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Income Tax Appellate Tribunal, “J”BENCH, MUMBAI
Before: SHRI SAKTIJIT DEYAND SHRI M. BALAGANESH
PER SAKTIJIT DEY. J.M.
The captioned appeals have been filed by the same assessee challenging the final assessment orders passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short "the Act")
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in pursuance to the directions of learned Dispute Resolution Panel–2, Mumbai, pertaining to the assessment years 2012–13 and 2013–14. Corresponding stay applications arise out of the aforesaid appeals.
ITA no.6648/Mum./2017 Assessment Year :2013–14
Ground no.1, being general in nature does not require adjudication.
In grounds no.2 to 3.5, the assessee has challenged the addition made on account of adjustment to the arm’s length price of international transaction with the Associated Enterprises (AEs) relating to export of finished goods. However, in ground no.2.2, the assessee has raised a legal issue challenging the authority jurisdiction of learned DRP in enhancing the income of the assessee. At the outset, we propose to deal with the aforesaid legal issue.
Brief facts are, the assessee, an Indian company, is engaged in the business of manufacture, trading and marketing including exports of fast moving consumer goods (FMCG) such as soaps, detergents, home and personal care (HPC) products, atta, beverages etc. For the assessment year under dispute, the assessee filed its return of income on 29th November 2013, declaring total income of ` 188,50,06,120. In course of assessment proceedings, the Assessing Officer noticing that
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in the relevant previous year, assessee has entered into various international transactions with its overseas AEs, made a reference to the Transfer Pricing Officer for determining the arm’s length price of such international transaction. In the course of proceedings before him, the Transfer Pricing Officer examined the audit report as well as the other details filed by the assessee including the transfer pricing study report. He found, during the year, the assessee has entered into following international transaction with AEs.
Sr. Nature of Transaction Amount Method Used no. 1. Import of raw materials ` 450436398 TNMM Export of manufactured ` 4930372273 2. TNMM HPC products 3. Export of beverages ` 2601936315 TNMM Payment of royalty fees 4. technical documentation, ` 100884408 CUP information and know how Payment of royalty fees 5. ` 15373005 CUP for trademarks Payment of royalty fees ` 4626216 6. CUP for services Not reported as a 7. Receivables. separate tran– saction
After verifying all the details, the Transfer Pricing Officer ultimately proposed adjustment in respect of the following international transactions.
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Royalty fees for technical document– ` 7,36,96,859 tary information and knowhow 2. Royalty paid for services ` 46,26,216 3. Interest on receivables ` 2,06,00,671 Total:– ` 9,89,23,746
Insofar as the international transactions relating to export of manufactured HPC and beverages are concerned, the Transfer Pricing Officer did not propose any adjustment in respect of them. In pursuance to the order passed by the Transfer Pricing Officer, the Assessing Officer framed the draft assessment order adding the transfer pricing adjustments proposed by the Transfer Pricing Officer. Against the draft assessment order, the assessee raised objections before learned DRP. While considering the objections raised by the assessee, learned DRP having found that the Transfer Pricing Officer has accepted the arm’s length price of the subject transaction, proceeded to examine the benchmarking done by the assessee as well as other relevant aspects relating to such transaction. Having examined, learned DRP observed, the profit margin of products sold to non–AEs is significantly higher than the profit margin on sales to AEs. In this context, learned DRP observed, as against the total turnover of ` 1062.54 crore, the export of HPC products to the AEs was ` 494.03 crore and export of beverages to the AEs amounted to ` 260.19 crore.
