Income Tax Appellate Tribunal - Delhi
M/S. Akzo Nobel India Limited, Gurgaon vs Dcit, New Delhi on 8 January, 2018
1 ITA No. 2936/Del/2014
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-2' NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No. 2936/DEL/2014 ( A.Y 2007-08)
DCIT Vs Akzo Noble Car Refinishes
Circle-1(1) India Pvt. Ltd.
New Delhi Shed No.9, DSIDC, Okhla
Industrial Area,
(APPELLANT) Phase-II, Scheme-II
New Delhi
AABCA0197Q
(RESPONDENT)
ITA No. 3005/DEL/2014 ( A.Y 2007-08
Akzo Noble Car Refinishes India Pvt. Vs DCIT
Ltd.(formerly known as Akzo Nobel Circle-1(1)
Car Refinishes India Pvt. Ltd) New Delhi
DLF Cyber Terraces, Building No. 5,
Tower A, 20th Floor, DLF Cyber City, (RESPONDENT)
Phase-III
Gurgaon
(APPELLANT)
Appellant by Sh. Yogesh Verma, CIT DR
Respondent by Sh. Manoneet Dalal, AR, Sh.
S. P. Singh, AR
Date of Hearing 31.10.2017
Date of Pronouncement 08.01.2018
ORDER
PER SUCHITRA KAMBLE These cross appeals are filed by the Revenue and assessee respectively against the order dated 28/2/2014 passed by CIT(A)-XX, New Delhi for Assessment Year 2007-08.
2 ITA No. 2936/Del/20142. The grounds of appeal are as under:-
ITA No. 2936/DEL/2014 (Revenue Appeal)1. Whether the Ld.CIT(A) has erred on facts and in law to direct the Assessing Officer /TPO to exclude Choksi Laboratories from the list of comparables.ITA No. 3005/DEL/2014 (Assessee's Appeal)
The grounds hereinafter taken by the Appellant are without prejudice to one another.
1. That the learned Commissioner of Income Tax (Appeals) - XX, Delhi ['CIT (Appeals)'] erred in disregarding the Transfer Pricing (TP) documentation and thereby erred in not appreciating economic analysis conducted bonafide by the Appellant in respect of its contract research and development services ('R&D segment'), performed with due diligence and using the data available at the time of conducting the comparability analysis.
2. The learned CIT (Appeals) erred on facts and circumstances of the case and in law by confirming an Transfer Pricing adjustment amounting to INR 8,129,483 holding that the international transaction pertaining to contract R&D segment do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in:
2.1 not appreciating that the Appellant had prepared the Transfer Pricing documentation bona fide and in good faith in compliance with the provisions of Section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ('Rules') and selected uncontrolled comparable companies based on a detailed Functional, Asset and Risk ('FAR') analysis, following a methodical and consistent benchmarking process in respect of contract research and 3 ITA No. 2936/Del/2014 development services.
2.2. rejecting the arm's length margin computed by the Appellant for contract R&D service segment using multiple year / average data and instead of using current year data for comparable companies, i.e., data for FY 2006-07, despite the fact that the same was not available with the Appellant at the time of preparing its transfer pricing documentation.
2.3. ignoring the comparability analysis undertaken by the Appellant for its contract research and development services and thereby performing his own comparability analysis in making adjustment to the transfer price of the Appellant.
2.4. ignoring the limited risk nature of the contract research and development services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential.
2.5. not appreciating the fact that there are significant differences in the levels of working capital employed by the comparables vis-a-vis that of the Appellant and suitable adjustment for differences in working capital needs to be provided.
3. The learned CIT (Appeals) erred in upholding the charging of interest under section 234B of the Act.
4. That the Appellant craves leave to add to and / or alter, amend, rescind or modify the grounds taken hereinabove before or at the time of hearing of this appeal."
4. Akzo Nobel Car Refinishes India Pvt. Ltd. (Akzo India) is a 100% subsidiary of Akzo Nobel Coatings International BV. Akzo India is into distribution and 4 ITA No. 2936/Del/2014 sale of car refinishes. It also undertakes contract research and development for Akzo Group. The international transactions reported in Form No. 3CEB are summarized as under:-
S. No. Description of transactions Method Value (in Rs.) 1 Purchase of finished goods RPM 22,28,96,589/- 2 Purchase of capital goods TNMM 32,54,246/- 3 Contract research and TNMM 9,18,66,974/-
development 4 Administration fee paid TNMM 42,07,000/-
5 Reimbursement towards IT TNMM 72,52,782/-
Charges 6 Reimbursement of expenses CUP 7,36,462/-
received 7 Reimbursement of expenses CUP 2,36,774/-
paid In the TP study, the international transactions in Distribution Segment was benchmarked by the assessee using RPM. The GP margin of the assessee is 36% as against the comparables margin of 20% using multiple year's data. In the TP study the international transactions in Contract R&D segment was benchmarked by the assessee using TNMM with OP/TC as the PLI. The margin of the assessee is computed at 5% as against the margin of the comparables at 4% using multiple year data. Thus as per the assessee the international transactions is at arm's length price. The TPO rejected the TP study of the assessee in the Contract Research and Development Segment. The TPO determined the TP adjustment of Rs. 1,52,87,628/- for the contract R&D services segment.
5 ITA No. 2936/Del/20145. The assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
6. The present appeals are filed by the Revenue as well as by the assessee.
7. In Revenue's appeal, the sole ground is to include Choksi Laboratories from the list of comparables which was directed by CIT(A) to exclude to the A.O/TPO.
8. In assessee's appeal, the assessee challenged that the international transaction pertaining to contract R & D segment do not specify the Arm's Length Principle envisaged under the act. The assessee is challenging CIT(A)'s order saying that the CIT(A) has not appreciated that the assessee's Transfer Pricing documentation is bonafide and in good faith in compliance with the provisions of Section 92D of the Act read with Rule 10D of the Income Tax Rules 1962 and selected uncontrolled comparable companies based on detailed functional, asset and risk (FAR) analysis, following a methodical and consistent bench mark process in respect of contract research and development services.
9. The Ld. DR submitted that as related to Choksi Laboratories the Transfer Pricing Officer rightly included this comparable.
10. The Ld. AR submitted that the TPO has not at all discussed how Chocsi Laboratories will be a comparable. In-fact for Assessment Year 2005-06, the CIT(A) has excluded the same by saying that company does not have segmental information and it is engaged in diverse activities. Therefore, functionally dissimilar. The CIT(A) also in the present Assessment Year has taken cognizance of the activities carried out by the Choksi Laboratories and thereafter verifying the documents came to the conclusion that it is functionally dissimilar and excluded the same from final comparables. Therefore, there is no need to interfere CIT(A)'s finding on this issue.
6 ITA No. 2936/Del/201411. We have heard both the parties and perused the material available on record. It is pertinent to note that this comparable is engaged in diverse activities and there is no segmental information available in this Assessment Year 2007-08. Therefore, the CIT(A) has rightly rejected this comparable and directed the same to the TPO/A.O for excluding the same. Besides functional dissimilarity there is also no separate segmental information available. Thus, on both the fronts this comparable has been rightly rejected/excluded by the CIT(A). There is no need to interfere with the findings of the CIT(A). Hence, the appeal of the Revenue on this issue is dismissed.
12. In result, appeal of the Revenue being ITA No. 2936/Del/2014 is dismissed.
13. As relates to the assessee's appeal, the Ld. AR submitted that the assessee is engaged in sale and distribution of car refinishes and contract (R &D) which is engaged in automobile industry. R & D segment of Akzo India undertakes contract Research and Development for the Akzo Group. Akzo India carries out not in Research and Development Activities (Colour mixing) on the basis of the specifications received from the Akzo Group. Akzo India is responsible for the global, regional refinishes market. R & D activity is targeted towards development of unfortunately friendly and technology advances products and development of new colour Akzo India does not own any significant intangible and does not take any significant research and development on its account that leads to the development and non written intangible. Akzo India uses the trade marks, process and know-how technological data software, operating/quality standard etc developed, owned by Akzo Group. Akzo India Provides contract R & D services only to the Akzo Group and is compensating on the cost plus pre-determine basis and thus operating in an owner risk insulated atmosphere. As a cost plus method is considered as compensation as the risk insulated service provider, which is paid irrespective of the success or failure of the services rendered. The Ld. AR 7 ITA No. 2936/Del/2014 submitted that TCG Lifesciences Ltd, Transgene Biotek Ltd. are functionally different from the assessee company. As TCG Lifesciences Ltd. is engaged in clinical research project development and is in Pharmaceutical Industry. While Transgene Bioteck Ltd. is engaged and manufacturing diagnostic products and allied services and again in Pharmaceutical Industry. Both these companies own patent and IPR which are intangible assets. There is a high risk end for developing product for both of this companies. Therefore, these companies have to be excluded.
14. The Ld. DR submitted that the TPO has rightly included these companies and this contention was not before the CIT(A). Therefore, the appeal of the assessee be dismissed.
15. We have heard both the parties and perused the material available on record. TCG Lifesciences Ltd. and Transgene Bioteck Ltd. both are functionally dissimilar. They are having intangible assets which are owned by both the companies. There is high risk involved by both the comparables. These are functionally dissimilar because they are into Pharmaceutical Industry and not in Auto Mobile Industry. Thus, both these comparables needs to be excluded. Therefore, the TPO/A.O is directed to exclude these two comparables.
16. As relates to R & D compensation, the Ld. AR submitted that the TPO as well as CIT(A) has grossly erred in not appreciating that the assessee after due verification and application selected uncontrolled comparable companies based on a detailed functional asset and risk (far analysis). The Ld. AR further submitted that using multiple year/average data instead of using current year data for comparable companies which was not available to the assessee,is not proper on part of TPO/A.O as well as CIT(A). Working capital levels were significantly different from the comparables which were not taken into account by the TPO as well as CIT(A). The Ld. AR relied upon the order of the ITAT in the assessee's own case where in Para 29 detail discussion was given.
8 ITA No. 2936/Del/201417. The Ld. DR relied upon the order of the TPO and the CIT(A).
18. We have heard both the parties and perused the order of the ITAT in the assessee's own case for Assessment Year 2005-06. In this particular year also, the working capital adjustment was not considered by TPO, therefore, ITAT directed the TPO to do the needful by taking into account of the relevant factors which was ignored on the earlier occasions. However, it would have to be decided fresh only after the fresh comparables are chosen by the TPO which are similar to the function segment and ownership of the assets.
19. In result, the assessee's appeal being ITA No. 3005/Del/2014 is partly allowed for statistical purpose.
Order pronounced in the Open Court on 08th January, 2018.
Sd/- Sd/-
(R. K. PANDA) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 08/01/2018
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
9 ITA No. 2936/Del/2014
Date
1. Draft dictated on 31/10/2017 PS
2. Draft placed before author 31/10/2017 PS
3. Draft proposed & placed before .2017 JM/AM
the second member
4. Draft discussed/approved by JM/AM
Second Member.
5. Approved Draft comes to the PS/PS
Sr.PS/PS 8.01.2018
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk 8.01.2018 PS
8. Date on which file goes to the AR
9. Date on which file goes to the
Head Clerk.
10. Date of dispatch of Order.