THE ACIT RG 10(1), MUMBAI V. M/S. NETAFIM IRRIGATION INDIA P. LTD, MUMBAI

ITA 3668/MUM/2008

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 6795 (ITAT-MUMBAI)
• Duration Of Justice: 10 year(s) 10 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 11-03-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 26-05-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANISH KUMAR SINGH
• Assessee Lawyers: K K VED
• Keywords: Transfer pricing; International transaction; Additional evidence
• Section: 92C; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI N.K. PRADHAN , ACCOUNTANT MEMBER ITA NO. 3668 / MUM . /2008 ( ASSESSMENT YEAR : 20 03 04 ) ASSTT. COMMISSIONER OF INCOME TAX RANGE 10(1) , MUMBAI . APPELLANT V/S NETAFIM IRRIGATION INDIA PVT. LTD. 1 ST FLOOR, 297, CST ROAD VIDYANAGRI, KALINA MUMBAI 400 098 PAN AAACE4738J . RESPONDENT ITA NO. 4837 /MUM. /2009 ( ASSESSMENT YEAR : 20 04 05 ) ASSTT. COMMISSIONER OF INCOME TAX RANGE 10(1), MUMBAI . APPELLANT V/S NETAFIM IRRIGATION INDIA PVT. LTD. 1 ST FLOOR, 297, CST ROAD VIDYANAGRI, KALINA MUMBAI 400 098 PAN AAACE4738J . RESPONDENT 2 J.B. CHEMICALS & PHARMACEUTICALS LTD. ITA NO. 1874 /MUM. /2011 ( ASSESSMENT YEAR : 20 05 06 ) ASSTT. COMMISSIONER OF INCOME TAX RANGE 10(1), MUMBAI . APPELLANT V/S NETAFIM IRRIGATION INDIA PVT. LTD. 1 ST FLOOR, 297, CST ROAD VIDYANAGRI, KALINA MUMBAI 400 098 PAN AAACE4738J . RESPONDENT REVENUE BY : SHRI MANISH KUMAR SINGH ASSESSEE BY : SHRI K.K. VED DATE OF HEARING 29 .0 1 .201 9 DATE OF ORDER 25.04.2019 O R D E R PER SAKTIJIT DEY. J.M. T HE AFORESAID APPEAL S PERTAINING TO THE SAME ASSESSEE HAVE BEEN FILED BY THE REVENUE CHALLENGING THREE SEPARATE ORDERS PASSED BY THE LEARNED COMMISSIONER (APPEALS) , MUMBAI, FOR THE ASSESSMENT YEARS 2004 05, 2004 05 AND 2005 06. ITA NO. 3668/MUM./2008 A.Y. 2003 04 2 . THE ONLY DISPUTE FOR WHICH THE REVENUE HAS PREFERRED THIS APPEAL IS ON ACCOUNT OF DELETION OF ADDITION MADE TOWARDS T RANSFER PRICING 3 J.B. CHEMICALS & PHARMACEUTICALS LTD. ADJUSTMENT TO THE ARM'S LENGTH PRICE OF THE ROYALTY PAID BY THE ASSESSEE TO ITS OVERSEAS ASSOCIATED ENTERPRISE (AE) 3 . B RIEF FACTS ARE, THE ASSESSEE , AN INDIAN COMPANY , WAS FORMED IN PURSUANCE TO A JOINT VENTURE AGREEMENT BETWEEN NETAFIM YIFTAH IRRIGATION EQUIPMENT & DRIP SYSTEM S, ISRAEAL (NETAFIM, ISRAEL) , EXCEL INDUSTRIES LTD. AND JALBINDU AGRITECH PVT. LTD. (JAL BINDU) ON THE SHARE HOLDING OF 75%, 15% AND 10% RESPECTIVELY. THE ASSESSEE UNDERT AKES MANUFACTURING, ASSEMBLING AND MARKETING IN INDIA OF TYPHOON FAMILY OF NON PRESSURE C OMPENSATED DRIP L INE S AND BOTTON DRIPPERS AND PROVIDE S TECHNICAL AND EXTENSION SERVICE ACCORDING TO CUSTOMERS NEEDS BEFORE, DURING AND AFTER SALES. DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE HAD ENTERED INTO A NUMBER OF INTERNATIONAL TRANSACTION S WITH ITS OVERSEAS A ES AS ENLI STED BELOW AND BY AGGREGATING T O SUCH TRANSACTIONS THE ASSESSEE HAS BENCH MARKED THEM BY APPLYING COST PLU S METHOD (CPM): NATURE OF TRANSACTION VALUE OF TRANSACTION METHOD USED FOR BENCH MARK IMPORT OF RAW MATERIAL, STORE AND CONSUMABLES ` 69,03,563 CPM IMPORT OF TRADED FINISHED GOODS ` 2,34,99,840 CPM IMPORT OF MACHINERY ` 3,23,20,061 CPM PAYMENT OF ROYALTY ` 56,30,506 CPM 4 J.B. CHEMICALS & PHARMACEUTICALS LTD. 4 . AFTER VERIFYING THE TRANSFER PRICING STUDY REPORT, THE TRANSFER PRICING OFFICER ACCEPTED THE AGGREGATION