Income Tax Appellate Tribunal - Kolkata
Dic India Limited , Kolkata vs Dcit, Circle-10(1), Kolkata, Kolkata on 23 August, 2019
1
ITA No. 2558/Kol/2017
DIC India Limited, AY- 2013-14
आयकर अपील य अधीकरण, यायपीठ - "C" कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH: KOLKATA
(सम ) ी ऐ. ट . वक , यायीक सद य एवं डॉ. अजन
ु$ लाल सैनी, लेखा सद य)
[Before Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]
I.T.A. No. 2558/Kol/2017
Assessment Year: 2013-14
DIC India Limited Vs. Deputy Commissioner of Income-tax,
(PAN: AABCC0703C) Circle-10(1), Kolkata.
Appellant Respondent
Date of Hearing 25.06.2019
Date of Pronouncement 23.08.2019
For the Appellant Shri Akkal Dudhwewala, FCA
For the Respondent Dr. P. K. Srihari, CIT, DR
ORDER
Per Shri A.T.Varkey, JM
This appeal preferred by the assessee is against the assessment order of DCIT, Circle-10(1), Kolkata dated 31.10.2017 for AY 2013-14 passed u/s. 143(3) read with Sec. 144C(5) of the Income-tax Act, 1961 (hereinafter referred to as the "Act") in pursuance of the order of Ld. DRP-2, New Delhi dated 24.08.2017.
2. The substantive issue involved in the several grounds taken in the appeal is against the transfer pricing adjustment of Rs.2,23,79,449/- made by the Ld. TPO in respect of the international transactions involving purchase of raw materials, finished goods and sale of finished goods with the AEs. Briefly stated, the facts of the case are that the appellant company is engaged in the business of manufacture and sale of printing inks and allied products. For the relevant AY 2013-14 the appellant filed its return of income declaring total income of Rs17,94,81,280/-. The case of the appellant was originally selected for scrutiny u/s 143(3) and thereafter the AO referred the case to the TPO. In the Form 3CEB filed along with the return of income, the appellant had benchmarked the transactions involving purchase of raw materials and sale of finished goods by applying the internal TNMM Method and the transaction involving purchase of finished goods for trading 2 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 purposes was benchmarked under the internal RPM Method. In the TPSR furnished along with the Form 3CEB, the appellant had drawn up segmented accounts for its manufacturing and trading segment. The manufacturing segment was further sub-divided into domestic, export and blanket. The export segment was sub-divided into related party and unrelated party and thereafter the internal TNMM was applied to benchmark transactions involving purchase of raw materials and sale of finished goods. As far as purchase of finished goods from the AEs is concerned, the trading segment involving purchase & sale of press chemicals was divided internally into related and unrelated party and benchmarked accordingly. According to TPO, this segmentation and re-segmentation furnished by the assessee was not backed by any data or basis and was far-fetched. The TPO further observed that the segmented results furnished by the appellant did not form part of the audited annual financial statements and therefore refused to accept the sancity of the segmented results as provided by the assessee. The TPO proceeded to benchmark these international transactions by applying entity level external TNMM. The TPO followed the same search process as followed by his predecessor in the earlier AY 2012-13 and identified 14 comparables having mean PLI [OP/OR] of 8.57% as against PLI of 3.58% of the tested party viz, the appellant. Accordingly the TPO computed transfer pricing adjustment of Rs,.2,47,61,421/-. Based on the order passed u/s 92CA(3), the AO passed a draft assessment order u/s 144C adding the aforesaid TP adjustment along with other additions/disallowances to the assessable income of the appellant for the relevant AY 2013-14. Aggrieved by this draft order, the appellant filed objections before the DRP-2 Delhi. The DRP-2, Delhi in their order dated 24.08.2017 rejected the usage of segmented results and upheld the application of external TNMM on entity level. The DRP-2, Delhi however excluded 4 comparables out of the 14 comparables identified by the TPO and accordingly directed the TPO to re-compute the transfer pricing adjustment. Consequent thereto the TPO passed a revised order u/s 92CA(3) r.w. Sec 144C(5) dated 30.10.2017 recommending transfer pricing adjustment of Rs.2,23,79,449/-. Thereafter the AO passed the final assessment order u/s 143(3)/144C(5) on 31.10.2017. Being aggrieved the appellant is now in appeal before us.
3. We have heard the rival submissions of both the parties. Before dwelling into the facts involved in the relevant year, the Ld. AR took us through the history of the transfer 3 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 pricing assessment of the appellant company. The Ld. AR submitted that the appellant company has all along been purchasing raw materials & finished goods from AEs and exporting finished goods to AEs. It was further stated that the appellant has been subjected to transfer pricing scrutiny from AY 2003-04 and onwards. The Ld. AR pointed out that the appellant had benchmarked the aforesaid transactions by applying TNMM on entity level in the AYs 2004-05 and 2005-06. The Revenue however rejected the application of TNMM on the premise that the value of transactions with its AEs as a percentage of overall volume of business was minimal and hence entity level TNMM was not the most appropriate method. Instead the Revenue drew up segmented accounts of the appellant and applied CPM in respect of purchase of raw materials and export of finished goods and RPM for the purchase of finished goods. The Ld. AR drew our attention to the decision of the coordinate Bench of this Tribunal in the appellant's own case for AYs 2004-05 & 2005-06 reported in [2016] 75 taxmann.com 122 (Kolkata - Trib.) wherein although application of TNMM by the assessee was upheld but even otherwise the Tribunal found the segmented accounts of the appellant to be reliable and on application of RPM & CPM, the international transactions were held to be at arm's length. He submitted that subsequent thereto, the appellant had been preparing segmented accounts and applying RPM in respect of its trading functions i.e. purchase of finished goods from AEs and TNMM in respect of manufacturing functions, i.e. purchase of raw materials and sale of manufactured goods to AEs. The Ld. AR submitted that this TPSR of the appellant was accepted by the Revenue and no adjustments were made in the orders passed u/s 92CA(3) for AYs 2006-07 to 2009-10. It was pointed out that the dispute again arose in AYs 2010-11 to 2012-13 wherein the TPO rejected the aforesaid methodology and applied entity level TNMM on aggregate international transactions. During the pendency of the appeal for AYs 2010-11 & 2011-12 before the Ld. CIT(A), the matters of the subsequent AY 2012-13 were decided by the DRP, Delhi. Although the DRP, Delhi did not accept the appellant's TPSR but found certain infirmities in the search process and comparables identified by the TPO. Following the revised set of comparables upheldby the DRP, Delhi, the TPO noted that the international transactions were on arm's length even on application of TNMM at entity level. The Ld. AR thus submitted that the matter for AY 2012-13 attained finality. Thereafter, the Ld. CIT(A) disposed-off the appeals for AY 2010- 4 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 11 & 2011-12 on the same lines as decided by the DRP, Delhi in AY 2012-13. Upon giving effect to Ld. CIT(A)'s order, the international transactions were found to be at arm's length. On appeal, this Tribunal in the order dated 03.05.2019 in ITA Nos. 1362 & 1363/Kol/2017 upheld the orders of the Ld. CIT(A) for the AYs 2010-11 & 2011-12. The Ld. AR pointed out that in the appeals filed by the Revenue for AYs 2010-11 & 2011-12, their sole grievance was concerning the product comparability and consequent identification of comparables. He submitted that since the assessee was not in appeal before the Tribunal, the question of usage of segmental accounts and application of RPM & transactional TNMM as opposed to TPO's approach of applying aggregate TNMM at entity level was never adjudicated by this Tribunal.
4. Referring to the above historical facts of the appellant's case, the Ld. AR submitted that the lower authorities were unjustified in rejecting the segmented accounts and the appellant's method of benchmarking distinct transactions separately, particularly when it was the Revenue who had advocated the usage of segmented results for appellant's trading & manufacturing functions and benchmarked each set of transaction separately in AYs 2004-05 & 2005-06 and, which has since been followed by the appellant and also accepted by the Revenue until AY 2009-10. The Ld. AR submitted that each activity, function or transaction has its own distinct FAR analysis and therefore where the FAR analysis of different activities are not inter-linked or inter-related then the correct approach is to determine the ALP for each of the activities independently. Drawing our attention to the facts of the case, the Ld. AR submitted that the appellant performed two separate and distinct functions i.e. manufacturing & trading which cannot be said to be relatedly comparable or inter-linked. He submitted that the manufacturing segment only dealt with manufacture of different variety of printing inks and the trading segment involved dealing in press chemicals. Accordingly he contended that the international transactions involving purchase of raw materials and export of manufactured finished goods being part of the manufacturing segment was rightly benchmarked together. As regards the press chemicals purchased from the AEs, he submitted that this transaction was completely distinct in as much as the appellant conducted only trading of these goods. The product profile, functions performed, risks assumed, assets employed& profitability in the trading activity could not 5 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 be even remotely be said to be linked or connected with the activity of manufacturing printing inks. The Ld. AR therefore claimed that the TPO's action of aggregating different & distinct set of international transactions and benchmarking it at entity level was unsustainable in law and on facts.
5. Assailing the order of the lower authorities, the ld. AR submitted that the reasoning put forth by them to reject the segmented accounts was extraneous. Inviting our attention to Page 121 of the paper book the ld. AR submitted that the appellant had furnished audited segmented accounts and hence the same could not be outrightly rejected as un-reliable. He further pointed out that the audit certificate also contained the different allocation keys adopted for bifurcation of common costs & expenses. Taking us through each of the allocation key, the ld. AR submitted that the segmented accounts had been drawn up on reasonable basis. He thus contended that in absence of any factual infirmity or any specific error in the segment information provided by the lower authorities they were unjustified in rejecting the same.
6. The ld. AR submitted that whether the segment reporting is disclosed in the audited financial statements or not, is irrelevant to decide its reliability. The Ld. AR pointed out that segment reporting in the annual financial statements is required to be done in accordance with the guidelines laid down in AS-17 prescribed by ICAI. He submitted that AS-17 was not applicable to all companies and even where it is applicable there are several conditions &criterias laid down for identification of segment reporting thereof. According to the ld. AR, the guidelines in AS-17 as prescribed in ICAI are meant solely for accounting purposes and it cannot be read into the provisions of Income-tax Act, 1961. The ld. AR pointed out that under other provisions of the Income-tax Act, 1961; the assessees are required to carve out separate segment / standalone accounts of units eligible for profit linked deduction u/s 10A, 10AA, 80IA, 80IB, 80IC etc. which may or may not form part of the segment reporting of the annual financial statements of the assessees which get published. He therefore contended that the stand-alone accounts so prepared by the assessee for income- tax purposes cannot be discarded on the premise that it does not form part of the segment reporting of the published financial statements. According to him merely because a segment 6 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 does not fulfill the conditions laid down in AS-17 so as to qualify for reporting purposes cannot be reason enough to hold that such segment does not exist. Drawing our attention to the TPO's order, the ld. AR submitted that even the TPO had carved out a separate R&D segment to benchmark the R&D expenses incurred by the appellant, which admittedly was not part of any segment reporting in the published financial statements. He thus submitted that the TPO's rejection of the audited segment results furnished by the appellant was self- contradictory. In this backdrop, the ld. AR submitted that the ld. TPO indeed has the requisite powers to examine and verify the segmental results furnished by the assessee and make necessary changes/alterations, if any infirmities are found therein but the segmental results cannot be rejectedon the bald premise that it does not form part of the segment reporting of the published financial statements. In support thereof, he relied on the following decisions:
- Netguru Ltd. [TS-383-ITAT-2019(Kol)-TP] (Copy enclosed);
- Tata Technologies Limtied [TS-390-ITAT-2019(PUN)-TP];
- Almatis Alumina Pvt. Ltd. [TS-302-ITAT-2019(Kol)-TP];
- Lummus Technology Heat Transfer BV [TS-406-ITAT-2018(Del)-TP]
7. The Ld. AR thereafter argued that the comparability analysis performed by the lower authorities was unjustified. He submitted that ideally the four comparables identified by the appellant and accepted by the TPO only were required to be considered.He submitted that these 4 comparables were engaged in the manufacture of 'printing inks' and this data was sufficient and there was no need to broaden the search horizon to include companies engaged in manufacture of specialty chemicals, pigments etc. Drawing attention to the six comparables identified by the TPO and retained by the DRP, he pointed out that each of these comparable was engaged in manufacture of pigments which was the raw material used in the manufacture of the appellant's product i.e. printing inks. He submitted that the functional profile of pigment was completely different than printing inks and that it could not be said to be comparable. According to ld. AR a comparable company for a manufacturer is its competitor and not its supplier or any other company which forms part 7 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 of the supply chain. The markets catered to, economic forces faced, price elasticity and other commercial factors faced by a raw material manufacturer would not be same as its user. To illustrate it further, he submitted that the profitability, market, functions, business model etc. of a wholesaler cannot be said to be comparable with that of a retailer (downstream) of the same product. The Ld. AR further explained that pigments are of different varieties having varied uses and significant price elasticity. He submitted that the similar variety of pigment, as used by the appellant company, is also used as a raw material in industries such as colors, cosmetics, paints etc. He therefore submitted that if the DRP's analogy of taking the companies involved in manufacture of pigments as comparables is accepted, then extending the same logic, even the companies involved in manufacture of cosmetics, paints etc. can be said to be comparable to the appellant company which manufactures printing inks. This proposition, according to the ld. AR, is ex-facie fallacious and untenable. He thus submitted that all the comparables retained by the DRP deserves to be rejected. As regards, the application of RPM for benchmarking the purchase of press chemicals from AEs, he relied on the orders passed in appellant's own case for AYs 2004- 05 & 2005-06 reported in 75 taxmann.com 122.
8. Per contra the Ld. CIT, DR vehemently supported the order of the lower authorities. According to him although segmented data can be used for undertaking benchmarking analysis in transfer pricing but re-segmentation of segmented data is not permissible. He reiterated the AO's observation that the segmented data did not form part of annual report and hence could not be relied upon. He alternatively submitted that in case the usage of segmented results were upheld, then the matters be restored to the file of the AO/TPO for verification of the facts & figures stated therein. As regards the comparability analysis, the Ld. DR supported the order of the DRP, Delhi upholding the retention of comparables engaged in manufacture of pigments viz., the raw material used in manufacture of printing inks. According to Ld. DR, since pigments is an essential raw material for manufacturing pigments the said industry could be said to be broadly comparable with the printing inks industry.
8 ITA No. 2558/Kol/2017DIC India Limited, AY- 2013-14
9. After giving a thoughtful consideration to the facts of the case and the issues raised before us, we deem it fit to first frame the questions which are required to be answered in the present appeal.
a) Whether on the facts and circumstances of the case, the lower authorities erred in law and/or facts in adopting aggregation approach and benchmarking all international transactions at entity level as opposed to transaction by transaction approach.
b) Whether on the facts and circumstances of the case, the lower authorities were unjustified in rejecting the segmental information furnished by the appellant.
c) If the use of segmental information is found to be acceptable then, whether on the facts and circumstances of the case, the appellant was justified in applying internal RPM for benchmarking the international transactions involving purchase of goods.
d) If the use of segmental information is found to be acceptable then, whether on the facts and circumstances of the case, the appellant's methodology of applying internal TNMM for benchmarking the international transactions involving purchase of raw materials and sale of manufactured goods was justified or not.
e) Whether on the facts and circumstances of the case, the comparability criteria followed and the comparables identified by the TPO and retained by the DRP, Delhi are acceptable or not.
10. From the facts on record it is noted that the appellant had entered into three separate & identifiable international transactions involving (i) purchase of raw materials, (ii) export of manufactured finished goods and (iii) purchase of trading goods. Now we advert to the provisions of Section 92(1) which states that, 'Any income arising from an international transaction shall be computed having regard to the arm's length price.' The language employed in Section 92(1) is clear that the ALP is required to the computed with regard to each international transaction. It is noted that the procedure for computation of arm's length price has been set out in section 92C(1) read with Rule 10B of the IT Rules, 1962. Five 9 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 specific methods have been enshrined in the said Rule apart from one general method. The relevant extracts of Rule 10B which inter alia includes RPM & TNMM, reads as under:
(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :--
(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 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 or the specified domestic 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;
(e) transactional net margin method, by which,--
(i) the net profit margin realised by the enterprise from an international
transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;10 ITA No. 2558/Kol/2017
DIC India Limited, AY- 2013-14
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction;
11. If one carefully peruses the above Rule, it shall be noted that even the manner of computation of ALP has been prescribed with reference to 'an international transaction'. Even where TNMM is found to be the most appropriate method, the Rule provides that the net profit margin realised by the enterprise from an 'international transaction' having regard to its FAR analysis is to be compared with the net profit margin derived by an unrelated enterprise from comparable uncontrolled transactions and the ALP is accordingly required to be computed. In view of the foregoing we note the ALP should be ordinarily determined in relation to an international transaction. The term 'international transaction' has been defined in section 92B to mean : 'a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, etc. It is discernible from the above definition of international transaction given in section 92B that it refers to 'a transaction' between two or more associated enterprises. The term 'transaction' has been defined in section 92F(v) and also in Rule 10A(d) of the Income-tax Rules, 1962. The Rule defines the term 'transaction' to include: 'a number of closely linked transactions.' 11 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14
12. Hence, in view of the above provisions and rules set out there-under, we are of the considered view that the arm's length price is essentially required to be determined on transaction-by-transaction approach for each international transaction separately. For that purpose, a transaction in singular also includes plural for closely linked transactions. In other words, where the transactions are not closely linked, that their ALP should be determined separately for each international transaction and such determination of ALP for 'an' international transaction as per section 92C(1) is done as per the most appropriate method. To put it simply, each international transaction is to be viewed separately and independent of other international transactions for determining its ALP by using one of the given methods, which is the most appropriate method having regard to the nature of transaction or class of transaction or functions performed, etc. It is impermissible to combine all the international transactions for determining their ALP in a unified manner when such transactions are diverse in nature.
13. To illustrate the above, there may be a case where transaction involving purchase of goods may be benchmarked applying CUP and it is found that such international transaction is recorded showing a higher cost than its ALP cost. Further, in another set of transactions involving rendering of services, it is found that the international transaction recorded shows a higher income than its ALP income. It is overt from section 92(1) that if an international transaction is recorded showing excess costs than its ALP cost, then it is the ALP cost which should be considered for the purpose of computation of the total income, which in this illustration would result in a transfer pricing adjustment of purchases from AE. Section 92(3) however manifests that the provisions of this section shall not apply in a case where the computation of income having regard to ALP has the effect of reducing income chargeable to tax. The effect of section 92(3) is that if transacted value income from an international transaction is more than its arm's length income, then, the arm's length income should be discarded and the actual income should be considered. To sum up, it is the higher of actual income or the arm's length income from an international transaction, which is taken into consideration for computing the total income. Accordingly, in this illustration the actual income (which is higher) from rendering of services will have to be considered. However if we consider these separate transactions under the aggregate approach on entity 12 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 level under TNMM, then it shall result in cross subsidization of the international transactions which is impermissible. It shall so happen therefore that a probable addition on account of transfer pricing adjustment arising from one set of international transactions may get set off against the income from the other international transaction giving higher income on transacted value. In our considered view therefore the transaction by transaction approach is the more appropriate and reasonable way to benchmark different international transactions, having regard to their FAR profile and this approach holds precedence over the aggregate approach.
14. In this regard we find that the Hon'ble Punjab & Haryana High Court in Knorr Bremse India (P) Ltd. v. Asstt. CIT [2016] 380 ITR 307 considered the question of aggregation of international transactions. Their Lordships held that several transactions between two or more AEs can form a single composite transaction only if they are closely linked transactions and the onus is always on the assessee to establish that such transactions are part of an international transaction pursuant to an understanding between various members of a group. It went on to hold that where a number of transactions are priced differently but on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e. either take all or leave all), then it is also an international transaction. But it will be on the assessee to prove that although each is priced separately, but they are provided under one composite agreement. It still further held that each component may be priced differently also, but it will have to be shown that they are inextricably linked that one cannot survive without other. Merely because purchase of goods and acceptance of services lead to manufacture of final product, it does not follow that they are dependent transactions. The relevant extracts of the judgment is as follows:
"- However, it cannot be accepted that as the services and goods are utilized by the assessee for the manufacture of the final product, they must be aggregated and considered to be a single transaction and the value thereof ought to be computed by the TNMM. Merely because the purchase of each item and the acceptance of each service is a component leading to the manufacture/production of the final product sold or service provided by the assessee, it does not follow that they are not independent transactions for the sale of goods or provision of services. The end product requires several inputs. The inputs may be acquired as part of a single composite transaction or by way of several independent transactions. In the latter case, the sale of certain goods and/or the provision of certain services from out of the total goods 13 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 purchased or services availed of by an assessee together can form part of a separate independent international transaction. In such an event, the Assessing Officer/TPO must value this group of sale or purchase of goods and/or provision of services as separate transactions. [Para 40]
- The TNM Method may establish the aggregate price paid for the goods and services received under independent transactions to be an arm's length price. This, however, would give a skewed picture. One of these independent transactions may be at a bargain and the pricing, therefore, is not objected to by the department. This bargain may be for a variety of reasons and in a variety of circumstances unconnected however to the other transactions. The value of the other transactions, on the other hand, may be over estimated and would not be at the arm's length price. In that event, for the purpose of the Act, the price of the second transaction cannot possibly be taken to be the arm's length price for it was not the arm's length price. It does not become the arm's length price merely because the bargain struck with respect to the first transaction balanced the inflated price of the second although the two transactions were independent of each other. The two transactions are different and, therefore, the arm's length price of each of them must be determined separately. The question, therefore, in each case must first be whether the sale of goods or the provision of services was a separate independent agreement or whether they formed part of an international transaction, i.e., a composite transaction. [Para 41]
- It follows, therefore, that if the TPO had correctly come to the conclusion that the said five items were not connected to the rest, he was justified in determining the arm's length price thereof separately from and independent of the others. It would be neither logical nor rational in that event to club several independent and unconnected transactions for the purpose of determining the arm's length price. If, on the other hand, it is established that the sale of various goods and/or the provision of services formed one composite indivisible transaction, TNM Method cannot be applied selectively to some of the components and the CUP or any other method to the remaining components. [Para 43]
- In the present case, all the items were not provided by the same entity. They were provided by different entities. That these entities were all part of the same group is not determinative of the issue whether they were part of a single international transaction. Each party to the group is a separate legal entity. There is a possibility of there being a single international transaction where goods are sold and/or services are supplied by various entities within a group under a single transaction. That, however, would depend upon the facts of each case. The onus would be on the assessee to establish that though the goods were supplied and/or the services were rendered by different legal entities, they were part of an international transaction pursuant to an understanding between the various members of the group. [Para 44]
- In the instant case, during the assessment year the assessee received professional consultancy services from KBSFS for improvement of its production process including planning of new machines, provision of internal machinery support, co-ordination of 14 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 maintenance activities and provision of technical support. However, the assessee availed management support services from another AE, i.e., KBAP which acted as a regional service centre for providing management and operational support services pursuant to an agreement. The transactions were not entered into with merely one AE. They were entered into with various entities within the group. This is clear from the transfer pricing study relied upon by the assessee itself. Throughout the report, the reference is to the group entities in the plural. There is nothing to suggest that these various transactions formed a composite agreement, to wit that the various agreements with the various group entities were, in fact, part of one single indivisible transaction. Nor was there anything that suggests that the pricing in respect of each transaction was dependent upon or interrelated to the pricing of the other transactions with the group entities. Prima facie at least, it appears, therefore, that each transaction was separate and independent of the other."
15. We note that the decision of the coordinate Delhi bench of this Tribunal in the case of JCB India Ltd Vs DCIT (69 taxmann.com 383) is of much relevance. In the decided case the assessee had international transactions with AEs inter alia including payment of royalty on sales and import of raw materials. It was the argument of the assessee that these transactions should be aggregated and benchmarked under TNMM on entity level. The Tribunal however did not find merit in this contention as because the payment of royalty pertained to marketing & distribution functions whereas the import of raw materials was a part of manufacturing activities. The Tribunal found that these two set of transactions were neither inter-linked or closely connected having regard to their respective FAR and therefore upheld the Revenue's contention that these transactions should be benchmarked separately viz., royalty under CUP Method and import of raw materials under TNMM. The relevant extracts of this decision is as follows:
"7.1 Next argument of the ld. AR was that the TNMM was applicable on entity level de hors the separate determination of ALP of the international transaction of payment of royalty under the CUP method by the assessee. It was argued that the assessee's main emphasis in the TP study report and also before the TPO was that the TNMM should be applied on entity level and that the determination of ALP of the international transaction of payment of royalty under the CUP method was without prejudice to its main argument of the applicability of the TNMM. Notwithstanding the fact that such a contention has been repelled by the tribunal for earlier years, still the ld. AR canvassed this view before us by relying on the judgment of the Hon'ble jurisdictional High Court in Sony Ericsson Mobile Communications India (P) Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 (Delhi), which in the opinion of the ld. AR, is an authority for the proposition that aggregation of all the international 15 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 transactions for benchmarking under the TNMM is permissible and, there is no need to separately determine the ALP of any international transaction including 'Payment of royalty'.
7.2 We are unable to countenance this contention. In a group of appeals by 'Distributors' (not Manufacturers) led by Sony Ericson Mobile Communications India (P.) Ltd's. case (supra), their Lordships espoused the determination of the ALP of Advertisement, Marketing and Promotion expenses (AMP expenses). Dealing with the computation of ALP of the international transaction of AMP expenses by a Distributor, the Hon'ble High Court held, inter alia, that the international transaction of AMP expenses should be bundled/aggregated with other international transaction carried out by the assessee as a distributor, who either simply acts an agent of manufacturer or purchases goods from the manufacturer for resale at his own account. The Hon'ble High Court held that where the TNMM has been applied as the most appropriate method by a Distributor, which method has not been disturbed by the TPO, then, the international transaction of AMP and distribution activities should be clubbed. It further held that for determining the ALP of such transactions under a combined approach, only such comparables should be chosen which conform to the AMP functions and other distribution functions conducted by the assessee. If there is some difference in the functions under these international transactions, including that of AMP, between the assessee and the comparables, then, suitable adjustment should be made to bring both the transactions at par. If probable comparables are not performing similar functions as done by the assessee and no adjustment is possible for bringing the international transactions of the assessee in an aggregated manner at par with those undertaken by the comparables, then, segregation should be done and the international transaction of AMP should be separately processed under the transfer pricing provisions. In such a determination of ALP of AMP expenses in a segregated manner, proper set off on account of excess purchase price adjustment should be allowed.
.....
7.4 Though the judgment in Sony Ericsson Mobile Communications India (P.) Ltd's case (supra)lays down at length the broader principles for determination of the ALP of AMP expenses in the case of a 'Distributor', certain principles dealing exclusively with the determination of the ALP of AMP expenses in the case of a 'Manufacturer' have also been laid down. Such discussion has been made in para 92 of the judgment, the relevant part of which is reproduced here as under :--
"92. The majority judgment refers to an example where the Indian AE may have earned actual profit of Rs.140/-, but returned reduced net profit of Rs.120/- as the Indian AE had incurred brand building expenses to the tune of Rs.20/- for the foreign AE, whereas the net profit on sales declared by comparable uncontrolled transactions was Rs.100/- only. Thus, it was observed that the costs including AMP expenses are independent of cost of imported raw material/finished products having some correlation with overall profit. The example highlights the weakness of the TNM Method. The reasoning would be equally valid, where no AMP or brand building' expenses are incurred. (See paragraph 21.8 to 22.10 of the majority 16 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 decision). The net profit margins can be affected by variation of operating expenses. Thus, the requirement to select appropriate comparable and adjustment. It would be inappropriate and unsound to accept comparables, with or without adjustment and apply TNM Method, and yet conjecturise and mistrust the arm's length price. TNM Method would not be the most appropriate method when there are considerable value additions by the subsidiary AEs. In paragraph 22.9, the majority decision has observed that all costs including the AMP expenses are independent of cost of material. This indicates that the observations have been made with reference to manufacturing activities. It would not be appropriate and proper to apply the TNM Method in case the Indian assessed is engaged in manufacturing activities and distribution and marketing of imported and manufactured products, as interconnected transactions. Import of raw material for manufacture would possibly be an independent international transaction viz. marketing and distribution activities or functions. We have earlier used the term 'plain vanilla distributor'. When we use the words 'plain vanilla distributor' we do not mean plain vanilla situations, but value additions and each party making valuable unique contribution."
7.5 It is discernible from the italicized part of the above para that the application of TNMM Method is not appropriate and proper in case the assessee is engaged in manufacturing activities. In such circumstances, the import of raw material for manufacture would be an independent international transaction viz., marketing and distribution activities or functions. The essence of the above para is that two or more unrelated transactions cannot be aggregated and in case of a 'Manufacturer', the international transactions concerned with the manufacturing activity cannot be aggregated with the AMP activities as both are separate and distinct.
7.6 Nitty gritty of the above discussion is that aggregation of related transactions is permissible, but there is no rule that all the related and unrelated transactions can be combined and shown at ALP under the TNMM on entity level. The Hon'ble Punjab & Haryana High Court in Knorr-Bremse India (P.)Ltd. v. Asstt. CIT [2016] 380 ITR 307/[2015] 236 Taxman 318/63 taxmann.com 186, has held that in order to combine two or more transactions, it is essential that they should be either inextricably linked to each other either by way of a package deal or that a number of transactions are priced differently but on the understanding that the assessee will accept all of them together (i.e. either take all or leave all). It further held that merely because purchase of goods and acceptance of services lead to manufacture of final product, it does not follow that they are dependent transactions.
7.7 On going through the facts and ratio of the decisions in Sony Ericsson Mobile Communication India (P.) Ltd's case (supra) and Knorr-Bremse (supra), it is manifest that the contention of the ld. AR for aggregating all the international transactions including 'Payment of royalty', and then applying TNMM on entity level, cannot be upheld because the international transaction of 'Payment of royalty' is independent of other transactions. The tribunal in assessee's own case has also jettisoned such argument advanced on behalf of the assessee for earlier years and has rightly held that the ALP of the international transaction of 'Payment of royalty' should be done separately on a transaction by transaction approach, 17 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 which has been rightly interpreted by the assessee as a CUP method, that was employed by the assessee in its transfer pricing study report for the year under consideration. Ergo, we turn down the argument of the ld. AR and approve in principle that the TNMM cannot be applied and the international transaction of payment of royalty in respect of model 3DX has to be benchmarked by applying CUP as the most appropriate method."
16. We find that the decision of this Tribunal in the case Benetton India (P) Ltd vs ITO (134 ITD 229) is also relevant in the facts of the present case. In the instant case also the assessee had different set of transactions inter alia including purchase of goods, payment of royalty, export of manufactured goods etc. with the AEs. The assessee had benchmarked the transactions distinctly and separately. The TPO however adopted the aggregation approach and combined all the transactions which were benchmarked at entity level. The Tribunal however rejected this methodology followed by the TPO, by observing as under:
7. We have heard rival contentions, perused the material available on record. The first and foremost question in this case is to determine whether the action of TPO in undertaking entity level benchmarking by TNM method combining of the international transactions is justifiable or the TP analysis provided by assessee, based on "transaction to transaction" basis in respect of different segments should be adopted.
7.1 From the facts mentioned above, it is clear that assessee's manufacturing export activities; buying/sourcing and commission earning activities are independent of each other.
Each activity has different factors in respect of source, identification of vendors, merchandise, designs quality control, handling etc. The FAR analysis in each of the activity will have distinct and separate considerations.
7.2 We, find merit in the argument of the learned counsel that the TPO should have accepted the method of assessee's benchmarking analysis on the basis of transaction to transaction basis in respect of different segments of assessee's international transactions with associated enterprises. In our view, assessee's functions, risk and assets FAR considerations, which are given in the above table, deserves to be merited. TPO did not appreciate the assessee's transactions correctly and applied entity level benchmarking on TNMM method by combining assessee's all international transactions with associated enterprise without justification.
7.3 Our view is supported by ITAT judgments - Mumbai Bench in the cases of UCB India (P.) Ltd. (supra); and Star India Ltd. ( supra); and Kolkata Bench in the case of Development Consultants (P.) Ltd. (supra). All these cases clearly lay down that ALP would be determined based on the nature of service provided by assessee for each class of transaction based on various factors and analysis. In the case of Star India Ltd. (supra), also the TPO treated all the activities of the assessee as one and determined the ALP at entity level without appreciating that one cannot compare the FAR of a principal and agent on same footing.
18 ITA No. 2558/Kol/2017DIC India Limited, AY- 2013-14 7.4 In our view, in the assessee's case there are different segmental activities, which are independent of each other. They are required to be analyzed on transaction to transaction basis and not by combining all activities. Consequently, we uphold the assessee's method of ALP.
17. Adverting to the facts of the present case, we find that the international transactions inter alia including purchase of raw materials and export of printing inks manufactured out of it, the appellant has sufficiently demonstrated that these transactions are closely linked and inter-related and therefore may be considered together for benchmarking purposes. Both these transactions relate to the appellant's manufacturing activity and have similar FAR analysis. The TNMM is therefore held to be the most appropriate method, as claimed by the appellant as well as the Revenue, for benchmarking these set of transactions. In respect of the press chemicals purchased from AEs for trading, we note that this set of transactions have no relation or connection with purchase of raw materials and export of printing inks and are hence separate & distinct. Further having regard to the FAR analysis, we find that the press chemicals purchased relate to pure trading functions of the appellant wherein minimal assets are employed and risks assumed are also significantly less in comparison to the other set of transactions viz., purchase of raw materials and export of manufactured printing inks. On these facts, we find merit in the submissions of the Ld. AR of the appellant the TPO's act of aggregating these three set of international transactions and benchmarking it on entity level was not the correct approach. Instead, in light of the provisions of Section 92 and Rules framed there under and also the judicial precedents available on this issue, we hold that the transaction-by-transaction approach was the most scientific and correct way to determine the ALP of each of set of similar / closely related international transactions.
18. In view of the above findings, the next issue for our consideration is whether therefore the use of segmented information qua the (a) manufacturing segment and (b) trading segment is permissible in the given facts of the present case. In the given facts of the present case, we note that the appellant has two separate & distinct activities viz., manufacturing of printing inks, blankets and trading in press chemicals. It is well understood that the functions involved in manufacturing activities, risks assumed, assets employed are significantly different and higher than the trading activity. Consequently it is 19 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 generally seen that the profitability of a manufacturing enterprise is higher than the profitability of a trading enterprise. As already held earlier, the cross subsidization of the international transactions in a combined approach is impermissible since it results in distorted presentation of facts. Hence if both the manufacturing & trading segments of the appellant are aggregated, the combined profit margin would throw up an inappropriate result in as much as it cannot be compared either with companies engaged in manufacture of printing ink or companies engaged in trading activities. Furthermore in order to benchmark each set of transactions distinctly, it is imperative to use the segmented information of the manufacturing activity and trading activity of the appellant. On these facts we are therefore of the view that the segmented results of the appellant are required to be used for benchmarking the international transactions.
19. We further hold that the argument of the Ld. DR that, since the segmented information did not form part of the published financial statements; it ought not be used, to be devoid of any merit. At the outset, we find merit in the submissions of the ld. AR that whether a particular segment is reportable or non-reportable under AS-17 prescribed by ICAI cannot be held to be decisive criteria to uphold the reliability of the segment identified for the purposes of income-tax laws. We find substance in the ld. AR's arguments that the Income-tax Act, 1961 operates in a different sphere and the requirements and guidelines prescribed in the accounting standards issued by ICAI cannot be inter-linked. We find that the Income-tax Act, 1961 has several provisions, particularly profit-linked deductions etc. wherein assessees are required to carve out and identify separate segmental information and prepare stand-alone accounts for the eligible unit. It is noted that preparation & identification of such segmented results are not linked with AS-17 in any manner and in that view of the matter, we are of the considered view that the lower authorities were unjustified in rejecting the audited segmented results on the frivolous premise that it did not form part of financial statements.
20. We further note that the disclosure of segment information in annual financial statements of an enterprise are governed by the Accounting Standard (AS) -17 (Segment Reporting) issued by the Institute of Chartered Accountants of India (ICAI). The aforesaid 20 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 accounting standard is applicable to an enterprise subject to certain conditions specified therein. The disclosure of segment information is mandatory for an enterprise, the enterprise discloses requisite information in respect of identifiable segments either product wise or geographical wise. The relevant definitions of the two types of segments in AS-17 read as follows:
"A BUSINESS SEGMENT is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments.
A GEOGRAPHICAL SEGMENT is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments."
21. It is thus noted that the AS-17 does not define or identify reportable segment based on the company's function or activity i.e. manufacturing or trading which is carried out in the same/similar products in the same geographical environment and hence there was no occasion for the appellant to have reported its identifiable manufacturing and trading segment in its financial statements since it did not satisfy the criteria laid down in AS-17. We are accordingly of the considered view that there was valid reason for non-disclosure of segment reporting in the audited accounts of the assessee company. At the same time however it is an undisputed fact that the appellant indeed has two identifiable segments i.e. manufacturing & trading which have significantly different FAR profile. The audited segmental information as furnished before the TPO & DRP is available at Pages __ to __ of the paper book. For the reasons as set out in the foregoing, we reject the reasonings put forth by the lower authorities for discarding the segmented information furnished by the appellant.
22. We find that our foregoing findings are supported by the following judicial precedents available on this subject.
(i) M/s Syniverse Mobile Solutions Pvt. Ltd., Hyderabad [TS-51-ITAT-2015], wherein it was held as follows:
21 ITA No. 2558/Kol/2017DIC India Limited, AY- 2013-14 "9. We have heard the arguments of both the sides and also perused the relevant material on record. As rightly submitted by the learned counsel for the assessee, segmental details taken by the assessee in its TP analysis cannot be rejected merely on the ground that they are unaudited, as done by the TPO and this position duly supported by several decisions of the Tribunal is not disputed even by the Learned Departmental Representative. He however, has submitted that the segmental details and financials were rejected by the TPO not merely on the basis of unaudited aspect, but he has also given certain specific reasons, such as assumptions and presumptions involved in the allocation of various expenses between different segments. He has also contended that the different segments of the assessee company are heterogeneous and in order to rely upon the financials of such segments for the TP analysis, it is always better to have the same duly audited. He has contended that although there is no legal M/s. Syniverse Mobile Solutions Private Limited, Hyderabad requirement to get the segmental financials audited, it is always preferable for establishing the reliability."
(ii) Brigade Global Service Pvt. Ltd. Vs ITO, Hyderabad [143 ITD 59], wherein it was observed as follows:
"The AR submitted that, in respect of F.I. Sofex (item No. 11 in the chart) introduced by the assessee but rejected by Learned CIT (Appeals) as well as TPO on the ground that nosegmental details were available. Whereas the fact remains that the assessee had furnished the segmental data. The Mumbai Tribunal in the case of Addl. CIT v. Technimont ICB India (P) Ltd. 148 TTJ (Mumbai) (TM) 547 had held that where the segmental data was furnished rejection of such cases as comparable is not justified. It was further held by both the lower authorities that bad debts written off cannot be allowed as operating cost. The Assessee respectfully submits that bad debts written off forms part of operating cost. In this connection, reliance is placed on the decision of Almatis Alumina Pvt. Ltd. ITA Nos.726&2361/Kol/2017 Assessment Years:2012-13&2013-14 Page|23 Tribunal in the cases of CA Computer Associates (P.) Ltd. v. Dy. CIT [2010] 37 SOT 306 (Mum.Tribunal) and Dy. CIT v. Vertex Customer Services India (P.)Ltd. [2009] 34 SOT 532 (Delhi). 34. The DR submitted that segmental total cost not available and that the subsidiary in India incurred a loss due to which the entire investment as well as recoverable advance had been fully provided for in the books of account. Being so it is not comparable with the assessee company. 35. We have considered the arguments of both the parties. In our considered view for computing the net margin of the assessee for the purpose of transfer pricing only the cost related to the transaction with the AEs has to be considered and accordingly, we agree with the argument that segmental financial data is to be considered for the purpose of arriving at the net margin on an international transaction with the assessee's enterprises in respect of transactions carried on by the assessee. This view of ours is also supported by the order of the Hyderabad Bench of the Tribunal in the case of Foursoft Ltd. vs. DCIT (62 DTR 308) (Hyd). Same view has been taken by the Tribunal in various cases stated by the assessee."22 ITA No. 2558/Kol/2017
DIC India Limited, AY- 2013-14
(iii) Asst.CIT vs Netguru Ltd. (ITA No. 1799/Kol/2018), Kolkata; wherein it was observed as follows:
"11. We have heard both the parties and perused the material available on record, we note that in ground No.1, the Revenue alleged that the segment reporting was prepared by the assessee company without having regard to the nature of business. According to them, had the segment reporting been prepared having regard to the nature of business, the segment reporting ought to have been part of the audited accounts considering the difference in the risk and returns of the two segments as claimed by the assessee company. So, the contention of the Revenue was that the Ld. CIT(A) erred in accepting the segment reporting prepared by the assessee company. We note that it is an undisputed fact that the assessee company belongs to the category of 'Small and Medium Sized Companies'. As a consequence, theAccounting Standard(AS)-17 is not mandatory for the assessee company. That is why, the assessee company has not disclosed segment reporting in the audited financial statements for the relevant financial year. However, it is pertinent to note that the assessee company submitted segment reporting to the Ld TPO solely for the purpose of application of the TNMM. We note that Coordinate Bench Delhi Tribunal in the matter of GSR Technology (India) (P.) Ltd vs. AGIT reported in[2018] 90 taxmann.com 85 (Delhi - Trib.), has examined the issue as to whether the TPO/DRP erred in disregarding the segmental information provided by the taxpayer for the reason that the same was not an audited one. ln this connection, the Coordinate Bench on the decision of the Coordinate Bench Chennai in the matter of Honeywell Electrical Devices & Systems India Ltd. v. Asstt. CIT reported in [2014] 42 taxmann.com 223/64 SOT 118 (Chennai - Trib.) wherein the Chennai Tribunal, placing reliance on the decision rendered in the matter of 3iInfotec Ltd. v. ITO reported in [2013] 35 txmann.com 582 (Chennai - Trib), held that even if such segmental results were not shown in the audited financial accounts, they had to be accepted. The Coordinate Bench in the matter of InfotecLtd. v. ITO (supra) held that there was no legal requirement that the segment wiseworking submitted before the TPO should have been audited by the Assessee'sChartered Accountant. The Coordinate Bench Delhi Tribunal further placedreliance on the decision rendered in the matter of Lummus Technology Heat Transfer BV v. Dy. CIT reported in [2014] 42 taxmann.com 342/64 SOT 47(URO) (Delhi - Trib) wherein it was held that segmental results could not berejected on the ground that the same was not audited. The TPO/DRP was required o examine the segmental results if the same were maintained in the ordinary course of business. On perusal of, inter alia, the aforesaid decisions, the Coordinate Bench Delhi in the matter of CSR Technology (India) (P.) Ltd vs. ACIT (supra)held that the AO/TPO/DRP erred in disregarding the segmental result of the taxpayer by proceeding to consider the margin of the taxpayer at the entity level for the transfer pricing analysis.
In view of above judgments of coordinate benches, we note that there was valid reason for non-disclosure of segment reporting in the audited accounts of the assessee company and submission of segment reporting before the TPO. Therefore, the allegation made by the Revenue in this regard needs to be rejected."23 ITA No. 2558/Kol/2017
DIC India Limited, AY- 2013-14
23. For the reasons set out above we therefore uphold the use of segmented information for benchmarking the trading activity involving purchase of finished goods and manufacturing activity involving purchase of raw materials and export of manufactured goods. We further note that the segmented information furnished by the appellant before the lower authorities were audited results and complete details of allocation keys were also set out therein. In these circumstances, the segment results cannot be said to be unreliable. However on perusal of the transfer pricing order, we agree with the ld. DR that these segmented results were never verified by the TPO since he had out-rightly rejected the same. Accordingly we uphold the Ld. DR's alternative claim and set aside the audited segmented results to the file of the AO for the limited purpose of verification and cross- check with the overall audited financial statements of the appellant. Needless to say, the appellant shall be afforded sufficient opportunity of being heard, in this regard.
24. Now let us examine the application of the internal RPM, as employed by the appellant, for benchmarking the purchase of press chemicals. It is noted that such drilled down approach was followed by the appellant since it had reliable data, cost systems, ledger level support available from the SAP-ERP system implemented by them in the year 2012. We further observe that RPM in respect of the international transactions involving purchase of traded goods, i.e. press chemicals, was applied by the Revenue in appellant's own case for AYs 2004-05 & 2005-06. In these years it was the Revenue's case that the trading transactions are minimal and therefore entity level benchmarking is not the ideal or the most appropriate approach. Instead the TPO had drawn up the segmented results of the trading segment and conducted internal comparison under RPM to benchmark the transactions. We find that on detailed examination of segmented information, this Tribunal had found the transactions involving purchase of traded goods to be at ALP under internal RPM. The relevant extracts of the decision is as follows:
"From the submission we find that the assessee had imported printing inks from AEs worth Rs. 7.06 crores which was sold to unrelated parties for Rs. 8.09 crores resulting in gross profit margin of 13%. Correspondingly the assessee had imported press chemicals from unrelated parties worth Rs. 1.75 crores which was sold to unrelated parties for Rs. 2.02 crores yielding profit margin of 14%. Without prejudice to the assessee's contention that the aforesaid margins would require turnover adjustment and working capital adjustment, it was 24 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 observed that the margin was 13% earned from transactions with related parties was found comparable to margin of 14% earned from uncontrolled transactions and was therefore held to be at arm's length by the CIT(Appeals). The difference in margin of 1% was well within the permitted range of +/- 5% allowed in second proviso Section 92C of the Income-tax Act, 1961. In view of above we do not find any infirmity in the order of the ld. CIT(A). Hence we allow assessee's ground."
25. Following the ratio laid down in the above decision rendered in appellant's own case and the given facts of the case, we uphold the application of internal RPM for benchmarking the international transactions involving purchase of press chemicals from AEs. We accordingly direct the TPO/AO to consider the assessee's audited trading segment results and to compute arm`s length price by applying internal RPM.
26. The next question for our consideration is the application of internal TNMM qua the manufacturing segment, for benchmarking the international transactions involving purchase of raw materials and export of manufactured printing inks and the appellant's claim for re- segmentation of the manufacturing segment into further sub-segments viz., (i) manufacture of printing inks and (ii) manufacture of blankets. In this regard, we note that the ld. AR of the appellant did not seriously contend both these aspects. We further find merit in the ld. DR's argument that the alleged sub-segment viz., manufacture of blankets is very small does not have any material bearing on the overall manufacturing segment. Accordingly we reject both these claims of the appellant and hold that external TNMM was the most appropriate method.
27. Now we turn to the issue of the comparability analysis undertaken by the lower authorities under the TNMM. We are of the considered view that for correct application of TNMM, it is necessary for the lower authorities to select comparables, which were functionally similar and engaged in similar line of business as that of the appellant. In the facts of the appellant's case, it is noted that the appellant is engaged in the manufacture of printing inks. On perusal of the TPSR, we find that the process of manufacture of printing inks is distinct and there are variety of range of printing inks which are manufactured across India. Since the "printing inks" in itself is a major industry, we are therefore of the considered view that the industry specific data pertaining to printing inks industry alone should have been taken into consideration. It is noted that the applying the relevant filters, the appellant had identified the 25 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 following four companies which were engaged in manufacture of printing inks and found to be comparable, having regard it its FAR profile.
(a) Rex-Tone Industries Limited
(b) Sakata Inx (India) Ltd
(c) Tirupati Inks Ld
(d) Organic Coatings Ltd
28. It is noted that comparables (a) to (c) are not in dispute in as much as all of them have been accepted and retained both by the TPO as well as the DRP. With regard to the comparable (d), M/s Organic Coatings Limited, it is noted that although the appellant had contended for its inclusion before the lower authorities but no reasons are found to have been given either by the AO or the DRP to reject the same. Instead we find that the DRP's order is conspicuously silent about this comparable. It was brought to our notice by the ld. AR that this company, M/s Organic Coatings Ltd was found to be functionally comparable and engaged in the same line of business by the DRP, Delhi in the appellant's own case in the earlier AY 2012-13 and thereafter it was also accepted by the TPO to be a comparable. On these facts and in view of the DRP's order for AY 2012-13, we do not find any reason to exclude the company, M/s Organic Coatings Limited from the list of comparables and hence direct the TPO/AO to consider the same.
29. Now we proceed to examine the six comparables, which were identified by the TPO and retained by DRP, but have been disputed by the appellant. The functional analysis conducted by the DRP and the remarks given for retaining them are reproduced hereunder:
Sr.No Comparable TPO Assessee DRP
1. AshiSongwon Selected by The company is The company as per the profile
TPO. engaged in pigment was found to be engaged in the
Colours Ltd production of pigments. The
FAR being Industry and is company had only one
same firmly fucused in segmental report. Pigment is
becoming a leading one of the basic constituents of
global player in the the printing ink. On a
26
ITA No. 2558/Kol/2017
DIC India Limited, AY- 2013-14
phtalocyanine reference to the production
pigments. process of the 'A' it was found
that the pigment was the basic
raw material which was mixed
in an agitator fitted in a pan to
finally produce ink. This is
close to the process largely
involved in the manufacturing
of ink. The process and the
ingredient being common he
comparable is held as a good
comparable. To be retained.
2. Lona Selected by The company is The company was also into
Industries Ltd. TPO. FAR involved in manufacturing of pigments.
is same. manufacturing of Pigment is one of the basic
organic colouring constituents of the printing ink.
matter and not As discussed supra this is a
printing inks. good comparable. To be
retained.
3. Mazda Colours Selected by The company is It was also into manufacturing Ld. TPO. FAR involved in of pigments. As discussed is same manufacturing of supra this is a good pigments and not comparable and should be printing. retained.
4. Sudarshan Selected by The company is The company was into the Chemical Ltd. TPO involved in manufacturing of pigments and manufacturing of agro chemicals. The pigments and agro comparable is to be retained.
chemicals and not printing inks.
5. Megnmani Selected by The company is The company being into the Organics Ltd. TPO involved in manufacture of he pigments, is manufacturing of held as a good comparable and diverse items such as to be retained.
pigments, agrochemical, power and not printing inks.
6. Ultramarine Selected by The company is This company being and Pigments TPO engaged in predominantly into pigments is Ltd (Seg) manufacturing of directed to be retained as a organic colouring comparable as in above matter and not companies.
printing inks.
27 ITA No. 2558/Kol/2017DIC India Limited, AY- 2013-14
30. On perusal of the above, it is noted that each of the above companies are engaged in manufacture of pigments, which in DRP's opinion is an essential raw material in manufacture of printings inks. According to the DRP therefore these companies could be considered as good comparables. We are however unable to agree with this analysis of the DRP. It is an admitted position that each of the above companies manufacture pigments as their final product. None of them manufacture printing inks. It is also not in dispute that the pigments, are used as a raw material along with dyes, resins, solvents & additives to manufacture the printing inks. The use of pigments in the manufacturing process is limited to colour the ink and make it frosted. Accordingly, it is evident that the manufacturing process& assets employed for producing pigments is materially different than the manufacturing process and assets employed for producing printing inks by consuming various components/materials inter-alia including pigments, dyes, resins, solvents & additives etc. In our considered view therefore it is incorrect to hold the supplier of one raw materialis functionally comparable with the manufacturer. It is further observed that the pigments are of wide variety having different applications and uses in different industries. As a consequence it is noted the price elasticity of the pigments is also very wide, depending it on its variety and actual use. It is also noted that the markets catered by pigment manufacturers, economic forces faced and other commercial factors are also significantly different with the companies involved in manufacture of printing inks. The ld. AR brought to our attention that the pigments are not only used as a raw material in manufacture of printing inks, but it is also an essential raw material in the paint industry, cosmetics industry, food industry, plastic industry, fabric industry etc. Hence, if the DRP's proposition that, the manufacturer of an essential raw material is a good comparable with the manufacturer of the final product, is upheld, then extending the same analogy it would mean that the companies involved in manufacture of printing inks is also comparable with companies engaged in manufacture of paint, fabrics, coloured foods, cosmetics etc., since in all these industries the common essential raw material is pigment. In our considered view however such a proposition is inherently fallacious and cannot be accepted. We agree with the ld. AR's contention that a good comparable can be said to be a company which is 28 ITA No. 2558/Kol/2017 DIC India Limited, AY- 2013-14 engaged in the same line of business and not any down-stream or up-stream company, which forms part of the supply chain. In the present case the appellant manufactures printing inks and not pigments. Instead it procures pigments from pigment manufacturers or suppliers. In our considered view therefore none of the above mentioned six comparables retained by the DRP are good comparables and hence stands rejected/ excluded.
31. With these findings, the AO/ TPO is directed to re-compute the ALP margin taking into consideration the above discussed four comparables and accordingly benchmark the international transactions involving purchase of raw materials and export of finished goods using the segmental data of the appellant.
32. In the result, the appeal of assessee stands partly allowed for statistical purposes.
Order is pronounced in the open court on 23rd August, 2019.
Sd/- Sd/-
(Dr. A. L. Saini) (Aby. T. Varkey)
Accountant Member Judicial Member
Dated : 23rd August, 2019
Jd.(Sr.P.S.)
Copy of the order forwarded to:
1. Appellant - DIC India Limited, Transport Depot Road, Kolkata-700 088.
2 Respondent - DCIT, Circle-10(1), Kolkata
3. DRP-2, New Delhi
4. Addl. CIT (IT&TP), Range-3, Kolkata.
5. DR, ITAT, Kolkata. (sent through e-mail) /True Copy, By order, Assistant Registrar