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Therefore, the remaining turnover of ` 309.32 crore, according to learned DRP, related to non-AEs. Further, learned DRP observed, as per the assessee, the sales to AEs was with a mark–up of 9% of the total cost. In that event, learned DRP observed, the cost of sales of ` 753.22 crore to the AEs comes to ` 691.02 crore giving a margin of ` 62.19 crore, which translates into net profit of 8.256%. Whereas, the total profit of the assessee as per the Profit & Loss account was ` 163.28 crore, meaning thereby, the profit of ` 101.09 crore pertains to sales made to the non-AEs which translates into a profit margin of 32.69%. Therefore, learned DRP issued a show cause notice to the assessee in terms with section 144C(8) of the Act, proposing to enhance the income. In the said notice, learned DRP called upon the assessee to explain why external Transactional Net Margin Method (TNMM) selected by it to benchmark the transaction relating to export of HPC and beverages should not be rejected and such transaction should not be benchmarked by applying internal Comparable Uncontrolled Price(CUP) / TNMM. In response to the aforesaid show cause notice, assessee made elaborate submissions objecting to the proposed enhancement. It was submitted by the assessee, learned DRP has no power to enhance the income of the assessee in respect of a transaction where no variation has been proposed and the assessee has not raised any objection. Further, the assessee also submitted, in
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the given facts and circumstances, internal TNMM cannot be applied as the non–AE transactions cannot be compared with the AE transactions because of various factors. However, learned DRP did not find merit in any of the submissions made by the assessee. Learned DRP observed, section 144C(8) r/w its Explanation empowers it to enhance the income even if the assessee has not raised any objection with regard to such variation. Having held so, learned DRP also rejected assessee’s contention with regard to non–applicability of internal TNMM and proceeded to compute the arm’s length price of the subject transaction with the AEs by applying internal TNMM and made an adjustment of ` 302.93 crore.
Shri P.J. Pardiwala, learned Sr. Counsel for the assessee submitted, the Transfer Pricing Officer has accepted the international transaction relating to export of HPC and beverages to the AEs benchmarked by the assessee under external TNMM to be at arm's length, hence, has not proposed any variation. He submitted, since the Transfer Pricing Officer has not proposed any variation regarding the aforesaid transaction, it does not arise out of the draft assessment order, hence, the assessee has not raised any objection before learned DRP on the issue. Drawing our attention to section 144C(8) of the Act, he submitted, learned DRP has power to enhance only in respect of variations proposed in the draft assessment order against which the
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assessee has raised objections. In support of such contention, he relied upon the following decisions:–
i) G.E. India Technology Centre Pvt. Ltd. v/s DRP, [2011] 338 ITR 416 (Kar.); and ii) Dredging International N.V. v/s ADIT, [2011] 15 taxmann.com 198 (Mum.).
The learned Sr. Counsel submitted, the Explanation to section 144C(8) of the Act brought to the statute by Finance Act, 2012, with retrospective effect from 1st April 2009, cannot expand the scope of the main provision. He submitted, the purpose of bringing an Explanation is to explain the main provision. In support of such contention, he relied upon the following decisions:–
i) S. Sundaram Pillai &Ors. v/s V.R. Pattaviraman & Ors. [1985] 1 SCC 591; ii) Zakiya Begum and Ors. v/s Shanaz Ali &Ors., [2010] 9 SCC 280; and iii) CIT v/s Knight Frank India Pvt. Ltd., [2016] 72 taxmann.com 300 (Bom.).
Drawing our attention to the Finance Bill 2010, the learned Sr. Counsel submitted, the main purpose for which Explanation to sub– section (8) of section 144C of the Act was introduced is to nullify the effect of the ratio laid down by the Courts and Tribunals with regard to DRP’s power of enhancement. Thus, he submitted, the Explanation
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was intended to expand the scope of the main provision. Without prejudice to the aforesaid submissions, learned Sr. Counsel submitted, even after introduction of Explanation to section 144C(8) of the Act, the power of enhancement is only with reference to a variation made by the Transfer Pricing Officer and not challenged by the assessee before the DRP. To buttress his submission, learned Sr. Counsel drew our attention to section 251 of the Act and submitted, unlike Explanation to section 144C(8) of the Act, the power of the first appellate authority is much wider as it is not confined to variation in income by the Assessing Officer. He submitted, the power of enhancement under section 144C(8) of the Act is much narrower than the power of enhancement under section 251 of the Act. Thus, he submitted, the action of learned DRP in enhancing the income has to be declared as without jurisdiction, hence, invalid.
As regards the merits of the disputed addition, learned Sr. Counsel submitted, under no circumstances internal TNMM can be applied to benchmark the transaction. He submitted, the Transfer Pricing Officer has not found any fault with the external TNMM applied by the assessee to benchmark the transaction. He submitted, even, learned DRP has not specifically pointed out any flaw in the benchmarking of the assessee. Drawing our attention to various materials placed in the paper book including the submissions made
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before learned DRP, he submitted, various distinguishing features make the AE and non-AE transactions incomparable. In this regard, learned Sr. Counsel submitted a tabular chart to demonstrate the specific differences between the AE and non-AE transactions. Thus, he submitted, internal TNMM cannot be the most appropriate method to determine the arm’s length price. In support, he relied upon the following decisions: -
(i) Wrigley India Pvt. Ltd. v/s ACIT, in ITA no.5648/Del./2012, etc., dated 31st December 2014; (ii) Piaggio Vehicles Pvt. Ltd. v/s DCIT, [2012] 26 taxmann.com 60 (Pun.)
