Dow Agrosciences India Private Limited Vs ACIT (ITAT Mumbai)
We shall now deal with the observation of the TPO/DRP that the approval provided by the RBI would not constitute a valid CUP data, since the RBI does not take into account the transfer pricing provisions to determine the appropriate rates which can be considered as the arm‟s length price for the As observed by us hereinabove, royalty paid by the assessee had been approved by the Secretariat of Industrial approval, Ministry of Industry (Government of India) and RBI, vide their approvals, dated 17th September, 1996 and 22nd January, 1997, respectively. Apart from that, the royalty paid by the assessee during the year under consideration i.e @ 8% of its net export sales was also in conformity with the “Press Note No. 2 (2003 series)” that was issued by the Government of India on 24th June, 2003. Rule 10B(2)(d) of the Income Tax Rules, 1962 inter alia provides that for the purpose of determining the arm‟s length price, the laws and government orders in force must be considered. For the sake of clarity the relevant extract of Rule 10B is reproduced as under:
“(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of completion and whether the markets are wholesale or retail.”
Accordingly, now when the royalty paid by the assessee to its AE was approved by the Government of India and RBI by their respective approvals dated 17th September, 1996 and 22nd January, 1997, and the same was also in conformity with the rates that were prescribed in the “Press Note No. 2 (2003 series)”, dated 24th June, 2003, therefore, no infirmity could be related to the assessee in considering the same for benchmarking the royalty paid by the assessee to its AE using CUP method. Insofar the reliance placed by the TPO on the judgment of the Hon‟ble High Court of Punjab and Haryana in the case of Coca Cola India Inc. Vs. Asst. CIT (2009) 309 ITR 194 (P&H), we find that the said order had been relegated by the Hon‟ble Supreme Court vide its order, viz. M/s Coca Cola India Inc. Vs. Asst. CIT [SLP (Civil) No(s). 646/2009, dated 25.10.2010] to the file of the lower authorities before whom the proceedings were pending. Also, we find, that the Hon‟ble High Court of Bombay in the case of CIT Vs. SI Group India Ltd. (2019) 107 taxmann.com 314 (Bom) and CIT Vs. SGS India Pvt. Ltd. (2015) 94 CCH 338 (Bom), had held, that where the payment made by the assessee to its AE is within the limits prescribed by the Government of India, then, the same can be considered as being at arm‟s length. In fact, we find that the DRP in the assessee‟s own case for A.Y 2012-13 by relying on the judgement of the Hon‟ble High Court of Bombay in the case of SGS India Pvt. Ltd. (supra) had though accepted that the issue as regards determining of the arm‟s length price of the royalty transaction was in favour of the assessee, however, only for the purpose of keeping the issue alive it had declined to accept the said claim of the assessee. Also, a similar view had been taken by the Tribunal in the assessee‟s own case for A.Y. 2004-05 to A.Y 2009- 10, and it has been held that the royalty paid by the assessee to its AE having been approved by the Government of India/RBI and being as per the rates prescribed in the Press Note No. 2 (2000 series) was to be taken as being at arm‟s length. In the backdrop of the aforesaid facts, we adopt a similar view and conclude that as the royalty paid during the year under consideration by the assessee to its AE @ 8% of its net exports was approved by the Government of India and RBI, and also, in conformity with the rates prescribed in Press Note No. 2 (2003 series), thus, the same on the said count too was to be held as being at arm‟s length.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal filed by the assessee company is directed against the respective orders passed by the A.O under Sec.143(3) r.w.s 144C(13) of the Income Tax Act, 1961(for short „Act‟) for A.Y. 2014-15, dated 19.09.2018. The assessee has assailed the impugned order on the following grounds of appeal before us :
“Based on the facts and circumstances of the case, Dow AgroSciences India Private Limited referred to as ‘the Appellant’) respectfully craves to prefer an appeal against the order issued by the Income Tax Officer, ward 14(1)(3), Mumbai [hereinafter referred to as sing Officer’] under section 143(3) read with section 144C(13) of the Income-tax 1961 (‘the Act’) in pursuance of the directions issued by the Hon’ble Dispute Resolution Panel-l, (hereinafter referred to as the ‘Hon’ble DRP’) on the following grounds, each of which are without prejudice to one another.
On the facts and in the circumstances of the case and in law, the learned AO/Deputy Commissioner of Income-tax (Transfer Pricing) – l(2)(2) („TPO‟) on fact and in law has:
GENERAL
1. Erred in assessing the total income at Rs.99,44,02,394 as against returned income of Rs. 66,91,50,480 disclosed in the return of income filed.
TRANSFER PRICING ADJUSTMENTS
1. PAYMENT OF ROYALTY TO ASSOCIATED ENTERPRISE (‘AE’)
General
2. Erred in making an adjustment of Rs.5,40,32,169 to the total income of the Appellant under Section 92CA(3) of the Act on account of adjustment in the arm’s length price of the international transaction of payment of royalty.
Rejection of economic analysis undertaken by the Appellant
3. Erred in not considering approvals received from Secretariat of Industrial Assistance (‘SIA’), Ministry of Industry and Reserve Bank of India (‘RBI’) as valid CUP and rejecting the CUP analysis undertaken by the Appellant as a primary analysis.
4. Erred in not accepting the economic analysis undertaken by the Appellant using Transactional Net Margin Method (‘TNMM’), in accordance with the provisions of the Act read with the Income-tax Rules, 1962 (‘the Rules’), for the determination of the arm’s length price of the international transaction of payment of royalty.
5. Erred in rejecting the aggregation approach adopted by the Appellant using TNMM to benchmark the said international transaction and not appreciating that payment of royalty is closely connected with the main business of the Appellant in relation to manufacturing.
Disregarding the commercial benefits received from the AE
6. Erred in not appreciating that the technical knowhow licensed by the AE to the Appellant was an invaluable and unique intangible which yielded commercial benefits to the Appellant.
7. Erred in not appreciating the commercial rationale of the Appellant for extending the technology agreement as well as making royalty payment to the AE and applying ‘benefit test’ to hold no benefit is received by the Appellant.
Inappropriately considered supplementary agreement as CUP
8. Erred in considering the supplementary agreement between HERC products and CCT corporation as comparable without giving cognizance to the validity of the agreement as well as the fact that the complete information (i.e. the master agreement) is not available.
9. Without prejudice to the above, failed to appreciate that the supplementary agreement mentions 2 different rates (i.e. 2 percent of the gross value and 5 percent of gross value on sales, based on customer) and conveniently considering the lower royalty rate for making transfer pricing adjustment (i.e. 2 percent).
10. Without prejudice to the above, erred in not considering the fact that royalty rates as mentioned in the agreement is on gross sales value and the rates at which Appellant is paying is based on net sales value.
Inappropriately considering controlled transaction as CUP
11. Erred in comparing the rate of royalty paid by the Appellant to its AE [Dow AgroSciences B.V (Dow Netherlands)], with a controlled transaction i.e. the royalty rate paid by Dow UK, another AE of the Appellant, to Dow Netherlands.
12. Erred in not considering the difference in definition of ‘net sales’ as per agreement between Appellant and Dow Netherlands and as per agreement between Dow UK and Dow Netherlands
13. Without prejudice to the above, erred in ignoring the fact that prices of the products in UK is significantly different as compared to India, since UK is a developed country and thereby the royalty paid by Dow UK cannot be compared with the royalty paid by the Appellant.
14. Without prejudice to the above, erred in ignoring the fact that there exists technological differences between the technology availed by the Appellant and Dow UK (where the technology was old) and hence the same cannot be taken as comparable.
15. Without prejudice to the above, even if controlled rate of royalty paid by Dow UK to Dow Netherland is taken as CUP, appropriate adjustment should be provided on the same to eliminate the differences.
Variation from the arithmetic mean
16. Without prejudice to the above, the benefit of proviso to section 92C(2) of the Act (Variation of 3% from the arithmetic mean) should be granted to the Appellant, if the transaction payment of royalty is within such range.
(ii) PAYMENT TO AE’S FOR AVAILING OF SERVICES
General
17. Erred in making an adjustment of Rs.24,42,84,844 to the total income of the Appellant under Section 92CA(3) of the Act on account of adjustment in the arm’s length price of the international transaction of availing of services.
Rejection of economic analysis undertaken by the Appellant
18. Erred in rejecting the economic analysis undertaken by the Appellant using TNMM, in accordance with the provisions of the Act read with the Rules and instead using hypothetical CUP as the most appropriate method, for the determination of the arm’s length price of the international transaction of payment for availing of services from AEs, without providing any cogent reasons for the same.
19. Erred in not appreciating that since costs in relation to the services availed by the Appellant were allocated to the manufacturing, trading and indenting segment which were at arm’s length (based on net level margin analysis using TNMM), the transaction of availing services by the Appellant from its AEs also meets the arm’s length test.
Inappropriate application of CUP method to benchmark international transaction
20. Erred in not using any of the six methods prescribed under section 92C to benchmark the international transaction of payment for availing of services.
21. Without prejudice to the above, erred in computing the arm’s length price by applying some ad-hoc man hour rate to some ad-hoc number of man hours (so called CUP) which is not in accordance with the transfer pricing regulations prescribed in India.
22. Erred in not appreciating the aggregation approach and the fact that one of the basic conditions for applying CUP is availability of the price of the same service in uncontrolled condition and it cannot be hypothetical or imaginary value but real value on which similar transactions have taken place.
Benefit test/commercial expediency for availing services
23. Failed to appreciate the business model and business realities of the Appellant and the role of its AEs and thereby stating that no service is received or benefits have been availed by the Appellant.
Ignored evidences submitted for service availed and benefits derived
24. Erred in stating that the services availed by the Appellant are in the nature of shareholder activities/ routine services without appreciating the nature of services availed from AEs and benefit derived by the Appellant therefrom.
25. Erred in not appreciating the evidences submitted to substantiate services received/ benefits derived/ basis of allocation of costs and disregarded the same without giving any cogent reasons.
CORPORATE TAX ADJUSTMENTS
I. SHORT TERM CAPITAL GAIN ON SALE OF BUILDING
26. Erred in computing the short term capital gain on sale of building at Rs 3,05,52,648 as against Rs 36,17,750 computed by the Appellant.
27. Erred in passing the final assessment order under section 143(3) read with section 144C(13) without taking into account the report of the Department Valuation Officer, as directed by the Hon’ble Dispute Resolution Panel.
28. Erred in considering the stamp duty value of the building amounting to Rs.3,58,42,240 as the lull value of consideration’ as against the actual sale consideration of Rs.89,07,342, as determined by a Government Approved Valuer, registered under the Wealth tax Act, 1957.
29. Erred in disregarding the valuation of building done by the Government Approved Valuer, registered under the Wealth Tax Act, 1957.
II. Credit for tax deducted at source („TDS’)
30. Erred in granting short credit of TDS amounting to Rs 2,07,68,263
III. Levy of interest under section 234A of the Act
31. Erred in levying interest of Rs.28,68,542 under section 234A of the Act even though the return of income was filed by the Appellate within the due date of filing the return of income under section 139(1) of the Act.
IV. Lew of interest under section 234B of the Act
32. Erred in levying interest of Rs.7,74,50,634 under section 234B of the Act.
V. Initiation of proceedings under section 271(1)(c) of the Act
33. Erred in initiating the penalty proceedings under section 274 read with section 271 (1)(c) of The appellant craves leave to add, alter, amend, delete or withdraw any or all of the grounds of lat or before the hearing of the appeal so as to enable the Income tax Appellate Tribunal s the appeal according to law.”
2. Briefly stated, the assessee company which is engaged in the business of manufacturing and trading of pesticides, agro chemicals & seeds had e-filed its return of income for A.Y. 2014-15 on 28.11.2014, declaring its total income at Rs.66,91,50,480/-. The case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.
3. Observing that the assessee company had during the year under consideration entered into international transactions with its Associate Enterprises (for short “AEs”), the A.O made a reference under Sec. 92CA(1) of the Act to the Dy. Commissioner of Income-tax (TP)-1(2)(2), Mumbai (hereinafter referred to as “TPO”) for determining the Arm‟s Length Price of the said transactions. The TPO vide his order passed under Sec. 92CA(3), dated 31.10.2017 made an adjustment of Rs. 29,83,17,013/- to the ALP of the international transactions of the assessee, as under:
