AKZO NOBEL INDIA LIMITED,KOLKATA vs. DCIT, CIRCLE-10(1), KOLKATA, KOLKATA

ORDER

Per Shri A.T.Varkey, JM

Akzo Nobel India Ltd., AY 2012-13 ii) National Starch and Chemicals Division (NSC) – NSC division is into Natural Polymers Group (NPG) and Specialty Polymer Group (SPG). It is engaged in the business of surfactants, synthetic specialty polymers and natural polymers, agro chemicals, chemicals used in customer care product, fabric and cleaning.

The Ld. AR also brought to the notice of the Bench that this issue is squarely covered in favour of the assessee by the decision of this Tribunal in its own case in & ITA No. 315/Kol/2016 vide order dated 28.08.2019.

Akzo Nobel India Ltd., AY 2012-13 expenditure is not an international transaction, the TP adjustment made in this regard need to be deleted and has observed as under:

“6. Ground No. 2 & 3, are on the issue of Transfer Pricing (TP) adjustments, made towards advertising, marketing and promotion expenses (AMP Expenses). The Transfer Pricing Officer (TPO) held that by incurring such expenses, the assessee has provided services to its Associate Enterprises (AE). Though a number of arguments were advanced by both the parties on this issue, the primary argument of the assessee is that, the transaction in question is not an international transaction. In other words, the submissions of the assessee is that, the AMP Expenses do not constitute international transactions. 6.1. We find that the ITAT Kolkata Bench of the Tribunal in the case of DCIT vs. M/s Philips India Ltd. in & 539/Kol/2016, order dt. 15/12/2017, held as follows:- “43. We have heard the rival submissions and perused the materials available on record. The primary issue here arises whether the AMP expenses constitute the international transactions so as to attract the provisions of transfer pricing of the Income Tax Act. The claim of the ld. AR is that the AMP transaction does not represent the international transaction between the AE's therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts & circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited Vs. CIT reported in 381 ITR 117 wherein it was held as under : "51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson Mobile Communications India (P.) Ltd. case (supra) holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses." In view of we note that the facts of the above case are identical to the present issue, thus the principle laid down by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited (supra) are applicable to the instant case. Respectfully following the same we dismiss the ground of appeal filed by the Revenue. 6.2. The Kolkata ‘C’ Bench of the Tribunal in the case of Organon India Pvt. Ltd. vs. DCIT in ITA Nos. 633 & 2459/Kol/2017, order dt. 24/10/2018, applied the ratio of decision in the case of Philips India Ltd vs ACIT in ITA No. 2489/Kol/2017 dated 4.4.2018 for Asst Year 2013-14, and came to a conclusion that the AMP expenditure is not an international transaction. 6.3. The argument of the ld. D/R that on facts the assessee is a distributor, is not emanating from the records. The assessee is engaged in manufacturing and supply activities. Thus, the argument of the ld. D/R is rejected on facts. The facts of the Akzo Nobel India Ltd., AY 2012-13 assessee’s case and the facts in the case of Philips India Ltd. (supra) and Organon India Pvt. Ltd. (supra) are same as all these companies are engaged in manufacturing and sale.

7. In view of the above discussion, AMP Expenses cannot be regarded as an international transaction as per Section 92B of the Act, in the case of the assessee so as to invoke provisions of Section 92 of the Act. As we have held that the that the AMP expenditure in question is not an international transaction, the TP adjustment made in this regard is hereby deleted and these grounds of the assessee are allowed.”

Respectfully following the decision cited supra in assessee’s own case, we hold that the AMP expenditure in question is not an international transaction, therefore, the TP adjustment made in this regard is hereby directed to be deleted and this ground of appeal of assessee is allowed.

7. Ground No. 3 is in respect of TP adjustment with respect to research and training expenditure (R&T Expenditure). Here also among the other arguments the Ld. AR pointed out that the jurisdictional issue is whether R&T expenses can be considered as an international transaction or not. According to Ld. AR, the adjustment towards the expenses in question was made to the income of the assessee under an erroneous assumption of fact that the assessee has provided research and development (R&D) services to its AE for AE’s product development/improvement. According to Ld. AR, the R&D expenditure was incurred by the assessee only for its manufacturing operations and local environmental compliance from HSE perspective and as such is not an international transaction. In support of his submission, the Ld. AR placed reliance on its own case decided by this Tribunal. Akzo Nobel India Ltd. (ITA No. 560/Kol/2016 & dated 28.08.2019.

Akzo Nobel India Ltd., AY 2012-13 B of the Act. We also note that the issue in hand is squarely covered by the decision of this Tribunal in assessee’s own case in & ITA No. 315/Kol/2016 wherein this Tribunal by order dated 28.08.2019 has held that the expenses in question covered under R&T Expenses relate to, service fee paid by the company for R&T Services obtained by the company, from another group company of the assessee i.e., ICT India Research & Technology Centre (ICI). ICT is a company registered u/s 25 of the Act as a “not for profit” organization. ICT provides manufacturing and training support services to the assessee on cost to cost basis. Accordingly, the expenses covered under the head ‘R&T expenses’ pertain to the fee paid to ICT. ICT provides technical support and training to the manufacturing and marketing operations of Paints Business Division. The Tribunal after examining the services rendered by the ICT has given a factual finding that the assessee has not carried out any R&T activities. The expenditure in question is incurred only for its manufacturing operations and local environmental compliance from HSE perspective. The assessee submitted that ICT also does not carry out any research and development activities for development of any new project/technology. It is primarily a captive support centre for the local India operation of the assessee. Thus, considering these facts, the Tribunal held that the expenditure on research and training does not constitute any international transaction. Thus, the Tribunal held that the expenditure incurred on R&T is not an international transaction as per Section 92B of the Act, so as to enable invocation of provision of Section 92 of the Act and observed as under:

“8.1. Here also, though a number of arguments were raised, the jurisdictional issue is whether R&T Expenses can be considered as an international transaction. The expenses in question covered under R&T Expenses relate to, service fee paid by the company for R&T Services, obtained by the company, from another group company of the assessee i.e., ICT India Research & Technology Centre (ICI). ICT is a company registered u/s 25 of the Act as a “not for profit” organization. ICT provides manufacturing and training support services to the assessee on cost to cost basis. Accordingly, the expenses covered under the head ‘R&T expenses’ pertain to the fee paid to ICT. ICT provides technical support and training to the manufacturing and marketing operations of Paints Business Division. The services provided by ICT during the relevant financial year can be summarized as follows: assisted the Appellant in complying with various Health Safety and Environment (HSE) procedures mandated for the chemical industry in India. provided solutions for compliance of environmental regulations governed by various local authorities in India.

Akzo Nobel India Ltd., AY 2012-13 provided assistance to the production department and the Company's factories in determining the appropriate mixture of various raw material components for achieving the desired colour and texture of the paint to be manufactured. provided technical training on the manufacturing processes to the production team from time to time to ensure technical updation, improvement and refinement of the production team for the overall efficient execution of manufacturing operations of the Appellant. provided other technical support on day to day basis to the manufacturing operations and addressed the manufacturing process gaps. provided training to the marketing team on the product, the nature and feature of the products etc. necessary for sales and marketing of the Appellant's products in the designated market i.e. India. assisted the Quality department in handling product defect/ quality issue or redressing any product complaints from the customers. 8.2. A perusal of the above demonstrates that, on facts the assessee has not carried out any R&T activities. The expenditure in question is incurred only for its manufacturing operations and local environmental compliance from HSE perspective. The assessee submitted that ICT also does not carry out any research and development activities for development of any new project/technology. It is primarily a captive support centre for the local India operation of the assessee. Thus, we are of the considered opinion that the expenditure on research and training does not constitute any international transactions on facts. We also find that the TPO/AO has not considered this expenditure incurred in the earlier years towards R&T expenses, as international transactions. Thus, in view of the above discussion, we hold that the expenditure incurred on R&T is not an international transaction as per Section 92B of the Act, so as to enable invocation of provision of Section 92 of the Act. Thus, we delete the TP Adjustment made in this regard and allow this ground of the assessee.”

Respectfully following the decision cited supra in assessee’s own case, we hold that the AMP expenditure in question is not an international transaction, therefore, the TP adjustment made in this regard is hereby directed to be deleted and this ground of appeal of assessee is allowed.

10. Ground no. 4 of the appeal of the assessee is against the action of the AO in enhancing the income of the assessee by Rs.69,963,072/- by determining arm’s length price of intra-group services in respect of support services received from its AEs as nil. This issue has been considered by this Bench of the Tribunal in the earlier AY 2011-12 in assessee’s own case in & ITA No. 315/Kol/2016 vide order dated 28.08.2019 in which the Tribunal has observed as under:

Akzo Nobel India Ltd., AY 2012-13 “9. Ground No. 5, is against the TP Adjustment made with regard to the International Transaction pertaining to “Intra Group Services”. This issue has been considered by this Bench of the Tribunal in the earlier Assessment Years, in the assessee’s own case in & 346/Kol/2015, Assessment Year 2010-11, order dt. 14/02/2018, wherein it has been held as follows:- “7. We have heard both the parties. We note that the TPO has not carried out the exercise for computing the arm's length price on the plea that assessee did not provide the agreement with ANCR, whereas the assessee claims to have provided a copy on 21.01.2014. Though the DRP observes that nature of service provided by ANCR are in the nature of service for strategic and operations and helps in achieving corporate objectives by aligning workforce and organizational objectives in the field of marketing HR, Finance, Management Services, Purchases etc., held it as stewardship services. We note that TPO has not carried out any exercise to determined the arms length price of benefit, service etc. as per the most appropriate method as envisaged in sec. 92C(1) of the Act. Since the TPO has not carried out the exercise which he ought to have carried out as envisaged by the Act on the erroneous plea that agreement between assessee and ANCR was not placed before him, we set aside the order of ld. DRP/AO & TPO and remand the matter back to TPO for fresh consideration and pass order in the light of the Tribunal's detailed analysis of the agreement between assessee and ANPAP which we decided supra. The TPO is directed to pass speaking order after giving proper opportunity to assessee on this issue.”

Since issue is identical, respectfully following the decision cited supra, we restore this issue back to the file of the AO for fresh adjudication in accordance to law. Accordingly, this ground of appeal of assessee is allowed for statistical purposes.

Akzo Nobel India Ltd., AY 2012-13

“6.1. Disregarding the ALP as determined by the Appellant in the Transfer Pricing ("TP") documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ("Rules") and in particular modifying/rejecting the filters applied by the Appellant; 6.2. Disregarding multiple year/prior years' data as used by the Appellant in the TP documentation and holding that current year [(i.e. Financial Year ("FY") 2011-12] data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 6.3. Not appropriately considering the functions, assets and risk profile of the companies used for comparison with the Appellant, thereby including in the final comparable set certain companies with completely different functional profile; 6.4. Excluding certain companies considered by the Appellant in the TP documentation and fresh search on arbitrary/frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; and 6.5. Committing a number of factual errors in the computation of the operating profit margins of the comparables.”

According to Ld. AR, the AO has taken as comparable, pharma companies which were held to be not comparable to the assessee’s activities as held by the Tribunal in the case of assessee’s sister concern Akzo Novel Car Refinishes India Pvt. Ltd. vide and 5007/Del/2014. He further submitted that this view has also been upheld by the DRP in assessee’s own case in AY 2014-15. So, he urged us to remand the matter back to TPO for de novo adjudication. Per contra, the Ld. DR contended that assessee company has to first demonstrate that its sister concern M/s. Akzo Novel Car Refinishes India Pvt. Ltd. is similar in functional profile and product similarly etc. and then only the TPO can consider the decision in M/s. Akzo Novel Car Refinishes and accept/reject comparables as decided by the Tribunal and apply the same to the assessee’s case for adjudication of arms length consideration.

Akzo Nobel India Ltd., AY 2012-13 to the AE is erroneous for not taking into consideration the Tribunal’s decision in assessee’s sister concern M/s. Akzo Novel Car Refinishes India Pvt. Ltd. wherein the Tribunal while adjudicating similar issue has excluded Pharma Companies from the list of comparables and which action of Tribunal has been followed by the Ld. DRP in assessee’s own case for AY 2014-15. If that is the case, then we are inclined to set aside the impugned order and remand the issue back to the Ld. TPO for fresh consideration the contention of assessee as well as Ld. DR on this issue and to pass order afresh in the light of discussion supra by a speaking order after giving opportunity to the assessee.

Akzo Nobel India Ltd., AY 2012-13 ii) Omar Salay Mohamed Sait Vs. CIT (1959) 37 ITR 151 (SC) and iii) State of Orissa Vs. Maharaja Shri B. P. Singh Deo (1970) 76 ITR 690 (SC).

The Ld. AR further submitted that the assessee has its policy of giving the cash discount and publicity and advertisement expenses from past several years and the assessee has claimed cash discount expenses and publicity and advertisement expenses in preceding years as well. However, the department has never questioned the said expenses in the past. Accordingly, the said expenditure should be allowed following the principle of consistency. For that, he relied on the following judicial precedents: i) Radhasoami Satsang Vs. CIT (1992) 193 ITR 321. ii) CIT Vs. A.K.J. Security Printers (2003) 264 ITR 276 and iii) CIT Vs. Neo Poly pack (P) Ltd. (2000) 12 Taxman 363.

Akzo Nobel India Ltd., AY 2012-13 17. Ground nos. 10 and 12 are consequential in nature in respect of penalty and interest proceedings which are consequential in nature and hence, dismissed.

Order is pronounced in the open court on 18 October, 2019.