Shri Bhupendra Kumar Singh, the learned Departmental Representative submitted, under section 144C(8) of the Act learned DRP always had the power to enhance the income/variation made by the Transfer Pricing Officer and the Explanation to section 144C(8) of the Act has further clarified the position. He submitted, the Explanation having been brought to the statute with retrospective effect would be applicable to the impugned assessment year. The learned Departmental Representative submitted, when the Explanation has clarified the intention of legislature, by interpreting the provision in a different manner the power of enhancement conferred on learned DRP cannot be restricted. The learned Departmental Representative
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submitted, the decision of the of the Hon’ble Karnataka High Court in G.E. India Technology Centre (P) Ltd. (supra) and the decision of the Tribunal in Dredging International N.V. (supra) would not apply to the facts of the present case as these decisions were rendered prior to introduction of Explanation to section 144C(8) of the Act. He submitted, after introduction of Explanation to section 144C(8) of the Act, the position has changed and all doubts regarding the power of enhancement of DRP has been put to rest. In this context he relied upon the decision of the Tribunal, Delhi Bench, in Bausch and Lomb India Pvt. Ltd. v/s ACIT, [2017] 85 taxmann.com 163 (Del.) and decision of Tribunal , Mumbai Bench in M/s. Hamon Shriram Cottrell Pvt. Ltd. v/s ITO, ITA no.7982/Mum/2011, dated. 19.04.2013. Thus, he submitted, aforesaid decisions of the Tribunal squarely cover the present dispute. As regards the merits of the issue, learned Departmental Representative relied upon the observations of learned DRP.
In rejoinder, though, learned Sr. Counsel for the assessee agreed that in the decisions of the Tribunal, the issue has been decided against the assessee, however, he submitted, in the said decisions the Tribunal had no occasion to deal with the argument advanced by him to the effect that the Explanation cannot expand the scope of main provision.
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We have considered rival submissions and perused the material on record. Undisputedly, the international transaction with the AEs relating to export of HPC and beverages was benchmarked by the assessee applying external TNMM. Admittedly, the Transfer Pricing Officer has not proposed any adjustment/variation to the arm’s length price of the aforesaid transaction shown by the assessee. That being the case, there is no scope for any objection being raised by the assessee before learned DRP with regard to the said transaction. It is a fact on record that while dealing with the objections raised by the assessee in relation to some other variations/additions, learned DRP, in exercise of power conferred under section 144C(8) of the Act, has made enhancement/adjustment to the arm’s length price of the transaction relating to export of HPC and beverages with the AEs. The issue before us is, whether or not learned DRP is empowered under the Act to enhance the income in respect of a transaction for which neither any variation has been proposed in the draft order nor the assessee has raised any objection? At this stage, it is relevant to examine the provisions contained under sub–section (8) of section 144C of the Act, which reads as under:–
“(8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order.
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Subsequently, by Finance Act, 2012, the following Explanation was introduced to section 144C(8) of the Act with retrospective effect from 1st April 2009.
