SABIC India Pvt. Ltd., Gurgaon V. DCIT Circle- 22(2), New Delhi

ITA 454/DEL/2021

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 3727 (ITAT-DELHI)
• Duration Of Justice: 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Assessment Year: 2016-2017
• Appeal Filed On: 19-04-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Application of stay; Valuation report
• Section: 144; 13; 22; 92CA; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2, NEW DELHI BEFORE SH. N. K. BILLAIYA, ACCOUNTANT MEMBER AND SH. SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCING) ITA NO.454/DEL/2021 ASSESSMENT YEAR: 2016-17 SABIC INDIA PVT. LTD. 10 TH AMBIENCE CORPORATE TOWER-II, AMBIENCE ISLANDS GURGAON PAN NO. AAACS2708N VS DCIT CIRCLE -22 (2) NEW DELHI (APPELLANT) (RESPONDENT) S.A. NO.49/DEL/2021 (IN ITA NO. 454/DEL/2021) ASSESSMENT YEAR: 2016-17 SABIC INDIA PVT. LTD. 10 TH AMBIENCE CORPORATE TOWER-II, AMBIENCE ISLANDS GURGAON PAN NO. AAACS2708N VS DCIT CIRCLE -22 (2) NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY SH. AJAY VOHRA, SR. ADVOCATE SH. ADITYA VOHRA, ADVOCATE RESPONDENT BY SH. SUNIL KUMAR, CIT DR DATE OF HEARING: 02/06/2021 DATE OF PRONOUNCEMENT: 08/06/2021 2 ORDER PER N. K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 31.03.2021 FRAMED U/S. 143 (3) READ WITH SECT ION 144 C (13) OF THE ACT. 2. SIMULTANEOUSLY THE ASSESSEE HAS ALSO FILED APPLI CATION FOR THE STAY OF THE DEMAND ARISING OUT OF THE AFOREMENT IONED ASSESSMENT ORDER. WE DECIDED TO PROCEED WITH THE A PPEAL. 3. THE SUBSTANTIVE GRIEVANCE OF THE ASSESSEE READ A S UNDER :- 1. THAT THE ON FACTS AND CIRCUMSTANCES OF THE CASE, THE ASSESSMENT UNDER SECTION 143 (3) READ WITH SECTION 144 (13) OF THE INCOME TAX ACT, 1961 (THE ACT) AT AN INCOME OF RS .4,39,14,34,770 IS BAD IN LAW AND VOID-AB-INITIO. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE TRANSFER PRICING ADJUSTMENT IN AN AMOUNT OF RS. 361,32,20,62 0 IS NOT SUSTAINABLE IN LAW. 3. THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN DISREGARDING THE ECONOMIC ANALYSIS PERFORMED BY APPELLANT AND RE JECTING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) ADOPTED BY APPELLANT IN RELATION TO PROVISION OF MARKETING SUPPORT SERVICES , THEREBY MAKING AN UPWARD ADJUSTMENT OF RS. 361,32,20,620. 4. WITHOUT PREJUDICE, THAT THE TPO / DRP ERRED ON F ACTS AND IN LAW IN NOT BENCHMARKING THE INTERNATIONAL TRANSACTI ON OF PROVISION OF MARKET SUPPORT SERVICES USING CUP METHOD, ADOPTING THE INTERNAL COMPARABLE IN THE FORM OF THIRD PARTY AGREEMENT BET WEEN SAUDI BASIC INDUSTRIES CORPORATION (SABIC) WITH AN UNRE LATED PARTY 3 NAMELY EURL MAGHREB PETROCHEMICALS COMPANY (MAPECO ), ACCEPTED BY DRP DURING AY 2015-16. 5. THAT THE TPO / DRP ERRED IN FACTS AND IN LAW IN APPLYING OTHER METHOD USING CUP APPROACH AS THE MOST APPROPR IATE METHOD (MAM) WITHOUT GIVING ANY REASONS / JUSTIFICATION IN SUPPORT THEREOF. 5.1. THAT THE TPO / DRP ERRED IN FACTS AND IN LAW I N BENCHMARKING THE INTERNATIONAL TRANSACTION OF PROVISION OF MARKE T SUPPORT SERVICES ADOPTING THE FOLLOWING COMPARABLES : A) 6245 ZBIGNIEW TORKAZ, B) 17964 ATAGENCER, LLC; MEHMET GENCER, C) L22581 DOW COMING CORP. & ADVANCED POLYMER SYSTE MS INC D) L291 EQUIPMART INC. AND COLLEGIATE PACIFIC INC. E) L23918 LONGMAN GROUP UK LTD AND FUTURE MEDIA PLC 5.2 THAT THE TPO / DRP ERRED IN FACTS AND IN LAW IN NOT APPRECIATING THAT THE AFORESAID COMPARABLES ARE NOT IN THE BUSINESS OF PROVISION OF MARKET SUPPORT SERVICES AND FURTHER THAT SUCH COMPARABLES WERE REJ ECTED BY THE DRP IN ASSESSMENT YEAR 2015-16. 6. THAT THE TPO / DRP ERRED IN FACTS AND IN LAW IN DISREGARDING THE PRINCIPLES OF RES JUDICATA AND THE RULE OF CONSISTE NCY EVEN THOUGH THE FACTS OF AY 2016-17 ARE IDENTICAL TO THAT OF AY 2015-16. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR VARY THE ABOVE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 4. REPRESENTATIVES OF BOTH THE SIDES WERE HEARD AT LENGTH. CASE RECORD CAREFULLY PERUSED AND THE JUDICIAL DECI SIONS REFERRED TO DURING THE COURSE OF THE ARGUMENTS HAVE BEEN DUL Y CONSIDERED. 5. THE PROFILE OF THE APPELLANT AND ITS GROUP READ AS UNDER :- 2. PROFILE OF THE GROUP AND ASSESSEE THE SABIC GROUP HOLDING COMPANY, SAUDI BASIC INDUST RIES CORPORATION ('SABIC'), IS A PUBLIC COMPANY, HEADQUA RTERED IN RIYADH, SAUDI ARABIA, AND HAS BEEN LISTED ON TADAWUL, THE S AUDI ARABIAN STOCK EXCHANGE, SINCE 1984. SABIC HAS OPERATIONS IN OVER 50 COUNTRIES WITH A GLOBAL WORKFORCE OF APPROXIMATELY 40,000 INDIVIDUALS AND MANUFACTURES ON A GLOBAL SCALE IN S AUDI ARABIA, THE AMERICAS, EUROPE, AND ASIA PACIFIC. SABIC IS AMONG THE WORLD'S MARKET LEADERS IN THE PRODUCTION OF POLYETHYLENE, P OLYPROPYLENE AND OTHER ADVANCED THERMOPLASTICS, GLYCOLS, METHANOL, A ND FERTILIZERS. WITH REGARD TO OWNERSHIP, 70 PERCENT OF SABIC'S SHA RE ARE OWNED 4 BY THE SAUDI ARABIAN GOVERNMENT, WHILE THE REMAININ G 30 PERCENT OF SHARES ARE HELD BY PRIVATE INVESTORS IN SAUDI ARABI A AND OTHER COUNTRIES OF THE GULF COOPERATION COUNCIL. SABIC INDIA PRIVATE LIMITED ('SABIC INDIA/ 'THE AS SESSEE') WAS INCORPORATED ON 15 TH JUNE, 1992 AS A WHOLLY FOREIGN OWNED ENTERPRISE. IT HAS OFFICES IN NEW DELHI, MUMBAI, CH ENNAI AND BANGALORE. SABIC INDIA'S PRIMARY ACTIVITIES ENTAIL THE PROVISI ON OF MARKETING SUPPORT SERVICES TO FACILITIES SABIC AND SAPPL IN T HEIR EFFORTS OF SELLING FERTILIZERS, CHEMICALS AND POLYMERS PRIMARI LY IN INDIA, BUT ALSO IN NEPAL, MALDIVES, BHUTAN, SRI LANKA, AND BAN GLADESH. AS A SALES SUPPORT ORGANIZATION, SABIC INDIA DOES NOT EN TER INTO CONTRACTS WITH THE CUSTOMERS AND DOES NOT TAKE TITLE TO INVEN TORY. THE PRODUCTS ARE SOLD AN: INVOICED DIRECTLY BY SABIC AND SAPPL T O THE THIRD PARTY CUSTOMERS. ACCORDINGLY, SABIC INDIA DOES NOT BOOK S ALES REVENUE IN ITS BOOKS, EITHER, SINCE IT DOES NOT ACT AS A BUY-S ELL ORGANIZATION. 6. THE DETAILS OF THE INTERNATIONAL TRANSACTION ENT ERED BY THE ASSESSEE WITH ITS AE DURING THE YEAR UNDER CONSIDER ATION ARE AS FOLLOWS :- S. NO. DESCRIPTION OF THE TRANSACTIONS AMOUNT (IN INR) I. PROVISION OF MARKETING SUPPORT SERVICES 87,92,14,730/ - II. TRAINING AND SAP RELATED EXPENSE 14,75,826/ - 7. THE ASSESSEE HAS USED TNMM TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF MARKETING 5 SUPPORT SERVICES. THE ASSESSEE HAS ALSO PAID TRAIN ING AND SAP RELATED EXPENSES TO ITS AE AND THE INTERNATIONAL TR ANSACTION RELATING TO THE SAME HAS BEEN CONSIDERED AS CLOSELY LINKED TO THE MARKETING SUPPORT ACTIVITIES AND HENCE NO SEPARATE BENCHMARKING IS UNDERTAKEN BY THE ASSESSEE. 8. JUSTIFYING THE ADOPTION TNMM AS THE MOST APPROPR IATE METHOD THE ASSESSEE CONTENDED THAT IT IS ENGAGED FA CILITATION OF SALES TO ITS AES AND ACCORDINGLY CHARACTERIZED AS A SUPPORT SERVICE PROVIDER EXPOSED TO NORMAL RISK. IT HAS BE EN ACCORDINGLY CONTENDED THAT BECAUSE OF THE LIMITED FUNCTIONAL AN D RISK PROFILE AND THERE BEING ABSENCE OF TANGIBLE PROPERTY, INVEN TORY, DEBTOR RELATED FUNCTIONS, OPERATING EXPENSES ARE CLEAR QUA NTITATIVE MEASURE OF FUNCTIONS PERFORMED AND THERE IS NO TAKI NG OF TITLE OF GOODS PURCHASED. ACCORDINGLY OP/ VAE AND GP / VAE WERE CONSIDERED AS PLI FOR BENCHMARKING PURPOSE. 9. THE FINAL SET OF COMPARABLE COMPANIES SELECTED A RE AS UNDER :- 6 10. IN ALTERNATIVE THE ASSESSEE HAS ALSO UNDERTAKEN CORROBORATIVE BENCHMARKING FOR COMPARABLE INDEPENDE NT SELLING/ INDENTING UNDER TNMM. THE OP/ OC EARNED BY THESE C OMPANIES FOR THE SELLING / INDENTING ACTIVITIES PERFORMED BY THEM, WAS THEN COMPUTED AS UNDER :- 7 11. IT WOULD BE PERTINENT TO MENTION HERE THAT THIS PRACTICE HAS BEEN ADOPTED BY THE ASSESSEE SINCE A.Y. 2009-10 TO A.Y. 2014-15. IT IS EQUALLY PERTINENT TO MENTION THAT TNMM HAS BE EN ACCEPTED AS THE MOST APPROPRIATE METHOD IN ASSESSMENT YEAR 2 009-10 TO 2014-15. 12. WE FIND THAT THE TPO HAS DISCARDED THE TNMM MET HOD ADOPTED BY THE ASSESSEE SUMMARY. WE FURTHER FIND T HAT WITHOUT ASSIGNING ANY SPECIFIC REASON THE TPO PROCEEDED BY USING THE OTHER METHOD AS THE MOST APPROPRIATE METHOD AND F INALLY CAME TO THE SET OF FOLLOWING COMPARABLES FOR MAKING THE ALP ADJUSTMENT :- 8 S. NO. REF. AGREEMENT TITLE AGREEMENT TYPE INDUSTRY COST BASE EXCLUSIVIT Y RATE 1 L22581 NON COMPETE AGREEMENT ASSET PURCHASE, PATENT, TECHNOLOGY, TRADEMARK CHEMICALS NET SALES EXCLUSIVE 5.00% 2 L291 DISTRIBUTION AGREEMENT DISTRIBUTION BUSINESS SERVICES NET SALES UNKNOWN 5.00% 3 L23918 DISTRIBUTION AGREEMENT DISTRIBUTION, TRADEMARK, TRADE NAME EDUCATIONAL SERVICES, BUSINESS SERVICES NET SALES EXCLUSIVE 15.00% 4 L17961 TECHNOLOGY ASSISTANCE AND MARKETING SUPPORT AGREEMENT SERVICES, TECHNOLOGY CHEMICALS NET SALES UNKNOWN 3.75% 5 L11144 EXCLUSIVE SALES AND DISTRIBUTORSHIP AGREEMENT DISTRIBUTION CHEMICALS NET SALES EXCLUSIVE 10% 6. L6245 LICENSE AGREEMENT KNOW-HOW PATENT, PROCESS TECHNOLOGY CHEMICALS, RECYLCING & SANITATION NET SALES UNKNOWN 3.75% 7. L17964 TECHNICAL ASSISTANCE AND MARKETING SUPPORT AGREEMENT SERVICES, TECHNOLOGY CHEMICALS, RECYCLING & SANITATION NET SALES UNKNOWN 3.75% MEDIAN 5% 13. AND ACCORDINGLY COMPUTED THE ARMS LENGTH PRICE AS UNDER :- PARTICULARS AMOUNT (INR) SALES GENERATED BY THE AES IN INDIA [A] 89,84,87,07,000/- ARMS LENGTH RATE OF COMMISSION (%) [B] 5.00% COMMISSION INCOME AT ALP [C = A*B] 4,49,24,35,350/- COMMISSION INCOME OF TAXPAYER [D] 87,92,14,730/- ADJUSTMENT U/S 92CA [E = C - 3,61,32,20,620/- 9 D] 14. IN OUR CONSIDERED OPINION THE TPO MAY DISCARD T HE SEARCH PROCESS, THE TPO MAY ALSO DISCARD THE COMPARABLES U SED BY THE ASSESSEE BUT CANNOT DISCARD THE METHOD WHICH IS ACC EPTED BY THE REVENUE SINCE A.Y. 2009-10 ONWARDS. 15. IN OUR CONSIDERED VIEW BEFORE ADOPTING THE OTH ER METHOD THE TPO HAS TO GIVE REASON FOR DISCARDING THE FIVE METHODS MENTIONED IN THE RULES. WE FIND THAT THE ORDER OF T HE TPO/AO/DRP ARE DEVOID OF SUCH FINDING. 16. THE HONBLE DELHI HIGH COURT IN THE CASE SUMITO MO CORPORATION INDIA PRIVATE LIMITED IN ITA NO.381/201 3, 382 /2013, 738/2015 AND 702/2014 VIDE JUDGMENT DATED 22 .07.2016 AT PARA 31 OF ITS ORDER HAS OBSERVED AS UNDER :- 31. THE ASSESSEE HAD, FOR REASONS INDICATED IN ITS TRANSFER PRICING REPORT, ADOPTED TNMM AS THE MOST APPROPRIATE METHOD WITH BERRY RATIO AS THE PLI. ALTHOUGH, THE TPO FOUND FAULT IN THE USE OF BERRY RATIO - ACCORDING TO HIM, THE SAME WAS NOT PERMISSI BLE UNDER RULE 10B(1)(E) OF THE RULES HE DID NOT PROCEED TO SELE CT THE MOST APPROPRIATE METHOD FOR COMPUTATION OF ALP. THIS, IN OUR VIEW, WOULD BE ESSENTIAL AS THE RELIABILITY OF THE DETERMINATIO N OF THE ALP IS IN TURN DEPENDENT ON THE EFFECTIVENESS OF THE METHOD IN RELATION TO THE CONTROLLED TRANSACTION BEING TESTED. IN THE PRESENT CASE, THE DISPUTE ESSENTIALLY RELATES TO THE COMMISSION EARNED BY THE ASSESSEE IN RESPECT OF TRANSACTION WITH ITS AES. 10 17. AND FURTHER PARA -33 OBSERVED AS UNDER :- 33. WE FIND NO INFIRMITY WITH THE TRIBUNAL'S FINDI NG THAT INDENTING TRANSACTIONS REPORTED BY THE ASSESSEE WERE PLAINLY IN THE NATURE OF FACILITATING TRADE WHERE THE ASSESSEE WAS REQUIRED TO DO NOTHING MORE THAN TO FOLLOW UP THE CUSTOMERS FOR FACILITATI ON OF THE TRANSACTION. THE ASSESSEE WAS NOT REQUIRED TO RAISE ANY INVOICE FOR SALE AND PURCHASE AND ITS FINANCIAL COMMITMENT AND RISK WERE INCONSIDERABLE. 35. ONE OF THE PRINCIPAL ISSUES BEFORE THE TRIBUNAL CONCERNED THE APPLICABILITY OF TNMM WITH BERRY RATIO AS THE PLI, AS THE MOST APPROPRIATE METHOD. MR AGGARWAL HAD SOUGHT TO CONTE ND BEFORE US THAT THE TPO HAD REJECTED THE PLI OF BERRY RATIO BU T HAD NOT REJECTED THE TNMM AS THE MOST APPROPRIATE METHOD AND, THEREF ORE, IT WAS INCUMBENT UPON HIM TO REPLACE THE PLI WITH WHICHEVE R RATIO HE CONSIDERED APPROPRIATE AS HAD BEEN DONE IN THE PREC EDING YEARS. HE CONTENDED THAT ON PRINCIPLES OF CONSISTENCY, HE WAS REQUIRED TO FOLLOW THE TNMM METHOD. THERE IS MUCH MERIT IN THE CONTENTION THAT A METHOD ONCE CONSIDERED APPROPRIATE SHOULD BE CONS ISTENTLY APPLIED UNLESS FOR GOOD REASONS, THE TPO DECIDES OT HERWISE. HOWEVER, THIS IS A SALUTARY GUIDING PRINCIPLE AND W OULD NOT FETTER THE TPO FROM INDEPENDENTLY EXAMINING THE TRANSFER P RICING APPROACH REPORTED BY THE ASSESSEE. THE PURPOSE OF IMPUTING A LP TO INTERNATIONAL TRANSACTIONS IS TO ENSURE THAT THE RE AL INCOME OF THE ASSESSEE IN RESPECT OF INTERNATIONAL TRANSACTIONS ( AND WITH EFFECT FROM 1ST APRIL, 2013 CERTAIN DOMESTIC TRANSACTIONS) ARE CHARGED TO TAX UNDER THE ACT. IT IS THUS, IMPLICIT THAT THE EX ERCISE TO DETERMINE SUCH INCOME BE UNDERTAKEN FOR EACH ASSESSMENT YEAR. 11 37. WE MAY NOW ALSO CONSIDER MR AGGARWAL'S CONTENTI ON THAT BERRY RATIO HAD BEEN ACCEPTED AS THE APPROPRIATE PLI IN R ESPECT OF SOGO SHOSHA ESTABLISHMENTS AND, THEREFORE, THE SAME SHOU LD ALSO BE ACCEPTED IN THE CASE OF THE ASSESSEE. THE TERM SOG O SHOSHA IS USED IN RESPECT OF LARGE GENERAL TRADING COMPANIES THAT INCLUDE WITHIN THEIR FOLD A LARGE NETWORK OF SUBSIDIARY AND AFFILIATED COMPANIES, THUS, ENABLING THE SAID COMPANIES TO LEV ERAGE THEIR NETWORK FOR THEIR BUSINESS. IT IS REPORTED THAT THE SE COMPANIES ACCOUNT FOR A SUBSTANTIAL PORTION OF THE JAPAN'S OVERALL TR ADE ACROSS THE WORLD. HOWEVER, IT IS NOT NECESSARY THAT THE TRADING ARRAN GEMENT BETWEEN SOGO SHOSHA ENTERPRISES AND THEIR AFFILIATES/ SUBSI DIARIES IN INDIA BE IDENTICAL OR SIMILAR. IT IS ALSO NOT POSSIBLE TO ASSUME - WITHOUT IT BEING ESTABLISHED AS A FACT - THAT ALL INTERNATIONA L TRANSACTIONS ENTERED INTO BY INDIAN ENTERPRISES WITH THEIR RELAT ED SOGO SHOSHA ENTERPRISES WOULD BE ON IDENTICAL FOOTING. THUS, IT IS NOT APPOSITE TO DETERMINE THE ALP WITHOUT EXAMINING THE NATURE OF I NTERNATIONAL TRANSACTION IN EACH CASE . 38. INSOFAR AS THE USE OF BERRY RATIO AS A PLI IS C ONCERNED, THE TPO HAD REJECTED THE SAME FOR THREE REASONS. FIRST OF A LL, HE HELD THAT THE SAME IS NOT PERMISSIBLE UNDER RULE 10B(1)(E) OF THE RULES; SECONDLY, HE HELD THAT THE ASSESSEE HAD ACQUIRED SUBSTANTIAL INTANGIBLES IN THE FORM OF SUPPLY CHAIN INTANGIBLES AND HUMAN RESO URCES INTANGIBLES AND BERRY RATIO WAS NOT AN APPOSITE PLI IN CASES WHERE AN ASSESSEE USED SUBSTANTIAL INTANGIBLES FOR ITS BU SINESS. THIRDLY, THE TPO HELD THAT THE RATE OF COMMISSION ON INDENTI NG TRANSACTION WAS DETERMINED IN REFERENCE TO THE VALUE OF GOODS A ND NOT ON THE BASIS OF ANY COST INCURRED BY THE ASSESSEE. 12 18. THE OBSERVATIONS MADE IN PARA -38 (SUPRA) DO NO T MATCH WITH THE FACTS OF THE CASE IN HAND AS NO SUCH FINDI NG HAS BEEN GIVEN BY THE TPO/ DRP. 19. THE FACTS CONSIDERED BY THE HONBLE HIGH COURT AT PARA -45 OF ITS ORDER ARE IDENTICAL TO THE FACTS OF THE ASSE SSEE. PARA-45 OF THE ORDER READ AS UNDER :- 45. TRADITIONALLY, THE DENOMINATOR OF THE RATIO ON LY COMPRISED OF SELLING, GENERAL AND ADMINISTRATION EXPENSES. HOWEV ER, THE TREASURY LEGISLATION OF USA ALSO INCLUDED DEPRECIATION AS A PART OF THE OPERATING EXPENSES USED AS A DENOMINATOR IN THE BER RY RATIO. AS IS APPARENT, BERRY RATIO HAS LIMITED APPLICABILITY; IT CAN BE USED EFFECTIVELY ONLY IN CASES WHERE THE VALUE OF GOODS HAVE NO ROLE TO PLAY IN THE PROFITS EARNED BY AN ASSESSEE AND THE PROFIT S EARNED ARE DIRECTLY LINKED WITH THE OPERATING EXPENDITURE INCU RRED BY THE ASSESSEE. IN OTHER WORDS, THE OPERATING EXPENDITURE INCURRED BY THE ASSESSEE EFFECTIVELY CAPTURES ALL FUNCTIONS PERFORM ED AND RISKS UNDERTAKEN BY THE ASSESSEE. THUS, IN CASES WHERE AN ASSESSEE USES INTANGIBLES AS A PART OF ITS BUSINESS, BERRY RATIO WOULD NOT BE AN APPOSITE PLI AS THE VALUE OF SUCH TANGIBLES WOULD N OT BE CAPTURED IN THE OPERATING COST AND, THEREFORE, IT WOULD NOT BE APPROPRIATE TO COMPUTE THE ALP BASED ON NET PROFIT MARGIN HAVING R EGARD TO THE OPERATING COST AS A RELEVANT BASE. SIMILARLY, BERRY RATIO WOULD NOT BE AN APPROPRIATE PLI FOR DETERMINING ALP IN CASES OF ASSESSEES WHO HAVE SUBSTANTIAL FIXED ASSETS SINCE THE VALUE ADDED BY SUCH ASSETS WOULD NOT BE CAPTURED IN BERRY RATIO. 13 20. IN ANOTHER CASE THE HONBLE HIGH COURT OF DELHI IN LI AND FUNG INDIA PRIVATE LIMITED 40 TAXMANN.COM 300 HAD T HE OCCASION TO CONSIDER A SIMILAR QUARREL WHEREIN THE ASSESSEE HAD STRONGLY CONTENDED THAT NO SUCH ADJUSTMENT WAS MADE IN THE E ARLIER ASSESSMENT YEARS. PARA -46 OF THE SAID JUDGMENT IS AS UNDER :- 46. IT CAN BE SEEN FROM THE ABOVE THAT THE BERRY RA TIO CAN BE USED ONLY IN VERY LIMITED CIRCUMSTANCES AND THE LIMITATI ONS THAT WE HAVE LISTED ABOVE ARE BY NO MEANS EXHAUSTIVE. THERE IS A LSO A VIEW EXPRESSED THAT USE OF BERRY RATIO AS A PLI RESULTS IN INDICATING LESS THAN FAIR ALPS IN TAX JURISDICTION WHERE THE ASSESS EES HAVE A LOWER BARGAINING POWER. IN THE AFORESAID CONTEXT, IN OUR VIEW, THE TPO HAD CORRECTLY REASONED THAT BERRY RATIO COULD NOT BE US ED AS A PLI IN CASES OF ASSESSEES WHICH WERE USING INTANGIBLES. HOWEVER, WE FIND THAT THERE WAS NO COGENT MATERIAL FOR THE TPO TO HOLD THAT THE ASSESSEE HAD DEVELOPED SUPPLY CHAIN A ND HUMAN RESOURCES INTANGIBLES. IN ANY EVENT, THERE WAS NO M ATERIAL TO CONCLUDE THAT COSTS OF SUCH INTANGIBLES WERE NOT CA PTURED IN THE OPERATING EXPENSES. 47. IN OUR PRIMA FACIE VIEW, THE THIRD REASON STATE D BY THE TPO, THAT IS, THE RATE OF COMMISSION PAID TO THE ASSESSEE IS BASED ON THE VALUE OF THE GOODS, WOULD BE A VALID REASON TO REJECT THE USE OF BERRY RATIO BECAUSE BERRY RATIO CAN ONLY BE APPLIED WHERE THE V ALUE OF THE GOODS ARE NOT DIRECTLY LINKED TO THE QUANTUM OF PRO FITS AND THE PROFITS ARE MAINLY DEPENDENT ON EXPENSES INCURRED. THE FUND AMENTAL PREMISE BEING THAT THE OPERATING EXPENSES ADEQUATEL Y REPRESENT ALL FUNCTIONS PERFORMED AND RISKS UNDERTAKEN. FOR THIS REASON BERRY RATIO IS EFFECTIVELY APPLIED ONLY IN CASES OF STRIP PED DOWN DISTRIBUTORS; THAT IS, DISTRIBUTORS THAT HAVE NO FI NANCIAL EXPOSURE AND RISK IN RESPECT OF THE GOODS DISTRIBUTED BY THEM. 14 21. WE FIND THAT THE CBDT CIRCULAR NO.14 REFERRED TO IN THE JUDGMENT (SUPRA) ALSO CLEARLY MENTIONS THAT IF ANY, OF SUCH CIRCUMSTANCES MENTIONED IN THE SAID CIRCULAR EXISTS THEN THE AO MAY REJECT THE PRICE ADOPTED BY THE ASSESSEE AND DE TERMINED THE ALP IN ACCORDANCE WITH THE SAME RULES. AS MENTIONE D ELSEWHERE NO SUCH CIRCUMSTANCE HAS BEEN MENTIONED BY THE TPO IN THE CASE IN HAND. 22. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN ITS GUIDELINES HAS MENTIONED AS UNDER :- 6.56 THE INTRODUCTION OF THE OTHER METHOD AS THE S IXTH METHOD ALLOWS THE USE OF ANY METHOD WHICH TAKES INTO ACC OUNT (I) THE PRICE WHICH HAS BEEN CHARGED OR PAID OR (II) WOULD HAVE B EEN CHARGED OR PAID FOR THE SAME OR SIMILAR UNCONTROLLED TRANSACTI ONS, WITH OR BETWEEN NON-ASSOCIATED ENTERPRISES, UNDER SIMILAR CIRCUMSTANCES, CONSIDERING ALL THE RELEVANT FACTS. THE VARIOUS DAT A WHICH MAY POSSIBLY BE USED FOR COMPARABILITY PURPOSES COULD B E: (A) THIRD PARTY QUOTATIONS/ INVOICES; (B) VALUATION REPORTS; (C) TENDER/BID DOCUMENTS; (D) DOCUMENTS RELATING TO THE NEGOTIATIONS; (E) STANDARD RATE CARDS; (F) COMMERCIAL & ECONOMIC BUSINESS MODELS; ETC. 6.57 IT IS RELEVANT TO NOTE THAT THE TEXT OF RULE 1 0AB DOES NOT DESCRIBE ANY METHODOLOGY BUT ONLY PROVIDES AN ENABL ING PROVISION TO USE ANY METHOD THAT HAS BEEN USED OR MAY BE USED TO ARRIVE AT PRICE OF A TRANSACTION UNDERTAKEN BETWEEN NON AES. HENCE, IT 15 PROVIDES FLEXIBILITY TO DETERMINE THE PRICE IN COMP LEX TRANSACTIONS WHERE THIRD PARTY COMPARABLE PRICES OR TRANSACTIONS MAY NOT EXIST. THE WIDE COVERAGE OF THE OTHER METHOD WOULD PROVIDE FLEXIBILITY IN ESTABLISHING ARMS LENGTH PRICES, PARTICULARLY IN C ASES WHERE THE APPLICATION OF THE FIVE SPECIFIC METHODS IS NOT POS SIBLE DUE TO REASONS SUCH AS DIFFICULTIES IN OBTAINING COMPARABLE DATA D UE TO UNIQUENESS OF TRANSACTIONS SUCH AS INTANGIBLES OR BUSINESS TRA NSFERS, TRANSFER OF UNLISTED SHARES, SALE OF FIXED ASSETS, REVENUE ALLO CATION/SPLITTING, GUARANTEES PROVIDED AND RECEIVED, ETC. HOWEVER, IT WOULD BE NECESSARY TO JUSTIFY AND DOCUM ENT REASONS FOR REJECTION OF ALL OTHER FIVE METHODS WHILE SELECTING THE OTHER METHOD AS THE MOST APPROPRIATE METHOD. THE OECD GUIDELINES ALSO PERMIT THE USE OF ANY OTHER METHOD AND STATE THAT THE TAXP AYER RETAIN THE FREEDOM TO APPLY METHODS NOT DESCRIBED IN OECD GUID ELINES TO ESTABLISH PRICES, PROVIDED THOSE PRICES SATISFY THE ARMS LENGTH PRINCIPLE. 23. A PERUSAL OF THE AFORESTATED GUIDELINES OF THE ICAI ALSO SHOW THAT IT WOULD BE NECESSARY TO JUSTIFY AND DOCUMENT REASONS FOR REJECTION OF OTHER FIVE METHODS WHILE SELECTING THE OTHER METHOD AS THE MOST APPROPRIATE METHOD. 24. IN THE LIGHT OF THE AFORESTATED DISCUSSION AND KEEPING IN MIND THE PAST HISTORY OF THE ASSESSEE IN SO FAR AS THE TP ADJUSTMENT AND THE MOST APPROPRIATE METHOD LET US N OW SEE THE FINDING OF THE DRP ON THE OBJECTIONS RAISED BY THE ASSESSEE :- 3.2.1 THE PANEL HAS CONSIDERED THE SUBMISSION. IT I S NOTICED THAT THIS PANEL DURING THE AY 2015-16 REJECTED THE ASSES SEE'S OBJECTION TO 16 THE 'CUP' METHOD ADOPTED BY THE TPO/AO AND ITS REQU EST TO ACCEPT TNMM AS MAM. FOLLOWING THE SAME, WE UPHOLD THE TPO' S ACTION OF USING THE 'CUP' APPROACH AND EMPLOYING THE OTHER ME THOD AND SELECTING THE COMPARABLES AFTER CONSIDERING THE FUN CTIONAL PROFILE. NO ARGUMENT HAS BEEN ADVANCED REGARDING THE DEFECTS IN THE OTHER METHOD EMPLOYED BY THE TPO AND IT IS MERELY STATED THAT THE TPO HAS NOT FOLLOWED THE DIRECTION OF THE PANEL ON THE PRINCIPLE OF RES JUDICATA. THE PANEL, HOWEVER, DOES NOT FIND THE ARG UMENT ACCEPTABLE AS EVERY ASSESSMENT YEAR IS AN INDEPENDENT ASSESSME NT YEAR AND THE DECISIONS MAY VARY IN VIEW OF THE FACTS OBTAINI NG .IN THAT CASE. THE TPO IN PARA 9 OF HIS ORDER HAS GIVEN SUFFICIENT REASONS JUSTIFYING THE APPLICATION OF OTHER METHOD USING THE DATABASE HAVING COMPARABLES. THE OBJECTION, THEREFORE, IS NOT ACCEP TABLE AND IS REJECTED ACCORDINGLY. 3.3 GROUND NO 1.2 RELATES TO THE CERTAIN FACTUAL ER RORS, WHICH THE ASSESSEE. HAS TABULATED AS FOLLOWS: FACTUAL ERRORS IN THE ORDER PASSED BY TPO OUR CONTENTIONS SABIC INDIA PRIVATE LIMITED WAS INCORPORATED ON 15 JUNE 1992 AS A WHOLLY OWNED FOREIGN OWNED ENTERPRISE, (REFER PARA 2, PAGE 1 OF THE TP ORDER GIVEN AT PAGE 19 OF THE PAPERBOOK) WE WERE INCORPORATED IN THE YEAR 1992 AS A JOINT VENTURE BETWEEN SABIC AND AN INDIAN UNRELATED PARTN ER. AS ON DATE, WE ARE A SUBSIDIARY OF SABIC GLOBAL LIM ITED ('SGL') WITH 51% SHAREHOLDING AND BALANCE SHARES AR E HELD BY SABIC ASIA PADFIC PTE LTD. ('SAPPL). COMPANIES ENGAGED IN TRADING OPERATIONS CANNOT BE CONSIDERED AS COMPARABLE TO THE SERVICE PROVIDER EARNING COMMISSION INCOME. WE WISH TO SUBMIT THAT WHILE UNDERTAKING THE BENCHM ARKING ANALYSIS OF THE INTERNATIONAL TRANSACTIONS ENTERED WITH THE AES, WE HAD ALSO PERFORMED A SEARCH OF COMPARABLE COMPANIES WHO WERE SERVICE PROVIDERS AND ENGAGED IN THE PROVISION OF SERVICES. HOWEVER, THE LEARNED TPO HAS COMPLETELY IGNORED THE ALTERNATE, BENCHMARKING ANAL YSIS 17 IN THE A BSENCE, OF RELIABILITY AND CORRECTNESS, THE BENCHMARKING PROCESS OF THE ASSESSEE COMPANY IS BEING REJECTED BY THE UNDERSIGNED. (PARA 8, PAGE 5 OF THE TP ORDER GIVEN AT PAGE 23 OF THE PAPERBOOK) CONDUCTED IN THE TP REPORT. REFER PAGE NO,27Q OF THE PAPER BOOK FOR ALTERNATE BENCHMARKING ANALYSIS SUBMITTED TO TPO WHILE UNDERTAKING THE SEARCH PROCESS, THIS OFFICE HAS SELECTED THE KEYWORDS FOR INDUSTRY OF BUSINESS SERVICES, CHEMICALS, OIL & GAS AND WHOLESALE TRADE ETC TO ARRIVE AT THE TRUE COMPARABLES. (PARA 12, PAGE 11 OF THE TP ORDER GIVEN AT PAGE 29 OF THE PAPERBOOK) THE LEARNED TPO HAS NOT PROVIDED ANY SEARCH PROCESS IN SUPPORT OF THE COMPARABLE AGREEMENTS IDENTIFIED ON THE THIRD PARTY DATABASE. ON PERUSAL OF THE SUBMISSION, IT WAS FOUND THAT THE ONE COMPARABLE AGREEMENT WAS DURING OUR SUBMISSION DATED 24 JUNE 2019 AND 2 SEPT EMBER 2019 AND, WE HAVE SUBMITTED TWO AGREEMENTS SUBMITTED BY THE ASSESSEE TO BENCHMARK THE INTERNATIONAL 3.3.1 THE PANEL DIRECTS -THE: TPO/AO TO VERIFY THE CONTENTION AND- LATE NECESSARY 'ACTIONS ACCORDINGLY. 3.4 GROUND NO 1.4 RELATES TO THE CONSIDERATION OF E XTERNAL COMPARABLES WHICH ACCORDING TO THE ASSESSEE DO NOT MEET THE COM PARABILITY CRITERION. THE DECISION OF THE PANEL IN RESPECT OF THESE COMPA RABLES IS AS FOLLOWS: L17961 MACIEJ ZALEWSKI TRUSTEE; MACIEJ ZALEWSKI, AN INDIVIDUAL AND POLYMER ENERGY / ILC RATE-3.75% 18 3.4.1 THIS COMPARABLE WAS ALREADY REJECTED BY THIS PANEL DURING AY 2015-16 ON THE GROUND THAT LICENSEE IS A MANUFACTUR ER OF MACHINERY AND EQUIPMENT, USING POLYMER RECYCLING AND RELATED TECHNOLOGY AND COMPENSATION IS FOR TECHNOLOGY AND CONTINUOUS TECHN ICAL ASSISTANCE TO LICENSEE. FOLLOWING ITS ORDER FOR AY 2015-16, THE P ANEL DIRECTS THE TPO/AO TO EXCLUDE THIS COMPARABLE. L11144 BIOSHIELD TECHNOLOGIES INC AND SANITARY COAT ING SYSTEMS, LLP RATE - 10% 3.4.2 THIS COMPARABLE WAS ALREADY REJECTED BY THIS PANEL DURING AY 2015-16 ON THE GROUND THAT THERE WAS NOTHING TO IND ICATE THAT AGREEMENT SURVIVED AND EXISTED DURING THE RELEVANT PERIOD ARID THAT INVOLVES ANTIMICROBIAL AND BIOSTATIC PRODUCTS. FURT HER, PURCHASER I.E SANITARY COATING IS REQUIRED TO PAY ROYALTY OF 10% OF NET SELLING PRICE OF ANY PRODUCT, SERVICE OR FEE EARNED BY HIM. FOLLOWIN G ITS ORDER FOR AY 2015-16, THE PANEL DIRECTS THE TPO/AO TO EXCLUDE TH IS COMPARABLE. . 6245 ZBIGNIEW TORKAZ, AN INDIVIDUAL AND TRUSTEE AND POLYMER ENERGY LLC RATE- 7.50% 3.4.3 THE ASSESSEE HAS SUBMITTED THAT THIS AGREEMEN T IS IDENTICAL TO SR NO 1 AND SHOULD, THEREFORE, BE EXCLUDED. THE PANE L HAS CONSIDERED THE SUBMISSION. THE AGREEMENT IS NOT SIMILAR TO THE SER IAL NO 1 AS IT PERTAINS TO A HOST OF SECTORS AND THE AGREEMENT IS REGARDING KNOW HOW, PATENT AND PROCESS TECHNOLOGY. THE PANEL, ACCORDINGLY, REJ ECTS THE OBJECTION AND UPHOLDS THE ACTION OF THE TPO. L17964 ATAGENCER, LLC; MEHMET GENCER, AN INDIVIDUAL AND POLYMER ENERGY LLC RATE- J. 3.75% 3.3.4 THE ASSESSEE HAS SUBMITTED THAT THIS AGREEMEN T IS IDENTICAL TO SR NO 1 AND SHOULD ; THEREFORE BE: EXCLUDED. THE PANE L HAS CONSIDERED THE SUBMISSION. THE AGREEMENT IS NOT SIMILAR TO THE SER IAL NO 1 BUT TO L6245 ZBIGNIEW TORKAZ, AN INDIVIDUAL AND TRUSTEE AND POLY MER ENERGY LLC. 19 THE PANEL, ACCORDINGLY, REJECTS THE OBJECTION AND U PHOLDS THE ACTION OF THE TPO. L22581 DOW COMING CORP. & ADVANCED POLYMER, SYSTEMS INC RATE-5% 3.4.5 THE ASSESSEE HAS SUBMITTED THAT THIS AGREEMEN T IS NOT SIMILAR TO THE ASSESSEES AGREEMENT IT IS ESSENTIALLY, AND AGREEMENT FOR SALE, TRANSFER AND ASSIGNMENT OF CERTAIN WORLDWIDE PATENTS IN RESPECT OF CERTAIN PRODUCTS. THUS, ACCORDING TO THE ASSESSEE, THE AGREEMENT IS AN ASSET PURCHASE AGREEMENT. THE PANEL DOES NOT FIND THE ARGUMENT ACCEPTABLE AS THIS AGREEMENT ALSO RELA TES TO PATENT, TECHNOLOGY AND TRADEMARK. L291 EQUIPMART INC. AND COLLEGIATE PACIFIC INC. RAT E-5.00% 3.4.6 THIS AGREEMENT IS SOUGHT TO BE DISTINGUISHED BY THE ASSESSEE ON THE GROUND THAT THE DISTRIBUTOR IS REQUIRED TO P AY ROYALTY OF 5 % OF NET SALES IN RESPECT OF PRODUCTS SOLD BY HIM, WHERE AS THE ASSESSEE IS SAID TO BE EARNING MARKETING SUPPORT FEE AND NOT MAKING ANY PAYMENT TO OUR AES. ACCORDING TO THE ASSESSEE, CONS IDERATION ALSO INVOLVES COMBINATION OF LUMP SUM FEES IN THE FORM O F SHARES AND CASH AND PRODUCT IS INCOMPARABLE (I.E. ROLLERS AND ITS COMPONENT PARTS & ACCESSORIES USED IN TENNIS COURT. THE PANEL HAS CONSIDERED THE SUBMISSION. IN THE CASE OF THE DISTRIBUTION AGR EEMENT, MARKETING SUPPORT SERVICES ARE INHERENT AND, THEREFORE, THE A GREEMENT CANNOT BE DISTINGUISHED ON THAT GROUND. FURTHER, THE TPO H AS CLEARLY RECORDED THE INDUSTRY AS 'BUSINESS SERVICES' AND TH US, THE PANEL HAS NO REASON TO INTERFERE WITH THE SELECTION OF THIS C OMPARABLE BY THE TPO. THE OBJECTION IS, ACCORDINGLY, REJECTED. L23918 LONGMAN GROUP UK LTD AND FUTURE MEDIA PLC RA TE-15.00% 3.4.7 THE ASSESSEE CONTESTS THIS AGREEMENT ON THE G ROUND OF THE PRODUCT BEING INCOMPARABLE (I.E. INTERACTIVE COURSE WARE). THE CONTENTION, HOWEVER, IS NOT ACCEPTABLE AS THE TPO H AS CATEGORICALLY RECORDED THAT THIS AGREEMENT IS/RELATING TO DISTRIB UTION, TRADEMARK AND TRADENAME AND THE INDUSTRY IS EDUCATIONAL SERVI CES AND 20 BUSINESS SERVICES. THE TPO, THEREFORE, .CORRECTLY I NCLUDED THIS COMPARABLE IN THE FINAL SET OF COMPARABLES. THE OBJ ECTION OF THE ASSESSEE, ACCORDINGLY, STANDS REJECTED. 25. A PERUSAL OF THE FINDING OF DRP SHOW THAT THE D RP HAD PUT THE ONUS ON THE ASSESSEE WHEREAS THE ONUS LIES ON T HE TPO TO JUSTIFY THE ADOPTION OF OTHER METHOD AS THE MOST APPROPRIATE METHOD AND NOT ON THE ASSESSEE. FURTHER THE COMPARA BLE USED BY THE TPO AND ACCEPTED BY THE DRP RELATED THE PAYMENT OF ROYALTY RELATING KNOW-HOW, PATENT AND PROCESS TECHNOLOGY AN D THEREFORE, SUCH COMPARABLES CANNOT BE ACCEPTED ON THE BUSINESS PROFILE OF THE ASSESSEE. 26. IN FACT WE FIND CONFLICTING FINDINGS OF THE DRP FOR EXAMPLE IN THE CASE OF L 1 7961 MACIEJ ZALEWSKI TRUSTEE; MACIE J ZALEWSKI. THE DRP SAYS THAT THIS COMPARABLE WAS REJECTED BY T HIS PANEL DURING A.Y. 2015-16 ON THE GROUND THAT LICENSEE IS A MANUFACTURER OF MACHINERY AND EQUIPMENT WHEREAS FOR THE SAME PROFILE THE DRP HAS ACCEPTED L6245 ZBIGNIEW TORKAZ, AN INDIVIDUAL AND TRUSTEE AND POLYMER ENERGY HAS SUBMI TTED THAT THIS AGREEMENT IS IDENTICAL TO SR. NO.1 AND SHOULD THEREFORE, BE EXCLUDED. THE AGREEMENT IS REGARDING KNOW-HOW, PATE NT AND PROCESS TECHNOLOGY. ATAGENCER, LLC; MEHMET GENCER A N INDIVIDUAL AND POLYMER ENERGY LLFC RATE 3.75% THE A SSESSEE HAS SUBMITTED THAT THIS AGREEMENT IS IDENTICAL TO SR. N O. 1. 21 27. CONSIDERING THE FACTS OF THE CASE IN HAND IN TO TALITY IN THE LIGHT OF THE JUDICIAL DECISIONS MENTIONED HERE IN A BOVE WE ARE OF THE CONSIDERED VIEW THAT THE LOWER AUTHORITIES SHOU LD HAVE ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD ON THE BUSINESS PROFILE QUA THE INTERNATIONAL TRANSACTION OF THE AS SESSEE AS WAS ACCEPTED IN A.Y.2009-10 TO 2014-15. WE ACCORDINGLY DIRECT THE AO/ TPO TO DELETE THE TP ADJUSTMENT OF RS.361320620 /- APPEAL FILED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 28. SINCE WE HAVE DECIDED THE APPEAL THE STAY PETIT ION IN STAY APPLICATION NO. 49/DEL/2021 BECOME INFRUCTUOUS. ORDER PRONOUNCED IN THE OPEN COURT ON 08.06.2021. SD/- SD/- (SUDHANSHU SRIVASTAVA) (N. K. B ILLAIYA) JUDICIAL MEMBER A CCOUNTANT MEMBER *NEHA* DATE:-08.06.2021 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGI STRAR ITAT NEW DELHI 22 DATE OF DICTATION 08.06.2021 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 08.06.2021 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER 08.06.2021 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS 08.06.2021 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 08.06.2021 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS 08.06.2021 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 08.06.2021 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 08.06.2021 DATE ON WHICH FILE GOES TO THE HEAD CLERK. THE DATE ON WHICH FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER