Firemenich Aromatics Production (India) Pvt. Ltd. Vs ACIT (ITAT Mumbai)
We find that IS charges were paid by the assessee for obtaining access to ERP software and for regular recurrent services and such charges were paid in earlier years also. In AY 2012-13, similar adjustment proposed by Ld. TPO was deleted by coordinate bench on the premises that Ld. TPO was duty bound to determine ALP by following any one of the prescribed methods and determination of ALP on adhoc basis could not be sustained. It was also observed that the assessee had submitted substantial evidences in support of the claim. This order was followed subsequently in AY 2013-14. In AY 2014-15, Ld. TPO allowed external cost but did not allow cost allocated to the assessee on the ground that the claim was unsubstantiated. This adjustment was also deleted by the Tribunal. Therefore, we find that this issue is recurring in nature. The charges have been paid pursuant to the agreement and the assessee has already placed on record third part audit certificate along with sample third party invoices raised by the vendors on its AE. In support of benefits, the assessee submitted a flowchart of the manufacturing operations, depicting the inter-linkage between the manufacturing operation and application provided /services received as part of IS and S3 services. Therefore, Ld. TPO, in our opinion, was not justified in denying this cost to the assessee. Respectfully following earlier view of Tribunal, we delete this adjustment and allow the relevant grounds of appeal.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1 Aforesaid appeal by assessee for Assessment Year 2015-16 arises out of final assessment order passed by Ld. AO u/s 143(3) r.w.s. 144C(13) on 25/10/2019 pursuant to the directions of Ld. Dispute Resolution Panel-1, WZ, Mumbai (DRP) u/s 144C(5) dated 22/08/2019. The grounds raised by the assessee read as under: –
i. Ground No. i: Transfer Pricing (‘TP’) adjustment in relation to export of finished products
1.1. On the facts and circumstances of the case, and in law, the Hon’ble DRP has erred in upholding the action of the Ld. AO/TPO in determining the Arms’ Length Price (‘ALP’) of the international transaction of export of finished products at Rs. 8,34,22,404 instead of Rs. 7,59,14,928 thereby, computing a TP adjustment of Rs. 75,07,476.
1.2. While doing so, the Hon’ble DRP/Ld. AO/Ld. TPO erred in:
(a) Disregarding the aggregation approach adopted by the Appellant thereby, rejecting the application of entity level Transactional Net Margin method (‘TNMM’) as the Most Appropriate Method (‘MAM’);
(b) Applying Comparable Uncontrolled Price (‘CUP’) Method as the MAM vis-a-vis the products sold to both Associated Enterprises (‘AEs’) and Non-AEs; and
(c) Applying two methods i.e., CUP and TNMM at the same time for benchmarking the impugned international transaction.
1.3. Without prejudice to point 1.1. and 1.2., while applying CUP, the Hon’ble DRP/ Ld. AO/ Ld. TPO erred in ignoring the differences on account of geographical market, volume of transactions, functional and risk profile and level of market while comparing the impugned international transaction with the comparable uncontrolled transaction.
1.4. On the facts and circumstances of the case, and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO has erred in not following the order of the Hon’ble Income Tax Appellate Tribunal (TTAT’) for AY 2013-14 and AY 2014-15.
The Appellant prays that the aforesaid adjustment of Rs. 75,07,476 be deleted.
2. Ground No. 2: Transfer Pricing (‘TP’) adjustment in relation to payment of royalty for availing technical know-how
2.1. On the facts and circumstances of the case and in law, the Hon’ble DRP has erred in upholding the action of the Ld. AO/ TPO in determining the ALP of royalty paid to AE for technical know-how at Rs.23,08,81,950 instead of Rs. 26,37,95,683 thereby, computing a TP adjustment of Rs.3,29,13,733.
2.2. While doing so, the Hon’ble DRP/ Ld. AO/ Ld. TPO erred in:
(a) Disregarding the fact that payment of royalty is inextricably linked to entrepreneurial operations of the Appellant and therefore, it should have been benchmarked on an aggregation basis by applying TNMM as the MAM; and
(b) Applying CUP method as the MAM to determine the ALP of the impugned international transaction.
2.3. Without prejudice to point 2.1. and 2.2., while applying CUP, the Hon’ble DRP/ Ld. AO/ Ld. TPO erred in:
(a) Inappropriately accepting the royalty agreement which is not comparable to the royalty agreement of the Appellant; and
(b) Inappropriately rejecting the royalty agreements which are comparable to the royalty agreement of the Appellant.
2.4. On the facts and circumstances of the case, and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO has erred in not following the order of the Hon’ble ITAT for AY 2012-13, AY 2013-14 and AY 2014-15-
The Appellant prays that the aforesaid adjustment of Rs. 3,29,13,733 be deleted.
3. Ground No. 3: Transfer Pricing (TP’) adjustment in relation to payment of interest on External Commercial Borrowing (‘ECU’)
3.1. On the facts and circumstances of the case and in law, the Hon’ble DRP erred in upholding the action of the Ld. AO/ TPO in determining the ALP of the international transaction of payment of interest on ECB at Rs. 48,53,007 instead of Rs. 1,06,58,345, thereby computing an adjustment of Rs. 58,05,338.
3.2. While doing so, the Hon’ble DRP/ Ld. AO/ Ld. TPO erred in:
(a) Not following a structured/ methodical search process in selecting the comparable companies for arriving at the arm’s length interest rate;
(b) Not appreciating the fact that the interest paid by the Appellant on ECB loan is as per the circular issued by Reserve Bank of India (‘RBI’); and
(c) Disregarding the fact that the effective rate of interest paid by the appellant is lower than the SBI Prime Lending rate (‘PLR’) for the relevant year.
3.3. On the facts and circumstances of the case, and in law, the Hon’ble DRP/Ld. AO/Ld. TPO has erred in not following the order of the Hon’ble ITAT for AY 2013-14 and AY 2014-15.
The Appellant prays that the aforesaid adjustment of Rs. 58,05,338 be deleted.
4. Ground No. 4: Transfer Pricing (‘TP’) adjustment in relation to payment of Information System (‘IS’) charges
4.1. On the facts and circumstances of the case and in law, the Hon’ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO in determining the ALP of the international transaction of payment of IS service charge at Rs. 9,41,68,816 instead of Rs. 11,08,02,230 thereby disallowing the claim pertaining to internal cost of IS charge amounting to Rs. 1,66,33,414.
4.2. While doing so, the Hon’ble DRP/ Ld. AO/ Ld. TPO grossly erred in:
(a) Determining the ALP of the international transaction of payment of internal cost of IS charge as ‘Nil’ purportedly applying ‘Other method’ as per the provisions of Rule 10AB of the Income-tax Rules, 1962; and
(b) Ignoring that the Appellant had supported the claim with appropriate evidences.
4.3. On the facts and circumstances of the case, and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO has erred in not following the order of the Hon’ble ITAT for AY 2012-13, AY 2013-14 and AY 2014-15-
The Appellant prays that the aforesaid adjustment of Rs.1,66,33,414 be deleted.
5. Ground No. 5: Initiating penalty proceedings under section 271(1)(c) of the Act
5.1. On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act for furnishing inaccurate particulars of income.
6. Ground No. 6: Levy of interest under section 2346 and 234C of the Act
6.1. On the facts and circumstances of the case and in law, the Ld. AO erred in levying interest under section 2346 and 2340 of the Act.
2. The Ld. AR, at the outset, placed on record ground-wise chart to submit that substantial issues are squarely covered by earlier orders of Tribunal in assessee’s own case for AYs 2012-13 (ITA No.2590/Mum/2017 dated 23/07/2018); 2013-14 (ITA No.7330/Mum/2017 dated 22/02/2019); 2014-15 (ITA No.6081/Mum/2018 dated 07/06/2019). The copies of the orders have been placed on record. Though Ld. DR justified the assessment framed by Ld. AO, however, this position could not be controverted by the revenue. In the said background, our adjudication to the appeal would be as given in succeeding paragraphs.
3. For ease of reference, the assessee’s grievance could be tabulated in the following manner: –