― Explanation.—For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee.‖
A reading of section 144C(8) of the Act suggests that learned DRP may confirm, reduce or enhance the variation proposed in the draft assessment order. Whereas, the Explanation to section 144C(8) of the Act clarifies that the power of enhancement vested with learned DRP extends to any matter arising out of assessment proceedings relating to the draft assessment order, notwithstanding the fact whether such issue was raised or not by the assessee before learned DRP. Thus, a conjoint reading of section 144C(8) of the Act along with its Explanation makes it clear that the power of enhancement conferred with learned DRP extends to all matters arising out of assessment proceedings, irrespective of the fact whether any variation has been proposed therein or the assessee raised any objection with regard to any such issue. As per the scheme of section 144C of the Act, against the variation proposed in the Draft Assessment Order, the assessee, at its own option may either avail the Commissioner
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(Appeals) route or the DRP route. That being the case, it would be incongruous to say that powers of the Commissioner (Appeals) in the matter of enhancement are much wider than that of the DRP. If we accept the proposition that power of enhancement with the Commissioner (Appeals) is wider than that of the DRP, it will lead to a anomalous situation, where, in respect of an assessee opting for Commissioner (Appeals) route, power of enhancement in respect of any income, whether challenged by the assessee or not, can be exercised without any fetters. Whereas, in respect of an assessee availing the DRP route, power of enhancement would be restricted only to the variations objected to by the assessee. In our humble opinion, this cannot be the intention of the legislature while enacting the provision of section 144C(8) of the Act. The power of enhancement conferred upon the DRP under section 144C(8) of the Act cannot be interpreted in a manner to restrict it only to the variations objected by the assessee. In our view, any interpretation of section 144C(8) of the Act leading to curtailment of DRP’s power of enhancement would defeat the purpose for which section 144C(8) was enacted. Thus, in our view, the Explanation brought to section 144C(8) of the Act does not expand the scope of the main provision, but only clarifies it and brings to the fore the intention of the legislature for enacting such provision. That being the case, the decisions of the Hon'ble Supreme
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Court in S. Sundaram Pillai &Ors. (supra) and in Zakiya Begum &Ors. (supra) and the decision of the Hon'ble Jurisdictional High Court in CIT v/s Knight Frank India Pvt. Ltd. (supra) would not be helpful to the assessee. As regards the decision of the Hon’ble Karnataka High Court in G.E. India Technology Centre Pvt. Ltd. (supra) and that of the Tribunal in Dredging International N.V. (supra), on a careful reading, it is noticed that the aforesaid decisions were rendered prior to the introduction of Explanation to section 144C(8) of the Act. Therefore, they had no occasion to examine the scope of section 144C(8) of the Act after introduction of Explanation to the said provision. That being the case, these decisions would also not apply to the facts of the present appeal. On the contrary, the decision of the Tribunal, Delhi Bench, in Bausch and Lomb India Pvt. Ltd. (supra) would clearly apply to the facts of the present appeal. In the aforesaid decision, the Tribunal, after taking note of Explanation to section 144C(8) of the Act, has held in the following manner:–
―10. It is clear from the mandate of sub-section (8) that the DRP is empowered, inter alia, to enhance the variations proposed in the draft order. The Explanation to this sub-section inserted retrospectively from 1.4.2000 clarifies that the power of the DRP to enhance the variation shall include the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was not raised by the assessee. When we consider the language of sub-section (8) in conjunction with the Explanation, it clearly emerges that the DRP has a power to enhance variations proposed in the draft order on an international transaction, even if it was not raised by the assessee. 'Enhance
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the variations' include not only increasing the amount of transfer pricing adjustment already proposed, but also making a new transfer pricing adjustment, which was omitted to be proposed/made by the AO/TPO. There is no doubt and cannot be that the power of the DRP is co-terminus with that of the AO/TPO. In other words, the DRP can also do all such things, which the authorities could have done but omitted to do. If the language of the provision is read as disabling the DRP to exercise the power of enhancement in the circumstances as are obtaining in the instant case, as has been canvassed on behalf of the assessee, it would amount to diluting the power, which the statute has expressly granted. 11. Sub-section (7) of section 144C makes it clear that the DRP, before issuing any final directions under sub-section (5), may either (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. In the instant case, the DRP has impliedly taken recourse to clause (b) of sub- section (7) by causing the further enquiry to be made by the TPO before issuing direction u/s 144C(5). In view of the foregoing discussion, it is clear that no exception can be taken to the course adopted by the DRP in making the enhancement.‖
Identical view was expressed by the tribunal also in case of _ M/s. Hamon Shriram Cottrell Pvt. Ltd. v/s ITO (supra). In our view, the aforesaid decisions of the Tribunal clearly clinch the issue in favour of the Revenue. In view of the aforesaid, we hold that learned DRP has validly exercised its power under section 144C(8) of the Act. Ground no.2.2 is dismissed.
