DCIT 10(1), MUMBAI V. JOHNSON DIVERSEY INDIA P.LTD, MUMBAI

ITA 305/MUM/2012

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 1022 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 07-04-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 12-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAURABH DESHPANDE
• Keywords: Depreciation; Transfer pricing; International transaction

Judgement Text

INCOME-TAX APPELLATE TRIBUNAL KBENCH M UMBAI , , BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMBER & AMARJIT SINGH, JUDICIAL MEMBER /.I.T.A./305/MUM/2012, /ASSESSMENT YEAR: 2004-05 A.C.IT-14(1)(2), 460, 4 TH FLOOR, AAYAKAR BHAVAN, MUMBAI 400 020. VS. M/S.DIVERSITY INDIA P. LTD., (FORMERLY KNOWN AS JOHNSON DIVERSITY INDIA P. LTD.), 501, 5 TH FLOOR, ACKRUTI CENTRE POINT, MIDC CENTRE ROAD, ANDHERI (E), MUMBAI 400 093. PAN: AAACI9744R ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI SAURABH DESHPANDE - DR ASSESSEE BY: SHRI NIRAJ SHETH / DATE OF HEARING: 23/10/2017 / DATE OF PRONOUNCEMENT: 03/01/2018 , 1961 254 )1( ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT). , / PER RAJENDRA, AM: CHALLENGING THE ORDER DATED 31/10/2011 OF CIT(A)-XX -20, NEW DELHI THE ASSESSEE HAS FILED THE PRESENT APPEAL.ASSESSEE-COMPANY ENGAGED IN THE BUSI NESS OF MANUFACTURING,MARKETING AND TRADING OF INSTITUTIONAL AND INDUSTRIAL CLEANING AN D HYGIENE PRODUCTS, FILED ITS RETURN OF INCOME ON 01/11/2004, DECLARING LOSS OF R.S2.93 CRORES.THE AS SESSMENT WAS COMPLETED, U/S.143(3) OF THE ACT, ON 21/12/2006,ASSESSING ITS INCOME AT RS.1.35 CRORES. 2. EFFECTIVE GROUND OF APPEAL IS ABOUT DELETING THE TR ANSFER PRICING(TP)ADJUSTMENT, MADE BY THE AO,UNDER THE HEAD PAYMENT OF ROYALTY BY THE ASSESSE E TO ITS ASSOCIATED ENTERPRISE(AE).DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE AS SESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS (IT.S) WITH ITS AE.S. HE MADE A REFER ENCE TO THE TRANSFER PRICING OFFICER (TPO) TO DETERMINE THE ARMS LENGTH PRICE(ALP) OF SUCH TRANS ACTIONS. 2.1. THE TPO, DURING THE TP PROCEEDINGS FOUND THAT THE A SSESSEE HAD MADE PAYMENT OF RS.1,58,54,850/- TO ITS AE ON ACCOUNT OF ROYALTY, T HAT IT HAD PRESENTED SEGMENTAL ACCOUNTS IN THE TP REPORT, THAT INDEPENDENT BENCHMARKING WAS CARRIE D OUT FOR EACH OF THE SEGMENT, THAT IT HAS USED TNMM OR RESALE PRICE METHOD (RPM) AS MOST APPR OPRIATE METHOD FOR DETERMINING THE 305/M/12- M/S. DIVERSITY INDIA P.LTD. 2 ALP.HOWEVER, THE TPO DID NOT ACCEPT THE SEGMENTAL A CCOUNTS PRESENTED BY IT. HE RE-CASTED MANUFACTURING AND SALE OF FINISHED GOODS PRODUCTS S EGMENT.HE CALCULATED NET PROFIT MARGIN (OPERATING PROFIT OR LOSS / OPERATING REVENUE) @ -3 .6 % AND NET PROFIT ON TOTAL COST @ 3.52 %.AS PER THE TP REPORT MARGIN OF THE ASSESSEE AND M ANUFACTURING & SALE-OF-FINISHED-GOODS SEGMENT WAS 11.72%.USING THE SINGLE YEAR DATA OF TH E COMPARABLES CHOSEN BY THE ASSESSEE WHICH WAS DETERMINED AT 19.35% THE TPO WAS ARRIVED AT A D IFFERENCE OF RS.8.14 CRORES.HOWEVER, HE DID NOT SUGGEST ANY ADJUSTMENT. 2.2. HOWEVER,HE SUGGESTED THAT THE VALUE OF THE ROYALTY PAYMENT (RS.1.58 CRORES) SHOULD BE TAKEN AS NIL.THUS, HE SUGGESTED AN UPWARD ADJUSTMEN T OF THE ABOVE AMOUNT.HE, FURTHER OBSERVED THAT THE ASSESSEE HAD ENTERED INTO TEN INTERNATIONA L TRANSACTIONS,THAT OUT OF THOSE IT.S THREE WAS MAJOR TRANSACTIONS NAMELY I.E. UNSECURED LOAN, IMPO RT OF TRADING EQUIPMENTS AND PAYMENT OF ROYALTY, THAT SEGMENTAL NET MARGINS HAD NOT BEEN PR OPERLY COMPUTED BY THE ASSESSEE, THAT OUT OF THE TOTAL ROYALTY PAYMENT IT HAD DEBITED RS.1.29 CR ORES TO MANUFACTURING SEGMENT (MS),THAT RS.5 LAKHS TO THE PRODUCT TRADING SEGMENT (PTS) AND RS.24 LAKHS HAD NOT BEEN ALLOCATED AT ALL, THAT THE ASSESSEE WAS PAYING 4% ROYALTY TO AE AS PE R THE AGREEMENT,DATED 04/05/2002 FOR THE TRADEMARK AND TECHNOLOGY RIGHTS.HE HELD THAT ROYALT Y WAS ONLY FOR MS AND NOT FOR ANY OTHER SEGMENT-ESPECIALLY FOR THE PTS. REFERRING TO THE T OTAL EXPENDITURE INCURRED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION,HE HELD THAT IT HAD IN CURRED EXPENDITURE OF RS.43.30 CRORES + 3.19 CRORES UNDER THE HEAD FINANCIAL CHARGES,THAT IT HAD ALLOCATED RS.35.74 CRORES ONLY IN THE SEGMENTAL ACCOUNT,THAT RS.10.75 CRORES HAD NOT BEEN ALLOCATED, THAT IT HAD NOT CORRECTLY DRAWN UP THE SEGMENTAL ACCOUNTS.SO,HE RE-CASTED THE MS ACCOU NT WHEREIN ENTIRE DEPRECIATION OF RS.7.03 CRORES(GOODWILL RS.1.68 CRORES+ COMMERCIAL RIGHTS 4 .67 CRORES +TANGIBLE ASSETS RS.68 LAKHS) APPEARING IN THE P & L ACCOUNT WERE ALLOCATED TO M S.FINALLY, HE HELD THAT THE VALUE OF ROYALTY PAYMENT SHOULD BE TAKEN AS NIL,STATED AS EARLIER. 3. AGGRIEVED BY THE ORDER OF THE AO/TPO THE ASSESSEE P REFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA) AND MADE DETAILED SUBMISS IONS.IT POINTED OUT VARIOUS DEFECTS IN THE RE-CASTED ACCOUNT PREPARED BY THE TPO.IT FILED FRES H RECONCILIATION STATEMENT BEFORE THE FAA ABOUT VARIOUS SEGMENTS,WHO GORWARDED THE SAME TO TH E AO.HE CALLED FOR A REMAND REPORT FROM THE AO,VIDE HIS LETTER DATED 06.02.2008.IN AUGUST,2 011 HE AGAIN DIRECTED THE AO TO SUBMIT THE REMAND REPORT BUT TILL THE PASSING OF THE APPELLATE ORDER THE AO DID NOT SEND HIS COMMENTS TO HIS 305/M/12- M/S. DIVERSITY INDIA P.LTD. 3 OFFICE.THE FAA OBSERVED THAT THE ASSESSEE HAD FURNI SHED COMPLETE RECONCILIATION OF ALLEGED DISCREPANCIES REFERRED TO BY THE TPO, THAT THE MS A CCOUNT, DRAWN UP BY THE TPO WAS INCORRECT,THAT WHILE ALLOCATING THE EXPENSES UNDER THE HEAD AMORTISATION(RS.6.35 CRORES)AN AMOUNT OF RS.5.23 CRORES WAS TREATED AS NON-OPERATI NG EXPENDITURE BY THE ASSESSEE, THAT THE TPO HAD CONSIDERED THE ENTIRE DEPRECIATION(RS.7.03 CROR ES) AS OPERATING EXPENSE WITHOUT ASSIGNING ANY REASON THEREOF,THAT THE DEPRECIATION INCLUDED N ON OPERATING DEPRECIATION EXPENSE OF RS.5.23 CRORES ALSO, THAT THE ASSESSEE HAD PAID RS.56.04 CR ORES FOR PURCHASING A BUSINESS UNIT FROM HINDUSTAN LEVER LIMITED, THAT THE PURCHASE PRICE IN CLUDED PAYMENT TOWARDS GOODWILL (RS.29.51 CRORES) AND PAYMENT FOR INTANGIBLE COMMERCIAL BENEF ITS (RS.18.17 CRORES), THAT THE ASSESSE HAD AMORTISED THE SAID EXPENDITURE AND HAD CLAIMED DEPR ECIATION ON IT, THAT THE DEPRECIATION ON SUCH ASSETS WAS NOT AN OPERATIONAL EXPENSE,THAT IT WAS A N EXTRAORDINARY ITEM, THAT SUCH AN ITEM WAS NOT PART OF THE FINANCIALS OF THE COMPARABLES,THAT THE ASSESSEE HAD RIGHTLY CLAIMED THAT THE SAME WERE NON OPERATIONAL IN NATURE.HE ALSO OBSERVED THAT ROY ALTY PAYMENT WAS ATTRIBUTABLE TO OTHER SEGMENTS AND NOT ONLY TO MS, THAT THERE WAS NO SOUN D LOGIC TO HOLD THAT ROYALTY WAS NOT PAYABLE IF TRADEMARK ALONE WAS USED BY THE ASSESSEE,THAT DE PRECIATION ON TANGIBLE ASSETS (RS.68.40 LAKHS) AND ON INTANGIBLE ASSETS(RS.1.12 CRORES)WAS ALLOCAB LE TO ALL THE FOUR SEGMENTS,THAT DEPRECIATION ON THE TANGIBLE AS WELL AS INTANGIBLE ASSETS HAD TO BE CONSIDERED FOR ALL THE SEGMENTS AND NOT ONLY FOR MS,THAT THE TPO HAD CONSIDERED ONLY THREE COMPA RABLES WHILE PASSING ORDER,THAT HE HAD NOT CONSIDERED TWO COMPARABLES BECAUSE OF LACK OF AVAIL ABILITY OF DATA, THAT THE ASSESSEE HAD FILED THE DATA FOR THE CURRENT YEAR FOR THE REMAINING TWO COM PARABLES ALONG WITH THE CALCULATION FOR REST OF THE COMPARABLES,THAT THE COST BASE WAS THE BASIS OF IT.S, THAT THE CORRECT PLI SHOULD BE OP/SALES AND NOT OP/TC,AS USED BY THE TPO. HE DIRECTED THE A SSESSEE TO CALCULATE THE MARGIN OF THE COMPARABLES AS WELL AS THE TESTED PARTY BEFORE CONS IDERING THE DEPRECIATION.HE FOUND THAT MARGIN OF THE ASSESSEE BEFORE DEPRECIATION WAS AT 16.82%,T HAT THE MARGIN OF THE COMPARABLES WITHOUT DEPRECIATION WAS 16.36%. HE OBSERVED THAT IF THE C ALCULATION WAS ADOPTED AS PER THE ALLOCATION OF THE TPO AND DEPRECIATION EXPENSES WERE PROPERLY ALLOCATED EVEN THEN THE MARGIN EARNED BY THE ASSESSEE WOULD BE WELL ABOVE THE MARGINS OF THE COMPARABLES,THAT IF DEPRECIATION WAS PROPERLY ALLOCATED THE NET MARGIN OF THE ASSESSEE W OULD BE ABOVE THE MARGINS OF THE COMPAR- ABLES,THAT THE ENTIRE ROYALTY WAS ALLOCATED ONLY TO MS WHILE CALCULATING THE MARGIN OF THE ASSESSEE,THAT IF THE ROYALTY WAS ALLOCATED TO ALL T HE SEGMENTS THE NET MARGIN OF THE ASSESSEE WOULD BE HIGHER,THAT THE IT.S ENTERED INTO BY THE A SSESSEE WAS AT ARMS LENGTH. 305/M/12- M/S. DIVERSITY INDIA P.LTD. 4 4. DURING THE COURSE OF HEARING BEFORE US,THE DEPARTME NTAL REPRESENTATIVE (DR) RELIED UPON THE ORDER OF THE TPO/AO.THE AUTHORISED REPRESENTATIVE ( AR) SUPPORTED THE ORDER FAA.HE REFERRED TO THE PAGE NO.128, 130 AND 131 OF THE PAPER BOOK A ND STATED THAT AS PER THE AGREEMENT THE ROYALTY WAS PAID FOR TRADEMARK AS WELL AS TECHNOLOG Y,THAT THERE WAS NO DOUBT THAT THE ROYALTY WAS PAID FOR MS AS WELL AS TRADING SEGMENT, THAT TH E AGREEMENT WAS APPROVED BY THE RBI (PAGE 212 OF THE PAPER BOOK).HE FURTHER ARGUED THAT DURIN G THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS PURCHASED A BUSINESS UNIT (PAGE 233 OF THE PAPE R BOOK), THAT IT WAS AN EXTRAORDINARY ITEM,THAT THE TPO HAD NOT CONSIDERED THE FACT OF PURCHASE OF BUSINESS UNIT WHILE DETERMINING THE ALP. 5.WE HAVE HEARD THE RIVAL SUBMISSIONS AND THE PERUS ED THE MATERIAL BEFORE US.WE FIND THAT THERE WAS TEN IT.S, THAT THE TPO HAD SUGGESTED UPWARD ADJ USTMENT OF 1.58 CRORES WITH REGARD TO ROYALTY PAYMENTS,THAT TPO HAD RE-CASTED MANUFACTURI NG AND SALE OF FINISHED GOODS PRODUCTS SEGMENT,THAT HE HAD CONSIDERED ONLY THREE COMPARABL ES FOR BENCH MARKING,THAT THE ASSESSEE HAD FILED OBJECTIONS ABOUT THE RE-CASTING OF THE ACCOUN TS,THAT IT HAD FILED ITS OWN RECONCILIATION CLAIMING THAT THE CALCULATION MADE BY THE TPO WAS FACTUALLY INCORRECT, THAT THE FAA DIRECTED THE AO TO SUBMIT A REMAND REPORT, THAT THE AO DID NOT F ILE HIS COMMENTS/REMAND REPORT IN SPITE OF HAVING SUFFICIENT TIME,THAT WHILE RE-CASTING THE MS AND PRODUCT SEGMENT THE TPO HAD CONSIDERED ENTIRE DEPRECIATION, THAT THE FAA HAD POINTED OUT T HE NON-OPERATIONAL DEPRECIATION EXPENDITURE SHOULD NOT HAVE BEEN CONSIDERED FOR DETERMINING THE ALP, THAT THE FAA HAD RECALCULATED THE DEPRECIATION FIGURE, THAT AS PER THE AGREEMENT THE ROYALTY WAS PAID FOR MS AS WELL AS TRADING SEGMENT, THAT THE TPO WAS FACTUALLY INCORRECT IN HO LDING THAT ROYALTY PAYMENT WAS ONLY FOR MS, THAT THE FAA OBTAINED THE DATA ABOUT ALL THE FIVE C OMPARABLES AND ARRIVED AT THE CONCLUSION THAT IT.S ENTERED INTO BY THE ASSESSEE WAS AT ARMS LENG TH. WE FIND THAT NET MARGIN OF THE ASSESSEE, EVEN AFTER ADOPTING THE FAULTY RE-CASTED STATEMENT OF THE TPO WAS MORE THAN THE MARGINS OF THE COMPARABLE COMPANIES.IN OUR OPINION, THE FAA HAS RI GHTLY POINTED OUT THAT IF THE ROYALTY WAS ALLOCATED TO ALL THE SEGMENTS THE NET MARGIN OF THE ASSESSEE WOULD BE HIGHER.THE DR COULD NOT POINT OUT ANY DEFECT IN THE CALCULATIONS MADE BY TH E FAA OR OBSERVATIONS MADE BY HIM. AS THE IT(PAYMENT OF ROYALTY) WAS AT ARMS LENGTH,SO,WE AR E OF THE OPINION THAT THERE IS NO NEED TO INTERFERE WITH THE ORDER OF THE FAA.CONFIRMING THE SAME,WE DECIDE EFFECTIVE GROUND OF APPEAL AGAINST THE AO. 305/M/12- M/S. DIVERSITY INDIA P.LTD. 5 AS A RESULT,APPEAL FILED BY THE A.O. STANDS DISMISS ED. . ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD JANUARY, 2018. 3 , 2018 SD/- SD/- / AMARJIT SINGH ) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 03.01.2018. S.GANGADHARA RAO, SR.PS./JV, SR.PS / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR K BENCH, ITAT, MUMBAI / , , . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.