M/s Akzo Nobel India Ltd., Kolkata V. DCIT, CIR-10, KOLKATA, Kolkata

ITA 531/KOL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1829 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2017
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 05-04-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 26-03-2014
• Court: TRIBUNAL
• Department Lawyers: G MALLIKARJUNA
• Assessee Lawyers: MANONEET DALAL; S P SINGH
• Keywords: Depreciation; Transfer pricing; Business expenditure; Double taxation relief; International transaction; Earning of tax free income; Permanent establishment; Advance ruling; Bad and doubtful debts; Commercial expediency
• Section: 143(3); 92B; 14A; 37; 92

Judgement Text

ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 1 IN THE INCOME TAX APPELLATE TRIBUNAL C B ENCH : KOLKATA [BEFORE HONBLE SRI N.V.VASUDEVAN, JM & DR.ARJUN LAL SAINI, AM] I.T.A NO. 531/KOL/2014 ASSESSMENT YEAR : 2009 -10 M/S. AKZO NOBEL INDIA LIMITED -VS.- D.C.I. T., CIRCLE-10, KOLKATA KOLKATA [PAN : AAACI 6297 A] (APPELLANT) (RESPONDENT) I.T.A NO. 335/KOL/2014 ASSESSMENT YEAR : 2009 -10 D.C.I.T., CIRCLE-10, -VS- M/S. AKZO NOBEL INDIA LIMITED KOLKATA KOLKATA [PAN : AAACI 6297 A] (APPELLANT) (RESPONDENT) FOR THE ASSESSEE : SHRI S.P.SINGH & SHRI M ANONEET DALAL (AR) FOR THE DEPARTMENT : SHRI G.MALLIKARJUNA, C IT(DR) DATE OF HEARING : 05.04.2017. DATE OF PRONOUNCEMENT : 03.05.2017. ORDER PER N.V.VASUDEVAN, JM ITA NO.531/KOL/2014 IS AN APPEAL BY THE ASSESSEE WH ILE ITA NO.335/KOL/2014 IS AN APPEAL BY THE REVENUE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE FAIR ORDER OF ASSESSMENT DATED 31.1.201 4 OF DCIT, CIRCLE-10, KOLKATA (AO) PASSED U/S.143(3) OF THE INCOME TAX ACT, 1961 (ACT) READ WITH SEC.144C OF THE ACT RELATING TO AY 2009-10. 2. AKZO NOBEL INDIA LIMITED, THE ASSESSEE IN THIS APPEAL WAS EARLIER KNOWN AS ICI INDIA LIMITED. THE ASSESSEE WILL HEREINAFTER BE RE FERRED TO AS 'AKZO NOBEL INDIA' OR ANI OR 'ASSESSEE'. THE ASSESSEE IS ENGAGED IN TH E BUSINESS OF MANUFACTURING AND MARKETING OF PAINTS, SPECIALITY CHEMICALS AND STARC H. IT HAS TWO BUSINESS DIVISIONS - PAINTS BUSINESS DIVISION (PBD) AND NATIONAL STARCH AND CHEMICALS DIVISION (NSC). ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 2 3. FIRST WE SHALL TAKE UP FOR CONSIDERATION ISSUES RAISED BY THE ASSESSEE AND THE REVENUE ARISING OUT OF APPLICATION OF THE PROVISION S OF SEC.92 OF THE INCOME TAX ACT, 1961 (ACT), VIZ., TRANSFER PRICING REGULATIONS. 4. AKZO NOBEL GROUP, OF WHICH THE ASSESSEE IS A PAR T, OPERATES THROUGH SUBSIDIARIES IN VARIOUS COUNTRIES. AKZO NOBEL N.V. IS THE ULTIMATE HOLDING COMPANY. AKZO NOBEL PAINTS (ASIA PACIFIC) PTE LTD. (HEREINAFTER REFERRE D TO AS ANPAP) IS ANOTHER COMPANY BELONGING TO THE AKZO NOBEL GROUP. ANPAP PROVIDES TO AKZO NOBEL GROUP COMPANIES IN VARIOUS COUNTRIES SUPPORT SERVICES IN THE FIELD OF HUMAN RESOURCES, MARKETING SUPPORT, INFORMATION TECHNOLOGY AND SIMIL AR OTHER AREAS. UNDER AN AGREEMENT DATED 8.12.2006 WHICH IS TITLED AS SERVI CE LEVEL AGREEMENT (HEREINAFTER REFERRED TO AS SLA) BETWEEN THE ASSESSEE AND ANPAP, ANPAP AGREED TO RENDER SERVICES SET OUT IN SCHEDULE TO THE SLA TO THE ASSE SSEE. THE SERVICES SET OUT IN THE SCHEDULE TO THE AGREEMENT RELATES TO (I) ADVISE/SUP PORT IN THE AREA OF HUMAN RESOURCES TO ATTAIN FUNCTIONAL EXCELLENCE (II) ADVI SE AND ASSISTANCE ON OPERATION RELATING TO PLANT (III) ADVISE AND SUPPORT ON STRAT EGIES TO OPTIMISE COST STRUCTURES IN PURCHASING (IV) PROVIDE A RANGE OF MARKET SUPPORT S ERVICES; (V) PROVIDE RANGE OF SERVICES IN INFORMATION TECHNOLOGY; (VI) ADVISE AND ASSISTANCE ON REPORTING/ACCOUNTING, FINANCIAL CONTROL AND PLANNIN G ACTIVITIES AND (VII) OTHER ANCILIARY SERVICES IN SUPPORT OF ASSESSEES BUSINESS, INCLUDI NG PUBLIC AFFAIRS ADVISE OR PUBLIC RELATIONS. CLAUSE 4 OF THE SLA PROVIDES THAT THE CONSIDERATION PAYABLE FOR SERVICES TO BE RENDERED BY ANPAP SHALL BE THE ACTUAL COST INCUR RED BY ANPAP FOR PROVIDING SERVICES TO THE ASSESSEE PLUS A MARGIN OF 5% OF SUC H COST. THE ISSUE IN THE ASSESSEES APPEAL IS AS TO WHETHER THE PAYMENT MADE BY THE ASS ESSEE UNDER SLA IS AT ARMS LENGTH AS REQUIRED UNDER THE PROVISIONS OF SEC.92 O F THE ACT. 5. AKZO NOBEL DECORATIVE COATING B.V. (HEREINAFTER REFERRED TO AS ANDC) IS ANOTHER COMPANY BELONGING TO THE AKZO NOBEL GROUP. UNDER AN AGREEMENT DATED 23.3.2010, WHICH IS TITLED AS TRINITY SERVICE AGRE EMENT (HEREINAFTER REFERRED TO AS TSA), ANDC WAS TO PROVIDE SAP SOFTWARE IMPLEMENTATI ON PROGRAMME DURING THE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 3 PERIOD 2008-2010 TO ALL AKZO NOBEL GROUP COMPANIES BELONGING TO THE BUSINESS AREA OF DECORATIVE PAINTS. AS PER TSA COSTS INCURRED AR E RECORDED, CATEGORISED AND RECHARGED BASED ON THE PRINCIPLES SET OUT IN SCHEDU LE 1 TO 4 OF THE TSA WHICH CLASSIFIES COSTS AS EXPENDED COSTS, CAPITALIZED COS TS, START UP COSTS AND LOCAL AKZO NOBEL OWN ACCOUNT COSTS. THE ISSUE IN REVENUES AP PEAL IS AS TO WHETHER THE DRP WAS JUSTIFIED IN COMING TO THE CONCLUSION THAT THE PAYMENT MADE BY THE ASSSESSEE TO ANDC UNDER TSA WAS AT ARMS LENGTH. 6. CONSEQUENT TO GLOBALIZATION, MULTINATIONAL ENTERPRISES ('MNES') S ET UP THEIR SUBSIDIARIES IN VARIOUS TAX JURISDICTIONS. FOR REAS ONS OF COSTS AND EFFICIENCY, ONE MEMBER OF THE MNE GROUP PROVIDES SERVICES TO THE OT HER MEMBER/MEMBERS OF THE MNE GROUP AND ENTER INTO VARIOUS INTRA-GROUP ARRANG EMENTS FOR PROVIDING OR RECEIVING SERVICES WHICH MAY RELATE TO TECHNICAL, F INANCIAL, ADMINISTRATION AND MANAGERIAL. THE COSTS INCURRED FOR PROVIDING SUCH C ENTRALISED SERVICES ARE ALLOCATED. SUCH ALLOCATION REQUIRES SCRUTINY BY THE TAX AUTHOR ITIES OF THE COUNTRIES WHOSE TAX RESIDENTS MAKE PAYMENT FOR SUCH SERVICES AS WELL AS THE COUNTRIES WHOSE TAX RESIDENTS RECEIVE PAYMENT FOR SUCH SERVICES, TO ENSURE THAT T HERE IS NO SHIFTING OF PROFITS FROM ONE JURISDICTION TO THE OTHER IN THE GARB OF PAYMEN TS OR RECEIPTS FOR INTRA GROUP SERVICES. THEREFORE IT IS NECESSARY TO EXAMINE MN E GROUPS' PRICING AND TRANSACTION STRUCTURES IN RESPECT OF ALLOCATION OF COMMON COSTS . SECTION 92 (1) OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANS ACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE (ALP). SEC.92(2) OF THE ACT PROVIDES THAT WHERE IN AN INTERNATIONAL TRANSACTION, TWO OR MORE ASSOCIATED E NTERPRISES ENTER INTO A MUTUAL AGREEMENT OR ARRANGEMENT FOR THE ALLOCATION OR APPO RTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE O R MORE OF SUCH ENTERPRISES, THE COST OR EXPENSE ALLOCATED OR APPORTIONED TO, OR, AS THE CASE MAY BE, CONTRIBUTED BY, ANY SUCH ENTERPRISE SHALL BE DETERMINED HAVING REGARD T O THE ARMS LENGTH PRICE OF SUCH BENEFIT, SERVICE OR FACILITY, AS THE CASE MAY BE. A RMS LENGTH PRICE HAS NOT BEEN DEFINED IN THE ACT BUT SECTION 92C(1) PROVIDES THAT THE ARMS LENGTH PRICE IN RELATION ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 4 TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FU NCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCR IBE, NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D ) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOA RD. SECTION 92B (1) OF THE ACT LAYS DOWN THAT FOR THE P URPOSES OF SECTION 92 OF THE ACT, INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDEN TS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVIS ION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INC LUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR F ACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. 7. THERE IS NO SPECIFIC MENTION OF ALLOCATION OF C OMMON COST IN THE ACT. SERVICES RENDERED ARE GENERALLY INTANGIBLE AND THEREFORE DIFFICULT TO IDENTIFY THE SERVICES ACTUALLY RECEIVED/RENDERED. IN THE FIRST PLACE IT H AS TO BE PROVED THAT SERVICES WERE RENDERED. SECONDLY IT HAS TO SHOWN AS TO HOW BENEFITS WERE RECEIVED BY THE ENTITY PAYING. IT IS A SETTLED PRINCIPAL IN THE INDIAN T AX LAW AND HAS BEEN RULED OUT IN VARIOUS ADJUDICATIONS LIKE EKL APPLIANCES LIMITED [(2012) 2 09 TAXMAN 200 BY THE HONBLE DELHI HIGH COURT, THAT THE COMMERCIAL EXPEDIENCY IS NOT BE QUESTIONED BY THE TAX AUTHORITIES. 