Having held so, the next issue, which arises for consideration is, whether the internal TNMM, as applied by learned DRP to determine the arm’s length price of the export of HPC and beverages to the AEs, is the most appropriate method? As discussed earlier, the assessee had benchmarked the aforesaid transaction with the AEs by applying
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external TNMM. Learned DRP has rejected the benchmarking of the assessee on the reasoning that similar transactions were entered into with both the AEs and non–AEs, hence, the transaction with non–AEs can be considered for comparability analysis with the AE transaction to determine the margin. As could be seen, while objecting to applicability of internal TNMM, the assessee has made elaborate submissions before learned DRP stating various factors which make benchmarking of the transaction under internal TNMM impossible. On a perusal of learned DRP’s directions, it appears, learned DRP has not at all considered the objections of the assessee in an objective manner. In fact, the segmental results of AE and non–AE segments furnished by the assessee have been rejected by learned DRP on the flimsy ground that the auditor’s certificate showing such segmental results is not acceptable since he had not initially audited the books of account of the assessee. What was required to be examined by learned DRP is the correctness of assessee’s claim and not who has audited the books of account of the assessee. Further, learned DRP has not provided any valid reason why the benchmarking done by the assessee under external TNMM is not acceptable. Merely because the assessee had entered into transactions both with the AEs and non–AEs, it does not render applicability of external TNMM redundant. More so, when learned DRP has recorded a factual finding that the products sold to
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AEs and non–AEs are different except in case of only five items. It is relevant to observe, in course of hearing of the present appeal, the learned Sr. Counsel for the assessee has brought to our notice various factors which can make a significant difference between the transactions with AEs and non–AEs and would have impact on profitability. As could be seen, insofar as the AE segment is concerned, the assessee acts as a contract manufacturer, accordingly, bears limited risk as the major risk is taken by the AEs. The marketing and distribution are performed by the AE who source the products. Whereas, in case of non–AE segment, the entire risk and reward is with the assessee, as, it not only has to explore the market but has to promote its products. It has to appoint distributors and incur various other expenditures including advertisement, sales promotion, etc. Similarly, for A.E. segment, any new capacity is required to support supplies, the AE underwrites the capital spends. Further, any cost incurred by the assessee with regard to plant and machinery, moulds, etc., will be amortized over the period of three years. Whereas, in case of non–AE segment, the assessee has to add new capacity in anticipation of growing demand and any risk relating to unutilized capacity is borne by the assessee and cannot be recovered from customer in any eventuality. Further, while in case of AE business, the assessee manufactures the products in accordance with the
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requirement of the AEs. However, in case of non–AEs, business innovations have to be on the basis of assessee’s own requirement and looking at market condition/competition, etc. The product offering and specification shall be determined by the assessee and it will not be under any obligation to continue the supply of all or any of the products. Further, in case of AE business, the AEs provide the full year volume estimation for capacity and in case of huge increase in requirement compared to projections, the assessee can refuse to support the additional demand. Whereas, in case of non–AE business the assessee has to make long term planning including capacity, though, along with the customer but it is not binding on the customer. It is noticed, to demonstrate that the transactions between the AEs and non–AEs are not comparable the assessee had furnished various documentary evidences before learned DRP. Moreover, various documentary evidences to support the external TNMM applied to benchmark the transactions were furnished not only before the Transfer Pricing Officer but also before learned DRP. In case of Wrigley India Pvt. Ltd. v/s ACIT, in ITA no.5648/Del./2012, etc., dated 31st December 2014, the Tribunal has held that as long as business model of sales to AE and sales to non–AEs are different, the transactions under these business models cannot be comparable transactions for the purpose of Transfer Pricing. While in the transactions with the AEs
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creation of market and the end users is not the responsibility of the assessee but in the transaction with non–AEs, it is the responsibility of the assessee to create and maintain the market and end users. Thus, it affects the FAR profile materially which ultimately would have an impact on the profitability. It is quite noticeable, various submissions made by the assessee regarding non–applicability of internal TNMM have been disregarded/ignored by learned DRP without proper examination. Similarly, learned DRP has not provided any valid reasoning why external TNMM is not applicable. It is relevant to observe, in case of Piaggio Vehicles Pvt. Ltd. v/s DCIT, [2012] 26 taxmann.com 60 (Pun.), the Tribunal, Pune Bench, has also expressed the view that unless the business models of the AE and non–AE are completely similar, they cannot be treated as comparable. Viewed in the aforesaid perspective, the decision of learned DRP in determining the arm’s length price of the export of HPC and beverages to the AEs by applying internal TNMM cannot be supported. Therefore, the adjustment proposed by learned DRP deserves to be deleted. 18. Having held so, it is necessary to observe, learned DRP has not at all gone into the aspect of acceptability of external TNMM applied by the assessee. However, it is evident, before the Transfer Pricing Officer, the assessee has furnished all documentary evidences to support its benchmarking under external TNMM. Of course, the
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Transfer Pricing Officer has not made any discussion on the issue and has simply accepted assessee’s benchmarking. In view of the aforesaid, though, we hold that external TNMM applied by the assessee has to be treated as the most appropriate method in the given facts and circumstances of the case, however, since neither the Transfer Pricing Officer nor learned DRP have examined the acceptability or otherwise of the comparables selected by the assessee, we restore the issue to the Assessing Officer to examine this aspect and determine the arm’s length price accordingly after due opportunity of being heard to the assessee. Grounds no.2 to 3.5, except ground no.2.2, are allowed for statistical purposes.
