DIC INDIA LIMITED,KOLKATA V. D.C.I.T., CIRCLE - 11(1), KOLKATA

ITA 1858/KOL/2024

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DIC India Ltd. appealed against the order of the Assessing Officer which included a transfer pricing adjustment and disallowed club expenses for the Assessment Year 2020-21. The Tribunal examined two main issues: the disallowance of club expenses amounting to Rs.3,73,864 and the transfer pricing adjustment of Rs.99,95,076. The Tribunal found that the club expenses were incurred for business purposes as the clubs provided a platform for interactions and business conduct, referencing decisions from the Supreme Court and various High Courts that supported the deductibility of such expenses. Regarding the transfer pricing issue, the Tribunal noted that the Assessing Officer had rejected the assessee's segmented accounts without proper examination and directed a re-evaluation of the segmented information provided by the assessee.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 473855 (ITAT-KOLKATA)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2020-2021
• Other Referred Cases: CIT Vs. United Glass Manufacturing Co. Ltd., CIT Vs. Sundaram Industries Ltd., Ingersoll-Rand (India) Ltd. Vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRAVEEN KISHORE
• Assessee Lawyers: AKKAL DUDHEWALA
• Keywords: Set aside; Opportunity of being heard; Additional evidence; Transfer pricing; International transaction; Business expenditure; Bad and doubtful debts
• Section: 37; 37(1); 20

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, KOLKATA [Before Shri Rajesh Kumar, AM & Shri Pradip Kumar Choubey, JM] I.T.A. No. 1858/Kol/2024 Assessment Year: 2020-21 DIC India Ltd. UB-03, Mani tower, 31/41, Binova Bhave Road, Kolkata-700038. (PAN: AABCC0703C) Vs. DCIT, Circle-11(1), Kolkata. Appellant Respondent Date of conclusion of Hearing 12.03.2025 Date of Pronouncement 19.03.2025 For the Assessee Shri Akkal Dudhewala, AR For the Revenue Shri Praveen Kishore, CIT, DR ORDER Per Shri Rajesh Kumar, AM The appeal filed by the assessee is against the order of the Assessing Officer, Assessment Unit, Income Tax Department dated 26.07.2024 for AY 2020-21 passed u/s. 143(3) read with section 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter referred to as the “Act”). 2. Shri Akkal Dudhewala, AR appeared on behalf of the assessee and Shri Praveen Kishore, CIT, DR appeared on behalf of the revenue. 3. It was submitted by the Ld. AR that there are two issues primarily involved, one being transfer pricing adjustment of Rs.99,95,076/-. The second was in regard to the issuance of disallowance of club expenses of Rs.3,73,864/-. It was the submission that in regard to the disallowance of the club expenses of Rs.3,73,864/- that the assessee is engaged in the business of manufacture and trading of printing inks and allowed products having its presence all over India. The company had obtained corporate membership of clubs having affiliations across India for its Directors, managerial personnel and senior employees to interact with customers and other stakeholders. It was the submission that such club provided a perfect platform for 2 ITA No. 1858/Kol/2024 DIC India Ltd. AY 2020-21 interactions, exchange of information and to conduct business. The Assessing Officer had originally disallowed the expenses u/s. 37(1) and before the DRP the assessee had furnished the invoices and the Hon’ble DRP had set aside the matter to the file of the Assessing Officer to examine the additional evidences. The Assessing Officer examined the invoices and noted that the invoices were issued in the names of different persons and, therefore, held that the expenses were not incurred for the business of the assessee. It was the further submission that the persons mentioned in the invoices were either the Directors or the managerial personnel and the Senior employees of the assessee Company. It was the submission that the Directors, managerial personnel and senior employees had used the services of the club for the business purpose of the assessee. It was the submission that the invoice is also included the names of the company being the assessee. It was the submission that the issue was squarely covered by the decisions of Hon’ble Supreme Court in the case of CIT Vs. United Glass Manufacturing Co. Ltd. reported in 28 taxmann.com 429 as also the decision of Hon’ble Madras High Court in the case of CIT Vs. Sundaram Industries Ltd. 240 ITR 335 (Mad.) as also the decision of Hon’ble Karnataka High Court in the case of Ingersoll-Rand (India) Ltd. Vs. CIT 427 ITR 158 (Kar). 4. In reply, the Ld. CIT, DR vehemently supported the orders of the Assessing Officer and the Ld. CIT(A). It was the submission that the expenses in the club were actually expenses incurred by the Directors and employees and no business transactions shown to have been done by the assessee. 5. We have considered the rival submissions. A perusal of the decision of the Hon’ble Supreme Court in the case of United Glass Manufacturing Co. Ltd. (supra) clearly shows that in para 3.3, the Hon’ble Supreme Court has held as follows: “3.3 As far as Question No.1 is concerned, the issue is answered in favour of the assessee in the order pass today in civil appeal arising out S.L.P. (C) No. 20791 of 2009. As far as Question No.2 is concerned, we find that a series of judgements have been passed by High Courts holding that club membership fees for employees incurred by the assessee is business expense under Section 37 of the Income Tax Act, 1961. We also find that none of the decisions have been challenged in this Court. Even otherwise, we are of the view that it is a pure business expense.” 6. This being so, respectfully following the decision of the Hon’ble Supreme Court in the case of United Glass Manufacturing Co. Ltd. (supra), it is held that the expenses incurred by 3 ITA No. 1858/Kol/2024 DIC India Ltd. AY 2020-21 the employees on account of the club membership are the business expenditure of the assessee company and the Assessing Officer is directed to allow the same. 7. Coming to the issue of transfer pricing. It was the submission that the assessee had applied Transactional (TNMM) Method using the Segmental accounts of the assessee. It was submitted by the Ld. AR that the Assessing Officer rejected the Segmental accounts furnished by the assessee and adopted entity level accounts stating that the segment account did not form part of the financial statements and that the allocation keys were not provided. The Ld. AR drew our attention to pages 106 to 107 of the auditor’s certificate which reads as follows: 4 ITA No. 1858/Kol/2024 DIC India Ltd. AY 2020-21 8. It was the submission that this issue was squarely covered by the decision of the Coordinate Bench of this Tribunal in the assessee’s own case for the AY 2014-15 reported in 111 taxmann.com 249 wherein the Co-ordinate Bench of this Tribunal had held the issue in 5 ITA No. 1858/Kol/2024 DIC India Ltd. AY 2020-21 favour of the assessee. The findings of the Co-ordinate Bench of this Tribunal are from para 7 which reads as follows: “7. We have heard the rival contentions and gone through the relevant materials as placed before us. We find from the impugned order of the Coordinate Bench in assessee’s own case in ITA No. 2558/KOL/2017 for A.Y. 2013-14 that the issue has been decided in favour of the assessee. The operative part of the decision is extracted below:- “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. 6 ITA No. 1858/Kol/2024 DIC India Ltd. AY 2020-21 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: \"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 7 ITA No. 1858/Kol/2024 DIC India Ltd. AY 2020-21 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.\" (iii) Asst.CITvsNetguru 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, theAccountingStandard(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 8 ITA No. 1858/Kol/2024 DIC India Ltd. AY 2020-21 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. 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.” 9. In reply, the Ld. CIT, DR vehemently supported the order of the Assessing Officer. It was the submission that the segmental account furnished by the assessee did not form part of the financial statement. It was the submission that the same cannot be relied upon. 9 ITA No. 1858/Kol/2024 DIC India Ltd. AY 2020-21 10. We have considered the rival submissions. A perusal of the facts of the present case clearly shows that the issue of the bench mark by applying the Transactional (TNMM) method using segmental method is now squarely covered by the decision of the Co-ordinate Bench of the Tribunal in the assessee’s own case in ITA No. 2084/Kol/2018 for AY 2014-15 and ITA No. 2558/Kol/2017 for AY 2013-14. Under these circumstances, respectfully following the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case, this issue is held in favour of the assessee 11. The next issue in respect of the transfer pricing adjustment is in regard to the selection of comparable. It was the submission that the assessee had selected Organic Coatings Ltd., Yasefu Inks & Coatings Pvt. Ltd., Bombay Wellprint Inks Pvt. Ltd. and Dolphin Inks Pvt. Ltd. The same were also accepted by the TPO. However, the TPO further went on to add four other comparable being Rex-Tone Industries Ltd., Sudarshan Chemicals Industries Ltd., Hi-shine Inks Ltd. and Siegwork India Pvt. Ltd. Before the DRP, the assessee challenged these comparable and the DRP rejected the comparable of Sudarshan Chemicals Industries Ltd. as selected by the TPO. The DRP went on to uphold the comparable added by the TPO being Rex-Tone Industries Ltd., Hi-shine Inks Ltd. and Siegwork India Pvt. Ltd. It was the submission that Hi-shine Inks Ltd. is engaged in manufacturing of primarily writing inks, marking inks and highlighting inks which is completely different product profile from that of the assessee company. It was the submission that this kind of products require a completely different manufacturing setup and working capital requirement than that required by the assessee for its specialty ink products. It was the submission that Rex-tone Industries Ltd. was a company engaged in manufacturing of primarily inkjet inks and the same was completely different product from that manufactured by the assessee company. It was further submitted that Siegwork India Ltd. was a company having a diversified product portfolio including a coatings product segment and the company was into manufacturing of flexo inks and inks for the tobacco industry. It was the submission that these were very nascent product lines. The Ld. AR drew our attention to the finding of the DRP at page 8 of the assessment order wherein the DRP has specifically held that Siegwork India Pvt. Ltd. is in the manufacture of pigments which is an important ingredient for making ink and certain types of specialized inks. It was submitted that it was clearly shown that Siegework India Pvt. Ltd. 10 ITA No. 1858/Kol/2024 DIC India Ltd. AY 2020-21 was not a comparable to the assessee. It was further submitted that the DRP has also similarly categorically found that Hi-Shine Inks Pvt. Ltd. was in the manufacture of writing inks and that Rex-Tone Industries Ltd. was in the manufacture of inkjet inks. The ld. DRP got carried away with the term ‘ink’ to hold that the activity was functionally and practically similar to the manufacturing of ink business carried out by the assessee. It was further submitted that in regard to Sudarshan Chemicals Industries Ltd., the ld. DRP had also recognized that the entity was ink in manufacture of pigment while the assessee was in the manufacture of printing inks. Having held so and having rejected the comparable Sudarshan Chemicals Industries Ltd. the DRP should have rejected Siegework India Pvt. Ltd., Hi-Shine Inks Pvt. Ltd., and Rex-Tone Industries Ltd. as all of them were in the manufacture of items which are not comparable to that of the assessee. 12. In reply, the ld. CIT, DR vehemently supported the order of the TPO. 13. We have heard the rival contentions. Ink has got various uses. A perusal of the facts clearly show that the assessee manufactures inks which are used for printing in newspapers, off set printing, packaging material, labels etc. When comparing with these, Rex-Tone Industries Ltd. are primarily engaged into manufacturing of printer cartridge ink. In respect of Hi-Shine Inks Pvt. Ltd., they manufacture ball pen ink and gel pen ink. Siegework India Pvt. Ltd. manufactures ink used in printing of food, edible or edible products and cosmetics. Obviously, none of the comparables which have been taken by the TPO and accepted by the DRP being Rex-Tone Industries Ltd., Hi-Shine Inks Pvt. Ltd., or Siegework India Pvt. Ltd. manufacture products which are similar to that of the assessee. Just because the comparable adopted also manufacture ink it cannot be said that the said three companies are comparable in respect of the manufacturing process. A perusal of the DRP’s order clearly shows that the DRP has accepted the fact that the said three companies are different in respect of the manufacturing process, which is emanating from page 8 of the assessment order. The DRP has taken the stand that the activity is functionally broadly similar to the business of manufacturing printing ink by the assessee and the same should be considered under TNMM. Both the Assessing Officer and the TPO and the DRP admittedly has failed to appreciate that similarity cannot be taken by broad process if such was the state that any manufacturer of ink 11 ITA No. 1858/Kol/2024 DIC India Ltd. AY 2020-21 could have been adopted. It cannot be said that manufacturing of ink for printing newspapers are broadly similar to manufacturing of ink for edible products, cosmetics, for writing ink or gel or desktop printers which are also known as toneric. This being so, we are of the view that three comparable adopted by the TPO and approved by the DRP being Rex-Tone Industries Ltd., Hi-Shine Inks Pvt. Ltd., or Siegework India Pvt. Ltd. are not comparable. Consequently, the TPO is directed to recompute the transfer pricing adjustment by including the said three comparable. 14. In the result, appeal of the assessee is partly allowed. Order is pronounced in the open court on 19th March, 2025. Sd/- Sd/- (Pradip Kumar Choubey) (Rajesh Kumar) Judicial Member Accountant Member Dated: 19th March, 2025 JD, Sr. PS Copy of the order forwarded to: 1. Appellant– DIC India Ltd. 2. Respondent – DCIT, Circle-11(1), Kolkata. 3. Assessing Officer, Assessment Unit, Income Tax Department 4. DRP 5. DR, ITAT, Kolkata True Copy By Order Assistant Registrar "