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सुनवाई क� तारीख / Date of Hearing: 23/10/2017 घोषणा क� तारीख / Date of Pronouncement: 03/01/2018 आयकर आयकर अिधिनयम अिधिनयम, 1961 क� धारा ( 1 ) 254 केकेकेके अ�तग�त अ�तग�त आदेश आदेश क� धारा आयकर आयकर अिधिनयम अिधिनयम क� क� धारा धारा अ�तग�त अ�तग�त आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act).
लेखा सद�य सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार/ PER RAJENDRA, AM: लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order dated 31/10/2011 of CIT(A)-XX-20, New Delhi the assessee has filed the present appeal.Assessee-company engaged in the business of manufacturing,marketing and trading of institutional and industrial cleaning and hygiene products, filed its return of income on 01/11/2004, declaring loss of R.s2.93 crores.The assessment was completed, u/s.143(3) of the Act, on 21/12/2006,assessing its income at Rs.1.35 crores.
2.Effective ground of appeal is about deleting the Transfer Pricing(TP)adjustment, made by the AO,under the head payment of Royalty by the assessee to its Associated Enterprise(AE).During the assessment proceedings,the AO found that the assessee had entered into International Transactions (IT.s) with its AE.s. He made a reference to the Transfer Pricing Officer (TPO) to determine the arm’s length price(ALP) of such transactions.
2.1.The TPO, during the TP proceedings found that the assessee had made payment of Rs.1,58,54,850/- to its AE on account of Royalty, that it had presented segmental accounts in the TP Report, that independent benchmarking was carried out for each of the segment, that it has used TNMM or Resale Price Method (RPM) as most appropriate method for determining the 305/M/12- M/s. Diversity India P.Ltd.
ALP.However, the TPO did not accept the segmental accounts presented by it. He re-casted manufacturing and sale of finished goods products segment.He calculated Net Profit Margin (Operating Profit or Loss / Operating Revenue) @ -3.6 % and net profit on total cost @ 3.52 %.As per the TP Report margin of the assessee and manufacturing & sale-of-finished-goods segment was 11.72%.Using the single year data of the comparables chosen by the assessee which was determined at 19.35% the TPO was arrived at a difference of Rs.8.14 crores.However, he did not suggest any adjustment.
2.2.However,he suggested that the value of the Royalty payment (Rs.1.58 crores) should be taken as nil.Thus, he suggested an upward adjustment of the above amount.He, further observed that the assessee had entered into ten International Transactions,that out of those IT.s three was major transactions namely i.e. unsecured loan, import of trading equipments and payment of Royalty, that segmental net margins had not been properly computed by the assessee, that out of the total Royalty payment it had debited Rs.1.29 crores to Manufacturing Segment (MS),that Rs.5 lakhs to the Product Trading Segment (PTS) and Rs.24 lakhs had not been allocated at all, that the assessee was paying 4% Royalty to AE as per the agreement,dated 04/05/2002 for the trademark and technology rights.He held that Royalty was only for MS and not for any other segment-especially for the PTS. Referring to the total expenditure incurred by the assessee for the year under consideration,he held that it had incurred expenditure of Rs.43.30 crores + 3.19 crores under the head financial charges,that it had allocated Rs.35.74 crores only in the segmental account,that Rs.10.75 crores had not been allocated, that it had not correctly drawn up the segmental accounts.So,he re-casted the MS account wherein entire depreciation of Rs.7.03 crores(Goodwill Rs.1.68 crores+ Commercial rights 4.67 crores +tangible assets Rs.68 lakhs) appearing in the P & L account were allocated to MS.Finally, he held that the value of Royalty payment should be taken as nil,stated as earlier.