AND BENCH MARKING OF ALL INTERNATIONAL TRANSACTION S WITH THE A ES , EXCEPT, THE TRANSACTION RELATING TO PAYMENT OF ROYALTY TO THE A E. INSOFAR AS PAYMENT OF ROYALTY IS CONCERNED, THE TRANSFER PRICING OFFICER ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE TO JUSTIFY ITS CLAIM THAT THE PAYMENT OF ROYALTY IS AT ARM'S LENGTH BY FURNIS HING SIMILAR PAYMENT BY OTHER A ES TO NETAFIM, ISRAEL. I N RESPONSE, THE ASSESSEE SUBMITTED ITS REPLY ON 14 TH MARCH 2006, STATING THAT THE PAYMENT OF ROYALTY IS CONSISTENT WITH THE COST INCURRED BY NETAFIM, ISRAEL, WITH REGARD TO ITS OWN PROPRIETARY INTELLECTUAL PROPERTY SECURED THROUGH A LONG LIST OF INNOVATIVE PATENT S IN WHICH THE SAID COMPANY INVESTS ITS R&D EFFORTS ON A ROUTINE BASIS. IT WAS SUBMITTED , THE ASSESSEE IS ONE OF THE SEVERAL MANUFACTURING FACILITIES OF NETAFIM, ISRAEL, ACROSS THE WORLD. AS A MANUFACTURING FACILITY, THE ASSESSEE USES THE NETAFIM, I SRAEL, PROPRIETARY INTELLECTUAL PROPERTY AND PATENTS DEVELOPMENT BY THIRD PARTY AND PAID FOR BY NETAFIM, ISRAEL. IT WAS SUBMITTED , OTHER MANUFACTURING FACILITIES OF NETAFIM, ISRAEL IN USA, AUST RALIA, SOUTH AFRICA, ETC., WERE ALSO CHARGED ROYALTY LIKE THE A SSESSEE. IT WAS SUBMITTED , ROYALTY CHARGES ARE DETERMINED BASED ON A TECHNICAL KNOWHOW AGREEMENT AND ON THE BASIS OF PRODUCT MANUFACTURE D AND THE CLIENTS COMMITTED FOR. IN THIS CONTEXT, THE ASSESSEE ALSO FURNISHED A LIST OF PATENTS OWNED BY NETAFIM, ISRAEL , WHICH ARE USED IN DIFFERENT MANUFACTURING FACILITIES ACROSS THE WORLD . 5 J.B. CHEMICALS & PHARMACEUTICALS LTD. THE TRANSFER PRICING OFFICER AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND MATERIAL ON RECORD OBSERVED THAT ASSESSEES CLAIM THAT THE ROYALTY PAYMENT IS AT ARM'S LENGTH CANNOT BE ACCEPTED DUE TO THE FOLLOWING REASONS. I) RBI/SIA APPROVALS UPON WHICH THE ASSESSEE IS RELYING DOES NOT CONSTITUTE AN ARM'S LENGTH BENCHMARK. II) THE ASSESSEE FAILED TO PROVIDE THE DETAILS OF COST OF DEVELOPMENT OF TECHNOLOGY BY ITS ASSOCIATED ENTE RPRISE AND HOW THE ASSOCIATE ENTERPRISE RECOVERED OR INTENDED TO RECOVER THE SAME FROM THIRD PARTIES OR FROM OTHER GROUP ENTITIES. III) THE ASSESSEE FAILED TO FURNISH THE RATES OF ROYALTY PAID OTHER GROUP CONCERNS OR ASSOCIATED ENTERPRISES. 5 . AFTER REJECT ING THE BENCH MARKING OF ROYALTY CHARGES PAID TO THE A E, THE TRANSFER PRICING OFFICER ULTIMATELY HELD THAT THE ARM'S LENGTH PR ICE OF ROYALTY PAYMENT TO THE AE HAS TO BE DETERMINED AS NIL. ACCORDINGLY, HE RECOMMENDED FOR THE ADDITION OF THE ROYALTY PAID OF ` 56,30,506. ON THE BASIS OF THE AFORESAID DECISION OF THE TRANSFER PRICING OFFICER, THE ASSESSING OFFICER MADE THE ADDITION IN THE ASSESSMENT ORDER. BEING AGGRIEVED WITH THE ADDITION SO MADE, THE ASSESSEE PREFERRED APPEAL BEFORE THE FIRST APPELLATE AUTHORI TY. 6 . IN COURSE OF HEARING OF APPEAL BEFORE THE FIRST APPELLATE AUTHORITY, THE ASSESSEE CHALLENGED THE DETERMINATION OF ARM'S LENGTH PRICE OF ROYALTY PAYMENT AT NIL. FURTHER, TO JUSTIFY THE PAYMENT OF ROYALTY, THE ASSESSEE AGAIN FURNISHED VARIOUS DOCUMENTAR Y EVIDENCES INCLUDING THE 6 J.B. CHEMICALS & PHARMACEUTICALS LTD. AGREEMENT DATED 18 TH SEPTEMBER 1975, BETWEEN NETAFIM, ISRAEL , AND HYDROPLAN GROUP TO DEMONSTRATE THAT NETAFIM, ISRAEL, INCURRED COST FOR ACQUIRING INTELLECTUAL PROPERTY. FURTHER, THE ASS ESSEE ALSO SUBMITTED THAT THE AE INCREASE S A DDITIONAL R&D COST TO TAILOR ITS DRIPPERS