AHLSTROM FIBERCOMPOSITES INDIA PVT. LTD.,,MUNDRA (KUTCH) vs. THE DY. COMMR. OF INCOME TAX, GANDHIDHAM CIRCLE,, GANDHIDHAM

आयकरअपीलीयअधिकरण, राजकोटनयायपीी IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT (Conducted through E-Court) BEFORE Ms SUCHITRA KAMBLE, JUDICIAL MEMBER And SHRI WASEEM AHMED, ACCOUNTANT MEMBER आयकरअपीलसं./ITA No. 437/Rjt/2018 धििाधरणणवध/Asstt. Year:2014-2015 Ahlstrom Munksjo Vs. D.C.I.T, Fibercomposites(India) Pvt. Ltd., Gandhidham Circle, Mundra SEZ Integrated Textile & Gandhidham. Apparel Park (MITAP), Plot No.07, Survey No.141, Mundra, Kutch-370421. PAN: AAGCA9137M (Applicant) (Respondent) Assessee by : Shri Tushar Hemani, A.R Revenue by : Shri Shramdeep Sinha, C.I.T DR सुिणाईकीतारीख/Date of Hearing : 06/12/2023 घोवणाकीतारीख/Date of Pronouncement: 20/12/2023 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeal has been filed at the instance of the assessee against the order of the Ld. Commissioner of Income Tax, Ahmedabad, arising in the matter of assessment order passed under Section 143(3) r.w.s 144C(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2014-15.

ITA No.437/Rjt/2018 A.Y. 2014-15 2 Ahlstrom Munksjo Fibercomposites (India) Pvt. Ltd. ('the Appellant') craves leave to prefer appeal against the order passed by the Deputy Commissioner of Income-tax, Gandhidham Circle, Gandhidham ['AO'] under section 143(3) read with section 144C(13) of the Income- tax Act, 1961 ('the Act') and Transfer Pricing order passed by the Deputy Commissioner of Income-tax, Transfer Pricing Officer 2, Ahmedabad ('TPO') and in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - 2, Mumbai ('DRP') on the following grounds: 1. Transfer Pricing ('TP') adjustment in relation to international transaction of sales to Associated Enterprises ('AEs') 1.1. On the facts and in the circumstances of the case and in law, the Learned AΟ / ΤΡΟ has erred in and learned DRP has further erred in confirming an upward Transfer Pricing ('TP') adjustment amounting to INR 65,553,557. 1.2. On the facts and in the circumstances of the case and in law, the Learned AO/TPO has erred in and learned DRP has further erred in rejecting the audited segmental financial statements of the Appellant, thereby ignoring the internal AE and Non AE segment comparison and accordingly computing transfer pricing adjustment considering entity wide margins. 1.3. On the facts and in the circumstances of the case and in law, the Learned AO/TPO has erred in and learned DRP has further erred in rejecting cost plus method ('CPM') adopted by the Appellant and selecting Transactional Net Margin Method ('TNMM') as the most appropriate method to determine the Arm's Length Price of sale of goods to AEs. 1.4. Without prejudice to the above ground number 1.3, on the facts and in the circumstances of the case and in law, the Learned AO/TPO has erred in and learned DRP has further erred in confirming selection of certain functionally dissimilar companies as comparable to benchmark the international transaction of sales of goods to AEs under TNMM approach. 1.5. Without prejudice to earlier grounds that the TP documentation prepared by the Appellant is compliant with law and should be accepted, the Learned AO / TPO has erred in and learned DRP has further erred in not considering the segmental information submitted by the Appellant while computing the adjustment under section 92 CA. The Appellant prays that the addition made by the Learned AO / TPO in relation to the international transaction of sales to AEs be deleted. 2. Disallowance of Management fees and Business Area Service fees under section 37(1) of the Act 2.1 On the facts and in the circumstances of the case and in law, the Learned AO has erred in and learned DRP has further erred in confirming disallowance of payment of Management fees and Business Area Service fees amounting to INR 53,259,975 under section 37(1) of the Act. 2.2 On the facts and in the circumstances of the case and in law, the Learned AO has erred in and learned DRP has further erred in confirming the disallowance under section 37(1) of the Act without appreciating the fact that no adverse inference is drawn by the learned TPO on the management fees and business area service fees. The Appellant prays that the additions made by the Learned AO in relation to the disallowance of Management fees and Business Area Service fees be deleted.

ITA No.437/Rjt/2018 A.Y. 2014-15 3

ITA No.437/Rjt/2018 A.Y. 2014-15 4 after adopting TNMM as most appropriate method and after taking external comparables.

ITA No.437/Rjt/2018 A.Y. 2014-15 5 9. During the course of arguments before us, the ld.counsel of the assessee began by challenging rejection of the segmental accounts of the assessee by the TPO. His contentions before us were to the effect that by virtue of segmental accounts the assessee had taken an internal comparable for the CPM selected by it for benchmarking international transaction and that the ld.TPO had rejected the segmental accounts on frivolous basis, without pointing out any specific defect in the same. That further the DRP had failed to adjudicate the objections of the assessee before it in this regard. He drew our attention to the show cause notice issued by the TPO during TP proceedings, reproduced at page no.3 of the order of the TPO, pointing out therefrom the basis with the TPO for rejecting the segmental accounts of the assessee as being; i) That as per the Notes to Accounts to the audited accounts of the assessee, there were no primary reportable segments; ii) That despite the same, the assessee had submitted segmental accounts in relation to its export and domestic segments, with the exports segment being further bifurcated into AE and non-AE segment. That these segmental accounts were verified by Chartered Accountants, who had not prepared the audited accounts of the assessee. Our attention was drawn to the show cause notice, bringing out the above at para 4-1 of the order as under: 3. (i) As per Note-15 to the accounts, the company has determined its business segment as non woven fabrics. Since 100% of the company business is from non woven fabrics there are no other primary reportable segments. (ii) However for the purpose of benchmarking International transactions the taxpayer has submitted following segmentals. **** The taxpayer was requested to submit basis of segmental account along with supporting documentary evidence vide order sheet entry dated 21.11.2014. The taxpayer merely submitted copy of segmentals verified by M/s Mukund and Rohit Chartered Accountants who incidentally did not prepare the audited accounts of the taxpayer. The audited accounts which were prepared by M/s. A. Aneja and Company. The taxpayer did not file any documentary evidence to corroborate the segmentals furnished by it. The segmental filed by the taxpayer are therefore rejected.” 10. He thereafter drew our attention to the reply of the assessee, pointing out that the segmental analysis was done based on actual/ allocation keys and was further reviewed by the independent auditors. The submission of the assessee to this are reproduced at para 4.2 of the order. He thereafter drew our attention to the finding of the TPO while rejecting the assessee’s contentions contained in para 8, wherein he pointed out that TPO had reiterated the basis mentioned in his show cause notice for rejecting the segmental accounts, as audited accounts mentioning no segment and segmental data having been audited by CAs who had not audited the final accounts. The ld.counsel for the assessee pointed out that without going into the basis of preparation of the segmental accounts, which the assessee had reiterated had been prepared based on actual allocation keys, the TPO had summarily rejected the same merely on frivolous basis. He contended that for the purpose of reporting in the audited annual accounts the segments identified are totally different; that Accounting standard prescribed by the Institute of Chartered accountants of India for reporting on segments,Accounting Standard -17(AS-17), requires reporting of financial information or result about different types of products and services that the concerned business segment produces which includes the different geographical areas of business operation. This being the criteria since the assessee produced only one product, there was no requirement of furnishing any segmental data as per the AS-17 in the audited accounts; but for the purpose of benchmarking of international transaction on sales, the assessee had got the segmental accounts prepared with the respect to the AE and non-AE segments of export sales undertaken by it, thus creating data relating to an internal comparable. He therefore stated that the mere fact that the segmental accounts

ITA No.437/Rjt/2018 A.Y. 2014-15 6 were not reported in its audited balance sheet and /or were audited by some other Cas who were not auditors of the assessee company, made no difference nor had any effect on the veracity of segmental accounts. He therefore stated that TPO had given no cogent reason for rejecting the assessee’s segmental accounts. 11. To this, the ld.DR countered by stating that segmental accounts prepared by the assessee were not reliable since they reflected huge difference between the profits of the AE export segments and the non-AE export segments which was as high as 19.21%; that segmental analysis by the assessee was cryptic and there was no notes or explanation to justify allocation of expenditure between two segments nor any material was produced before the TPO; that even prima facie, it was evident from a very simple test applied to these segmental analysis that it was not based on any logical reasoning. Submissionsin writing,dated 5.1.2023, to this effect were submitted by the ld.DR before us. In the written submission, the ld.DR had produced a chart to justify his contention that the allocation key adopted by the assessee for preparing segmental data was not uniform. 12. At this juncture, agreeing with the Ld.Counsel for the assessee that the basis of rejecting the segmental accounts by the TPO was totally frivolous and agreeing with him that what mattered for accepting these accounts was whether they had been prepared on a just and reasonable basis and noting the fact that the assessee had not been given an opportunity to submit its justification for the basis of preparation of its segmental accounts, nor was it examined by the TPO on this basis, it was considered fit to restore the issue to the AO/TPO to examine the basis of preparing segmental accounts by the assessee. Both the parties fairly agreed with the same. 13. Since the entire basis of the TPO for rejecting benchmarking analysis done by the assessee and proposing the adjustment to the international transactions of sale by adopting TNMM method, began with the rejection of the segmental accounts of the assessee, we deem it fit to restore this issue to the file of the TPO. The entire issue relating to the determination of ALP of international transaction of the sale is restored back to the TPO, to be determined afresh after first dealing with the aspect of justifiability of segmental data submitted by the assessee along with the MAM adopted by it for determining the ALP of the transaction. Needless to add the assessee be provided due opportunity of hearing in this regard. 10.1 Before us, no material has been placed on record by the Revenue to demonstrate that the decision of the Tribunal in own case of the assessee discussed above has been set aside/stayed or overruled by the Higher Judicial Authorities. Before us, no material was placed on record pointing out any distinguishing feature in the facts of the case of earlier AY and the year under consideration. Thus, respectfully following the order of the Tribunal in the own case of the assessee as discussed above, we hereby set aside the issue to the file of TPO for fresh determination of ALP in accordance with the direction given in the above order. Hence, the ground of assessee’s appeal is hereby allowed for statistical purposes.

ITA No.437/Rjt/2018 A.Y. 2014-15 7 The next issue raised by the assessee is that the learned DRP erred in 11. confirming the disallowance of management fee and business area service fee aggregating to Rs. 5,32,59,975/- only.

ITA No.437/Rjt/2018 A.Y. 2014-15 8 17. We have heard the rival contentions of both the parties and perused the materials available before us. At the outset, we note that the identical disallowances were also made in earlier years being A.Y. 2011-12 to 2012-13. The coordinate bench of this tribunal in the assessee’s appeal for A.Y. 2011-12 in ITA No. 97/RJT/2016 vide order dated 03-08-2023 has deleted the addition made by the AO. The relevant observation/finding of the ITAT for A.Y. 2011-12 is extracted as under: 24. We have carefully heard contentions of both the parties and gone through orders of the AO and the DRP, and we find merit in the contention made by the ld.counsel for the assessee. Before us, the issue relates to disallowance of intra-group service expenses incurred by the assessee amounting in all to Rs.1.60 crores, the details of which find mention in the earlier part of our order. The fact that these expenses qualified as international transactions and were accepted to be at ALP by the TPO is not disputed. The said facts emanate from the order of the TPO who categorically states that no adverse inference can be drawn with respect to this transaction. The ld. Departmental Representative also does not contradict this fact. These expenses have been disallowed under section 37(1) of the Act and held not to have been incurred wholly and exclusively for the purpose of the business of the assessee. The reason being that the assessee was unable to establish the business necessity for incurring these expenses and also demonstrating benefit derived by the assessee from the same. The factum of incurrence of expenses by the assessee and the fact of service having rendered by the group concern i.e. Ahlstrom Corporation to the assessee have not been disputed. 25. In the light of the above facts, we are in agreement with the ld.counsel for the assessee that the said expenses could not be held as not having been incurred wholly and exclusively for the purpose of business of the assessee. As rightly pointed out by the ld.counsel for the assessee, there are several judgments including that of Apex Court laying down the principle to be applied for determining allowability of expenses under section 37(1) of the Act and this principle have emerged over years by virtue of judicial interpretation of expression “wholly and exclusively” for the purpose of business appearing in section 37(1) of the Act. Broadly, the principle laid down are – i. the term “wholly and exclusively” for the purpose of business is of a wider import, wider than the expression “for the purpose of earning profit”; ii. expenses are allowable under section 37(1)( of the Act if it is commercially expedient; and iii. the expenses should be commercially expedient from the perspective of a prudent businessman and not from the point of view of Revenue. It is enough to show that money is expended, not out of necessity and with a view to a direct and immediate benefit, but voluntarily on account of commercial expediency, and in order indirectly facilitate the carrying on of business. iv. Lastly, it is not necessary to show that the expenditure was profitable one and in fact it earned any profit. 26. On the touch-stone of jurisprudence regarding interpretation of the term “wholly and exclusively” for the purpose of business, we find that no case has been made out by the Revenue showing that the assessee does not fulfill the required parameter to qualify for deduction under section 37(1) of the Act. The only basis being that the assessee was unable to establish necessity of incurring the expenses and benefit accrued to it, which has been outrightly ruled out by Courts for establishing commercial expediency of incurrence of the expenditure, the basis with Revenue authorities therefore for disallowing the impugned expenditure of Rs.1.60 crores in the present case is found to be not in accordance with law.

ITA No.437/Rjt/2018 A.Y. 2014-15 9 27. Even otherwise, we have noted from the order of the DRP that it has heavily relied on OECD commentary and various case laws for emphasizing the establishment of necessity of incurring expenses for their allowability u/s 37(1) of the Act,which decisions/ commentary we find have been rendered in the context of the determination of ALP of transaction by the TPO, wherein on finding, the assessee failing to qualify the benefit test, it was held that the ALP in such circumstances of international transactions could be treated as NIL. All the case laws and even OECD commentary relied upon by the DRP while upholding the order of the AO on the issue are in the context of determination of ALP of international transaction entered into with the associated enterprise. In the present case, the TPO in his order clearly found the impugned transaction to be at ALP. The TPO being an officer specially designated for the purpose of determining ALP of international transactions officer and finding the transaction to be at ALP there is no question of the AO thereafter stepping into the shoes of the TPO, applying benefit test to the expenditure incurred, and disallow the expenses u/s 37(1) of the Act for failure to fulfil the said test. The scope of powers of the TPO and that of the AO are completely different. The TPO being a specialized officer for determining the ALP of international transactions, his finding on this aspect of the international transactions are to be treated as final. Once the TPO has given his finding on the issue of determination of ALP of international transactions entered into by the assessee, they are to be accepted by the AO and cannot be inquired into by the AO further. In the present case, the AO, by applying benefit test to the impugned international transaction has attempted to step into the shoes of TPO, since the benefit test could have been applied only for the purpose of determining ALP of the transaction as pointed out by the DRP also from the OECD commentary and from the various decision of the ITAT on this issue. Therefore also, disallowance made by the AO on the impugned expenses amounting to Rs.1.60 crores is held to be not sustainable in law, and directed to be deleted. 17.1 Before us, no material has been placed on record by the Revenue demonstrating that the decision of the Tribunal in own case of the assessee as discussed above has been set aside/stayed or overruled by the Higher Judicial Authorities. Before us, no material was placed on record pointing out any distinguishing feature in the facts of the case of earlier AY and the year under consideration. Thus, respectfully following the order of the tribunal in the own case of the assessee as discussed above, we hereby direct the AO to delete the addition made by him. Hence the ground of assessee’s appeal is hereby allowed.

ITA No.437/Rjt/2018 A.Y. 2014-15 10 AE without withholding tax deductible at source under the provision of section 195 of the Act. The AO found that same guarantee commission has been reimbursed by the Assessee in earlier year without deducting tax which has been disallowed under the provision of section 40(a)(ia) of the Act. Hence the AO, following the order of the predecessor AO disallowed the reimbursement of bank guarantee commission in the year under consideration also which was confirmed by the learned DRP.

ITA No.437/Rjt/2018 A.Y. 2014-15 11 bare perusal of the submissions made by the assessee before the DRP coupled with the evidence filed to the DRP which was also placed before us in PB, reveals the assessee had sufficiently demonstrated that the impugned expenses were not prior period expenses, but pertained to the impugned year itself. The assessee had filed copies of invoices raised by the Ahlstrom Corporation, Finland for the bank guarantee commission which described thealleged prior period commission expenses raised as pertaining to the impugned year. Even otherwise, we find that the invoices were raised by the Ahlstrom Corporation, Finland on the assessee during the impugned year itself. These facts are all evident from the copies of invoices which were placed before us also in the paper book at page no. There is no iota of doubt, therefore, that the expenses pertained to the impugned year alone and could not be categorized as prior period expenses. We have noted that basis for the AO for treating it as prior period expenses was that the loan agreement entered into by the assessee with the ICICI Bank, which was guaranteed by Pohjola Bank Plc.,and commission expenses reimbursed from the assessee to the Ahlstrom Corporation, Finland, was dated 8.5.2009. From the same, we deduced that the bank guarantee commission pertained to the financial year 2009-10 relating to the Asst.Year 2010-11, the preceding year. The assessee has sufficiently demonstrated before us that the invoices were raised during the year by Ahlstrom Corporation, Finland on the issue and related to the bank guarantee commission for the impugned year alone. In view of the same, we have no hesitation in holding that the bank guarantee expenses paid by the assessee pertained to the impugned year, and could not disallowed as prior period expenses under section 37(1) of the Act. The order of the DRP/ AO holding so, is accordingly set aside. 34. We take up now the alternate reason for disallowing bank guarantee expenses, as being disallowable in terms of section 40(a)(i) of the Act for non-deduction of tax at source. As is evident from the order of the DRP reproduced above, the assessee was held liable to withhold the tax on the impugned payment in terms of Article 21 of the DTAA entered into with Finland. The Article 21 is reproduced hereunder: “ARTICLE 21 OTHER INCOME 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 3. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Agreement and arising in the other Contracting State may be taxed in that other State.” 35. The contention of the Ld.Counsel for the assessee was that extensive arguments were made to the DRP against the applicability of Article 21 of the DTAA between India and Finland which were not even considered by the DRP.Ld.Counsel for the assessee drew our attention to the arguments made which were to the following effect and are reproduced in the submissions made to the DRP– (i) DRP has relied on the US Model Tax Convention 2006 (US-MTC) in order to conclude that to the transaction of bank guarantee commission Article 21applied,which is applicable only in cases where one of the contracting States to

ITA No.437/Rjt/2018 A.Y. 2014-15 12 the DTTA is USA, while in the present case the other contracting state is Finland and the India Finland DTAA applies. ITA (TP)No.97/RJT/2016 and 2 Others 30 (ii) that even otherwise as per the US-MTC applied by the DRP, it dealt with the situation where bank guarantee commission is paid within intra-company group. In the present case, the said transaction is between the Ahlstrom Corporation, Finland and Pohjola Bank Plc which are unrelated party, and therefore, even as per the US-MTC, Article 21 is not attracted to the bank guarantee commission paid, and (iii) assuming bank guarantee to be covered under Article 21 of the India Finland DTTA, the same be taxed in India as other income under section 56(1) of the Act and in terms of the same expenses incurred for earning income as per the section 57 of the Act are to be allowed, which in the present case would result in NIL income to Ahlstrom Corporation, Finland, since it is a case of pure reimbursement with no mark-up. (iv) Even otherwise, in terms of section 195 of the Act, since reimbursement of expenses is without any mark-up, the provisions of section 195 cannot be invoked in the absence of any amount chargeable to tax in terms of provision of the Act. (v) On account of non-discriminatory clause of IndiaFinland DTAA, in the context of the section 40(a)(ia) of the Act, no disallowance can be made of the impugned amount. Article 23(3) of the India-Finland DTAA was invoked by the ld.counsel for the assessee pointing out that as per the Article 23(3) of the said DTAA, interest, royalty and other disbursements paid by an enterprise of a Contracting State (India) to the resident of other Contracting State (Finland), shall for the purpose of determining the taxable profits of such enterprise, be deductible under the same condition, as if they had been paid to a resident of the first mentioned State and considered from this aspect, if the commission payment by the assessee to the Ahlstrom Corporation, Finland is to be treated as that paid to an Indian entity, then for non-deduction of TDS on the said payment, no disallowance under the applicable section 40(a)(ia) of the Act is attracted, since the term “commission” mentioned in section 40(a)(ia) is to be read in only the context of commission paid on sales and does not include bank guarantee commission. For this purpose, reliance was placed on the decision of Mumbai Tribunal in the case of Kotak Securities Vs. DCIT, ITA No.6657/Mum/2011. In view of the same, since if the impugned payment of bank guarantee were to be treated as having paid to resident, no disallowance under the provision of the Act were attracted. Applying non-discriminatory clause of the India-Finland DTAA no disallowance could be made for non-deduction of tax at source to the resident-recipient. 36. Ld.Counsel for the assessee pointed out that despite exhaustive contentions raised by the assessee against the applicability of Article 21 of the DTAA between India and Finland to the transaction of reimbursement of Bank guarantee commission, the DRP held Article 21 applicable without dealing with the contentions of the assessee. 37. Ld.DR fairly agreed with the same. He agreed that the issue needed reconsideration by the AO. In view of the same, the issue of disallowance of bank guarantee commission is restored back to the AO to be dealt with after considering the arguments raised by the assessee. The AO is directed to pass a speaking order after granting due opportunity of hearing to the assessee 23.1 Before us, no material has been placed on record by the Revenue demonstrating that the decision of the Tribunal in the own case of the assessee discussed above has been set aside/stayed or overruled by the Higher Judicial Authorities. Before us, no material was placed on record pointing out any

ITA No.437/Rjt/2018 A.Y. 2014-15 13 distinguishing feature in the facts of the case of earlier AY and the year under consideration. Thus, respectfully following the order of the Tribunal in the own case of the assessee as discussed above, we hereby set aside the issue of disallowance of bank guarantee commission to the file of the AO for fresh adjudication in accordance with the direction given in the above order. Hence the ground of assessee’s appeal is hereby allowed for statistical purposes.

Sd/- Sd/- (SUCHITRA KAMBLE) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 20/12/2023 Manish, Sr. PS TRUE COPY