3.Aggrieved by the order of the AO/TPO the assessee preferred an appeal before the First Appellate Authority (FAA) and made detailed submissions.It pointed out various defects in the re-casted account prepared by the TPO.It filed fresh reconciliation statement before the FAA about various segments,who gorwarded the same to the AO.He called for a remand report from the AO,vide his letter dated 06.02.2008.In August,2011 he again directed the AO to submit the remand report but till the passing of the appellate order the AO did not send his comments to his
305/M/12- M/s. Diversity India P.Ltd. office.The FAA observed that the assessee had furnished complete reconciliation of alleged discrepancies referred to by the TPO, that the MS account, drawn up by the TPO was incorrect,that while allocating the expenses under the head amortisation(Rs.6.35 crores)an amount of Rs.5.23 crores was treated as non-operating expenditure by the assessee, that the TPO had considered the entire depreciation(Rs.7.03 crores) as operating expense without assigning any reason thereof,that the depreciation included non operating depreciation expense of Rs.5.23 crores also, that the assessee had paid Rs.56.04 crores for purchasing a business unit from Hindustan Lever Limited, that the purchase price included payment towards goodwill (Rs.29.51 crores) and payment for intangible commercial benefits (Rs.18.17 crores), that the assesse had amortised the said expenditure and had claimed depreciation on it, that the depreciation on such assets was not an operational expense,that it was an extraordinary item, that such an item was not part of the financials of the comparables,that the assessee had rightly claimed that the same were non operational in nature.He also observed that Royalty payment was attributable to other segments and not only to MS, that there was no sound logic to hold that Royalty was not payable if trademark alone was used by the assessee,that depreciation on tangible assets (Rs.68.40 lakhs) and on intangible assets(Rs.1.12 crores)was allocable to all the four segments,that depreciation on the tangible as well as intangible assets had to be considered for all the segments and not only for MS,that the TPO had considered only three comparables while passing order,that he had not considered two comparables because of lack of availability of data, that the assessee had filed the data for the current year for the remaining two comparables along with the calculation for rest of the comparables,that the cost base was the basis of IT.s, that the correct PLI should be OP/Sales and not OP/TC,as used by the TPO. He directed the assessee to calculate the margin of the comparables as well as the tested party before considering the depreciation.He found that margin of the assessee before depreciation was at 16.82%,that the margin of the comparables without depreciation was 16.36%. He observed that if the calculation was adopted as per the allocation of the TPO and depreciation expenses were properly allocated even then the margin earned by the assessee would be well above the margins of the comparables,that if depreciation was properly allocated the net margin of the assessee would be above the margins of the compar- ables,that the entire Royalty was allocated only to MS while calculating the margin of the assessee,that if the Royalty was allocated to all the segments the net margin of the assessee would be higher,that the IT.s entered into by the assessee was at arm’s length.
305/M/12- M/s. Diversity India P.Ltd.
4.During the course of hearing before us,the Departmental Representative (DR) relied upon the order of the TPO/AO.The Authorised Representative (AR) supported the order FAA.He referred to the page no.128, 130 and 131 of the paper book and stated that as per the agreement the Royalty was paid for trademark as well as technology,that there was no doubt that the Royalty was paid for MS as well as trading segment, that the agreement was approved by the RBI (page 212 of the paper book).He further argued that during the year under consideration the assessee has purchased a business unit (page 233 of the paper book), that it was an extraordinary item,that the TPO had not considered the fact of purchase of business unit while determining the ALP.
5.We have heard the rival submissions and the perused the material before us.We find that there was ten IT.s, that the TPO had suggested upward adjustment of 1.58 crores with regard to Royalty payments,that TPO had re-casted manufacturing and sale of finished goods products segment,that he had considered only three comparables for bench marking,that the assessee had filed objections about the re-casting of the accounts,that it had filed its own reconciliation claiming that the calculation made by the TPO was factually incorrect, that the FAA directed the AO to submit a remand report, that the AO did not file his comments/remand report in spite of having sufficient time,that while re-casting the MS and product segment the TPO had considered entire depreciation, that the FAA had pointed out the non-operational depreciation expenditure should not have been considered for determining the ALP, that the FAA had recalculated the depreciation figure, that as per the agreement the Royalty was paid for MS as well as trading segment, that the TPO was factually incorrect in holding that Royalty payment was only for MS, that the FAA obtained the data about all the five comparables and arrived at the conclusion that IT.s entered into by the assessee was at arm’s length. We find that net margin of the assessee, even after adopting the faulty re-casted statement of the TPO was more than the margins of the comparable companies.In our opinion, the FAA has rightly pointed out that if the Royalty was allocated to all the segments the net margin of the assessee would be higher.The DR could not point out any defect in the calculations made by the FAA or observations made by him. As the IT(payment of Royalty) was at arm’s length,so,we are of the opinion that there is no need to interfere with the order of the FAA.Confirming the same,we decide effective ground of appeal against the AO.
305/M/12- M/s. Diversity India P.Ltd.