EVONIK INDIA P.LTD, MUMBAI V. DCIT CIR 3(1), MUMBAI

ITA 1125/MUM/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83706 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2009-2010
• Appeal Filed On: 20-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S D SHRIVASTAVA
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI , BEFORE SHRI R.C.SHARMA , A M & SHRI VIJAY PAL RAO , J M ITA NO. 1125 / MUM/20 1 4 ( ASSESSMENT YEAR : 20 0 9 - 10 ) M/S EVONIK INDIA PRIVATE LIMITED (FORMERLY KNOWN AS EVONIK DEGUSSA INDIA PRIVATE LIMITED), KRISLON HOUSE, SAKIVIHAR ROAD, SAKINAKA, ANDHERI (EAST), MUMBAI - 72 VS. DCIT, CIR. - 3(1), MUMBAI PAN/GIR NO. : A A ACH 3690 Q ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : MR. AJIT KUMAR JAIN /REVENUE BY : MR. S . D . SHRIVASTAVA DATE OF HEARI NG : 1 9 TH JUNE , 201 4 DATE OF PRONOUNCEMENT : 18 TH SEPT , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : TH IS IS AN APPEAL FILED BY THE ASSESSEE CHALLENGING THE FINAL O R DER OF AO PASSED U/S. 143(3) R.W.S. 144C(13), DATED 20 - 12 - 201 3 TO GIVE EFFECT TO THE DIRECTION ISSUED BY THE DRP U/S. 144C ( 5 ) OF THE I.T. ACT. FOLLOWING GROUNDS OF APPEAL HAVE BEEN TAKEN BY THE ASSESSEE : APPEAL UNDER SECTION 253(1) OF THE INCOME TAX ACT, 1961 (ACT) AGAINST THE ORDER DATED DECEMBER 20,2013 (RECEIVED ON DECEMBER 24, 2013) PASSED UNDER SECTION 143(3) READ WITH SECTION 144C (13) OF THE ACT, PASSED BY THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX - 3(1) . ITA NO 1125 /1 4 2 1. THAT THE ASSESSING OFFICER (AO) ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN MAKING AN ADDITION TO THE TOTAL INCOME OF THE ASSESSEE AMOUNTING TO RS. 88,01,327/ - IN PURSUANCE TO THE DIRECTIONS OF HONBLE DISPUTE RESOLUTION PANEL (DRP) UPHOLDING THE ADJUSTMENT TO THE TRANSFER PRICE PROPOSED BY THE LEARNED TRANSFER PRICING OFFICE R (TPO) AND ON ACCOUNT OF DISALLOWANCE OF FOREIGN TRAVEL EXPENSES. 2. THAT THE AO/DRP/TPO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN MAKING AN ADDITION OF RS. 60,94,790/ - IN RESPECT OF THE INTERNATIONAL TRANSACTIONS RELATING TO CONTRACT RESEARCH AND DEVELOPMENT SERVICES ALLEGING THE SAME TO BE NOT AT ARMS LENGTH IN TERMS OF THE PROVISIONS OF SECTIONS 92C(2) OF THE ACT READ WITH RULE 10D OF THE INCOME TAX RULES, 1962 (THE RULES) 3. THAT THE AO/DRP/TPO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN ARBITRARILY REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT, WITHOUT GIVING ADEQUATE REASONS FOR THE REJECTION AND FURTHER CHOOSING COMPARABLE COMPANIES WHICH WERE FUNCTIONALLY OR OTHERWISE NOT COMPARABLE TO THE APPE LLANT. 4. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW , THE AO/TPO HAS ERRED IN MERELY RELYING UPON COMPARABLES CHOSEN BY THE TPO IN THE PREVIOUS YEAR FOR BENCHMARKING THE INTERNATIONAL TRANSACTION IN RELATION TO RESEARCH AND DEVELOPMENT. 5. T HAT THE AO//TPO /DRP ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW BY IGNORING THE PROVISIONS OF RULE 10B(3) OF THE RULES AND JUDICIAL PRONOUNCEMENTS, WHICH ADVOCATE USAGE OF MULTIPLE YEAR DATA OF COMPARABLES COMPANIES FOR THE PURPOSE OF DETERMIN ATION OF THE ARMS LENGTH PRICE. 6. THAT THE AO/DRP/TPO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN NOT ALLOWING THE WORKING CAPITAL ADJUSTMENT. 7. THAT THE AO/DRP/TPO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN NOT GRANT ING THE BENEFIT OF ECONOMIC AND RISK ADJUSTMENTS. 8. THAT THE AO/DRP/TPO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW BY NOT PROVIDING THE APPELLANT THE BENEFIT OF 5 PERCENT RANGE AS PROVIDED BY THE PROVISO OF SECTION 92C(2) OF THE ACT. 9. TH AT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN CHARGING INTEREST UNDER SECTIONS 234B, 234C AND 234D OF THE ACT. ITA NO 1125 /1 4 3 2 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS AN INDIAN COMPANY ENGAGED IN PROVIDING MARKETING SUPPORT SERVICES TO ITS ASSOCIATE ENTERPRISES AND PROVISION OF RESEARCH AND DEVELOPMENT SUPPORT SERVICES IN THE BUSINESS OF RENDERING INVESTMENT ADVISORY SERVICES. AS PER THE TRANSFER PRICING DOCUMENTATION SUBMITTED BEFORE LEARNED TPO VIDE SUBMISSION DATED SEPTEMBER 27,2012, FOLLOWING ARE THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE DURING FINANCIAL YEAR 2008 - 09. PROVISION OF MARKETING SUPPORT SERVICES; PROVISION OF R&D SUPPORT SERVICES; PAYMENT OF E - MAIL INFRA STRUCTURE AND NETWORK MAINTENANCE SERVICES; PAYMENT FOR SEMINAR CONDUCTED; REIMBURSEMENT OF SOFTWARE LICENSE; AND RECOVERY OF EXPENSES. THE ASSESSEE HAD CARRIED OUT FUNCTIONAL , ASSETS, RISK AND ECONOMIC ANALYSIS IN RESPECT OF EACH INTERNATIONAL TRANSACTION IN THE TRANSFER PRICING DOCUMENTATION. DURING THE COURSE OF ASSESSMENT, TRANSFER PRICING ADDITION OF INR 5,260,500 WAS MADE TO INTERNATIONAL TRANSACTIONS RELATING TO PROVISION OF R&D SUPPORT SERVICES TO THE TOTAL INCOME OF THE ASSESSEE. CORPORATE TAX ADDI TION BY DISALLOWANCE OF FOREIGN TRAVELLING EXPENSES OF INR 2,706,537 TO THE TOTAL INCOME OF THE ITA NO 1125 /1 4 4 ASSESSEE. THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE SAID ADDITIONS/DISALLOWANCES. 3 . WE HAD CONSIDERED RIVAL CONTENTIONS AND FOUND FROM THE RECORD THAT D URING THE COURSE OF ASSESSMENT PROCEEDINGS, FROM A SET OF TWENTY ONE (21) COMPARABLE COMPANIES, TPO HAS REJECTED TWELVE (12) COMPARABLE COMPANIES SELECTED BY THE ASSESSEE AND ACCEPTED NINE (9) COMPARABLES. ALSO, TPO HAS CONSIDERED TWO (2) ADDITIONAL COMPAR ABLES TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS RELATING TO PROVISION OF R&D SUPPORT SERVICES. THE TPO, IN HIS IMPUGNED ORDER CONSIDERED THE FOLLOWING SET OF COMPARABLES; SL.NO. NAME OF THE COMPANY NCP(%) 1. ACCESS INDIA ADVISORS LIMITED 7.53 2. CHOSKI LABORATORIES LIMITED 23.24 3. CRISI L LIMITED (SEGMENTAL) 51.01 4. CYBER MEDIA EVENTS LIMITED 24.97 5. DOLPHIN MEDICAL SERVICES LIMITED 9.08 6. ICRA ONLINE LIMITED(SEGMENTAL) 47.62 7. IN HOUSE PRODUCTIONS LIMITED (SEGMENTAL) 31. 16 8. RESEARCH SUPPORT INTERNATIONAL LIMITED 17.71 9. VIMTA LABS LIMITED 11.47 10. TC G LIFE SCIENCE LIMITED 26.61 11 GVK BIO SCIENCE LIMITED 16.96 ARITHMETIC MEAN 24.30 THE ARMS LENGTH MARGIN OF THE INTERNATIONAL TRANSACTION WAS DETERMINED BY THE TPO AT 24.30 PERCENT AS AGAINST EVONIK INDIAS MARGIN OF 14.09 PERCENT AND THEREBY PROPOSING AN ADJUSTMENT OF INR 5,269,500. BEFORE THE DRP, ASSESSEE CONTESTED THAT THE TPO HAS NOT SELECTED THE COMPARABLES AS PER THE FUNCTIONAL, ASSET AND RISK PRO FILE OF THE ITA NO 1125 /1 4 5 ASSESSEE. FURTHER T HE TPO ALSO DID NOT CONSIDER THE USE OF MULTIPLE YEAR DATA AND DID NOT GIVE BENEFIT OF ANY ECONOMIC ADJUSTMENTS AND THE BENEFIT OF THE + 5% PERCENT VARIATION. HOWEVER, THE DRP UPHELD THE MODUS OPERANDI ADOPTED BY THE TPO WITH RESPECT TO SELECTION OF COMPAR ABLES AND ENHANCED ADJUSTMENT MADE BY THE TPO TO INR 60,94,790 BY ARRIVING AT ARMS LENGTH MARGIN OF 25.92 PER CENT. THE DRP FINALLY SELECTED 9 COMPARABLES AS UNDER : - SL.NO. NAME OF THE COMPANY NCP(%) 1. ACCESS INDIA ADVISORS LIMITED 7.53 2. CHOSKI LAB ORATORIES LIMITED 23.24 3. CRISIL LIMITED (SEGMENTAL) 51.01 4 . ICRA ONLINE LIMITED(SEGMENTAL) 47.62 5 . IN HOUSE PRODUCTIONS LIMITED (SEGMENTAL) 31. 16 6 . RESEARCH SUPPORT INTERNATIONAL LIMITED 17.71 7 . VIMTA LABS LIMITED 11.47 8 . TC G LIFE SCIENCE LIMI TED 26.61 9. GVK BIO SCIENCE LIMITED 16.96 ARITHMETIC MEAN 2 5 . 92 4 . IT WAS THE CONTENTION OF LEARNED AR THAT A S PER THE BALANCE SHEET OF CRISIL LIMITED PLACED ON RECORD, THE COMPANY FOLLOWS 31 - 12 - 2008 YEAR ENDING WHICH IS DIFFERENT FROM THAT OF THE ASS ESSEE WHICH IS 31 - 3 - 2009. ACCORDINGLY, IN VIEW OF THE DECISION OF THE COORDINATE BENCH IN THE CASE OF HAPAG LLOYD GLOBAL SERVICES (P) LTD., (2013) 34 TAXMANN.COM 241 (MUM TRIB) , THE SAME SHOULD BE IGNORED. IT WAS ALSO ARGUED BY THE LEARNED AR THAT EVEN TH OUGH THE CRISIL LIMITED WAS ITS OWN COMPARABLE, HOWEVER, IN VIEW OF THE FACT THAT IT IS NOT ITA NO 1125 /1 4 6 FUNCTIONALLY COMPARABLE, HE REQUESTED FOR EXCLUSION OF THE SAME AND FOR THIS PURPOSE HE PLACE RELIANCE ON THE FOLLOWING DECISIONS : - I) QUARK SYSTEMS (P.) LTD [201 OJ 38 SOT 307 (CHD.)(SB) II) STREAM INTERNATIONAL SERVICES PRIVATE LIMITED 2013 - T/I - 42 - ITAT - MUM - TP III) TECHBOOK INTERNATIONAL PRIVATE LIMITED TS - 117 - ITAT - 2014(DELHI) IV) ALCATEL LUCENT TECHNOLOGIES INDIA PRIVATE LIMITED TS - 125 - ITAT - 2014(DELHI) V) TATA POWER SOLAR SYSTEMS LIMITED TS - 14 - ITAT - 2014(MUMBAI) VI) PREMIER EXPLORATION SERVICES P. LIMITED TS - 146 - ITAT - 2013 - DELHI - TP PARA 14 VII) STREAM INTERNATIONAL SERVICES PRIVATE LIMITED 2013 - TII - 42 - ITA T - MUM - TP 5 . WE HAVE CONSIDERED RIVAL CONTENTION S AND FOUND THAT CRISIL LIMITED WAS PROPOSED BY THE ASSESSEE ITSELF IN ITS TRANSFER PRICING DOCUMENT AFTER CONSIDERING FUNCTIONAL, ASSETS, RISK AND ECONOMIC ANALYSIS OF THE COMPARABLE COMPANY. AT THE VERY SAME TIME, THE COORDINATE BENCH IN THE DECISION REF ERRED ABOVE BY LEARNED AR HAD HELD THAT IN CASE OF COMPARABLES HAVING DIFFERENT YEAR ENDING, THE SAME SHOULD BE IGNORED. KEEPING IN VIEW THE TOTALITY OF FACTS, WE RESTORE FOR RECONSIDERATION OF CRISIL LIMITED AS COMPARABLE AFTER CONSIDERING ASSESSEES CONT ENTION REGARDING DIFFERENT YEAR ENDING BEING FOLLOWED BY THE ASSESSEE VIS - - VIS CRISIL LIMITED. WE DIRECT ACCORDINGLY. 6 . IN RESPECT OF ICRA ONLINE LIMITED, WE FOUND THAT THE INFORMATION SERVICES SEGMENT WAS USED FOR COMPUTATION OF MARGIN IN THE TRANSFER PRICING STUDY. THE ASSESSEE ITSELF HAS USED IT AS A COMPARABLE IN ITS ITA NO 1125 /1 4 7 TRANSFER PRICING STUDY/COMPARABLES. SINCE FUNCTIONALLY IT IS COMPARABLE WITH THAT OF ASSESSEE, THEREFORE, ASSESSEES CONTENTION FOR EX CLUSION OF ICRA ONLINE LIMITED HAS NO MERIT. 7 . WIT H REGARD TO IN HOUSE PRODUCTIONS LIMITED , IT WAS CONTENDED BY THE LEARNED AR THAT IN HOUSE PRODUCTIONS LIMITED IS ENGAGED IN HEALTHCARE SERVICES AND FOR THIS PURPOSE OUR ATTENTION WAS INVITED TO PAGE 109 OF THE PAPER BOOK. OUR ATTENTION WAS ALSO INVITED TO THE FACT THAT UPDATED MARGIN OF IN HOUSE PRODUCTIONS WERE ERRONEOUSLY COMPUTED FOR THE INCORRECT SEGMENT I.E.MEDIA DIVISION I.E. 31.16 PER CENT. AS PER LEARNED AR, THE CORRECT COMPUTATION OF HEALTHCARE SEGMENT IS 5.27% . KEEPING IN VIEW THE ERRONEOUS COMPU TATION OF MARGIN AND ALSO THE ACTIVITIES IN WHICH IN HOUSE PRODUCTIONS LIMITED IS ENGAGED WHICH IS STATED TO BE BASICALLY HEALTHCARE SERVICES, NOT COMPARABLE TO THE ASSESSEE, W E RESTORE THIS COMPARABLE BACK TO THE FILE OF THE AO /TPO/DRP FOR CONSIDERING AFR ESH IN THE LIGHT OF OUR ABOVE OBSERVATIONS. 8 . IN VIEW OF THE ABOVE DISCUSSION, THE MATTER IS RESTORED BACK TO THE FILE OF THE AO FOR DECIDING AFRESH IN TERMS OF OUR ABOVE OBSERVATION. AFTER RECOMPUTATION, ASSESSEE SHOULD BE CONSIDERED FOR BENEFIT OF 5% R ANGE FROM THE TRANSFER PRICE, IF THE SAME FALLS WITHIN + 5% AS PER THE PROVISO TO SECTION 92C(2) OF I.T. ACT. WE DIRECT ACCORDINGLY. ITA NO 1125 /1 4 8 9 . THE ASSESSEE HAS ALSO ALLEGED THE DISALLOWANCE OF 25% OF ITS FOREIGN TRAVELLING EXPENSES. WE FOUND THAT THE DISALLOWANC E HAS BEEN MADE MERELY ON THE PLEA THAT EVIDENCE HAS BEEN FILED BY THE ASSESSEE ON SAMPLE BASIS. ON THE OTHER HAND, LEARNED AR DRAWN OUR ATTENTION TO THE DETAILED INFORMATION FURNISHED BEFORE THE LOWER AUTHORITIES IN THE FORM OF STATEMENT GIVING DETAILS AN D PURPOSE OF FOREIGN TRAVELLING EXPENSES, PLACE OF FOREIGN TRAVELLING, PURPOSE OF VISIT, NAME OF PERSON VISITED, AMOUNT INCURRED ON TRAVELLING, BOARDING AND LODGING ETC. HOWEVER, THE OBSERVATION OF THE LOWER AUTHORITIES WERE THAT SOME OF THE AIRWAYS BILLS WERE NOT IN THE NAME OF ASSESSEE COMPANY. KEEPING IN VIEW THE NATURE OF ASSESSEES BUSINESS VIS - - VIS NECESSITY OF JOURNEY UNDERTAKEN WHICH WAS ESSENTIALLY FOR THE PURPOSE OF BUSINESS, WE DIRECT THE AO TO RESTRICT THE DISALLOWANCE TO THE EXTENT OF 10% OF THE EXPENDITURE SO INCURRED IN PLACE OF 25% MADE BY THE LOWER AUTHORITIES. 10 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED IN PART IN TERMS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 18 TH SEPT , 201 4 . 18 TH SEPT ,2014 SD/ - SD/ - ( ) ( VIJAY PAL RAO ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / AC COUNTANT MEMBER MUMBAI ; DATED 18 /0 9 /2014 /PKM , PS ITA NO 1125 /1 4 9 COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY// ITA NO 1125 /1 4 10