In grounds no.4 & 5, the assessee has challenged addition made of ` 2,06,00,671, on account of notional interest on overdue receivables from the AEs.
Brief facts are, in the course of proceedings before him, the Transfer Pricing Officer noticed that the assessee has allowed credit period to the AEs in respect of receivables from them. Therefore, he called upon the assessee to explain why arm's length price of interest on the credit period allowed to the AEs should not be computed. In response, the assessee submitted, a reasonable credit period is allowed both to the AEs and non–AEs. Therefore, no overdue interest
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should be charged on the credit period allowed to the AEs. The Transfer Pricing Officer, however, did not accept the submissions of the assessee and proceeded to determine the arm's length price of the credit period on receivables allowed to the AEs and proposed an adjustment of ` 2,06,00,671.
The learned DRP also sustained the adjustment proposed by the Transfer Pricing Officer.
The learned Sr. Counsel for the assessee submitted, though, as per the terms of the contract with the AEs, the assessee is entitled to charge interest on overdue receivables beyond the credit period and the same is the case with some of the non–AEs, however, as a matter of policy the assessee does not charge any interest on the overdue receivables both from the AEs and non–AEs. He submitted, in many cases delay in getting the payment from the AEs as well as non–AEs is on account of delay in delivery of shipment. He submitted, a detailed submission in this regard was filed before the Transfer Pricing Officer in course of the proceedings. Drawing our attention to the materials placed in the paper book, the learned Sr. Counsel submitted, the average delay in case of AEs is 26.70 days, whereas, the average delay in case of non–AEs is 35.61 days. He submitted, assessee allows credit period of 30 days in respect of non–AEs and 60 days in respect
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of AEs. He submitted, the assessee is a debt free company, therefore, when there is no chance of assessee utilizing borrowed funds and incurring expenditure to pass on the benefit to the AEs, there should not be any adjustment on account of notional interest on overdue receivables. He submitted, since the assessee charges the AEs at cost plus 9%, any delay on account of receivables is already factored in the mark–up charged to the AEs. Thus, he submitted, the adjustment made should be deleted. In support of such contention, he relied upon the following decisions:–
i) CIT v/s Kusum Healthcare Pvt. Ltd., ITA no.765/2016, order dated 25.04.2017 (Del. HC); PCIT v/s Bechtel India Pvt. Ltd. ITA no.379/2016, dated 21.07.2016 (Del. HC); and ii) Bechtel India Pvt. Ltd. v/s DCIT, ITA no.1478/Del./2015, dated 21.12.2015.
The learned Departmental Representative strongly relying upon the observations of learned DRP and the Transfer Pricing Officer submitted, the AE and the non–AE transactions cannot be compared for determining the arm's length price of the interest on overdue receivables.
We have considered rival submissions and perused the material on record. No doubt, there is a delay in respect of receivables from the AEs. However, so is the case with receivables from non–AEs. The
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learned Sr. Counsel for the assessee has demonstrated before us that the average delay on overdue receivables form the AEs works out to 26.70 days, as against average delay on receivables from non–AEs at 35.61 days. Thus, from the aforesaid facts, it is clear that as a matter of policy, the assessee does not charge any interest on overdue receivables either from the AEs or non–AEs. Further, the contention of the assessee that it is a debt free company has not been controverted by the Department. It is also a fact that the assessee raises invoices on the AEs at cost plus 9%. Thus, it can be said that in the mark–up charged, the assessee has factored in the interest element on the overdue receivables. In these circumstances, applying the ratio laid down in the decisions relied upon by the learned Sr. Counsel for the assessee, we are of the view that no adjustment on account of notional interest on overdue receivables from the AEs should be made. Accordingly, we delete the addition. Grounds raised are allowed.
In grounds no.6 and 7, the assessee has challenged the adjustment to the arm's length price on account of payment of royalty/fee for services.
Brief facts are, the Transfer Pricing Officer noticing that the assessee has paid an amount of ` 46,26,216, towards royalty for various central services provided vide technology, trademark license
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and central service agreement effective from 1st February 2013, called upon the assessee to justify the arm's length nature of such transaction. Alleging that the assessee was unable to specify the exact nature of services provided under the aforesaid agreement, the Transfer Pricing Officer determined the arm's length price of the royalty for central service at nil, thereby, proposing adjustment of ` 46,26,216.
Learned DRP also agreed with the decision of the Transfer Pricing Officer while dealing with the objections of the assessee.
The learned Sr. Counsel for the assessee drawing our attention to the technology, trademark license and central services agreement placed in paper book submitted, the export division of Hindustan Unilever Ltd. was spun–off and converted into the assessee company. He submitted, insofar as the domestic sales are concerned, Hindustan Unilever Ltd. is paying royalty for availing services from the AE. However, insofar as the export sales are concerned, the assessee avails services from the AE though the agreement remains the same. He submitted, in case of both Hindustan Unilever Ltd. and the AE, the Transfer Pricing Officer has accepted the royalty payment on such services to be at arm's length in the assessment year 2013–14 itself. In this context, he drew our attention to the orders passed under
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section 92CA(3) of the Act in case of Unilever PLC and Hindustan Unilever Ltd., for the assessment year 2013–14. The learned Sr. Counsel submitted, the assessee is a contract manufacturer, hence, has to avail certain services from the AE. Further, the royalty paid to the AE also forms part of assessee’s cost base on which it gets mark– up of 9%. He submitted, if the arm's length price of royalty payment to the AE is determined at nil, then it has to be removed from the cost base of the assessee thereby reducing the income of the assessee to that extent. Further, he submitted, in the transfer pricing study report, the assessee had benchmarked the arm's length price of royalty payment by applying CUP method. If the Assessing Officer had any doubt with regard to the benchmarking done by the assessee, he should have determined the arm's length price of royalty payment by applying any one of the prescribed methods, which is not the case. Thus, he submitted, the adjustment made should be deleted. In support of such contention, he relied upon the following decisions:–
i) Mercer Consulting India Pvt. Ltd. v/s DCIT, ITA no.1085/Del./ 2016, dated 25.07.2016; ii) CIT v/s Liver India Exports Ltd., [2017] 78 taxmann.com 88 (Bom.); and iii) Philips India Ltd. v/s ACIT, [2018] 90 taxmann.com 357 (Kol.).
The learned Departmental Representative strongly relied upon the observations of learned DRP and the Transfer Pricing Officer.
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We have considered rival submissions and perused the material on record. Undisputedly, the assessee has benchmarked the payment of royalty under central service agreement by applying CUP method. Whereas, the Transfer Pricing Officer has determined the arm's length price of the royalty payment at nil on purely conjecture and surmises without following any prescribed method. In fact, the observations of the Transfer Pricing Officer on the issue are very cryptic and non– speaking. Therefore, simply for the reason that the determination of arm's length price by the Transfer Pricing Officer is not in accordance with the statutory provisions, the adjustment made deserves to be deleted. In any case of the matter, it is noticed by us that under the very same agreement, the AE is paid royalty by Hindustan Unilever Ltd. for domestic sales and by the assessee in respect of export sales. While examining the royalty payment in case of Hindustan Unilever Ltd. in assessment year 2013–14, the Transfer Pricing Officer has accepted royalty paid to the AE to be at arm's length. Similarly, in the order passed under section 92CA(3) of the Act in respect of AE, the Transfer Pricing Officer has accepted the royalty payment to be at arm's length. That being the case, the arm's length price of royalty payment at the hands of the assessee cannot be determined at nil. In any case of the matter, it is not disputed that the assessee is remunerated by the AE on cost plus mark–up basis. That being the
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case, royalty paid to the AE forms part of the cost base of the assessee on which it has charged mark–up @ 9%. In the aforesaid circumstances, if the payment of royalty to the AE is disallowed by determining the arm's length price at nil, then logically the income of the assessee also should be reduced. This is the view expressed by the Co–ordinate Bench in Mercer Consulting Pvt. Ltd. (supra). Thus, considering the overall facts and circumstances of the case and keeping in view the ratio laid down in the decisions cited before us, we are of the view that the adjustment made by determining the arm's length price of royalty payment at nil deserves to be deleted. Accordingly, we do so. Grounds are allowed.
In the result, assessee’s appeal is partly allowed.
ITA no.2096/Mum./2017 Assessee’s Appeal
Ground no.1, is general in nature, hence, does not require adjudication.
Grounds no.2 to 9, are on the issue of adjustment made to the arm's length price of exports of HPC products and beverages to the AEs.
These grounds are identical to ground no.2 to 3.5, raised by the assessee in its appeal being ITA no.6648/Mum./2017. The only factual
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difference in the impugned assessment year is, the Transfer Pricing Officer has himself determined the arm's length price by applying internal TNMM as against external TNMM applied by the assessee. However, while dealing with the objections of the assessee, learned DRP, taking note of assessee’s submissions that in assessment year 2013–14 the Transfer Pricing Officer has accepted the benchmarking of the assessee by applying external TNMM, directed the Assessing Officer/Transfer Pricing Officer to verify assessee’s claim and delete the adjustment. Notably, in assessment year 2013–14, learned DRP while dealing with the issue has held that export of HPC products and beverages to AEs has to be benchmarked by applying internal TNMM and accordingly has proposed adjustment. While implementing the directions of learned DRP the Transfer Pricing Officer again determined the arm’s length price applying internal TNMM and proposed adjustment. Notably, while dealing with identical issue in assessment year 2013–14, vide ITA no.6648/Mum./2017 in the earlier part of the order, we have held that internal TNMM is not applicable to the subject transaction. However, since neither the Transfer Pricing Officer nor learned DRP had examined the acceptability or otherwise of the comparables selected by the assessee under external TNMM, we have restored the issue to the Assessing Officer only for the limited purpose of verifying the acceptability or otherwise of the external comparables
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proposed by the assessee. Facts being identical, following our decision therein, though, we hold that external TNMM is the most appropriate method to benchmark the export of HPC and beverages to the AEs, however, we restore the issue relating to acceptability or otherwise of the comparables proposed by the assessee under external TNMM for verification of the Assessing Officer. It is made clear, while deciding the issue, the Assessing Officer must afford reasonable opportunity of being heard to the assessee. Grounds are allowed for statistical purposes.
Grounds no.10 and 11, are on the issue of addition of an amount of ` 76,32,823, made on account of notional interest on overdue receivables from the AEs.
These grounds are identical to grounds no.4 and 5 raised by the assessee in its appeal being ITA no.6648/Mum./2017. Following our decision therein, we delete the addition made. Grounds are allowed.
In grounds no.12 and 13, the assessee has challenged the adjustment to the arm's length price of royalty paid to the AE on technical documents, information and knowhow. Whereas, in grounds no.14 to 16, the assessee has challenged the adjustment proposed in respect of provisions of business service.
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At the outset, we must observe, though, the aforesaid adjustments were proposed by the Transfer Pricing Officer on without prejudice basis considering the fact that the main adjustment was proposed by him while determining the arm's length price of export of HPC and beverages to the AEs by applying internal TNMM. In fact, while doing so, the Transfer Pricing Officer proposed adjustment of ` 85,94,39,962. After the directions of learned DRP on the issue, the Transfer Pricing Officer again made identical adjustment by stating that the assessee did not furnish any evidence to demonstrate that facts involved in the impugned assessment year are identical to assessment year 2013–14. While making the aforesaid adjustment, the Transfer Pricing Officer also made adjustment to the arm's length price of royalty paid on documentation, technical knowhow, as well as provisions of business service on without prejudice basis. However, it is observed, no addition on the aforesaid adjustments was either made in the draft assessment order or even in the final assessment order. Therefore, the issues raised in grounds no.12 to 16 are of mere academic importance as the assessee cannot have any grievance in the absence of any addition made in this regard in the final assessment order. Therefore, it is not necessary to adjudicate these grounds. However, the issues raised in these grounds are left upon for
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adjudication if they arise in future. These grounds are accordingly dismissed.
In the result, assessee’s appeal is partly allowed.
S.A. no.29& 30/Mum./2019 (Arising out of Assessee’s Appeal in ITA no.2069 & 6648/Mum.2017)
Insofar as these stay applications are concerned, in view of our decision in respect of the corresponding appeals hereinbefore, these stay applications have become infructuous, hence, dismissed.
In the result, stay applications are dismissed.
To sum up, assessee’s appeals are partly allowed and stay applications are dismissed. Order pronounced in the open Court on 31.07.2019
Sd/- Sd/- M. BALAGANESH SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 31.07.2019
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Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai