M/s. Akzo Nobel India Limited, Gurgaon V. DCIT, New Delhi

ITA 3005/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3928 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2007-2008
• Appeal Filed On: 15-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 92D; 234B

Judgement Text

1 ITA NO. 2936/DEL/2014 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEM BER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER ITA NO. 2936/DEL/201 4 ( A.Y 2007-08) DCIT CIRCLE-1(1) NEW DELHI (APPELLANT) VS AKZO NOBLE CAR REFINISHES INDIA PVT. LTD. SHED NO.9, DSIDC, OKHLA INDUSTRIAL AREA, PHASE-II, SCHEME-II NEW DELHI AABCA0197Q (RESPONDENT) ITA NO. 3005/DEL /2014 ( A.Y 2007-08 AKZO NOBLE CAR REFINISHES INDIA PVT. LTD.(FORMERLY KNOWN AS AKZO NOBEL CAR REFINISHES INDIA PVT. LTD) DLF CYBER TERRACES, BUILDING NO. 5, TOWER A, 20 TH FLOOR, DLF CYBER CITY, PHASE-III GURGAON (APPELLANT) VS DCIT CIRCLE-1(1) NEW DELHI (RESPONDENT) ORDER PER SUCHITRA KAMBLE THESE CROSS APPEALS ARE FILED BY THE REVENUE AND AS SESSEE RESPECTIVELY AGAINST THE ORDER DATED 28/2/2014 PASSED BY CIT(A)- XX, NEW DELHI FOR ASSESSMENT YEAR 2007-08. 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 2 ITA NO. 2936/DEL/2014 2. 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 LABORATORI ES FROM THE LIST OF COMPARABLES. ITA NO. 3005/DEL/2014 (ASSESSEES APPEAL) THE GROUNDS HEREINAFTER TAKEN BY THE APPELLANT ARE WITHOUT PREJUDICE TO ONE ANOTHER. 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS) - XX, DELHI [CIT (APPEALS)] ERRED IN DISREGARDING THE TRANSFE R PRICING (TP) DOCUMENTATION AND THEREBY ERRED IN NOT APPRECIATING ECONOMIC ANALYSIS CONDUCTED BONAFIDE BY THE APPELLANT IN RES PECT OF ITS CONTRACT RESEARCH AND DEVELOPMENT SERVICES (R&D SE GMENT), PERFORMED WITH DUE DILIGENCE AND USING THE DATA AVA ILABLE AT THE TIME OF CONDUCTING THE COMPARABILITY ANALYSIS. 2. THE LEARNED CIT (APPEALS) ERRED ON FACTS AND CI RCUMSTANCES OF THE CASE AND IN LAW BY CONFIRMING AN TRANSFER PRICING A DJUSTMENT AMOUNTING TO INR 8,129,483 HOLDING THAT THE INTERNA TIONAL TRANSACTION PERTAINING TO CONTRACT R&D SEGMENT DO N OT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE ACT AND IN DOING SO HAVE GROSSLY ERRED IN: 2.1 NOT APPRECIATING THAT THE APPELLANT HAD PRE PARED THE TRANSFER PRICING DOCUMENTATION BONA FIDE AND IN GOOD FAITH I N COMPLIANCE WITH THE PROVISIONS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME TAX RULES, 1962 (RULES) AND SELECTED UNCON TROLLED COMPARABLE COMPANIES BASED ON A DETAILED FUNCTIONAL , ASSET AND RISK (FAR) ANALYSIS, FOLLOWING A METHODICAL AND C ONSISTENT BENCHMARKING PROCESS IN RESPECT OF CONTRACT RESEARC H AND 3 ITA NO. 2936/DEL/2014 DEVELOPMENT SERVICES. 2.2. REJECTING THE ARMS 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 C OMPANIES, 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 TRA NSFER 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 CONTR ACT RESEARCH AND DEVELOPMENT SERVICES PROVIDED BY THE APPELLANT AND IN NOT PROVIDING AN APPROPRIATE ADJUSTMENT TOWARDS THE RISK DIFFEREN TIAL. 2.5. NOT APPRECIATING THE FACT THAT THERE ARE SIGNI FICANT DIFFERENCES IN THE LEVELS OF WORKING CAPITAL EMPLOYED BY THE COMPARABL ES VIS-A-VIS THAT OF THE APPELLANT AND SUITABLE ADJUSTMENT FOR DIFFER ENCES IN WORKING CAPITAL NEEDS TO BE PROVIDED. 3. THE LEARNED CIT (APPEALS) ERRED IN UPHOLDING TH E 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 BEF ORE 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 CONTRAC T RESEARCH AND DEVELOPMENT FOR AKZO GROUP. THE INTERNATIONAL TRANSACTIONS REP ORTED IN FORM NO. 3CEB ARE SUMMARIZED AS UNDER:- S. NO. DESCRIPTION OF TRANSACTIONS METHOD VALUE (I N RS.) 1 PURCHASE OF FINISHED GOODS RPM 22,28,96,589/ - 2 PURCHASE OF CAPITAL GOODS TNMM 32,54,246/ - 3 CONTRACT RESEARCH AND DEVELOPMENT TNMM 9,18,66,974/ - 4 ADMINISTRATION FEE PAID TNMM 42,07,000/ - 5 REIMBURSEMENT TOWARDS IT CHARGES TNMM 72,52,782/ - 6 REIMBURSEMENT OF EXPENSES RECEIVED CUP 7,36,462/ - 7 REIMBURSEMENT OF EXPENSES PAID CUP 2,36,774/ - IN THE TP STUDY, THE INTERNATIONAL TRANSACTIONS IN DISTRIBUTION SEGMENT WAS BENCHMARKED BY THE ASSESSEE USING RPM. THE GP MARGI N OF THE ASSESSEE IS 36% AS AGAINST THE COMPARABLES MARGIN OF 20% USING MULTIPLE YEARS DATA. IN THE TP STUDY THE INTERNATIONAL TRANSACTIONS IN CONT RACT R&D SEGMENT WAS BENCHMARKED BY THE ASSESSEE USING TNMM WITH OP/TC A S THE PLI. THE MARGIN OF THE ASSESSEE IS COMPUTED AT 5% AS AGAINST THE MA RGIN OF THE COMPARABLES AT 4% USING MULTIPLE YEAR DATA. THUS AS PER THE ASSESS EE THE INTERNATIONAL TRANSACTIONS IS AT ARMS LENGTH PRICE. THE TPO REJE CTED THE TP STUDY OF THE ASSESSEE IN THE CONTRACT RESEARCH AND DEVELOPMENT S EGMENT. THE TPO DETERMINED THE TP ADJUSTMENT OF RS. 1,52,87,628/- F OR THE CONTRACT R&D SERVICES SEGMENT. 5 ITA NO. 2936/DEL/2014 5. THE ASSESSEE FILED APPEAL BEFORE THE CIT(A). TH E 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 REVENUES APPEAL, THE SOLE GROUND IS TO INCLU DE CHOKSI LABORATORIES FROM THE LIST OF COMPARABLES WHICH WAS DIRECTED BY CIT(A) TO EXCLUDE TO THE A.O/TPO. 8. IN ASSESSEES APPEAL, THE ASSESSEE CHALLENGED TH AT THE INTERNATIONAL TRANSACTION PERTAINING TO CONTRACT R & D SEGMENT DO NOT SPECIFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. THE ASSE SSEE IS CHALLENGING CIT(A)S ORDER SAYING THAT THE CIT(A) HAS NOT APPRECIATED TH AT THE ASSESSEES 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 COM PANIES BASED ON DETAILED FUNCTIONAL, ASSET AND RISK (FAR) ANALYSIS, FOLLOWIN G 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 AL L DISCUSSED HOW CHOCSI LABORATORIES WILL BE A COMPARABLE. IN-FACT FOR ASS ESSMENT 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 PR ESENT ASSESSMENT YEAR HAS TAKEN COGNIZANCE OF THE ACTIVITIES CARRIED OUT BY T HE CHOKSI LABORATORIES AND THEREAFTER VERIFYING THE DOCUMENTS CAME TO THE CONC LUSION THAT IT IS FUNCTIONALLY DISSIMILAR AND EXCLUDED THE SAME FROM FINAL COMPARABLES. THEREFORE, THERE IS NO NEED TO INTERFERE CIT(A)S F INDING ON THIS ISSUE. 6 ITA NO. 2936/DEL/2014 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IT IS PERTINENT TO NOTE THAT THIS COMPARAB LE IS ENGAGED IN DIVERSE ACTIVITIES AND THERE IS NO SEGMENTAL INFORMATION AV AILABLE IN THIS ASSESSMENT YEAR 2007-08. THEREFORE, THE CIT(A) HAS RIGHTLY RE JECTED THIS COMPARABLE AND DIRECTED THE SAME TO THE TPO/A.O FOR EXCLUDING THE SAME. BESIDES FUNCTIONAL DISSIMILARITY THERE IS ALSO NO SEPARATE SEGMENTAL I NFORMATION 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 FIN DINGS 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 ASSESSEES 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 TH E AKZO GROUP. AKZO INDIA CARRIES OUT NOT IN RESEARCH AND DEVELOPMENT ACTIVIT IES (COLOUR MIXING) ON THE BASIS OF THE SPECIFICATIONS RECEIVED FROM THE AKZO GROUP. AKZO INDIA IS RESPONSIBLE FOR THE GLOBAL, REGIONAL REFINISHES MAR KET. R & D ACTIVITY IS TARGETED TOWARDS DEVELOPMENT OF UNFORTUNATELY FRIENDLY AND T ECHNOLOGY ADVANCES PRODUCTS AND DEVELOPMENT OF NEW COLOUR AKZO INDIA D OES NOT OWN ANY SIGNIFICANT INTANGIBLE AND DOES NOT TAKE ANY SIGNIF ICANT RESEARCH AND DEVELOPMENT ON ITS ACCOUNT THAT LEADS TO THE DEVELO PMENT AND NON WRITTEN INTANGIBLE. AKZO INDIA USES THE TRADE MARKS, PROCE SS AND KNOW-HOW TECHNOLOGICAL DATA SOFTWARE, OPERATING/QUALITY STAN DARD 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-DETE RMINE BASIS AND THUS OPERATING IN AN OWNER RISK INSULATED ATMOSPHERE. A S A COST PLUS METHOD IS CONSIDERED AS COMPENSATION AS THE RISK INSULATED SE RVICE 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 BIOT EK LTD. ARE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY. AS TCG LIFESC IENCES LTD. IS ENGAGED IN CLINICAL RESEARCH PROJECT DEVELOPMENT AND IS IN PHA RMACEUTICAL INDUSTRY. WHILE TRANSGENE BIOTECK LTD. IS ENGAGED AND MANUFACTURING DIAGNOSTIC PRODUCTS AND ALLIED SERVICES AND AGAIN IN PHARMACEUTICAL INDUSTR Y. BOTH THESE COMPANIES OWN PATENT AND IPR WHICH ARE INTANGIBLE ASSETS. TH ERE IS A HIGH RISK END FOR DEVELOPING PRODUCT FOR BOTH OF THIS COMPANIES. THER EFORE, 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). THE REFORE, 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 BIOTEC K 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 PHARM ACEUTICAL INDUSTRY AND NOT IN AUTO MOBILE INDUSTRY. THUS, BOTH THESE COMPARAB LES 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 APPRECIATIN G THAT THE ASSESSEE AFTER DUE VERIFICATION AND APPLICATION SELECTED UNCONTROLLED COMPARABLE COMPANIES BASED ON A DETAILED FUNCTIONAL ASSET AND RISK (FAR ANALYS IS). THE LD. AR FURTHER SUBMITTED THAT USING MULTIPLE YEAR/AVERAGE DATA IN STEAD OF USING CURRENT YEAR DATA FOR COMPARABLE COMPANIES WHICH WAS NOT AVAILAB LE TO THE ASSESSEE,IS NOT PROPER ON PART OF TPO/A.O AS WELL AS CIT(A). WORKI NG 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 UP ON THE ORDER OF THE ITAT IN THE ASSESSEES OWN CASE WHERE IN PARA 29 DETAIL DIS CUSSION WAS GIVEN. 8 ITA NO. 2936/DEL/2014 17. THE LD. DR RELIED UPON THE ORDER OF THE TPO AN D THE CIT(A). 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDER OF THE ITAT IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005 -06. IN THIS PARTICULAR YEAR ALSO, THE WORKING CAPITAL ADJUSTMENT WAS NOT C ONSIDERED 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 O CCASIONS. HOWEVER, IT WOULD HAVE TO BE DECIDED FRESH ONLY AFTER THE FRESH COMPA RABLES ARE CHOSEN BY THE TPO WHICH ARE SIMILAR TO THE FUNCTION SEGMENT AND O WNERSHIP OF THE ASSETS. 19. IN RESULT, THE ASSESSEES APPEAL BEING ITA NO . 3005/DEL/2014 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 08 TH JANUARY, 2018 . SD/- SD/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER 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 THE SECOND MEMBER .2017 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 8.01.2018 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 8 .01 .201 8 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.