DOW CHEMICAL INERNATIONAL PVT. LTD. AS SUCCESSOR OF ROHAM AND HAAS (INDIA) PVT. LTD.,MUMBAI vs. ITO - 14(1)(1), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

3.1. The assessee’s business operations of manufacturing speciality chemicals can be divided into the following three areas:

 Paint and coating materials  Packaging and building materials  Performance chemicals and biocides 3.2. The assessee has its manufacturing plant at Taloja, Mumbai and Sriperumbudur, Chennai. The Taloja plant is used for manufacturing water based emulsion polymers for the decorative paints, textiles, construction, paper coatings and leather industries, and flexible packaging adhesives. The Sriperumbudur plant manufactures acrylic emulsion polymers largely used in manufacturing paints and coatings.

3.3. The assessee filed its Return of Income ('ROI') for AY 2010-11 on 30 September 2010 declaring total income as NIL after adjusting brought forward losses amounting to INR 9,61,23,747. Along with its Return of Income, the assessee also filed Accountant's Report in Form 3CEB [in accordance with section 92E of the Income-tax Act, 1961 ('Act')] reporting inter-alia, the particulars of the international transactions undertaken with its Associated Enterprises ('AEs') during AY 2010-11.

3.4. The list of international transactions carried out by the assessee with its AEs during the year are as under:-

Name of international Method Profit Level Value of transaction Indicator transaction (INR) 1,40,89,43,936 Import of raw materials Cost Plus Method Gross margins for manufacturing chemicals ('CPM') Net sales

1,04,53,26,726 Export of manufactured finished goods 41,52,83,426 Import of finished goods Resale Price Method Gross margins 9,88,50,072 Export of traded goods Net Sales 11,71,45,490 Provision of support services Transactional Net Operating margin Operating cost Margin Method (TNMM1) TNMM 5,41,67,039 Provision of technical Operating margin support services Operating cost 64,47,798 Payment of interest on Comparable external commercial Uncontrolled Price borrowing ('CUP') 16,22,360 Purchase of software Not Applicable 11,87,38,679 Availing of support services Cost allocation

2,46,77,756 Reimbursements of expenses Not Applicable

1,40,782 Recovery of expenses Not Applicable 3.5. The ld. TPO sought to make an adjustment with regard to international transaction of import of raw materials for manufacturing made by the assessee from its AE. The ld. TPO accepted international transactions to be at arm’s length in respect of export of manufactured finished goods, import of finished goods, export of traded goods, provision of support services, payment of interest on external commercial borrowing, purchase of software, availing of support services, reimbursements of expenses and recovery of expenses.

3.6. During the A.Y.2010-11, the assessee has imported raw materials from its AEs amounting to INR 140,89,43,936. Adopting the methodology used during AY 2007-08 to AY 2009-10, the assessee benchmarked the said transaction in the transfer pricing report applying Cost Plus Method (CPM) as the Most Appropriate Method (MAM). It was stated in the transfer pricing report submitted for AY 2010-11 that the assessee had aggregated its transactions pertaining to import of raw materials for manufacturing with the transactions of export of manufactured finished goods and benchmarking of the said transactions were done on an aggregated basis.

3.7. The gross profit margin earned by assessee for the aforesaid transaction is computed at 16.63 percent as under: Particulars Amount (INR) Net sales 458,11,94,993 Cost of sales 381,94,43,003 Gross profit 76,17,51,990 Gross profit margin (on net sales) 16.63%:

3.8 Whereas, the updated gross operating margin of the comparable companies for AY 2010-11 was arrived at 14.22 percent. The method of computation is in line with the computation of gross profit margins of the assessee as submitted in the TP Study.

Sr. Name of company Gross Margins (Single No. year updated) 1 South Asian Petrochem Limited (Merged with 19.90% Dhunseri Petrochem & Tea Limited) 2 Apar Industries Limited 7.53% 3 Axel Polymers Limited 20,58%

4 Gujarat Polybutenes Private Limited 8.88% Arithmetic mean 14.22% 3.9. Accordingly, the transaction of import of raw materials was considered to be at arm's length.

3.10. The above approach of adoption of CPM for the transaction of import of raw materials and export of finished goods has been adopted by the assessee in the previous years and has been accepted by the Learned Transfer Pricing Officers in the Orders passed from AY 2007-08 to AY 2009-10.

3.11 The assessee adopted Cost Plus Method (CPM) as the most appropriate method for benchmarking its international transactions. The ld. TPO has rejected CPM as MAM and applied Transaction Net Margin Method (TNMM) rejecting the comparables chosen by the assessee and by adopting fresh comparables. The ld. TPO rejected the CPM on the ground that assessee is a loss making concern.

3.12. The TPO worked out the Profit Level Indicator ('PLI') of the assessee using net operating margin calculated as Operating Profit/ Operating Income (OP/ Ol) as under:

Particulars Amount (INR) Amount (INR) Operating income Net sales 4,58,11,94,993 Other operating income 3,38,84,690 4,61,50,79,683

Operating cost Cost of sales 3,81,94,43,003 Other operating cost 96,44,29,863 4,78,38,72,866

Operating profit (16,87,93,183) OP/OI -3.66% 3.13. Further, the ld. TPO rejected all 4 companies adopted as comparable by the assessee (mentioned above) in its TP Study for CPM Method and selected 4 companies as comparables for applying TNMM to benchmark the transaction of import of raw materials. The comparables chosen by the ld. TPO are as under:-

Sr. Name of the company OP/OI for AY No. 2010-11 (%) 1 Jupiter Bioscience Limited 31.07 2 Fineotex Chemicals Limited 22.11 3 Vivimed Labs Limited 15.90 4 Jubilant Lifesciences. Limited 26.40 Arithmetic Mean 23.87 3.14. The ld. TPO computed the arm’s length price of international transactions as under:-

Particulars Key Amount (INR) AE Purchases A 1,40,89,43,936 OP/OI B (3.66)% Corresponding sales C = A*(1-B) 1,35,82,21,954 ALP Margin (Comparable' s Margin) D 23.87% ALP Profit E=C*D 32,42,07,580/- ALP Cost F=C-E 1,03,40,14,374 Adjustment G=A-F 37,49,29,562 3.15. The ld. TPO did not disturb the arm’s length determination of any of the other international transactions undertaken by the assessee as detailed above including export of finished goods.

