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Before: SHRI N. K. SAINI & MS SUCHITRA KAMBLE
These appeals are filed by the assessee as well as by the Revenue against the Assessment Order dated 07.02.2012 passed by the Assessing Officer u/s 143 (3) read with Section 144C of the Income Tax Act, 1961.
The grounds of appeal are as under:-
1. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made by the A.O at Rs.6,00,00,000/- on account of deemed dividend and Rs.8,74,517/- as interest thereon by holding that the assessee was not a shareholder of the payer company when the A.O had clearly established that the payer company was de facto beneficial shareholder of the assessee.
“1. That the learned Commissioner of Income Tax (Appeals) - XX, Delhi [‘CIT (Appeals)’] erred in disregarding the Transfer Pricing (TP) documentation and thereby erred in not appreciating economic analysis conducted bonafide by the Appellant in respect of its contract research and development services (‘R&D segment’), performed with due diligence and using the data available at the time of conducting the comparability analysis.
2. The learned CIT (Appeals) erred on facts and circumstances of the case and in law by confirming an Transfer Pricing adjustment amounting to INR 26,850,486 holding that the international transaction pertaining to contract R&D segment do not satisfy the arm’s length principle envisaged under the Act and in doing so have grossly erred in:
2.1. not appreciating that the Appellant had prepared the Transfer Pricing documentation bona fide and in good faith in compliance with the provisions of Section 92D of the Act read with Rule xoD of the Income Tax Rules, 1962 (‘Rules’) and selected uncontrolled comparable companies based on a detailed Functional, Asset and Risk (‘FAR’) analysis, following a methodical and consistent benchmarking process in respect of contract research and development services.
2.2. rejecting the arm’s length margin computed by the Appellant for contract R&D service segment using multiple year / average data and instead using current year data for comparable companies, i.e., data for Financial Year 2007-08, despite the fact that the same was not available with the Appellant at the time of preparing its transfer pricing documentation.
2.3. ignoring the comparability analysis undertaken by the Appellant for its contract R&D services and thereby performing his own comparability analysis in making adjustment to the transfer price of the Appellant.
2.4. considering only one comparable company namely TCG Lifesciences Limited to benchmark the international transaction pertaining to contract R&D segment thereby expecting the Appellant to perform at par with TCG Lifesciences Limited and also disregarding the statistical principle which states that “other things being equal, as the sample size increases, the results tend to be more reliable and accurate.”
2.5 ignoring the limited risk nature of the contract R&D services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential.
2.6. not appreciating the fact that there are significant differences in the levels of working capital employed by the comparables vis-a-vis that of the Appellant and suitable adjustment for differences in working capital needs to be provided.
2.7. denying the benefit of (+/-) 5% range mentioned in the proviso to Section 92C(2) of the Act in determination of the arms’ length price.
3. The learned CIT (Appeals) erred in considering the payment of INR 19,465,250 by the Appellant towards the administrative services received from the Associated Enterprises (“AEs”) to be ‘Nil”, and in doing so grossly erred in law and in facts for the following reasons:
3.1. applying the Comparable Uncontrolled Price method and rejecting the application of Transactional Net Margin Method as most appropriate method for determination of arm’s length price in case of payment of administration fee.
3.2. drawing conclusion as regards to no economic value was derived and that no tangible and substantial commercial benefit was derived out of services for which the admin fee was paid.
3.3. disregarding the collective evidences provided in justification of the arm’s length nature of international transactions pertaining to the payment of administration fee.
3.4 the support services are in the nature of stewardship as it result into benefit to the AEs and such coordination activity is required to be carried out by the parent companies to improve its global presence and global profit.
4. The learned CIT (Appeals) erred in upholding the charging of interest under section 234B of the Act.
5. That the Appellant craves leave to add to and / or alter, amend, rescind or modify the grounds taken hereinabove before or at the time of hearing of this appeal.”
Akzo Nobel Car Refinishes India Private Limited is a wholly owned subsidiary of Akzo Nobel Coatings International BV, Netherlands. The company was incorporated on December 05, 1997. The assessee is engaged in the business of distribution of car refinish paints and ancillaries in India and providing research and development services to its global affiliates as contract service provider being remunerated on the basis of a mark-up on total cost of 5%. The TPO has determined the following TP adjustments: Particulars Outcome of TP order Receipts towards contract research and Adjustment of Rs. 26,850,486 development services Administration fees paid Adjustment of Rs. 19,465,250 The assessee company filed its return on 30/9/2008 for the Assessment Year 2008-09 declaring loss of income at Rs.22,87,532/-. Various additions on account of Transfer Pricing, Deemed Dividend u/s 2(22) (e) and Interest paid on loan held to be deemed dividend u/s 2(22) (e) were effected in the Assessment Order, the same are as follows: Particulars Amount (INR) Total income as per Return A (22,87,532)
Add: B 6,08,74,517 1) Addition on account of deemed dividend 2) Addition under Section C 4,63,15,736 92CA of the Act Total income assessed under D=A+B+C 10,49,02,721 Section 143(3) of the Act
Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. Aggrieved by the order of the CIT(A), the Revenue as well as the assessee are before us.
During the hearing the Ld. AR submitted that the Hon’ble Karnataka High Court vide decree dated 15/12/2014 has concluded the amalgamation w.e.f 1st April 2011 the same information was available before the Transfer Pricing Officer as well as before the Assessing Officer. Thus, the Ld. AR has taken prima facie legal ground that the Assessing Officer passed assessment order on a non existing entity. Thus, the Revenue’s appeal is on non existing entity and is not maintainable. The Ld. DR could not controvert this position.
We have heard both the parties in respect of the Revenue’s appeal. It is pertinent to note that the Revenue was very well informed by the assessee about the non existence of the entity named M/s. Akzo Noble Car Refinishes India Pvt. Ltd. Thus, the appeal is not maintainable in respect of the non- existing entity. Therefore, Revenue’s appeal is dismissed.
In result, appeal of the Revenue is dismissed.
As regards to the Assessee’s appeal, the Ld. AR submitted that the Tribunal in assessee’s own case for A.Y. 2007-08 being & 3005/DEL/2014 order dated 08.01.2018 has partly allowed the appeal of the assessee wherein the identical issues were contested by the Revenue as well as by the assessee. The Ld. DR relied upon the Assessment Order but could not controvert the earlier Assessment Year decision of the Tribunal.
We have heard both the parties and perused all the relevant records. The Tribunal in A.Y. 2007-08 wherein the same comparables have been contested directed the TPO/AO to exclude these comparables. The Tribunal held as under:
“13. As relates to the assessee’s appeal, the Ld. AR submitted that the assessee is engaged in sale and distribution of car refinishes and contract (R &D) which is engaged in automobile industry. R & D segment of Akzo India undertakes contract Research and Development for the Akzo Group. Akzo India carries out not in Research and Development Activities (Colour mixing) on the basis of the specifications received from the Akzo Group. Akzo India is responsible for the global, regional refinishes market. R & D activity is targeted towards development of unfortunately friendly and technology advances products and development of new colour Akzo India does not own any significant intangible and does not take any significant research and development on its account that leads to the development and non written intangible. Akzo India uses the trade marks, process and know-how technological data software, operating/quality standard etc developed, owned by Akzo Group. Akzo India Provides contract R & D services only to the Akzo Group and is compensating on the cost plus pre-determine basis and thus operating in an owner risk insulated atmosphere. As a cost plus method is considered as compensation as the risk insulated service provider, which is paid irrespective of the success or failure of the services rendered. The Ld. AR submitted that TCG Lifesciences Ltd, Transgene Biotek Ltd. are functionally different from the assessee company. As TCG Lifesciences Ltd. is engaged in clinical research project development and is in Pharmaceutical Industry. While Transgene Bioteck Ltd. is engaged and manufacturing diagnostic products and allied services and again in Pharmaceutical Industry. Both these companies own patent and IPR which are intangible assets. There is a high risk end for developing product for both of this companies. Therefore, these companies have to be excluded.
The Ld. DR submitted that the TPO has rightly included these companies and this contention was not before the CIT(A). Therefore, the appeal of the assessee be dismissed.
We have heard both the parties and perused the material available on record. TCG Lifesciences Ltd. and Transgene Bioteck Ltd. both are functionally dissimilar. They are having intangible assets which are owned by both the companies. There is high risk involved by both the comparables. These are functionally dissimilar because they are into Pharmaceutical Industry and not in Auto Mobile Industry. Thus, both these comparables needs to be excluded. Therefore, the TPO/A.O is directed to exclude these two comparables.”
As regards to R & D compensation, the said issue is also considered by the Tribunal and held as under:
“16. As relates to R & D compensation, the Ld. AR submitted that the TPO as well as CIT(A) has grossly erred in not appreciating that the assessee after due verification and application selected uncontrolled comparable companies based on a detailed functional asset and risk (far analysis). The Ld. AR further submitted that using multiple year/average data instead of using current year data for comparable companies which was not available to the assessee,is not proper on part of TPO/A.O as well as CIT(A). Working capital levels were significantly different from the comparables which were not taken into account by the TPO as well as CIT(A). The Ld. AR relied upon the order of the ITAT in the assessee’s own case where in Para 29 detail discussion was given.
The Ld. DR relied upon the order of the TPO and the CIT(A).
We have heard both the parties and perused the order of the ITAT in the assessee’s own case for Assessment Year 2005-06. In this particular year also, the working capital adjustment was not considered by TPO, therefore, ITAT directed the TPO to do the needful by taking into account of the relevant factors which was ignored on the earlier occasions. However, it would have to be decided fresh only after the fresh comparables are chosen by the TPO which are similar to the function segment and ownership of the assets.
In result, the assessee’s appeal being is partly allowed for statistical purpose.”
In this particular year also, the working capital adjustment was not considered by TPO, therefore, we direct the TPO to do the needful by taking into account the relevant factors which was ignored on the earlier occasions. However, it would have to be decided afresh only after the fresh comparables are chosen by the TPO which are similar to the functional segment and ownership of the assets of the assessee company.
Thus, both the issues are decided by the Tribunal by directing the TPO/AO to decide as per the directions of the Tribunal. Similar directions are issued in the present appeal as well.
In result, appeal of the assessee is partly allowed.