be different in different geographical locations / markets, as these prices are factor of raw material prices in those respective locations and also because of market sensitivity, bargaining power and local competition. The following table highlights the differences in geography and covers more than 80% of the adjustment made by the TPO. Also, TPO has compared local sales to third parties with exports to AEs as under:- Sr.No in Material A/on AE Adjustment TPO's AE Country Description Country made (INR) order 55 Aldehyde India Brazil, China, 96,920,377 Supra Singapore 56 Damascenone India Switzerland, 490,873,437 Total Singapore 59 Neobutenone India Switzerland, 490,680,563 Alpha Singapore 60 Norlimbanol India Brazil, China, 73,314,292 Singapore 11. Further, with respect to the DRP observations on geographical differences, we find from the facts of the case that the adjustment made with respect to sales made @ item No 55, the majority of the sales are made to an AE in Switzerland. Out of the total AE sales of 38,528 kgs of sales made, 23,310 kgs of sales is made to Firmench SA in Switzerland which comprises of 61% of sales to AE. According to us the TPO erred in simply comparing the prices of common products sold to both AEs and Non-AEs without appreciating that the two transactions are not comparable owing to differences on account of volume, geography, functions performed and risks assumed while transacting with AEs and non-AEs.Also, sub-rule (3) of rule 10B provides that, uncontrolled transaction would not be regarded as being comparable unless any of the differences between the transactions if compared are likely to materially affect the price or cost charged or paid or the profit arising from such transaction in the open market. Therefore, it is essential to adjust for the above mentioned differences in order to create level paying filed ie.. in order to ensure like by like comparison. Since, the TPO was unable to quantify the same, the CUP should not be used as the most appropriate method. 12. We find that this issue is covered by the decision of the Coordinate Bench of this ITAT in the case of M/s. Amphenol Interconnect India Pvt. Ltd., in ITA No. 477/Pun/2015 [TS- 201- ITAT-2014(PUN)-TP], wherein it is held as under:

25 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited “8. In this regard, the Ld. Counsel for the assessee brought our attention to the DRP's order dated 24-12- 2014 and read out the contents of Para Nos. 3.15 to 3.17 which read as under : "3.15 The assessee submitted that the TPO also disregarded and ignored Tribunal rulings which have laid down principles that the transactions will not be considered as similar for the purpose of benchmarking transactions under CUP method merely on account of similar products sold to AEs to third parties. These rulings are as under: • Intervet India Private Limited Vs ACIT (ITA No.3185/Mum/2006 • ACIT Vs. Dufon Laboratiories (2010-TII-26-ITAT-MUM-TP) • Ranbaxy Laboratories Ltd. Vs. Asstt. CIT (208-TII-01-ITAT- DEL-TP) • Gharda Chemicals Ltd. Vs. The Deputy Commissioner of Income tax (ITA No.2242/MUM/06) • Schutz Dishman Biotech Pvt. Ltd. Vs. DCIT (ITA No.3590 & 3751/Ahd/2007) ITA No.477/PUN/2015 • Dresser-Rand India Pvt. Ltd. Vs. ACIT (ITA No.8753/Mum/2010 AY 2006-07) • Aztec Software and Technology (ITAT Bangalore) and MSS India Pvt. Ltd., (ITAT, Pune). • DCIT Vs. Quark Systems (P) Ltd. (ITAT No.100/Chd/2009 - AY 2004-05) and Quark Systems (P) Ltd. ITO (ITA No.115/Chd/2009 - AY 2004-05) 3.16 The assessee has submitted that for AY 2006- 07, 2007-08 and 2008-09, on similar facts, the then DRP had rejected the objections of the assessee and upheld the order of the TPO. The assessee preferred appeal before the Hon'ble ITAT,Pune. The ITAT, Pune vide its order dated 30th May, 2014 has upheld the stand of the assesse and allowed its appeal against the orders of the DRP. Findings: 3.17 We have considered the submissions of the assessee as well as the findings and order of the TPO. We have also considered the order dated 30th May, 2014 of the ITAT, Pune for the earlier assessment years 2006-07, 2007-08 and 2008-09. In the earlier assessment years, the issues involved before the ITAT were adjustments made by the TPO to some of the transactions in respect of exports and

26 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited imports and payment of Commission by the assessee to its AE. The ITAT has dealt with all the three issues and given its finding in favour of the assessee. The assessee has submitted before us a note on the ITAT order and Points of similarity with the facts of the assessee's case in the current AY 2010-11. Upon going through the same, we find that the issues involved before the DRP in the current assessment year relate to adjustments made by the TPO in relation to some of the exports and imports on reasoning similar to the earlier assessment years which have now been adjudicated by the ITAT, Pune in favour of the assessee. In the circumstances, respectfully following the ratio laid down by the Hon'ble ITAT, Pune in the assessee's own case for the earlier assessment years, the assessee's objection is allowed. Accordingly, the Assessing Officer is directed not to make any adjustment with regard to the Export of finished goods and Import of raw materials." 9. From the above, we find in principle the facts are the same. In those years too, Transfer Pricing adjustments were made to the transactions with Associated Enterprises with reference to the Export of goods and Import of the raw materials. Appropriateness of the TNMM method was also the issue in those years. Tribunal decided the issue in favour of the assessee and dismissed the appeal of the revenue on those issues. After hearing both the ITA No.477/PUN/2015 sides and perusing the contents of the DRP, we are of the opinion that the order passed by the DRP with reference to the most appropriate accounting method for TP study, is fair and reasonable and same does not call for any interference. Accordingly, the ground raised by the Revenue is dismissed”. 13. Further, Hon’ble Bombay High Court dismissed the appeal of the Department filed by the Department against the ITAT’s order and noted that in this case, since the finished goods are customized goods and the geographical differences, volume differences, timing differences, risk differences and functional differences, the CUP method would not be the most appropriate method to determine the ALP. It upheld the stand of the assessee that TNMM is the most appropriate method to

27 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited arrive at ALP. This judgement is reported as PCIT Vs. M/s. Amphenol Interconnect India Pvt. Ltd., (supra). 14. In view of the above facts of the case and the issue being covered by the decision of the Co-ordinate Bench of the Tribunal in the case of PCIT Vs. M/s. Amphenol Interconnect India Pvt. Ltd., (supra)and which is affirmed by the Hon’ble Bombay High Court, respectfully following the same we delete the addition and allow this issue of assessee’s appeal.” 9. The principle/ratio laid down by the Co–ordinate Bench in the aforesaid decision squarely applies to the facts of the present appeal as well. Therefore, we hold that CUP method applied by the Transfer Pricing Officer to determine the arm's length price of the price charged for sale of finished products to the AEs is invalid. Accordingly, accepting assessee’s claim we delete the addition made by the Assessing Officer. Ground raised is allowed.” 11. In this view of the matter and consistent with the view taken by the coordinate bench, we are of the considered view that the TPO as well as the Ld.DRP were erred in applying CUP as most appropriate method to determine the arm’s length price of transactions of the assessee with its AEs for sale of inished goods. Accordingly, we direct the AO / TPO to delete TP adjustment of Rs.3,18,81,702 in relation to export of finished goods.”

28 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited the international transactions we restore this issue to the file of TPO for benchmarking the transactions under TNMM method and recompute the adjustment, if any, in respect of the imports. This ground is partly allowed.

29 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited 30. We have heard the rival submissions and perused the orders of the authorities below and the material available on record. On a perusal of the schedule of investments we notice that costs of the investments were made in the assessment year prior to A.Y. 2008-09. It is the submission of the assessee that loans prior to the assessment year under consideration have been utilized for working capital requirements and there is no link with the investments. These submissions have to be verified with reference to the books of accounts of the assessee. Thus, we restore this issue to the file of the assessing officer for limited purpose of verification as to whether the loans obtained in the earlier assessment years were used for working capital purposes or for making investments. If it is proved that the loans were utilized for working capital requirements no disallowance under Rule 8D2(ii) of I.T. Rules is warranted, since there are no fresh investments made by the assessee during the year under consideration. We direct the Assessing Officer accordingly.

30 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s. 14A r.w. Rule 8D of the I.T Rules, 1962. Thus, respectfully following the above decision, we direct the Assessing Officer to recompute the disallowance by applying the decision of the Special Bench and decide the issue.

31 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited “6. We find that the assessee had raised an additional ground No. 1.1. and 1.2. claiming depreciation on Goodwill arising on account of amalgamation. 6.1. The brief facts of this issue are that during the Financial Year 2002- 03 relevant to Asst Year 2003-04, the assessee acquired an Undertaking of Schenectady Specialties Asia P. Ltd. (‘SSAPL’ or ‘amalgamating company’) under a scheme of amalgamation approved by the Hon’ble Bombay High Court. Pursuant to the Scheme of amalgamation, all the assets, liabilities, and reserves of SSAPL were transferred to and vested in the Company at book values. As per the scheme, the assessee recorded Rs. 8,86,57,302 as ‘Goodwill’ in its books towards the excess liability/outflow of over and above the value of the Undertaking. 6.2. The assessee had not claimed depreciation on such Goodwill in its Return of Income. Based on subsequent development in terms of the law / principle laid down by the Hon’ble Supreme Court in CIT v. Smifs Securities Ltd. 348 ITR 302 (SC), the assessee for the first time made its claim before this Tribunal for Asst Year 2003-04 and subsequently, for Asst Years 2006-07 and 2007-08. This Tribunal in assessee’s own case for Asst Year 2003-04 in ITA No. 4384/Mum/2010 dated 16.1.2015 had remanded the matter back to the file of the ld AO for fresh adjudication. This Tribunal passed similar order dated 8.3.2017 for the Asst Years 2006-07 and 2007- 08 in ITA Nos. 9197/Mum/2013 and ITA No. 1009/Mum/2013 against the additional grounds raised thereon. We deem it fit and appropriate to give similar directions to the ld AO for the year under consideration also for fresh adjudication. Needless to mention that the assessee be given reasonable opportunity of being heard. Accordingly, the Additional Grounds 1.1. and 1.2. raised by the assessee are allowed for statistical purposes.”

32 ITA NO.3431 & 3306/MUM/2015 (A.Y: 2008-09) M/s. SI Group India Limited 38. In the result appeal of the assessee is partly allowed and appeal of the Revenue is dismissed.

Order pronounced in the open court on the 16th October, 2019

Sd/- Sd/- (G. MANJUNATHA) (C.N. PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai / Dated 16/10/2019 Giridhar, Sr.PS

Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.

//True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum