Danisco (India) Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 5291/DEL/2010

• Counselvise Citation: 529120114 RSA 2010
• Duration Of Justice: 3 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 04-02-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 26-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: HIMANSHU SHEKHAR SINHA; MRS PRIYANKA
• Keywords: Business income; Transfer pricing; Business expenditure; Opportunity of being heard; Principle of natural justice; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary
• Section: 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I: NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SHRI I.C. SUDHIR, JUDICIAL MEMBER I.T.A.NO.5291/DEL/2010 ASSESSMENT YEAR : 2006-07 DANISCO (INDIA) PVT. LTD. VS. ACIT NO.5, E-BLOCK, CIRCLE 10(1) SHOPPING CENTRE, MASJID MOTH, G. K. PART-II NEW DELHI. NEW DELHI. PAN: RTKDO2441F. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI HIMANSHU SHEKHAR S INHA, ADV & MRS. PRIYANKA, AR. RESPONDENT BY : SHRI PEEYUSH JAIN, CIT-DR. O R D E R PER I. C. SUDHIR, JUDICIAL MEMBER THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN ITS AP PEAL: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE ORDER PASSED BY THE LD. ASSESSING OFFICER (ASSESSING OFFICER) IS BAD IN LAW AND VOID AB-INITIO. 2. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE REFERENCE MADE BY THE LD. ASSESSING OFFICER SUFFERS FROM JURI SDICTIONAL ERROR AS THE LD. ASSESSING OFFICER DID NOT RECORD ANY REASONS IN THE DRAFT ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WA S EXPEDIENT AND NECESSARY TO REFER THE MATTER TO THE LD. TRANSFER PRICING OFFICER (TPO) FOR COMPUTATION OF THE ARMS LENGTH PRICE, AS IS RE QUIRED U/S 92CA(1) OF THE INCOME TAX ACT, 1961(ACT). 3. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. ASSESSING OFFICER ERRED IN MAKING AN ADDITION OF RS .3,61,37,882/- TO THE 2 RETURNED INCOME OF THE APPELLANT BY RE-COMPUTING TH E ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS U/S 92 OF THE ACT. 4. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. ASSESSING OFFICER/LD. TPO/LD. DISPUTE RESOLUTION PA NEL (DRP) ERRED IN APPLYING TRANSACTION NET MARGIN METHOD (TNMM) IN A MANNER THAT IS CONTRARY TO THE PROVISIONS OF THE ACT AND RULES BY: (A) REJECTING THE COMPARABILITY ANALYSIS CONDUCTED BY T HE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION; (B) REJECTING CERTAIN COMPARABLES CHOSEN BY THE APPELLA NT BY APPLYING INCORRECT AND UNSUITABLE FILTERS IN THE SE ARCH PROCESS OF THE ECONOMIC ANALYSIS; (C) REJECTING THE ECONOMIC ADJUSTMENT MANDATED BY THE R ULES FOR EXCESS ADMINISTRATIVE COST INCURRED BY THE APPELLAN T VIS--VIS THE COMPARABLE COMPANIES; AND (D) RE-COMPUTING THE OPERATING MARGIN OF THE APPELLANT BY CHARACTERIZING CERTAIN NON OPERATING ITEMS AS OPERA TION AND VICE VERSA. 5. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE IN L AW, THE LD. ASSESSING OFFICER/ LD. TPO/LD. DRP ERRED IN IGNORING THE SUPP LEMENTARY ANALYSIS CONDUCTED BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION IN RESPECT OF THE INTERNATIONAL TRANSACTION PERTAINING SOLELY TO ITS TRADING SEGMENT BY RELYING ON THE RESALE PRICE METHOD. 6. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. DRP ERRED IN NOT PROVIDING THE APPELLANT SUFFICIENT OPP ORTUNITY OF BEING HEARD IN RESPECT OF THE COMPARABLE UNCONTROLLED PRICES SUBMI TTED BY THE APPELLANT IN SUPPORT OF ITS ARMS LENGTH PRICING. 7. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. ASSESSING OFFICER/ LD. TPO/ LD. DRP ERRED IN SELECT ING THE CURRENT YEAR (I.E. FINANCIAL YEAR 2005-06 ) DATA FOR COMPARABILITY DES PITE THE FACT THAT AT THE TIME OF PREPARATION OF TRANSFER PRICING DOCUMENTATI ON BY THE APPELLANT, THE COMPLETE DATE FOR FINANCIAL YEAR 2005-06 WAS NOT AV AILABLE WITHIN THE PUBLIC DOMAIN. 8. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. ASSESSING OFFICER/ LD. TPO/ LD. DRP ERRED IN DENYIN G THE BENEFIT OF 5% 3 MARGIN ALLOWED UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT BY RELYING ON AN AMENDMENT APPLICABLE ONLY FROM 01.04.2009 (AND N OT APPLICABLE TO THE RELEVANT ASSESSMENT YEAR 2006-07). 9. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. DRP HAS ERRED IN NOT EXAMINING THE VALIDITY OF INITIATION OF PENALTY PROCEEDINGS U/S 271(1) (C). 2. WE HAVE HEARD AND CONSIDERED THE ARGUMENTS ADVAN CED BY THE PARTIES, IN VIEW OF ORDERS OF THE AUTHORITIES BELOW, MATERIAL A VAILABLE ON RECORD AND THE DECISIONS RELIED UPON. GROUND NO.1 3. THE GROUND NO.1 IS GENERAL IN NATURE HENCE DOES NOT NEED INDEPENDENT ADJUDICATION. GROUND NO.2 4. THE LD. AR DID NOT ADVANCE ANY ARGUMENT IN SUPPO RT OF THIS GROUND SAYING THAT THE ISSUE RAISED IN THE GROUND QUESTION ING THE VALIDITY OF REFERENCE OF THE MATTER BY THE ASSESSING OFFICER TO THE LD. TRAN SFER PRICING OFFICER FOR COMPUTATION OF ARMS LENGTH PRICE WITHOUT RECORDING REASONS FOR THE SAME HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL I N THE CASE OF AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD. VS. ACIT (07) 107ITD 1 41. THIS GROUND IS ACCORDINGLY REJECTED. GROUND NO.3 TO 6 4 5. IN GROUND NO. 3 THE ASSESSEE HAS RAISED OBJECTI ON AGAINST MANNER IN WHICH TRANSFER PRICING ADJUSTMENT HAS BEEN MADE BY THE ASSESSING OFFICER /TPO. THE GRIEVANCE OF THE ASSESSEE IS THAT THE LD. TPO H AS ERRED IN MAKING AN ADDITION ON THE ENTIRE TRANSACTIONS UNDER TAKEN BY THE ASSESSEE, IRRESPECTIVE OF THE FACT THAT DURING THE YEAR, THE ASSESSEE HAS ALS O UNDER TAKEN TRANSACTIONS WITH UNRELATED TREATIES WHICH ARE NOT SUBJECT TO TR ANSFER PRICING. THE RELEVANT FACTS ARE THAT ASSESSEE WAS ESTABLISHED IN 1998 AS A 100% SUBSIDIARY OF DANISCO A/S DENMARK. THE ASSESSEE DANISCO INDIA IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF FOOD ADDITIVES. THE MA NUFACTURING BUSINESS IS IN RESPECT OF FOOD FLAVOURS AND THE TRADING BUSINESS I S FOR PRODUCTS THAT FALL UNDER THE CATEGORY OF FOOD INGREDIENTS. FOR THE PURPOSE O F MANUFACTURING FOOD FLAVOURS, THE ASSESSEE PURCHASES RAW MATERIALS FROM BOTH OVERSEAS PARTIES AND FROM LOCAL PARTIES IN INDIA. THE TOTAL SALES OF MAN UFACTURED PRODUCTS DURING THE F. Y. 2005-06 WAS OF RS.10.47 CRORES. THE VALUE OF INTERNATIONAL TRANSACTIONS PERTAINING TO IMPORT OF RAW MATERIALS USED IN MANUF ACTURING WAS RS.55.5 LACS. SO FAR AS TRADING OF INGREDIENTS IS CONCERN FROM THE A SSESSEE ALSO IMPORTS INGREDIENTS FROM ASSOCIATED ENTERPRISE(S) AND RESEL LS THEM TO ITS CUSTOMERS IN INDIA THOUGH ITS DISTRIBUTION CHAIN. DURING THE REL EVANT FINANCIAL YEAR, THE APPELLANT IMPORTED FINISHED GOODS WORTH RS.5.89 CRO RES FOR RESALE IN THE INDIAN MARKET. THE ASSESSEE HAS A CHAIN OF DEALERS SPREAD ACROSS THE COUNTRY, WHO ARE INVOLVED IN SELLING OF GOODS MANUFACTURED BY THE AS SESSEE AS WELL ASS FINISHED GOODS IMPORTED BY THE COMPANY FROM ITS ASSOCIATED EN TERPRISE(S). THE 5 SENGMENTAL ACCOUNTS OF THE ASSESSEES BUSINESS SHOW ING THE BIFURCATION OF RESULTS BETWEEN THE MANUFACTURING AND TRADING SEGME NTS WAS SUBMITTED BEFORE THE LD. TPO DURING THE ASSESSMENT PROCEEDINGS. THE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES DURING THE FINANCIAL YEAR WERE DULY REPORTED IN THE ACCOUNTANTS REPORT IN FORM NO.3CEB FILED ALONG WITH THE RETURN OF INCOME. IN ITS TP DOCUMENTATION, THE APPELLANT SELECTED THE TRANSA CTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD. FOR THE PRU POSE OF DETERMINING THE ARMS LENGTH PRICE OF THE ABOVE INTERNATIONAL TRANS ACTIONS, ALL THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT WERE GROUP ED TOGETHER, AND THE PROFITABILITY HAS BEEN DETERMINED ON A COMPANY AS A WHOLE APPROACH. TO APPLY TNMM, THE ASSESSEE SEARCHED FOR EXTERNAL UNCONTROLL ED INDIAN COMPARABLE COMPANY. THE SHORT LISTED COMPANIES WERE SUBJECTED TO QUALITATIVE ANALYSIS AND 7 INDEPENDENT COMPANIES WERE IDENTIFIED AS COMPARAB LES. BASED ON THE RESULTS OF THE BENCHMARKING STUDY THE MEAN MARGIN (OPM) OF THE COMPARABLE COMPANIES WAS DETERMINED AT 3.38% AS AGAINST OPM MA RGIN OF 8.65% EARNED BY THE ASSESSEE. THE OPM OF THE ASSESSEE WAS COMPUT ED AFTER MAKING AN ECONOMIC ADJUSTMENT FOR THE HIGH LEVEL OF ADMINISTR ATIVE EXPENSES VIS--VIS THE COMPARABLES. AS THE OPERATING PROFIT MARGIN OF THE ASSESSEE WAS MORE THAN AVERAGE MARGIN OF THE COMPARABLES COMPANIES, THE IN TERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WERE CONSIDERED TO BE AT ARMS LENGTH. THE ASSESSEE CARRIED OUT A SECONDARY ANALYSIS OF THE IN TERNATIONAL TRANSACTION PERTAINING TO THE IMPORT OF FINISHED GOODS FOR TRAD ING. THE ASSESSEE FURTHER 6 CARRIED OUT (FOR TRADING) FOR RESALE PRICE MARGIN ( RPM) METHOD WHEREBY IT SHOWED THAT THE GROSS MARGIN EARNED BY IT ON TRADIN G OF THESE IMPORTED GOODS WAS AROUND 50% WHICH WAS WAY ABOVE THE GROSS MARGIN OF THE COMPARABLE COMPANIES. THE TPO ISSUED A SHOW CAUSE NOTICE TO TH E ASSESSEE CONTENDING THAT THE COMPANIES SELECTED BY THE ASSESSEE WERE NOT COM PARABLE TO THE ASSESSEE AND ARE MAINLY CHOSEN FROM THE CHEMICAL INDUSTRY WH ILE THE ASSESSEE COMPANY MAINLY OPERATES IN FOOD ADDITIVE AND PROCESSING IND USTRY. THE LD. TPO IDENTIFIED FOUR COMPANIES AS COMPARABLE TO THE ASSESSEE AND TH E ASSESSEE SUBMITTED REPLY DATED 15.10.2009. IN THIS SUBMISSION THE ASSESSEE P ROVIDED VARIOUS VALID REASONS AS TO WHY THE APPROACH PROPOSED BY THE LD. TPO WAS NOT JUSTIFIED. THE TPO AFTER PERUSING THE REPLY PROVIDED BY THE ASSESSEE D ROPPED THE APPROACH PROPOSED IN HIS SHOW CAUSE NOTICE. INSTEAD, THE LD. TPO EXAMINED THE SET OF 7 COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE AND REJ ECTED FOUR OF THESE COMPARABLES ON THE GROUND THAT EITHER THESE COMPANI ES HAD NEGATIVE NET-WORTH OR SHOWED A TREND OF PERSISTENT LOSSES. THE THREE R EMAINING COMPANIES THAT WERE ACCEPTED BY THE TPO AS ACCEPTABLE COMPARABLES WERE ALL MANUFACTURES. THE TPO ALSO REJECTED THE ECONOMIC ADJUSTMENT OF ADMINISTRA TIVE EXPENSES MADE IN THE OPM OF THE ASSESSEE. BASED ON THESE FINDINGS, HE MA DE AN ADJUSTMENT OF RS. 3.61 CRORES. THE ADJUSTMENT MADE BY HIM WAS NOT CON FINED TO THE INTERNATIONAL TRANSACTIONS BUT THE ENTIRE ENTITY. 7 6. THE AGGRIEVED BY THE ORDER OF THE TPO, THE ASSE SSEE RAISED OBJECTION BEFORE THE LD. DISPUTED RESOLUTION PANEL (DRP) PAS SED THE FINAL ORDER WHEREIN HE UPHELD THE ADDITION PROPOSED BY THE TPO AMOUNTING T O RS.3,61,88,237/-. THIS ACTION OF THE LD. DRP HAS BEEN QUESTIONED BEFORE US SEVERAL GROUNDS. 7. THE MAIN GRIEVANCE IN THE GROUND NO.3 OF THE ASS ESSEE IS THAT THE LD. TPO HAS ERRED IN MAKING ADDITION ON THE ENTIRE TRANSACT IONS UNDER TAKEN BY THE ASSESSEE, IRRESPECTIVE OF THE FACT THAT DURING THE YEAR THE ASSESSEE HAD ALSO UNDER TAKEN TRANSACTIONS WITH UNRELATED ENTITIES WH ICH ARE NOT SUBJECT TO TRANSFER PRICING. 8. THE LD. AR SUBMITTED THAT THE METHODOLOGY ADOPTE D BY THE LD. TPO HAS BEEN TO ARRIVE AT THE DEFICIENCY IN THE OPERATING P ROFITS OF THE ASSESSEE VIS--VIS THE COMPARABLES AND ATTRIBUTE THE ENTIRE DIFFERENTI AL ONLY TO THE PRICES ACCORDINGLY. THE LD. TPO HAS CONVENIENTLY IGNORED T HAT THE PURPORTED DEFICIENCY IN THE PROFITS OF THE APPELLANT IS ALSO A FUNCTION OF SEVERAL OTHER NORMAL THIRD PARTY BUSINESS EXPENSES INCURRED BY THE ASSESSEE DU RING THE YEAR. HE SUBMITTED THAT IN THE MANUFACTURING ACTIVITY THE MAJORITY OF THE RAW MATERIAL WAS PURCHASED FROM UNRELATED THIRD PARTIES. THE LD. TPO HAS HIMSE LF HAS NOTED ONLY 12.5% OF PURCHASES ARE FROM RELATED PARTIES. HENCE ABOUT 87. 5% OF THE PURCHASES OF RAW MATERIAL ARE FROM UNRELATED PARTIES AND HENCE THESE TRANSACTIONS WERE OUTSIDE THE PURVIEW OF TRANSFER PRICING EXAMINATION. HOWEVE R, THE LD. TPO HAS IGNORED 8 THE ABOVE PREVIOUS OF THE LAW WHILE DRAFTING HIS OR DER. HE SUBMITTED THAT IN RESPECT OF PURCHASE OF TRADED GOODS, A SMALL PORTIO N OF THE SAME WAS PURCHASED FROM UNRELATED ENTITIES. THUS, THE LD. TPO HAS ERRE D IN MAKING AN ADDITION TO ENTIRE TRANSACTIONS ENTERED INTO BY THE ASSESSEE. I N SUPPORT OF HE PLACED RELIANCE ON THE FOLLOWING DECISIONS: 1. ABHISHEK AUTO INDUSTRIES LTD. VS. DCIT, ITA NO. 1433/DEL/2009 AY 2004-05 (PARAGRAPH 8.2) 2. LIONBRIDGE TECHNOLOGIES PVT. LTD. VS. DC IT, ITA NO. 9032/MUM/2010 AY 2006-07 (PARAGRAPH7 PAGE 6) 3. FIRESTONE INTERNATIONAL (PVT.) LTD. VS. DCIT, ITA NO. 4520/MUM/2011 AY 2006-07 (PARAGRAPH 7PAGE 5) 4. PENNZOIL QUAKER STATE INDIA VS. DCIT , ITA NO. 8885/MUM/ 2010 AY 2006-07 (PARAGRAPH 5 PAGE 6-7) 9. IN GROUND NO. 4 THE GRIEVANCE OF THE ASSESS EE IS IN RESPECT OF APPROACH ADOPTED BY THE LD. TPO IN SELECTING COMPARABLE CO MPANIES DENYING THE ECONOMIC ADJUSTMENTS CLAIM MADE BY THE ASSESSEE AND ERRONEOUS COMPUTATION OF THE MARGINS OF THE ASSESSEE. 10. REGARDING SELECTION OF COMPARABLES BY THE LD. TPO THE LD. AR SUBMITTED THAT HE HAS ERRED IN REJECTING 4 COMPARABLE COMPANI ES SELECTED BY THE ASSESSEE IN ITS TRANSFER PRICING DOCUMENT. HE SUBMITTED THAT THREE OF THE COMPARABLES NAMELY ASHOK ALCO CHEM, GAYATRI STAR CHEM AND KOTHA RI FERMENT HAS BEEN REJECTED ON THE GROUND THAT THEY HAVE NEGATIVE NET- WORTH. THE LD. AR SUBMITTED 9 THAT THERE IS NO CORRELATION BETWEEN NET WORTH AND PROFITABILITY OF A COMPANY. THE FACT THAT TWO OF THESE 3 COMPANIES HAD POSITIVE MARGINS CLEARLY SHOWS THE ABSENCE OF THIS CORRELATION. ASHOK ALEO CHEM AND KO THARI FERMENT HAD OPERATING PROFIT MARGINS OF 1% AND 15.46% RESPECTIVELY. ONE O F THE COMPARABLE NAMELY PENTOKEY HAS BEEN REJECTED BY THE LD. TPO ON THE BA SIS THAT IT IS PERSISTENT LOSS MAKING. THE LD. AR SUBMITTED THAT LOSS AND PROFIT A RE NORMAL INCIDENT OF BUSINESS AND THE LAW AS PROVIDED IN SECTION 92C(2) PROVIDES FOR TAKING AN ARITHMETIC MEAN OF MORE THAN ONE ALPS IS MEANT TO TAKE INTO ACCOUNT PROFIT AND LOSS MAKING COMPANIES. IN SUPPORT HE STATED DECISIO N OF MUMBAI BENCH OF TRIBUNAL IN THE CASE OF TEVA INDIA (P) LTD. 43 SOT 5 (MUM). HE SUBMITTED THAT RELYING ON THE RULING OF SONY INDIA PVT. LTD. IN TH IS REGARD THE TRIBUNAL IN THAT CASE HAS HELD THAT A COMPARABLE CANNOT BE REJECTED MERELY ON THE GROUND OF LOSSES BUT IF THERE ARE OTHER FACTORS WHICH JUSTIFY EXCLUSION, A REJECTION CAN BE MADE. HE ALSO CITED THE DECISION OF SPECIAL BENCH O F THE TRIBUNAL IN THIS REGARD IN THE CASE OF QUARK SYSTEMS 38 SOT 307 (SB). THE LD. AR SUBMITTED THAT THE LD. TPO HAS ERRED IN SELECTING THREE COMPARABLE COMPANI ES THAT ARE ONLY IN MANUFACTURING AND DO NOT HAVE ANY TRADING BUSINESS. HE POINTED OUT THAT ALMOST HALF OF THE REVENUE OF THE ASSESSEE HAVE BEEN DERIV ED FROM TRADING AS EVIDENT FROM THE SEGMENTAL ACCOUNTS. IN FACT THE PREDOMINAN T INTERNATIONAL TRANSACTION IS IMPORT OF TRADED GOODS. THEREFORE CHOICE OF MANUFAC TURING COMPANIES AS COMPARABLES FOR THE ASSESSEE COMPANY HAVING BOTH TR ADING AND MANUFACTURING OPERATIONS IS FUNDAMENTALLY FLAWED AND CONTRARY TO THE STANDARDS OF 10 COMPARABILITY LAID DOWN IN RULE 10B(2) OF I.T. RULE S 1962. HE SUBMITTED THAT THE LD. TPO OUGHT TO HAVE USED THE SEGMENTAL ACCOUNTS F URNISHED BY THE ASSESSEE TO EXAMINE THE TRADING AND MANUFACTURING ACTIVITIES SEPARATELY. SEPARATE SET OF COMPARABLES SHOULD HAVE BEEN CHOSEN FOR THE TRADING SEGMENT. FURTHERMORE FOR TRADING RESALE PRICE METHOD (RPM) WIDELY ACKNOWLEDG ED AS THE MOST APPROPRIATE METHOD FOR DISTRIBUTORS OUGHT TO HAVE BEEN USED. 11. REGARDING THE DENIAL OF ECONOMIC ADJ USTMENTS BY THE LD. TPO, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD IN ITS TRANS FER PRICING DOCUMENTATION RIGHTFULLY MADE AN ECONOMIC ADJUSTMENT FOR DIFFEREN CE IN THE ADMINISTRATIVE COST OF THE ASSESEE VIS A VIS COMPARABLE COMPANIES. HE S UBMITTED THAT INDIAN TRANSFER PRICING REGULATIONS RULE 10B(1)(E)(III) PR OVIDE FOR REASONABLE ADJUSTMENTS TO BE MADE IN CASE THERE ARE DIFFERENCE S BETWEEN TRANSACTIONS BEING COMPARED. THE LD. AR SUBMITTED THAT THE LD. T PO HAS DENIED THE ECONOMIC ADJUSTMENTS MADE BY THE ASSESSEE IN ITS TR ANSFER PRICING DOCUMENTATION WITHOUT PROVIDING THE ASSESSEE ANY OP PORTUNITY OF BEING HEARD. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS :- 1. ARISTON THERMO INDIA LIMITED ITA N O. 1455/PN/2010 AY 2006-07 (PARAGRAPH 14 PAGE 11) 2. EGAIN COMMUNICATION (P) LTD. ITA NO . 1685/PN/2007 AY 2004-05 (PARAGRAPH 36 AND 40, PAGE 33-37) 3. FIAT INDIA PRIVATE LIMITED ITA NO . 1848/MUM/2009 AY 2004-05 (PARAGRAPH 8 PAGE 6) 4. SKODA AUTO INDIA PVT. LTD. ITA NO. 202/PN/07 AY 2003-04 (PARAGRAPH 19 PAGE 36) 5. AMDOCS BUSINESS SERVICES PVT. LTD . ITA NO. 1412/PN/11 AY 2007 -08 (PARAGRAPH 9 PAGE 13-14) 11 12. THE LD. AR SUBMITTED FURTHER THAT THE LD. TPO HAS ALSO ERRED IN COMPUTATION OF THE MARGINS OF THE ASSESSEE. THE LD . TPO WHILE CALCULATING THE OPERATING MARGIN OF THE ASSESSEE HAS ERRONEOUSLY CO NSIDERED MISCELLANEOUS INCOME AMOUNTING TO RS. 23,599/- AND EXCESS PROVISI ON WRITTEN BACK RS. 1,943,927/- AS NON-OPERATING IN NATURE. HE SUBMITTE D THAT THESE ITEMS WERE PURELY OF OPERATING NATURE AND THE LD. TPO HAS ERRE D BY CONSIDERING THEM OTHERWISE. THE LD. TPO DID NOT PROVIDE THE ASSESSEE ANY OPPORTUNITY OF BEING HEARD AGAINST THIS APPROACH TAKEN BY HIM. 13. IN GROUND NO. 5 THE GRIEVANCE OF THE ASSESSE E IS THAT BOTH THE LD. TPO AND LD. DRP HAVE FAILED TO CONSIDER THE SUPPLEMENTARY A NALYSIS CARRIED OUT BY THE ASSESSEE USING RESALE PRICE METHOD (RPM) FOR DETERM INING THE ARMS LENGTH PRICE (ALP) OF THE IMPORT TRANSACTIONS. IN GROUND NO. 6 T HE GRIEVANCE OF THE ASSESSEE IS THAT THERE WAS VIOLATION OF PRINCIPLE OF NATURAL JUSTICE IN DENIAL OF ADEQUATE OPPORTUNITY OF BEING HEARD PROVIDED TO THE ASSESSEE BY THE AUTHORITIES BELOW AND FAILURE TO EXAMINE THE CONTENTIONS AND ARGUMENTS OF THE ASSESSEE BY THEM IN THIS REGARD. 14. ON THE ISSUE OF USE OF RPM TO DETERMINE THE ALP OF THE TRADING TRANSACTIONS (IMPORT OF FINISHED GOODS), THE LD. AR SUBMITTED THAT IN THE TRADING SEGMENTS THE ASSESSEE IMPORTS THE INGREDIENTS FROM ASSOCIATED ENTERPRISE(S) AND RESELLS THEM TO ITS CUSTOMERS IN INDIA THROUGH ITS DISTRIBUTION CHAIN. IN ITS TRANSFER 12 PRICING DOCUMENTATION THE ASSESSEE HAD CONDUCTED A COMPANY AS A WHOLE APPROACH AND APPLIED TNMM AS THE MOST APPROPRIATE M ETHOD TO BENCHMARK ITS INTERNATIONAL TRANSFER. HOWEVER ALONGWITH THE PRIMA RY ANALYSIS, THE ASSESSEE IN ITS TRANSFER PRICING DOCUMENTATION HAD ALSO CONDUCT ED A SECONDARY ANALYSIS IN FORM OF RESALE PRICE METHOD FOR THE TRADING TRANSAC TIONS UNDERTAKEN BY IT. HE SUBMITTED THAT UNDER THE TRADING SEGMENT THE ASSESS EE MERELY IMPORTS THE INGREDIENTS AND RESELLS IT FURTHER TO UNRELATED PAR TIES. THUS IT DOES NOT ADD ANY VALUE TO THE PRODUCE IMPORTED AND MERELY ACTS AS A BUY SELL AGENT. THIS SEGMENT CONSTITUTES 47.81% TO THE TOTAL REVENUE OF THE ASSE SSEE FOR THE YEAR UNDER CONSIDERATION. THE LD. AR SUBMITTED THAT IN RESPEC T OF THE INTERNATIONAL TRANSACTION OF IMPORT OF FURNISHED GOODS, WHEREIN T HE ASSESSEE MERELY ACTS A RESELLER / DISTRIBUTOR IT HAS APPLIED RPM WHILE CO MPARING THE GROSS PROFIT MARGIN FROM THE SALE OF SUCH IMPORTS IN THE DOMESTIC MARKE T WITH THE GROSS PROFIT MARGIN EARNED BY THE COMPARABLE COMPANIES FROM THE SIMILAR TRANSACTIONS. THE INTERNATIONAL TRANSACTION OF IMPORT OF FINISHED GOO DS FROM THE AES FOR DISTRIBUTION IN INDIA WOULD APPROPRIATELY BE BENCHMARKED APPLYI NG RPM AS DEFINED AT RULE 10B (1) BY COMPARING THE GROSS PROFIT MARGINS FROM THE TRANSACTIONS OF RESALE OF SIMILAR PRODUCTS SOURCED FROM UNRELATED PARTIES. IN THIS REGARD THE LD. AR SUBMITTED FURTHER THAT HE WOULD ALSO LIKE TO DRAW A TTENTION TOWARDS THE GUIDANCE NOTE ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANT ON THE APPLICABILITY OF RPM. HE REFERRED RELEVANT EXTRACTS OF THE PARA NOS. 19.2 AN D 19.3 OF THE GUIDANCE NOTE WHICH RELIES ON OECD GUIDELINES. ON THE BASIS OF THE SE GUIDELINES THE LD. AR 13 SUBMITTED THAT RESALE PRICE METHOD IS MOST APPROPRI ATE IN A SITUATION WHERE THE SELLER ADDS RELATIVELY LITTLE VALUE TO THE GOODS. H E SUBMITTED THAT THE ASSESSEE MERELY IMPORTS AND RESALE THE GOODS TO UNRELATED PA RTIES. THUS IT DOES NOT ADD ANY VALUE TO THE PRODUCTS IMPORTED AND MERELY ACT A S A BUY SELL AGENT. THUS THE RPM IS THE MOST APPROPRIATE METHOD TO BENCHMARK THE TRADING SEGMENT OF THE ASSESSEE. THE LD. AR HAS SUMMERISED THE RESULTS OF SUCH ANALYSIS , DETAILS OF WHICH WERE PROVIDED IN THE TRANSFER PRICING DOCUMEN TATION, AS REPRODUCED HEREUNDER :- 15. HAVING ASSISTANCE OF THE ABOVE CHART TH E LD. AR SUBMITTED THAT THE GROSS MARGINS EARNED BY THE COMPARABLE COMPANIES IS 17.86% WHILE THAT EARNED BY ASSESSEE IS 50.01%. THUS THE INTERNATIONAL TRANS ACTIONS UNDERTAKEN BY THE ASSESSEE WITH RESPECT TO ITS TRADING SEGMENT ARE AT ARMS LENGTH AS DEFINED BY THE INDIAN TRANSFER PRICING REGULATIONS. 16. THE LD. AR SUBMITTED THAT THE ABOVE DET AILS WERE ALSO PROVIDED TO THE LD. TPO AS A PART OF THE TRANSFER PRICING DOCUMENTA TION AND ALSO HAD DETAILED NAME OF THE COMPANY GROSS PROFIT MARGIN (%) (FY 2005-06) ANUKARAN COMMERCIALS 8.66% OREGON COMMERCIALS LIMITED 3.65% PRIYA INTERNATIONAL 41.26% AVERAGE RATIO 17.86% GROSS PROFIT MARGIN OF DANISCO INDIA 50.01% 14 SUBMISSIONS DURING THE COURSE OF ASSESSMENT PROCEED INGS. HOWEVER THE SAME WERE NOT TAKEN INTO ACCOUNT BY THE LD. TPO WHILE FR AMING HIS ORDER FOR THE YEAR UNDER CONSIDERATION. THE LD. AR PLACED RELIANCE ON THE FOLLOWING RULINGS WHEREIN RPM HAS BEEN HELD TO BE THE MOST APPROPRIATE METHOD FOR DISTRIBUTORS :- 1. MATTEL TOYS (I) PVT. LTD. ITA NO. 2476/MUM//2008(PARAGRAPH 38 PAGE 22) 2. LOREAL INDIA P. LTD. ITA NO. 542 3/MUM./2009 AY 2003-04 (PARAGRAPH 19 PAGE 10) 3. STAR DIAMOND GROUP V/S DDIT, 141 TTJ 21, ITA NO. 3923/MUM/2008 AY 2004-05 (PARAGR APH 13 PAGE 13) 4. KODAK POLYCHROME GRAPHICS (I) P. LTD. ITA NO. 1557/MUM./2009 AY 2004-05 (PARAG RAPH 48-49, PAGE 26-27) 17. ON THE ISSUE OF TRANSACTION BY TRANSACT ION APPROACH THE LD. AR SUBMITTED THAT THOUGH THE ASSESSEE HAS ADOPTED A CO MPANY AS A WHOLE APPROACH TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTIONS BUT UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE TRANSACTION BY TRANSACTION APPROACH WAS MORE APPROPRIATE AS THE MANUFACTURING AND TRADING T RANSACTIONS ARE NOT INTERLINKED AND HAS THE TWO SEGMENTS HAVING COMPLET ELY DIFFERENT FUNCTIONAL PROFILE. RULE 10A DEFINES TRANSACTION TO INCLUDE TRANSACTIONS THAT ARE CLOSELY LINKED. HE SUBMITTED THAT AT PRESENT HE HAS THE BEN EFIT OF SEVERAL RULINGS OF THE TRIBUNAL, WHEREIN IT HAS BEEN CLEARLY HELD THAT TR ANSACTION BY TRANSACTION APPROACH IS MORE APPROPRIATE IN SO FAR AS IT TAKES INTO ACCOUNT THE FUNCTIONAL PROFILE OF EACH CLASS OF TRANSACTIONS SEPARATELY. I N THIS REGARD HE CITED DECISION OF 15 SPECIAL BENCH IN THE CASE OF LG ELECTRONICS INDIA PV T. LTD. ITA NO. 5140/D/2011 PARA 21.5. 18. THE LD. AR SUBMITTED FURTHER THAT MERELY BECAUSE THE ASSESSEE ADOPTED A COMPANY AS A WHOLE APPROACH BEFORE THE LD. TPO AN D LD. DRP, IT IS NOT PRECLUDED FROM ASSERTING THE CORRECT POSITION OF LA W REGARDING THE USE OF MOST APPROPRIATE APPROACH AND METHOD. IN THIS REGARD HE PLACED RELIANCE ON THE FOLLOWING DECISIONS :- 1. QUARK SYSTEM PVT. LTD. (2010) 38 SOT 307 ( SB) 2. A.M. TOD COMPANY INDIA PVT. LTD. ITA NO. 492/MUM/2006 3. NAVISITE INDIA PVT. LTD. ITA NO. 5329/DE L/2012 19. THE LD AR ALSO TRIED TO EXPLAIN AS TO WH Y THE ASSESSEE WAS NOT GRANTED AN APPROPRIATE OPPORTUNITY OF PRESENTING ITS CASE B EFORE THE AUTHORITIES BELOW. IN THIS REGARD HE REFERRED PAGE NO. 11 AND 12 OF THE W RITTEN SYNOPSIS WHEREIN CHRONOLOGICAL SEQUENCE OF PROCEEDINGS BEFORE THE LD . TPO HAVE BEEN SUMMARIZED IN A TABULAR FORM. 20. LD. AR SUBMITTED THAT THE LD. TPO MADE AN ADJUSTMENT NOT ONLY BY ELIMINATING SOME OF THE COMPARABLE COMPANY BUT ALSO REJECTING THE ECONOMIC ADJUSTMENT IN THE FORM OF DIFFERENCES IN EXCESS ADM INISTRATIVE COST. THE LD. TPO DID NOT ALLOW THE ASSESSEE AN OPPORTUNITY TO PUT FO RTH ITS SUBMISSION ON THE SAID ANALYSIS DONE BY HIM RESULTING IN SUBSTANTIAL ADJUS TMENT TO THE ASSESSEE. HE SUBMITTED THAT THE ASSESSEE RAISED OBJECTIONS BEFOR E THE LD. DRP IN THIS REGARD. 16 HOWEVER THE LD. DRP DID NOT EXAMINE THE ASSESSEES CONTENTIONS AND ARGUMENTS IN RESPECT OF THE APPLICABILITY OF THE RPM FOR THE TRADING GOODS. BUT LD. DRP HAS ISSUED A LACONIC ORDER REJECTING THE CLAIMS OF THE ASSESSEE IN A SUMMARY MANNER. THE LD. AR ALSO CITED SEVERAL DECISIONS ON THE ISSU E OF DENIAL OF OPPORTUNITY OF PERSONAL HEARING TO THE ASSESSEE ON THE ONE HAND CO UPLED WITH THE LD. TPO RUSHING TO PASS THE ORDER MAKING ADJUSTMENT OF HUGE SUM TO THE INCOME OF THE ASSESSEE ON THE OTHER HAND RESULTED IN GRAVE AND SE RIOUS CONSEQUENCES FOR THE ASSESSEE. 21. LD. CIT(DR) ON THE OTHER HAND TRIED TO JUST IFY THE ORDERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT THE ASSESSEE HAS SHOWN LOS SES DURING THE YEAR UNDER CONSIDERATION. THE NON AE TRANSACTIONS HAVE ALSO BEE N TAKEN INTO ACCOUNT WRONGLY WHILE APPLYING APPROPRIATE METHOD WHICH IS BASICALLY FOR TP TRANSACTION. 22. CONSIDERING THE ABOVE SUBMISSIONS WE FIND THAT THE ASSESSEE ESTABLISHED IN 1998AS A 100% SUBSIDIARY OF DANISCO A/S DENMAR K. DANISCO INDIA IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADI NG OF FOOD ADDITIVES. THE MANUFACTURING BUSINESS IN RESPECT OF FOOD FLAVOURS AND THE TRADING BUSINESS IS FOR PRODUCTS FOR FALLING UNDER THE CATEGORY OF FOOD INGREDIENTS. THE MAIN GRIEVANCES OF THE ASSESSEE AGAINST THE ORDER OF THE LD. TPO UPHELD BY THE LD. DRP ARE REGARDING THEIR APPROACH IN THE MANNER IN WHICH TRANSFER PRICING ADJUSTMENT HAS BEEN MADE, THE APPROACH ADOPTED BY T HE LD. TPO IN GRANTING 17 COMPARABLE COMPANIES DENYING THE ECONOMIC ADJUSTMEN T CLAIM MADE BY THE ASSESSEE, REGARDING COMPUTATION OF MARGINS OF THE A SSESEE, NON CONSIDERATION OF SUPPLEMENTARY ANALYSIS CARRIED OUT BY THE ASSESSEE USING RPM FOR DETERMINING THE ALP OF THE IMPORT TRANSACTION AND DENIAL OF ADE QUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BY THE AUTHORITIES BELOW AS W ELL AS THEIR FAILURE TO EXAMINE THE CONTENTIONS AND ARGUMENTS OF THE ASSESSEE IN TH IS REGARD. CONSIDERING THESE GRIEVANCES AS DISCUSSED HEREIN ABOVE BY US IN THE A RGUMENTS ADVANCED BY THE PARTIES / THEIR SUBMISSIONS AND HAVING GONE THROUGH THE DECISIONS RELIED UPON, WE FIND SUBSTANCE IN THE SUBMISSION OF THE ASSESSEE AND THUS WE ARE OF THE VIEW THAT IT IS A FIT CASE TO SET ASIDE THE MATTER TO TH E FILE OF THE LD. TPO FOR HIS FRESH CONSIDERATION AND DECIDE THE ISSUE AFRESH AFTER AFF ORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND DISCUSSING THEIR SUBMISSI ONS IN THE ORDER AND REASONS, IF ANY FOR NOT AGREEING OR AGREEING WITH THEM. IT I S ORDERED ACCORDINGLY WITH DIRECTION TO THE LD. TPO TO A) FIRST EXAMINE AS TO WHETHER, WAS THERE ANY VALU E ADDITION ON IMPORTED GOODS, AND IF ANSWER IS IN NEGATIVE THEN APPLY RPM AS A M OST APPROPRIATE METHOD FOR TRADING TRANSACTIONS OF IMPORTED GOODS AND IN CONSE QUENCE EXAMINE THE APPLICATION OF APPROPRIATE METHOD AS COMMISSION PAY MENT ; B) CONSIDER TNMM ONLY FOR THE TRANSACTION PERTAININ G TO IMPORT OF RAW MATERIAL USED IN MANUFACTURING BY TAKING INTO ACCOUNT THE SE GMENTAL ACCOUNT; C) SELECT APPROPRIATE COMPARABLES WITHOUT USING NEG ATIVE NET WORTH AND PERSISTENT LOSSES FILTERS KEEPING IN MIND THAT BEI NG NOT PE TO PE TRANSACTION IN MANUFACTURING, TRANSFER PRICING DOES NOT INVOLVE AN D THEREAFTER APPLY APPROPRIATE METHOD; D) ALLOW APPROPRIATE ECONOMIC ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN ADMINISTRATIVE EXPENSES BETWEEN THE ASSESSEE AND T HE COMPARABLE COMPANIES 18 23. THE GROUND NO. 3 TO 6 ARE THUS ALLOWED FOR STATISTICAL PURPOSES. 24. THE LD. AR DID NOT ADVANCE ANY ARGUMENT IN SUPPORT OF GROUND NOS. 7 TO 8. THESE GROUNDS ARE THUS REJECTED AS NOT PRESSED. 25. IN GROUND NO. 9, THE ASSESSEE HAS QUESTIONED VALIDITY OF INITIATION OF PENALTY U/S 271(1)(C) WHICH IN OUR VIEW IS PREMATU RE AT THIS STAGE. THIS GROUND IS ACCORDINGLY REJECTED. CONSEQUENTLY APPEAL IN EFFECT IS ALLOWE D FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH APRIL, 2014. SD/- SD/- (R.S. SYAL) (I. C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 29 TH APRIL, 2014. VEENA COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER ASSTT. REGISTRAR, ITAT.