NLC NALCO INDIA LTD.,KOLKATA vs. ACIT, CIRCLE - 11, KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH: KOLKATA [Before Shri Mahavir Singh, JM& Shri Waseem Ahmed, AM]

I.T.A No.529/Kol/2008 Assessment Year: 2003-04

N L C Nalco India Ltd. Vs. Deputy Commissioner of Income-tax, (PAN: AAACO4994N) Circle-10, Kolkata. (Appellant) (Respondent) I.T.A No.1256/Kol/2009 Assessment Year: 2004-05

N L C Nalco India Ltd. Vs. Assistant Commissioner of Income-tax, (PAN: AAACO4994N) Circle-11, Kolkata. (Appellant) (Respondent)

Date of hearing: 05.11.2015 Date of pronouncement: 03.02.2016

For the Appellant: Shri Soumitra Chowdhury, Advocate For the Respondent: Shri D. Mallikarjuna & Shri Rashmi Ranjan Das, CIT, DRs

ORDER Per Shri Mahavir Singh, JM:

Both these appeals by assessee are arising out of separate orders of CIT(A)-XI, Kolkata in Appeal Nos.63 & 214/CIT(A)-XI/Cir-11/06-07/Kol/dated 21.02.2008 and 31.03.2009. Assessments were framed by ACIT, Circle-11, Kolkata u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Years 2003- 04and 2004-05vide his separate orders dated 31.03.2006 and 29.12.2006. 2. The first common issue in both these appeals of assessee is against the order of CIT(A) in confirming the disallowance of bad debts by the AO. For this, assessee in ITA No. 529/Kol/2008 has raised following ground nos. 2 and 3: “1. For that the CIT(A) erred in confirming the disallowance of bad debts amounting to Rs.2,81,54,266 and Rs.64,04,000/- totaling to Rs.3,45,58,266/-. The CIT(A) erred in relying on various documents and evidences in this regard which was not disclosed to the appellant and with which the appellant was not confronted. 2. For that the CIT(A) failed to appreciate the facts of the case and did not consider the various details filed in this regard and erred in holding that the appellant should have obtained confirmation from the buyers regarding the bad debts and that the debts written off pertained to the same financial year.” For AY 2004-05 in ITA No. 1256/K/2009, the assessee has raised following ground no.1:

2 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 “1. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the AO in disallowing the appellant’s claim for deduction of bad debts written off in the books of account for the financial year ended 31st March, 2004 amounting to Rs.5,05,24,710/- and further erred in confirming the action of the AO in disallowing the appellant’s claim of advances written off in the books of account during the financial year relevant to the assessment year 2004-05 amounting to Rs.68,703/-.” The facts and circumstances are exactly identical in both the years and the assessment order as well as order of CIT(A) in both the years are identically worded, hence we will take the issue in ITA No. 1256/Kol/2009 for AY 2004-05 and will decide the issue in both the years on these facts. 3. Briefly stated facts are that the assessee company was engaged in manufacturing and dealing with water treatment chemicals, industrial additives and oilfield chemicals etc. The AO during the course of assessment proceedings required the assessee to file the details in respect to claim of bad debts. The assessee has claimed bad debts of Rs.4,68,90,427/- out of provisions and also written off a sum of Rs.37,02,986/- directly to the P&L Account. The AO asked the assessee whether the conditions for allowability of bad debts have been satisfied in term of the provisions of section 36(1)(vii) of the Act or not. The assessee filed details of bad debts in respect to the claim of provisions and write off made directly to P&L Account. The AO observed from the details filed by the assessee that most of the bills were raised during the financial year itself and few bill relates to earlier periods like one party Southern Petro Chemicals & Industries. According to AO, the balance of invoices are relating to January, February and March, 2004 for the year ending 31.03.2004. According to AO, these are very reputed parties like SAIL, National Fertilizers Ltd. Southern Petro Chemicals Ltd., Chambal Fertilizers & Chemicals Ltd. etc. and bad debt could have been with these parties. According to AO, the assessee is unable to fulfill the conditions prescribed and hence, he disallowed the claim of bad debt of Rs.4,68,90,427/- on account of claim of bad debt of provisions and a sum of Rs.37,02,986/- being written off directly to the P&L Account. Thereby the total disallowance on this account was made at Rs.5,05,24,710/-. Aggrieved assessee preferred appeal before CIT(A), who also confirmed the action of the AO. Aggrieved assessee preferred second appeal before Tribunal. 4. We have heard rival submissions and gone through facts and circumstances of the case. We have gone through the case records and arguments of both sides and noticed that

3 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 the assessee had inter alia written off during the relevant previous year, a sum of Rs. 5,05,24,710/- being bad debts as irrecoverable in the books of accounts. Out of the said sum an amount of RS.4,68,90,427/- was written off through provision account and an amount of Rs.36,34,283/- was directly written off in the Profit and Loss Account for the relevant previous year relevant to this assessment year. It is a fact that assessee is engaged in the manufacture of various types of chemicals which are used inter alia in steel, paper, water treatment and other industries. The facts explained by assessee for the above bad debts are that due to peculiar nature of the business carried on by assessee and the system of computation of sale price by assessee. As and when the supply is made to a customer a bill is raised on the customer depending upon the quantity of material supplied by the assessee. However, the customers pay the amount on the basis of the production achieved by them out of the material supplied by the assessee on the basis of the pre-approved formula and if the consumption of the material supplied by the assessee for production by the customer is more than in that event proportionate reduction is made by the customer from the sale price and the reduced amount is paid to the assessee. Thus, the bad debt happen with any customer due to peculiar nature of the business carried on by assessee. The said sums have been accounted for as income in the profit and loss account of the previous year in which invoices were raised. Since the assessee could not recover the said sums from the customer concerned, it actually written off the said sums as irrecoverable in the books of accounts prepared for the relevant previous year and claimed deduction with respect to the same u/s 36(1 )(vii) of the Act, while computing business profits for the relevant AY. The assessee has also filed copy of relevant portion of books of accounts i.e. ledger account and details of bad debts written off amounting to Rs.5,05,24,710/- have been enclosed at pages 1-13 of the assessee’s paper book. The CIT (A) held that all the details relevant to allow the bad debt were produced by the assessee before the AO and further held that since the assessee fulfilled all the conditions required to be fulfilled, hence normally the deduction claimed by the assessee on account of bad debt should be allowed. However, being satisfied that the assessee had fulfilled all conditions required to get the bad debt allowed, he confirmed the disallowance on the ground that no internal documents were produced to prove that the debt has become bad during the year. 5. In view of the facts of the case we are of the view that while computing business profits, an assessee is inter alia entitled to avail the deduction with respect to any bad

4 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 debts written off in accounts in accordance with the provisions of section 36(1 )(vii) of the Act, which provides that the subject to the provisions of section 36(2) of the Act, amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year, will be allowed unless inter alia such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. On a conjoint reading of provisions of section 36(1)(vii) and 36(2) of the Act, it appears that in order to be allowed deduction with respect to bad debts, following conditions must inter alia be satisfied by the assessee: The debt in question must be written off as irrecoverable in the accounts of the assessee for the relevant previous year and The amount of the debt must have been taken into account in computing the income of the assessee at any time prior to being written off in the books of accounts. In our view, there is no dispute to the fact that the assessee had satisfied both the conditions with respect to its claim for being allowed deduction with respect to bad debts written off. The same has been accepted by CIT(A) also. The pivotal question, which falls to be adjudicated, is whether under the present position of law, the assessee is required to prove before the AO that the debt in question had actually become bad, in order to be entitled to the deduction envisaged in section 36(1) (vii) of the Act with respect to the same. Reference made by Ld. Counsel for the assessee to the judgment of Hon'ble Supreme Court in the case of TRF Ltd v CIT 323 ITR 397 (SC) wherein Hon'ble Supreme Court has held that post 1st April, 1989 it is not necessary for any assessee to establish that the debt in fact has become bad. It is further held that if the debt has been written off in the books of accounts then it would be enough to allow the deduction. Further, Hon'ble Supreme Court in the case of Vijaya Bank v CIT 323 ITR 166 (SC) wherein Hon'ble Court has held that in order to allow the bad debt which is written off through the provision account, the only conditions that are required to be fulfilled may be stated as under: That the bad debt has to be actually written off through the provision account created earlier and That the sundry debtors balance at the year-end should be disclosed in the balance sheet as net of provision balance.

5 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 6. In the present case before us, the assessee had written off actual bad debt in the profit and loss account through the provision for bad debt created earlier, the details of which are filed by assessee at page 4 of assessee’s paper book and further at the year end the balance sheet of assessee has disclosed the sundry debtors at net of provision figure. Ld. Counsel for the assessee also explained that the AO, after accepting the submissions of assessee, allowed the bad debt claimed for the later assessment years viz., 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10. We have reproduced herein below the relevant information as under: Assessment Year Bad Debt Allowed (INR'OOO) 2005-06 42992 2006-07 77593 2007-08 30355 2008-09 38915 The assessee also filed copy of Assessment Order passed by the AO for the Assessment Year2005-06 , which is enclosed at pages 22- 24 of assessee’s paper book. Further, in the AY 2002-03, the AO disallowed the bad debt on the reasons that party wise break up was not furnished before him and further it was also alleged by the AO in that year that the assessee had made an ad hoc adjustment in the provision for bad debt account and further the value of the sundry debtors had not been reduced at the year end. The allegation of the AO in relation to disallowance in regard to bad debt for the assessment years 2002-03 was totally different than the allegation raised by the AO in the instant years. However, Tribunal vide order dated 19.08.2011 in ITA No 213/Kol/2011 has to set aside the said issue to the file of the AO with a direction to verify as to whether the provision made for bad debts had been ever claimed by assessee. The AO has also allowed the bad debt after verification as directed by Tribunal in AY 2002-03. We find from the facts in entirety that the assessee had written off actual bad debt in the profit and loss account through the provision for bad debt created earlier, the details of which are filed by assessee at page 4 of assessee’s paper book and further at the year end the balance sheet of assessee has disclosed the sundry debtors at net of provision figure. In view of the facts and circumstances of the case and precedent cited above, we are of the view that bad debts claimed by the assessee are allowable and we allow accordingly. This issue of assessee’s appeal is allowed.

6 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 7. The next issue in ITA No. 529/K/2008 for AY 2003-04 is against the order of CIT(A) in confirming the disallowance of write off on account of reduction in the value of stock. For this, assessee has raised following ground no.4: “4. For that the CIT(A) erred in confirming the disallowance of Rs.60,00,622/- written off by the appellant on account of reduction in the value of the stock of goods. The CIT(A) failed to appreciate the fact that the write off was made in accordance with the established and accepted practice followed by the appellant were in accordance with the Accounting Standard and the claim made by the appellant was fully allowable and has been accepted in earlier years by the department.” 8. Briefly stated facts are that the assessee has claimed write off of stock in valuation of finished goods amounting to Rs.60,00,622/-. The AO during the course of assessment proceedings required the assessee to explain the write off. The assessee informed that goods more than one year old are reduced from the value of stock. According to AO, the assessee could not file details of provision for goods in bond, godown and factory. As the assessee could not file details of sales of the same goods next year at a reduced price as included in closing stock, the AO made addition of this provision. Aggrieved assessee preferred appeal before CIT(A), who also confirmed the action of AO by holding that the assessee has not been able to prove that such stock has zero value or reduced value. Aggrieved, assessee came in second appeal before Tribunal. 9. We have heard rival submissions and gone through facts and circumstances of the case. We find that the AO has added back this provision on the following three grounds: “a) No details of provisions of obsolete stock of raw materials were filed before him. b) No certificate from Director or President of the appellant company was filed to substantiate that the materials had become obsolete and needs to be reduced from closing stock shown in the books of accounts. c) No details were filed before the AO to substantiate that in the next year the obsolete materials were sold at reduced prices as included in the closing stock for the relevant assessment year.” Now before us, the assessee’s main contention was that complete details in respect to provisions for writing off of the obsolete stock of raw material, the value of which has become nil, was filed before the AO as well as before CIT(A). Ld. Counsel for the assessee referred to page 35 and 36 of the assessee’s paper book wherein certificate issued by Works Manager of the assessee company to create a provision for writing off of the stock is enclosed. The assessee has claimed that the complete details of raw material which has become obsolete and has no value were filed before the AO and CIT(A) during the course of assessment proceedings and appellate proceedings. The assessee has now

7 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 filed complete details before us, the value of the closing stock after reduction of provision for obsolete stock disclosed as opening stock for the immediate next year i.e. AY 2004- 05. The value of closing stock of raw material for the year ending 31.03.2003 and the value of opening stock of raw material as on 01.04.2004 are given hereunder. Particulars Amount as per audited accounts (INR) Closing stock of raw materials as on 31.03.2003 Rs.7,11,12,000/- Opening stock of raw material as on 01.04.2004 Rs.7,11,12,000/- We find that the allegation of the lower authorities that the assessee company has not filed the details to substantiate that in the next year the obsolete stock of raw material were sold at reduced price as included in the closing stock in the AY 2003-04 has no basis as the assessee had not included the value of obsolete stock in the valuation of closing stock for the year ended 31.03.2003. This was done for the reason that such stock has become of nil value and question of selling the same in the next year does not arise. In view of these facts and circumstances, we are of the view that the action of the lower authorities in making addition and confirming the same in regard to provision for obsolete stock with the value of closing stock correspondingly increasing the value of opening stock in the immediate next year would lead to double taxation as the assessee company has to pay tax on the additional amount without getting the benefit of increased value of stock in the immediate next year. Accordingly, we delete this addition and allow this issue of assessee’s appeal. 10. The next issue in assessee’s appeal in ITA No.529/K/2008 for the AY 2003-04 is as regards to disallowance of annual contribution of gratuity to Group Gratuity Scheme of LICI. For this, assessee has raised following ground no.7: “7. For that the appellant paid a sum of Rs.33,00,000/- and claimed a sum of Rs.10,57,680/- only on account of annual contribution of gratuity to Group Gratuity Scheme of LIC of India and the Assessing Officer erred in disallowing an ad hoc sum on estimate amounting to Rs. 10 lacs without any basis and/or material and should have allowed the amount as claimed.” 11. Briefly stated facts are that the AO during the course of assessment proceedings noted that the assessee has shown following payments to approved gratuity fund but according to him the provision does not tally with the provision shown by the assessee in its accounts. Payments made Payments shown in the Accounts

8 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05

Rs. 9,48,801/- Opening balance as on 01.04.2002 Rs.73,95,102/- Rs.10,00,000/- Add provision made during the year Rs.12,52,860/- Rs.86,47.962/- Rs.3,00,000/- Rs.22,48,801/- Less Payment during the year Rs.31,89,486/- Rs.12,52,861/- Closing Balance as on 31.03.03 Rs.54,58,476/- According to AO, the provisions for gratuity fund should not exceed 8.1/3% of the salary and assessee has not filed certificate qua that, hence, the AO disallowed on estimate basis Rs.10,00,000/- and added to the returned income of the assessee. Aggrieved, assessee preferred appeal before CIT(A), who confirmed the addition for want of reconciliation. 12. We have heard rival submissions and gone through facts and circumstances of the case. We find from the facts of the case that the assessee during the relevant previous year created a provision with respect to gratuity amounting to Rs.12,52,861/- and provision was debited to the P&L Account for the year ended 31.03.2003 and added back the same to the computation of total income. The assessee during the relevant assessment year made payment of gratuity amount of Rs.31,89,486/- to gratuity fund being maintained by LIC. This fact is very much available in the accounts and tax audit report. We find that the assessee during the course of assessment proceedings filed details in regard to gratuity payment and provision made in the books of account and difference was only to the extent of Rs.8116/- only. The reconciliation statement reads as under:

Particulars Amount in Rs. Enclosures Opening Balance Rs.73,95,102/- Annexure No. C Add Provision made in the books of Rs.12,52,861/- Added back in computation page accounts 49 of paper book tallying with the tax audit report and accounts. Less Closing Balance Rs.54,58,477/- Annexure No. C Payments made as per accounts Rs.31,89,486/- Accounts certified by the certified by the Auditors Auditors Payments made as per Tax Audit Rs.22,48,801/- Tax Audit Report Report Difference Rs.9,40,685/- Less Opening Balance of prepayments Rs.9,48,801/- Tax Audit Report as on 1.4.2002 Difference (rounded off) Rs.8,116/- In view of the above reconciliation statement, we are of the view that the disallowance should be restricted to the extent of Rs.8116/- only and that that extent the addition is confirmed and balance is deleted. This issue of assessee’s appeal is partly allowed.

9 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05

“11. For that the CIT(A) erred in confirming the addition of Rs. 1,25,59,000/- being the adjustment made by the Transfer Pricing Officer (TPO) vide order passed under section 92CA(3) of the act without appreciating the fact that the report of TPO was not a part of the Assessment Order and the appellant has been denied the opportunity of making its objection against the said report. 12. For that in view of the finding by the TPO that there was no benefit, service of facility provided by the Associated Enterprise (A.E.) to the appellant, the computation of arms length price and the order passed by the TPO is against the provisions of law and not covered by Chapter-X of the Act. 13. For that various findings and observations made by the TPO in his order have been arrived at without taking into consideration the relevant facts and materials filed by the appellant in this behalf and the said finding is erroneous, perverse and should be quashed. No proper, adequate and reasonable opportunity was granted by the TPO as well as by the Assessing Officer to the appellant and the order passed suffers from breach of natural justice and the C.I.T.(A) should have cancelled the said order. 14. For that the CIT(A) erred in confirming the action of the TPO in computing the arms length price without considering that the Transactional Net Margin Method (TNMM) is the most appropriate method which should have been applied on the facts of the instant case. 15. For that the C.I.T (A) failed to appreciate that the Royalty to A.E. was paid in terms of an agreement which was duly approved by Govt. of India and the CIT(A) should have quashed the order passed by the TPO and should have directed the deletion of the said sum of Rs. 1,25,59,000/-. 16. For that the CIT(A) erred in confirming the disallowance of Rs.5,00,00,000/- on account of amalgamation of Aqua Chemicals and Systems (Mfg.) Ltd. (ACS). 17. For that no deduction of any amount was claimed by the appellant in the return of income file for the relevant assessment year in respect of the amalgamation of ACS with it and there was no question of making any disallowance of Rs.5,00,00,000/- and the CIT(A) without application of mind erred in confirming the said disallowance.” 14. Similarly, in ITA No. 1256/K/2009 for AY 2004-05, the assessee has raised following ground nos. 2(a) and 2(b):

“2(a) That on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in confirming the addition made by the Transfer Pricing Officer (TPO)/ AO amounting to Rs.1,51,74,980/- to the returned income of the appellant for the previous year relevant to the assessment year 2004-2005 in regard to the technical consultation fees paid by the appellant to its Associated Enterprise, namely, Nalco Pacific Pte Ltd, Singapore, during the period under consideration. 2(b) That on the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in confirming the aforementioned addition of INR 1,51,74,980/- without appreciating the fact the TPO/ AO cannot hold that the transaction of payment of technical fees of Rs 1,51,74,980/- by the appellant to its Associated Enterprise is not at arm's length and determining the arm's length price in this regard as nil without applying any of the methods for determining arm's length price as prescribed under Section 92C(1) of the Income-Tax Act, 1961 (ITA), being the most appropriate method as prescribed under

10 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05

Section 92C(2) of the ITA read with rule 10C of the Income-tax Rules, 1962 (ITR) as well as erred in rejecting the method and approach adopted by the appellant for justifying the arm's length nature of the transaction referred to hereinabove without assigning any valid reasons and without due consideration to the relevant factual and commercial aspects underlying the impugned transaction.” 15. The facts and circumstances and issues are exactly identical, hence we will decide the issue by taking the facts from ITA No. 1256/K/2009 for AY 2004-05. Brief facts relating to this issue are that this issue is directed against the disallowance made by AO and confirmed by CIT(A) in respect of the intra-group service charge at an amount of Rs.1,51,74,980/- paid by the assessee to its associated enterprise, namely, Nalco Pacific Pvt. Ltd., Singapore, under the ‘Technical and Management Assistance Agreement’. The assesse with annual turnover of RS.82.79 Crore for the FY ending 31st March, 2004, received technical and management assistance from its associated enterprise Nalco Pacific Pte Ltd, Singapore 1 formerly known as Ondeo Nalco Pacific Pte Ltd, Singapore (hereinafter referred to as 'Nalco Pacific') under the 'Technical and Management Assistance Agreement' (hereinafter referred to as the 'agreement') entered into between the assessee and Nalco Pacific. The relevant copy of the agreement enclosed at pages 88- 93 of the assessee’s paper book. As consideration for the intra-group services provided by Nalco Pacific under the agreement, the assesse agreed for net remittance to Nalco Pacific up to a maximum of 2% of net sales for each calendar year. The amount of intra-group service charge for the previous year relevant to the AY 2004-05 stood at Rs.1,51,74,980/-. The Transfer Pricing Officer (in short 'TPO') in his order had mentioned that the assesse had filed FormNo. 3CEB along with return of income for the assessment year 2004-05. The TPO's order contained a summary of the international transactions, which is as under:

Sl. No. Nature of Transactions Amount (INR) Method Used 1. Import of raw materials and intermediates 77,129,732.60 Transactional Net Margin Method (‘TNMM’) 2. Export of finished goods 4,610,830.00 TNMM 3. Import of tangible movable/immovable 2,635,016.00 TNMM property 4. Particulars in respect of providing services 15,174,980.00 TNMM 5. Interest on loan received 1,603,119.00 Comparable Uncontrolled price (‘CUP’) Method 6. Reimbursement of expenses 6,893,894.00 TNMM The TPO observed in his order that in response to the notice u/s 92CA (2) of the Act, the assessee attended his office and filed details which were placed on record. The TPO held in his order that the pricing of the aforesaid agreement in respect of technical consultation

11 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 fees amounting to Rs.15,174,980/- paid by assessee to Nalco Pacific for AY 2004-05 was justified on the basis of Transactional Net Margin Method. But the TPO had raised the following objections: a) First objection: The TPO noted that the services rendered by Nalco Pacific were more in the nature of directions/management decision/routine advice which were provided by Nalco Pacific to the assesse to take care of its own interests rather than to meet the identified needs of the assessee. b) Second objection: The TPO further noted that though some incidental benefits accrued to the assessee, yet such benefits would not be ones for which an independent enterprise would be willing to pay. c) Third objection: The TPO noted that the aforesaid international transaction was not at arm's length and the arm's length price in this regard would be taken at NIL value. 16. The AO made the disallowance of Rs.1,51,74,980/- in respect of the intra-group service charge paid by the assessee to Nalco Pacific as per the recommendations made by the TPO in his order. Aggrieved, assesse preferred appeal before CIT(A), who also confirmed the adjustment of Rs.1,51,74,980/- made by the AO based on the recommendation of the TPO on two following grounds: • First ground: No independent documentary evidence had been furnished by assessee to show that the fact of actual services having been rendered to assessee. He alsoheld that Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence. • Second ground: The remuneration was fixed not with reference to any particular service. It was at a fixed amount, calculated at a fixed percentage of sales of assessee, irrespective of which services were actually received by assessee or whether any services were received by it or not. Aggrieved, assesse preferred an appeal before Tribunal against the order of CIT (A) in confirming the disallowance of intra-group service fee amounting to Rs.1,51,74,980/- 17. We have hear rival submissions and gone through facts and circumstances of the case. We have also gone through the case records and factual details filed by the assessee

12 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 in its voluminous paper books and also written submissions by both the sides on this issue. Ld. Counsel for the assesse first of all argued that CIT(A)’s main reasoning for confirmation of addition is that no independent documentary evidence had been furnished by assesse to show that the fact of actual services having been rendered to assessee. He also held that Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence. For this he argued that the TPO proceeded to judge the reasonableness of the payment made by assesse to Nalco Pacific from his point of view and alleged that the services were more in the nature of directions/management decisions/routine advices which were provided by Nalco Pacific to the assesse to take care of its own interests in the assesse rather than to meet the identified needs of the assesse. The TPO further alleged that though some incidental benefits accrued to assessee, yet such benefits would not be ones for which an independent enterprise would be willing to pay. Based on the aforesaid allegations, he determined the value of the aforesaid international transaction at 'NIL' value. The CIT (A) confirmed the arm's length price computation done by the TPO in his order. Ld. Counsel at this juncture referred to section 92 of the Act provides that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price and any expense or outgoing in an international transaction is also to be computed having regard to the arm's length price. As per the provision of section 92C of the Act read with rule 10B and 10C of the Rules, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, such as(a) comparable uncontrolled price method; or (b) resale price method; or (c) cost plus method; or (d) profit split method; or (e) transactional net margin method; or (f) any other method which may be prescribed by the Board. 18. Ld. Counsel for the assesse explained that the assesse had discharged its onus by filing all the relevant data and the data used for determining the arm’s length price is reliable and correct, there can be no intervention by the AO without pointing out any defect in the same. This is made clear by sub-section (3) of section 92C which provides that the AO may intervene only if he is, on the basis of material or information or document in his possession, of the opinion that: (i) the price charged in the international transaction has not been determined in accordance with sub-sections (1) and (2), or

13 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 (ii) information and documents relating to the international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made thereunder; or (iii) the information or data used in computation of the arm's length price is not reliable or correct; or (iv) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D. According to assessee, If anyone of such circumstances exists, the AO may reject the price adopted by the assessee and determine the arm's length price in accordance with the same rules. However, an opportunity has to be given to the assessee before determining such price. Thereafter, as provided in sub-section (4) of section 92C, the AO may compute the total income on the basis of the arm's length price so determined by him. 19. We have gone through the data as well through the details filed by assessee in its paper book and the TPO himself mentioned in his order that the assessee performed arm's length analysis in respect of all the international transactions entered into by assesse with its associated enterprises under section 92C of the Act read with rule 10B and 10C of the Rules. And that nothing was found in the TPO's order which was indicative of the existence of any of the circumstances prescribed under (a) to (d) of section 92C (3) of the Act which necessitates intervention of the AO/TPO for determination of arm's length price. But TPO, determined the arm's length price of the international transactions under review at 'NIL' value, based on his main allegation that the benefits claimed to have been received by the assesse from Nalco Pacific under the agreement would not be ones for which an independent enterprise would be willing to pay. In this connection Ld. Counsel referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances [2012] 24 taxmann.com 199 (Delhi), wherein the Hon'ble High Court has examined the issue as to whether the TPO has power to restrict the value of an international transaction to nil when he was supposed to have determined the arm's length price of the international transaction. The Hon'ble High Court after examining the facts of the case held as under: "19…… In CIT v. Walchand& Co. etc. [1967] 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. . .

14 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 22. Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was un-remunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevantconsiderations for the purpose of Rule l0B. Whether or not to enter into the transaction is for the assessee to decide........ So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning ..." 20. Ld. Counsel also relied on the case of CIT v. Walchand& Co. etc. [1967] 65 ITR 381, the Hon'ble Apex Court has held that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. The essence is that a businessman himself is the best judge in determining the reasonableness / usefulness / benefit of an expenditure which is wholly and exclusively laid out for the purpose of business. The Revenue has no role to play in determining the reasonableness / usefulness / benefit of a business expenditure. However, in the instant case, the TPO had judged the reasonableness of the aforesaid intra-group service charge (regarding which there was no dispute that the same was incurred wholly and exclusively for the purpose of business) from his own point of view and computed the arm's length price of the international transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assessee from Nalco Pacific under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. Hence, the first ground for confirming the disallowace by CIT (A) will not stand. Ld. Counsel also referred to the case of CIT v. EKL Appliances (supra), the Hon'ble Delhi High Court has held that rule 10B of the Rules does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was un remunerative. The Hon'ble High Court has further held that the quantum of expenditure can be examined by the TPO as per law and so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. But in the present case before us, the TPO judged the reasonableness of the aforesaid intra-group service

15 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05

charge and computed the arm's length price of the international transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assessee from Nalco Pacific under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. The CIT (A) also confirmed his order. 21. Attention was further invited to the decision of Hon'ble Delhi Tribunal of McCann Erickson India (P.) Ltd vs. Addl. CIT [2012] 24 taxmann.com 21 (Delhi), wherein the Tribunal, following the aforesaid decision of the Hon'ble Delhi High Court, has interalia held that: "9. We have heard both sides and have also gone through the orders of the AO, TPO and DRP…. The evidences have been submitted before the authorities below showing rendering of the certain services against the payments made to the associated enterprises. In the arena in which the assessee company is functioning, it will be difficult to imagine a successful business entity in the global environment without receipt of the services which carries huge intrinsic and creative value. In our considered view, it is only a particular business expert who can evaluate the true intrinsic and creative value of such services. In view of these facts, it shall be just to avoid any guesswork to evaluate or judge value of these services in isolation or individually. In any case, the value of these services cannot be taken at nil which the AO as well as TPO originally sought to do......... The term "benefit" to a company in relation to its business has a very wide connotation. It is difficult to accurately measure these benefits in terms of money value separately. Therefore, we find no justification to sustain any addition in this regard on this issue. We direct to delete the addition and this ground is allowed. 22. We have gone through the case of McCann Erickson India (P.) Ltd (supra), the Delhi Tribunal has held that it is only a particular business expert who can evaluate the true intrinsic and creative value of intra-group services and in any case, the value of these services cannot be taken at nil. However, in the instant case, the TPO judged the reasonableness of the aforesaid intra-group service charge and computed the arm's length price of the international transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assesse from Nalco Pacific under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. The CIT (A) accepted the valuation of the intra-group services made by the TPO at 'NIL' value. We have observed from the facts of the case that in the instant case, the TPO determined the arm's length prices of the intra-group services claimed to have been received by assessee from Nalco Pacific at 'NIL' value without applying any of the transfer pricing methods prescribed under section 92C of the Act read with rule 10B and 10C of the Rules. In this connection, Co-ordinate bench decision of Mumbai Tribunal in the matter of DCIT vs. Diebold Software Services (P.)

16 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05

Ltd. [2014] 48 taxmann.com 26 (Mumbai - Trib) was referred, wherein the principle laid down by Tribunal along with brief facts are as under: • The assessee received information technology (in short, 'I.T.')services from its associated enterprise and paid service charge to the latter. The assessee clubbed the aforesaid international transaction together with other international transactions, applied the TNMM as the most appropriate method and selected a set of external comparables. As per this analysis, the international transactions covered under the TNMM, were at arm's length. The aforesaid analysis by assessee was not disputed by the TPO. • The assessee was called upon by TPO to provide the basis of pricing of these transactions. The assessee was also required by the TPO to provide necessary details along with allocation keys and basis of calculation of payment made for I.T. support services. According toTPO, the assessee, however, failed to comply with these requirements and the ALP of the relevant transactions therefore wasdetermined by TPO at 'nil' value. • The CIT(A) held that the action of TPO in arriving at the ALP of the relevant international transactions at "nil" was without any basis and accordingly he deleted the addition made on account of the transfer pricing adjustments made by A.O./TPO holding the same to be unsustainable. • The Tribunal observed that the exercise of benchmarking made by the assessee to show that the price charged by its associated enterprise for providing IT support services was at arm's length had not been disputed by TPO. It was also observed by the Tribunal that the arm's length price of the internationaltransaction under review was determined by the TPO at "nil" without applying any of the prescribed methods and the entire payment made by the assessee for availing the IT support services from its associated enterprise was added as TP adjustment. • In view this, the Tribunal had given the decision that the addition made by A.O./TPO on account of TP adjustments in respect of the international transactions of the assessee company with its AE involving availing of IT support services was not sustainable either in law or on the facts of the case. The Tribunal upheld the order of CIT (A). 23. According to assessee the aforesaid decision is squarely applicable to the case of assessee. In the instant case, TPO computed the arm's length price of intra-group services received by assessee from Nalco Pacific under the aforesaid agreements at 'nil' value without applying any of the transfer pricing methodologies prescribed under section 92C of the Act read with rule 10B and 10C of the Rules. Accordingly, the action of the TPO in arriving at the arm's length price of the relevant international transactions at 'nil' value without application of any transfer pricing methodology, was without any basis and hence, was not sustainable. In the instant case, TPO was authorised to determine, by order in writing, the arm's length price of an international transaction in accordance with section 92C (3) of the Act. The TPO mentioned in his order that during the course of hearing in response to notice issued under section 92CA (2) of the Act, assessee had attended the office of the TPO from time to time and filed details as requisitioned by the TPO which were placed on records. The TPO had examined the details filed by assessee and based on such examination, he held in his order that the pricing of the aforesaid agreements was

17 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 justified by assessee on the basis of the TNMM. We find that the TPO did not make any adverse comments in his order upon the arm's length analysis carried out by assesse under the TNMM as per section 92C of the Act read with rule 10B of the Rules. Accordingly, we feel that TPO made proper enquiry and applied his mind to the details brought on record by assessee. He had agreed with the assessee that the international transactions covered by the TNMM analysis (including the intra-group service charge paid /payable to Nalco Pacific) adhered to the arm’s length principle Transfer Pricing Regulation. 24. Further, it is also a fact that the aforesaid intra-group service charge was allowed as deduction by TPO for the assessment years 2005-06, 2006-07, 2007-08 and 2008-09. In this connection, Ld. Counsel referred to the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Britannia Industries Ltd 257 ITR 225, wherein Hon'ble Calcutta High Court has held that the Department cannot take a contrary view in respect of any issue which has been accepted by the Department for succeeding assessment year based upon the similar set of facts. Thus, by following the above principle laid down by the Hon'ble Calcutta High Court, we feel that the action of TPO in making disallowance of the intra-group service charge paid/payable by assesse to Nalco Pacific for the assessment year 2004-05, after allowing the same for the assessment years 2005-06,2006-07,2007-08 and 2008-09 based on the same facts, has no leg to stand. Ld. Counsel referred to the relevant information in the tabular format: Intra-group Service Charges Assessment Year Associated Enterprise Intra-group Service Charge allowed as deduction (Rs. '000) 2005-06 Nalco Pacific Pte Ltd 19,543 2006-07 Nalco Pacific Pte Ltd 31,128 2007-08 Nalco Pacific Pte Ltd 27,157 2008-09 Nalco Pacific Pte Ltd 28,120 We also find from the records that assesse submitted various evidences of receipt of intra- group services to the TPO which are enclosed in page no. 71-79, 103-124, 129-132, 133- 138, 139-140, 143-144 and 157-162 of the assessee’spaper book. The assesse also furnished explanation in regard to the nature of the aforesaid services in page no. 9, 11and 12 of its first submissions. Further, in appeal before CIT(A)also assesse submitted a certificate of services dated 01.09.2008, issued by LiawHinHao, Finance Director, Nalco

18 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 Pacific. Copy of the certificate was also submitted before us and marked the same as Annexure No. 1. The certificate contains the nature of services rendered by Nalco Pacific to Nalco Asia Pacific group of companies including, the personnel/department engaged in rendering service, expenses incurred by various personnel/departments in rendering services from the year 2002 to 2004 (separately for each year) and the intra-group service fees charged (billing) by Nalco Pacific to various group companies including the assesse company from the year 2002 to 2004 (separately for each year). The assesse also submitted various evidences of receipt of intra-group services to CIT (A) which are enclosed in page no.195-216, 243, 249-252 of the assessee’s paper book. The assesse also filed explanations in regard to the nature of the aforesaid services in page no. 10 of its first submissions. 25. In the instant case, Nalco Pacific operated as the regional headquarters company in relation to Nalco Asia Pacific group of companies including assessee. It functioned as a group service centre and recruited regional employees, though located in Singapore, exclusively for the purpose of rendering services to Nalco Asia Pacific group of companies including assessee. Nalco Pacific incurred expenses for the payment of salaries & other benefits to the regional employees. We find that the services rendered by Nalco Pacific to assessee under the agreement were similar to the services mentioned in paragraph no. 7.14 of the DECD Guidelines. In view of this, we appreciate that the services rendered by Nalco Pacific to assessee were intra-group services for which independent enterprises would have been willing to pay for or to perform in-house for themselves and hence, the value of the aforesaid services in comparable uncontrolled transactions could not be 'nil'. The paragraph no. 7.12 of the OECD Guidelines provides that there are some cases where an intra-group service performed by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members. Examples could be analysing the question whether to recognise the group, to acquire new members, or to terminate a division. These activities may constitute intra-group services to the particular group members involved, for example those members who will make the acquisition or terminate one of their divisions, but they may also produce economic benefits for other group members not involved in the object of the decision by increasing efficiencies, economies of scale, or other synergies. The incidental benefits ordinarily would not cause

19 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 these othergroup members to be treated as receiving intra-group services because the activities producing the benefits would not be ones for which an independent enterprise ordinarily would be willing to pay. But in the instant case no such benefits such as those mentioned in paragraph no. 7.12 of the OECD Guidelines accrued to assessee under the agreement and hence, no incidental benefits accrued under the agreement. 26. Accordingly, We are of the view that the first ground for confirming disallowance by CIT (A) that no independent documentary evidence had been furnished by assesse to show that the fact of actual services having been rendered to assessee and Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence, has no leg to stand. 27. The second ground for confirming disallowance by CIT (A)that the intra-group service charge under the agreement between assessee and Nalco Pacific was fixed not with reference to any particular service. The intra-group service charge was calculated at a fixed percentage of sales of assessee, irrespective of which services were actually received by assessee or whether any services were received by it or not. Ld. Counsel referred to paragraph no. B.2.2 in page no. 211 of the OECD Guidelines and explained that so far as the pricing arrangement for intra-group service is concerned, the MNE group may use either direct-charge method or indirect-charge method. In case of direct-charge method, the associated enterprises are charged for specific services. As per the OECD Guidelines, the MNE group should often be able to adopt direct charging arrangements, particularly where services similar to those rendered to associated enterprises are also rendered to independent parties. If specific services are provided not only to associated enterprises but also to independent enterprises in a comparable manner and as a significant part of its business, it could be presumed that the MNE has the ability to demonstrate a separate basis for the charge (e.g. by recording the work done and costs expended in fulfilling its third party contracts). As a result, MNEs in such a case are encouraged to adopt the direct-charge method in relation to their transactions with associated enterprises. It is accepted, however, that this approach may not always be appropriate if, for example, the services to independent parties are merely occasional or marginal. Further it has been provided in paragraph no. 8.2.2 of the OECD Guidelines that a direct-charge method for charging for intra-group services is so difficult to apply in

20 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 practice in many cases for the MNE groups that such groups have developed other methods for charging for services provided by parent companies or group service centres. In such cases, the MNE groups may find that they have few alternatives but to use cost allocation and apportionment methods which often necessitate some degree of estimation or approximation, as a basis for calculating an arm's length charge. Such methods are generally referred to as indirect-charge methods. The allocation might be based on turnover, or staff employed, or some other basis. Whether the allocation method is appropriate may depend on the nature and usage of the service. 28. In the instant case, the main allegation of CIT (A) was that the intra-group service charge was calculated at a fixed percentage of sales of assessee, irrespective of which services were actually received by assesse or whether any services were received by it or not. He tried to relate the intra-group service charge paid by assesse to Nalco Pacific to the specific services rendered by Nalco Pacific to assessee, which constitute direct-charge method as provided by the OECD Guidelines. But, Nalco Pacific, having been a group service centre for Nalco Asia Pacific group companies including assessee, did not render same/similar services to third parties (i.e. independent customers) during the relevant financial year and hence, Nalco Pacific, did not have the ability to demonstrate a separate basis for the charge by recording the work done and costs expended in fulfilling its third party contracts. Hence, in view of this, we are of the view that the application of direct- charge method, as desired by CIT (A), was not feasible for Nalco Pacific that rendered services only to the group companies. The only alternative pricing arrangement available to Nalco Pacific was indirect-charge method. Ld. Counsel referred to page no. 190 and 191 of the assessee’s paper book, wherein 11 cost centre were engaged in rendering intra- group services to 14 group companies located in Australia, New Zealand, China, Malaysia, Taiwan, South Korea, Thailand, Japan, Philippines, Indonesia and India (i.e. the assessee) and the costs incurred by the respective cost centre were allocated to the group companies based on percentage of sales agreed between Nalco Pacific and the group companies. For instance, the assessee, under the agreement, agreed a net remittance to Nalco Pacific for the intra-group services up to a maximum of 2% of net sales for each calendar year. This method of allocation has been approved by the OECD Guidelines. Accordingly, the second ground of CIT (A) that the intra-group service charge under the agreement between the assessee and Nalco Pacific was fixed not with reference to any

21 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 particular service and the intra-group service charge was calculated at a fixed percentage of sales of assessee, irrespective of which services were actually received by assessee or whether any services were received by it or not, has no leg to stand. 29. Another fact relating to this issue is that the CIT(A) confirmed the addition of Rs. 1,51,74,980/- without considering that the aforesaid payments were approved by the Reserve Bank of India. Ld. Counsel referred to page no. 52 of the assessee’s paper book, wherein the Reserve Bank of India (Exchange Control Department) vide letter (Reference No. 1068/03.19.0007 (XI) / 2000-01 dated 3rd April, 2001 intimated their "in-principle" approval for remittance of consultancy charges to Nalco Pacific @ 2% of net sales for the calendar year 2001. It is a fact that the rate at which intra-group service charges was paid / payable to Nalco Pacific for the assessment year 2004-05 remained the same (i.e. 2% of net sales) as the rate mentioned in the aforesaid approval letters. Ld. Counsel also referred to decision of Mumbai Tribunal in the matter of Thyssenkrupp Industries India (P.) Ltd. vs ACIT [2013] 33 taxmann.com 107 (Mumbai - Trib.), wherein the assessee company entered into collaboration agreement with its associated enterprise for payment of 2% of contract value for manufacturing, drawing and engineering services and 5% of the selling price as royalty. The assessee company applied to the RBI seeking approval in respect of payment of royalty and technical fee through Central Bank of India. It was in pursuance to the deemed approval by RBI under the automatic approval scheme that the assessee made payment of royalty and technical fee to its associated enterprise. The Tribunal inter alia held that: "In our considered opinion, when the rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered atALP. We, therefore, direct to delete addition of Rs. 4.29 crore made by the A.O. in this regard." [Para 14.3] Further, he referred to the decision of Mumbai Tribunal in the matter of Cadbury India Ltd. vs. ACIT [2013] 40 taxmann.com 529 (Mumbai - Trib.), wherein Tribunal has inter alia held that: "Ongoing through the records and the orders of the revenue authorities, we find that in so far as the payment of royalty on technical knowhow concerned, the assessee has been paying to its parent AE right from 1993, as, other group companies are paying across the globe Besides this, the payment is made as perthe approval given by the RBI and SIA, Government of India. Hence there cannot be

22 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05

any scope of doubt that the royalty payment on technical knowhow is not at arm's length." In the aforesaid decisions, Mumbai Tribunal has held that in the event payment of royalty / technical know-how / fee for drawing etc. is approved by the RBI / Government of India, then such payment has to be considered at arm's length price (i.e. ALP). In the instant case also, we find in page no. 53 of the assessee’s paper book that assesse made application dated 14th March, 2001 to the General Manager, Exchange Control Department, Reserve Bank of India. In the aforesaid application, assesse explained the scope of services receivable from Nalco Pacific under the aforesaid agreement, the benefits to be received by it from entering into the aforesaid agreement with Nalco Pacific and the maximum amounts to be remitted as consultancy charge to Nalco Pacific under the aforesaid agreement. In reply, the RBI intimated their "in-principle" approval for remittance of consultancy charge to Nalco Pacific @ 2% of net sales for the calendar year 2001. In view of this, weare of the view that the aforesaid payment (Rs. 1,51,74,980/-) made to Nalco Pacific @ 2% of net sales, having been the rate of consultancy charge approved by the RBI, are at arm's length price. Accordingly, we delete the addition and allow this issue of assessee’s appeals. This common issue in both years is allowed. The appeals of the assessee are allowed. 30. The next issue in ITA No. 1256/K/2009 for AY 2004-05 is as regards to the order of CIT(A) confirming the adjustment made by TPO in respect to disallowance of export of chemicals to associated enterprises valued Rs.39,78,196/-. . For this, assessee has raised following ground nos. 3(a) and 3(b): “3(a) That on the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in confirming the addition made by the TPO/ AO amounting to Rs.39,78,196/- to the returned income of the appellant for the previous year relevant to the assessment year 2004-2005 in regard to export of chemicals by the appellant to its associated enterprises during the period under consideration. 3(b) That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the addition made by the TPO/ AO amounting to Rs.39,78,196 which was based on erroneous application of the Comparable Uncontrolled Price (CUP) method wherein appellant's prices of export transactions with Associated Enterprises were compared to prices of sales transactions with unrelated parties in India without due consideration and appreciation of the critical functional, risk and geographical differences in-between such transactions which would have otherwise rendered the application of CUP method to be inappropriate and unreliable under the provisions of section 92C(2) of the ITA read with rule 10C of the ITR and further, erred in rejecting the method and approach adopted by the appellant for justifying the arm's length nature of the transactions with Associated Enterprises referred to hereinabove, without assigning any valid reasons whatsoever.”

23 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 31. The assessee during the course of assessment proceedings submitted the following information to the TPO in regard to export of chemicals to its associated enterprises for the previous year relevant to the assessment year 2004-05: The assessee exported chemical named EC5300A/180 to Ondeo Nalco (Sanghai) Trading Co. Ltd. (associated enterprise) at the following prices: 14,040 units @ INR 104.56 per unit 14,400 units @ INR 106.08 per unit. The assessee exported 14,400 units of EC5300A/180 to Nalco Hong Kong Limited (associated enterprise) @ INR 105.96 per unit. The assessee sold 2880 units of EC5300A/180 to Bongaigaon Refinery Petrochemicals Ltd, which is an independent customer, @ INR 190 per unit. The assessee sold 990 units of chemical named EC3210A/198 to Ondeo Nalco Thailand (associated enterprise) @ INR 86.37 per unit. The assessee sold 792 units of chemical named EC3210A/198 to Haldia Petrochemicals Ltd, which is an independent customer, @ INR 450 per unit. The assessee applied the TNMM on aggregate basis in order to benchmark international transactions (1), (2), (3), (4) and (6) as mentioned 1 hereinabove. In item no. (2), we have disclosed the international transaction involving export of finished goods by assessee to its associated enterprises. The TPO had principally agreed with assessee that the international transactions covered by TNMM analysis adhered to the arm's length principle embodied in the Indian Transfer Pricing Regulation. The assessee offered justification for the aforementioned price differentials. But TPO applied the Comparable Uncontrolled Price ('CUP') Method to determine the arm's length prices to the aforesaid international transactions with reference to the uncontrolled transactions between assessee and the third party customers such as Bongaigaon Refinery Petrochemicals Ltd and Haldia Petrochemicals Ltd. Accordingly, an adjustment of Rs.39,78,196/- was recommended to the income of assessee. 32. Assessee before CIT(A), contended that the functions performed by the associated enterprises and unrelated parties were different and geographical difference also caused significant variation in international transactions. But he rejected the contentions of assessee. His main allegation was that there was no rationale for price differentials between controlled and uncontrolled transactions. The CIT (A) further held that the findings of the TPO were not to be interfered with. He confirmed the aforesaid addition /

24 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 adjustment to income made by the AO based on the recommendation of the TPO. Aggrieved, assessee preferred an appeal before Tribunal. 33. Before us, Ld. Counsel for the assessee argued that there was rationale for price differentials between controlled and uncontrolled transactions. He referred to page no. 56 of assessee’s paper book, the assessee vide letter dated 20.11.2006 stated that the product EC5300A/180 was manufactured to cater to the Indian customers but in course of time the demand for the aforesaid item declined in India and the same became part of obsolete stock. Hence, the assessee had to sell the chemical to its associated enterprises as obsolete stock. In this connection, Ld. Counsel refereed to a copy of the e-mail dated 16/05/2003 sent by Jayanta Guha (Material Management) to Swapan Paul (Production Manager) which is marked as Annexure No. 2. In the aforesaid e-mail, certain quantity of EC/5300A/180 had shelf life issues which were either needed to be re-worked or needed to be disposed of. The dictionary meaning of 'shelf life' is the period during which a good remains effective and free from deterioration, and thus saleable. Jayanta Guha sought for the advice of Swapan Paul in regard to re-work or disposal of the chemical. Swapan Paul forwarded the e-mail to Jaideep Gupta with a request to look into the matter as there was difficulty in disposal of the aforesaid chemical (written by hand on the copy of the e- mail). In reply, Jaideep Gupta wrote by hand on the copy of the e-mail that there was a requirement from Nalco (Sanghai) Trading Co. Ltd and the price offered by the aforesaid associated enterprise was the highest possible disposal rate. In this connection, a copy of the e-mail dated 16/08/2003 sent by Jayanta Guha (Material Management) to Swapan Paul (Production Manager) referred and marked the same as Annexure No. 3. In the aforesaid e-mail, certain quantity of EC3210A/198 was lying in store and the same had no local requirement at that point of time. It was further mentioned in the e-mail that the chemical was going to expire soon. Jayanta Guha was seeking for the advice of Swapan Paul as to whether the chemical could be used in some way or to dispose it off. Swapan Paul forwarded the e-mail to Jaideep Gupta with a request to consider whether the chemical could be sold at a low/discounted price or scrap value as it was not feasible to re-work the same or to re-blend the same in any other formulation (written by hand on the copy of the e-mail). In reply, Jaideep Gupta wrote by hand on the copy of the e-mail that there was a requirement from Ondeo Nalco Thailand and their offer could be accepted to avoid scrap sale.

25 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05

"Determination of arm's length price under section 92C 10B.(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; ... ” Further, attention was invited to paragraph no. D.1.2.1 of page 44of Chapter I of the OECD Guidelines, wherein clarification on the terms 'characteristics of property or services' which is briefly given as under: "D.1.2.1 Characteristics of property or services 1.39 Differences in the specific characteristics of property or services often account, at least in part, for differences in their value in the open market. Therefore, comparisons of these features may be useful in determining the comparability of controlled and uncontrolled transactions. Characteristics that may be important to consider include the following: in the case of transfers of tangible property, the physical features of the property, its quality and reliability, and the availability and volume of supply; in the case of the provision of services, the nature and extent of the services; ……. 1.40 Depending on the transfer pricing method, this factor must be given more or less weight. Among the methods described at Chapter 11 of these Guidelines, the requirement for comparability of property or services is the strictest for the comparable uncontrolled price method…… " Further, attention was invited to paragraph no. 2.15 of page no. 63 of Part 11 of Chapter 11, which inter alia reads as under: "2. 15 It may be difficult to find a transaction between independent enterprises that is similar enough to a controlled transaction such that no differences have a material effect on price. For example, a minor difference in the property transferred in the controlled and uncontrolled transactions could materially affect the price even though the nature of the business activities undertaken may be sufficiently similar to generate the same overall profit margin. When this is the case, some adjustments will be appropriate ……." 35. In view of the above, we find that 'characteristics of property' that may be important to be considered in the case of transfer of tangible property are the physical

26 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05

features of the property, its quality and reliability, and the availability and volume of supply. The OECD provides that the requirement for the aforesaid factor of comparability is the strictest under the CUP Method. The OECD also provides that it may be difficult to find a transaction between independent enterprises that is similar enough to a controlled transaction such that no differences have a material effect on price. Even a minor difference in the property transferred in the controlled and uncontrolled transactions could materially affect the price even though the nature of the business activities undertaken may be sufficiently similar to generate the same overall profit margin. In the instant case, the characteristics of EC5300A/180 sold to Bongaigaon Refinery Petrochemicals Ltd were significantly different from those of EC5300A/180 sold to Ondeo Nalco (Sanghai) Trading Co. Ltd and Nalco Hong Kong Ltd on the account of the following reasons: • Difference in Quality, Reliability and Availability: EC5300A/180 became part of obsolete stock, had shelf life issues and therefore was not in normal saleable condition in the market when the same was transferred to Ondeo Nalco (Sanghai) Trading Co. Ltd and Nalco Hong Kong Ltd. The personnel of the appellant company were planning to sell the obsolete chemical at a discounted rate. However, EC5300A/180 was of standard / good quality and in saleable condition in the local market when the same was transferred to Bongaigaon Refinery Petrochemicals Ltd. • Difference in Volume of Supply: The appellant company sold only 2,880 units of EC5300A/180 to Bongaigaon Refinery Petrochemicals Ltd @ INR 190 per unit, whereas it sold 14,040 units of EC5300A/180 @ INR 104.56 per unit and 14,400 units of EC5300A/180 @ INR 106.08 per unit to Ondeo Nalco (Sanghai) Trading Co. Ltd and also 14,400 units of EC5300Al180 @ INR 105.96 per unit to Nalco Hong Kong Ltd. This significant difference in quantity sold to independent customer (i.e. 2,880 units) from the quantity sold to associated enterprises (i. e. 42840 units) justified the action of the appellant company in granting quantity discount to the associated enterprises. 36. In view of the above differences, we can easily assume that the characteristics of EC5300A/180 transferred in the uncontrolled transaction between assessee and Bongaigaon Refinery Petrochemicals Ltd were not at all comparable to the characteristics of EC5300A/180 transferred in controlled transactions between (i) assessee and Ondeo Nalco (Sanghai) Trading Co. Ltd Nalco Hong Kong Ltd. and (ii) assessee and Nalco Hong Kong Ltd. The TPO did not adjust the price charged by assessee in the uncontrolled transaction in order to account for the aforesaid differences between the controlled transactions and the uncontrolled transaction. Hence, the application of the CUP Method made by the TPO in the above case was inappropriate. In the instant case, the characteristics of EC3210A/198 sold to Haldia Petrochemicals Ltd were significantly

27 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05

different from those of EC3210A/198 sold to Ondeo Nalco Thailand on the account of the following reasons: Difference in Quality, Reliability and Availability: EC3210A/198 had no requirement in the local market and it was on the verge of expiry when the same was transferred to Ondeo Nalco Thailand. Hence, the chemical was not in saleable condition in the market. Further, the appellant company could not re- work the chemical or re-blend the same in any other formulation. The appellant company was planning to sell EC3210A/198 at a low price / discounted price / scrap value. However, EC3210A/198 was of standard / good quality and in saleable condition in the local market when the same was transferred to Haldia Petrochemicals Ltd. In view of the above differences, we are of the view that characteristics of EC3210A/198 transferred in the uncontrolled transaction between assessee and Haldia Petrochemicals Ltd were not at all comparable to the characteristics of EC3210A/198 transferred in controlled transactions between assessee and Ondeo Nalco Thailand. The TPO did not adjust the price charged by assessee in the uncontrolled transaction in order to account for the aforesaid differences between controlled transaction and uncontrolled transaction. Hence, the application of the CUP Method made by the TPO in the above case was inappropriate.

28 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 view that the chemical EC5300A/180 was sold to associated enterprises at low/discounted price when the same had shelf life issues and the chemical EC3210A/198 was sold to associated enterprise at low/discounted price when the same had no local demand and was on the verge of expiry. In both cases, the chemicals were not in normal saleable condition. The assessee could not find any local customer for the chemicals. The chemicals could not be re-worked or re-blended with any other formulation. Hence, the assessee was bound to sell the chemicals at low prices to its associated enterprises to recover a part of the costs incurred in manufacturing the chemicals. Thus there was no room for the prices of the aforesaid chemicals to be determined by the free interplay of demand and supply forces in the open market. On the other hand, EC5300A/180 was sold to Bongaigaon Refinery Petrochemicals Ltd and EC3210A/198 was sold to Haldia Petrochemicals Ltd when the chemicals were in good physical condition and had demand from various customers. The prices at which the chemicals were sold to the aforesaid independent parties were determined by the free interplay of demand and supply forces in the open market. We further find that the TPO did not adjust the prices charged by assessee in uncontrolled transactions with Bongaigaon Refinery Petrochemicals Ltd and Haldia Petrochemicals Ltd on account of the differences in quality, reliability and availability of chemicals, volume of supply, geographical location, availability of raw material, demand and supply equation between the respective controlled transactions and the uncontrolled transactions in chemicals EC5300A/180 and EC3210A/198.Hence, we delete the addition/adjustment of Rs.39,78,196/- made by the AO and confirmed by CIT (A). 39. The next issue in the appeal of assessee in ITA No.529/kol/2008 for the assessment year 2003-04 is as regards to the order of ld. CIT(A) confirming the disallowance of ad hoc on the basis of amalgamation of Acqa Chemicals & Systems (Mfg.) Ltd. amounting to Rs.5 Cr. 40. Briefly stated facts are that by virtue of scheme of amalgamation, the subsidiary of the assessee Acqa Chemicals & Systems (Mfg.) Ltd. merged with the assessee-Company as approved by the Hon’ble Calcutta High Court vide its order dated 24.02.2003 effective from 1.4.2000 and also Hon’ble Madras High Court vide its order dated 2.9.2002 effective from 1.4.2000. The assssee-company filed its revised return for the AY 2001-02 on 28.03.2003 incorporating the effect of this amalgamation and assessment was framed

29 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 on the same under section 143(3) of the Act. In the immediate next year, i.e. AY 2002-03 the assessee-company filed a consolidated financial statement before the AO taking into account the financial results of Acqa Chemicals & Systems (Mfg.) Ltd. to arrive at a consolidated profit & loss account of the relevant AY. This assessment also was framed under section 143(3) of the Act. For the relevant previous year 2002-03 relevant to AY 2003-04, the year under consideration, the assessee filed its return of income taking into the accounts of Acqa Chemicals & Systems (Mfg.) Ltd. on 27.11.2003. The AO while framing assessment for AY 2003-04 held that the effective date of amalgamation has to be taken as 1.4.2000 and as such held that the effect of amalgamation should have been from AY 2001-02 and not in the AY 2003-04, without understanding the facts that the assessee company had already given effect to the amalgamation w.e.f. 1.4.2000 in the return of income filed along with financial statements of Acqa Chemicals & Systems (Mfg.) Ltd. and AO has also assessed on the same. The AO without noticing these facts made ad hoc addition for an amount of Rs.5 Cr. In the total income of the assessee and ld. CIT(A) also confirmed the addition made by AO without understanding the fact that the effect of the amalgamation has been duly given by the assessee company in AY 2001-02 and 2002-03 and the same has been allowed by the AO while completing assessment under section 143(3) of the Act. Assessments in these two AYs were completed after detailed scrutiny and taking note of amalgamation into consideration. Ld. Counsel for the assessee filed copies of assessment order for AY 2001-02 and 2002-03 in its paper book. Aggrieved assessee came in second appeal before Tribunal on this issue. 41. We have heard rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee company received the amalgamation order from Hon’ble High Courts of Calcutta and Madras in FY 2002-03 relevant to AY 2003-04 and immediately on receiving the amalgamation order, the revised return consolidating the financial results / accounts was filed incorporating the effect of amalgamation. The assessee company following the mandatory AS-14 issued by ICAI has given full effect to the scheme of amalgamation issued by Hon’ble High Courts in the books of account of the assessee in the year of sanction from the Court, i.e. 31.3.2003. The same was duly reported in the Director’s report as well as in the notes to accounts for FY 2002-03. In the books of account for earlier FY 2001-02 and 2002-03, the same was not incorporated for the reason that at the time of sanction of the scheme,

30 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd.AY 2003-04& 2004-05 the accounts for both the years were closed. As a result of the same, the changes as per the scheme of amalgamation approved by the Hon’ble High Courts were given effect to in the books of account for the AY 2003-04. Even Hon’ble ITAT in assessee’s own case for AY 2001-02 has held that the effect of amalgamation should be given effect to from the AY 2001-02 and not from AY 2003-04. and held that the AO should consider the revised return filed by assessee consolidating the financial results of both the entities for AY 2001-02. In view of these facts, we are of the considered view that the allegation of the lower authorities that the assessee has not given effect to the scheme of amalgamation in AY 2001-02 and 2002-03 is without any basis and accordingly, the ad hoc disallowance made by AO and confirmed by ld. CIT(A) to the extent of Rs.5 Cr. is deleted. This issue of assessee’s appeal is allowed. 42. In the result, the appeal of assessee in ITA No. 529/KOL/2008 for AY 2003-04 is partly allowed and ITA No. 1256/KOL/2009 for AY 2004-05 is allowed. 43. Order is pronounced in the open court on 03.02.2016.

Sd/- Sd/- (Waseem Ahmed) (Mahavir Singh) Accountant Member Judicial Member

Dated :03rd February, 2016 Jd. Sr. P.S Copy of the order forwarded to:

APPELLANT –NLC Nalco India Ltd., 20A, Park Street, Kolkata-700 1. 016 Respondent –DCIT, Circle-10, Kolkata 2 The CIT(A), Kolkata 3. 4. CITKolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,

Asstt.Registrar.