3.16. Before the ld. DRP the assessee filed objections on the following issues. a. Transfer pricing adjustment on account of international transaction on import of raw materials from AEs amounting to Rs.37,49,29,562/- b. Disregarding the economic analysis undertaken by the assessee using the CPM for determination of ALP c. Rejecting the companies adopted as comparable by the assessee for benchmarking its international transactions without providing any cogent reasons for the same. d. Considering the comparables engaged in different products and activities vis-a-vis the assessee as comparables for arriving at the comparables margin. e. Erroneous calculation of the margins of certain comparables adopted by the ld. TPO.

3.17. The assessee submitted additional evidences for application of Controllable Uncontrolled Price (CUP) method using independent Chemical Information Service (ICIS) prices instead of CPM and TNMM before the ld. DRP. This was filed without prejudice to its claim that CPM should be adopted as MAM. The assessee pleaded that by applying CUP using ICIS prices in respect of chemicals (Monomers) imported by the assessee from its AEs, around 68% of the total raw materials imports from AEs were covered. In other words, the comparable data was available in respect of 68% of total import of raw materials from AEs by application of CUP using ICIS prices. The assessee submitted the details pertaining to date-wise comparison of import price with market price, in the form of Independent Chemical Information Service (ICIS)

3.18. ICIS is a global chemical market information provider with over 30 years of experience in providing data, information, high-value news, analysis and independent consulting to companies operating in the chemical industry enabling them to make better-informed trading and planning decisions. It publishes CUP data which is available in public domain of market price and hence can be regarded as a valid CUP. During the remand proceedings, the learned TPO rejected the additional evidence filed as the ld. TPO in his original order had already rejected CUP method and applied TNMM.

3.19. The ld. DRP disregarding the submissions and contentions of the assessee upheld the action of ld. TPO to disallow application of CPM to compute the ALP of the international transaction of import of raw materials and instead applied TNMM by stating that:

 The assessee while computing the gross margin has not considered indirect cost of production and has merely reduced cost of goods sold from the value of total sales to arrive at profit.

 The assessee has not explained how comparable gross margin in case of uncontrolled transaction has been computed.

3.20. The ld. DRP neither commented on acceptability of ICIS prices as a valid CUP nor rejected the same. The ld. DRP only rejected the aggregation methodology adopted by the assessee while calculating the ALP using the ICIS prices. The ld. DRP stated that set off approach of the assessee could not be accepted as no documents were produced to show that transactions were entered together and prices were negotiated on a combined basis.

Further, the ld. DRP held that even if CUP is considered for some of the transactions, the adjustment would still persist to the extent of Rs.1,29,19,187 (i.e. value of imports where the purchase price is higher than market price) and hence, this further supports the adjustment made by the TPO under TNMM.

3.21. The ld. DRP upheld the action of the ld. TPO/AO in rejecting assessee's comparable companies and applying TNMM using ld. TPO's set of comparables. However, the ld. DRP directed the ld. AO to rectify arithmetic mean of the comparable companies considered by the ld.TPO at operating margin (on operating revenue) of 22.37% and reduced the adjustment to Rs. 35,45,28,005/-.

3.22. Thus, the ld. DRP upheld the action of the learned AO in rejecting CPM and applying TNMM as the MAM. Also, the ld. DRP rejected alternate submission of the assessee to apply CUP method based on ICIS prices, merely because there was some positive adjustment, without using aggregated approach.

A. JUSTIFICATION OF LOSSES ON NET LEVEL The ld. AR argued that the primary reason for rejection of CPM by the ld. TPO was that assessee had incurred loss during the year. He argued that the loss had been incurred due to sales made to a third party i.e. Asian Paints Ltd. wherein the prices were very poor. The selling price offered by Asian Paints Ltd. was very poor and loss had not been incurred on account of import of raw materials from its AEs. In support of this proposition, the ld. AR filed a letter dated 13/04/2018, wherein additional evidences were filed in this regard which are enclosed in 1044 of the paper book. The ld. AR vide letter dated 22/10/2018 had also filed additional grounds of appeal to substantiate the commercial rationale in respect of operating loss incurred in its manufacturing segment. He vehemently argued that the gross margins of the assessee cannot be ignored which are derived based on commercial decisions taken by the assessee by accepting to the selling price quoted by Asian Paints Ltd., which is a third party.

B. Usage of TIPS Data Base for application of CUP as MAM The ld. AR in support of application of CUP method as MAM provided data from TIPS Data Base in addition to ICIS, based on the action of the ld. TPO in the subsequent years wherein in assessee’s own case, the ld. TPO alternatively applied CUP method using TIPS Data Base to benchmark the international transaction of import of raw materials, though the same was rejected by the ld. TPO as availability of data was not substantial. In view of this the assessee filed a request for admission of additional grounds of appeal to consider CUP in the form of prices published by TIPS Data Base which were available for 94.69% of the total raw materials imported from AEs. According to the ld. AR, if TIPS Data Base is used for verification of comparable prices using CUP method, it would cover 94.69% of the total import transactions from its AEs for which comparable data is also available thereon. In this regard, the ld. AR filed additional evidences substantiating the comparison of import prices with TIPS Data Base prices which are available for 94.69% of the raw material imported from AEs. The ld. AR vehemently pleaded that under CUP method using TIPS Data Base, there were days wherein the prices of the assessee are favourable and there were days wherein the prices of the assessee are adverse when compared to comparable prices. He prayed that a portfolio approach should be adopted and no cherry picking could be done thereon by considering only those days where the prices of the assessee are adverse. The additional evidences in this regard giving comparative workings are enclosed in page 1051 of the paper book filed by the assessee. The ld. AR vehemently argued that the ld. DRP had accepted the fact of fluctuating prices both upwards as well as downwards for the same product during the year. The ld. DRP stated that difference in ALP by CUP method and by taking cherry picking of the transactions resulted in addition of Rs.1.29 Crores.

The ld. AR reiterated his contentions that if portfolio approach is followed by the revenue, then there will only be loss of Rs.7.80 Crores and accordingly, there would be no need to make any adjustment to ALP thereon. In this regard, he also vehemently argued that the ld. DRP having accepted the fact of fluctuating prices of the product and having worked out the ALP adjustment to the tune of Rs.1.29 Crores thereon, ought not to have sustained the addition of Rs.35.45 Crores.

C. USE OF SEGMENTAL DATA OF COMPANIES IF TNMM IS APPLIED ON WITHOUT PREJUDICE BASIS

The ld. AR also filed additional ground vide letter dated 22/10/2018 wherein he contested that even if TNMM is applied as the MAM, in respect of two comparables chosen by the ld. TPO i.e. Jubiliant Life Sciences Ltd., and Vivimed Labs Ltd., he requested for adoption of operating margin of these two companies at segment level instead of entity level. The ld. AR reiterated the fact that this additional ground is raised without prejudice to his earlier contention that CUP should be accepted as MAM. The ld. AR also argued that ld. DRP had also been following the proper method for selection of MAM. Before the ld. DRP, the combined profitability of both import of raw materials and export of finished goods from / to AE’s for last three years were availed. The ld. DRP having accepted TNMM to be MAM cannot choose only for one transaction. This argument was advanced by the ld. AR in order to drive home the point that the ld. DRP ought to have accepted CUP as MAM using TIPS Data Base wherein 68% of comparable data were available for benchmarking the international transaction, in addition to adoption of portfolio approach thereon by considering both positive figures as well as negative figures of various dates in respect of import of materials from AEs and portfolio approach in respect of import of materials from AEs and export of finished goods to AEs to be taken together for the purpose of benchmarking the international transactions.

5.1. The ld. AR argued that though assessee had followed CPM as MAM in earlier years and the same was accepted by the ld. TPO in earlier years, the assessee found it desirable to choose CUP as MAM before the ld. DRP in view of the availability of comparable data for almost 68% of import transactions from AE. He also argued that even the ld. TPO had changed his stand by choosing TNMM as MAM which is in contrast to his own stand taken in earlier years wherein CPM was accepted as MAM. The ld. AR also placed on record the additional evidences before this Tribunal by providing comparable data by adopting CUP as MAM and by using TIPS Data Base which covers 94.69% of the total transactions in respect of import of raw materials from AEs as additional evidences and vehemently prayed for adoption of CUP as MAM and fairly stated that let this comparable data which is available for 94.69% of transactions be verified by the ld. TPO as to its veracity. By this process, the entire dispute would come to rest to real adjustment, if any, pursuant to such verification by the ld. TPO. The ld. AR again reiterated the fact that CPM was rejected by the ld. TPO only on the ground that assessee during the year had incurred loss from manufacturing business. The reason for the said loss was stated to be primarily on account of lower sales realization from supply of finished goods to a third party customer i.e., Asian Paints Ltd. and the same was not on account of import of raw materials from its AEs. The ld. AR placed on record the additional evidence to support this statement in page 1046 of the paper book. The ld. AR also stated that the assessee identified business opportunity in the South India market and intended to set up the ground level plan at Sriperumbudur for emulsions to cater its customer base in paints and other applications, accordingly, the assessee and Asian Paints Ltd., entered into a Memorandum of Understanding for supply of binders. Evidences in this regard were filed as additional evidence vide pages 1048 and 1049 of the paper book. Under the terms of the MOU, the assessee sold binders to Asian Paints Ltd., during the three year period from 2007 till 2009 primarily at a price linked to Asian Paints Ltd., internal cost of manufacturing the same product irrespective of market price and the actual cost of manufacture in the hands of the assessee. The said commercial arrangement with Asian Paints Ltd., (third party customer) was a primary reason for operating loss in the hands of the assessee. The assessee also submitted the segmental information with respect to its manufacturing business vide page No.1050 of paper book as under:- a. Sale of products - (Primal RH – 4A, Bulk and Piramal RH-1 /Bulk) to Asian Paints Ltd b. Sale of other products to Asian Paints Ltd. and sale of products to other customers 5.2. The ld. AR also stated that assessee had incurred operating losses of 29.72% on its operating revenue with regard to sale made to Asian Paints Ltd., on account of specific business of commercial arrangement made with M/s. Asian Paints Ltd., whereas the assessee had made reasonable profits of other manufacturing business. Further the arrangement with Asian Paints Ltd. continued till F.Y.2014-15 post which, the assessee decided to change the product portfolio owing to continuous loss. The ld. AR stated that post such change in the product portfolio of the assessee, the assessee started making profits.

5.3. The ld. AR argued that CUP being the more direct method, the same should be preferred over other methods. He also placed reliance on the decision of Co-ordinate Bench of this Tribunal in the case of Serdia Pharmaceuticals India Pvt. Ltd. vs. ACIT reported in 44 SOT 391, Mumbai wherein it was held that Traditional Transaction Method such as CUP, CPM and RPM should be used, if data is available, over Traditional Profit Methods such as PSM and TNMM. The ld. AR also placed reliance on the decision of this Tribunal in the case of Sonata Software Ltd. vs. ACIT in wherein it was held that TNMM and Profit Supply Method (PSM) are treated as methods of last resort which are pressed into service only when the methods i.e. CUP, Resale Price Method (RPM) and Cost Plus Method (CPM) cannot be reasonably applied. All these decisions were relied upon by the ld. AR to drive home the point that CUP should be accepted as the MAM in the instant case. The ld. AR also placed reliance on the decision of Delhi Tribunal in the case of Tilda Riceland Pvt. Ltd. vs. ACIT reported in 161 TTJ 213 wherein acceptability of prices from TIPS Data Base was engaged and it was also held that in any event what TIPS software does is to collect the data, compile the same in easy to refer format and make it available to the end user of such data online (www.TIPSaxim.com) or on electrical media, but this data nonetheless, is public data maintained by the Customs department at various ports. It was also held by the Delhi Tribunal that the ld. TPO was in error in rejecting the information, inputs received from the TIPS software and the data base made available by the said entity.

5.4. The ld. AR with regard to his statement of adopting portfolio approach in CUP method by using TIPS Data Base, placed reliance on the decision of this Tribunal in the case of Boskalis International Dredging C.V vs. DDIT reported in 67 SOT 118. The ld. AR also submitted that this decision of Mumbai Tribunal in the case of Boskalis International Dredging C.V, supra had been upheld by the Hon’ble Jurisdictional High Court which is reported in TS-1310-HC-2018 (MUM). The ld. AR also submitted that in the recently released OECD final deliverables on the Base Erosion and Profit Shifting (BEPS), Action Plan 8 to 10 on Aligning Transfer Pricing TP outcomes as with Valuation Creation specifically contains the chapter of commodity transactions, wherein the OECD as profit guidance with price obtained from a recognized and transparent price reporting or statistical agencies or from Governmental price setting agencies can be considered to be valid for CUP method.

5.5. The ld. AR also made several arguments to prove that TNMM cannot be considered as MAM in the facts of the instant case and he also vehemently objected to the various comparables chosen by the ld. TPO. due to functional dissimilarities, among others in that regard. The said arguments are not brought out herein in this order in view of the elaborate arguments made by the ld. AR for adoption of CUP to be MAM.

5.6. Per contra, the ld. DR vehemently objected to admission of various additional evidences filed by the assessee detailed hereinabove on the ground that assessee is in the habit of filing additional evidences before the ld. DRP as well as before this Tribunal. The ld. DR vehemently argued that the reasons for incurring losses by the assessee using CPM as MAM during the year was stated to be the commercial decision taken by the assessee pursuant to MOU entered into with Asian Paints Ltd. and that this was stated for the first time before this Tribunal only by the assessee. This was never pointed out before the lower authorities. In other words, the ld. DR argued that assessee had never adduced proper reasoning before the lower authorities for incurrence of losses during the year in its manufacturing business that it was attributable to lower sales realization from Asian Paints Ltd. 5.7. With regard to adoption of CUP as MAM, the ld. DR objected that assessee had to be consistent with regard to one particular method to be adopted by him. He argued that the assessee cannot be given a complete leeway to choose different methods at different point in time for different assessment years before different forums. He stated that up to A.Y.2014- 15, assessee had been applying only CPM as MAM.

5.8. The ld. DR reiterated the findings of the ld. DRP that the market price of raw materials was fluctuating on a day to day basis and hence, the set off as proposed by the assessee for using portfolio approach cannot be considered and the price prevailing on the day of transaction alone is to be considered. He argued that no evidences were produced by the assessee to show that the prices were initiated on combined basis for both import as well as export.

5.9. With regard to adoption of CUP as MAM using TIPS Data Base, the ld. DR argued that the data base in TIPS software is only Customs Department data maintained for determining the levy of duty and the same cannot be used for benchmarking international transactions carried out by the assessee. He further argued that even if the TIPS Data Base is to be accepted, the data on the relevant date of transaction is to be compared. He vehemently opposed the acceptance of bundled approach carried out by the assessee.

5.10. With regard to acceptability of TIPS software by the ld. TPO in A.Y.2014-15, the ld. DR argued that the same was just used by the ld. TPO for his own purposes and has been taken by the ld. TPO for A.Y.2014-15 cannot be applied for A.Y.2010-11 i.e. year under appeal. The ld. DR vehemently opposed for admission of additional evidences filed by the assessee for usage of TIPS Data Base which covers 94.69% of the total import transactions from AEs, and opposed for remanding the same for verification to the file of the ld. TPO on the grounds that assessee cannot be given a second chance to improve its case. The ld. TPO finally submitted that even in TIPS Data Base, the data on the relevant date of transaction is to be considered or at least to the nearby dates. Hence, the claim of the assessee is that 94.69% of the total import transactions gets covered using TIPS Data Base is not correct and only 70% of the total value is comparable from the said TIPS Data Base. Hence, he submitted that the argument of the ld. AR deserves to be rejected on this ground itself.

(b) TIPS Data Base maintained by the Customs Department which has also been accepted by the Delhi Tribunal in the case of Tilda Riceland Pvt. Ltd. vs. ACIT reported in 161 TTJ 213 supra, should be accepted as a valid database.

(c) While comparing the data at or near to the relevant date of transactions with the comparable prices using TIPS Data Base, the ld. TPO is directed to adopt portfolio approach to take both the prices that are favourable to assessee as well as that are adverse to assessee in view of a categorical finding of fluctuating prices for the same product already given by the ld. DR which is not disputed by the ld. DR before us. We hold that the revenue cannot do cherry picking of those transactions which are favouring them and ignore those transactions that are detrimental to them while benchmarking the transactions of the assessee with comparable cases. This has already been upheld by the decision of this Tribunal in the case of Boskalis International Dredging C.V vs. DDIT reported in 67 SOT 118 , which decision has been subsequently approved by the Hon’ble Jurisdictional High Court reported in TS-1310-HC-2018 (MUM).

6.1. Based on the aforesaid directions, the ld. TPO is directed to work out the arm’s length price and make adjustment thereon, if necessary in respect of import of raw materials made by the assessee from its AEs. Accordingly, the Revised ground Nos.1-7 raised by the assessee in respect of transfer pricing adjustment together with additional grounds thereon are allowed for statistical purposes.

CORPORATE TAX ISSUES:-

7.1. The assessee pleaded before the ld. DRP that those sundry creditors were continued to be shown as liabilities in its balance sheet and those liabilities has not ceased to exist so as to warrant invocation of provisions of Section 41(1) of the Act. It was also submitted that the concerned creditors had not waived their right to receive money from the assessee and the assessee had not written back those liabilities to its income. Accordingly, it was pleaded that there is neither unilateral nor bilateral cessation of liability. The ld. DRP however, observed that these liabilities are outstanding since 2009 and continued as outstanding till 2014, but still upheld the action of the ld. AO.

7.2.. Aggrieved, the assessee is in appeal before us.

7.3. We have heard the rival submissions. It is not in dispute that the assessee had not written back those liabilities as no longer payable by crediting to its profit and loss account. The assessee continues to show the said sundry creditor balance as its liability, meaning thereby liability to pay all these sundry creditors had been duly acknowledged by the assessee as on the balance sheet date and even in subsequent years. Hence, the same does not fall under the ambit of cessation of liability. It is for the assessee to decide whether a particular liability had ceased to exist from its books or not. We find lot of force in the reliance placed by the ld. AR on the decision of Hon’ble Apex Court in the case of CIT vs. Sugauli Sugar Works Pvt. Ltd.,reported in 236 ITR 518, decision of Hon’ble Delhi High Court in the case of CIT vs. Shri Vardhman Overseas Ltd., in 343 ITR 408 (Del) which supports the argument of the assessee. In view of the aforesaid observations and respectfully following the judicial precedents, we direct the ld. AO to delete the addition made u/s.41(1) of the Act in the sum of Rs.1,24,008/-. Accordingly, the revised ground No.8 is allowed.

8.1. The brief facts of this issue are that the assessee is engaged in the business of manufacturing and trading of chemicals, imports and exports of raw materials, finished goods, traded products etc., The assessee has taken foreign currency loan for the purpose of business which was repaid during the year under consideration. In order to mitigate the risk of foreign exchange fluctuation, the assessee entered into forward exchange contracts with the bank. During the year under consideration, the assessee has incurred a foreign exchange fluctuation loss of Rs.26,13,86,459/- on cancellation of forward contracts, which were claimed as deduction in the return of income filed by the assessee as the same were related to the business of the assessee. The assessee during the course of assessment proceedings gave a break-up of net foreign exchange loss adopted in the profit and loss account in the sum of Rs.4,52,69,267/- as under:- a) Net exchange loss on cancellation of forward contracts - Rs.26,13,86,459/- b) Exchange loss realized (other than Cancellation of forward contracts) Rs.12,66,14,800/- c) Exchange gain and realized (other Than cancellation of forward contracts) (Rs.34,27,21,993/-) Net Foreign exchange loss adopted to P & L Account (a+b+c) Rs.4,52,79,266/- ============== 8.2. Out of the above, the ld. AO asked the assessee to furnish the detailed note and description of exchange fluctuation loss of Rs. 26,13,86,459/- incurred due to foreign exchange fluctuation of cancellation of forward contracts alone. In response to the same, the assessee submitted that the losses incurred on cancellation of forward contracts were related to import / export transaction regarding to trading of goods. The assessee further submitted that it is not in the business of hedging forward contracts. The ld. AO further observed that the assessee failed to demonstrate that the forward contracts were entered into in relation to its business. The ld. AO further observed that the foreclosure or cancellation of forward contracts falls within the ambit of speculation activity carried out by the assessee and accordingly proceeded to disallow the sum of Rs.26,13,86,459/- in the assessment. In other words, the ld. AO treated the said loss as speculation loss and not normal business loss.

8.3. Before the ld. DRP, the assessee furnished certain additional evidences in the form of statement giving listing of forward contracts which resulted in loss of Rs. 26,13,86,459/- together with certain sample copies of forward contracts entered into with the bank to prove that the same were related to the trading activity of the business of the assessee. The ld. DRP sought for a remand report in this regard from the ld. AO. During the remand proceedings, the ld. AO after verification of additional evidences that were filed by the assessee held that loss on cancellation of forward contract is not allowable by observing that the documentary evidences does not prove that the same were related to import / export transactions carried out by the assessee. The ld. DRP however, after considering the statements of the assessee and the remand report of the ld. AO together with the additional evidences filed stated that loss of cancellation of forward contracts in respect of traded goods should be allowed as deduction and accordingly, directed the ld. AO to verify other forward contracts also. Pursuant to the directions of the ld. DRP, the assessee submitted a letter dated 24/12/2014 submitting listing of forward contracts and some more sample copy of forward contracts including three sample copies already submitted in the form of additional evidences with the ld. AO and explained prices and charges of entering into forward contracts. The assessee duly submitted that these forward contracts were either entered for import / export transaction or it had been “re-booked” for extension for further period. However, in the final assessment order, the ld. AO without appreciating the explanation of the assessee and not following the directions of the ld. DRP proceeded to disallow the entire loss on cancellation of forward contracts as not relatable to traded goods of the assessee in the sum of Rs. 26,13,86,459/-.

8.4. We have heard rival submissions. We find that the ld. AR had filed additional evidences in the form of certificate from Citi Bank stating that the foreign exchange fluctuation loss on cancellation of forward contract had arose only in respect of trading transactions. These documents are enclosed in pages 1013 and 1014 of the paper book. We also find that the ld. AR had placed a certificate from Standard Chartered Bank confirming the same which is enclosed in page 1055 of the paper book. The ld. AR also placed on record the RBI guidelines permitting opening of forward contract which are enclosed in page 1020 of the paper book. The ld. AR fairly stated that since these documents were admittedly not submitted before the lower authorities, he stated that let it be examined by the ld. AO, and in case if the forward contracts were entered by the assessee for these trading transactions and, if on examination that is found to be correct, then the assessee may be granted deduction pursuant to its verification by the ld. AO. The ld. AR also gave the entire details of various forward contracts entered into by the assessee with Citi Bank and Standard Chartered Bank which are enclosed in pages 760-780 of the paper book. The ld. DR vehemently opposed that the additional evidences submitted by the assessee before the Tribunal should not be admitted as sufficient opportunities were provided to the assessee by the lower authorities. We are not inclined to accept this argument of the ld. DR as the basic details of forward contracts were indeed given by the assessee before the lower authorities and the same were not properly appreciated with reference to the relevant documents by the lower authorities. The present documents filed were only as a matter of abundant caution and to further strengthen the evidences as detailed supra. Hence, we are convinced that these additional evidences deserve to be admitted and accordingly, deem it fit and appropriate to remand this issue to the file of the ld. AO to decide the impugned issue in dispute before us in the light of additional evidences filed by the assessee together with list of forward contracts on cancellation of which foreign exchange fluctuation loss had been incurred by the assessee need to be verified by the ld. AO and, if it is found by the ld. AO, that the forward contract was indeed entered for trading purposes, then the exchange fluctuation loss should be allowed as deduction for the assessee. With these directions, the revised ground Nos. 9 & 10 and additional Ground (revised Ground No.23) are allowed for statistical purposes.

9.1. During the course of assessment proceedings, the assessee was asked to establish identity / creditworthiness of the following list of creditors by the ld. AO:- Party name Amount* (in Rs) 31,557,521 L2 Material GR/IR clearing 71,027,584 26,829,323 Non product goods receipt/ invoice receipt 14,434,052 Non material/ goods receipt/ invoice receipt 45,645,484 Goods receipt/ invoice receipt/ clear/F

89,2241 Other provision 23,927,068 A/P suppliers manual posting 21,43,13,273 Total (*closing balance as on 31 March 2010} 9.2. The ld. AO observed that assessee was unable to provide the requisite details and accordingly, proceeded to make the addition u/s.68 of the Act as unexplained creditors. Before the ld. DRP, assessee filed additional evidences like name of the party, address of the party, amount owed comprising the aforesaid creditors aggregating to Rs.21,43,13,273/- The assessee further submitted that most of the parties involved therein were duly paid / settled in the subsequent years. The ld. CIT(A) called for a remand report from the ld. AO. In the remand proceedings, the ld. AO after verification of additional evidences observed that the details submitted by the assessee are found to be untenable as assessee had simply filed list of alleged creditors that the assessee could not establish the identity and creditworthiness of the parties involved and failed to substantiate the genuineness of the transactions. The ld. DRP on considering the party wise details submitted by the assessee before it and the remand report of the ld. AO again directed the ld. AO to verify whether the creditors have been settled subsequently. Further the ld. DRP also directed that where amounts are still outstanding at the time of issue of direction, the addition may be retained unless the assessee gives full address of the party and establish the identity thereon. Pursuant to the directions of the ld. DRP, the assessee vide letter dated 24/12/2014 submitted before the ld. AO the following details to establish the identity and creditworthiness of the sundry creditors. a) The statement giving list of sundry creditors. (i) Having balance more than Rs.5 lakhs outstanding (ii) Others i.e. party name, address and amount due alongwith sample copy of recent invoices issued by the said sundry creditors to establish identity of the creditors. These documents are enclosed in pages 787 to 953 of the paper book filed before us. b) The ld. AO requested assessee to submit the written balance confirmation of more than 300 parties and to bring them in person to substantiate the identity of the parties involved. In response to the same, the assessee could not produce the confirmation from the parties or bring them in person after so many years. However, assessee submitted the full addresses and respective PAN of most of the parties to substantiate their identity. These details are enclosed in pages 960 to 968 of the paper book filed before us.

9.3. Inspite of having all these documents on record, the ld. AO in the final assessment order made an addition of Rs.21,43,13,273/- in respect of sundry creditors for the reasons that the identity and creditworthiness of the parties were not proved by the assessee.

9.4. Aggrieved, assessee is in appeal before us.

9.5. We have heard the rival submissions. We find that assessee has submitted the following supplementary evidences before us vide letter dated 19/10/2018:- a) The details submitted before the lower authorities are now categorized into foreign vendors and other vendors. These details are enclosed in page 1029 to 1038 of the additional evidences in respect of the above details. The assessee submitted that out of the total amount of Rs.21,43,13,273,

(i) An amount of Rs.1,81,88,112/- pertains to foreign vendors for which assessee has provided the addresses of all the parties. (ii) Further in the case of foreign vendors which include transactions with the assessee’s AEs, the transactions with them even benchmarked and verified / accepted during the transfer pricing assessment proceedings. Further PAN details of other party vendors were not provided wherein they were not required to obtain PAN in India. (iii) The balance amount of Rs.19,61,25,161/- pertains to Indian vendors for which the assessee has already provided the addresses and PAN details of parties aggregating to Rs.15,78,97,121/- which covers 80% of the total amount thereon. (iv) Assessee submitted that in order to establish identity of the parties, addresses and PAN details were provided for major parties b) The assessee also submitted a statement showing details of movement of parties having closing balance of more than Rs.1 Crore as on 31/03/2010 i.e. opening balance as on 01/04/2009, purchases made from the parties during the year, payments made during the year to those parties, closing balance as on 31/03/2010 and the date of payment / credit in the bank statement to prove that the closing balance has been subsequently paid by the assessee. This statement is enclosed in page 1039 of the additional evidence filed before us in the paper book. With these documents on record, the ld. AR pleaded that assessee had duly proved the identity of those parties and also their creditworthiness and further pleaded that these parties are having regular business transactions with the assessee and prayed for deletion of addition made u/s.68 of the Act. We find lot of force in the alternative argument made by the ld. AR that purchases made from the aforesaid parties involved were accepted by the ld. AO as genuine. Once the purchases have been accepted as genuine, there cannot be any question of disputing the closing balance of the sundry creditors of the very same parties by treating them as unexplained credits u/s.68 of the Act. We find that the assessee had furnished various evidences which had not been properly appreciated by the lower authorities and certain evidences were also submitted before us as additional evidence for the first time as detailed supra and these additional evidences require to be factually examined by the ld. AO. Hence, we admit those additional evidences in the interest of justice and fair play and deem it fit and appropriate to remand this issue to the file of the ld. AO for denovo adjudication in the light of various evidences including the additional evidence submitted by the assessee. The assessee is also at a liberty to furnish further evidences, if any, in support of its contentions. Accordingly, the revised ground Nos.11 & 12 raised by the assessee are allowed for statistical purposes.

10.1. During the year under consideration, the assessee had incurred legal and professional fees of Rs.5,03,02,904/- and assessee was asked to produce the details of the same. The assessee vide letter dated 21/02/2017 submitted the details such as name of the party, address of the party, amount incurred thereon. The ld. AO however, proposed to make adhoc disallowance of 20% of the total expenditure amounting to Rs.1,00,60,581/- for want of documentary evidence of incurring legal and professional fees. The ld. AO also placed reliance on the decision of his predecessor in assessee’s own case for the earlier year to support the disallowance made in the year under consideration. The assessee submitted before the ld. DRP that the aforesaid incurrence of legal and professional expenses were made wholly and exclusively for the purpose of his business; that the same are not capital / personal in nature and hence, the same are squarely allowable as deduction u/s.37 of the Act. The assessee also submitted that the statutory and Tax Auditors had not given any adverse comments in their audit reports regarding genuineness of legal and professional fees and its related business nexus thereon. The assessee further submitted that, in any case, the adhoc disallowance made by the ld. AO at 20% of total legal and professional fees cannot be sustained. However, the ld. DRP upheld the addition made by the ld. AO for want of documentary evidences.

10.2. Aggrieved, the assessee is in appeal before us.

10.3. We have heard the rival submissions. We find that the assessee had also submitted additional evidences in pages 988 to 1012 of the paper book and pages 1040 to 1042 of the paper book giving various details of legal and professional fees paid to various parties together with their PAN and nature of services rendered by them. These evidences require factual examination of the ld. AO and hence, in the interest of natural justice and fair play, we deem it fit to remand this issue to the file of the ld. AO for denovo adjudication in the light of various additional evidences submitted by the assessee which are admitted herein and decide the issue in accordance with law. The assessee is at liberty to furnish further evidences, if any in support of its contentions. Accordingly, the ground No.13 raised by the assessee is allowed for statistical purposes.

11.1. Aggrieved, the assessee is in appeal before us.

11.2. We have heard rival submissions. We find that the ld. AR vehemently pleaded that the advances in the sum of Rs.3,92,62,964/- were regular business / trade advances given by the assessee for the purpose of its business and were given to the regular parties with whom the assessee has regular business transactions. The ld. AR also submitted supplementary evidence before us vide letter dated 19/10/2018 in the form of statement showing movement of advance given to these parties and that is opening balance as on 01/04/2009, advance given during the year, payments received / set off during the year, closing balance as on 31/03/2010 and the adjustment / set off of closing balance in the subsequent period by raising the invoice or by adjusting the advances. These additional evidences are enclosed in page 1043 of the paper book which deserves to be admitted as it is a factual matter. The ld. AR also argued that assessee is having sufficient interest free funds in its kitty to make these interest free advances in any case, and hence, by placing reliance on the decision of the Hon’ble Jurisdictional High Court in the case of HDFC Bank and Reliance Utilities and Power Ltd., he argued that no disallowance of interest u/s. 36(1)(iii) could be made in the facts of the instant case. We also find that these documents requires to be factually examined by the ld. AO, hence we deem it fit and appropriate in the interest of justice and fair play to remand this issue to the file of the ld. AO for adjudication in the light of additional evidences filed hereinabove and in the light of decision of Hon’ble Jurisdictional High Court HDFC Bank and Reliance Utilities and Power Ltd supra. The assessee is at a liberty to furnish further evidences, if any, in support of its contentions. Accordingly, the revised grounds 14 & 15 raised by the assessee are allowed for statistical purposes.

11.2. In the result, appeal of the assessee in for A.Y.2010-11 is partly allowed for statistical purposes.

13.1. During the year under consideration, the assessee had imported raw materials amounting to Rs.182,91,48,671/- for manufacturing specialty chemicals and exporting finished goods to its AEs amounting to Rs.129,43,85,574/-. The assessee has segregated both the transactions and benchmarked the same applying CPM in its TP study as was done in earlier years. The ld. TPO as was done by him in A.Y.2010-11 rejected the CPM as well as alternate benchmarking done by the assessee using CUP method, and applied TNMM, benchmarked the transactions of import of raw materials and made an adjustment of Rs.25,25,13,733/-. The ld. TPO used PLI of Operating Profit / Operating Revenue (OP/OR) under TNMM and rejected the companies adopted as comparables by the assessee in its TP study report and selected his own set of comparables. The resultant arithmetic mean of 14.96% was arrived and the same when compared to assessee’s operating margin of 1.34% on income resulted in an adjustment of Rs.25,25,13,733/- to the income of the assessee. This entire adjustment was made by the ld. TPO in the same manner as was done by him in A.Y.2010-11.

13.2. The ld. TPO based on alternative analysis conducted by him in A.Y.2013-14, added four additional comparables engaged in manufacture of emulsions during year under consideration to the study of companies selected as comparables by him and on without prejudice basis, proposed to make an alternate adjustment of Rs.17,94,66,442/- in respect of import of raw materials from AEs by applying TNMM. The ld. TPO rejected the CUP analysis submitted by the assessee using ICIS data base and on his own conducted a search on TIPS Data Base for import prices of raw materials. In the study analysis, the ld. TPO did not consider the portfolio approach and proposed an alternate adjustment of Rs.6,25,15,581/- to the income of the assessee under CUP method. However, the ld. TPO himself did not consider the CUP adjustment worked out using TIPS Data Base stating that comparable datas for only 80% of the raw materials imported by the assessee were available and hence, in the absence of complete CUP data for 100% of raw materials imported, limited CUP data cannot be used to benchmark the said transaction.

13.3. Accordingly, the ld. TPO finally sustained the adjustment of Rs.25,25,13,733/- made to ALP in respect of import of raw materials from AEs by using TNMM in the same manner in which as was done by him in the assessment year 2010-11. The ld. DRP upheld the order of the ld. TPO.

13.4. Aggrieved the assessee is in appeal before us. Before us the assessee filed an additional evidence furnishing the revised TIPS analysis under CUP method using TIPS data base, wherein, the assessee was able to provide the comparable data to 98.25% of the total transaction of import of raw materials as against 80% computed by the ld. TPO in its order. The assessee pleaded that once the portfolio approach is considered using TIPS Data Base under CUP method, there would be no need to make any adjustment to ALP. The ld. DR vehemently opposed to the non-admission of these additional evidences as was done by him for A.Y.2010-11 and reiterated the findings of the lower authorities.

13.5. We have heard rival submissions and perused the materials available on record. At the outset, we find that this issue of adjustment to ALP in respect of import of raw materials is similar to that adjudicated by us in A.Y.2010-11 supra wherein we have remanded the issue to the file of the ld. TPO with certain directions. The said decision would apply with equal force for this assessment year also except with variance in figures. We also find that for this assessment year i.e. A.Y.2014-15, assessee is able to provide comparable data using TIPS Data Base under CUP method for 98.25% of the transactions as against 94.69% transactions provided for the A.Y.2010-11. Accordingly, the grounds raised by the assessee in respect of import of raw materials are allowed for statistical purposes subject to aforesaid directions contained in A.Y.2010-11.

13.6. With regard to international transaction in respect of export of finished goods to AE during the A.Y.2014-15, the ld. TPO made an alternate transfer pricing adjustment of Rs.21,07,34,721/- by applyingTNMM using Profit Level Indicator (PLI) of OP/OC (Operating Profit/Operating Cost) of the assessee and two comparables selected by him. However, the ld. TPO sustained the adjustment of Rs.25,25,13,733/- arising on account of benchmarking of the import of raw materials as it was higher than the adjustment arising on account of benchmarking of export of finished goods at Rs.21,07,34,721/-. This action of the ld. TPO was upheld by the ld. DRP.

13.7. Aggrieved, the assessee is in appeal before us.

13.8. We have heard rival submissions. Before us, the assessee filed additional evidence in the form of datawise comparison of export prices and market prices using TIPS Data Base under CUP method using aggregation / portfolio approach for 94.23% of the total exports made to AE’s and pleaded for acceptance of the same. This was filed in addition to vehemently objecting to the adoption of TNMM as MAM. The ld. AR on without prejudice basis, vide letter dated 08/02/2019 also submitted that even if TNMM is to be adopted as MAM, the assessee segmental results pertaining to export of finished goods is required to be considered for benchmarking the international transaction of export of finished goods wherein assessee has earned operating margin of 25.14% on operating cost. Accordingly, the operating margin earned by the assessee in respect of export to AEs was higher than the arithmetic mean of the operating margin earned by comparable companies selected in TP study (i.e. 2.55% companies selected by the ld. TPO for computing disallowance i.e. 17.86%, additional companies selected by the ld. TPO from emulsions companies i.e. 10.78%)

13.9. Per contra ld. DR vehemently objected to the admission of additional evidences filed before this Tribunal and reiterated the findings of the ld. DRP. We have already held in A.Y.2010-11 that additional evidences filed by the assessee for import of raw materials using TIPS Data Base under CUP method is to be admitted as it covers majority of the international transactions carried out by the assessee. In the instant case in respect of export of finished goods, the comparable data using TIPS Data Base under CUP method covers 94.23% as stated by the ld. AR of the total value of the transactions. However, since this data requires factual examination of comparable prices by the ld. TPO, we deem it fit and appropriate to remand this issue to the file of the ld. TPO in the same directions as was given by us for import of raw materials from AEs for A.Y.2014-15 supra.

13.10. Accordingly, the ground Nos. 3-14 raised by the assessee are allowed for statistical purposes.

14.1. The ground No.16 raised by the assessee is with regard to initiation of penalty proceedings u/s.271(1)(c) of the Act which would be premature at this stage to be adjudicated.

14.2. In the result, appeals of the assessee in A.Y.2010-11 and 2014-15 are partly allowed for statistical purposes.

SA No.261/Mum/2019 (A.Y.2014-15)

Order pronounced in the open court on this 26/09/2019