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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI B R BASKARAN & SHRI AMIT SHUKLA
आदेश ORDER �ी अिमत शु�ला, �या स: PER AMIT SHUKLA, JM:
The aforesaid appeals have been filed by the assessee against separate impugned Final Assessment Order dated, 10.10.2011 and 29.11.2012 passed by Ld. Addl. Commissioner of Income Tax-Range 1(3), Mumbai in pursuance of direction given by the Dispute Resolution Panel (DRP) under section 144C(5) dated 28th September 2011 and 07th September, 2012 for the assessment
2 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 years 2007-08 and 2008-09 respectively. Since some of the issues involved in both the appeals are common, therefore, the same were heard together and are being disposed off by way of this consolidated order.
We will first take-up appeal for the AY 2007-08, wherein various grounds have been raised on transfer pricing adjustments and additions made under other domestic corporate issues. For the sake of ready reference, grounds of appeal raised in appeal are reproduced hereunder: Direct Tax Grounds: 1.1 Based on facts and circumstances of the case, the Additional Commissioner of Income-tax, Range 1(3), Mumbai (hereinafter referred to as the AO) while passing the order dated 10th October, 2011 under section 143(3) r.w.s. 144C pursuant to the directions dated 28th September, 2011 of the Dispute Resolution Panel –II (hereinafter referred to as the DRP) erred in reducing ‘Other Income’ as shown below:-
Particulars TMX Unit Multipurpose Total (Rs.) Formulation (Rs) Unit (Rs.) Interest on Employee loans 9,494 39,029 48,523 Other interest income 4,573 - 4,673 Miscellaneous income (Misc interest, service charges, lease rent) - 19,98,499 19,98,499 Total 14,167 20,37,528 20,51,695
from the amount of profit eligible for deduction under Section 80IB.
1.2 Without prejudice to the above, the AO erred in not excluding net amount of “Other Income’ while computing the profits eligible for deduction under section 80IB.
3 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 2.1 The AO erred in setting off the losses of one 80IB unit against the profits of the other 80IB unit, for the purpose of computing deduction under section 80IB.
2.2 The AO while giving effect to the directions of the DRP, erred in, not considering the submissions made by the appellants during the course of hearing thereby overlooking facts of the case.
2.3 The AO erred in not taking cognizance of the facts in the appellants’ case thereby placing reliance on a decision, which had no application in the applicant’s case.
2.4 The AO ought to have appreciated the fact that while computing the deduction under section 80IB, each unit was to be considered as a separate and independent unit.
2.5 The appellants submit that even after set off of losses of the 80IB units against the profits of non 80IB units, the Gross Total income would work to Rs.82.92 crores, which was substantially more than the deduction claimed under section 80IB.
3.1 The AO erred in adding an amount of Rs.19,00,63,130 to the value of closing stock on account of unit of unutilized CENVAT credit.
3.2 Without prejudice and in any event, the AO ought to have increased the amount of purchases by a similar amount as has been laid down in Section 145A.
The assessee therefore pray that the AO be directed to delete the addition of Rs.19,00,63,130 on the value of closing stock.
3.3 The AO, while giving effect to the directions of the DRP, erred in, not considering the submissions made by the assessee during the course of hearing thereby overlooking facts of the case.
3.4 Without prejudice to the above, the AO ought to have held that the value of the opening stock of the subsequent assessment year should be increased by Rs.19,00,63,130 on account of the addition made to the closing stock for the assessment year 2007-08.
3.5 Without prejudice to the above, the AO ought to have held that the value of the opening stock of the
4 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 assessment year 2007-08 should be increased by Rs.12,04,57,747/- on account of the addition made to the closing stock of the assessment year 2006-07.
4.1 The AO erred in disallowing certain expenses of Rs.28,77,512 (net of depreciation) forming part of Repairs and Maintenance for building by stating that these expenses are capital in nature.
4.2 The AO erred in stating that the appellants have not furnished further details of the above expenses is allowable under section 37(1).
4.3 The AO while giving effect to the directions of the DRP, erred in, not considering the submissions made by the appellants during the course of hearing and overlooking the facts in the matter.
5.1 The AO erred in disallowing an amount of Rs.11,55,931/- on account of provision for maintenance charges to building and an amount of Rs.33,18,027 on account of provision for miscellaneous repair to plant and machinery under section 37(1) of the Act.
5.2 The AO erred in holding that the provisions represent mere estimates for repairs and maintenance of building and plant & machinery.
5.3 The AO while giving effect to the directions of the DRP, erred in, not considering the submissions made by the appellants during the course of hearing and overlooking the facts in the matter.
The appellants pray that the AO be directed suitably in the matter.
The AO erred is not following the directions of the DRP, thereby not granting depreciation on software expenses of Rs.1,75,000 disallowed in the assessment year 2006-07 as being capital in nature.
The AO erred in charging interest under section 234B of Rs.3,46,01,142.
Based on the outcome of the appeal the AO be directed to recompute the interest under section 234B.
5 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 8. The AO erred in charging interest under section 234C of Rs.7,27,684/- as against NIL chargeable per the Return of Income.
The AO erred in charging interest under section 234D of Rs.82,75,343.
Based on the outcome of the appeal the AO be directed to recompute the interest under section 234D.
Transfer Pricing Grounds
On the facts and circumstances of the case, the AO erred on facts and in law in adding Rs.20,73,62,327/- to the income of the assessee by holding that its international transaction of ‘Purchase of Raw Material’ does not satisfy the arm’s length standard under the Income-tax Act, 1961 (‘the Act’).
Without prejudice to ground no. 10 above, the AO erred on facts and in aw in not allowing (+/-) 5% range option allowable to the assessee under the proviso to section 92C(2) of the Act.
On the facts and circumstances of the case, the AO erred both on facts and in law in adding Rs.3,81,46,602/- to the income of the assessee by disallowing the entire payment of ‘Royalty on seeds’ to the Associated Enterprise”.
Besides this, assessee had also raised additional grounds, as an alternative plea for ground no. 12 which reads as under:- “Without prejudice and notwithstanding to ground of appeal No.12 based on the facts and circumstances of the case, the disallowance of royalty payment for the instant assessment year should be restricted by the amount of payments recovered from its AEs and offered to tax in the subsequent year(s) or directions may kindly be issued to reduce the said amount from income in the year offered to tax”.
We shall first take-up additions challenged on account of Transfer Pricing Adjustment as has been raised vide ground nos.10, 11,12 and Addl. Ground.
6 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 4. The brief facts qua the issue of transfer pricing adjustments of Rs. 20,73,62,327 on purchase of raw material in “Licensed Manufacturing” segment are that, assessee is a public limited company engaged in the business of manufacturing and trading of Agro Chemical Products, Crop protection chemicals, multiplication and trading of seeds. The assessee has classified its business operation into two primary segments; namely, “Crop Protection” and “Seeds”. The ‘Crop Protection segment’ is further divided into ‘Licensed Manufacturing’ and ‘Contract Manufacturing’. Under the ‘License Manufacturing’ segment the assessee operates as a full- fledged manufacturer of chemicals for crop protection. It also imports pesticides and formulations which are repacked and sold in the Indian markets. Under the ‘Contract manufacturing’ segment assessee is manufacturing active ingredient Thiamethoxam (“TMX”) and its derivative products. This involves imports of raw materials from its AE, Syngenta Asia Pacific Pte. Ltd.(“SAPL”) and sale of finished goods to them. It has a manufacturing unit at Goa where it manufactures such active ingredients. Under the seeds segment as a whole, the assessee imports foundation/breeder seeds from its AE and then seeds procured are further developed at facilities located at Pune and Aurangabad. Post development of the seeds, the same are multiplied with the help of the farmers and sold locally. The transactions undertaken with the AE under the ‘Crop Protection Segment’ for the assessment year 2007-08 were as under:- PAYMENTS:- S Description of the Amount Method No. transaction (In rupees) Selected AY 2007-08 1 Purchase of Raw material 2,370,124,106 2 Purchase of Finished Goods 129,459,931 3 Purchase of packing material TNMM 3,906,119 4 Payment of Royalty 547,620 5 Payment towards employee 908,046 Deferred share plan 6 Reimbursement of salary 14,505,179 CUP Sub-Total 25,19,451,001
7 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013
Receipts:- S Description of the Amount Method No. transaction (In rupees) Selected AY 2007-08 1 Sale of Finished Goods 2,813,405,595 TNMM 2 Reimbursement of expenses 14458212 - Sub-Total 2,827,863,807
Under the sub-segment of ‘‘Licensed Manufacturing’’, which is the subject matter of adjustment, the details of international transactions reported were as under:-
S Nature of transaction Amount No. (Rs) 1 Purchase of raw material 1,67,49,80,515 2 Purchase of packing material 39,06,119 3 Purchase of finished goods 12,94,59,931 4 Sale of finished goods 2,07,33,648 5 Payment of royalty 5,47,620 6 Reimbursement of expenses (paid) 1,54,13,225 7 Reimbursement of expenses (received) 1,44,58,212
For the purpose of ALP the assessee selected Transactional Net Margin Method (TNMM) to be the Most Appropriate Method (MAM) for benchmarking the transaction in its crop protection and licensed manufacturing segments with operating profit to sales as PLI. Its OP/sales was reported at 4.21% which was worked out in the following manner:- Amount (Rs) Net sales 4,42,59,49,105 Purchases 3,66,01,22,504 Other expenses 55,58,21,927 Total 4,21,59,44,431 OP 21,00,04,674 OP/Sales 4.21% For the purpose of benchmarking its profit margins, the assessee identified 08 Indian companies engaged in the manufacturing of chemical/pesticides having functions, assets and risks (FAR)
8 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 broadly comparable to the assessee. The arithmetic mean (OP/Sales) of the 08 Comparables was arrived at 5.84% which was based on multiple year data. Hence, it was reported that, assessee’s margins are at Arm’s length price as it falls within the +/- 5% range. Later on, as per the TPO’s direction, the assessee submitted the data of current financial year of the comparable companies which threw the result of OP/sales of 6.32% comprising of 7 comparables as the financial data of one comparable for the current year was not available. The list of such comparables companies along with the average profit mean was as under: Sr.No. Name of company OP/Sales % 1 Asia Arch Timber Protection Ltd 9.68 2 Bhagiradha Chemicals & Industries Ltd 14.84 3 Dhanuka Pesticides Ltd. 8.93 4 Ficom Organics Ltd - 5 Kilpest India Ltd 6.38 6 Nagarjuna Agrichem Ltd. 10.83 7 Phytochem (India) Ltd. 5.93 8 Sudarshan Chemicals Industries Ltd. (Segment) -12.37 Average mean 6.32%
The Ld. TPO after carrying out the detail analysis of the documentation and replies filed by the assessee, agreed with the most of the comparables, except for M/s. Sudarshan Chemicals Industries Ltd., which was sought to be excluded by the TPO on the ground that, firstly, it was a loss making comparable segment; secondly, there was under-utilization of the capacity of the relevant segment; and lastly, proportionate pigment export was more vis-à- vis its Agro Chemical pigment export. The TPO further noted from the assessee’s reply before him that the said company was rejected as a comparable by the assessee in the AY 2006-07 on the ground that, it was predominantly paint and dyes industries. The position remains the same for the assessment year 2007-08 also as it continues to be predominantly in Pigment Sector. Thus, he rejected
9 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013
this comparable and accordingly, the average mean result of margin worked out to 9.43%.
Before the TPO, another important plea was taken that by the assessee that, its operating margin was comparatively less in this year mainly on account of severe competition faced in the sale of its premium product “Topik Formulation” as different generic substitute had come in the market. To maintain its presence in the market, it has to reduce the sale price of its product substantially. Further, the Crop Protection Industry was affected adversely by bad Monsoon and climatic conditions which have also been recognized in the annual reports of several companies, such as Dhanuka Pesticides Ltd., Nagarjuna Agrichem Ltd. etc. It was specifically submitted and pointed out to the TPO that, if the sale price of “Topik” would have remained the same as in the earlier year, then its profitability would have stood at 9.72% this year. Thus, while determining the ALP, market conditions and other economic factors have to be taken into consideration while determining the Arm’s Length Price. However, the TPO rejected the assessee’s contention on the ground that, under the TNMM the operating profit margins are compared which is a product of market driven factors, that is the reason why some comparable companies make profit, some make loss even both operate in same industry. Hence, a separate adjustment cannot be considered on account of a market driven factors. Adverse weather and bad monsoon would equally be applicable to all the companies operating in the agro industry. Hence, the claim of adjustment in the operating profit was rejected by the TPO. Accordingly, he made the adjustment of Rs.20,73,63,327/- in the following manner:-
10 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 Particulars Amount (Rs.) Net Sales 4,42,59,49,105 Operating expenses Purchases from AE 1,80,83,46,565 From Non-AEs 1,85,17,75,939 Other non-AE expenses 55,58,21,927 Total operating expenses 4,21,59,44,431 Operating profit 21,00,04,674 OP/Sales 4.74%
ALP OP/Sales A 9.43%
Net Sales B 4,42,59,49,105 Arm’s length operating profit C=A*B 41,73,67,001 Total Operating cost D=B-C 4,00,85,82,104 Less: non-AE purchase E 1,85,12,28,319 Less: non-AE other expenses F 55,58,21,927 Arm’s length value of AE purchases G=D-E-F 1,601,531,858 105% of ALP H= G*105% 1,600,984,238 Adjustment (1,808,894,185 - 1,601,531,858) 207,362,327
The DRP too confirmed the action of the TPO after observing and holding as under:- “Comparability of a company in TNMM is guided by three factors, viz function, asset, risk. If a company is functionally dissimilar TPO would be correct in rejecting such comparable. Under utilization of capacity reflects upon asset profile and function profile of a company. Similarly, a consistent loss making company has different asset profile than a normal company. Such companies are therefore correctly rejected by the TPO on FAR analysis basis. The assessee has not made a specific point in this ground. As per note 7 in assessee's notes to account, tax audit report, segment reporting as per AS 17 norms, the disputed comparable i.e. Sudarshan Chemicals Inds. Ltd. has two segments i.e. pigment for Rs.296.03 cr and agrochemicals Rs. 88.12 Cr out of total sales at Rs. 384.15cr. It is seen that agrochemicals represent only 2294% of disputed comparable's turnover. Major
11 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 turnover being in the nature of pigments, pre-dominant character of the comparable is not agrochemical but that of pigment manufacturer and therefore would not be a valid comparable. Further, it is seen that segmental accounts are not reliable as-they have both un-allocable income and un- allocable expenses. In view of this,, no reliable inference can be drawn about the profit margin of the agrochemical segment of Sudarshan Chemicals. Further, the Hon'ble ITAT Mumbai in DHL case has also held that wherever there are un-allocable items segmental results cannot be relied upon. TPO was therefore correct in rejecting this company as comparable.
Fluctuations in domestic market are normal economic conditions. Every producer in the market is exposed to the same fluctuations. At the same time, supply side of numerous producers in the market is also subject to market fluctuations. Every producer has to undertake this risk and reward of such a risk is market determined profit. Any departure from market determined profit points towards possibility of transfer of profit. The assessee has failed to bring out any specific point against the TPOs. action.
The TPO has considered various factors in detail in para 6.6 & 6.7 of his order. The assessee has benchmarked its transaction on TNMM. MINIM is comparison of operating profit margins of different players in the same industry, the industry being agrochemicals and products being different formulations to deal with agricultural sector. Operating profit margin rises out of numerous products being sold by a player in the market. Adjustment for a lesser performance of a particular product of assessee cannot be given when such minute breakups are not available for all comparables: Moreover, factors such as bad monsoon, adverse weather etc. are equally applicable to all players in agrochemical industries. Operating profit of all the players are a result of various market forces.
12 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 Section 92C(4) states that the total income of the assessee may be computed by TPO "having regard to" the arms length price so determined. We find no reason to hold that the TPO has used the phrase loosely.
Under entity level TNMM, it is the operating margin of an assessee which is compared with average operating margin of the industry. Computation of operating margin excludes non operating, non business reasons behind fluctuations in profits. Operating profit therefore reflects performance of a industry player under market conditions. Operating profit is different from PBT/PAT. Since market factors are uniform to all the players of the industry and it is only the operating margin which is compared, TPO is correct in not allowing separate adjustment towards market factors.
The assessee has not pointed out as to how the TPO has disregarded the provisions of Rule 10B(2) and (3) read with Rule 10C. A mere statement without substantiation cannot be considered.
Transfer of profit under TP provisions generally holds that if there is sub optimal profit in transactions then Arms length pricing needs to be established vis a vis AEs. In this background IT'O's action is reasonable”.
Before us, Ld. Counsel Mr. Mukesh Bhutani, as regards the first objection raised by the TPO for rejection of Sudarshan Chemical Industries Ltd. as a comparable on the ground that it is a loss making segment, submitted that Sudarshan Chemicals is mainly engaged in the manufacturing and processing of organic and inorganic pigment, pesticides, agro, chemicals and other products from its manufacturing facilities at Pune, Roha and Mahad. Assessee as well as Sudarshan Chemicals, both are full- fledged entrepreneur bearing full risk and rewards for their business operations. Simply because there is a loss in a particular year, it cannot be the reason for exclusion because it depends
13 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 upon the performance and various factors governing the industry. It is not a constant loss making segment as it has profit in earlier years and subsequent years, therefore, in this year it cannot be rejected. In support of its contention, he strongly relied upon the decision of Special Bench in the case of DCTI vs. Quark Systems P Ltd, reported in [2010] 38 SOT 307 (CHD)(SB,) wherein the Special Bench upheld that, merely because comparable is a loss making entity it cannot be rejected form the list of the comparables for the purpose of computation of ALP. He further placed reliance on various similar decisions, like:-
i) Exxon Mobil Co. India Ltd. v. DCIT [2011] 46 SOT 294(Mum)(URO); ii) TCL Holdings (P) Ltd. v. ACIT [2013) 59 SOT 68 (Mum-TRIB); iii) Qualcomm India (P) Ltd v. ACIT [2014] 147 ITD 17 (Del-TRIB); iv) Cummins Turbo Technologies Ltd v.DDIT [2014]147 ITD 463(Pun); v) Apotex Research P Ltd. v DCIT [2013] 59 sot 117 (Bang).
He also placed reliance on OECD guidelines to show that the loss making comparables that satisfies the functional and comparability analysis should not be rejected on the sole basis that they have suffered losses. Lastly, he submitted that an entity level Sudarshan Chemicals has not made any loss and it was only in this particular segment there was a loss.
Regarding under-utilization of the capacity, he submitted that simply because the agro chemical segment of the Sudarshan Chemicals was functioning at 53% of its capacity utilization, it could not be the ground for rejection especially when other comparable companies accepted in this year were also having similar capacity utilization levels. He also gave the following details to show the various capacity utilization of the comparables selected and accepted in this year:-
14 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 Name of the comparable Capacity utilization (%) Bhagiradha Chemicals & Inds Ltd. 64% Dhanuka Pesticides Ltd. 47% Kilpest India Ltd. 40% Nagarjuna Agrichem Ltd 63% Phyto Chem (India) Ltd. 49% SudarshanChemical–Segment agro-chemicals 53%
Thus, all the comparables were in the capacity utilization range of approximately 40% to 60%, therefore, Sudarshan Chemicals which had operated at 53% of the total capacity cannot be rejected on this ground.
On the issue of the proportion of pigment exports being more than Agro Chemical Division segment of Sudarshan Chemicals, Mr. Bhutani submitted that the pigment segment is entirely different from the agro chemical segment of the Sudarshan Chemicals. The total exports of Sudarshan Chemicals were 35% of the total turnover, of which pigment segment contributed 95% and agro chemical segment contributed the balance 5%. The segmental profitability of the pigment and agro chemical segments have been separately reported in the financial accounts which is evident from Schedule 16 and Notes forming parts of the accounts for the year ending 31st March, 2007 which he showed it from the paper book page 236. He submitted that, the assessee for the purpose of benchmarking has only considered the agro chemicals segment of Sudarshan Chemicals and, therefore, the exports sales of the pigment segment have no bearing on the sales under agro chemical segment. Thus, TPO’s action for placing reliance on the export data in relation to the pigment segment is misplaced. He also brought to our notice that in AYs 08-09, 09-10 and 10-11, the TPO himself has accepted Sudarshan Chemicals (segment) as comparable, therefore, in view of the principle of consistency this comparable should be accepted in this year also. In support of principle of
15 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 consistency he also relied upon various decisions which are as under: (i) NGC Networks (India) Private Limited v ACIT bearing ITA No. 5307/Mum/2008; (ii) Britons Carpets Asia (P) Ltd vs DCIT [2011] 139 TTJ (Pune) 177; (iii) Hosley India Pvt Ltd vs DCIT (ITA No. 5904/Del/2010); (iv) Missionpharma Logistice (India) Private Limited vs ACIT [2013] 158 TTJ 758 (Ahd).
Coming to the assessee’s other limb of contention that the market condition, business and commercial consideration and peculiar feature present in this year has to be taken into account to see the profitability and if required, adjustment should be made in the profit margin to determine the correct Arm’s Length Margin. He pointed out in the TP Study report and in various submissions made before TPO; the assessee demonstrated the reasons for low margin in this year in the license manufacturing - crop protection segment. As a licensed manufacturer, it purchases goods from its AE as well as from others to manufacture agro chemicals using technology of from the Syngeta group and sell the goods in the domestic market. The assessee exploits the domestic market for its own commercial gain and is therefore, solely entitled to the rewards and the risks associated with the business. The impact of the market conditions, like increased competition, relative pricing pressures in this year, change in demand patterns and climatic conditions has affected assessee in this year which has resulted into low margin. He submitted that if the margins earned by the comparable manufacturers and margin earned by the assessee in various years are taken into account then, it can be seen that, assessee has made huge margins in license manufacturing segment. The comparative details of the margins of the assessee and comparables as stated before us are reproduced hereunder:
16 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013
AY Arm’s length operating Appellants’ operating profit margin of comparable margin of licensed companies manufacturing segment 2003-04 5.34% 11.30% 2004-05 6.39% 10.43% 2005-06 6.07% 15.41% 2006-07 6.41% 12.17% 2007-08 5.84% 4.21% 2008-09 7.02% 12.53% 2009-10 4.96% 14.30%
Thus, it was submitted that it was only in AY 2007-08, the operating margin was dropped to 4.21%.
Mr. Bhutani submitted that another very important reason for decline in operating margin in the case of the assessee was that, the sale price of its key product, namely “Topik” which was a premium product of the assessee and contributed approximately 15 to 20% of the total sales of this segment and also approximately 35% of the gross margin had sharply declined. Until AY 2006-07, the assessee was sole seller of this product in the country and it accordingly charged premium price, thus, resulting into high profitability in this segment. However, during the assessment year 2007-08, unanticipated competition entered into the market with generic substitute of “Topik” having significantly reduced prices, therefore, in order to sustain its market share, the assessee was forced by the market conditions to reduce the selling prices of its product. He further submitted that, if the assessee would not have reduced the price of the “Topik” it would have lost its market share significantly and would have saddled with high unsold inventory, blocked significant amount in working capital and subsequently may have led to write down the net realizable value of such inventory. He also pointed out that, the average sale rate of per metric ton in AY 2006-07 was Rs. 2957 which had reduced significantly in AY 2007-08 at Rs.1634 and continued in the
17 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 subsequent years also. This reason itself shows that there is rejection in sale price by almost 45% and if assessee would have continued to sell the “Topic” @ Rs.2957, assessee’s profit would have been 9.27%. To demonstrate the effect of drop on the margins of profitability on account on sale of “topic” he gave the following comparative details: Particulars Profitability before Profitability after Adjustment for adjustment for Topik Topik (Topik sold (Topik sold at at INR 1,534) INR 2957) Net Sales 44,25,949 4,721,973 Less: Operating Cost Materials 33,32,431 3,332,431 Factory Overheads 3,27,691 3,27,691 Operating Expenses 5,44,297 544,297 Operating Profit 2,21,530 517,554 Operating Profit/Sales 4.44% 9.72%
Thus, he submitted that, a suitable adjustment should be made on account of this factor, which alone had led to drop off the profit margin drastically. In support of suitable adjustments to be made in such circumstances he placed strong reliance on the OECD guidelines and drew our attention of paragraphs 1.60 and 1.62. He also submitted that Rule 10B (2) read with10B (3) also provide for a suitable adjustments to remove the material differences.
Ld. DR on the other hand, strongly relied upon the directions of the DRP as well as order of the TPO and submitted that, Sudarshan Chemicals itself was excluded in AY 2006-07 by the assessee and secondly, if any adjustment has to be made then it should be made both on purchase as well as sales which only can give the correct arm’s length result. Otherwise, if comparability is being done under TNMM, then similar factors of market conditions and bad weather would have affected across all the industries that is, in the case of comparables also, therefore, it cannot be the factor for making the adjustment. The average arithmetic mean of
18 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 profit margin of various comparables takes care of all such factors, therefore, no adjustment should be made. Regarding rejection on the ground that the said comparable was a loss making entity and had a under-utilization of the capacity, he strongly relied upon the order of the DRP and submitted that, comparison has to be seen with the assessee and not the comparables, therefore, considering all the factors Sudarshan Chemicals has rightly been excluded by the TPO as well as by the DRP.
We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as material relied upon before us. So far as transfer pricing adjustment of Rs.20,73,62,327/- in the segment of “Crop Protection- License Manufacturing”, the entire controversy revolves around inclusion/ exclusion of one comparable namely, Sudarshan Chemical Industries Ltd. (segment agro chemical). Another important limb of argument which has been argued before us to challenge the adjustment is that, looking to the market conditions; business and commercial considerations particularly sharp decline in sale price of the key product “Topik”, adjustment should be made in the profit margin to remove the material difference in the determination of arm’s length price. Before we deal with the inclusion or exclusion of the sole comparable, M/s Sudarshan Chemicals (segment), we would first deal upon the issue, whether any such adjustment on account of profit margin should be made or not, as it is quite a key factor for determination of arm’s length price in the present case. It is an undisputed that TNMM is the MAM, whereby PLI has been arrived on operating profit/sales. The assessee has reported PLI of 4.21%. Its margin in TP Study Report has been benchmarked with the help of 7 comparables whereby the arithmetic mean was arrived at 6.32% based on current year data and hence it was reported that, the profit margin of 4.21% in this segment is at ALP. Mr. Mukesh Bhutani before us has stated
19 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 that operating profit margin of licensed manufacturing segment has always been more than 10%, ranging between 10.43% to 15.41%, however it was particularly in this year that the profit margin has declined to 4.21% due to various factors. The operating profit margin of this segment for various assessment years were stated to be as under: AY Arm’s length operating Assessee’s operating Profit margin of Margin in licensed comparable companies Manufacturing segment 2003-04 5.34% 11.30% 2004-05 6.39% 10.43% 2005-06 6.07% 15.41% 2006-07 6.41% 12.17% 2007-08 5.84% 4.21% 2008-09 7.02% 12.53% 2009-10 4.96% 14.30%
The reasons for such a sharp decline of profit margin has been stated to be the market conditions whereby competitive products were launched compelling the assessee to reduce the sale-price of its product; business and commercial considerations surrounding the transactions in license manufacturing; and factors like bad monsoon and adverse climatic conditions. One of the main reasons cited before us is that, a premium product sold by the assessee named as “Topik” was sold at a very lower price in this year. This product itself contributes approximately 20% of the total sales of this segment and contributes almost 35% of the gross profit margin of this segment. Until AY 2006-07, the assessee was the sole seller of this product in the country and, therefore, it was able to charge premium price, however, in the assessment year 2007- 08, due to generic substitute of the product which had entered into market, un-anticipated competition had arisen which forced the assessee to reduce the price or else assessee would have been out of the market. In order to sustain its market share, the assessee was forced to reduce the selling price of its product. If the sale- price would not have been reduced then assessee would have
20 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 firstly, lost its market share significantly; secondly¸ would have been saddled with significantly high inventory which would have carried huge cost; thirdly, would have blocked huge amount of working capital; and lastly, may have led down to write down the net realizable value of huge inventory. The comparative average sale price of ‘Topic’ in the earlier years and in this year had already been incorporated above. From the said comparative details, it has been pointed out that, the average sale-price of ‘Topic’ per metric ton, which was Rs.2,957/- in AY 2006-07 had gone down to Rs.1,634/-. Thus, there was a huge price reduction of almost 45%, causing sharp decline in profit margin. Whether on this peculiar factor which has not been rebutted by the revenue, any adjustment can be made in the profit margin.
The cornerstone of Transfer Pricing principle is the comparability analysis of a controlled transaction with an uncontrolled transaction which is substratum of arriving at Arm’s length price. The controlled and uncontrolled transactions are comparable if none of the differences between the transactions materially affect the factor being examined in a given methodology, whether determination of prices or for profit margin and for such determination a reasonable accurate adjustment can be made to eliminate the material effects of any such differences. Rule 10B(2) of Income Tax Rules, provides the comparability of the transaction with uncontrolled transaction which has to be judged with reference to specific characteristics of the property transferred or services provided; FAR analysis; contractual terms; conditions prevailing in the markets, that is, economic conditions in which respective parties transact or operate including geographical locations, size etc. Thus, comparison of attributes of the transaction is carried which would affect conditions in Arm’s length dealing. Rule 10B (3) specifically provides as under:-
21 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 “An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences”.
This, Rule specifically recognizes that reasonably accurate adjustment should be made to eliminate the material effects of differences, if any. Sub-rule (2) lays down the factors for determining comparability whereas; sub-rule (3) lays down the standard of comparability. The standard comparability not necessarily entails complete identity between the two transactions but sufficient similarity. It can be held to be sufficient similar if the differences between them is not material so as to effect price or profit in the open market and if there is one such thing, then such a material difference needs to be eliminated through adjustments. The factors governing the price or profit in a transaction may depend upon business strategies, market conditions, competitions, market penetration schemes, geographical locations, climatic conditions, etc. Guidelines issued by OECD also recognized the business strategies adopted by the companies which have a bearing on profitability levels. Para 1.60 and 1.62 of OECD guidelines for the sake of ready reference are reproduced hereunder: “Para 1.60 of the Guidelines states as under: “Business strategies also could include market penetrate schemes. A taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise
22 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 comparable products in the same market. Furthermore, a taxpayer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs (e.g. due to start-up costs or increased marketing efforts) and hence achieve lower profit levels than other taxpayers operating in the same market”. Further, para 1.62 of the OECD Guidelines states as under:
When evaluating a taxpayer’s claim that it was following a business strategy that temporarily decreased profits in return for higher long-run profits, several factors should be considered. Tax administrations should examine the conduct of the parties to determine if it is consistent with the professed business strategy …. Another factor to consider is whether the nature of the relationship between the parties to the controlled transaction would be consistent with the taxpayer bearing the costs of the business strategy. For example, in arm’s length dealings a company acting solely as a sales agent with little or no responsibility for long-term market development would generally not bear the costs of a market penetration strategy ….” Thus, business strategies, market penetration, increase or save its market share are relevant and material factors determining prices and profit. All these factors have to be taken into consideration while eliminating the material effects which warrants some kind of reasonable accurate adjustments.
Before us the material factors which have been pointed out by the assessee is that the agro chemical business linked with monsoon and climatic conditions and if there is any adverse conditions, then it affects not only the pricing mechanism but also the profit margins. However, these factors may not warrant much need for adjustments in the present case to eliminate material
23 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 difference in comparability conditions as these factors will affect agro chemical/seeds industry as a whole. Nothing has been demonstrated before us that climatic conditions has particularly hit assessee only not the others. Under TNMM this factor probably will not affect much vis-a-vis margins of comparables faced under similar circumstances in this year. In any case how much adjustment if at all on account of these factors is to be made and how it can be quantified, has not been elaborated before us. To this extent TPO’s and DRP’s contention appears to be right. But what really impresses us is that, one of the premium products of the assessee which was earlier sold at a premium price has been substantially reduced in this year due to availability of similar cheap generic product in the market and therefore, in order to defend its market share and to ensure that it does not get eliminated from the market completion, it has sold the product at lower price. Definitely this business strategy had a huge impact on the profit margin of the assessee which is evident from the comparative pricing and the profitability on account of this product (i.e. “Topik”) as incorporated above. Ld. Counsel had tried to demonstrate before us that, if the “Topik” would have been sold at a price commanded by the assessee earlier then the operating profit on the sale would have been 9.72% which would otherwise have fallen within the arm’s length range vis-a-vis the comparables. This factor has majorly affected the profit margin, because 35% of the gross profit margin was on account of the sale of this agro product alone. Once the price of such a product has been reduced substantially by 45% then definitely it has a huge impact on profit margin as discussed above. On these facts, we are of the considered opinion that a reasonable and accurate adjustment should be made to the profit margin because of huge price reduction of a premium product which constituted 35% of its gross profit margin. If such an adjustment is carried out, the net profit margin would be much higher. Whether, the impact on profit
24 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 margin would be of 9.72% as stated by the Ld. Counsel before us, requires proper verification by the AO with regard to the data given before us. Because not only the figure of sale price needs verification for the purpose of adjustment, but also the contention raised by the Ld. DR that whether there is any impact on purchase of raw materials or not needs to be verified. Accordingly, we direct the AO to examine the impact of profitability after adjustment of price for “Topik” vis-à-vis the earlier years and make the necessary adjustment accordingly.
Though in view of our aforesaid finding, the issue of inclusion or exclusion of Sudarshan Chemicals (segmental) may become of academic interest, because if the adjustment as directed above is carried out, then perhaps the assessee’s margin would fall within the ± 5% range. However, we will also deal with the objections raised by the TPO for eliminating the said comparable from the comparability list. The first objection raised by the TPO is that, Sudarshan Chemicals had incurred loss in AY 2007-08; therefore, it cannot be included in comparable list. As far as FAR analysis and functionality is concerned, the TPO has not given any adverse comment, which, inter alia, leads to presumption that on functional test the agro chemical segment of this company is comparable. The assessee has taken ‘Agro Chemical’ segment of Sudarshan Chemical and in this segment Sudarshan Chemicals had incurred a loss and the reported margin was (-) 12.37%. The ld. TPO has not carried out any evaluation and analysis as to whether there was any exceptional factor or circumstances in this segment which has led to loss in this year. If the loss has been incurred under the normal course and condition of the business transaction and there is no material or exceptional factor, then simply because there was a loss in this year, a company cannot be excluded from the basket of comparability list. Profits or loss depends upon the market of a given product or services and various other economic conditions and in case of the agro business, geographical and climatic conditions are additional features, If the general conditions affects the whole industry as such, then without pointing out any specific factors especially
25 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 applicable for a particular entity, then incurring of a loss cannot be criteria for rejection. As pointed out by the Ld. Counsel, the Special Bench in case of DCIT v Quarks Systems P Ltd. (supra) it has been held that merely because comparable company is loss making it cannot be rejected from the list of comparables for the purpose of computation of ALP. Similar view has been echoed by other decisions as already cited above. OECD guidelines of extreme results and comparability consideration have given following guidelines:- “3.64 An independent enterprise would not continue loss- generating activities unless it had reasonable expectations of future profits. See paragraphs 1.70 to 1.72. Simple or low risk functions in particular are not expected to generate losses for a long period of time. This does not mean however that loss- making transactions can never be comparable. In general, all relevant information should be used and there should not be any overriding rule on the inclusion or exclusion of loss- making comparables. Indeed, it is the facts and circumstances surrounding the company in question that should determine its status as a comparable, not its financial result.
3.65 Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses”.
On the strength of the decisions relied by the ld. Counsel and also the OECD guidelines which have some persuasive value, we also hold that, if the loss making comparables otherwise satisfies the comparability analysis, the same cannot be rejected. The facts and circumstances associated with a given industry and FAR analysis should be the determinative factor. Thus, this reason given by the
26 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 TPO cannot be the criteria or ground for rejection from the comparability list.
On the second objection of under-utilization of the capacity of Sudarshan Chemicals, the Ld. Counsel before us as stated herein above has demonstrated that almost all the comparables were working under capacity utilization between 49% to 64% and Sudarshan Chemicals (segment Agro chemicals) was working with 53% capacity, therefore, this factor on the present facts cannot held to be a deterrent so as to lead to exclusion of the comparable. Thus, this objection of the TPO is also rejected.
The third objection of the TPO is that, proportion of pigment export vis-à-vis agro export of Sudarshan Chemical is very high, therefore, it cannot be taken as a comparable. The TPO has alleged that the pigment export constitutes 95% of the sales, therefore, this company is predominantly focuses on pigment segment. To counter this, the Ld. Counsel before us has pointed out from the annual report of the Sudarshan Chemicals that the total export of the Sudarshan Chemicals was 35% of which pigment segment contributed 95% and balance contributed to 5%. Otherwise, on a entity level (total turnover basis) domestic sales as well as export sales of the agro chemical segment constituted a major component. When only a segmental detail is taken into comparability analysis, then the cost and pricing factor of that segment alone has to be compared and not the whole of the company’s turnover. We agree with the contention of the Ld. Counsel and thus, this objection too does not support the case of the TPO.
The last objection raised by the TPO which has been stressed by the Ld. DR also is that, in the immediately preceding assessment year, that is AY 2006-07, the assessee itself has rejected the said comparable from comparability analysis and,
27 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 therefore, assessee in this year on same facts cannot plead for inclusion. This contention of the revenue has not been rebutted before us by the Ld. Counsel on material facts rather the case of the Ld. Counsel before us is that, in subsequent three assessment years, that is, 2008-09, 2009-10 and 2010-11, the assessee has included it as a comparable in its Transfer Pricing Study report which has been accepted by the TPO. Thus, it has been pleaded that in view of the principle of consistency, this comparable should be included in the AY 2007-08 also. In absence of any cogent reasons as to why in AY 2006-07 the Sudarshan Chemicals was excluded by the assessee itself, we find it very difficult to accept the theory of consistency as pleaded by the assessee before us. Whether this company was rejected by the assessee in earlier year due to some peculiar factor or FAR analysis or simply on the basis of any search criteria or filter applied etc. and why it has been included in this year has not been clarified before us. If the company was rejected on the reasons of filters applied or on any of search criteria, then it cannot be of much relevance for this year. However, if in the earlier year the FAR analysis was the same with all the other comparability criteria being analysed then assessee has to demonstrate and give strong reasons as to why it should not be excluded in this year. Since no materials has been placed before us on this aspect as highlighted by the revenue, therefore, we in the interest of justice are of the opinion that only for this limited purpose the matter should go back to the file of the TPO/AO to examine this aspect and to consider all the material facts and circumstances for rejection in the earlier year and acceptance in this year as well as in the subsequent years.
Thus, in view of our discussion above, so far as the inclusion/exclusion of Sudarshan Chemicals is concerned, we reject the TPO’s other three contentions but for the last contention, we are remanding the matter back to the file of the TPO in light of
28 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 our observation. The TPO will give due opportunity to explain its case. However, we make it clear that our finding/direction on the sole comparable Sudarshan Chemicals is dependent upon our first finding that if suitable adjustment is be carried out and if there is an increase in the profit margin by way of the adjustment and assessee’s profit margin falls within arm’s length margin then the exercise of inclusion/ exclusion of the lone comparable will be purely an academic exercise. The TPO will first carry out our first direction of adjustment and then if required will go to the second aspect. With this direction, grounds no. 10 and 11 relating to transfer pricing adjustment of Rs.20,73,02,327/- on the segment “crop protection – license manufacturing” is treated as partly allowed for statistical purposes in the manner indicated above.
The second Transfer Pricing adjustment of Rs.3,81,46,602/- is on account of ‘Royalty’ payments on seeds to its Associated Enterprise (AE). The brief facts qua the issue are that, assessee had entered into a Technical Collaboration Agreement with Syngenta Seeds AG, Switzerland (“SSAG”) for the use of proprietary rights, proprietary information, valuable technical know-how and trademarks owned by its AE, SSAG; to produce, promote and commercialize corn and sunflower seeds in the domestic market. In terms of said agreement, the assessee paid SSAG, royalty @ 5% on local sales and 8% on export sales. The details of royalty payment given by the assessee were as under:-
S.No. Name of product Sale(Rs.) Rate Royalty(Rs.) 1 Com(Local) 24,65,52,184 5.00 1.23.28,609 2 Com(Export) 4,09,95,285 8.00 32,79,625 3 Sunflower(Local) 41,03,44,329 5.00 2,05,17,216 4 Sunflower(Export) 2,52,76,928 8.00 20,22,154
In response to the show cause notice, the assessee vide letter dated 3rd September, 2010 explained the entire manufacturing process including benefits of technical knowhow received from the AE.
29 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 Technical collaboration agreement including ‘specific approvals’ received from the RBI was also furnished. The TPO noted that the technical know-how received is in the form of training to the breeders, production employees, marketing personnel and growers of sunflower and corn seeds. The training includes production and growing techniques. However, the assessee has not produced any form of evidence for the technical know received for the sunflower and corn flower production. The specific detail, like the quantum of seeds purchased, from whom it was purchased, the quantum of seeds bred & sold was not furnished, though specifically called for. He further noted from the details of expenses and reimbursement of expenses that payment for training workshop related expenses to professionals have been incurred separately. In such a scenario, there is no justification for making such a huge payment in the form of ‘royalty’. He further noted that assessee is incurring 4% of turnover towards advertisement and marketing, which he held that any independent entity would not have made such a huge payment for such type of expenses. Accordingly, he disallowed the payment of royalty and added back the entire amount of Rs.3,81,46,602/- under the seed segment business.
The DRP confirmed the order of the TPO and held that, no technical know-how has been transferred or received by the assessee with respect to the ‘mutation of seed’, ‘hybridization processes and ‘manufacture to plant gene-pool’ etc. The assessee had also sought to benchmark the royalty payment @ 7.5% per annum plus lump sum payment of Rs.50 lakhs made to HSAL, a third party. The DRP observed that, since, the agreement with this party has entered into in 1995 therefore it has no relevance in 2006.
Before us, Mr. Mukesh Bhutani, first of all, drew our attention to the “royalty agreement” placed in paper book and
30 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 submitted that this agreement has not been questioned by the Department at any stage. Further, such a royalty payment has been made in the earlier years and subsequent years and no adjustment has been made. The benefits received by the assessee from use of know-how etc. were stated before the authorities below to be as under: The appellant could not have been able to undertake the process of multiplication and breeding of seeds had it not received the technology, process and know-how from its AE. “Syngenta” technology has enabled the Appellant in breeding and multiplication of seeds and it exploits the same in the domestic and export markets. Access to technology, helps in increasing the productivity, yield and/or provides disease resistant product to the farmers and thereby increase in sales and market share of the assessee in the seeds segment.
The technical royalty was being paid for a host of rights/licenses in respect of corn and sunflower seeds. The relevant extracts of Article 2-Object of the technical collaboration agreement for sunflower and corn seeds between SCPAG and the assessee was given as under:
“Article 2 – Object 2.1 SSAG hereby grants to SIL, who accepts, according to the terms and conditions of the present Agreement, a non-exclusive, non-transferable, royalty- bearing license to use or utilize any and all of the PROPRIETORY RIGHTS, PROPRIETARY INFORMATION and TRADEMARKS in order to produce, promote and commercialise SEED within the TERRITORY (“the license”)
31 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 2.2 The license does not include the right to grant sub-licenses
2.3 The license includes the rights to multiply the lines and varieties and produce the BASIC SEED as per SIL’s requirement. The License also includes the right to have SEED produced by sub-contractors within the TERRITORY on behalf of SIL provided that sub- contractors shall be bound with SIL by provisions as severe as in the present Agreement and especially shall accept, by written agreement, provisions identical mutatis mutandis to Article 3, 6, 7, 9 and 13.
2.4 The License also includes the right to have SEED promoted and commercialized by distributors within the TRRITORY under the TRADEMARKS provided that distributors shall be found with SIL by provisions with respect to TRADEMARKS as severe as in the present Agreement and especially shall accept, by written agreement, provisions identical mutatis mutandis to Article 5”.
It was further submitted that the benefit received by the assessee has been further documented in the TP Study as under: “7. Seeds Business 7.4 Characterisation 7.4.1 …. 7.4.2 SIL benefits from the technical know-how of SCPAG relating to the development of few varieties of seeds. It is engaged in the R&D, production, promotion and commercialization of seeds of field crops. Based on this knowledge, SIL has developed the capability of locally develop seeds that cater to the tropical climate of
32 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 the region. Accordingly, SIL does not undertake any significant R&D on its account that leads to the development of non-routine intangibles.
Thus, he submitted that, on perusal of the above, it is apparent that the royalty has been paid in terms of the above agreements for sunflower and corn seeds was in relation to host of rights/licenses attached and the assessee clearly benefited from the same.
Coming to the objections of the TPO, Mr. Bhutani submitted that, TPO could not have disallowed the royalty payments alleging no benefit has been received and thus computing the arm’s length price as Nil. He submitted that as per the scheme of Chapter-X, TPO has to compute the arm’s length price of a transaction. The provisions do not contemplate that ALP of the transaction could be at ‘Nil’. Further, the term used in section 92C is to compute the “price” of a transaction. In support of this contention he placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Hero Moto Corp Limited v ACIT, reported in [2013] 156 TTJ 139 (Del). In the said decision, the assessee had paid model development fee to its AE. The TPO applied CUP as the most appropriate method for determining the ALP to be Nil. Further, the DRP arbitrarily used 25 percent as the CUP to benchmark the said transaction. The Tribunal rejected the approach of the DRP/TPO stating that it is TPO’s responsibility to compute the appropriate ALP and the same cannot be determined as nil or a randomly assigned percentage. He also referred to many decisions that the revenue authorities cannot question the commercial wisdom of the assessee. Further benefit test is not the criteria and is not the method prescribed under the Transfer Pricing provision. Thus, Arm’s Length Price of technical services has to be determined on the basis of one of the prescribed methods and it cannot be taken at “Nil”.
33 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013
For the CUP argument, that is, similar royalty payment made a third party in pursuance to agreement dated 30th August, 1995, he submitted that the reasons for the TPO for rejecting the same that it was entered in the year 1995 and has no relevance to the payment made in 2006, cannot be upheld, because, the said agreement of 1995 was still in force and will remain so unless it is terminated by either of the parties. Hence, it cannot be the ground, because this agreement has not been terminated. Further, ITAT Mumbai Bench in the assessee’s own case for the assessment year 2002-03 to 2004-05 held that royalty paid in respect of licensed manufacturing segment should be benchmarked, using CUP method (in ITA nos. 2977/Mum/2006; 6575/Mum/2010;6448/Mum/2010;856 &948/Mum/2011). Thus, in this case also, there is an Internal CUP which should have been accepted. Lastly, he submitted that, royalty payment has been made as per the regulatory guidelines of the RBI and, therefore, such a payment made with the rate approved by the RBI cannot be held to be unjustified or not meeting Arm’s Length Price.
Mr. Bhutani, also raised an alternative argument which has been raised vide additional ground that, even after payment of royalty is disallowed, the operating profit margin in assessee’s Seed business is 23.70% which is much higher than the comparable companies where the average margin was 10.60%. Hence, no adjustment in any case is called for in this segment. He also clarified that, so far as observation of the TPO relating payment of training workshop related exercise etc. is concerned, he submitted that, same is entirely different nature of payment having no nexus with the payment made for technology i.e. ‘royalty’ and ‘reimbursement’.
34 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 28. On the other hand, the Ld. DR strongly relied upon order of the TPO as well as DRP and stated that assessee could not provide proper justification of technical know-how before the TPO as well as DRP as stated in the respective orders. In any case, this matter should be restored back to the file of the TPO to examine the royalty agreement vis-à-vis the functions performed by the assessee, because the the assessee has also made payment for other activities carried out by the AE on which reimbursement of expenses have been made like on training and workshop related expenses. Whether they are part of same function or not needs to be examined. Regarding CUP if required to be analysed then as per the direction of the earlier years’ Tribunal order, same can also be examined afresh.
We have heard the rival submissions and perused the relevant finding given in the impugned orders as well as material placed before us. It is an undisputed fact that assessee had entered into technical collaboration agreement with Syngenta AG Switzerland for the use of proprietary rights; proprietary information; valuable technical know-how; trademarks owned by its AE to produce, promote and commercialize corn and sunflower seeds in the domestic market. All these rights, information and trademarks were given as non-exclusive, non-transferable and royalty bearing license. As per agreement, the said license includes the rights to multiply the lines and varieties and produce the basic seed as per the assessee’s requirement. In the TP Study report, the assessee has highlighted the benefits from such a technical know- how agreement and how it has helped the assessee to develop the capability of seeds that cater to the tropical climate of the region. The significant R&D required for this purpose has not been undertaken by the assessee. If all these technical know-how given by AE have been used including trademark and information for the business carried out by assessee in India, then the payment made
35 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 for usage and utilization of such rights, information and trademarks has to be reckoned as “royalty” only. Here it is not the case that payment has been made in this year for the first time albeit is a recurring payment from the earlier years and also in the subsequent years and no such adjustment or disallowance has been made in the seeds segment. It has been categorically stated before the authorities below and before us, which has not been rebutted by the revenue that, the payment of royalty in the seed segment had passed the test of functional and economic justification and has been allowed in the earlier years. The assessee is importing basically the breeder seeds and with the aid of technical know-how of its AE and assists in further developing seeds at the facilities located in various parts of the country. Thus, to say that there is no benefit to the assessee from such proprietary information, trademarks, technical know-how would not be correct. Even in third party situation, proprietary rights, information and license to use trademarks and know-how is provided or make available then it would not be free of cost. In such transactions there is always a price which needs to be computed under the principles of “Arm’s Length Price”. Thus, we hold that, the contention of the TPO as well as direction of the DRP that royalty payment has to be treated as “Nil” cannot be justified in the wake of not only the “technical collaboration agreement” but also the actual conduct of the parties and the assessee who has earned huge returns during carrying out its activity by exploiting these intangibles.
Once we hold that the royalty payment cannot be computed at “Nil”, the next issue which comes before us is how to compute the Arm’s Length Price of such a transaction. The Ld. Counsel before us has contended that, there is an Internal-CUP which is based on agreement dated 13th August, 1995 with the third parties namely, HSAL & Sandoz India Ltd. The third party data
36 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 have been rejected on the ground that, the agreement relates to the year 1995, whereas the payment has been made in 2006 by the assessee to its AE. However, we fail to understand if the terms of the agreement are still in force and has not been terminated then how the year of agreement will make a difference. If a similar payment has been made to the third party in this year, then, if other attributes of CUP are fulfilled then same has to be considered for the comparability analysis to benchmark the ALP of the payment. What is required to be seen is, whether the terms and conditions of the agreement with the third party and the terms and conditions of the agreement with the AE are similar or not. If they are similar, then definitely there is a situation of internal CUP, unless some material differences is shown between the two agreements or there is change in the facts from year 1995 to this year or any other criteria of significance. We find that the Tribunal in respect of ‘license manufacturing segment’ has restored back the matter to the file of the TPO for benchmarking the same by using CUP method. On the same principle, we are also in agreement that CUP method should be applied for benchmarking this transaction. Accordingly, we restore this issue to the file of the TPO/AO to examine the terms and conditions of the agreements with the third party and whether such terms are still relevant for the year under consideration and also the terms and conditions entered into by the assessee with its AE.
Further, we also find great strength in the alternate argument taken by the Ld. Counsel before us that, under the segment of seed business, the operating profit margin is 23.70% which is far more and higher than the comparable companies which have been arrived at 10.80%. In such case, no adjustment in respect of the said international transaction is required. However, this aspect of the matter has not been dealt upon either by the AO or by the DRP, therefore, only for the purpose of
37 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 verification and examination of this contention, the matter is being restored to the file of the TPO to see whether the assessee’s operating profit margin under the ‘Seed business segment’ is much higher than the comparable companies. If it is found that assessee’s contention with regard to higher profit margin in this segment is correct, then no adjustment in respect of royalty payment should be made. With this direction, ground no. 12 and additional ground is treated as allowed.
Now, we will come to other grounds of appeal, which have been raised vide grounds No.1 to 9.
At the outset, the Ld. Counsel submitted that, ground nos. 4.1 to 4.3; 5.1 to 5.3 are being not pressed, therefore, these grounds are treated as dismissed as not pressed.
In ground no. 1.1 to 1.2, the assessee has challenged deduction of “other income” from the amount of profits eligible for deduction under section 80IB. The details of “other income” have already been given in ground no.1.1 as reproduced earlier. So far as the ‘interest of employee loan’ is concerned, the Ld. Counsel fairly admitted that this issue has been decided against the assessee by the Tribunal in assessee’s own case right from assessment years 2001-02 to 2006-07. Regarding ‘sale of scrap’ of Rs. 19,98,499/-, the Ld. Counsel submitted that, assessee has filed additional evidences before the Tribunal under Rule 29 in the paper book, providing break-up and details of scrap sales. On merits he submitted that this issue has been decided in favour of the assessee by the decision of the Tribunal in AY 2002-03 to 2004-05 vide para 10, therefore, this matter can be decided in the light of the Tribunal order.
38 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 35. After considering the aforesaid submission and on perusal of the impugned order, we find that the assessee had claimed deduction under section 80IB on “other income” which also comprised of interest on employee loan; other interest income; and sale of scrap. So far as the interest on employee loan is concerned, it cannot be held that same has direct or proximate connection with the business of the industrial undertaking. Moreover, this issue has been decided against by the Tribunal in assessee’s own case as admitted by the Ld. Counsel, therefore, so far as interest on employee loan at Rs.28,523/-, the same has righty been disallowed by the AO. As regards the ‘other interest income’, no submissions have been made before us, therefore, on this score also we uphold the order of the AO denying the deduction claimed under section 80IB. As regards the ‘sale of scrap’, the Ld. Counsel before us has filed the details of miscellaneous income which is on account of sale of scraps. Since these evidences were not filed before the authorities below, therefore, same needs to be verified by the AO and accordingly, we are setting aside this issue for examining the same. We also find that the Tribunal in the assessment year 2002-03 to 2004-05 vide order dated 31.07.2013 has decided this issue in favour of the assessee. Accordingly, the AO after examining the details will decide this issue in line with the decision of the Tribunal. Thus, ground no.1.1 and 1.2 are treated as partly allowed for statistical purposes.
In ground No. 2.1 to 2.5, the assessee has mainly challenged the set off of losses of 80IB units against the profits of non 80IB units for working out the eligible profits under section 80IB.
Brief facts are that, the assessee company in its Audit report in Form No.10 had made a claim for deduction under section 80IB with regard to its 4 unit namely: i) Multipurpose Formulation Unit; ii) Thiamethoxam Unit; iii) Topik Unit; and iv) Profenofos Unit.
39 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013
The AO required the assessee as to why deduction under section 80IB should not be calculated after adjusting consolidated loss of the two units against the profits of two other units. In response to the show cause notice, assessee relied upon certain case laws viz., CIT vs Canara Workshops, 161 ITR 320(SC) and various other Tribunal decisions. The Ld. AO however, rejected the assessee’s contention that deduction has been claimed only in respect of two units without setting off of losses of other 2 units. The relevant observation of the AO in this regard is as under:- “The contention of the ARs is perused. The assessee draws a consolidated trading and P&L a/c including sales purchases and expenses of all the units. So profit and loss shown by the assessee company includes the profits and losses of all the units. Since the above losses are included in the profit or loss of the assessee company, its taxable income is already reduced to that extent. Even the AR admits to that in above submission. In such a situation on one hand the taxable profit of the company is reduced by these losses and on the 80IB. Thus, the deduction u/s 80IB is inflated to that extent. The assessee is claiming double benefit. This was certainly not the intention of the legislature. When the total income of the assessee is reduced by the loss of an eligible unit, profits of other eligible unit before calculation of deduction u/s 80IB”. 3.4.3 The decisions relied on by the AR cannot be applied to the case of the facts are different. These decisions are based on the facts and documents of the relevant cases and the accounting treatment given by the assessee in
40 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 those circumstances. It also depends on whether the loss in question is of eligible units or not. For example, in the above illustration, if the assessee keeps the loss of an eligible unit separate and does not consider it in arriving at the total deduction available will be Rs.50 and taxable income will be Rs.100. In such a case the loss of one eligible unit is not set off against the profit of another eligible unit and is carried forward for that unit itself. However, in the case of the total income, including the profits of the ineligible unit. Hence for the purpose of calculation of deduction u/s 80IB, the losses of eligible units are to be first set off from profits of other eligible units and on resultant positive figure the deduction is to be calculated. 3.4.4 In similar and circumstances and accounting treatments, it has been held that losses in two units and profit in one unit should be set off before computing deduction – CIT vs. Sundravel Match Industries Pvt Ltd. (MAD) 245 ITR 605 and CIT vs Macmilan Co. of India Ltd. (MAD) 243 ITR 403. Further, it has been held in CIT vs RPG Telecom Ltd. (Kar) 292 ITR 355 that “set off loss in other u nits against the income from eligible units and compute deduction only on the net income”.
and accordingly, computed the deduction under section 80IB in the following manner:
41 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 Name of Unit Profit Loss Net Amount 1)Multipurpose Formulation Unit 20,00,51,614 20,00,51,614 2)Thiamethoxam Unit 2,19,69,406 2,19,59,406 3)Topik Units -- 2,31,03,440 2,31,03,440 4)Profenofos Unit -- 49,83,380 49,83,380 Total 22,20,21,020 2,80,86,820 19,39,34,200
The DRP also confirmed the said disallowance of deduction.
Before us the Ld. Counsel submitted that, for the purpose of computing the deduction under section 80IB, each unit has to be considered as a separate and independent unit. In support, he relied upon the following decisions:- a) Canara Workshops -161 ITR 320 (SC); b) Hindustan Construction Co. Ltd. -368 ITR 733 (Bom); c) Tridoss laboratories Ltd. -328 ITR 448 (Bom); d) Eskay Knit India Ltd. -ITA No.184 of 2007 (Bom); e) Sona Koyo Steering Systems Ltd -321 ITR 463 (Del); f) Modi Xerox Ltd [2012] -344 ITR 0411; g) Meera Cotton & Synthetic Mills P Ltd-29 SOT 177(All); h) Jindal Alluminium Ltd [2012] 19 ITR(T) 255 (Bang Trib); i) Nishikant S Shirodkar –ITA No.7626/M/2013 (Mum Trib).
On the other hand, Ld. DR strongly relied upon the order of the AO.
After considering the relevant finding given in the impugned orders as well as various decisions relied upon by the Ld. Counsel, we find that so far as the issue of claim of deduction under section 80IB, the profit and loss for 4 units for the year as well as profits eligible for deduction as per the assessee and as per the revenue is as under:
42 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013
Particular Multipurpose Thiamethoxam Topik Profenofos Total Unit Unit Unit Profit/loss for the year 20,00,51,614 2,19,69,406 (2,31,03,440) (49,83,380) As per Assessee : Profits Eligible for deduction 20,00,51,614 2,19,69,406 -- -- 22,20,21,020 As per Revenue : Profits eligible for deduction (As per Assessment Order) 20,00,51,614 2,19,69,406 (2,31,03,440) (49,83,380) 19,39,34,200 Less: Exclusion of other income (20,51,695) Balance Profit 19,18,82,505 Deduction under 80IB 5,75,64,752
So far as the issue, whether each unit is to be treated as independent unit for the purpose of computing the profit or whether loss of one unit can be adjusted with profit of other unit or not, we find from the perusal of Hon’ble Delhi High Court decision in the case of Sona Koyo Steering Systems Ltd., reported in [2010] 328 ITR 463, that while computing the deduction under section 80I, loss of one eligible unit can be set off or adjusted against profit of another eligible unit. Relevant observation of the Hon’ble Delhi High Court after relying upon the decision of Supreme Court in the case of Synco Industries Ltd, 299 ITR 44 reads as under:-
“8. It is further clear from a plain reading of the aforesaid provisions that the deduction under S. 80-I is to be made in case the gross total income includes any profits and gains derived from an industrial undertaking, etc., in case such profits and gains are included in the gross total income of the assessee. The deduction in the case of a company, in view of the proviso to s. 80-1(1), is to be given to the extent of 25 per cent of such profits and gains of such an industrial undertaking. It is also clear that in view of s. 80-1(6), which begins with a non obstante clause, the quantum of deduction is to be
43 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 computed as if the industrial undertaking were the only source of income of the assessee during the relevant years. In other words, each industrial undertaking or unit is to be treated separately and independently. It is only those industrial undertakings, which have a profit or gain, which would be considered for computing the deduction. The loss making industrial undertaking would not come into the picture at all. The plain reading of the provision suggests that the loss of one such industrial undertaking cannot be set off against the profit of another such industrial undertaking to arrive at a computation of the quantum of deduction that is to be allowed to the assessee under s. 80-1(1) of the said Act.
In this regard, we may refer to the decision of this Court in the case of Dewan Kraft System (P) Ltd. (supra), which considered the pari materia provisions of s. 80-IA(7) of the said Act. In that case, the question arose with respect to computation of the deduction in relation to three units - the Kalamb unit, the Delhi unit and the Noida unit. This Court held that while computing the deduction under s. 80-IA of the said Act, the profits and gains of the Kalamb unit for the purposes of determining the quantum of deduction under s. 80-IA(5) was to be computed as if such eligible business of the said unit was the only source of income of the assessee. This Court observed that the AO had erroneously mixed the profits of the Delhi and Noida units and had thereby restricted the deduction to the extent of business income and that such an exercise was in total disregard of the provisions of sub-s. (7) of s. 80-IA of the said Act. It was held that the Kalamb unit, being the only unit of the assessee eligible for deduction under s. 80-IA of the said Act, was to be treated as an independent unit and the same was to be treated as the only source of income of the assessee for the purposes of computing deduction under s. 80-IA.
44 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 10. We now came to the decision of the Supreme Court in the case of Synco Industries Ltd. (supra) which was strongly relied upon by the learned counsel for the appellant. On going through the entire decision, we find that the Supreme Court was primarily concerned with the question as to whether any deduction could be allowed under Chapter VI-A if the gross total income was 'nil. It is in that context that the Supreme Court considered the concept of gross total income and came to the conclusion, following its earlier decision in CIT vs. Kotagiri Industrial Co-operative Tea Factory Ltd. (1997) 139 CTR (SC) 359 : (1997) 224 ITR 604 (SC), that the gross total income has to be computed in accordance with the Act after adjusting the losses, etc. and that, if the gross total income so determined is positive, then the question of allowing deductions under Chapter VI- A would arise, but not otherwise. While doing so, the Supreme Court further made it clear that the gross total income must be determined by setting off business losses of earlier years before allowing deduction under Chapter VI-A and that if the resultant income is 'nil', then the assessee cannot claim any deduction under Chapter VI-A. While coming to the aforesaid conclusion, the Supreme Court was also confronted with an argument which had been raised on the basis of the provisions of s. 80-1(6) that the profits of one industrial undertaking cannot be set off against the losses suffered by the other industrial undertaking. The Supreme Court was of the view that the provisions of s. 80-1(6) were only for the purposes of computing the quantum of deduction, whereas the gross total income was to be computed in terms of the Act as provided in s. 80B(5). It is apparent that the Supreme Court distinguished the provisions of s. 80-1(6) which was for the purposes of computing the quantum of deduction from the provisions of s. 80-I (1) and s. 80-13(5) which deal with the manner in which the gross total income is to be considered. The Supreme Court observed as under:-
45 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 "13.While computing the quantum of deduction under s. 80-1(6), the AO, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income in order to arrive at the deduction under Chapter VI-A. However, this Court finds that the non obstante clause appearing in s. 80-1(6) of the Act, is applicable only to the quantum of deduction, whereas, the gross total income under s. 80B(5) which is also referred to in s. 801(1) is required to be computed in the manner provided under the Act which presupposes that the gross total income shall be arrived at after adjusting the losses of the other division against the profits derived from an industrial undertaking. If the interpretation as suggested by the appellant is accepted it would almost render the provisions of s. 80A(2) of the Act nugatory and, therefore, the interpretation canvassed on behalf of the appellant cannot be accepted. It is true that under s. 80-1(6) for the purpose of calculating the deduction, the loss sustained in one of the units, cannot be taken into account because sub-s. (6) contemplates that only the profits shall be taken into account as if it were the only source of income. However, s. 80A(2) and s. 80B(5) are declaratory in nature. They apply to all the sections falling in Chapter VI-A. They impose a ceiling on the total amount of deduction and, therefore, the non obstante clause in s. 80-1(6) cannot restrict the operation of ss. 80A(2) and 80B(5) which operate in different spheres. As observed earlier, s. 80-1(6) deals with actual computation of deduction whereas s. 80-1(1) deals with the treatment to be given to such deductions in order to arrive at the total income of the assessee and, therefore, while interpreting s. 80-I(1), which also refers to gross total income one has to read the expression 'gross total income as defined in s. 806(5). Therefore, this Court is of the opinion that the High Court was justified in holding that the loss from the oil division was required to be adjusted before determining the gross total income and as the gross total income was 'nil' the assessee was not entitled to claim deduction under Chapter VI-A which includes s. 80-1 also.
The proposition of law, emerging from the above discussion is that the gross total income of the assessee has first got to be determined after adjusting losses, etc., and if the gross total income
46 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 of the assessee is "nil" the assessee would not be entitled to deductions under Chapter VI-A of the Act." 11. From the above extract, it is apparent that the Supreme Court did not at all hold that while computing the deduction under s. 80-1(6), the loss of one eligible industrial undertaking is to be set off against the profit of another eligible industrial undertaking. All that the Supreme Court said was that in computing the gross total income of the assessee, the same has to be determined after adjusting the losses and that, if the gross total income of the assessee so determined turns out to be 'nil', then the assessee would not be entitled to deduction under Chapter VI-A of the said Act.
We agree with the submissions made by the learned counsel for the assessee that there is nothing in the decision in the case of Synco Industries Ltd. (supra) which would enable us to detract from the position indicated by this Court in Dewan Kraft System (P) Ltd. (supra) and, as indicated by us above. In fact, the Supreme Court clearly held that while computing the quantum of deduction under s. 80-1(6), the AO, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income of the assessee in order to arrive at a deduction under Chapter VI-A. The Supreme Court also held that under s. 80-1(6), for the purposes of calculating the deduction, the loss sustained in one of the units is not to be taken into account because sub-s. (6) contemplates that only the profits shall be taken into account as if it were the only source of income.
The above discussion makes it absolutely clear that the Supreme Court decision sought to be relied upon by the learned counsel for the appellant/Revenue, rather than deciding the issue in favour of the Revenue, clinches the matter in favour of the assessee. In view of the foregoing discussion, the substantial question of law, referred to above, is decided in favour of the assessee and against the Revenue. The appeals are dismissed.
In the light of the aforesaid decision, we hold that each undertaking or unit is to be treated as independent and separate unit and it is those industrial undertaking which have a profit or gain are to be considered for computing the deduction. The loss making industrial undertaking would not come into picture at all.
47 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 Thus respectfully following the aforesaid decision, we allow the claim of the assessee.
The next issue is with regard to addition on account of closing stock on account of unutilized CENVAT credit.
In this regard the only submission of the Ld. Counsel before us is that, if the addition of Rs.19,00,63,130/- made to the closing stock on account of unutilized CENVAT credit is to be sustained, then corresponding adjustment should be made to the opening stock, purchases and sales and this proposition is covered in favour of the assessee by the order of the Tribunal in the assessee’s own case for the AY 2005-06. The relevant observation and the finding of the Tribunal in this regard read as under:
“3 The third dispute is regarding addition of Rs.8,03,34,273/- to the value closing stock on account of unutilized CEN VAT credit. The AO noted that that the assessee had not added the unutilized CENVAT credit in respect of materials other than capital goods amounting to Rs.8,03,34,173/- which was required to be added in view of the provisions of section 145A. He, therefore made addition of Rs.8,03,34,273/-. The claim of the assessee to make similar adjustments to opening stock and purchases was not accepted. In appeal CIT(A) agreed with AO that this being the first year of change, the method of accounting u/s 145A was bound to have impact on the profit. He, therefore, confirmed the addition made by AO, aggrieved by which the assessee is in appeal before Tribunal.
2.3.1. Before us the learned AR for the assessee submitted that the assessee was following the exclusive method of accounting in which duty was not routed through the profit loss account. It was also submitted that adjustment u/s 145A will have to be made at all stages including opening stock and purchases and if this was done this would not result in any addition to the total income. Reliance was placed on the judgment of Hon'ble High Court of Bombay in case of Mahalaxmi Glass Works Pvt. Ltd (318 ITR 116) and on the judgment of Hon7ble Supreme Court in case of CIT Vs. Dynavision Ltd. (348 ITR 380). The learned DR on the other hand supported the orders of authorities below
48 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 and placed reliance on the finding given in the respective orders. 2.3.2 We have perused the records and considered the matter carefully. The dispute is regarding addition on account of duty to the closing stock value. Under the provisions of section 145A, the valuation of purchase and sale and inventories for the purpose of determining the income is required to be made in accordance with the method of accounting regularly employed by the assessee and further adjustment is required to be made to include the amount of any tax duty cess or fee by whatever name called actually paid or incurred by the assessee to bring the goods at place of its location and conditions as on the date of valuation. Therefore, the addition u/s 145A on account of duty is required to be made both in the valuation of purchase and sales as well as inventories. Hon’ble High Court of Delhi in case of Mahabir Aluminium (297 ITR 77) have held that adjustment o account of duty etc u/s 145A is required to be made to the opening stock. Therefore, adjustment on account of duty u/s 145A is required to be made at all stages including opening stock purchase and sales. We, therefore, set aside the order of CIT(A) and restore the matter to the file of AO for passing a fresh order after necessary examination in the light of observations made in this order and after allowing opportunity of hearing to the assessee”.
Thus, respectfully following the aforesaid decision, which in turn is based on the decision of Hon’ble Bombay High Court in the case of Mahalaxmi Glass Works Pvt. Ltd (supra), we decide this issue accordingly and restore the matter to the file of the AO with similar direction. Accordingly, ground No. 3.1 to 3.5 is treated as partly allowed for statistical purposes.
The next issue relates to denial of depreciation on software expenses of Rs.1,75,000/- disallowed in the assessment year 2006-07.
Before us, it has been stated that DRP has given direction to the AO to grant depreciation on this expenditure which has not been given by the AO. Accordingly, we direct the AO to grant
49 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 depreciation which has to be held as capital in nature for AY 2006-07.
Ground no. 7 and 9 as admitted by the Ld. Counsel for the assessee is consequential in nature, accordingly the same are dismissed being consequential.
As regards interest chargeable under section 234C, we direct the AO to compute the interest as per the returned income.
Thus, appeal of the assessee is treated as partly allowed for statistical purposes.
Now, we shall take-up assessee’s appeal being ITA No.649/Mum/2013 for AY 2008-09, vide which following grounds have been raised:- 1(a) Based on facts and circumstances of the case, the Additional Commissioner of Income-tax, Range 1(3), Mumbai (hereinafter referred to as the AO) while passing the order dated 10th October, 2011 under section 143(3) r.w.s. 144C pursuant to the directions dated 28th September, 2011 of the Dispute Resolution Panel –II (hereinafter referred to as the DRP) erred in reducing the following Óther Income’ from the amount of profit eligible for deduction under Section 80 IB of the Act:-
Particulars Multipurpose Topik TMX Profenos Total Formulation Unit Unit Unit (Rs.) Unit (Rs.) (Rs) (Rs) (Rs.) Interest Income - - 11,989 33,753 45,742 Rental Income 79,975 - - - 79,975 Other External Income 14,46,431 28,12,878 - - 42,59,309 Commission Income from Group company 4,95,215 9,90,873 - - 14,86,088 Total 20,21,621 38,03,751 11,989 33,753 58,71,114
2.(a) Based on facts and circumstances of the case and in law, the learned AO in order passed under section 143(3) r.w.s. 144C of the Act pursuant to the directions
50 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 of the DRP erred in not granting a deduction of Rs.3,25,77,892/- under Section 80IB of the Act. (b) Based on facts and circumstances of the case and in law, the learned AO erred in setting off the brought forward losses of Rs.25,10,41,929 for Assessment Years 2000-01 to 2007-08 pertaining to profenofos unit while computing deduction under Section 80IB of the Act. (c) Based on facts and circumstances of the case and in law, the learned AO erred in setting off the brought forward losses of Rs.2,31,03,440 for Assessment Year 2007-08 pertaining to Topik unit which had already been set-off by the AO in AY 2007-08. 3(a) Based on facts and circumstances of the case and in law, the learned AO in order passed under section 143(3) r.w.s. 144C of the Act pursuant to the directions of the DRP erred in adding an amount of Rs.18,53,74,019/- to the value of closing stock on account of unutilized CENVAT credit. (b) Without prejudice to the above, the learned AO ought to have increased the amount of opening stock, purchases and sales by a similar amount as has been laid down in Section 145A of the Act. (c) Without prejudice to the above, the learned AO ought to have held the value of the opening stock of the subsequent assessment year i.e. 2009-10 should be increased by Rs.18,53,74,019/- on account of the addition made to the closing stock for the assessment year 2008-09. (d) Without prejudice to the above, the learned AO ought to have held that the value of the opening stock of the assessment year 2008-09 should be increased by Rs.19,00,63,130/- on account of the addition made to the closing stock for the assessment year 2007-08. 4. Based on facts and circumstances of the case and in law, the learned AO in the order passed under section 143(3) r.w.s. 144C of the Act pursuant to the directions of the DRP erred in disallowing repairs and maintenance expenses amounting to Rs.68,89,477 as capital expenditure. 5. Based on facts and circumstances of the case and in law, the learned AO in the order passed under section 143(3) r.w.s. 144C of the Act pursuant to the directions
51 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 of the DRP erred in not allowing actual site restriction expenses of Rs.1,34,38,000. 6. Based on facts and circumstances of the case and in law, the learned AO in not recording the brought forward losses for being set off against the income in the subsequent years. 7(a) On the facts and circumstances of the case, the AO erred both on facts and in law in adding Rs.3,53,30,934/- to the income of the Appellant by disallowing the payment of royalty on corn and sunflower seeds to its Associated Enterprise. (b) The Appellant prays that the above adjustment be deleted. 8. Based on the facts and circumstances of the case and in law, the learned AO erred in non-granting of correct credit of taxes paid during the year. 9. Based on the facts and circumstances of the case and in law, the learned AO erred in charging interest under section 234B of Rs.4,50,28,500. 10. Based on the facts and circumstances of the case and in law, the learned AO erred in charging interest under section 234C of Rs.1,31,22,379 as against Rs.1,12,28,787 chargeable per the return of income”.
It has been admitted by both the parties that, ground No.1 is similar to the ground raised in assessee’s appeal for assessment year 2007-08 which has been decided above. So far as interest on employee loan is concerned, same have been decided against the assessee by the Tribunal in earlier years, therefore, this issue is decided against the assessee.
As regards the other income, the matter is restored back to the file of the AO to decide the matter in the light of earlier Tribunal decisions. Thus, this ground is treated as partly allowed for statistical purposes.
Ground no.2 relates to set off of one 80IB unit to the profit of other eligible unit for deduction under section 80IB.
52 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013
This issue is similar to the ground raised in appeal for the assessment year 2006-07 and accordingly in view of our finding given therein, we set aside the impugned issue to the file of the AO with similar direction and accordingly, ground No.3 is treated as partly allowed for statistical purposes.
Ground No. 4 is not pressed; accordingly, the same is dismissed as not pressed.
In ground no. 5, the assessee has challenged the disallowance of site restoration expenses.
Assessee’s case before us is that, the actual expense incurred on restoration cost has not been allowed. It was stated that provision for ‘site restoration expenses’ were disallowed in AY 2006-07 and 2007-08 and actual cost incurred was allowed. The assessee has however incurred actual cost of Rs.1,34,38,000/- against the provision which has been claimed as deduction and the AO has not considered the same. The DRP has directed the AO to allow the same after due verification of the provision made in the earlier years. Before the AO, the assessee submitted as under:-
“We humbly submit that provisions for site restoration cost of Rs.7,50,00,000/- and Rs.3,50,00,000/- was made for the AY 2006-07 and 2007-08 respectively. The above provisions had been disallowed in the return of income and the actual expenditure incurred on site restoration was claimed in the respective assessment years.
53 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 Given that the provisions made in earlier years was not claimed as a deduction, the actual expenditure incurred should be allowed as a deduction.
In view of the above, as directed by the DRP, we humbly submit that the restoration expenses of Rs.1,34,38,000/- should be allowed as deduction”.
However, the AO held that, assessee’s claim is not acceptable as in AY 2006-07, the Department has not disallowed the provision and assessee should have claimed the deduction by claiming revised return. Here the case of the assessee before us is that it has itself disallowed the provision and now it is being claimed on actual basis. We accept this contention that once it is undisputed fact that the assessee’s claim has been disallowed in the earlier years then, actual expenditure incurred in this year has to be allowed. Before us, the Ld. Counsel has also pointed out that, in AY 2009- 10, a similar expense on actual basis has been allowed. Accordingly, we direct the AO to allow the actual expenditure incurred during this year on site restoration cost. Accordingly, ground no. 5 is treated as allowed.
Next issue argued before us is with regard to non-granting of TDS credit/short-deduction of TDS of Rs.17,45,272/-. Accordingly, we direct the AO to verify the contention of the assessee and grant the credit after verification.
In ground no. 9, the assessee has challenged the levy of interest under section 234B. This ground is treated as consequential and AO while computing the interest should consider the proper credit of TDS.
54 �संगएनता इं�डया �ाइवेट �ल�मटेड Syngenta India Ltd ITA 8534/Mum/2011 ITA 649/Mum/2013 59. As regards ground no. 10 relating to interest under section 234C, same has to be computed on the return of income.
Accordingly, appeal of the assessee for AY 2008-09 is treated as partly allowed for statistical purposes. To sum-up:- Both the appeals of the assessee for AY 2007-08 and 2008- 09 stands partly allowed for statistical purposes. Order pronounced in the open court on 1st June, 2016
Sd/- Sd/- (बी आर भा�करन ) (अिमत शु�ला) लेखा सद�य �याईक सद�य (B R BASKARAN) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 1st June, 2016
��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) –Concerned/DRP-II, Mumbai. 4) The CIT– Concerned__, Mumbai. 5) िवभागीय �ितिनिध “के“, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “K” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / / उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, मुंबई Dy./Asstt. Registrar I.T.A.T., Mumbai
*च�हान व.िन.स *Chavan, Sr.PS