Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs M/S. Akzo Nobel Car Refinishes India ... on 4 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-1 : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
SMT. BEENA A. PILLAI, JUDICIAL MEMBER
ITA No.1925/Del/2011
Assessment Year : 2003-04
ITA No.6482/Del/2012
Assessment Year : 2005-06
ACIT, Vs. Akzo Nobel Car Refinishes India
Circle 1(1), Room No.390, Pvt. Ltd.,
CR Building, IP Estate, Shed No.9, DSIDC, Okhla
New Delhi. Industrial Area, Phase-II,
Scheme-II,
New Delhi.
PAN: AABCA0197Q
ITA No.4096/Del/2011
Assessment Year : 2004-05
Akzo Nobel Car Refinishes Vs. ACIT,
India Pvt. Ltd., Circle 1(1), Room No.390,
Plot No.62P, Hokote Industrial CR Building, IP Estate,
Area, New Delhi
Bangalore.
PAN: AABCA0197Q
(Appellant) (Respondent)
ITA Nos.1925 & 4096/Del/2011 &
ITA No.6482/Del/2012
Assessee By : S/Shri S.P. Singh; Manomeet Dalal;
Gyan Srivastava; Jasvinder Singh, CA;
& Yishu Goel
Department By : Shri Kumar Pranav, Sr. DR
Date of Hearing : 02.08.2017
Date of Pronouncement : 04.08.2017
ORDER
PER R.S. SYAL, VP:
This batch of three appeals comprises of one appeal by the Revenue for each of the assessment years 2003-04 and 2005-06 and one appeal by the assessee is for the assessment year 2004-05. Since some common issues are raised in these appeals, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.
Assessment Year 2003-04
2. The first issue raised by the Revenue is against the deletion of transfer pricing addition amounting to Rs.3,21,70,540/- made by the Assessing Officer from the international transaction of `Purchase of finished goods'.
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ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012
3. Succinctly, the facts of the case are that the assessee is a 100% Indian subsidiary of Akzo Noble Coatings International, B.V. The assessee is engaged in the business of distribution and sale of car paints and refinishes and also undertakes contract research and development for the Akzo group. The assessee reported five international transactions in Form No.3CEB. The Assessing Officer referred the matter of determination of ALP of the international transactions to the Transfer Pricing Officer (TPO). The extant dispute relates to the deletion of transfer pricing addition made by the AO from the international transaction of 'Purchase of finished goods' with transacted value of Rs.5,17,19,544/-. The assessee applied Resale Price Method (RPM) with Profit level indicator (PLI) of Gross profit/Sales for demonstrating that its international transaction of `Purchase of finished goods' for resale was at arm's length price. The assessee computed its own gross profit margin from sales at 37%. Two companies were chosen as comparable, namely, Mafatlal Dyes and Chemicals Ltd. and Vipul Dyes and Chemicals Ltd.. Their mean margin on the basis of figures for the preceding year, namely, year ending 31.03.2002 was worked out at 3 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 18%. That is how, the assessee claimed that its international transaction of purchase of finished goods was at arm's length price. The TPO observed that the mean margin of the two companies was based on the figures of earlier year, that is, year ending March, 2002 as against the relevant financial year ending on 31.03.2003. It was further observed that the companies chosen by the assessee were in the field of Marketing and manufacture of dyes and intermediates. It was seen from the financials of Mafatlal Dyes and Chemicals Ltd. for the year ending 2003 that out of a total sale of Rs.25.33 crore, the trading sales constituted only Rs.9.52 crore and the balance was of the manufactured goods. It was observed that the results of the companies chosen by the assessee as comparable did not depict their true comparability. Both these companies were ergo held to be incomparable. It was held that closer comparability of products was necessary for producing better results under the RPM. In the absence of appropriate comparables chosen by the assessee, the TPO held that in such circumstances the Transactional Net Margin Method (TNMM) would be the most appropriate method as it is neutral to functional differences to some extent. While working out 4 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 the ALP under the TNMM on the premise that functional comparability can be compromised under the TNMM, the TPO selected five more manufacturing companies in addition to two manufacturing companies chosen by the assessee. Average OP/Sales of seven companies was computed at 3.71% as under:-
S.No. Name of the company OP/Sales (%)
1. Aksharchem (India) Limited 6%
2. Amal 13%
3. Metrochem Industries Limited 8%
4. Indokem 8%
5. Organic Coatings Limited 5%
6. Mafatlal Dyes & Chemicals (16)%
7. Vipul Dyes & Chemicals 2%
Mean 3.71%
4. By applying 3.71% as the arm's length margin, the TPO computed the amount of transfer pricing adjustment from the international transaction of `Purchase of finished goods' at Rs.3,21,70,540/-. The assessee assailed the final assessment order, giving effect to the TPO's order, before the ld. CIT(A). The ld. first appellate authority approved the method adopted by the assessee, namely, RPM, as the most appropriate method. He further held that the companies chosen by the 5 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 assessee were correct thereby expunging the five companies chosen by the TPO as comparable. Ex consequenti, the addition on account of transfer pricing adjustment from the international transaction of `Purchase of finished goods' got deleted. The Revenue is aggrieved against such deletion of addition.
5. We have heard the rival submissions and perused the relevant material on record. There are basically two larger issues requiring adjudication at our end. First is the selection of most appropriate method and the second is about comparables. We will espouse these issues one by one for consideration and decision.
Whether RPM is the most appropriate method ?
6. Whereas the assessee chose the RPM, the TPO rejected the same and treated the TNMM as the most appropriate method. However, the ld. CIT(A) restored the assessee's point of view of the RPM as the most appropriate method. The Revenue's contention is that the TNMM should be applied for benchmarking the international transaction of `Purchase of finished goods'. In order to analyse the most appropriate 6 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 method in the given facts and circumstances, it is necessary to note that the assessee purchased finished goods from its AE under this segment and then resold the same to the customers in India. On a specific query, it was submitted that the assessee did not carry out any value addition to the goods purchased from its AE and sold the same as such. Section 92C(1) deals with the computation of ALP and states that one of the given methods shall be chosen as the most appropriate method for determining the ALP of an international transaction. Sub-section (2) of section 92C provides that the most appropriate method referred to in sub-section (1) shall be applied for determination of ALP, in the manner as may be prescribed. The RPM is one of the methods given u/s 92C(1). The mechanism for determining the ALP under this method has been set out under Rule 10B(1)(b), which reads as under:-
"(b) resale price method, by which,--
(i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified ;
(ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and 7 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions ;
(iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services ;
(iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market ;
(v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise ;"
7. Sub-clause (i) of Rule 10B(1)(b) gives the first step in the determination of the ALP, being identifying the price at which property purchased by the enterprise from an AE is resold. Sub-clause (ii) provides that such resale price is reduced by the normal amount of gross profit rate resulting from comparable uncontrolled transactions. Sub- clause (iii) states that the price so arrived as per sub-clause (ii) is further reduced by the amount of expenses incurred by the enterprise in connection with the purchase of goods. The price so arrived at is adjusted to take into account differences, if any, under sub-clause (iv) and the adjusted price is taken as arm's length price in respect of 8 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 property purchased. It is apparent from the nomenclature of the method, that is, `Resale price method' and the modus operandi given in Rule 10B(1)(b) that where the goods purchased by an enterprise are resold as such, without making any value addition, the RPM is the most appropriate method as it specifically deals with the situations of resale of the goods purchased by an enterprise from its AE. In contrast to that, the TNMM is a method of last resort. When none of the specified methods out of the given methods in section 92C(1) can be applied, then, the TNMM is applied for determining the ALP of an international transaction. As the assessee in the instant case is directly engaged in reselling the goods, in our considered opinion, the RPM is the most appropriate method in the given circumstances. The same is directed to be applied for benchmarking the international transaction of `Purchase of finished goods'.
Comparables
8. Now, we turn to the comparability analysis done by the assessee and also the TPO. It can be seen that the assessee chose two companies 9 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 as comparable, namely, Mafatlal Dyes & Chemicals Ltd. and Vipul Dyes & Chemicals Ltd. We have noted above that the assessee applied RPM and the TPO switched over to the TNMM by holding that comparability of the companies can be compromised in the later method. That is how that inspite of holding the two companies selected by the assessee as not comparable, he still included the same in the list of comparables along with his own selection of five companies which were also engaged in manufacturing as the two companies chosen by the assessee. The ld. DR also made the similar observations before the Bench that the TNMM should be applied as it is more tolerant to functional differences and, as the sequitur, a wider range of companies can be roped in under this method which are not strictly comparable. We will first deal with this view point of the TPO as reiterated by the ld. DR.
9. This contention is not acceptable for the obvious reason that similarity of the functions performed under any of the methods for determining the ALP is essential and cannot be dispensed with even under the TNMM. The Hon'ble jurisdictional High Court in Rampgreen 10 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 Solutions Pvt. Ltd. vs. CIT (2015) 377 ITR 533 (Del) has held that the selection of comparables does not differ with the method adopted and the comparables should be selected on the basis of similarity found even under the TNMM. Relevant discussion made in paras 42 and 43 accentuates the importance of functional similarity even under the TNMM :`Before concluding, there is yet another aspect of the matter that needs consideration. The Tribunal proceeded on the basis that while applying TNMM method, broad functionality is sufficient and it is not necessary that further effort be taken to find a comparable entity rendering services of similar characteristics as the tested entity. The DRP held that TNMM allows flexibility and tolerance in selection of comparables, as functional dissimilarities are subsumed at net margin levels, as compared to Resale Price Method or Comparable Uncontrolled Price Method and, therefore, the functional dissimilarities pointed out by the Assessee did not warrant rejection of eClerx and Vishal as comparables. .... In our view, the aforesaid approach would not be apposite. Insofar as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing 11 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction/entity. Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by TNMM method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities.' It is apparent from the above that there is no compromise on the functional similarity even under the TNMM. Thus the contention of the ld. DR in this regard does not hold water.
10. Now we take up the companies for consideration chosen by the TPO, which were excluded by the ld. CIT(A). Page 20 of the impugned order discusses the nature of business carried out by these companies, which is admittedly, `Manufacturing'. In that view of the matter, it becomes manifest that none of such companies can be considered as 12 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 comparable. At the same time, it is relevant to note that the TPO switched over to the TNMM on the understanding that functional comparability is not relevant under this method. That is why, even after holding the two companies chosen by the assessee as incomparable, he still included them in the list of seven comparables on the hypothesis that manufacturing companies can also be compared with trading companies under the TNMM. On a specific query, the ld. AR fairly agreed that both the companies chosen by the assessee are also not functionally similar to that of the assessee, which is exclusively doing trading under this segment. This contention gets fortified from the Annual reports of both the companies which have been placed on record. It is obvious that none of these two companies is engaged in the purchase and sale of the goods dealt with by the assessee. Both the companies are also engaged in manufacturing. Even though the manufacturing component may be a little less than the trading component, but, the character of trading company cannot be assigned to them. It is so for the reason that the impact of profit from manufacturing segment in the overall kitty of the profit from the entity as a whole 13 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 cannot be ascertained. Since both the companies are engaged in manufacturing as well and the TPO's selection of five new comparables is based on a level playing with the two companies selected by the assessee on a misunderstanding of the scope of selection of comparables under the TNMM, we cannot permit the two companies chosen by the assessee to stand when the TPO's selection has also been set aside not only on the method but also the comparables. This leaves us with no comparable company existing in the given circumstances.
11. At this juncture, we are reminded of the prescription of section 92(1) of the Act, which provides that any income arising from an international transaction shall be computed having regard to the ALP. When this position was confronted, it was fairly admitted by both the sides that in the given circumstances, it would be appropriate if the question of finding suitable comparables is restored to the file of the TPO. We agree with the same and order accordingly. The impugned order to this extent is set aside and the matter is restored to the file of Assessing Officer/TPO for selecting a fresh set of comparables after due 14 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 opportunity to the assessee and then determining the ALP of the international transaction of purchase of goods. Before parting, we deem it pertinent to mention that it transpired during the course of hearing that in addition to the sale of goods imported from its AE, the assessee also sold some similar goods purchased from unrelated parties. The TPO, if considered expedient, may also explore the possibility of finding internal comparables provided they are really comparable.
12. The next ground is against the deletion of addition of Rs.33,25,517/- on account of business promotion expenses. The facts apropos this issue are that the assessee claimed deduction of Rs.66,51,033/- on account of business promotion expenses. The Assessing Officer observed that such expenses led to enhancement of value of brand owned by the parent company. He, therefore, disallowed 50% of the expenses amounting to Rs.33,25,517/-. The ld. CIT(A) deleted the addition.
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ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012
13. We have gone through the relevant material on record and find the details of `Business promotion expenses' at page 462 of the paper book, as under :-
Details of Business Promotion Expenses Amount (in Rs.) Giveaways 368 Entertainment 559,695 Giveaways literature, brochures, leaflets 30,310 Giveaways color swatches 1,677,866 Giveaways premium 23,700 Library material 37,737 Training customers 381,797 Test market material 13,701 Market penetration cost -
Seminars 1,000
Convention & meetings 225,070
Giveaways paints 1,574,453
Outside promotions 952,370
PR events 964,676
Gifts to customers 208,291
Total 6,651,033
14. It is visible from the details of business promotion expenses that some of the expenses do not have any relation with enhancing the value of brand owned by the foreign AE. Such expenses cannot be considered as leading to the brand promotion. Further, some of the expenses like training customers and entertainment, etc., have no relation whatsoever with the brand promotion. In our considered opinion, the ends of justice 16 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 would meet adequately if the impugned order on this issue is also set aside and the matter is restored to the file of Assessing Officer. We order accordingly and direct him to examine details of the items extracted above. The expenses which are not in the nature of advertising, marketing and promotion, not leading to the enhancement in value of the brand owned by the AE, should be excluded. The remaining amount should be considered for seeing firstly, if there is an international transaction and if yes, then, to compute the ALP of such international transaction in the light of various judgments of the Hon'ble jurisdictional High Court as discussed by the Delhi tribunal in its order passed in July, 2017 in Olympus Medical Systems India Pvt. Ltd vs. DCIT in ITA No. 890/Del/2017.
15. The next ground is against the deletion of addition of Rs.3,63,461/-
The assessee claimed depreciation on computers, UPS and printers, etc., @ 60%. The Assessing Officer restricted such depreciation to 25%. This led to an addition of Rs.3,63,461/-. The ld. CIT(A) deleted the addition.
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ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012
16. Having heard both the sides and perused the relevant material on record, we find that the test for higher rate of depreciation is the non- standalone application of the items de hors computer. The Hon'ble Delhi High Court in CIT vs. BSES Yamuna Powers Ltd. (2010) TIOL- 636-HC-DEL-IT, has held that routers and switches can be classified as computers and, hence, entitled to higher depreciation @ 60%. Similar view has been taken by the Special Bench of the Tribunal in DCIT vs. Data Craft India Ltd. (2010) 133 TTJ (Mum) (SB) 377. In view of the above decisions, it is clear that the items of computer peripherals, which work in tandem with computers, can be rightly classified as computer for the purpose of granting depreciation at the enhanced rate. The items taken note of by the Assessing Officer for not granting higher rate of depreciation are UPS and Printers. These items do not have any stand alone application without computers. Going by the ratio decidendi of the above decisions, we hold that these items are also eligible for depreciation @ 60%. The addition thus made is held to be rightly deleted.
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ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012
17. The last ground of this appeal is against deletion of addition of Rs.60,17,801/-, being the amount of testing material purchased. The assessee considered this amount as a revenue expenditure. The Assessing Officer treated it as an expenditure of capital nature and, hence, disallowed. The ld. CIT(A) overturned the action of the Assessing Officer.
18. After considering the rival submissions and perusing the relevant material on record, we find that this expenditure includes cost of empty tins, test cards, colour panels for checking the colour shades and developing variant colour formulae. This expenditure has been incurred to check the quality, coverage and shade of colours dealt with by the assessee in its business. After use, the testing material becomes waste product having no value. This shows that the expenditure on such testing material is in the nature of revenue field and, hence, cannot be disallowed as a capital expenditure. It has been brought to our notice that the Assessing Officer has consistently allowed deduction of such 19 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 expenses in earlier years. We, therefore, countenance the view taken by the ld. CIT(A) on this issue. This ground is not allowed.
19. In the result, the appeal filed by the Revenue is partly allowed for statistical purposes.
Assessment Year 2004-05
20. This appeal filed by the assessee is directed against the order passed by the ld. CIT(A) on 22.06.2011.
21. The only issue raised is against the confirmation of addition on account of transfer pricing adjustment from the international transaction of `Purchase of traded goods' from the AE.
22. At the very outset, it was contended by the ld. AR as well as the ld. DR that the facts and circumstances of this appeal are similar to those of the appeal for assessment year 2003-04 with a small modification. We find that the assessee used the RPM as the most appropriate method for showing purchase of finished goods at ALP. The TPO applied the TNMM as the most appropriate method. However, the ld. CIT(A) 20 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 approved the action of the Assessing Officer/TPO in applying the TNMM as the most appropriate method with the Profit level indicator of OP/Sales. As the nature of transactions of `Purchase of goods' from its AEs admittedly remains the same as in the preceding year, being the sale of goods purchased from AE without any value addition, we hold that RPM is the most appropriate method in the given circumstances.
23. For this year, again, both the sides are agreeable that the comparables chosen by the assessee as well as the TPO are different in their functional profiles and the matter may be restored to the file of TPO/Assessing Officer for ascertaining fresh comparables and then determining the ALP of the international transaction of purchase of goods by applying RPM. We order accordingly.
24. In the result, the appeal of the assessee is allowed for statistical purposes.
Assessment Year 2005-06
25. Ground Nos.1 and 2 of the Revenue's appeal are directed against the rejection of the TNMM as the most appropriate method and 21 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 upholding the RPM for determining the ALP of the international transaction of `Purchase of goods'. For this year, again, it is seen that the assessee applied the RPM as the most appropriate method for indicating that the international transaction of `Purchase of finished goods' was at ALP. The TPO applied TNMM. Taking a different view from the preceding year, the ld. CIT(A) upheld the application of RPM as the most appropriate method for this year. As the nature of international transaction continues to remain the same, we approve the application of the RPM as the most appropriate method.
26. As regards comparables, both the sides fairly conceded that none of the comparables chosen either by the assessee or by the TPO is functionally similar with the assessee and it was requested that the matter may be examined afresh by the TPO for selecting fresh comparables. Following the view taken for earlier years, we set aside the impugned order on this score and remit the matter to the file of Assessing Officer/TPO for choosing fresh comparables (external or 22 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 internal) and then determining the ALP of the international transaction of `Purchase of goods' by applying the RPM.
27. Ground Nos. 3 to 5 deal with the other international transaction of `Contract Research &Development' segment. The facts of this issue are that the assessee carried out `Contract R&D' and received a sum of Rs.6,66,97,040/-. The TNMM was applied for showing such international transaction at ALP with PLI of OP/OC. The TPO accepted TNMM as the most appropriate method and also the PLI. However, it was observed that the comparables chosen by the assessee were, in fact, not comparable. The TPO selected his own comparables and proposed transfer pricing adjustment of Rs.1,06,16,921/- by adopting average OP/OC of five comparables at 20.68%. The ld. CIT(A) restored the comparables chosen by the assessee and excluded the companies selected by the TPO. The Revenue is aggrieved against the action of the ld. CIT(A) in this regard.
28. Here, again, both the parties are consensus ad item that the comparables chosen either by the assessee or by the TPO are not, in fact, 23 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 comparable to the international transaction of `Contract R&D'. It was commonly requested that the matter may be restored for selection of fresh comparables. Agreeing with the rival, but, common submission, we set aside the impugned order and direct the Assessing Officer/TPO to find out fresh comparables under the segment of `Contract R&D' and then find out the ALP of the international transaction. Needless to say, the assessee will be given an opportunity of being heard in such fresh proceedings.
29. The last ground of the Revenue's appeal is against the grant of working capital adjustment in the computation of ALP of the `Contract R&D' segment. The ld. CIT(A) agreed with the assessee for grant of working capital adjustment in `Contract R&D' segment. In our considered opinion, this issue is no more res integra in view of several orders passed by the Tribunal permitting the grant of working capital adjustment in case of comparables finally shortlisted. We, therefore, uphold the action of the ld. CIT(A) in principle that the working capital adjustment should be considered. However, it would have to be decided 24 ITA Nos.1925 & 4096/Del/2011 & ITA No.6482/Del/2012 afresh only after the fresh comparables are chosen by the TPO which are really similar.
30. In the result, the appeal is partly allowed for statistical purposes.
The order pronounced in the open court on 04 .08.2017.
Sd/- Sd/-
[BEENA A. PILLAI] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 04th August, 2017.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT AR, ITAT, NEW DELHI.
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