Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S Allied Domecq Spirits & Wine India ... on 9 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES "I-2" : DELHI
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND
SHRI L.P. SAHU, ACCOUNTANT MEMBER
ITA.No.54/Del./2011
Assessment Year 2005-2006
The Deputy CIT, M/s. Allied Domecq Spirits &
Circle-2(1), Wine India Pvt. Ltd. (Now M/s.
Room No.398D, Beam Global Spirits & Wine India
C.R. Building, vs. Pvt. Ltd.,) 14-A, S-3 Level
New Delhi. International Trade Tower,
Nehru Place, New Delhi - 110 019.
PAN AAACA1614R
(Appellant) (Respondent)
For Revenue : Shri Sanjay Kumar Yadav, Sr.D.R.
Shri Ravi Sharma, Advocate &
For Assessee :
Shri Anubhav Rastogi, Advocate
Date of Hearing : 28.02.2018
Date of Pronouncement : 09.03.2018
ORDER
PER BHAVNESH SAINI, J.M.
This appeal by Revenue has been directed against the order of the Ld. CIT(A)-XX, New Delhi, dated 29th October, 2010, for the A.Y. 2005-2006, on the following grounds :
1. "The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs.2,31,23,800/- made on account of 2 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi difference in Arm's length Price ignoring that :
(a) Value of international transactions is outside the (+ 5%) tolerance band, therefore, the assessee is not entitled to the benefit of proviso to sub-section (2) to section 92C of the I.T. Act.
(b) The revenue and expenses related to the manufacturing segment of the company has to be culled out after separating from overall financial result of the company
2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal."
2. Briefly the facts of the case are that the A.O. passed the assessment order under section 143(3) dated 18th December, 2008 whereby the A.O. determined the total assessed income of Rs.9,63,50,800/- by making the disallowances/additions to the returned income of Rs.5,46,81,880/-. One of the addition was on account of Arm's Length Price ("ALP") of Rs.2,31,23,800/-. During the assessment proceedings, the A.O. noticed the following international transactions entered into by the assessee during financial year under appeal as reported in Form-3CEB and 3 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi details filed by the assessee along with the return of income for the year under consideration.
Value of transactions
S. No. Particulars (in Rs.)
1. Purchase of Compound Alcoholic Preparation (CAP) 7,50,42,300/-
.
2. Provision of market support services 1,09,14,596/-
3. Reimbursement of expenses received 1,13,07,791/-
4. Reimbursement of expenses paid 225,976/-
5. Reimbursement of expenses paid 503,353/- 2.1. The A.O. then referred assessee's case to TPO under section 92CA(1) of the I.T. Act, to determine the ALP in respect of these international transactions and an adjustment of Rs.2,31,23,800/- was made by the TPO in relation to the international transactions pertaining to purchase of CAP from A.E. While so holding, the TPO -
Clubbed the Bottled in India Scotch ("BIIS") and India Made Foreign Liquor ("IMFL") segments and compared the net profit margin (NPM) of the combined manufacturing operations of the Appellant 4 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi with those of broadly comparable independent companies.
The TPO also rejected 5 companies out of the set of 12 comparable companies selected by the Appellant for benchmarking the above transaction. Used the final year (FY 2004-05) financial data for the purpose of arriving at an arm's length price for the above transaction.
2.2. No adverse inference has been drawn by the TPO with regard to international transactions related to market support services and reimbursement of expenses.
3. The assessee aggrieved against the findings of the A.O./TPO, filed appeal before Ld. CIT(A) and in Ground Nos. 3 to 5, the assessee challenged the addition of Rs.2,31,23,800/- for determining the ALP on the basis of TPO's order by contending that the addition is wrong, unjust and opposed to the evidence on record and is based on surmises and conjectures. It was also contended that A.O. erred in law and 5 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi on facts in accepting TPO's operating profit margin at 7.78% as against 6.02% declared by the assessee.
3.1. The Ld. CIT(A) considering the explanation of the assessee and facts of the case, framed the following issues for adjudication.
1. Whether the economic analysis undertaken by the appellant in respect of international transaction pertaining to purchase of CAP following a segmental approach by segregating manufacturing operations into BIIS and IMFL business verticals is in accordance with the relevant transfer pricing regulations ?
