IMERYS NEWQUEST (INDIA) P. LTD.,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX,,

आदेश / ORDER

PER VIKAS AWASTHY, JM

This appeal by assessee is directed against the assessment order dated 27.02.2015 passed u/s. 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

2 ITA No.590/PUN/2015 A.Y. 2010-11

assessee-company is a joint venture of Imerys Group and Ballarpur

Industries Group for manufacturing of Wet Ground Calcium Carbonate

(WGCC), a chemical used in the paper industry. The assessee-company

imported calcite chips from Imerys Group entities, processes the same to at

plant in India and supplied the out-put i.e. calcium carbonate slurry to

Ballarpur Industries Limited and its affiliates. During the assessment year

under appeal, the assessee entered into following international transactions

with its Associated Enterprises (AEs):

Sr. Nature of International Total value Method Adopted No. Transaction For Benchmarking 1 Import of Raw Material 21,14,53,306 (Calcite Chips) From CUP Imerys Minerals Malaysia Sdn. 2 Import of Raw Material 2,30,84,775 Imerys Asia Pacific Pte. CUP Ltd. 3 Import of Raw Material 6,09,997 from Imerys Mineral CUP Taiwan Ltd. 4 Import of Calcium 8,42,784 Carbontes Power From CUP Imerys Malaysia 5 Royalty Payable To 48,88,234 Imerys Singapore For Use TNMM of Technology and Know how 6 Reimbursement of 7,58,793 NA Expenses To Imerys Singapore. Total 24,16,37,889

benchmark its international transaction except payment of royalty. To

benchmark the royalty paid to Imerys Singapore for use of technology and

know-how, the assessee applied Transactional Net Margin Method (TNMM)

as the most appropriate method. The assessee selected 8 companies as

3 ITA No.590/PUN/2015 A.Y. 2010-11

comparables in TP study report. However, Transfer Pricing Officer (TPO)

selected only 4 companies as comparables for benchmarking the

transactions. The comparables selected by the TPO along with their Profit

Level Indicator (PLI) is as under:

Sr. Name of the Comparable PLI (OP/OR) No. 1 English India Clays Ltd. 17.30%

2 Kanchan Minerals Ltd. 14.86%

3 Kilburn Chemicals Ltd. 11.17%

4 Calchem Industries (India) Ltd. 4.63%

Arithmetic mean 11.99%

The TPO made downward adjustment of Rs.5,65,56,415/- in the

international transactions of import of raw material. In draft assessment

order, the Assessing Officer further made addition of Rs.4,46,94,000/- on

account of reduction in sale price and Rs.3,28,86,037/- on account of

‘Provision for Bad Debts written off’.

assessee filed objection before Dispute Resolution Panel (DRP). The DRP vide

directions dated 19.12.2014 confirmed the additions and rejected the

objections filed by the assessee. Based on the directions of DRP, the

Assessing Officer passed impugned assessment order against which the

assessee is in appeal before the Tribunal.

outset that he has not pressing the grounds No. 5 and 6 raised in appeal

4 ITA No.590/PUN/2015 A.Y. 2010-11

pertaining to Transfer Pricing issue. The remaining grounds which are to be

adjudicated by the Tribunal reads as under:

“Ground pertaining to corporate tax

Erred in disallowing the reduction in sales price of Rs.4,46,94,000 claimed by the Appellant on account of quality and consumption adjustment from sales to Ballarpur Industries Limited.

Grounds pertaining to transfer pricing 2. Incorrect rejection of Calchem Industries (India) Limited.

Erred by concluding that Calchem Industries (India) Limited is not comparable to the Appellant on account of insufficient data to perform analysis and hence should not be considered while computing the operating margins of comparable companies for arriving at the arm's length price in relation to international transaction pertaining to import of calcite chips from AE. 3. Incorrect computation of operating margin of the Appellant for A.Y.2010-11

Without prejudice to the above grounds of appeal, erred by incorrectly computing operating margin of the Appellant for A.Y. 2010-11 by treating 'write back of provision of doubtful debts' as non-operating income. If 'write back of provision of doubtful debts' is treated as non- operating then even bad debts should also be treated as non-operating expenses.

Without prejudice to the above grounds of appeal, erred by treating foreign exchange gain/loss as non-operating item of income/expenditure, while computing the operating margin of the Appellant and comparable companies for A.Y. 2010-11.” 5. Not pressed 6. Not pressed.

Erred by computing the arm’s length price, without taking into account the lower 5% variation from the mean arm’s length price determined, which is permitted to and which has been opted for by the Appellant under the provisions of Section 92C(2) of the Act.

Other grounds

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5.1 The ld. AR of the assessee in respect of ground No. 1 submitted that

the assessee is manufacturing WGCC, a chemical used in paper Industry.

The entire produce of the assessee is supplied to Ballarpur Industries Ltd

and its group of companies. The ld. A.R. submitted that to understand

factual matrix of the case, it is necessary to first understand the

manufacturing process of WGCC. Explaining the manufacturing process of

WGCC the ld. AR submitted that the calcite chips are imported by the

assessee and are crushed with the help of machine converting into powder.

The Calcite chips powder is then mixed along with other materials which are

used to smoothen out the calcite chips powder. This mixture is separated in

two parts, one is the powder from and other the semi ground chips. The

powder is mixed with chemicals to make it into slurry form. This slurry is

supplied through a pipeline connected from manufacturing unit to Ballarpur

Industries Limited. Requisition slips for a gross quantity are issued by

Ballarpur Industries Limited, pursuant to which dispatch is made.

6 ITA No.590/PUN/2015 A.Y. 2010-11

The assessee schedules its production activity based on the forecast

received by it from Ballarpur Industries Limited. Actual stock count of the

raw material i.e. Calcite chips is not possible and therefore, the stock is

measured through a scientific process based on volume and space.

5.2 The ld. AR pointed that as per mutual understanding of the assessee

and Ballarpur Industries Limited, the billing for supply of WGCC is done on

cost plus basis, which includes total cost as increased by a specified margin.

The ld. AR submitted that during the period relevant to assessment year

under appeal, Ballarpur Industries Limited raised objection with regard to

inferior quality of WGCC received from assessee. The total value of alleged

inferior quality of WGCC supplied was to the tune of Rs.3,27,90,000/-.

Though material was utilized by Ballarpur Industries Limited but payment

was not made to the assessee for supplying inferior quality of input. The

assessee had no other option but to reduce the value of such material

supplied from the total sales. The Authorities below raised objection to the

method of reduction of such amount from sales. The DRP observed that

assessee should have claimed the amount as bad debts. The ld. AR

submitted that the assessee did not raise any legal dispute with Ballarpur

Industries Limited on the issue of quality of material supplied as the entire

production of the assessee is consumed by Ballarpur Industries Limited.

Thus, it was on account of commercial expediency and to maintain

harmonious relation with Ballarpur Industries Limited that the assessee

suffered loss.

5.3 With regard to second limb of reduction in sale price on account of

difference in the stock quantity of Rs.1,19,04,000/-, the ld. AR pointed that

the assessee engaged the services of National Survey Engineers for physical

7 ITA No.590/PUN/2015 A.Y. 2010-11

measurement of stock. The said agency carried out extensive exercise and

came to the conclusion that stock to the extent of Rs.1,19,04,000/- has been

excessively recorded in the books. The assessee in order to rectify the

mistake and reconcile physical stock vis-à-vis stock recorded in the books

reduced cost of excess quantity which was to the tune of Rs.1,19,04,000/-.

TPO/DRP have rejected Calchem Industries (India) Limited as comparable for

the reason that sufficient data is not available with regard to said company.

The ld. AR pointed that before the Authorities below, the assessee had

furnished Balance Sheet and P & L account for the Financial Year 2009-10.

The ld. AR also filed Director’s report for the Financial Year 2009-10 as

additional evidence. A perusal of the Director’s report would show that there

was no extraordinary event during Financial Year 2009-10 in Calchem

Industries (India) Limited. Therefore, on the basis of Director’s report and

Balance Sheet which have already been submitted before the Authorities

below, the said company i.e. Calchem Industries (India) Limited can be

included in the list of comparables. The ld. AR pointed that though during

assessment proceeding, the assessee could not furnish Director’s report for

the relevant period but the Director’s report for the earlier year was available

and same was furnished. The Co-ordinate Bench of the Tribunal in the case

of Yazaki India Limited Vs. The Addl. Commissioner of Income Tax, in ITA

No.886/PUN/2014 and ITA No. 1026/PUN/2014 for the assessment year

2005-06 decided on 11.09.2017 has held that a company can be taken as

comparable in case annual report of subsequent year is available. Thus, the

fact whether Calchem Industries (India) Limited is good comparable,

inference could have been drawn by TPO on the basis of earlier year’s

Director’s report.

8 ITA No.590/PUN/2015 A.Y. 2010-11

have erred in wrongly computing operating margin by treating ‘writing back

of provision of doubtful debts’ as non –operational income. For coming to

such conclusion, the DRP has placed reliance on ‘Safe Harbour Rules’. The

ld. AR contended that ‘Safe Harbour Rules’ were introduced on 18.09.2013

and are prospective in nature i.e. they would be applicable from assessment

year 2013-14. The same would not apply to assessment year under appeal

i.e. assessment year 2010-11. In support of his submission, the ld. AR

placed reliance on the following decisions:

i) Haworth ( India) (P) Ltd. Vs. DCIT, ITA No. 281/PUN/2014 for assessment year 2009-10 decided on 30.10.2017.

ii) CGI information Systems and Management Consultants Pvt. Ltd. Vs. DCIT, ITA No. 1227/Bang/2012.

have erred in not considering foreign exchange gain/loss as non-operating in

nature. The ld. AR submitted that in the case of Approva System Pvt. Ltd Vs.

CIT(A)-IT/TP in ITA No.1788 & 1803/PN/2013 for assessment year 2009-10

decided on 13.01.2015, the Co-ordinate Bench of Tribunal has held that

foreign exchange gain/loss is operating in nature. The Authorities below

have placed reliance on ‘Safe Harbour Rules’ and has rejected the

contentions of assessee. The ld. AR pointed that ‘Safe Harbour Rules’ are

applicable w.e.f. assessment year 2013-14 and would have no application in

the assessment year 2010-11.

vehemently defended the directions of DRP and the assessment order.

9 ITA No.590/PUN/2015 A.Y. 2010-11

and have perused the orders of Authorities below. We have also considered

the decisions and documents on which the ld. AR has placed reliance. The

assessee in appeal has raised grounds relating to corporate tax and Transfer

Pricing issue.

Corporate Tax:-

10.1 The ground No.1 of the appeal is with respect to corporate tax. The

assessee has assailed disallowance of reduction in sales price of

Rs.4,46,94,000/-. The aforesaid amount consists of two segments i.e.

Sr. Aspects Amount No. 1. Quality issues with respect to Rs.3,27,90,000/- materials supplied to Ballarpur Industries Limited

The ld. AR for the assessee has explained that entire produce of WGCC

is supplied to Ballarpur Industries Limited and its associate concerns. There

were some quality issues with regard to WGCC supplied in the period

relevant to assessment year under appeal. Ballarpur Industries Limited

though used the material but did not make payment of Rs.3,27,90,000/- on

account of inferior quality of WGCC. Thus, the assessee decided to ‘write off’

the said amount. The ld. AR further explained that instead of ‘writing off’ the

amount as ‘Bad Debts’ u/s. 36(1)(vii) of the Income Tax Act, 1961

(hereinafter referred to as ‘the Act’), the assessee has reduced the

10 ITA No.590/PUN/2015 A.Y. 2010-11

unrecovered amount of sales proceeds from total sales. Thus, it would give

same result as writing of’ of Bad Debts’ u/s. 36(1)(vii) of the Act.

10.2 In the present case, the assessee in the P & L account has reduced

the amount of Rs. 3.27 Crore from sales. On the other hand, contention of

Revenue is that the assessee should have considered it as Bed Debts u/s.

36(1)(vii) of the Act. We are of the view by applying any method i.e. either by

reducing amount from sales or by debiting the amount as bad debt, will not

affect final profit declared by the assessee. It is not the case of Revenue that

the claim made by the assessee is false/ incorrect. Further, it is a settled law

that entitlement of any deduction cannot depend on the treatment accorded

to such entries by assessee. The existence or the absence of entries in the

books of account is not determinative of such claim. The Authorities below

have taken hyper-technical and pedantic view in rejecting the assessee’s

claim of ‘writing off’ of the amount, not received from Ballarpur Industries

Limited against supply of WGCC, though the assessee has ‘written off’ the

amount by reducing sales price. The manner in which assessee has given

accounting treatment to the irrecoverable sales may not be the typical

desired method of book entry but it will have the same effect on financial

results as is writing off of ‘Bad Debts’. Accordingly, we allow assessee’s

claim to the extent of Rs.3,27,90,000/- i.e amount irrecoverable from

Ballarpur Industries Ltd. against supply of WGCC.

price is difference in stock. The assessee deployed National Survey Engineers

to carry out physical survey of stock. As per physical survey report, there

was difference of Rs.1,19,04,000/- between actual stock and stock recorded

in the books. The stock recorded in the books was much more than actual

11 ITA No.590/PUN/2015 A.Y. 2010-11

stock quantified by National Survey Engineers. Therefore, to show correct

picture, the assessee reduced sales by Rs.1,19,04,000/-. We find that

Assessing Officer rejected assessee’s plea with respect to physical verification

of stock out-rightly, without seeking necessary details of valuation of stock.

The Authorities below have not given any finding on valuation of stock.

11.1 The ld. AR for the assessee pointed that DRP has erred in referring to

the closing stock audit report which was for the period ended to 31st March,

2010, whereas discrepancies in the stock was reported on 21st September,

2010. Therefore, mapping the closing stock as on 21.09.2010 with audit

report dated 31st March, 2010 would not be correct. The ld. AR further

objected to the observation of DRP that assessee bills Ballarpur Industries

Limited on estimated consumption for the year. The assessee is consistently

raising bills for supply of WGCC on similar methodology and the Revenue

has accepted the same in past without any objection. Taking into

consideration entirety of facts, we are of considered view that this issue

relating to reduction of sales on account of verification of stock needs revisit

to Assessing Officer for de novo consideration. We hold and direct

accordingly. The assessee shall furnish necessary details before the

Assessing Officer viz. the manner of valuation, scope of work carried out by

National Survey Engineers and other relevant details. The Assessing Officer

after considering the same shall decide the issue afresh after allowing

opportunity of hearing to the assessee, in accordance with law. In the result,

ground No.1 raised in appeal by the assessee is partly allowed in terms

aforesaid.

12 ITA No.590/PUN/2015 A.Y. 2010-11

Transfer Pricing Issue:-

Calchem Industries (India) Ltd. from the list of comparables. The Transfer

Pricing Officer (TPO) excluded the above said company from the list of

comparables on the ground that the assessee has only filed Balance Sheet

and P & L account and has not furnished Annual Report for the Financial

Year 2009-10. Since information furnished by assessee was incomplete to

carry out analysis, the said company was rejected. The assessee has filed

Director’s report along with Balance Sheet, P & L account and notes to

account of Calchem Industries (India) Ltd for Financial Year 2009-10 as

additional evidence. Accordingly, we deem it appropriate to remit the issue

back to the file of TPO/Assessing Officer for considering additional evidences

filed by assessee and deciding the issue of inclusion/exclusion of the above-

said company from the list of comparables. Thus, ground No. 2 raised in

appeal by assessee is allowed for statistical purposes.

computation of operating margin. The TPO while computing operating

margin has considered ‘write back of provision for doubtful debts’ as non-

operating in nature. The DRP rejected assessee’s submission by placing

reliance on ‘Safe Harbour Rules’. It is an undisputed fact that ‘Safe Harbour

Rules’ were introduced on 18.09.2013. Safe Harbour Rules does not apply

retrospectively and hence, they would not have application on the

assessment year under appeal. The Hon'ble Delhi High Court in the case of

Pr. CIT Vs. M/s. Cashedge India Pvt. Ltd in ITA No. 279/2016 decided on

04.05.2016 has held that “Safe Harbour Rules’ do not apply to the

assessment year 2010-11. Similar view has been taken by Hon'ble Delhi

13 ITA No.590/PUN/2015 A.Y. 2010-11

High Court in the case of Pr. CIT Vs. Rolls Royce India Pvt. Ltd. in ITA

No.419/2016 and ITA No.747/2016 decided on 23.10.2017.

13.1 In so far as the issue whether ‘ write back of provision of doubtful

debts’ is operating in nature, the Co-ordinate Bench of Tribunal in the case

of Haworth (India) (P) Ltd. Vs. DCIT (supra) has held that liabilities written

back and bad debts recovered are part of operating income of the assessee.

Thus, following the decision of Co-ordinate Bench, we hold that Authorities

below have erred in coming to the conclusion that ‘write back of provision for

doubtful debts’ is non-operating in nature. Accordingly, findings of the

Authorities below on this issue are reversed and the ground No. 3 raised in

appeal by the assessee is allowed.

in treating foreign exchange gain/loss as non-operating in nature. The DRP

has formed such opinion on the basis of Section 10TA of Safe Harbour Rules.

As has been pointed earlier, ‘Safe Harbour Rules’ came into existence from

September, 2013. They do not apply retrospectively and hence, have no

application in the assessment year 2010-11. In the case of Approva System

Pvt. Ltd Vs. CIT(A)-IT/TP (supra.), the Co-ordinate Bench of Tribunal has

held that foreign exchange gain/loss is part of operating income. The

relevant extract of findings of the Tribunal on this issue is as under:

“22. We have considered the rival arguments made by both the sides. As reproduced above in para 20 in the arguments advanced by the Ld. Counsel for the assessee, we find the Delhi Bench of the Tribunal in the case of Westfalia Separtator India Pvt. Ltd., (Supra) following various decisions has held that foreign exchange loss/gain is a part of the operating revenue/cost. In the following decisions also (filed in the paper book by the assessee), it has been held that foreign exchange fluctuation cannot be excluded from the computation of the operating margin of the assessee company:

14 ITA No.590/PUN/2015 A.Y. 2010-11

Respectfully following the same, we direct the Assessing Officer to treat

foreign exchange gain/loss as part of operating income of the assessee.

Accordingly, ground No. 4 raised in appeal by assessee is allowed.

ground No. 5 and 6. Accordingly, grounds No. 5 and 6 are dismissed as

not pressed.

benefit of variation of 5%. The Assessing Officer/TPO is directed to allow

benefit of ±5% to the assessee in accordance with law. Thus, ground No. 7

raised in appeal by assessee is allowed for statistical purpose.

interest u/s.234B, 234C and 234D of the Act. Charging of interest under the

15 ITA No.590/PUN/2015 A.Y. 2010-11

said provisions is mandatory and consequential. Accordingly, ground No. 8 raised in appeal by assessee is dismissed.

Sd/- Sd/- (अ�नल चतुव�द� /ANIL CHATURVEDI) (�वकास अव�थी /Vikas Awasthy) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER

पुणे / Pune; �दनांक / Dated : 23rd May, 2018 SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT (Appeals)-13, Pune. 4. The CIT, IT/TP, Pune. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “ए” ब�च, 5. पुणे / DR, ITAT, “A” Bench, Pune. गाड� फ़ाइल / Guard File. 6.

// True Copy // आदेशानुसार / BY ORDER,

�नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune.