RECKITT BENCKISER SCHOLL INDIA PRIVATE LIMITED,KANCHEEPURAM vs. DCIT, CHENNAI

आयकर अपीलीय अिधकरण, ‘डी’ "यायपीठ, चे"ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI "ी एन.आर.एस. गणेशन, "याियक सद"य एवं "ी िड.एस. सु"दर "सह, लेखा सद"य केसम" BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.756/Mds/2016 िनधा"रण वष" / Assessment Year : 2011-12 M/s. Reckitt Benckiser Scholl The Deputy Commissioner of India Private Limited v. Income Tax, (Formerly known as M/s. Corporate Circle – V (1), Reckitt Benekiser Scholl India Chennai Limited). Plot F 73/74, SIPCOT Industrial Park, Irungattukottai, Sriperumbudur, Kancheepuram – 602 117

[PAN: AAFCS 5498 E] (अपीलाथ"/Appellant) (""यथ"/Respondent) अपीलाथ" क" ओर से/Appellant by : Shri S.P. Chidambaram, Advocate ""यथ" क" ओर से/Respondent : Shri Milind Madhukar Bhusari, CIT सुनवाई क" तारीख/Date of Hearing : 28.12.2016 घोषणा क" तारीख/Date of Pronouncement : 28.02.2017 आदेश /O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER:

This appeal of the assessee is directed against the order of the Deputy Commissioner of Income Tax (Appeals), Chennai dated

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11.01.2016 and pertains to the assessment year 2011-12. The assessee

challenged the order of the DRP/AO on the following grounds of appeal:

TRANSFER PRICING GROUNDS:

2.1 The TPO’s recommendation/computation in pursuance of DRP directions and the consequential final Assessment Order passed by the AO is erroneous in seeking to make an upward adjustment of Rs.6,39,69,973/- to income/sales declared by the Appellant. 2.2 The AO/DRP erred in facts and circumstances of the case and in law, by not making an adjustment to the arm’s length margin for the differences in working capital of the Appellant as compared to external comparables adopted for the arm’s length analysis on account of the Appellant has a positive working capital. 2.3 The AO/DRP erred in considering certain class of income (i.e. creditor claim reversed and provision for bonus) as non-operating in nature while determining the arm’s length price of the international transactions without appreciating that the base expense relates to routine business operations. 2.4 The AO/DRP has erred in rejecting Hipolin Limited, Standard Surfactants Limited and Corona Plus Industries Limited as comparable companies without appreciating that under TNMM only functional profile of the company is relevant as against product comparability. 2.5 The AO/DRP erred in not considering the manufacturing segment results of ’Ador Multi-products Limited (“Ador”) for the purpose of benchmarking analysis. 2.6 The AO/DRP erred in rejecting Ador as a comparable on the ground that the company as a whole has related party transactions (‘RPT’) above 25%. 2.7 The AO/DRP erred in not appreciating that RPT were in the trading segment and hence the reason for rejection of Ador by application of the RPT filter by the AO/DRP is not tenable. 2.8 The AO/DRP has erred, in facts of the case, by including J K Helene Curtis Limited as a comparable as the said company is functionally different from the Appellant. 2.9 The AO/DRP has erred, in facts of the case, by including JIHS Svendgaard Laboratories Limited as a comparable as the said company is functionally different and is involved in research and development activities and has low raw material cost unlike the Appellant. 2.10 The AO/DRP has erred, in facts of the case by including JHS Svendgaard Laboratories Limited as a comparable as the said company was involved in a merger during the AY 2011-12. 2.11 The AO/DRP has erred, in law and in facts of the case, by not providing the marketing and research and development adjustments sought by the Appellant on account of the differences in the functional profile of the Appellant (contract manufacturer) in respect of the international transactions entered into by it vis-a-vis the functional profile of the comparable companies (routine manufacturers).

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2.12 The AO/DRP has erred in law by not adopting a methodical search process in arriving at new comparables and not providing the search methodology and filters adopted to arrive at the aforesaid comparable companies.

CORIORATE TAX GROUNDS:

3.1 The DRP/AO erred in restricting the claim of deduction under Section 10B of the Act. 3.2 The DRP erred in confirming the action of the AO in excluding income received from Bata, Interest income, Reversal of Provisions no longer required, Gain on Foreign Exchange fluctuation and other miscellaneous incomes amounting to Rs.3,46,00,202/- from profits and gains of the business of the undertaking while computing the deduction under Section 10B of the Act. 3.3 The DRP and AO failed to appreciate that income from Bata forms integral part of the core business activity of the undertaking and as such the same cannot be excluded from profits of the undertaking while computing deduction under Section 10B of the Act. 3.4 The DRP/AO erred in not appreciating that interest income was received from short term bank deposits which were primarily made for the purpose of bank guarantee requirements in relation to export obligations of the undertaking and as such the interest earned on such deposits is directly/inextricably linked with the activity of the undertaking. 3.5 The DRP/AO erred in excluding the reversal of provisions from profits of the undertaking without appreciating that such provision was a charge against profits of the undertaking in the earlier years and as such the reversal of the same should be considered as part of the profits of the undertaking. 3.6 The DRP/AO ought to have appreciated that foreign exchange fluctuation gain was earned on account of receivables/payables in respect of export activity of the eligible undertaking and as such it is inextricably linked to business of the undertaking, consequently, the gain on foreign exchange fluctuation should be included as part of profits and gains of the undertaking while computing deduction under Section 10B of the Act. 3.7 The AO erred in not appreciating that miscellaneous income includes scrap sales, Vendor Discounts and CENVAT credit all of which is inextricably connected with the manufacturing activity of the undertaking and therefore cannot be excluded from ‘profits of the business of the undertaking’ for the purpose of deduction under Section10B of the Act. 3.8 Without prejudice to the above, if the above incomes are held to excludible from the profits of the business of the undertaking, then the same should also be excluded from the total turnover of the undertaking while computing deduction under Section 10B of the Act

4.1 The DRP grossly erred in confirming the action of the AO in disallowing Rs.4,49,823/- under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (‘Rules’) without appreciating that the Appellant had already disallowed the said expenditure while computing its total income. 4.2 The DRP/AO grossly failed to appreciate that disallowing the same amount again amounts to double disallowance.

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4.3 The DRP/AO grossly erred in following its own order for the preceding AY 2010-11 without considering that the expenditure had already been disallowed by the Appellant.

5.1 The DRP/AO erred in setting off the brought forward business loss of earlier years from profits of the undertaking before allowing deduction under Section 10B of the Act. 5.2 The DRP/AO failed to appreciate that the term ‘total income’ used in Section 10B of the Act refers only to the total income of the undertaking and not total income as defined under Section 2(45) of the Act. 5.3 The DRP/AO failed to appreciate that Section 10B of the Act falls under Chapter-III of the Act and the computation of total income of the assessee begins only with Chapter-IV, consequently, the brought forward losses should be not adjusted before allowing deduction under Section 10B of the Act. 5.4 In any event, the DRP/AO ought to have appreciated that Section 10B of the Act provides for a deduction of such ‘profits and gains’ as are derived by a hundred percent export-oriented undertaking and not deduction of such ‘income’ of the undertaking.

2.0 The assessee has raised transfer pricing in Ground No.2 and corporate taxation grounds in Ground Nos.3 to 6 it’s appeal. The ground

No.1 & 2.1 are general in nature, which do not require specific

adjudication.

Facts in Brief: “SSL-TTK Ltd is a 100% Export Oriented Unit and has a manufacturing facility at Irrungattukottai near Sriperumbudur in SIPCIT industrial park. The company commenced manufacturing operations during the year 2005-06. Almost 90%of the Sales are made to SSL International PLC with the balance being sold in India. The products are marketed in India through TTK Healthcare Ltd. The products, sold under the brand name of “Scholl” come under the “foot care” segment. There are 200 different varieties of products under this segment: however the manufacturing volume for each product is not very significant. Hence detailed planning is required to ensure flexibility in operations and to avoid bottlenecks. In this situation inventory control and production floor management is very vital. The products manufactured include medicated and non-medicated products. Orthaheel, an orthotics brand was launched in the Indian market in the Indian market in June, 2008. It complements the existing School range and connects both foot care and footwear. The products come in three categories – regular, shock absorber, gel heel device. During the assessment proceedings the assessing officer found the following international transaction as per Form 3CEB”.

3.0 Associated Enterprises & Details of International Transactions:-

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Name of the Associate Nature of Method Amount (Rs.) Enterprises transaction Adopted SSL International Pic.UK. Import of goods 7,09,21,008 SSL Australia Pty Ltd SSL International Pic UK Export of goods 107,15,41,551 TNMM SSL International Pic UK, Services Received 7,58,312 SSL Australia Pty LTd SSL International Pic UK Reimbursement of 7,22,58,749 freight and insurance expenses Reimbursement of 10,953 testing fees Reimbursement for 43,86,156 - obsolete stock Reimbursement of 3,46,880 other expenses Recovery of packing 36,73,914 expenses Total 122,38,97,523

4.0 The assessee is 100% export oriented unit which has entered in to the International transaction with Associated Enterprises (AE) to the extent of Rs.122,38,97,523/- as above and the Assessing Officer referred

the international transaction to the Transfer Pricing Officer (TPO) under Section 92C of the Income Tax Act, 1961 (in short ‘the Act’) for determining the ALP adjustment. The TPO has characterized the assessee as a contract manufacturer assuming minimum risk. The assessee is tested party and the assessee adopted TNMMs as most

appropriate method for benchmarking the international transaction of import and export of foot care products and payment for receipt of services from the AE. PLI adopted is operating profit / operating cost and the assessee has shown PLI at 4.58% as against the comparable margin

of 0.74% and claimed that international transaction was at arms lengthy.

The TPO has gone through the T.P study of the assessee and recalculated

the operating margin as under:-

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Rs. in million Operating Revenue Rs.1071.54 Scrap Sales Rs. 0.26.00 Total Income Rs.1071.80 ------------------- Operating Cost Rs.1029.99 Operating profit Rs.41.81

OP/OC 4.06%

and arrived at operating margins at 4.06%. The assessee has selected

four comparables as under:

Sl.No. Name of the comparables Reasons for rejection 1. Ador Multiproducts Limited Related party transaction >25% 2. Hipolin Limited Functionally dissimilar as they are involved in manufacturing detergents 3. Standard Surfactants Limited Functionally dissimilar as they are involved in manufacturing detergents 4. Corona Plus Industries Limited Data not available in prowess

The TPO has rejected the comparables as per the reasons given

against the comparables and has selected the following fresh comparables

after making due search process:

Sl.No. Name of the comparables Profit Margin 1. J H S Sevendgaard Laboratories Limited 12.89% 2. Hifly Footwear Limited 4.33% 3. J K Helene Curtis Limited 13.60% Average 10.27

The TPO has worked out the average margin at 10.27% as against

4.06% of the assessee. The TPO has rejected the creditors claim

reversed amounting to sum of Rs.34.80 lakhs and provision for bonus

Rs.18.6 lakhs from the working of operating Revenue. The assessee has asked for the adjustment of working capital and the same was rejected by :-7-:

the TPO and arrived at the upward adjustment of Rs.63,96,973/- applying

the PLI of 10.27% against the PLI of the assessee at 4.06%. The Assessing Officer issued draft assessment order proposing the adjustments suggested by the TPO.

5.0 The assessee moved petition before the DRP and raised various objections against the Draft Assessment Order.

i) Before the DRP, the assessee has raised objections for working capital adjustment and the DRP has rejected the assessee’s objections for adjustment of working capital. ii) The assessee raised objections for considering the creditors claim reversed and provision for bonus for inclusion in operating income and the DRP has rejected the assessee’s claim and held that above items would not form part of operating income. iii) The assessee has raised objections for rejecting the comparable companies, M/s.Ador Multi-products Limited, Hipolin Limited, Standard Surfactants Limited and Corona Plus Industries Limited selected by the assessee. The Ld. DRP rejected the claim of the assessee, the assessee objected for inclusion of additional comparable companies JK Helene Curtis Limited, JHS Svendgaard Laboratories Limited. After considering the assessee’s argument the Ld. DRP has rejected the objections of the assessee. iv) The assessee has further requested for adjustment in respect of margin and research and development adjustment on account of the difference in functional profile of the assessee. The DRP has rejected the objections of the assessee. v) Similarly, the assessee requested for set off of brought forward losses before allowing deduction under Section 10B of the Act and the DRP has rejected the claim of the assessee. vi) The assessee objected disallowance under Section 14A of the Act and the DRP has rejected. vii) The assessee objected for excluding of income, interest dividend, provision for foreign exchange, etc., for deduction u/s.10B which was rejected by the DRP and upheld the order of the TPO. Consequent to the DRP order, the Assessing Officer passed the assessment order under Section 143(3) r.w.s. 144C of the Act on 11.01.2016 making the above adjustments computing the total income of Rs.11,66,01,928/- on which the assessee filed appeal before us.

6.0 Ground No.2.2 relates to the working capital adjustment. The assessee requested for working capital adjustment among the company

comparable companies. The TPO in his order had rejected the claim of the assessee stating as under:

8.6 Adjustment of Working Capital: Assessee submitted that the comparables’ margin should adjusted for working capital intensities. This contention would be relevant only in the event of assessee’s working capital being negative. To verify, the data from the financials is presented hereunder:

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Particulars 31.03.2010 31.03.2011 Average Receivables 14,36,71,806 21,66,98,474 18,01,85,140 Inventory 23,97,56,799 16,36,71,602 20,17,14,200 Payables 14,87,26,248 14,29,23,480 14,58,24,864 Working Capital 23,47,02,357 23,74,46,596 23,60,74,476 Sales 108,95,29,646 118,99,14,594 - Percentage 21.54% 19.95%

The date in the above table shows that the working capital of the assessee is not negative. Therefore there can be no grievance for the assessee that its margins are affected by negative working capital. Another reason is that the transactions with AE are only exports by the assessee as a contract manufacturer. Therefore, assessee’s claim for working capital adjustment is rejected. Reliance is placed on the decision of the Honourable ITAT ‘C’ bench Chennai in ITA No.2112/Mds/2011 (AY 2007-08) in the case of Mobis India Limited Vs Deputy Commissioner of Income Tax. In this case the appellant had negative working capital. Despite this fact, the Hon’ble ITAT held that “the assessee has not been able to justify the adjustments that were required to be made on account of negative working capital.” Therefore the assessee’s claim is rejected.”

6.1 The Ld.DRP rejected the claim of the assessee stating that the detailed working was not furnished by the assessee. The same issue has come for adjudication before this Tribunal for the assessment year 2010-

11 in ITA No.949/Mds/2014 dated 28.10.2016 and the Tribunal in Para

No.45 Page No.23 of the Order, remitted the matter back to the file of the AO to make appropriate adjustments .The relevant part of the order is extracted as under:

6.2 Following that decision of this ITAT we direct the Assessing Officer

to consider the working capital adjustment as required under law based

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on the comparables finally considered. Accordingly ground No.2.2 is allowed is for statistical purpose.

7.0 Ground No.2.3 is relating to the creditor claim reversed and provisions no longer required and written back. The assessee claimed the Creditor’s claims reversed Rs.34,80,000/- and provisions for bonus

Rs.18.06 lakhs as operating income. The TPO has rejected the claim of the assessee and the DRP confirmed the action of TPO. The AR of the assessee argued that provisions and expenses were considered as operating expenditure in the earlier years and reversal is on account of normal business operations and hence is in the nature of operating

income. On the similar issue the Hon’ble ITAT for the assessment year

2009-10 had rejected the claim of the assessee, remarking that nothing

was brought on record to show that such provisions had been treated as operating expenses in the year in which the provisions were created. The AR stated that the appellant has consistently computed these margins for computing PLI as operating income/expenditure. The appellant has submitted working of its margins computed for the Assessment Year

2010-11 in the Paper Book filed in page No.149 and margin computations

for the assessment year 2009-10 and 2010-11 have also been enclosed in Annex-1. According to the Ld.AR, the provisions reversed are operating

income and the plea of the assessee is that these items have been constituted operative cost of the earlier years and therefore, the reversal

shall be treated as operating income.

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7.1 On the other hand the Ld.D.R argued that for benchmarking the operating profit of the assessee, profit is computed taking into account

the revenues generated on cost incurred from the regular portions of the assessee during the relevant previous year which may be either the cost

incurred and paid for, the cost incurred but not paid and cost provided

for. The reversal of such provision in a later year is a book entry which would not generate any operating profit. The income and expenditure

relevant to the previous year has to be considered for making out the operating income but not the earlier incomes or expenses which do not have impact on the current year’s income.

7.2 The DRP rejected the assessee’s claim for non-submission of the data relating to balance for suppliers and bonus provision. The assessee

did not furnish such details before the Tribunal also. The ITAT ‘D’ bench

of this Tribunal in the assessee’s own case for the assessment year 2009-

10 in ITA cited supra held under:

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authorities were justified in taking a view that write back of provision could not be considered as operating income. Ground No.1.1 of assessee stands dismissed.

During the appeal hearing also, the assessee has not furnished

any such details of balance of the suppliers and details of bonus

provisions made. The Ld.DRP observed that income arising on account of reversal of entries made in the current year would not form part of operating income. The Ld.DRP also relied on the Safe Harbour Rules.

The assessee’s AR did not demonstrate how the earlier year provision of expenses reversed during the year would have material impact on the margin of current year. Therefore, we do not find any infirmity in the order of the direction of the DRP on this ground of appeal and the same is dismissed.

8.0 Ground No.2.4 is related to the rejection of comparables. Hipolin

Limited, Standard Surfactants Ltd and Corona Plus Industries Limited

were rejected by the TPO and confirmed by the DRP. Hipolin Limited and Standard Surfactants Limited were rejected because of functional

dissimilarity and they are involved in manufacturing of detergents. The Corona Plus Industries was rejected since the data was not available in prowess. The Hon’ble ITAT in appeal No.962/Mds/2015 for the assessment year 2010-11 rejected the assessee’s argument to include the Hipolin & Standard Surfactants Ltd in para No. 62 of page 30 as under:

We have considered the rival contentions and perused the orders of the authorities below. In so far as M/s.Hipolin Ltd., is concerned, it might be true that stock, production and purchase turnover have been segmented in its annual report. However, segmental apportioning of expenditure is not available. Former details alone would not :-12-:

be sufficient to arrive at the segmental results. Further, the said company was predominantly doing manufacturing detergents whereas the assessee was in footwear business. These two types of business, in our opinion were poles apart. Almost similar is the situation In the case of M/5.Standard Surfactants Ltd., also. No doubt, In the case of M/s. Standard Surfactants Ltd., segmental report with segmental results were available, However, the segments in which M/s.Standard Surfactants Ltd., was functioning were chemical and surface active synthetic detergent segment. As against this, functional profile of the assessee shows that it was in foot wear business. In our opinion, these companies were therefore not functionally comparable with that of the assessee and were rightly rejected by the lower authorities.

8.1 Following the decision of this Tribunal, the assessee’s

ground No.2.4 for inclusion of M/s.Hipolin Ltd and M/s.Standard

Surfactants Limited is dismissed since there is no change in the facts. With regard to M/s.Corona Plus Industries, it was rejected by the Assessing Officer for non-availability of data. For the financial year 2009-

10 and 2011-12, the assessee has furnished the audited financial

statement in respect of M/s. Corona Plus Industries and as per the Profit

& Loss account, the Corona Plus Industries is not engaged in the manufacturing activity and only engaged in trading. Whereas the assessee is engaged in manufacturing and trading and the assessee’s

functions are not similar to that of Corona Plus. Hence, Corona Plus is not a good comparable. Therefore, the assessee’s request to include

M/s.Corona Plus Industries as a new comparable is rightly rejected by the DRP and the orders of the DPR/AO is upheld and assessee’s Ground

No.2.4 is dismissed.

9.0 Ground No.2.5, 2.6 & 2.7 are related to the rejection of comparable

in case of Ador Multi-products Limited with Relative Party Transaction

(RPT) of more than 25%, the DRP confirmed the action of the TPO’s Order

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for exclusion of the comparable. The AR argued that RPT transaction is only in the trading segment but not in the manufacturing segment and in manufacturing segment, there was a minimum related party transaction.

For the assessment year 2009-10 & 2010-11, the ITAT has decided this issue against the assessee stating that it was not established that RPT

was in the trading segment. The Ld. AR of the assessee placed on record

the annual report of the company in the paper book page No.87 wherein

he was mentioned that 99% of the related parties transactions were purchase of goods amounting to Rs.4,13,93,389/- and it appears that there was no RPT in manufacturing sector. However, it was not clear

whether the entire purchases were used for trading purpose or for the purpose of manufacturing also. Further, as per the assessee’s profile, the assessee is engaged in manufacturing as well as trading. The application

of RPT has to be applied considering the functions of the assessee as well

as the comparable company. Hence, this issue requires further

verification. Therefore, we remit the matter back to the Assessing Officer

to consider the submission of the AR regarding RPT filter and decide the issue afresh on merits. Ground Nos.2.5 to 2.7 are allowed for statistical

purposes.

10.0 Ground No.2.8 relates to the selection of comparable M/s.J K Helene

Curtis Limited. The TPO has selected M/s.J K Helene Curtis Limited as comparable. According to the assessee (as per the financial statements

enclosed in the Paper Book Page No.89), the company is categorized as :-14-:

trading industry and also in the prowess database. The assessee has not enclosed the complete financial statement and we are unable to decide

the issue in the absence of complete information. As per the information

furnished before us, it appears that M/s. J K Helene Curtis is engaged only

in the trading activity and on the similar reasons, we upheld the rejection

of comparable in the case of M/s. Corona Plus Industries. Therefore, we

remit thematter back to the file of the AO to consider the exclusion of M/s.J K Helene Curtis Limited as comparable on functional dissimilarity

after verification of facts. This ground of appeal is allowed for statistical

purposes.

11.0 Ground No.2.9 & 2.10 are related to the exclusion of M/s.JHS

Svendgaard Laboratories Limited as comparable. The TPO has selected

M/s.JHS Svendgaard Laboratories as a comparable. The assessee

contended that the company was involved in a merger in this year and the same is extraordinary event. The DRP has confirmed the TPO’s order

stating that there was no mention of adverse impact on the margins of the company due to the merger. The AR furnished financial summary for FY ending 2009 to 2011 M/s.JHS Stvendgaard Laboratories which shows

that there was a dip in the margins for the assessment year 2010-11. 11.1 We heard both the parties. The DRP has rejected the assessee’s

request to exclude M/s. JHS Svengaard Laboratories as comparable on the reasoning that there was no impact on margin of the company on :-15-:

account of the merger. However, as per the financial statement, the profit before tax was Rs.7.57 crores as against the total Revenue of Rs.88.72 crores and the immediately preceding year, the PBT was Rs.6.61

crores on the total Revenue of rs.51.16 crores as per the Director’s report

enclosed as Annex-2 by the assessee. The scheme of amalgamation of M/s. JSH Svengaard Laboratories Limited has been approved by the Delhi

High Court on 30.08.2011. It appeared that the TPO has taken the consolidated P&L account including merger as stated by the AR. There

was substantial impact on margin after the merger and the assessee has stated that the company also involved in research and development

activities and the expenditure of R&D was disclosed as a separate line of item. The assessee further argued that the company was involved in manufacturing of tooth brushes, the material cost and operating cost is minimal and leads to functional dis-similarity. For the assessment year

2010-11 in the assessee’s own case (cited supra), the Tribunal has remanded the issue to the DRP for afresh adjudication. Therefore, we are of the considered opinion that this comparable is to be re-adjudicated

considering the objections raised by the assessee. Therefore, the issue of comparability of M/s. JHS Svengaard Ltd. remitted back to the file of AO

and the assessee’s ground is allowed for statistical purposes.

12.0 Ground No.2.11 is related to the adjustment for marketing and research and development .The issue has been raised by the assessee

before the DRP and DRP has rejected the assessee’s request for :-16-:

adjustment. The relevant part of the directions of the DRP are extracted

for the sake of convenience as under:

Ground No.12: The TPO erred in not appreciating the marketing and research & development adjustments sought by the assessee on account of the differences in the functional profile of the assessee (contract manufacturer in respect of the International transactions entered into by it vis-a-vis the functional profile of the comparable companies.

The assessee wishes to submit that it is a contract manufacturer and does not undertake any marketing activities in respect of the sale of goods by it to its associated enterprise. The assessee also does not carry out any Research & Development activity nor does it develop any new product specifications. However, the comparables were full-fledged entrepreneurs who undertake a great degree of research and development and marketing expenses. Hence, the margins of the assessee need to be compared with the average margin or comparable companies which have been computed in similar manner and based on the similar activities.

5.1 It was further submitted that:

As the assessee does not incur any marketing expenses in the export segment, it has made an attempt to quantify the amount of adjustment to be made in respect of the marketing expenses incurred by comparables.

Marketing Total marketing Particulars Net sales expenses to net Average expenses sales Hilfy Footwears Ltd. 0.31 8.80 3.52% JHS Svendgaard Laboratories Ltd. 1.16 58.41 1.36% 11.52% J K Helene Curtis Ltd. 46.50 156.70 29.67%

From the above, it is evident that all the comparable companies are incurring expenses in relating to marketing, advertisement and sales promotion activities, whereas the assessee has not incurred any of such expenses. Hence, the comparable companies would minimal expect a return of 11.52% on the sales for their marketing activity. The 11.52% return would only be sufficient to cover the costs of such activities, The companies would also expect a minimal profit margin of 2% on sales.

Hence, the return for the marketing activity would be 13.52% (Cost of 11.52% + markup of 2%). Therefore, an adjustment of 14% on Arm ‘s Length Price is required to neutralize the impact of difference in the functions carried out by the assessee and the comparable companies.

The assessee pleads before the Hon’ble Dispute Resolution Panel, that the above mentioned relief should be provided on account of the differing risk profiles of the assessee and the comparable companies.

12.1 The assessee has submitted the above details of marketing

expenses incurred by the comparables but not furnished the the material

impact of marketing expenditure on the comparable companies. Unless

the assessee establishes the material impact on the margins of the company with documentary evidences we do not find any reason to make

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adjustment towards the marketing and research. On the same issue

coordinate bench in the assessee’s own case for the AY 2010-11 rejected

the claim which was considered by the DRP. By merely furnishing the expenses of marketing of comparable companies without bringing the evidences for establishing the material impact on the margins of the comparable company we do not find any justifying reason to allow the adjustment. Therefore, following the order of this tribunal in the assessee’s own case for the AY 2010-11 (cited supra) we dismiss the ground of the assessee.

13.0 Ground No.2.12 is related to ‘not adopting the methodical search

process in arriving at the comparable’. This ground was raised by the assessee before the Ld.DRP and the DRP rejected this ground as per the following discussion.

6.1 The TPO has done analysis of the TP document submitted by the assessee and has found that the comparables selected by assessee are not acceptable for various reasons like failing RPT filter, functionally dissimilar, and data not available in public domain. TPO has mentioned that the due search was carried out in the prowess database for appropriate comparables. The assessee was given proper opportunity to raise his objections to the fresh search and comparables undertaken by the TPO. The concerns of the assessee have duly been considered and mentioned in the TP Order. Therefore, objection of the assessee that the TPO has not adopted a methodical search process does not appear to have any substance”

Before this tribunal the assessee relied on the ground and did not make any further argument. The Ld.DR relied on the TPO’s order. We

have gone through the TPO’s order and the DRP directions. The Ld TPO in his order clearly mentioned that fresh search has been conducted and proper opportunity was given to the assessee. Therefore, we do not find

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any error in the order of the DRP and the same is upheld. The ground of the aasesse on this issue is dismissed.

14.0 Ground No.3 is related to deduction u/s 10B. Ground Nos.3.1 to 3.7

are related to inclusion of other income for the purpose of computing the deduction u/s 10B.This ground has been raised by the assessee before

the DRP and the Ld.DRP rejected the assessee’s contention. The relevant

part of the DRP order is extracted as under:

3.1 As regards the above objections of the assessee, it is found that in the Draft order the AO has excluded following items of income as Other Income:

Particulars Amount (in Rs.) Commission from Bata India Ltd. 2,45,16,430.00 Interest from Banks 13,70,993.00 Dividend received from MF Investments 44,58,787.00 Provision no longer required written back 53,44,771.00 Gain on forex fluctuation (net.) 27,69,662.00 Misc. Income 5,98,346.00 Total 3,90,58,989.00

Since the above incomes are not “derived” from the eligible undertaking from the export of article, these amounts were excluded from the profit for the purpose of computing deduction us.10B of the Act. Before us the assessee has challenged the action of the TPO for excluded an amount of Rs.3,46,00,202/- out of the above. Presumably exclusion of Rs.44,58,787/- in respect of Dividend received from Mutual Funds has not been challenged.

3.2 The identical issue was under consideration before eh DRP for the AY 2010-11 where the objections of the assessee was rejected after considering the submission of the taxpayer and the reasoning of the AO. This Panel after careful consideration of the matter, is in agreement with the view of the DRP for AY 2010-11. Hence, the objections of the assessee cannot be accepted.

5.1 During the ear, the AO noted that, the assessee has earned dividend income of Rs,44,58,787/-. The assessee company’s average value of investment during the year was worked out to be Rs.8,99,64,619/-. However, the AO found that no expenditure has been disallowed by the company attributable to such investment. The AO observed that the assessee could not have earned exempt Income without incurring any expenditure and thus recorded his non-satisfaction about the correctness of claim of the assessee. Consequently, provisions of section 14A read with Rule 8D was applied and a sum of Rs.4,49,823/- was disallowed as expenditure relatable to exempt income.

5.2 The submission of the assessee and objections have duly been considered. Similar issue was under consideration of the DRP for AY 2010-11 where the objections of the assessee have been rejected after due consideration of the arguments of the assessee and :-19-:

due deliberations in the order. This Panel, after careful consideration, finds itself in agreement with the view taken for AY 2010-11 and therefore, the action of the AO does not call for any interference.

14.1 The assessee relied on the grounds of appeal on this issue and the Ld.DR relied on this tribunal order in the assessee’s own case for the AY

2010-11. We heard the rival submissions and perused the material placed on record. The deduction u/s 10B is allowable in respect of export income.

The items of income mentioned above are not derived from the export

income or the income derived from the industrial activity. In the case of commission from Bata India Ltd it was received from M/s Bata for the operations in India therefore the income was not related to exports made

and is not eligible for deduction under section 10B. It was expressly

mentioned in the agreement enclosed in the paper book submitted by the assessee, that commission is paid on sales in India. The entire issue is squarely covered by this tribunal order for the assessment year 2010-11. This tribunal in the order cited (supra) held that except foreign exchange

fluctuation none of the other items of income was eligible for deduction

u/s.10B of the Act. Therefore, we direct the AO/DRP to include gain on foreign exchange fluctuation amounting to Rs 29,69,662/- for the purpose

of deduction under section 10B and the assesse’s request for inclusion of other items of income for deduction under section 10B are rejected. The assesse’s grounds of appeal on this issue are partly allowed.

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14.2 Ground No.3.8 is related to exclusion of the profits of other income

from the total turnover while computing the deduction u/s.10B of IT Act.

The assessee contended that if the other income is held to be excluded

from the profits of the business undertaking then it should be excluded

from total turnover.

We heard the rival submissions and perused the material placed on record.

The assessee had other income of Rs.3,90,58,989/- and argued for inclusion of the other income for the purpose of deduction u/s.10B. We

decided the issue of deduction u/s.10B against the assessee placing

reliance on this Tribunal Order for the AY 2009-10 and 2010-11 in assessee’s own case and held that except the gain on Foreign Exchange

fluctuation of Rs.27,69,662/- other items of income would not be includible for deduction u/s.10B. Alternatively, the assessee argued that if the other income is held to be not includible for the purpose of deduction

u/s.10B, the same should be excluded from total turnover. The receipts

of other income do not related to exports and the same cannot be included in export turnover. However, the entire receipts related to the business income and it should be included either in domestic turnover or the export turnover or otherwise it should be assessed as income from other sources separately. The Assessing Officer has not made out a case

for income from other sources. The Ld.AR has not brought on record any of the decision to support his contention. The total turnover constitutes

domestic turnover plus export turnover. Since the miscellaneous receipts

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were not assessed as income from other sources and the fact that the receipts related to business income and derived from domestic operation

is not disputed, we hold that the contention of the assessee is not tenable

and it should be included in total turnover. This Ground of appeal of the assessee is dismissed.

15.0 Ground number 4 is related to the disallowance u/s.14A read with Rule 8D of IT Rules amounting to Rs.4,49,823/-. Both the Ld AR and DR

relied on the orders of this tribunal in the assesee’s own case for the assessment year 2009-10 and 2010-11 cited (supra). This tribunal in Para

No. 82 of Page No. 41 held that the assessing officer has rightly applied

sub rule (2)(iii) of rule 8D in the assessee’s own case. Assessee submitted

that the expenditure of Rs.4,49,823/- was already disallowed by the assessee and further disallowance would lead to double taxation of the same amount. The assessee has enclosed the computation statement

showing the disallowance made by it. Therefore we direct the assessing

officer to exclude the disallowance after verification of the facts. This ground is allowed for statistical purposes.

16.0 Ground no. 5 is related to set off of brought forward business loss

before allowing deduction under Section 10B of the IT Act.

16.1 The Ld DRP has rejected the assessee’s ground on the reason that no factual details are submitted by the assessee. The same issue has come for the adjudication before this tribunal for the assessment year

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2009-10, 2010-11, in the assessee’s own case and the tribunal allowed the assessee’s appeal in page 41 Para No. 84 placing reliance on CIT vs. Yokogawa Ltd of Karnataka High Court. The Hon’ble Supreme Court decided the issue in favour of the assessee in the cited judgment of Yokogawa Case. Therefore, respectfully following the decision of Hon’ble Supreme Court we direct the assessing officer to allow the deduction under section 10B before setting off of brought forward losses. This ground of appeal of the assessee is allowed.

17.0 In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 28th February, 2017 at Chennai. (एन.आर.एस. गणेशन) ("ड.एस. सु"दर "संह) (N.R.S. GANESAN) (D.S.SUNDER SINGH) लेखा सद"य/ACCOUNTANT MEMBER "या"यक सद"य/JUDICIAL MEMBER

चे"नई/Chennai, "दनांक/Dated: 28th February, 2017. tln

आदेश क" ""त"ल"प अ"े"षत/Copy to: 1. अपीलाथ"/Appellant 4. आयकर आयु"त/CIT 2. ""यथ"/Respondent 5. "वभागीय ""त"न"ध/DR 3. आयकर आयु"त (अपील)/CIT(A) 6. गाड" फाईल/GF