FIRMENICH AROMATICS (INDIA) P. LTD,MUMBAI vs. ACIT 9(3)(1), MUMBAI

1 ITA 6081/Mum/2018

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K”, MUMBAI

Before Shri G Manjunatha (ACCOUNTANT MEMBER) AND Shri Ravish Sood (JUDICIAL MEMBER)

ITA No. 6081/Mum/2018 (Assessment year : 2014-15)

Firmenich Aromatics (India) vs ACIT-9(3)(1), Mumbai Pvt Ltd, 9th Floor, Arena Space, CTS 20, New Shyam Nagar Road, Behind Majas Bus Depot, Jogeshwari (E), Mumbai. PAN : AAACF1621M APPELLANT RESPONDEDNT

Appellant by Shri Dhanesh Bafna / Hirali Desai / Kiresh Respondent by Shri Rignesh K Das

Date of hearing 08-04-2019 Date of pronouncement -06-2019

O R D E R Per G Manjunatha, AM : This appeal filed by the assessee is directed against directions of the

DRP-1 , Mumbai dated 06-07-2018 issued u/s 144C(5) of the Income-tax Act,

1961, which, in turn, arises against the order of the AO / TPO passed u/s 143(3)

2 ITA 6081/Mum/2018

r.w.s. 144C(1) of the Income-tax Act, 1961 and it pertains to AY 2014-15. The

assessee has raised the following grounds of appeal:-

“Each of the grounds and/ or sub-grounds of the appeal are independent and without prejudice to the other: 1. Ground No. 1 — Transfer Pricing (*TP') adjustment in relation to export of finished goods 1.1. On the facts and circumstances of the case, and in law, the Hon'ble DRP has erred in upholding the action of the Ld. AO/TPO in determining the Arms' Length Price ('ALP') of the international transaction of export of finished goods at Rs. 10,35,77,048 instead of Rs. 7,16,95,346 thereby, computing a TP adjustment of Rs. 3,18,81,702. 1.2. While doing so, the Hon'ble DRP/ Ld. AO/ Ld. TPO erred in: (a) Disregarding the aggregation approach adopted by the Appellant thereby, rejecting the application of entity level Transactional Net Margin method ('TNMM') as the Most Appropriate Method ('MAM'); (b) Applying Comparable Uncontrolled Price ('CUP') Method as the MAM vis-a-vis the products sold to both Associated Enterprises ('AEs') and Non-AEs; and (c) Applying two methods i.e., CUP and TNMM for benchmarking the impugned international transaction. 1.3. Without prejudice to point 1.1. and 1.2., the Hon'ble DRP/ Ld. AO/ Ld. TPO while applying CUP, erred in: (a) Comparing the prices of products exported to AEs with the prices of products sold to Non-AEs, domestically; and (b) Ignoring the differences on account of geographical market, volume of transactions, functional and risk profile and level of market while comparing the impugned international transaction with the comparable uncontrolled transaction. The Appellant prays that the aforesaid adjustment be deleted. 2. Ground No. 2 - TP adjustment in relation to payment of royalty for use of technical know-how 2.1. On the facts and circumstances of the case and in law, the Hon'ble DRP has erred in upholding the action of the Ld. AO/ TPO in determining the ALP of royalty paid to AE for technical know-how at Rs. 20,09,63,574 instead of Rs. 24,06,53,880 thereby, computing a TP adjustment of Rs. 3,96,90,306. 2.2. While doing so, the Hon'ble DRP/ Ld. AO/ Ld. TPO erred in: (a) Not following the orders of the earlier years wherein payment of royalty has been consistently accepted to be at arm's length, even though when there is no change in the facts; (b) Disregarding the fact that payment of royalty is inextricably linked to entrepreneurial operations of the Appellant and therefore, it should have been benchmarked on an aggregation basis by applying TNMM as the MAM; and (c) Applying CUP method as the MAM to determine the ALP of the impugned international transaction. 2.3. Without prejudice to point 2.1. and 2.2., while applying CUP, the Hon'ble DRP/ Ld. AO/ Ld. TPO erred in considering the royalty agreements which were not comparable to the royalty agreement entered into by the Appellant with its AE. The Appellant prays that the aforesaid adjustment be deleted. 3. Ground No. 3 — TP adjustment in relation to payment of interest on External Commercial Borrowing ('ECB') loan 3.1. On the facts and circumstances of the case and in law, the Hon'ble DRP erred in upholding the action of the Ld. AO/ TPO in determining the ALP of the international

3 ITA 6081/Mum/2018

transaction of payment of interest on ECB at Rs. 56,10,095 instead of Rs. 1,07,84,304, thereby computing an adjustment of Rs. 51,74,209. 3.2. While doing so, the Hon'ble DRP/ Ld. AO/ Ld. TPO erred in: (a) Not following a structured/ methodical search process in selecting the comparable companies for arriving at the arm's length interest rate; (b) Not appreciating the fact that the interest paid by the Appellant on ECB loan is as per the circular issued by Reserve Bank of India ("RBI"); and (c) Disregarding the fact that the effective rate of interest paid by the appellant is lower than the SBI Prime Lending rate ('PLR') for the relevant year. The Appellant prays that the aforesaid adjustment be deleted. 4. Ground_No_. 4 - TP adjustment in relation to availing of Information Systems ('IS') services 4.1. On the facts and circumstances of the case and in law, the Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO in determining the ALP of the international transaction of payment of IS service charge at Rs. 8,24,93,129 instead of Rs. 10,46,55,437 thereby disallowing the claim pertaining to internal cost of IS charge amounting to Rs. 2,21,62,308, 4.2. While doing so, the Hon'ble DRP/ Ld. AO/ Ld. TPO grossly erred in: (a) Determining the ALP of the international transaction of payment of internal cost of IS charge as 'Nil' purportedly applying 'Other method' as per the provisions of Rule loAB of the Income-tax Rules, 1962; (b) Ignoring that the Appellant had supported the claim with appropriate evidences; and (c) Rejecting the comparability analysis conducted by the Appellant in the TP study report to determine the ALP of the impugned international transaction. The Appellant prays that the aforesaid adjustment be deleted. 5. Group. cLNo. 5 - Adjustment in relation to employees' contribution to Provident Fund 5.1. On the facts and circumstances of the case and in law, the Hon'ble DRP erred in upholding the action of the Ld. AO in disallowing employees' contribution to Provident Fund of Rs. 14,98,505 paid within the due date for filing the income-tax return for the year under consideration. The Appellant prays that the aforesaid adjustment be deleted. 6. Ground No. 6 — Adjustment in relation to 'Other Miscellaneous EG expenses' 6.1. On the facts and circumstances of the case and in law, the HonTale DRP erred in upholding the action of the Ld. AO in disallowing "Other Miscellaneous EG expenses" of Rs. 2,15,229 relating to write off of rent deposits made by the Appellant either for office use of the Appellant or on behalf of its employees by considering such expenses as not related to the business of the Appellant. The Appellant prays that the aforesaid adjustment be deleted. 7. Ground No. 7 - Initiating penalty proceedings under section 27i(i)(c) of th Act On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 27i(i)(c) of the Act for furnishing inaccurate particulars of income. 8. Ground No. 8 - Levy of interest under section 234B and 2340 of the Act On the facts and circumstances of the case and in law, the Ld. AO erred in levying interest under section 2346 and 2340 of the Act. The Appellant prays that the consequential interest be deleted.”

Aromatics (I) Pvt Ltd, is an Indian company which was incorporated in January

4 ITA 6081/Mum/2018

20, 1997. The assessee was engaged in the business of manufacturing and

marketing of natural flavours, fragrance and chemical specialities. The

manufactured products of the assessee are supplied to various customers

within and outside India. During the year under consideration, the assessee

had entered into various international transactions and specified domestic

transactions with its several AEs, the details of which are as under:-

S.No. Nature of International F.Y. 2013-14 Method used by Transactions taxpayer (i) Import of raw materials 883,266,845 Transactional Net Margin Method (“TNMM”) (II) Sale of finished goods 71,695,346 TNMM (iii) Payment of Royalty 240,653,880 TNMM (iv) Commission received 15,315,067 TNMM (v) Payment of interest on ECB 10,784,304 Other Method loan (vi) Payment for Software 104,655,437 Other method charges (S3 and IS charges) (vii) Recovery of expenses 11,680,908 Other method (viii) Reimbursement of 6,129,335 Other method Expenses (ix) Dividend paid 77,457,379 Other method Total 1,42,15,38,501 10 Purchase of raw materials 122,057,695 TNMM 11 Payment of Rent 2,820,000 Other Method 12 Payment of managerial 21,146,231 Other Method remuneration / professional fee Total 146,023,926

5 ITA 6081/Mum/2018

income of Rs.16,20,01,320. The case was selected for scrutiny and notices u/s

143(2) and 142(1) of the Act, alongwith questionnaire calling for various details

were issued and served on the assessee. In response to the notices, the

authorised representative of the assessee appeared from time to time and filed

various details, as called for. During the course of assessment proceedings, a

reference u/s 92CA(1) of the Income-tax Act, 1961 was made to the Additional

Commissioner of Income-tax (TPO). The TPO, vide his order dated October 20,

2017, after considering submissions of the assessee and also by taking note of

TP study conducted by the assessee, suggested transfer pricing adjustment in

respect of assessee’s international transactions with regard to sale of finished

goods, payment for technical know how, payment for interest on ECB loan and

payment for software charges. The details of TP adjustment made by the TPO

are as under:-

Sr.No. Adjustment on account of Amount (in INR) a. Sale of finished goods 3,18,81,702 b. Payments for Technical Knowhow 3,96,90,306 c. Payment for interest on ECB loan 51,74,209 d. Payment for software charges 2,21,62,308 Total 9,89,08,525

the I.T. Act, 1961 on 30-11-2017 and made TP adjustment as suggested by the

6 ITA 6081/Mum/2018

TPO in his order dated 20-10-2017 in respect of sale of finished goods, payment

for technical know how, payment for interest on ECB loan and payment for

software charges. Further, the AO has also made disallowance of a sum of

Rs.14,98,505 towards d employees contribution to PF u/s 36(1)(viia) of the Act,

for delayed payment of employees provident fund contribution to the

respective fund. Similarly, the AO has also made addition on account of

disallowance of other miscellaneous expenses to the tune of Rs.2,15,229.

assessment order passed by the AO u/s 143(3) r.w.s. 144C(1) of the Income-tax

Act, 1961. The assessee has filed elaborate written submissions on each and

every transfer pricing adjustment made by the AO and also other corporate tax

issues. The DRP, vide its directions u/s 144C(5) of the Income-tax Act, 1961

dated 06-07-2018, rejected objections filed by the assessee and confirmed

transfer pricing adjustment suggested by the TPO in respect of sale of finished

goods, payment of royalty and payment for interest on ECB loan. Similarly, the

DRP has rejected objections filed by the assessee insofar as disallowance of

employees contribution to PF u/s 36(1)(viia) on the ground that although the

issues had been covered in favour of the assessee by the decision of Hon’ble

Supreme Court in the case of CIT vs M/s Alstorm Extrusions Ltd 319 ITR306

(SC), but since the decision of the DRP is binding upon the revenue and further

7 ITA 6081/Mum/2018

appeal cannot be preferred against the same, it would be prejudicial to the

stand of the revenue if the decision of the Supreme Court is not awaited

because the revenue has challenged the order of the High Court before the

Hon’ble Supreme Court in the case of CIT vs Jaipur Vidyut Vitran Nigam Ltd and

such SLP filed by the revenue is pending before the Supreme Court for final

decision. As regards disallowance of other expenses, the Ld.DRP rejected

objections filed by the assessee on the ground that the assessee has not been

able to produce any correspondence with the landlords or with its own

employees on the issue of forfeiture or adjustment of deposits.

appeal is transfer pricing adjustment in relation to export of finished goods.

The facts with regard to the impugned dispute are that the assessee has

exported finished goods to its AE. The assessee has benchmarked its

transactions with AE in respect of sale of finished goods by applying TNMM as

most appropriate method. The AO has rejected TP study conducted by the

assessee and applied two methods for benchmarking international transactions

on export of finished goods. The TPO has applied CUP on common finished

goods exported to the AEs and non AEs. The TPO has also employed TNMM on

the balance exported goods. According to the assessee, as per section 92C

8 ITA 6081/Mum/2018

r.w.r.10B, the arms length price in relation to an international transaction shall

be determined by adopting any one method thereunder and not by adopting

two methods as the most appropriate method. The assessee has also argued

for not adopting as most appropriate method, as per which, the price at which

finished goods are exported to associated enterprises are not comparable with

price at which finished goods are exported to unrelated / third parties for the

reason that difference in the geographical markets, difference in volume of

both the transactions, difference in market and product related risk, difference

in functional profiles, difference in timing and difference in contractual terms.

The TPO rejected TNMM method selected by the assessee and benchmarked

its transactions with AE by applying CUP method. The Ld.DRP has confirmed

the findings of the TPO by holding that as per Rule 10B(3), adjustment is

required to be made on account of difference between controlled and

uncontrolled transactions only if the differences are likely to materially affect

the prices charged. Since, the TPO has noted that the products sold by the

assessee and the countries in which the products were sold are primarily within

Asia and Africa, therefore, no effect of the geography on the price and

accordingly, there is no error in the method selected by the TPO to benchmark

its transactions with associated enterprises.

9 ITA 6081/Mum/2018

issue is covered in favour of the assessee by the decision of the ITAT, Mumbai

Bench “K” in assessee’s own case for AY 2013-14 in ITA No.7330/Mum/2017

where, under identical set of facts, the Tribunal held that CUP method applied

by the TPO to determine the arm’s length price of the price charged for sale of

finished goods to the AEs is incorrect.

favour of the assessee by the decision of ITAT in assessee’s own case for earlier

years. But, fact remains that while deciding the issue, the Tribunal has

followed the decision o the Tribunal in assessee’s sister concern’s case.

However, the facts of present case may not be at par with the case considered

by the Tribunal in assessee’s sister concern’s case, because the Indian entity

may not be paying royalty; hence, business model is different from the

assessee. Therefore, the TPO as well as the DRP were right in benchmarking its

international transactions by applying CUP as most appropriate method and,

therefore, their order should be upheld.

and gone through the orders of the revenue authorities. We find that the co-

ordinate bench of ITAT, Mumbai Bench “K” in assessee’s own case for AY 2013-

14 in ITA No.7330/Mum/2017, had an occasion to consider an identical issue in

10 ITA 6081/Mum/2018

light of the facts brought out by the AO and rule 10B of I.T. Rules, 1962 and

held that while considering the issue of comparability with an uncontrolled

transaction, the condition prevailing in the market for which the respective

parties to the transaction operate, including the geographical location

alongwith other factors relevant to decide which method is suitable for

benchmarking transaction.