AS PER DIFFERENT MARKET NEEDS AND TO IMPROVE EFFICIENCY IN USAGE AND PRODUCT. IN THIS CONTEXT THE ASSESSEE FURNISHED A WORKING OF ROYALTY AND R&D INVESTMENT AT 5%. FURTHER, IT WAS SUBMITTED , DURING THE YEAR 2002 AL L THE INTELLECTUAL PROPERTY COSTS WERE RECOVERED THROUGH ROYALTY CHARGES WITH THE EXCEPTION OF CHINA. IN THIS CONTEXT, THE ASSESSEE FURNISHED A CHART BEFORE THE FIRST APPELLATE AUTHORITY INDICATING THE COST OF DRIPPER AND OTHER MATERIALS AND ROYALTY CHARGE D . S INCE A PART OF THE AFORESAID SUBMISSIONS AND WORKINGS WERE NOT FURNISHED BEFORE THE TRANSFER PRICING OFFICER, LEARNED COMMISSIONER (APPEALS) FORWARDED THEM TO THE TRANSFER PRICING OFFICER SEEKING HIS COMMENT S. VIDE LETTER DATED 29 TH JANUARY 2008 THE TR ANSFER PRICING OFFICER OFFERED HIS COMMENT S IN RESPECT OF ASSESSEES SUBMISSIONS AND WORKINGS BY REFERRING TO HIS OBSERVATIONS WHILE DEALING WITH THE ISSUE IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004 05. AFTER CONSIDERING THE REPORT OF THE TRANSFER PRICING OFFICER IN THE CONTEXT OF THE SUBMISSIONS MADE BY THE ASSESSEE AND THE MATERIAL ON RECORD, LEARNED COMMISSIONER (APPEALS) ADMITTED THE ADDITIONAL EVIDENCE S FURNISHED BY THE ASSESSEE AND PROCEEDED TO DECIDE THE ISSUE IN FAVOUR OF TH E ASSESSEE ON THE FOLLOWING REASONING: 7 J.B. CHEMICALS & PHARMACEUTICALS LTD. I) AS REQUIRED BY RULE 10B(2) OF THE INCOME TAX RULES, 1962, THE PAYMENT OF ROYALTY IS MADE IN ACCORDANCE WITH THE SIA APPROVAL AND IN COMPLIANCE WITH STATUTORY REGULATIONS IN INDIA THE LAWS AND GOVERNMENT ORDE RS IN FORCE. II) THE WHOLE ENTITY APPROACH ACCEPTED BY THE TPO ALSO BENCHMARKS THE INTERNATIONAL TAXATION IN RESPECT OF PAYMENT OF ROYALTY. III) THE TRANSACTION BETWEEN THE APPELLANT AND ITS AES IS ESSENTIALLY AT ARM'S LENGTH SINCE THEY HAVE BEEN AR RIVED AT AFTER PROLONGED NEGOTIATIONS / DELIBERATIONS BETWEEN THE JV PARTNERS. IV) THE APPELLANT HAS ALSO FURNISHED EVIDENCE THAT ROYALTY PAYMENTS HAVE ALSO BEEN MADE TO NETAFIM, ISRAEL BY THE ASSOCIATES IN USA AND AUSTRALIA. V) THOUGH IN CASE OF CHINA THERE IS NO PAYMENT IN THE FORM OF ROYALTY THE AVERAGE PRICE CHARGED PER 1000 DRIPPERS IS LOWER THAN AVERAGE PRICE CHARGED TO THE APPELLANT EVEN AFTER INCLUDING ROYALTY PAYMENTS. VI) THE COMPARATIVE OF THE COSTS CHARGES FOR DRIPPERS CHARGED BY NETAFIM I SRAEL FROM CHINA, INDIA AND USA SHOWS THAT THE AVERAGE PRICE OF THE DRIPPERS SOLD TO INDIA IS LOWEST AND HENCE THERE IS NO OVERCHARGING ON ACCOUNT OF ROYALTY. ACCORDINGLY, HE DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 7 . THE LEARNED DEPARTMENTAL R EPRESENTATIVE SUBMITTED , SINCE THE ASSESSEE FAILED TO FURNISH THE DETAILS OF COST INCURRED BY NETAFIM, ISRAEL FOR DEVELOPMENT OF TECHNICAL KNOWHOW, THE TRANSFER PRICING OFFICER WAS JUSTIFIED IN REJECTING THE CPM APPLIED BY THE ASSESSEE. HE SUBMITTED , IN 8 J.B. CHEMICALS & PHARMACEUTICALS LTD. SU CH SITUATION, THE ONLY METHOD WHICH COULD HAVE BEEN APPLIED TO DETERMINE THE ARM'S LENGTH PRICE OF ROYALTY PAYMENT IS CUP METHOD. HE SUBMITTED , SINCE THE ASSESSEE FAILED TO FURNISH THE DETAILS OF ROYALTY PAYMENT , THE TRANSFER PRICING OFFICER DETERMINED THE ARM'S LENGTH PRICE OF ROYALTY AS NIL. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED , LEARNED COMMISSIONER (APPEALS) HAS ERRONEOUSLY DELETED THE ADDITION BY HOLDING THAT THE TRANSFER PRICING OFFICER HAS FOLLOWED WHOLE ENTITY APPROACH , THEREFORE, THE RE WAS NO NEED TO BENCHMARK THE ROYALTY SEPARATELY. REFERRING TO SECTIONS 92(1) & 92C(1) OF THE ACT AS WELL AS RULE 10B(1) OF THE RULES AND CERTAIN OECD GUIDELINES, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED , EACH INTERNATIO NAL TRANSACTION SHOULD BE BENCH MARKED INDEPENDENTLY. FURTHER, HE SUBMITTED , FOR BENCH MARKING THE ARM'S LENGTH PRICE RBI/SIA APPROVAL CANNOT BE CONSIDERED AS A CUP AS IT IS NOT PROVIDED UNDER RULE 10B(1)(A). FURTHER, HE SUBMITTED , OECD TRANSFER PRICING GUIDELINES OF 2010 ALSO DO NO T PROVIDE SUCH COMPARABILITY. HE SUBMITTED , MERELY BECAUSE PAYMENT OF ROYALTY WAS AFTER PROLONG ED NEGOTIATION AND DELIBERATION BETWEEN THE PARTIES IT CANNOT BE TREATED TO BE AT ARM'S LENGTH UNLESS IT IS COMPARED WITH PRICE PAID IN RESPECT OF SIMILAR UNCONT ROLLED TRANSACTIONS. HE SUBMITTED , THE ROYALTY PAID BY THE ASSESSEE CANNOT BE COMPARED WITH ROYA LTY PAID BY USA OR AUSTRALIAN A ES SINCE THEY ARE CONTROLLED TRANSACTIONS. FURTHER, HE SUBMITTED , THE CONCLUSION OF LEARNED COMMI SSIONER (APPEALS) THAT THE COST CHARGED 9 J.B. CHEMICALS & PHARMACEUTICALS LTD. FOR DRIPPERS BY THE AE TO THE ASSESSEE IS OF NO RELE VANCE SINCE WHAT IS TO BE BENCH MARKED IS THE PAYMENT OF ROYALTY. THUS, HE SUBMITTED , THE DELETION OF AD JUSTMENT MADE BY THE TRANSFER PRICING OFFICER IS IMPROPER. IN SUPPORT OF HIS CONTENTION, LEAR NED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE FOLLOWING DECISIONS: I ) DENSO INDIA LTD. V/S CIT, [2016] 68 TAXMANN.COM 55 (DEL.); II ) SKOI BRAVERIES LTD. V/S ACIT, ITA NO.6175/MUM./2011, DATED 18.01.2013; AND III ) A.W. F A BER CASTELL INDIA PVT. LTD. V/S DCIT, ITA NO.1037/ MUM./2017, DATED 12.04.2017. 8 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , AS PER RULE 10B(1)(C) FOR WORKING OUT THE MARGIN ONE NEVER NEED S TO CONSIDER THE COSTS INCURRED BY THE AE WHICH ARE CHARGED TO THE TESTED PARTY. HE SUBMITTED , TO JUSTIFY THE BENCH MARKING OF ROYALTY PAYMENT AS WELL AS OTHER INTERNATIONAL TRANSACTION UNDER CPM, THE ASSESSEE HAD FURNISHED THE TRANSFER PRICING STUDY REPORT WHICH HAS NOT BEING DOUBTED BY THE TRANSFER PRICING OFFICER. IN THIS CONTEXT, HE DREW OUR ATTENTI ON TO THE TRANSFER P RICING STUDY REPORT TO SHOW THE REASONS FOR WHICH CPM WAS SELECTED AS MOST APPROPRIATE METHOD. HE ALSO REFERRED TO THE DETAILS FURNISHED INDICATING THE COST INCLUDED IN CALCULATING THE MARGIN OF THE ASSESSEE. HE ALSO DREW OUR ATTENTION TO THE COMPUTATION OF COST PLUS MARGIN OF THE ASSESSEE. FURTHER, HE ALSO DREW OUR ATTENTION TO THE COMPUTATION OF COST PLUS MARGIN OF THE COMPARABLE COMPANIES. THE 10 J.B. CHEMICALS & PHARMACEUTICALS LTD. LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , ON THE REQUEST OF THE TRANSFER PRICING OFFICER, THE ASSESSEE HAS ALSO PROVIDED THE UPDATED SINGLE YEAR MARGIN OF COMPARABLE COMPANIES FOR THE ASSESSMENT YEAR 2003 04. HE SUBMITTED , IN THE ORDER PASSED, THE TRANSFER PRICING OFFICER HAS NOT MADE ANY ADVERSE OBSERVATIONS ON THE COMPARABILITY ANALYSIS DONE BY THE ASSESSEE. HE SUBMITTED , THE BENCH MARKING DONE BY THE ASSESSEE UNDER CPM BY AGGREGATING INTERNATIONAL TRANSACTION S HAS NOT BEEN SPECIFICALLY DISPUTED BY THE TRANSFER PRICING OFFICER. THEREFORE, HE SUBMITTED , THE CONTENTION OF THE REVENUE THAT CPM I S NOT THE RIGHT METHOD FOR DETERMINING THE ARM'S LENGTH PRICE OF ROYALTY PAYMENT IS NOT CORRECT. HE SUBMITTED , THE CONTENTION OF THE DEPARTMENT THAT THE WHOLE ENTITY APPROACH IS NOT PROVIDED UNDER LAW IS UNACCEPTABLE SINCE THE PAYMENT OF ROYALTY IS CLOSELY LINKED TO THE OTHER INTERNATIONAL TRANSACTION S , HENCE, CANNOT BE EVALUATED SEPARATELY. IN THIS CONTEXT, HE RELIED UPON THE FOLLOWING DECISIONS: I ) SONY ERECTIONS MOBILE COMMUNICATIONS INDIA PVT. LTD. V/S CIT, [2015] 374 ITR 118; II ) CUMMINS INDIA LTD. V/S ACIT, [2015] 68 SOT 14; III ) DEMAG CRANES AND COMPONENT INDIA PVT. LTD. V/S DCIT, [2015] 30 TAXMANN.COM 364; IV ) PANASONIC INDIA PVT. LTD. V/S ITO, [2010] 7 TAXMANN.COM 117; AND V ) INTIMATE FASHION INDIA PVT. LTD. V/S ACIT, [2012] 24 TAXMANN.COM 80. 11 J.B. CHEMICALS & PHARMACEUTICALS LTD. 9 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THE ORDER PASSED BY THE TRANSFER PRICING OFFICER WOULD REVEAL THAT WHILE DETERMINING THE ARM'S LENGTH PRICE OF THE ROYALTY PAYMENT AT NIL, HE HAS NOT APPLIED ANY OF THE PRESCRIBED METHODS. HE SUBMITTED , FOR THE FIRST TI ME BEFORE THE TRIBUNAL, THE REVENUE HAS CAME UP WITH ALTOGETHER NEW PLEA THAT TRANSFER PRICING OFFICER HAS APPLIED CUP METHOD. HE SUBMITTED , IT IS WELL SETTLED PRINCIPLE OF LAW THAT THE TRANSF ER PRICING OFFICER HAS TO BENCH MARK THE INTERNATIONAL TRANSACTIO N BY APPLYING ANY ONE OF THE PRESCRIBED METHODS AND HE CANNOT DETERMINE THE ARM'S LENGTH PRICE AT NIL. IN SUPPORT OF SUCH PROPOSITION, HE RELIED UPON THE FOLLOWING DECISIONS: I ) CIT V/S LIVER INDIA EXPORTS LTD., [2017] 78 TAXMANN.COM 88 (BOM.); II ) DCIT V/S CLSA INDIA LTD., [2013] 33 TAXMANN.COM 260 (MUM.); III) CIT V/S KODAK INDIA PVT. LTD., ITA NO.15/2014, DATED 11.07.2016; IV) CIT V/S JOHNSON & JOHNSON LTD., ITA NO.1291/2014, DATED 03.04.2017; AND V) CIT V/S MERCK LTD., ITA NO .272/2014, DATED 08.08.2016. 10 . IN SUPPORT OF HIS CONTENTION THAT THE LEARNED DEPARTMENTAL REPRESENTATIVE CANNOT MAKE OUT A NEW CASE, WHICH IS NOT THE CASE OF THE TRANSFER PRICING OFFICER, THE LEARNED AUTHORISED REPRESENTATIVE RELIED UPON THE FOLLOWING DECI SION: 12 J.B. CHEMICALS & PHARMACEUTICALS LTD. I ) MAHINDRA & MAHINDRA LTD. V/S DCIT, [2009] 122 TTJ 577 (MUM.)(SB); AND II ) CIT V/S MAHINDRA & MAHINDRA LTD. [2014] 365 ITR 560 (BOM.). 11 . FURTHER, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , RBI/SIA APPROVAL IS A VALID CUP AND CAN BE USED TO BENCH MARK THE TRANSACTIONS HAS BEEN APPROVED IN VARIOUS JUDICIAL PRECEDENTS. IN THIS CONTEXT, HE RELIED UPON THE FOLLOWING DECISIONS: I ) M . SPICER INDIA PVT. LTD. V/S ACIT, ITA NO.2948/PUN./ 2016, DATED 1 1.12.2018; II ) SPICER INDIA LTD. V/S ACIT, ITA NO.251/PUN./2014, DATED 10.02.2017; III ) CADBURY INDIA LTD. V/S ACIT, [2014] 147 ITD 487, (MUM.); AND IV ) MONDELEZ INDIA FOODS PVT. LTD. V/S ACIT, [2016] 70 TAXMANN.COM 112. 12 . W ITH OUT PREJUDICE TO HIS SUBMISSION THAT THE TRANSFER PRIC ING OFFICER HAS NOT APPLIED CUP, H E SUBMITTED , FOR BENCHMARKING THE PAYMENT OF ROYALTY CUP IS NOT THE MOST APPROPRIATE METHOD. HE SUBMITTED , IF THE TRANSFER PRICING OFFICER WAS OF THE VIEW THAT CPM IS NOT THE MOST APPROPRIATE METHOD, HE C OULD HAVE DETERMINED THE ARM'S LENGTH PRICE OF ROYALTY PAID BY APPLYING TNMM AS THE MOST APPROPRIATE METHOD. IN THIS CONTEXT, HE RELIED UPON THE FOLLOWING DECISIONS: I ) DCIT V/S CLSA INDIA LTD., [2013] 33 TAXMANN.COM 260 (MUM.); AND 13 J.B. CHEMICALS & PHARMACEUTICALS LTD. II ) FRIGO GLASS INDIA PVT. LTD. V/S DCIT,, [2017] 83 TAXMANN.COM 38 (DEL.). 13 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. WE HAVE ALSO APPLIED OUR MIND TO THE DECISIONS RELIED UPON. THE FACTUAL MATRIX RELATING TO THE DISPUTED ISSUE REVEALS THAT THE ASSESSEE H AS ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS AE NETAFIM, ISRAEL, INCLUDING PAYMENT OF ROYALTY. IT IS ALSO A FACT THAT IN THE TRANSFER PRICING STUDY REPORT, THE ASSESSEE HAS AGGREGATED ALL INTERNATIONAL TRANSACTION S INCLUDI NG PAYMENT OF ROYALTY AND BENCHMARKED THEM APPLYING CPM AS THE MOST APPROPRIATE METHOD. IT IS EVIDENT , THE TRANSFER PRICING OFFICER HAS ACCEPTED THE BENCH MARKING OF ALL INTERNATIONAL TRANSACTION S UNDER CMP EXCEPT THE PAYMENT OF ROYALTY. IT FURTHER TRANSPIRES FROM THE MA TERIAL ON RECORD , TO ALTERNATIVELY SUPPORT ITS CLAIM THAT THE PAYMENT OF ROYALTY IS AT ARM'S LENGTH, THE ASSESSEE HAS RELIED UPON RBI / SIA APPROVALS FOR PAYMENT OF ROYALTY. IT IS EVIDENT , THE TRANSFER PRI CING OFFICER REJECTED THE BENCH MARKING OF ROYALTY P AID TO NETAFIM, ISRAEL DONE BY THE ASSESSEE IN THE TRANSFER PRICING STUDY REPORT BASICALLY FOR THE REASON THAT THE ASSESSEE FAILED TO PROVIDE THE DE TAILS OF COST INCURRED BY THE AE FOR DEVELOPMENT OF TECHNOLOGY AND FURTHER , IT FAILED TO FURNISH THE RATES O F ROYALTY PAID BY THE OTHER GROUP CONCERN S. OF COURSE, THE TRANSFER PRICING OFFICER HAS ALSO OBSERVED THAT RBI / SIA APPROVALS CANNOT BE 14 J.B. CHEMICALS & PHARMACEUTICALS LTD. CONSIDERED FOR BENCH MARKING THE PAYMENT OF ROYALTY. HAVING DONE SO, IT IS APPARENT , THE TRANSFER PRICING OFF ICER HAS NO T PROCEEDED TO BENCH MARK THE PAYMENT OF ROYALTY BY APPLYING ANY OF THE PRESCRIBED METHODS PROVIDED UNDER THE STATUTE. WITHOUT ASSIGNING ANY REASON , THE TRANSFER PRICING OFFICER HAS DETERMINED THE ARM'S LENGTH PRICE OF THE ROYALTY PAYMENT AT NIL. PRIMA FACI E, IT APPEARS , THE DETERMINATION OF ARM'S LENGTH PRICE OF ROYALTY PAYMENT AT NIL BY THE TRANSFER PRICING OFFICER IS COMPLETELY ON AD HOC BASIS WITHOUT FOLLOWING THE DUE PROCESS OF LAW AS PROVIDED UNDER THE STATUTE. LAW IS FAIRLY WELL SETTLED BY THE HON'BLE JURISDICTIONAL HIGH COURT AS WELL AS DIFFERENT BENCHES OF THE TRIBUNAL THAT THE TRANSFER PRICING OFFICER IS DUTY BOUND TO DETERMINE THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION BY APPLYING ANY ONE OF THE PRESCRIBED METHODS. THIS PRINCIPLE HAS BEEN PROPOUNDED BY THE HON'BLE JURISDICTIONAL HIGH COURT TIME AND AGAIN WHICH CAN BE SEEN FROM THE FOLLOWING DECISIONS: I ) CIT V/S KODAK INDIA PVT. LTD., ITA NO.15/2014, DATED 11.07.2016; II ) CIT V/S JOHNSON & JOHNSON LTD., ITA NO.1291/2014, DATED 03.04.2017; III ) CIT V/S MERCK LTD., ITA NO.272/2014, DATED 08.08.2016; AND IV ) CIT V/S LE VER INDIA EXPORTS LTD., [2017] 78 TAXMANN.COM 88. 14 . UNDIS PUTEDLY, THE ASSESSEE HAS BENCH MARKED THE PAYMENT OF ROYALTY BY APPLYING CPM . IF THE TRANSFER PRICING OFFICER WAS NOT 15 J.B. CHEMICALS & PHARMACEUTICALS LTD. CONVINCED WITH T HE BENCH MARKING OF THE ASSESSEE, HE SHOULD HAVE INDEPENDENTLY BENCH MARKED THE ARM'S LENGTH PRICE OF ROYALTY PAYMENT BY ADOPTING ANY ONE OF THE PRESCRIBED METH ODS WHICH HE HAS FAILED TO DO . THAT BEING THE CASE, THE DETERMINATION OF ARM'S LENGTH PRICE AT NI L ON PURELY AD HOC BASIS WITHOUT ASSIGNING ANY VALID AND ACCEPTABLE REASON IS LEGALLY UNSUSTAINABLE. THEREFORE, THE ADDITION MADE ON ACCOUNT OF ADJUSTMENT MADE TO THE ARM'S LENGTH PRICE OF ROYALTY PAYMENT DESERVES TO BE DELETED. 15 . HAVING HELD SO, IT IS NOW NECESSARY TO DEAL WITH SOME OF THE SUBMISSIONS MADE BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE TRANSFER PRICING OFFICER DETERMINED THE ARM'S LENGTH PRICE OF THE ROYALTY PAYMENT BY APPLYING CU P METHOD. FIRSTLY, NEITHER THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT BY THE TRANSFER PRICING OFFICER N OR ANY OTHER MATERIAL EVEN REMOTELY DEMONSTRATE THAT THE TRANSFER PRICING OFFICER HAS APPLIED CUP METHOD WHILE DETERMINING THE ARM'S LENGTH PRICE OF ROYALTY PAYMENT AT NIL. THEREFORE, THE LEARNED DEPARTMENTAL REPRESENTATIVE WHILE ARGUING THE ISSUE BEFORE US HAS GIVEN A COMPLETELY NEW DIMENSION TO THE ORDER OF THE TRANSFER PRICING OFFICER, WHICH IS OTHERWISE NOT FORTHCOMING FROM THE SAID ORDER . THE I SSUE IS WHETHER THE LEARNED DEPARTMENTAL REPRESENTATIVE CAN INTRODUCE SUCH FRESH AND COMPLETELY NEW ARGUMENT AT THIS STAGE. ON 16 J.B. CHEMICALS & PHARMACEUTICALS LTD. GOING THROUGH THE PROVISIONS OF THE ACT, IT IS EVIDENT THAT THE TRANSFER PRICING OFFICER HAS TO DETERMINE THE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION BY APPLYING A PRESCRIBED METHOD. SECTION 92C OF THE ACT PRESCRIBES THE METHODS UNDER WHICH ARM'S LENGTH PRICE CAN BE COMPUTED. RULE 10B OF THE RULES LAYS DOWN THE MECHANISM FOR COMPUTATION OF ARM'S LENGTH PRICE UNDER DIFFERE NT METHODS. AS PER RULE 10B(I)(A) , FOR DETERMINATION OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION UNDER CUP, THE PRICE CHARGED OR PAID FOR PROPERTY TRANSF ERRED OR SERVICE PROVIDED IN A COMPARABLE U NCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTI ONS HAVE TO BE IDENTIFIED AND MAKING ADJUSTMENT TO SUCH PRICE , AS MAY BE REQUIRED , IT HAS TO BE TAKEN AS AN ARM'S LENGTH PRICE OF THE INTERNAT IONAL TRANSACTION BETWEEN THE A ES. A PERUSAL OF THE ORDER PASSED BY THE TRANSFER PRICING OFFICER DOES NOT REVEAL A NY SUCH EXERCISE BEING UNDERTAKEN BY THE TRANSFER PRICING OFFICER. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO NOT BROUGHT TO OUR NOTICE ANY MATERIAL TO DEMONSTRATE THAT THE MECHANISM PRESCRIBED UNDER RULE 10B(I)(A) WAS FOLLOWED BY THE TRANSFER PRICIN G OFFICER FOR DETERMINING THE ARM'S LENGTH PRICE AT NIL. THEREFORE, EVEN ASSUMING THAT CUP METHOD HAS BEEN APPLIED BY THE TRANSFER PRICING OFFICER, IT IS APPARENT THAT HE HAS NOT UNDERTAKEN THE EXERCISE PROVIDED UNDER RULE 10B(I)(A) FOR DETERMINING THE ARM 'S LENGTH PRICE. THEREFORE, THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE ARM'S LENGTH PRICE OF ROYALTY HAS BEEN DETERMINED AT NIL BY APPLYING 17 J.B. CHEMICALS & PHARMACEUTICALS LTD. CUP METHOD IS TOTALLY UNACCEPTABLE. FURTHER, IN CASE OF DENSO INDIA LTD. (SUPRA), CITED BY T HE LEARNED DEPARTMENTAL REPRESENTATIVE, THE HON'BLE JURISDICTIONAL HIGH COURT HAS APPROVED THE DECISION OF THE TRANSFER PRICING OFF ICER IN APPLYING TNMM FOR BENCH MARKING THE ARM'S LENGTH PRICE OF ROYALTY PAID. IN CASE OF CLSA INDIA LTD. (SUPRA) AND FRIGO G LASS INDIA PVT. LTD. (SUPRA) CITED BY THE LEARNED AUTHORISED REPRESENTATIVE, THE TRIBUNAL HAS REJECTED APPLICABILITY OF CUP METHOD FOR DETERMINING THE ARM'S LENGTH PRICE OF ROYALTY PAYMENT AND HAS HELD THAT TNMM IS THE MOST APPROPRIATE METHOD TO DETERMINE THE ARM'S LENGTH PRICE OF ROYALTY PAYMENT. IN THE FACTS OF THE PRESENT APPEAL, WHILE ARGUING IN FAVOUR OF APPLICABILITY OF CUP, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT SINCE THE ASSESSEE FAILED TO FURNISH RATES AT WHICH ROYALTY WAS PAID BY OTHER GROUP ENTITIES, THE TRANSFER PRICING OFFICER DETERMINED THE ARM'S LENGTH PRICE AT NIL. THE AFORESAID ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS UNACCEPTABLE SIMPLY FOR THE REASON THAT THE TRANSFER PRICING OFFICER COULD NOT HAVE DETERMI NED THE ARM'S LENGTH PRICE UNDER CUP BY APPLYING THE RATE OF ROYALTY PAID BY OTHER GROUP ENTITIES SINCE THEY ARE CONTROLLED TRANSACTIONS. WHEREAS, RULE 10B(1)(A) MANDATES THAT THE PRICE CHARGED FOR AN UNCONTROLLED TRANSACTION / TRANSACTION SHOULD BE CONSID ERED AS A CUP. AS REGARDS THE JUSTIFIABILITY OF PAYMENT OF ROYALTY QUA RBI/SIA APPROVALS, WE MUST OBSERVE THAT IN THE DECISIONS CITED BY THE LEARNED AUTHORISED REPRESENTATIVE, THE TRIBUNAL 18 J.B. CHEMICALS & PHARMACEUTICALS LTD. HAS HELD THAT THE RATE AT WHICH PAYMENT OF ROYALTY WAS APPROVED BY THE RBI/SIA CAN BE CONSIDERED AS ARM'S LEN GTH PRICE. IN THE CASE OF A.W.FABER CASTELL INDIA PVT. LTD. (SUPRA) CITED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, THOUGH, THE TRIBUNAL HAS OBSERVED THAT ARM'S LENGTH PRICE OF ROYALTY NEEDS TO BE DETERMINED IN A CCORDANCE WITH THE TRANSFER PRICING REGULATIONS, HOWEVER, THE BENCH ALSO OBSERVED THAT IF AN AUTHORITY BY WAY OF SPECIFIC APPROVAL HAS ALLOWED A PARTICULAR RATE OF PAYMENT, IT DOES CARRY PERSUASIVE VALUE AND CAN ACT AS ONE OF THE SUPPORTI VE TOOLS FOR CARRY ING OUT BENCHMARKING OF TRANSACTION RELATING TO PAYMENT OF ROYALTY. INSOFAR AS THE D ECISION OF THE TRIBUNAL IN SKOL BREWERIES (SUPRA) CITED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE MUST OBSERVE THAT THE TRIBUNAL HAS OBSERVED THAT PRESS NOTE OF MINIST RY OF COMMERCE FIXING RATE OF ROYALTY UNDER FDI POLICY CANNOT BE CONSIDERED TO BE RELEVANT FOR DETERMINATION OF ARM'S LENGTH PRICE UNDER THE ACT. HOWEVER, FOLLOWING TH E WELL SETTLED PROPOSITION OF LA W THAT THE VIEW FAVOURABLE TO THE ASSESSEE HAS TO BE TAKE N, WE ARE INCLINED TO FOLLOW THE DECISION S CITED BY THE LEARNED AUTHORISED REPRESENTATIVE HOLDING THAT THE DETERMINATION OF ARM'S LENGTH PRICE AS APPROVED BY THE RBI/SIA IS VALID. ON THE BASIS OF THE AFORESAID REASON ING , WE UPHOLD THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) IN DELETING THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 19 J.B. CHEMICALS & PHARMACEUTICALS LTD. 16 . IN THE RESULT, REVENUES APPEAL IS DISMISSED. ITA NO.4837/MUM./2009 A.Y. 2004 05 ITA NO.1874/MUM./2011 A.Y. 2005 06 17 . THE FACTS AND ISSUES INVOLVED IN THESE TWO APPEALS ARE IDE NTICAL TO ITA NO.3668/MUM./2008. IN FACT, THE TRANSFER PRICING OFFICER WHILE RECOMMENDING TRANSFER PRICING ADJUSTMENT ON PAYMENT OF ROYALTY IN ASSESSMENT YEAR 2005 06 HAS REFERRED TO HIS DECISION IN ASSESSMENT YEAR 2003 04 AND 2 004 05. THEREFORE, OUR DECISION THEREIN WILL APPLY MUTATIS MUTANDIS TO THESE TWO APPEALS AS WELL. IN VIEW OF THE AFORESAID, WE UPHOLD THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) IN DELETING THE ADDITION S MADE ON ACCOUNT OF TRANSFER PRICING OFFICER IN THESE TWO APPEALS ALSO. 18 . IN THE RESULT, APPEALS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN C OURT ON 25.04.2019 SD/ - N.K. PRADHAN ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 25.04.2019 20 J.B. CHEMICALS & PHARMACEUTICALS LTD. COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (SR. PRIVATE SECRETARY) ITAT, MUMBAI