2. Whether the international transaction of the appellant comply with the arm's length standard even if the TPO's approach of clubbing the BIIS and IMFL segment is to be followed for the year under consideration ? 3.2. The Ld. CIT(A) in order to decide the issue noted that it has to see business model, asked the assessee to give power- point presentation, which the assessee gave on 22nd October, 2010. The same reads as under :
6
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi The appellant is a wholly-owned subsidiary of Allied Domecq Spirits & Wine (Europe) BV, Netherlands. The ultimate parent company of the appellant is Allied Domecq Pic, UK. The business segments under which the appellant processes, bottles and sells liquor in India comprise of BIIS and IMFL.
Under the BIIS segment, the appellant processes CAP imported by it from its AE, Allied Distilleries Limited, Scotland ("Allied Scotland"). The CAP so imported is further processed by the appellant into scotch whiskey by way of dilution into desired alcoholic strength, bottled and sold in India under the brand name, Teacher's® Scotch, Old Smuggler Whiskey and Long John.
The IMFL segment pertains to domestic business of the appellant. The IMFL is manufactured from a purified form of spirit/ alcohol called the Extra Neutral Alcohol ("ENA"). The ENA is manufactured by the appellant in its own distillery in Behror, District Alwar, State of Rajasthan, 7 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi India. The IMFL is sold by the appellant under the brand names Old Smuggler Rum, Old Smuggler Gin and Curtis No. 1. The IMFL is also manufactured and bottled by the Appellant on a contract basis for Seagram Manufacturing Private Limited ("SMPL") under a Technical and Marketing Assistance Agreement ("TMAA"). The IMFL so manufactured and bottled is sold by the appellant under the latter's brand names (Royal Stag, Imperial Blue, and Fling Vodka). For this activity, the Appellant receives income in the form of a fixed fee on number of cases manufactured and bottled for SMPL.
3.3. It was further explained that for the purpose of benchmarking of international transactions pertaining to purchase of CAP from A.E, assessee has segregated its manufacturing operations into two different segments on the basis of their functional differences. This was also stated in the assessee's notes to accounts in the Audit Report. (1) Bottled in India Scotch ("BIIS") and (2) Indian Made Foreign Liquor 8 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi ("IMFL"). The key indicative difference between the two business segments summarized as below :
The raw material imported by the appellant is the CAP which is matured under the climatic conditions of Scotland and cannot be manufactured in India. Then, the imported CAP is filtered and diluted for the bottling of the final product i.e. Scotch. The main activity involved in the manufacture of Scotch i.e. manufacturing and maturing of the product is carried out by the AE in Scotland. The appellant only filters, dilutes (to reach the desired alcohol strength) and bottles the product (CAP) in order to produce Scotch to be sold in India. The domestic manufacturing function consists of local production of grain- based extra-neutral alcohol which does not require rigorous maturing process as in the case of imported raw material. The ENA is diluted and blended (given flavour) to produce IMFL. 9
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi The manufacturing/bottling processes undertaken by the appellant in the respective BIIS and IMFL segments are different and completely distinct. Further, for the bottling of Scotch the appellant does not require huge plant and machinery set-up as is required in case of domestic distillation and bottling function.
The bottled Scotch is a premium product which is highly priced, and market of the product is very small as compared to that of the IMFL domestic business. The two products (BIIS and IMFL) are completely different and represent distinct product lines. Also, these are sold under different brand names - o BIIS - Teacher's(R) Scotch, Old Smuggler Whiskey and Long John.
o IMFL - Old Smuggler Rum, Old Smuggler Gin and Curtis No. 1, Royal Stag, Imperial Blue, and Fling Vodka.10
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi Further, there are no international transactions with AEs for production of grain based alcohol and IMFL.
3.4. To explain the rationale for segmental analysis, the assessee draws attention to the definition of "TNMM" as mentioned in Rule 10B(1)(e) of the I.T. Rules, 1962 and submitted that this Rule refers to net profit margin realised by an enterprise from an international transaction or a class of such transactions. The key points as envisaged in the above Rule are noted below :
An analysis should consider only the profits of the associated enterprise that are attributable to particular controlled transactions. Similarly, when analyzing the transactions between the independent enterprises to the extent they are needed, profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. 11
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi The TNMM compares the profitability of the controlled transaction, measured in relation to (1) costs or sales or (2) assets, to the profitability of the uncontrolled transaction in similar circumstances. The focus is on transactions rather than business line or the operating income of the company. The expression "in relation to" means in connection with and implies connection between a thing in relation to something else. Thus, there should be relationship between profit and assets or between profit and costs or sales. That relationship may be expressed as a ratio between net profit to assets, or between profit and costs or sales.