“7.We have considered rival submissions and perused material on record. As far as the primary facts are concerned, there is no dispute that out of the sales turnover of finished products sold to the AE amounting to ` 10,13,28,211, benchmarked by the assessee applying TNMM, the Transfer Pricing Officer has accepted a major part of the sales of finished products to the AEs to be at arm's length. He has only raised objections in respect of the turnover relating to specific finished products sold both to AEs and non–AEs. Upon verifying the price charged for such products to AEs and non–AEs, he has observed that the price charged to non–AEs is more than the price charged to AEs. Thus, he has made an upward adjustment of ` 73,04,480, to the price charged to AEs for sale of finished products. On a perusal of Annexure–1 to the order passed by the Transfer Pricing Officer, wherein, he has made comparative analysis of price charged to AEs and non–AEs for common products, it is noticed that he has short listed eight common products which were sold both to AEs and non–AEs. On a critical examination of the details mentioned in Annexure–1, it is noticed that except one non-AE in U.A.E., all other non–AEs are located in India. Whereas, the AEs are located outside India. Even, in respect of price charged to the solitary non–AE situated outside India, the Transfer Pricing Officer has compared it to the price charged for similar product to an AE in India. Therefore, in strict sense of the term, this particular sale of product Lemoncello to the AE in India cannot be termed as an international transaction. Be that as it may, from a perusal of Annexure–

11 ITA 6081/Mum/2018

1, it becomes factually clear that sale of similar products made to both AEs and non–AEs are in different geographical locations. While the AEs are located in foreign countries the non–AEs are located in India. Therefore, the price charged to non–AEs in India cannot be used as a CUP for determining the arm's length price of the sales of finished products made to overseas AEs. One of the conditions of rule–10B(2) of the I.T. Rules, 1962, is, while considering the issue of comparability with an uncontrolled transaction, the conditions prevailing in the markets in which the respective parties to the transaction operate including the geographical location along with other factors have to be examined. Therefore, geographical location of the party to whom sales were made is a crucial factor to be weighed in while making comparability analysis. Undisputedly, in the facts of the present appeal, the Transfer Pricing Officer has compared the price charged to non–AEs located in India with the price charged to AEs in foreign countries. Therefore, the AEs and non–AEs being situated in different geographical locations, there may be various factors/reasons which could have influenced the price charged by the assessee to the AEs and non–AEs. Hence, the price charged to non–AEs cannot be considered to be a CUP to determine the arm's length price of the price charged for sale of finished products to the AEs.

“7. We have considered rival submissions and perused material on record. As far as the primary facts are concerned, there is no dispute that out of the sales turnover of finished products sold to the AE amounting to ` 10,13,28,211, benchmarked by the assessee applying TNMM, the Transfer Pricing Officer has accepted a major part of the sales of

12 ITA 6081/Mum/2018

finished products to the AEs to be at arm's length. He has only raised objections in respect of the turnover relating to specific finished products sold both to AEs and non–AEs. Upon verifying the price charged for such products to AEs and non–AEs, he has observed that the price charged to non–AEs is more than the price charged to AEs. Thus, he has made an upward adjustment of 73,04,480, to the price charged to AEs for sale of finished products. On a perusal of Annexure–1 to the order passed by the Transfer Pricing Officer, wherein, he has made comparative analysis of price charged to AEs and non–AEs for common products, it is noticed that he has short listed eight common products which were sold both to AEs and non–AEs. On a critical examination of the details mentioned in Annexure– 1, it is noticed that except one non-AE in U.A.E., all other non– AEs are located in India. Whereas, the AEs are located outside India. Even, in respect of price charged to the solitary non–AE situated outside India, the Transfer Pricing Officer has compared it to the price charged for similar product to an AE in India. Therefore, in strict sense of the term, this particular sale of product Lemoncello to the AE in India cannot be termed as an international transaction. Be that as it may, from a perusal of Annexure–1, it becomes factually clear that sale of similar products made to both AEs and non–AEs are in different geographical locations. While the AEs are located in foreign countries the non–AEs are located in India. Therefore, the price charged to non–AEs in India cannot be used as a CUP for determining the arm's length price of the sales of finished products made to overseas AEs. One of the conditions of rule– 10B(2) of the I.T. Rules, 1962, is, while considering the issue of comparability with an uncontrolled transaction, the conditions prevailing in the markets in which the respective parties to the transaction operate including the geographical location along with other factors have to be examined. Therefore, geographical location of the party to whom sales were made is a crucial factor to be weighed in while making comparability analysis. Undisputedly, in the facts of the present appeal, the Transfer Pricing Officer has compared the price charged to non–AEs located in India with the price charged to AEs in foreign countries. Therefore, the AEs and non–AEs being situated in different geographical locations, there may be various factors/reasons which could have influenced the price charged by the assessee to the AEs and non–AEs. Hence, the price charged to non–AEs cannot be considered to be a CUP to determine the arm's length price of the price charged for sale of finished products to the AEs.

13 ITA 6081/Mum/2018

price charged to AEs and non–AEs situated in different geographical locations. The Tribunal held that in such circumstances CUP cannot be applied as the most appropriate method. In this regard, the detailed finding of the Co–ordinate Bench is reproduced hereunder:–

“8. First of all it is pertinent to consider that the price at which finished products are exported to AEs are not comparable with the domestic prices for the following reasons:

* differences in the level of market of the product by either parties (i.e. traders / manufacturers); and * difference in functional and risk profiles; * differences in volume of both the transactions; * differences in the geographic markets; The reasons of difference in prices is tabulated below:

Reasons Export to Local for AE Sales to difference third parties Level of There are different levels of Market market in the entire value chain. The Appellant sells manufactured products to third parties who are in the last step of the entire value chain vis-à-vis group companies who are in the second last step of the value chain. Functional Appellant is differences not required to undertake marketing functions, distribution and other sales related functions vis-à-vis sales to third parties,

14 ITA 6081/Mum/2018

where the intensity of such functions are very high. Risks The market risk, business risk, differences inventory risk and capacity utilization risk (on account of large orders) and credit risk (supply to group company) in case of transactions with AE’s are significantly lower as compared to the transactions with third parties. Therefore, considering the risk differences, the prices charged to third parties are higher than the prices charged to AEs in certain cases.

Volume High Lower differences volume volume (large bulk (small orders orders catering the specific to group’s the requiremen requireme t results nt of each better customers manageme ) nt of production supply chain and resource manageme nt. Geographic Export prices of same products al are bound to be different in difference different geographical locations / markets, as these prices are factor of buying power, market sensitivity and local competitions etc. Thus it would not be economically right to compare export prices of different market of locations.

15 ITA 6081/Mum/2018

i). Differences in volume of both the transactions - It is general knowledge that volumes commands the prices. Purchase or sale of lower quantities are expensive, this is usually because of cost of transportation for deliveries and administration cost involved in handling smaller deliveries. The assessee is engaged in manufacturing of aromatic ingredients, natural and synthetic perfumery, flavoring and derivatives. Specific and majority of the products manufactured are sold to the group companies. However, in the circumstances where the group entities do not want a product then it is sold in the market at a price best negotiated by the assessee. In the table below, the assessee has provided the details of the quantitative differences in respect of Sales made to the AE and the Non-AE.

Sr.No Material Quantity Quantity Addition Value AE in Description in KG in KG (INR) sales TPO sold to sold to times Order Non AE’s of AE’s Non AE sales 59 Neobutenone 25 32,343 490,680,563 1,294 Alpha 56 Damascenone 25 19,734 490,873,437 789 Total 45 Great Heart 28,080 303,840 95,340,394 11 55 Aldehyde 245 38,528 96,920,377 157 Supra 57 Damascone 2,175 33,610 84,185,258 15 Alpha 60 Norlimbanol 250 10,825 73,314,292 43 1,331,314,321

Thus, we find from the facts of the case that the quantities sold to Non-AEs is significantly lower as compared with sales made to AEs. In fact the difference in quantities is to the extent of 1,294 times to 11 times. It is noteworthy that the CUP analysis of common products sold to AE and Non-AE,one of the example taken from the facts of the case is that w.r.t. product ‘Damascenone Total’, the assessee had sold 25 kg to a Non-AE at the rate of INR 38,000 per

16 ITA 6081/Mum/2018

kg and sold 1,260 kg and 16,299 kg at the rate of INR 9,800 and INR 9,664 respectively to its AE namely, Firmenich Aromatics (China) Company Limited and Firmenich SA. Similarly, the assesee has sold 50 kg of the same product at the rate of INR 36,408 to other AE. Thus, TPO erred in comparing small; quantities with large quantities, thereby ignoring the volume difference. We also noted that when the quantity sold to a Non-AE is higher than that sold to an AE, then the price charged from the AE is more than non-AE. The assessee also explained that this would show that the comparison done by the TPO is wholly erroneous.

Sr.No in Material Non AE AE Country Adjustment TPO’s Description Country made order (INR) 55 Aldehyde India Brazil, China, 96,920,377 Supra Singapore 56 Damascenone India Switzerland, 490,873,437 Total Singapore 59 Neobutenone India Switzerland, 490,680,563 Alpha Singapore 60 Norlimbanol India Brazil, China, 73,314,292 Singapore

17 ITA 6081/Mum/2018

differences between the transactions if compared are likely to materially affect the price or cost charged or paid or the profit arising from such transaction in the open market. Therefore, it is essential to adjust for the above mentioned differences in order to create level paying filed ie.. in order to ensure like by like comparison. Since, the TPO was unable to quantify the same, the CUP should not be used as the most appropriate method.

“8. In this regard, the Ld. Counsel for the assessee brought our attention to the DRP's order dated 24-12-2014 and read out the contents of Para Nos. 3.15 to 3.17 which read as under :

"3.15 The assessee submitted that the TPO also disregarded and ignored Tribunal rulings which have laid down principles that the transactions will not be considered as similar for the purpose of benchmarking transactions under CUP method merely on account of similar products sold to AEs to third parties. These rulings are as under:

• Intervet India Private Limited Vs ACIT (ITA No.3185/Mum/2006 • ACIT Vs. Dufon Laboratiories (2010-TII-26-ITAT-MUM-TP) • Ranbaxy Laboratories Ltd. Vs. Asstt. CIT (208-TII-01-ITAT- DEL-TP) • Gharda Chemicals Ltd. Vs. The Deputy Commissioner of Income tax (ITA No.2242/MUM/06) • Schutz Dishman Biotech Pvt. Ltd. Vs. DCIT (ITA No.3590 & 3751/Ahd/2007) ITA No.477/PUN/2015 • Dresser-Rand India Pvt. Ltd. Vs. ACIT (ITA No.8753/Mum/2010 AY 2006-07) • Aztec Software and Technology (ITAT Bangalore) and MSS India Pvt. Ltd., (ITAT, Pune).

• DCIT Vs. Quark Systems (P) Ltd. (ITAT No.100/Chd/2009 - AY 2004-05) and Quark Systems (P) Ltd. ITO (ITA No.115/Chd/2009 - AY 2004-05) 3.16 The assessee has submitted that for AY 2006-07, 2007-08 and 2008-09, on similar facts, the then DRP had rejected the objections of the assessee and upheld the order of the TPO. The assessee preferred appeal before the Hon'ble ITAT,Pune. The ITAT,

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Pune vide its order dated 30th May, 2014 has upheld the stand of the assesse and allowed its appeal against the orders of the DRP. Findings :

3.17 We have considered the submissions of the assessee as well as the findings and order of the TPO. We have also considered the order dated 30th May, 2014 of the ITAT, Pune for the earlier assessment years 2006-07, 2007-08 and 2008-09. In the earlier assessment years, the issues involved before the ITAT were adjustments made by the TPO to some of the transactions in respect of exports and imports and payment of Commission by the assessee to its AE. The ITAT has dealt with all the three issues and given its finding in favour of the assessee. The assessee has submitted before us a note on the ITAT order and Points of similarity with the facts of the assessee's case in the current AY 2010-11. Upon going through the same, we find that the issues involved before the DRP in the current assessment year relate to adjustments made by the TPO in relation to some of the exports and imports on reasoning similar to the earlier assessment years which have now been adjudicated by the ITAT, Pune in favour of the assessee.

In the circumstances, respectfully following the ratio laid down by the Hon'ble ITAT, Pune in the assessee's own case for the earlier assessment years, the assessee's objection is allowed. Accordingly, the Assessing Officer is directed not to make any adjustment with regard to the Export of finished goods and Import of raw materials."

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reasonable and same does not call for any interference. Accordingly, the ground raised by the Revenue is dismissed”.

ordinate bench, we are of the considered view that the TPO as well as the

Ld.DRP were erred in applying CUP as most appropriate method to determine

the arm’s length price of transactions of the assessee with its AEs for sale of

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finished goods. Accordingly, we direct the AO / TPO to delete TP adjustment of

Rs.3,18,81,702 in relation to export of finished goods.

adjustment of Rs.3,96,903,06 in relation to payment of royalties for use of

technical know how. The brief facts of the impugned dispute are that in the

course of transfer pricing proceedings, on examination of the TP study

conducted by the assessee, the TPO noticed that the assessee has aggregated

all international transactions and benchmarked it at entry level by applying

TNMM as the most appropriate method. Further, the TPO, after considering

submissions of the assessee, held that royalty payment to the AE was not

justified due to reasons that the assessee has not submitted any documentary

evidence regarding transfer of technical know how by the AE which should

have been used by the assessee in the manufacturing process and also the

assessee has failed to explain the manufacturing process used by it. Further,

the TPO held that since the assessee was paying royalties since 1997, it is not

required to be paid any more, because the assessee no more needs technical

know how from the AE. He, further observed that the AE has not collected any

royalty for technical know how from another subsidiary in India. Thus, on the

basis of the aforesaid reasons, the TPO finally concluded that the assessee

having failed to make out a case that the payment of royalty to the AE is for the

21 ITA 6081/Mum/2018

purpose of business, and it has to be allowed u/s 37(1) of the Act. The Ld.DRP

has confirmed TP adjustment suggested by the TPO in respect of payment of

royalty for use of technical know how.

issue is also covered in favour of the assessee by the decision of of the ITAT,

Mumbai Bench “K” in assessee’s own case for AY 2013-14 in ITA

No.7330/Mum/2017, where it was held that CUP method cannot be applied for

benchmarking international transactions with regard to payment of royalty for

use of technical know how because of geographical differences.

covered in favour of the assessee by the decision of decision of the ITAT,

Mumbai Bench “K” in assessee’s own case for AY 2013-14 in ITA

No.7330/Mum/2017. However, he reiterated the observations of the TPO and

Ld.DRP.

We find that the Tribunal had an occasion to consider an identical issue in

assessee’s own case for AY 20-13-14 and after considering relevant submissions

of the assessee and also by following its earlier order in assessee’s own case for

AY 2012-13 held that CUP is not most appropriate method for benchmarking

22 ITA 6081/Mum/2018

royalty payment for use of technical know how because of geographical

differences. The relevant findings of the Tribunal are as under:-

“14. We have considered rival submissions and perused material on record. Factual matrix relating to the disputed issue reveals that the assessee has benchmarked the transactions relating to royalty payment along with other transactions adopting TNMM as the most appropriate method. The Transfer Pricing Officer has rejected the benchmarking of the assessee primarily for the reason that the payment of royalty not being for the purpose of business has to be disallowed under section 37(1) of the Act. However, ultimately, he has allowed, on ad–hoc basis, 10% of the amount paid by the assessee to the AE towards royalty. Of course, referring to certain agreements between unrelated parties, which according to him can be used as external CUP, the Transfer Pricing Officer has concluded that 1% of the net value added sales can be determined as the arm's length price of the royalty paid to the AE. It is very much clear, while coming to such conclusion, the Transfer Pricing Officer has wholly relied upon the order passed by him in assessee’s own case for assessment year 2012–13. It is relevant to observe, while deciding identical issue arising in assessee’s own case for assessment year 2012–13, the Tribunal in ITA no.2590/Mum./2017, dated 23rd July 2018, has decided the issue in the following manner:–

“11. We have carefully considered the rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon by both the parties. The dispute in this ground relates to determination of arm's length price of the royalty paid by the assessee to its AE. As could be seen from the facts on record, the assessee is availing technical knowhow from its AE in Switzerland since past so many years and paying royalty for the services availed. For this purpose, the assessee has entered into a license agreement with the AE from the very inception of carrying out the manufacturing activity of industrial flavours and fragrances, which has been renewed from time–to–time. The transactions in the impugned assessment year were under a license agreement executed on 1st April 2009. Though, the assessee was required to pay royalty @ 5% on local sales and @ 8% on export sales, net of Indian taxes, however, there is no major change in the terms of the contract, except for the fact that the in the impugned assessment year, the assessee has paid royalty on the gross sales instead of net sales as was done in the preceding assessment years. In the transfer pricing study the assessee has benchmarked the royalty payment by applying TNMM as the most appropriate method and has aggregated it with other international transactions in the manufacturing segment with operating profit / sales as the profit level indicator. The assessee has selected a set of six comparables with average margin of 7.40% as against its own margin of 5.23%. Hence, the arm's length price of the international transaction was claimed to

23 ITA 6081/Mum/2018

be at arm's length. Notably, the Transfer Pricing Officer has accepted assessee’s benchmarking by apply TNMM in respect of all transactions in manufacturing segment except payment of royalty. Pertinently, on a perusal of the order of the Transfer Pricing Officer, it is evident that the Transfer Pricing Officer has raised doubt / suspicion with regard to payment of royalty basically for the reason of business expediency. The Transfer Pricing Officer has observed, since the assessee was availing the technical knowhow from the AE and paying royalty since 1997, it does not require any further technical help from the AE with regard to its manufacturing activity of industrial flavours and fragrances. Thus, the Transfer Pricing Officer has ultimately concluded that the royalty payment needs to be disallowed under section 37(1) of the Act in the absence of any evidence to suggest transfer of technical knowhow during the year. Having held so, the Transfer Pricing Officer again observed that since the assessee might be getting some technical inputs to run his manufacturing plan, he is required to pay 10% of the royalty paid to the AE during the year. Accordingly, he determined the arm's length price of the royalty payment at ` 2,01,19,124 as against the amount of ` 18,10,72,120 actually paid by the assessee. Thus, it is evident that the Transfer Pricing Officer has determined the arm's length price of royalty payment by making an ad–hoc adjustment purely on estimate basis without following any approved method for determination of arm's length price as prescribed under the statutory provisions. Thus, the primary issue which arises for consideration is, whether the Transfer Pricing Officer has power under the statute to determine the arm's length price of international transaction on estimate basis by weighing in the business expediency factor. In our considered opinion the legal principle on the issue is quite clear. As could be seen from the scheme of the Income Tax Act, 1961, Chapter–X contains special provisions relating to avoidance of tax with regard to international transaction between related parties. Section 92 of the Act provides for computation of income arising from international transaction at arm's length price. Section 92C of the Act provides for determination of arm's length price of an international transaction by applying the most appropriate method having regard to the nature of transaction for class of transaction or functions performed, etc. The most appropriate method prescribed are as under:–

i) Comparable Uncontrolled Price Method; ii) Resale Price Method; iii) Cost Plus Method; iv) Profit Split Method; v) Transactional Net Margin Method; and vi) Such other methods, as may be prescribed by the Board.

24 ITA 6081/Mum/2018

Assessing Officer in course of assessment proceedings finds that the assessee has entered into international transactions with its AE, he may with the previous approval of the authority concerned make a reference to the Transfer Pricing Officer under section 92CA(1) of the Act to compute the arm's length price of the international transaction by applying any of the methods prescribed under section 92C of the Act. After receiving such a reference from the Assessing Officer, the Transfer Pricing Officer is required to determine the arm's length price of the international transaction as per the provisions contained under section 92C and 92CA of the Act read with relevant rules. Thus, as could be seen from the reading of the aforesaid provisions, the duty of the Transfer Pricing Officer is restricted only to the determination of arm's length price of an international transaction between two related parties by applying any of the methods prescribed under section 92C of the Act r/w rule 10B of the Rules. Thus, there is no provision under the Act empowering the Transfer Pricing Officer to determine the arm's length price on estimation basis, that too, by entertaining doubts with regard to the business expediency of the payment and in the process stepping into the shoes of the Assessing Officer for making disallowance under section 37(1) of the Act. This, in our considered opinion, is not in conformity with the statutory provision, hence, unacceptable. The Transfer Pricing Officer is duty bound to determine the arm's length price of the international transaction by adopting one of the method prescribed under the statute and cannot deviate from the restrictions / conditions imposed under the statute. The Hon'ble Jurisdictional High Court in CIT v/s Johnson & Johnson Ltd., ITA no.1030/2014, dated 7th March 2017, while dealing with identical issue of determination of arm's length price of royalty by resorting to estimation by the Transfer Pricing Officer has held as under:–

“(d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical know how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical know how royalty by the TPO was ad–hoc and arbitrary as held by the CIT(A) and the Tribunal.”

25 ITA 6081/Mum/2018

determination of arm's length price of royalty payment by estimation held as under:–

“7. We have considered the submissions made by learned counsels from both the sides and perused the orders of departmental authorities as well as other materials on record. We have also carefully examined the decisions placed before us. At the outset, it needs to be mentioned, the only dispute arising for consideration before us is determination of ALP of royalty at 2% by TPO as against 3% claimed by assessee. Undisputedly, assessee on 01/04/2009 has entered into a royalty agreement with its AE, RAK, UAE. As per clause 1.1 of the agreement, RAK, UAE will provide the technology assistance and on- going process, product improvement and complete know-how assistance to assessee. Clause 2.1 of the agreement stipulates, assessee shall manufacture the products in keeping with the highest quality standards, rules, and specifications internationally available and in accordance with guidelines established from time to time by RAK, UAE. Further, assessee shall use apparatus, ancillary equipment, accessories and materials that will ensure that such standards, rules, specifications and guidelines are met. Clause 3.1 of the agreement provides, in consideration of the ongoing technical assistance on process and product improvement to be provided or any other services as specified in the agreement, including any technology or services provided, assessee shall pay to RAK, UAE royalty equivalent to 3% of the net ex-factory sale price of the products on both domestic as well as export sales during the tenure of the royalty agreement. 8. From the clauses of the royalty agreement referred to above, it becomes clear not only RAK, UAE, will provide the technical know-how and assistance for manufacturing products, but, assessee will also have to manufacture by using such technical know-how, assistance in accordance with international standards and guidelines set by RAK, UAE. For using such technical know-how, assistance, etc. assessee is required to pay royalty of 3% to its AE both on domestic and export sales. Department has not denied existence of royalty agreement nor the fact that payment of royalty at 3% is as per the terms of the agreement. TPO has also not disputed the fact that there is transfer of technical know-how and assistance from the AE to assessee. What the TPO disputes is the quantum of royalty paid. As can be seen from the TP report of the assessee as well as other materials on record, assessee has benchmarked ALP of royalty paid to AE by applying TNMM. As average margin of comparables selected was 4.32% as against assessee's margin of 11.69%, payment of royalty was found to be within arm's length. Assessee also undertook alternative analysis under CUP method. Assessee has searched Royalstat database which yielded three companies as comparables with average royalty paid of 3.65% on net sales as against 3% by assessee. Therefore, even under CUP method also payment of royalty at 3% was found to be within arm's length. The TPO did not accept assessee's TP analysis under TNMM by observing that payment of royalty being an intangible

26 ITA 6081/Mum/2018

transaction should not have been aggregated with tangible transactions. As far as, assessee's analysis under CUP method is concerned, TPO has rejected it citing following reasons:–

i it is an alternate analysis ) i database used is for US based companies i ) i copies of agreements not furnished; and i i ) i bench marking has to be done for Indian v companies in similar trade making royalty ) payment.

27 ITA 6081/Mum/2018

determining ALP under CUP method. As per the said provision, TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions. Thereafter, making necessary adjustments to such price, on account of differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market, TPO will determine the ALP. It is patent and obvious from TPO's order, the determination of ALP at 2% is not at all in conformity with Rule 10B(1)(a). The TPO has not brought even a single comparable to justify arm's length percentage of royalty at 2% either under CUP or TNMM method. On the contrary, observations made by TPO gives ample scope to conclude that adoption of royalty at 2% is neither on the basis of any approved method nor any reasonable basis. Rather it is on adhoc or estimate basis, hence, not in accordance with statutory provisions. The approach of TPO in estimating royalty at 2% by applying the benefit test, in our view, is not only in complete violation of TP provisions but against the settled principles of law. ITAT, Mumbai Bench in case of Castrol India Ltd. (supra) while examining identical issue of determination of ALP at 'Nil' by applying the benefit test held as under:

"11. We have considered the rival submissions and perused the relevant material on record. It is observed that the impugned royalty was paid by the assessee company to its AE namely Castrol Ltd. UK at 3.5 % of the net exfactory sale price of products manufactured and sold in India as per the technical collaboration agreement. This internatio–nal transaction involving payment of royalty to its AE was bench-marked by the assessee by following CUP method in its TP study report and since average rate of royalty of three comparables selected by it was higher at 4.67% than the rate at which royalty was paid by the assessee to its AE, the transaction involving payment of royalty was claimed to be at arm's length. A perusal of the order passed by the TPO u/s 92CA (3) of the Act shows that neither these comparables selected by the assessee in its TP study report were rejected by her nor any new comparables were selected by her by making a fresh search in order to show that the payment of royalty by the assessee to its AE was not at arm's length. She simply relied on the approval of SIA to hold that any royalty paid by the assessee on exports and other income was not allowable and disallowed the royalty payment to the extent of Rs. 40,51,486/- treating the same as the royalty paid by the assessee in respect of exports sale and other income. We are unable to agree with this strange method followed by the TPO to make a TP adjustment in respect of royalty payment which is not sustainable either in law or on the facts of the case. She has neither rejected the method followed by the assessee to bench-mark the transaction in respect of payment of royalty nor has been adopted any recognized method to determine the ALP of the said transactions. The approval of SIA adopted by the TPO as basis to make TP adjustment in respect of

28 ITA 6081/Mum/2018

royalty payment was untenable and even going by the said basis wrongly adopted by the TPO, no TP adjustment in respect of royalty payment was liable to be made. As per the said basis, the net sales of the assessee after excluding export sale and other income were to the extent of Rs. 1118.70 crores and the royalty paid thereon at Rs. 24.38 crore being less than the rate of 3.5% approved by SIA, there was no case of any excess payment made of royalty by assessee than approved by SIA to justify its disallowance by way of TP adjustment. In our opinion, the ld. CIT (A) could not appreciate these infirmities in the order of the TPO despite the same were specifically brought to his notice on behalf of the assessee and confirmed the TP adjustment made by the TPO in respect of royalty payment which was totally unjustified. We therefore, delete the addition made by the AO/TPO and confirmed by the ld. CIT on account of TP adjustment in respect of royalty payment and allow ground no. 3 of the assessee's appeal." 11. Similar view has also been expressed in the other decisions relied upon by ld. AR. At the cost of repetition, it needs reiteration, assessee has benchmarked the royalty payment by bringing comparables both under TNMM as well as CUP. Whereas, TPO has rejected the analysis done by assessee under both the methods without any reasonable basis nor has brought a single comparable to justify ALP of royalty at 2%. Unfortunately, ld. DRP has approached the entire issue in rather mechanical manner without examining whether approach of the TPO is in accordance with statutory mandate. Therefore, determination of ALP of royalty at 2% cannot be supported, hence, deserves to be struck down. Moreover, theory of benefit test applied by TPO also falls flat considering the fact that TPO does not question the necessity of paying royalty but only objects to the quantum. Further, quantum increase in sale with no apparent increase in production, minimal product recalls, low after sales maintenance cost certainly goes to prove assessee's claim that these could be achieved due to utilization of advanced technical know-how transferred by AE. The TPO has not been able disprove these facts with any sound argument. Considering the totality of facts and circumstances, we are of the opinion, reduction of rate of royalty by TPO from 3% to 2% is without any basis, hence, cannot be accepted. Accordingly, we delete the addition made on account of TP adjustment to royalty payment. Grounds raised are allowed.”

“Having considered the rival submissions, we find that the assessee offered two transfer pricing studies in relation to payment of royalty. In so far as the acceptable study adopting the Comparable Uncontrolled Price method is concerned, it is not in dispute that the

29 ITA 6081/Mum/2018

assessee offered three comparables with an average royalty payment of 3.65% as against its own rate of royalty at 3%. Significantly, the TPO rejected these comparable on the ground that they were US based, while the AE of the assessee was UAE based. Having rejected these comparables, it was for the TPO to come up with other comparables, it was for the TPO to come up with other comparables, it was for the TPO to come up with other comparables so as to justify reduction of the royalty payment. However, no such exercise was undertaken by the TPO determined that the reason for the same was increased marketing along with offer of discounts and that there was no justification for payment of royalty at 3% to the AE by the assessee. This reasoning is without legal basis of law as it is not for the TPO to decide the best business strategy for the assessee.

In WALCHAND AND CO. PRIVATE LTD. the Supreme Court observed in the context of the Income–tax Act, 1922 that when a claim is made for an allowance by the assessee, the income tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. The Supreme Court pointed out that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively for the purpose of business, it has to be adjudged from the point of view of the businessmen and not of the revenue. The Supreme Court concluded that it is open to the revenue to come to the conclusion that the alleged payment was not real or that it had not been incurred by the assessee in the character of a tender or that it was not laid out exclusively for the purpose of the business so as to disallow it but it is not the function of the revenue to determine what remuneration should be paid to an employee by the assessee.

Applying the same logic to the case on hand, once it is admitted by the Revenue that the assessee entered into a royalty agreement with the A.E. and the assessee claimed benefit from such agreement, in the form of quantum increase in sales with no apparent increase in production, minimal product recalls and low after sales maintenance cost, and consequently paid royalty in terms thereof, it was not for the TPO to determine as to what would be the other reasons for increase in the assessee’s sales and profit.

Above all, there is no explanation forthcoming as to why the TPO decided upon 2% instead of the contractual rate of 3% for payment of royalty. No reason is offered by the TPO for picking on 2%. This whimsical fixation by the TPO amounts to an arbitrary and unbridled exercise of power. In consequence, we find that the TPO having rejected the comparables cited by the assessee, did not take the trouble to examine alternate comparables so as to justify reduction of

30 ITA 6081/Mum/2018

the rate of payment of royalty and by applying a wholly inapplicable methodology of determining the benefit from payment of such royalty, he capriciously reduced the rate for payment of such royalty from 3% to 2%.

On the above analysis, we find no grounds to interfere with the cogent and well reasoned order passed by the Tribunal. No question of law, much less a substantial question of law, therefore, arises for consideration in this regard.”

31 ITA 6081/Mum/2018

agreement and further all the parties relating to such agreement are located outside India, hence, are not governed by Indian rules and regulations. The aforesaid objection of the assessee has neither been dealt with nor controverted by the Transfer Pricing Officer. Thus, when the comparable proposed by the Transfer Pricing Officer are in different geographical location we do not understand how they can be compared to the assessee. It is further necessary to observe that the payment of royalty by the assessee in the preceding assessment years, though, identical in nature but they have been accepted by the Transfer Pricing Officer in course of Transfer Pricing proceedings from assessment year 2006–07 onwards. This is evident from the Transfer Pricing Officer’s order passed for the assessment year 2010–11 and 2011–12, copies of which are placed before us. Further, the Transfer Pricing Officer having not determined the arm's length price in conformity with statutory provision and in the process having failed to demonstrate that arm's length price shown by the assessee is incorrect, the contention of the learned Departmental Representative to restore the issue to Transfer Pricing Officer for fresh determination of arm's length price is unacceptable. Thus, on overall consideration of facts and material on record, we hold that the adjustment made to the arm's length price of royalty payment is unsustainable; hence, the addition made in this regard is deleted. This ground is allowed.”

ordinate bench, we direct the AO / TPO to delete TP adjustment of

Rs.3,96,90,306 in relation to payment of royalty for use of technical know how.

adjustment of Rs.51,74,209 in relation to payment of interest on external

commercial borrowings (ECB) loan. The facts with regard to the impugned

dispute are that the assessee has availed external commercial borrowings with

the permission of RBI. The assessee has paid interest on the basis of LIBOR (+)

32 ITA 6081/Mum/2018

300 basis points, and such rate of interest has been determined on the basis

of circular issued by RBI. The TPO rejected the arm’s length interest rate paid

by the assessee on the basis of LIBOR (+) 300 bps. The AO has determined

arm’s length interest rate on the basis of data available in bloomberg data base

where interest on the ECB rate has been taken USD LIBOR (+) 143.62 basis.

Accordingly, determined arm’s length interest rate. The Ld.DRP has confirmed

TP adjustment suggested by AO / TPO on the ground that the assessee was

required to carry out an economic analysis and submit the TPSR after due

diligence in order to benchmark interest paid to its AE. However, even in the

TPSR, the assessee has merely relied on the RBI letter and hence, the same

cannot be termed as TP study and the TPO was free to choose his own method.

issue is also covered in favour of the assessee by the decision of the ITAT,

Mumbai Bench “K” in assessee’s own case for AY 2013-14 in ITA

No.7330/Mum/2017, where under identical set of facts, the Tribunal held that

arm’s length price of the interest to be charged on the ECB loan availed from

the AE has to be determined at six months USD LIBOR rate (+) 300 basis points.

The Ld.DR, on the other hand, fairly accepted that this issue is also covered in

favour of the assessee by the decision of ITAT for AY 2013-14.

33 ITA 6081/Mum/2018

and gone through the orders of authorities below. We find that the co-

ordinate bench of the ITAT, Mumbai Bench “K” in assessee’s own case for AY

2013-14 in ITA No.7330/Mum/2017 had considered an identical issue and by

following its earlier decision in the case of ION Exchange India Ltd vs ADIT in ITA

No.5109/Mum/2013 held that arm’s length price of the interest to be charged

on the ECB loan availed from the AE has to be determined at six months USD

LIBOR rate (+) 300 points. The relevant paras of the order of the Tribunal are as

under:-

“23. We have considered rival submissions and perused material on record. At the outset, we must address the issue relating to the admission of additional grounds raised by the assessee. In this context, we must observe, the issues raised in the additional grounds were never raised by the assessee at any stage and have only been raised in course of appeal hearing before us. The assessee has not even claimed depreciation in the return of income which is the issue raised in the additional ground no.3.4. The principle of law on the issue of admission of additional ground is very much clear. If the additional grounds require examination of fresh facts which have not been examined at any stage, the additional grounds cannot be allowed. After examining the factual and legal position relating to the admission of additional grounds, we are of the view that taking a decision on the additional grounds raised by the assessee requires examination / verification of fresh facts relating to utilization of loan, etc., which have not been examined at any stage. That being the case, we decline to admit the additional grounds raised by the assessee at this stage. 2. Having held so, it is necessary to examine whether the benchmarking of the Transfer Pricing Officer insofar as it relates to interest payment to the

34 ITA 6081/Mum/2018

AE on ECB loan is correct. On perusal of the facts and material on record, we are of the view that determination of arm's length price of interest charged on ECB loan at USD LIBOR rate plus 143.62 basis points is arrived at on the basis of average of 46 companies in Bloomberg Database. From the discussion of the Transfer Pricing Officer in the Transfer Pricing order it is not clear whether the Transfer Pricing Officer has obtained all the data relating to 46 comparables, such as, the nature of loan, whether secured or unsecured, the period of loan, the purpose for which the loan was granted, etc. It also appears, all relevant data available with the Transfer Pricing Officer was not provided to the assessee. In these circumstances, the determination of arm's length price of the interest charged on ECB loan on the basis of 46 comparables appearing in Bloomberg Database cannot be said to be valid comparable. In contrast, the Transfer Pricing Officer himself has stated that while granting permission to the assessee for availing ECB loan, the RBI vide letter dated 8th June 2012, has fixed the interest rate at six months USD LIBOR plus 350 basis points. Even, the RBI circular referred to by the learned Authorised Representative, a copy of which is at Page–311 of the paper book, the interest rate for ECB loan availed for a period of three years and up to five years has been fixed at six months LIBOR plus 350 basis points. In view of the aforesaid facts, we are of the opinion that arm's length price of the interest charged to the AE can be more accurately determined by following the rate of interest fixed by the RBI in respect of ECB loan. For coming to such conclusion, we find support from the decision of the coordinate bench in Ion Exchange India Ltd. v/s ADIT, ITA no.5109/Mum./2013, dated 10th February 2014, cited by the learned Authorised Representative. In view of the aforesaid, we accept learned Authorised Representative’s contention that the arm's length price of the interest to be charged on the ECB loan availed from the AE has to be determined at six months USD LIBOR rate plus 300 basis points. The Assessing Officer is directed to carry out the adjustment accordingly. This ground is partly allowed.” 20. In this view of the matter and consistent with the view taken by the co-

ordinate bench, we direct the AO / TPO to delete TP adjustment of

35 ITA 6081/Mum/2018

Rs.51,74,209 made in relation to payment of interest on external commercial

borrowing loan.

adjustment ofRs.2,21,62,308 in relation to availing of information systems (IS)

services. The brief facts of the impugned dispute are that during the course of

TP proceedings, the TPO rejected TP study conducted by the assessee to

benchmark its international transactions in relation to information system

services by applying TNMM as most appropriate method. The TPO further

observed that the assessee has failed to prove with supporting evidences, the

fact that the AE has provided services to the assessee. Therefore, he

proceeded to determine the arm’s length price of the software usage charges

paid to the AE on estimate basis by applying man hour rate of Rs.8,500 per

hour for two man hour a day. Accordingly, he determined the arm’s length

price on IT services rendered by the AE for maintaining software at

Rs.8,24,93,129. Since the assessee has paid an amount of Rs.10,46,55,347, the

differential amount of Rs.2,21,62,308 has been adjusted in relation to availing

of information system services.

issue is also covered in favour of the assessee by the decision of the ITAT,

Mumbai Bench “K” in assessee’s own case for AY 2013-14 in ITA

36 ITA 6081/Mum/2018

No.7330/Mum/2017, where under identical set of facts, the Tribunal held that,

where the assessee placed on record details of employees rendering IS service,

complete details of documents raised during the year and the quantum of

internal and external cost was duly certified by the external auditors, the

disallowance of IS charge was not sustainable.

decided by the Tribunal in favour of the assessee for AY 2013-14; however, he

relied upon the observation of the TPO and DRP.

and gone through the orders of authorities below. We find that the co-

ordinate bench of the ITAT, Mumbai Bench “K” in assessee’s own case for AY

2012-13 had considered an identical issue. We further noted that the Tribunal

in assessee’s own case for AY 2013-14, after considering relevant facts, held

that the TPO was erred in not following any one of the most appropriate

method prescribed under the statute to determine arm’s length price of

international transactions of the assessee with its AE, but made adjustment on

an adhoc or estimate basis without any valid reasons. The relevant finding of

the Tribunal are as under:-

“30. We have considered rival submissions and perused material on record. Undisputedly, the Transfer Pricing Officer has made an adjustment to the arm's length price of the payment made towards information services to the AE by following the same reasoning on the basis of which he has made

37 ITA 6081/Mum/2018

similar adjustment in assessment year 2012–13. Moreover, it is evident, the adjustment made by the Transfer Pricing Officer is not by following anyone of the most appropriate methods prescribed under the statute but on an ad–hoc or estimate basis. In fact, learned DRP has upheld the adjustment made by the Transfer Pricing Officer simply relying upon their decision in assessment year 2012–13. While doing so, the DRP has even observed that the facts in the impugned assessment year are similar to those prevailing in assessment year 2012–13. Notably, while deciding identical issue in assessee’s own case in assessment year 2012–13, in the decision referred to above, the Tribunal has deleted the addition made on account of transfer pricing adjustment with the following observations:–

“21. We have considered rival submissions and perused materials on record in the light of decisions relied upon. Though, the Transfer Pricing Officer has alleged that the assessee failed to furnish any evidence to substantiate its claim that the payment made to the AE for availing Information System Services, however, the material on record reveal that the assessee has not only undertaken a bench marking process for determining the arm's length price of the transaction in the transfer pricing study report which was filed before the Transfer Pricing Officer, but, other relevant and necessary documents like copy of the agreement, invoices raised, certificate from independent Chartered Accountant Firm, KPMG, details of users were also furnished before the Transfer Pricing Officer. Therefore, the allegation of the Transfer Pricing Officer that the assessee has not furnished the necessary details is not totally correct. In any case of the matter, non–furnishing of certain documentary evidences, as alleged by the Transfer Pricing Officer, does not empower him to embark upon determining the arm's length price of the international transaction on estimation basis. Further, a reading of the Transfer Pricing Officer’s order makes it clear that his finding on the issue is contradictory. On the one hand, he has observed that the assessee has failed all the three tests, including, whether the services have actually been provided, on the other hand, he has accepted that the AE has provided the software. Thus, ultimately, what the Transfer Pricing Officer disbelieves is the quantum of payment. Accordingly, he has proceeded to estimate the price of the services rendered by the AE at ` 1,62,05,000. Though, the Transfer Pricing Officer has observed that he has applied CUP method for determining the arm's length price, however, he has not brought on record even a single comparable to support the arm's length price determined by him even on estimate basis. The estimation of service charges on so called man hour basis is without any supporting material. Similarly, the estimation of cost

38 ITA 6081/Mum/2018

of software at `. 1 crore is without any basis. Thus, it is very much clear that the determination of arm's length price by the Transfer Pricing Officer is not as per any one of the methods prescribed under section 92C of the Act r/w rule 10B. As discussed elsewhere in this order, such determination of arm's length price on ad–hoc / estimation basis is not permissible under the scheme of the Act as the Transfer Pricing Officer is duty bound to determine the arm's length price by following any one of the most appropriate method prescribed under the statute. It is relevant to observe, the DRP has approved the determination of the arm's length price by the Transfer Pricing Officer without properly appreciating the implication of the relevant statutory provisions. As regards the observations of the DRP regarding the report of the KPMG, it is necessary to observe that the KPMG report is not an audit report but was furnished by the assessee to support the attribution of cost. Therefore, it cannot be said that it is a qualified report. It is further relevant to observe, the material submitted before us, which also forms part of the Transfer Pricing Officer’s record, indicates that the cost of the software has been allocated to 40 group companies across the globe who are using the software and related services and assessee’s share in cost allocation works out to 2.3%. Moreover, when the Transfer Pricing Officer himself agrees that the AE has provided software and certain services, there is no reason for not accepting the payment made to the AE to be at arm's length in the absence of any contrary evidence brought on record and by simply applying the benefit test. If the Transfer Pricing Officer did not agree to the arm's length price shown by the assessee it was open for him to determine the arm's length price by applying one of the most appropriate methods being backed by supporting material. Without complying to the statutory provisions, the Transfer Pricing Officer certainly cannot determine the arm's length price on ad–hoc / estimation basis. Our reasoning in paragraph 11 to 15 will equally apply to this issue also. Accordingly, we delete the adjustment made to the arm's length price of payment made towards availing information system services from AE. This ground is allowed.” “Facts relating to the disputed issue being identical in the impugned assessment year, respectfully following the decision of the Co–ordinate Bench in assessee’s own case, we delete the addition made on account of adjustment to the arm's length price of payment made to the AE towards availing of information system services. Ground raised is allowed.”

39 ITA 6081/Mum/2018

ordinate bench, we direct the AO / TPO to delete TP adjustment of

Rs.2,21,62,308 in relation to availing of information system services.

assessee’s appeal is disallowance of rs.14,19,805 in respect of employees

contribution to provident fund. The AO has disallowed employees contribution

to PF u/s 36(1)(viia) on the ground that the assessee has made delayed

payment of employees contribution to PF and accordingly, he held that

employees contribution to PF beyond the due dates specified under the

respective Act is income of the assessee u/s 2(24)(x) r.w. Explanation to section

36(1)(viia) of the Act.

favour of the assessee by the decision of Hon’ble Bombay High Court in the

case of CIT vs Ghatge Patil Transport 368 ITR 793 (Bom) where it was held that

employees contribution to PF, even if made beyond the due date prescribed

under the relevant Act is liable for deduction u/s 43B of the I.T. Act, 1961, if the

same is paid on or before the due date of filing the return of income u/s 139(1)

of the Act. The Ld.AR further submitted that the assessee, although remitted

employees contribution to PF beyond the due date specified under the

respective Act, but such payment has been made on or before the due date for

40 ITA 6081/Mum/2018

filing return of income u/s 139(1) of the Act and hence, in view of specific

provisions of section 43B, if such payment is made before due date of filing

return of income, no disallowance could be made.

record. There is no dispute with regard to the fact that although the assessee

has remitted employees contribution to PF beyond the due date prescribed

under the PF and miscellaneous Act, but such payment has been made on or

before the due date of filing return of income u/s 139(1) of the Act. Once

employees contribution to PF is paid on or before the due date of filing the

return of income, then the same is required to be considered at par with

employer’s contribution to PF for the purpose of provisions of section 43B of

the Income-tax Act, 1961; hence, any payment of employees contribution to PF

on or before the due date of filing return of income u/s 139(1), shall be allowed

u/s 43B of the Income-tax Act, 1961. This legal proposition is supported by the

decision of Hon’ble Bombay High Court in the case of CIT vs Ghatge Patil

Transport (supra). This legal proposition is further supported by the decision of

Hon’ble Supreme Court in the case of CIT vs Jaipur Vidyut Vitran Nigam Ltd 49

taxman.com 560 where the Hon’ble Supreme Court has dismissed SLP filed by

the revenue against the decision of Hon’ble Rajasthan High Court by holding

that amount claimed on payment of PF & ESI having been deposited on or

41 ITA 6081/Mum/2018

before due date of filing of return, same cannot be disallowed u/s 43B or u/s

36(1)(viia). In this view of the matter and respectfully following the case laws

discussed hereinabove, we are of the considered view that the AO was erred in

disallowing employees contribution to PF u/s 43B, even though such payment

has been made on or before due date of filing return of income u/s 139(1) of

the Income-tax Act, 1961. Hence, we direct the AO to delete addition made

towards disallowance of employees contribution to PF.

assessee’s appeal is disallowance of other miscellaneous expenses relating to

write off of rent deposits. The Ld.AR for the assessee, at the time of hearing

submitted that due to smallness of amount, the assessee does not want to

presss this ground. Therefore, the same is dismissed, as not pressed.

Order pronounced in the open court on 07 -06-2019.

Sd/- sd/- (Ravish Sood) (G Manjunatha) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Dt : 07th June, 2019 Pk/-

42 ITA 6081/Mum/2018

Copy to : 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR /True copy/ By order

Asstt. Registrar, ITAT, Mumbai