Reliance is also placed on the decision of E-gain Communication (P) Ltd. vs. ITO [(2008) 23 SOT 385 (Pune)] in which it was held as under :
"It is thus evident from that both OECD Guidelines and US regulations insist on necessary adjustments for 12 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi difference on issues affecting profitability. The transactional net margin method may afford practical solution to otherwise insoluble transfer pricing problems if is used sensibly and with appropriate adjustments to account for differences of the type referred to above. Similarities and dissimilarities of the transactions under comparison are to be scrutinized to differences of situations, circumstances and environment. Any difference which materially affects market value is to be given a serious consideration. The degree of comparability between the tested party and the uncontrolled taxpayer with parameters like nature or line of business, product or service market , the assets composition employed, the size and scope of operation, the stage of business or product cycle are required to be seen. In case of uncontrolled entity, 13 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi operative income attributable to assets other than assets under consideration is to be adjusted before taking transaction for working mean margin of profit. Income and expenses of the segment of total business mag have to be considered. Depending on facts and circumstances of the case, 'it may also be appropriate to adjust the appropriate profit of tested party and comparable parties".
Further, Sub-Rule (3) of Rule 10B of the Rules, requires that the difference between controlled and uncontrolled transactions is to be taken into account for dealing as under:-
"(3) An uncontrolled transaction shall be comparable to an international transaction if-
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are 14 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences."
Thus, the Rule envisages that the net profit margin realised by the taxpayer from the international transactions needs to be compared with the net profit margin of the comparables.
As discussed in para above not only there are functional differences in the BIIS and IMFL segment but also the international transaction pertaining to purchase of CAP pertains to the BIIS operations of the appellant. Since the IMFL segment does not involve any international transactions, the exclusion of the said segment for the purpose of analysis is consistent with the Rules.
15
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi 3.5. The assessee also referred to OECD Transfer Pricing guidelines July, 2010, which advocates the same philosophy for application of TNMM. Para 3.9 of OECD guidelines reads as follows :
"3.9. Ideally, in order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction-by-transaction basis."
In addition, Para 2.58 of the OECD Guidelines states:
"2.58 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction9 3.6. The assessee again relied upon the order of the Pune Tribunal in the case of E-gain Communication (P) Ltd., vs. ITO (2008) 23 SOT 385 (Pune) (supra), in which it was further held "if the differences are such that they cannot be subjected to evaluation, then transaction may have to be 16 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi eliminated for the purposes of comparison." It was also submitted that ITAT, Mumbai Bench has affirmed in the case of ACIT vs. Tej Diam 37 SOT 341 that "while applying TNMM, comparison of only net profit margins realised by an enterprise from an international transaction can be considered while making comparison with the profit margin of the comparables."
The assessee also relied upon order of ITAT, Mumbai Bench in the case of UCB India (P) Ltd., vs. ACIT 121 ITD 131 in which it was held as under :
"A plain reading of the above shows that TNMM requires comparison of net profit margins realised by an enterprise from an international transaction or an aggregate of international transactions and not comparisons of operating margins of enterprises. For arriving at this conclusion, we drew strength from the decision of Mumbai 'L' Bench of the Tribunal in the case of UCB India (P.) Ltd. v. Asstt. CIT [2009] 121 ITD 1311 where it is held that section 92C read with rule 17 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi 10B(1)( e) deals with Transactions Net Margin Method (TNMM) and it refers to only net profit margin realised by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole. "
3.7. Similar decision has been given in the case of Twinkle Diamond 2010-TII-09-Mum wherein the Mumbai Bench of the Tribunal held that "TNMM should not be applied to compare enterprise level profits." In this context reliance was also placed by the appellant on the following judgments:
(i) Development Consultants (P) Ltd. vs. DCIT 115 TTJ 577 (Kol).
(ii) Star India Limited (ITA No.3846/3585/M/2006) (Mum).
3.8. It was further submitted that for the purpose of benchmarking its transactions, the assessee selected 12 broadly comparable independent companies with a three year's weighted average arithmetic mean NPM of 5.18%. Since the assessee earned an NPM of 12.21% from its manufacturing 18 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi function pertaining to the BIIS segment as shown below, the assessee determined the international transaction pertaining to purchase of CAP to be at arm's length.
Net Profit Margin ('NPM') computation Particulars FY 2004-05 Income Amt (Rs.) Net Sales (Net of Excise Duty) 511,752,721 Other Income 835,896 Total Income 512,588,617 Expenditure Change in stock (5,103,694) Manufacturing expenses 225,034,913 Personnel expenses 29,797,653 Net Profit Margin ('NPM') computation Particulars FY 2004-05 Administrative expenses 30,393,463 Selling & Distribution expenses 162,238,311 Bank Charges 2,333,240 Depreciation 5,562,673 Exchange Difference (Net) (256,690) Total Expenditure 449,999,869 Net Operating Profit 62,588,748 NPM ( percent) (Net Operating Profit / Total Income) * 12.21% 100 19 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi 3.9. The assessee follows a consistent approach for segmentation of expenses between the segments pertaining to BIIS and IMFL. Segmental profit and loss account of the assessee, along with the underlying allocation keys used for segregating revenue and expenses for the year under consideration were filed. The expenses have primarily been allocated either on the basis of gross revenue in the respective segments i.e., Sales Ratio or number of cases produced i.e., Bottling Ratio. Further, direct expenses that can be specifically identified with business segments have been charged accordingly on an actual basis. The assessee further submitted that the allocation of keys used for segregation are robust and applied consistently on a year-on-year basis. The TPO, while undertaking the impugned transfer pricing adjustment on account of international transaction pertaining to purchase of CAP, clubbed the BIIS and the IMFL (Domestic) segments of the assessee. The entity wide NPM of 6.02% arrived in the manufacturing segment (BIIS + IMFL) was compared with the arithmetic mean of the year (F.Y.2004-05) updated NPM of 7.78% of 7 broadly comparable companies while arriving at an adjustment of Rs.2,31,23,800 for the year under consideration. The same is reproduced as under : 20
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi NPM % for Comparable Companies for FY 2004-05 NPM % for FY 2004-05 S.No. Name of the Company TPO's Set of Companies Associated Alcohols & Breweries Limited 1 (4.22) Brihan Maharshtra Sugar Syndicate Limited 2 4.61 3 GM Breweries Limited 1.87 4 IFB Agro Industries Limited 1.40 5 Radico Khaitan Limited 12.83 6 Sri Rama Distilleries Limited 34.76 7 Tilaknagar Industries Limited 3.20 8 Arthos Breweries Limited X 9 Blossom Industries Limited X 10 Khoday India Limited X Rajasthan State Ganganagar Sugar Mills 11 Limited X 12 Thiru Arroran Sugars Limited X Arithmetic Mean 7.78% Transfer Pricing Adjustment Particulars Amount (Rs.) Operating Income (Manufacturing - BUS + IMFL) 132,04,08,637 Operating Expenditure 124,08,04,645 Net Profit 7,96,03,992 NPM % 6.02% Revenue related to manufacturing 132,04,08,637 NPM at 7.78% 10,27,27,792 NPM earned 7,96,03,992 Difference (Transfer Pricing adjustment) 2,31,23,800 21 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi 3.10 Further, in the power-point presentation, the assessee depicted the T.P. adjustment on segmental analysis - BIIS at 5.18% and as per TPO by clubbing BIIS and IMFL segments clubbed together at 7.78%. It was, therefore, submitted that while clubbing the above two segments, TPO observed that BIIS and IMFL are not distinct and that the risk and reward of the enterprise manufacturing operations as a whole is uniform. The TPO has placed reliance on the audited accounts of the assessee, according to which, no segmental accounts were being maintained by the assessee. The TPO observed that vide note 22 to the notes to accounts, the auditors have specifically mentioned that -
"The company primarily manufactures and sells alcoholic beverages and related products. Accordingly, the Company has only alcoholic beverages as its business segment. Further, the economic environment in which the Company operates is significantly similar and is not subject to 22 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi materially different risks and returns Accordingly, no separate disclosures are necessary under the Accounting Standard 17 (Segment Reporting) issued by the Institute of Chartered Accountants of India." 3.11. The TPO further relied upon a third-party evidence to arrive at a conclusion that the process of manufacturing of IMFL also requires Concentrate Alcoholic Beverage (CAB) and accordingly rejected the segmental approach followed by the assessee on the pretext that there is no international transaction comprised in the domestic segment. It was submitted that the Accounting Standard is not a governing law for an economic analysis as warranted for transfer pricing purposes. From the perspective of AS-17, the assessee is engaged in the manufacture and sale of alcoholic beverages. From the accounting perspective it is one line of business and accordingly, the assessee is not required to disclose segmental reporting in its notes to the accounts. However, this does not preclude the assessee from preparing internal robust segments 23 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi from an economic and a transfer pricing perspective as undertaken by the assessee in its transfer pricing study for the year under consideration. The assessee has also quoted the following example :
"Company 'A' is the manufacturer of televisions and manufactures two types of television sets (a) Flat CRT color TV's 51' (b) Flat CRT color TV's 29'. For manufacturing of Flat CRT color TV's 51' the Company imports components from its associated enterprise. The international transaction of the Company pertains to Flat CRT color TV's 51' segment. From the AS-17 perspective the Company is engaged in the manufacture and sale of Flat CRT color TV's. However, from the perspective of transfer pricing, to test the arm's length nature of the imports from its AE's it will be prudent to analyse the Flat CRT color TV's 51' segment."
3.12. It was, therefore, submitted that the TPO's finding that IMFL segment of the assessee include international transactions is mislead by an erroneous conclusion drawn from a third-party data. It was further submitted that during the appellate stage when Ld. CIT(A) asked the assessee to submit the updated margins for the year under consideration, the 24 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi arithmetic mean NPM of the above 12 comparable companies worked-out at 5.91% based on which also the assessee's international transactions complied with the arm's length standard. The comparables selected by the assessee for the assessment year under appeal margin is as under :
NPM % for Comparable Companies for FY NPM % for FY 2004-05 S.No. Name of the Company Appellant's Set of Companies 1 Associated Alcohols & Breweries Limited (5.73) 2 Brihan Maharshtra Sugar Syndicate Limited 4.28 3 GM Breweries Limited 2.01 4 IFB Agro Industries Limited 2.06 5 Radico Khaitan Limited 6.73 6 Sri Rama Distilleries Limited 34.08 7 Tilaknagar Industries Limited 4.20 8 Arthos Breweries Limited 3.59 9 Blossom Industries Limited 10.07 10 Khoday India Limited (2.41) Rajasthan State Ganganagar Sugar Mills 11 Limited* 6.03 12 Thiru Arroran Sugars Limited 6.01 Arithmetic Mean 5.91 25 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi 3.13. The Ld. CIT(A) considering the explanation of assessee and material on record, set aside the orders of the authorities below and decided the issue in favour of the assessee. This ground of appeal of the assessee is accordingly allowed. The findings of the Ld. CIT(A) in paras 18 to 26 of the impugned order are reproduced as under :
"18. I have perused the TPO's observation and rationale for clubbing the two segments while analysing the entire entity as such.
The appellant in slide no.4 of Power Point Presentation has shown this in the following manner at page 14 of my order.
19. The TPO's rationale for clubbing the two segments just because the appellant has not drawn any segmental accounts as prescribed under the Accounting Standard (AS) 17 (Segment Reporting), in my view, is not appropriate. AS 17 cannot be said to be a governing law for the economic analysis to be undertaken for transfer pricing purposes.
20. The TPO appears to have been mislead by the notion that the appellant's IMFL segment also includes international transaction comprising of import of CAP. There is no concrete evidence that the TPO could place on record in this regard. 26
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi
21. I have also considered the submissions of the appellant. The appellant has been able to aptly distinguish the two business segments (i.e. BUS and IMFL). The international transaction undertaken by the appellant only with respect of its BUS segment. Further, the allocation keys used for segregation of BUS and IMFL segments are robust and applied consistently on a year-on-year (YOY) basis by the appellant. This has been discussed in para 7.71 and 7.72.
22. I am of the opinion that the appellant's submissions that while applying TNMM, comparison of only net profit margins realized by an enterprise from an international transaction need to be considered. The above position is in accordance with the Rules and also supported by the OECD Guidelines and various ITAT decisions as submitted by the appellant (refer Para above). By clubbing the two segments, one would be ignoring the fact that IMFL and BUS are two distinct segments, with different market positioning of the product, manufacturing process involved, raw material used and returns generated. The IMFL segment represents the domestic transactions and the BUS segment represents international transaction with the AE and hence the two can not be equated and treated as a single segment.
In view the above, I hold that the economic analysis undertaken by the appellant in respect of international transaction pertaining to purchase of CAP following a segmental 27 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi approach by segregating manufacturing operations into BUS and IMFL business verticals is in accordance with the relevant transfer pricing regulations. The appellant's international transaction pertaining to purchase of CAP, thus, complies with the arm's length standard for the year under consideration.
In the result, Ground No. 3 to 8 of the grounds of appeal filed by the appellant in relation to transfer pricing adjustment are allowed.
Issue 2 : Whether the international transaction of the appellant comply with the arm's length standard even if the TPO's approach of clubbing the BUS and IMFL segment is to be followed for the year under consideration?
23. Prima facie relief of Rs.1,29,40,005/- The appellant has filed the updated (FY 2004-05) NPM computations of the comparable companies based on their annual reports and selected the same seven final comparables as adopted by the TPO in his order at page 11. The reasons for rejecting the five comparables have been given at page 10 of TPO's order. The arithmetic mean of which now works out at 6.80 percent (see table below) as against 7.78 percent computed by the TPO. As a result, the transfer pricing adjustment gets reduced to Rs. 1,01,83,795/- from Rs.2,31,23,800/- (a consequential relief of Rs.1,29,40,005/-) as under - 28
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi NPM % for Comparable Companies for FY 2004-05 NPM % for FY 2004-05 S.No. Name of the Company TPO's Set of Companies 1 Associated Alcohols 8s Breweries Limited (5.73) Brihan Maharshtra Sugar Syndicate 2 Limited 4.28 3 GM Breweries Limited 2.01 4 IFB Agro Industries Limited 2.06 5 Radico Khaitan Limited 6.73 6 Sri Rama Distilleries Limited 34.08 7 Tilaknagar Industries Limited 4.20 8 Arthos Breweries Limited X 9 Blossom Industries Limited X 10 Khoday India Limited X 11 Rajasthan State Ganganagar Sugar Mills Limited X 12 Thiru Arroran Sugars Limited X Arithmetic Mean 6.80 Transfer Pricing Adjustment Particulars Amount (Rs.) Operating Income (Manufacturing - BUS + 132,04,08,637 IMFL) Operating Expenditure 124,08,04,645 Net Profit 7,96,03,992 NPM % 6.02% Revenue related to manufacturing 132,04,08,637 NPM at 6.80% 8,97,87,787 NPM earned 7,96,03,992 Difference (Transfer Pricing adjustment) 1,01,83,795 29 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi
23. Exclude the outliers.
The appellant also contended that the following comparable companies should be excluded from the final set as these were outliers and represent extreme positions. The inclusion of comparables with extreme results (heavy losses or extraordinary profits) tends to skew the arithmetic mean of the comparable set and distort the arm's length results. The appellant's NPM of 6.02% will accordingly be above the arm's length margin of 3.60 % of the remaining 5 comparable companies.
NPM % for Comparable Companies for FY 2004-05 S.No. Name of the Company NPM % for FY 2004-05 TPO's Set of Companies 1 Associated Alcohols & Breweries (4.22) Limited 6 Sri Rama Distilleries Limited 34.76 NPM % for Comparable Companies for FY 2004-05 30 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi NPM % for FY 2004-05 S.No. Name of the Company TPO's Set of Companies 1 Associated Alcohols 8s Breweries Limited X Brihan Maharshtra Sugar Syndicate 2 Limited 4.61 3 GM Breweries Limited 1.87 4 IFB Agro Industries Limited 1.40 5 Radico Khaitan Limited 12.83 6 Sri Rama Distilleries Limited X 7 Tilaknagar Industries Limited 3.20 8 Arthos Breweries Limited X 9 Blossom Industries Limited X 10 Khoday India Limited X Rajasthan State Ganganagar Sugar Mills 11 Limited X 12 Thiru Arroran Sugars Limited X Arithmetic Mean 3.60% The appellant placed reliance on the following ITAT decisions :
• DCIT vs M/s Quark System Private Limited (2010- TIOL-31 -ITAT-CHD-SB) • M/s. Sap Labs India Pvt. Ltd. Vs. ACIT (2010-TII-44- ITAT-BANG-TP) • Aztee Software and Technology, vs ACIT (294 ITR 32) • Mentor Graphics (Noida) Private Limited (109 ITD 101) • Sony India (P) Limited v. Dy. Commissioner of Income tax (118 TTJ 865) 31 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi Proportionate transfer pricing adjustment based on ratio of transaction with AE and Non AE.
25. The appellant submits that the TPO has erred in applying the entire transfer pricing adjustment of Rs.23.12 mn /- (computed using TNMM at an entity level with NPM as the PLI) to the transaction pertaining to purchase of CAP from the AE.
Since the purchase of CAP (related-party transaction) amounting to Rs.75.04 mn/- comprise of only 6 percent of the total operating expenses, a proportionate transfer pricing adjustment amounting to Rs.1.40 mn /- (i.e. 6% X Rs. 23.12 mn /-) is warranted in the instant case.
The appellant places reliance on the decision by the jurisdictional Delhi ITAT in the case of II Jin Electronics (India) Pvt. Ltd. v. ACIT [ITA No. 438/ Del/ 2008, (2010) 36 SOT 227} The consequential arm's length price of Rs. 73.64 mn /- (i.e. Rs. 75.04 mn less Rs.1.40 mn) will meet the arm's length standard as per proviso to section 92C(2) of the Act (+/- 5 percent tolerance band) as under :
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ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi Particulars Amount (Rs.mn) Arm's Length price (ALP) 73.64 1.05* ALP (+/- 5 percent 77.63 tolerance band) Value of Intl. Transaction 75.04 Net profit margin to an appropriate base
26. The appellant submits that the TPO erred in not considering the actual turnover of its IMFL operations pertaining to contract manufacturing and bottling for a third party, namely Seagram Manufacturing Private Limited ("SMPL") under the Technical Marketing Assistance Agreement ("TMAA"), The appellant highlighted that that the manufacturing activity in the IMFL segment largely comprises of contract manufacturing and bottling of liquor for SMPL under a TMAA for which it receives a fixed return per case manufactured. Accordingly, the net profit margin computed by excluding the pseudo turnover and taking into account the true turnover for bottling activities undertaken for SMPL, would work out at 9.82 percent which is more than 7.78 percent arm's length NPM arrived at by the TPO. The appellant's also filed detailed working calculations in relation thereto.33
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi Since Issue No. 1 has already been decided in favour of the appellant based on which the appellant is entitled for a full relief on account of transfer pricing adjustment, Issue No. 2 as discussed above does not require separate adjudication. However based on submissions and explanations provided by the appellant, I find merit in appellant's alternate contentions which have been briefly discussed in the above paragraphs 23 and 24 of my order."
4. The Ld. D.R. relied upon the order of the A.O./TPO. He has submitted that no segmental accounts have been prepared by the assessee. The assessee prepared combined accounts of both the segments. Therefore, no separate accounts of BIIS segment have been prepared. The risk and return of both segments are same. Product may be different but risk and return on both segments are same. The Auditor has taken both the segments together. The Ld. D.R. also referred to page 244 on AS-17. He has, therefore, submitted that once Auditor has reported both the segments together, the Ld. CIT(A), should not have deleted the addition.
34
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi
5. On the other hand, Learned Counsel for the Assessee, reiterated the submissions made before the authorities below and submitted that BIIS and IMFL are two different segments. The raw material are different. AS-17 is irrelevant to computation of Arm's Length Price. It is relating to financial analysis only. For profit, Auditor took both the segments together. Purchase of material from A.E. is required for BIIS segment only and not for IMFL. BIIS segment is to be considered for international transactions only because IMFL is a domestic transaction. He has referred to PB-330 which is submission filed before the Ld. CIT(A) to explain BIIS segment regarding bottling process is undertaken in India and similarly, for BIIS segment processes are undertaken in Scotland. However, IMFL process is undertaken in India only. PB-332 is process undertaken by assessee on bottling and process undertaken by A.E. in Scotland. PB-335 is IMFL segment and process undertaken by the assessee in India only. PB-360 is segmental accounting of both the segments filed before the authorities below, on which, no adverse inference have been 35 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi drawn against the assessee. PB-291 is segmentation allocation key which was filed before the authorities below, on which, no adverse inference have been drawn. He has relied upon the order of the ITAT, Mumbai Bench in the case of Paradigm Geophysical (I) (P.) Ltd. vs. DCIT (2016) 72 taxmann.com 108 (Mum.) (Tribu.) and referred to para-9 of the order in which the Tribunal observed that "TPO in his order contended that Audited Annual Reports of the assessee did not contain any segmental reporting and rejected the audited segmental filed during the course of transfer pricing assessment proceedings. However, failed to appreciate that assessee had already filed segmental accounts as part of its T.P. documentation. The segment, if any, ought to have been restricted to the international transaction under review". The Tribunal held in this case as under :
"Where in course of transfer pricing proceedings, assessee had furnished segmental reports, TPO could not have adopted entity level reports for benchmarking international transaction."36
ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi
6. We have considered the rival contentions and perused the material on record and do not find any justification to interfere with the order of the Ld. CIT(A). The assessee entered into international transaction with respect to purchase of Compound Alcoholic Preparation ("CAP") which was considered by the TPO/AO. The TPO clubbed BIIS and IMFL segments and compared the net margin of the combined manufacturing operations of the assessee with those of the broadly comparable independent companies. The assessee, however, explained that under BIIS segment, assessee processes CAP imported by it from it's A.E. in Scotland. The CAP so imported, is further processed by the assessee into the scotch, whisky by way of dilution into desired Alcoholic strength bottled and sold in India. Further, in IMFL segment, it pertains to domestic business of the assessee. The IMFL is manufactured from a purified form of spirit/alcohol called the Extra Neutral Alcohol ("ENA"). The ENA is manufactured by the assessee in India and IMFL is sold under different names. The assessee, therefore, explained that there is a key indicative difference 37 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi between the two business segments as reproduced above. It was, therefore, proved that raw material imported by the assessee is CAP which is matured under the climatic conditions of Scotland and cannot be manufactured in India. Then, the imported CAP is filtered and diluted for the bottling of the final product i.e., Scotch. The manufacturing ultimate product, market condition, price and functions of both segments i.e., BIIS and IMFL are completely different and distinct. Therefore, both the segments of the assessee are totally different and independent. Further, there was no international transaction with A.Es. for production of IMFL. The above dissimilarity in both the segments have not been scrutinized by the TPO/AO. to see the difference of situation, circumstances and environment. The assessee filed complete details before the authorities below to explain that both the segments are distinct and independent and also filed segmental accounting of both the segments, on which, authorities below, have not adversely commented upon the same. AS-17 is not applicable to the facts and circumstances of the case for undertaking transfer pricing 38 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi adjustments. The assessee adopted the same method of Accounting on year-to-year basis, which have not been disputed by the authorities below. The AO/TPO clubbed the domestic transaction of IMFL with international transaction while applying TNMM. The contention of the assessee has been supported by the decisions of ITAT referred to above. Therefore, the economic analysis undertaken by the assessee in respect of international transaction pertaining to the purchase of CAP following segmental approach by segregating manufacturing operations into BIIS and IMFL business verticals is in accordance with the relevant Transfer Pricing Regulations. The assessee's international transaction pertaining to purchase of CAP, thus, complies with the Arm's Length Standard for the year under consideration. The Ld. D.R. merely relied upon the Auditor's Note in the Accounts, which, according to assessee, is not relevant because from the accounting perspective, it is one line of business and accordingly, assessee was not required to disclose segmental reporting in its Note to the Accounts. However, the assessee filed the segmental accounting on both 39 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi the segments before the authorities below, which have not been disputed by them. Therefore, there is nothing wrong in the analysis submitted by the assessee for the purpose of benchmarking of ALP. Both the segments cannot be clubbed together to determine the ALP.
6.1. The Ld. CIT(A), even on the alternative point considered that even if the TPO's approach of clubbing of both the segments is to be followed for the year under consideration and certain comparables which are not relevant to the issue are excluded, the assessee's would be entitled for full relief on account of T.P. adjustment. The reason given by the Ld. CIT(A) have not been disputed by the Ld. D.R. through any evidence or material on record. The Ld. CIT(A) also considered that manufacturing activity in the IMFL segment largely comprises of contract manufacturing and bottling of liquor for other companies, for which, fixed return are received and in case of bottling, profit is excluded, then also, the ALP declared by the assessee was correct. In the absence of any serious challenge to 40 ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi the findings of the Ld. CIT(A) on this issue also, no interference is called for in the matter. In view of the above discussion and in the light of findings of fact arrived at by the Ld. CIT(A), we do not find any justification to interfere with the finding of fact recorded by the Ld. CIT(A). No interference is called for in the matter. The Departmental Appeal has no merit and is accordingly, dismissed.
7. In the result, Departmental Appeal is dismissed.
Order pronounced in the open Court.
Sd/- Sd/-
(L.P. SAHU) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Delhi, Dated 09th March, 2018
VBP/-
Copy to
1. The appellant
2. The respondent
3. CIT(A) concerned
4. CIT concerned
5. D.R. ITAT 'I-2' Bench, Delhi
6. Guard File.
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ITA.No.54/Del./2011 M/s. Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi // BY Order // Assistant Registrar : ITAT Delhi Benches :
Delhi.