8. IN CIT V. CUSHMAN & WAKEFIELD (INDIA) (P.) LTD. 367 ITR 730(D EL) , THE HON'BLE DELHI HIGH COURT OBSERVED THAT WHETHER A THIRD PART Y - IN AN UNCONTROLLED TRANSACTION WITH THE TAXPAYER WOULD HAVE CHARGED AMOUNTS LOWER, EQUAL TO OR GREATER THAN THE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 5 AMOUNTS CLAIMED BY THE AES, HAS TO PERFORCE BE TEST ED UNDER THE VARIOUS METHODS PRESCRIBED UNDER THE INDIAN TP PROVISIONS. IN THE C ONTEXT OF COST SHARING ARRANGEMENT, THE HON'BLE HIGH COURT OPINED THAT CONCEPT OF BASE EROSION IS NOT A LOGICAL INFERENCE FROM THE FACT THAT THE AES HAVE ONLY ASKED FOR REIM BURSEMENT OF COST. THIS BEING A TRANSACTION BETWEEN RELATED PARTIES, WHETHER THAT C OST ITSELF IS INFLATED OR NOT ONLY IS A MATTER TO BE TESTED UNDER A COMPREHENSIVE TRANSFER PRICING ANALYSIS. THE BASIS FOR THE COSTS INCURRED, THE ACTIVITIES FOR WHICH THEY WERE INCURRED, AND THE BENEFIT ACCRUING TO THE TAXPAYER FROM THOSE ACTIVITIES MUST ALL BE PROV ED TO DETERMINE FIRST, WHETHER, AND HOW MUCH, OF SUCH EXPENDITURE WAS FOR THE PURPOSE O F BENEFIT OF THE TAXPAYER, AND SECONDLY, WHETHER THAT AMOUNT MEETS ALP CRITERION. 9. THE FOLLOWING ASPECTS WOULD REQUIRE CONSIDERATIO N IN ORDER TO IDENTIFY INTRAGROUP SERVICES REQUIRING ARM'S LENGTH REMUNERATION: - WHETHER SERVICES WERE RECEIVED FROM RELATED PARTY . - NATURE OF SERVICES INCLUDING QUANTUM OF SERVICES RECEIVED BY THE RELATED PARTY. - SERVICES WERE PROVIDED IN ORDER TO MEET SPECIFIC NEED OF RECIPIENT OF THE SERVICES. - THE ECONOMIC AND COMMERCIAL BENEFITS DERIVED BY T HE RECIPIENT OF INTRAGROUP SERVICES. - IN COMPARABLE CIRCUMSTANCES AN INDEPENDENT ENTERP RISE WOULD BE WILLING TO PAY THE PRICE FOR SUCH SERVICES? - AN INDEPENDENT THIRD PARTY WOULD BE WILLING AND A BLE TO PROVIDE SUCH SERVICES? WHETHER PAYMENT MADE TO AE MEETS ALP CRITERION WILL BE DETERMINED, KEEPING IN MIND ALL THE ABOVE FACTORS, AS WELL. 10. ANOTHER ASPECT TO BE SEEN IS AS TO WHETHER TH E NATURE OF SERVICES RENDERED SHOULD NOT IN THE NATURE OF SHAREHOLDER SERVICES. IF SE RVICES ARE IN THE NATURE OF SHARE HOLDER SERVICES, THEN SUCH SERVICES SHOULD NOT BEA R A CHARGE, AS THE BENEFITS FROM SHAREHOLDING ACTIVITIES OUGHT TO BE RECEIVED BY THE PROVIDER OF THE SERVICES RATHER THAN THE RECIPIENT. WHAT CONSTITUTES A SHAREHOLDER ACTIV ITY. THE CURRENT OECD TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AN D TAX ADMINISTRATIONS, 2010 (AMENDED SINCE 1995), LISTS THE FOLLOWING AS SHAREH OLDER ACTIVITIES: ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 6 COSTS OF ACTIVITIES RELATING TO THE JURIDICAL STRUC TURE OF THE PARENT COMPANY ITSELF, SUCH AS PARENT COMPANY SHAREHOLDER MEETINGS, ISSUIN G SHARES IN THE PARENT COMPANY AND SUPERVISORY BOARD COSTS; COSTS RELATING TO REPORTING REQUIREMENTS OF THE PAR ENT COMPANY, INCLUDING THE CONSOLIDATION OF REPORTS; AND COSTS OF RAISING FUNDS FOR ACQUISITION BY ITS PARTI CIPANTS 11. FURTHERMORE, IN RELATION TO ACTIVITIES WHICH C ONCERN MORE THAN ONE ENTERPRISE OF AN MNE, THE OECD GUIDELINES STATE THAT SHAREHOLDER ACTIVITIES SHOULD BE DISTINGUISHED FROM THE BROADER CONCEPT OF STEWARDSH IP ACTIVITIES WHICH INCLUDE THE FOLLOWING: STEWARDSHIP ACTIVITIES COVER A RANGE OF ACTIVITIES BY A SHAREHOLDER THAT MAY INCLUDE THE PROVISION OF SERVICES TO OTHER GROUP ME MBERS, FOR EXAMPLE SERVICES THAT WOULD BE PROVIDED BY A COORDINATION CENTRE. TH ESE LATTER TYPES OF NON- SHAREHOLDER ACTIVITIES COULD INCLUDE DETAILED PLANN ING SERVICES FOR PARTICULAR OPERATIONS, EMERGENCY MANAGEMENT OR TECHNICAL ADVIC E (TROUBLESHOOTING), OR IN SOME CASES ASSISTANCE IN DAY TO-DAY MANAGEMENT. THUS, IN THE CASE OF CENTRAL COORDINATION AND CONTR OL ACTIVITIES, THE FOCUS HAS CHANGED FROM THE NATURE OF THE ACTIVITY TO THE WILLINGNESS TO PAY IN AN INDEPENDENT SCENARIO. IT FOLLOWS IMPLICITLY FROM THE OECD GUIDELINES THAT CO ORDINATION ACTIVITIES (STEWARDSHIP ACTIVITIES) QUALIFY AS SERVICES, UNLESS A PARTICULA R SUBSIDIARY DOES NOT NEED THE ACTIVITY AND WOULD NOT BE WILLING TO PAY AN UNRELATED PARTY TO PERFORM IT. 12. THE TRANSFER PRICING OFFICER (TPO) IN THE PRES ENT CASE IN HIS ORDER PASSED U/S.92CA(3) OF THE ACT DATED 30.1.2013 DISCUSSED TH E OECD GUIDELINES & US REGULATIONS ON SHAREHOLDER ACTIVITY. THE ASSESSING OFFICER IS REQUIRED UNDER THE PROVISIONS OF SEC.92CA OF THE ACT, WHEREVER ALP HAS TO BE DETERMINED TO MAKE A REFERENCE TO TPO TO DETERMINE ALP OF AN INTERNATION AL TRANSACTION. THE GIST OF ALL THESE DISCUSSION BY THE TPO IN HIS ORDER IS THAT MN ES PREFER CENTRALISING COMMON SERVICES AND COSTS AND DOING SO HAS AN ECONOMIC RAT IONALE. A TAXPAYER SHOULD BE ABLE TO SHOW THAT INTRA GROUP SERVICES HAVE BEEN RENDERE D AND THAT THE INDIAN TAXPAYER HAS RECEIVED AN ECONOMIC OR COMMERCIAL BENEFIT THAT HAS ENHANCED COMMERCIAL POSITION OF THE RECIPIENT. THIS TEST, KNOWN AS THE BENEFIT TEST , HAS TO BE SATISFIED. THE TRANSACTION RELATED TO THE PROVISION OF SERVICES WOULD BE AT AR MS LENGTH ONLY WHERE A BENEFIT IS ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 7 PROVIDED TO AN ENTITY BY WAY OF PROVISION OF SERVIC ES, AND THERE SHOULD BE A REAL CONNECTION BETWEEN THE OPERATION OF THE ENTERPRISE WHICH IS PROVIDING SERVICES AND THE ENTERPRISE WHICH IS EXPECTED TO PAY FOR THE SAME. IN OTHER WORDS, THE TESTS LAID DOWN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CUSH MAN & WAKEFIELD (SUPRA) SHOULD BE SATISFIED. 13. ANOTHER ASPECT WHICH THE TPO HAS HIGHLIGHTED I N HIS ORDER IS THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF DIT (IT) VS. M ORGAN STANLEY & CO. (2007) 162 TAXMAN 165 (SC). ACCORDING TO THE TPO THE HONBLE SUPREME COURT HAS LAID DOWN IN THE AFORESAID DECISION THAT BY RENDERING STEWARD SHIP ACTIVITIES A HOLDING COMPANY WAS MERELY PROTECTING ITS OWN INTEREST AND THEREFOR E THE HOLDING COMPANY RENDERING SERVICES SHOULD NOT CHARGE FOR SUCH SERVICES FROM I TS SUBSIDIARY COMPANY. WE WISH TO CLARIFY THAT THE RULING IN THE AFORESAID DECISION, IN OUR VIEW, HAS NO APPLICATION TO THE FACTS OF THE PRESENT CASE. FIRSTLY, THE OBSERVATIO NS WERE RENDERED IN THE CONTEXT OF AN ADMITTED FACTUAL POSITION BY THE APPLICANT BEFORE T HE AUTHORITY FOR ADVANCE RULING (AAR) THAT CERTAIN SERVICES WERE IN THE NATURE OF S TEWARDSHIP SERVICES. SECONDLY THE OBSERVATIONS WERE MADE BY THE HONBLE SUPREME COURT AS TO WHETHER STEWARDSHIP ACTIVITY RENDERED BY THE HOLDING COMPANY FOR THE IN DIAN SUBSIDIARY IN INDIA WOULD CONSTITUTE A PERMANENT ESTABLISHMENT (PE) WITHIN TH E MEANING OF ARTICLE 5(2)(L) OF THE DTAA BETWEEN INDIA AND USA. IN THE PRESENT CASE TH E FACTUAL DISPUTE IS AS TO WHETHER THE NATURE OF SERVICES RENDERED BY ANPAP WA S IN THE NATURE OF STEWARDSHIP SERVICES OR NOT. TO THIS EXTENT WE HAVE TO CONCLUD E THAT THE REFERENCE TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MORGAN STANLEY (SUPRA) BY THE TPO IN HIS ORDER HAS TO BE HELD AS NOT RELEVANT. 14. KEEPING IN MIND THE PRINCIPLES EMANATING FROM THE AFORESAID DISCUSSION, WE SHALL NOW PROCEED TO EXAMINE THE GROUNDS OF APPEAL OF THE ASSESSEE AND THE REVENUE IN SO FAR AS IT RELATES TO ISSUES ARISING OUT OF TRANSFER PRICING REGLATIONS. 15. FIRST WE SHALL TAKE UP FOR CONSIDERATION, APPE AL BY THE ASSESSEE. THE MAIN ISSUE FOR CONSIDERATION IN THIS APPEAL IS AS TO WHETHER T HE CONSIDERATION PAID BY THE ASSESSEE TO ANPAP UNDER THE SLA IS AT ARMS LENGTH. ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 8 16. THE FOLLOWING ARE THE CRITERIA TO DETERMINE A LP OF THE PAYMENT MADE BY THE ASSESSEE TO ANPAP UNDER SLA: - WHETHER SERVICES WERE RECEIVED FROM RELATED PARTY . - NATURE OF SERVICES INCLUDING QUANTUM OF SERVICES RECEIVED BY THE RELATED PARTY. - SERVICES WERE PROVIDED IN ORDER TO MEET SPECIFIC NEED OF RECIPIENT OF THE SERVICES. - THE ECONOMIC AND COMMERCIAL BENEFITS DERIVED BY T HE RECIPIENT OF INTRAGROUP SERVICES. 17. THE CLAIM OF THE ASSESSEE WAS THAT SERVICES PR OVIDED BY ANPAP TO IT UNDER SLA ARE SUPPORT SERVICES PROVIDED BY ANPAP TO SEVERAL A KZO GROUP COMPANIES ACROSS THE WORLD AND RELATE TO SUPPORT SERVICES IN THE FIELD O F HUMAN RESOURCES, MARKETING SUPPORT, INFORMATION TECHNOLOGY AND SIMILAR OTHER A REAS. ACCORDING TO THE ASSESSEE, SUCH SERVICES ENABLE THE WORLDWIDE AKZO GROUP ENTIT IES TO HAVE A FULL ACCESS TO THE EXTENSIVE RESOURCES AND EXPERTISE AVAILABLE IN THES E SPECIFIC FUNCTIONAL AREAS FOR THE BENEFIT OF THE AKZO GROUP. SUCH A POLICY ENABLES TH E AKZO GROUP ENTITIES TO ANTICIPATE COMMERCIAL DEVELOPMENTS ON A GLOBAL BASI S AND TO APPLY THEM EFFECTIVELY TO BUSINESS SITUATIONS. IN ADDITION, IT GIVES SUBSTANT IAL SAVINGS IN TOTAL COSTS WHEN COMPARED WITH THOSE THAT WOULD OTHERWISE BE INCURRE D IF THEY WERE ORGANIZED BY INDIVIDUAL AKZO GROUP COMPANIES IN VARIOUS COUNTRIE S. THE NATURE OF THE SUPPORT SERVICES PROVIDED BY ANPAP AND THEIR FUNCTIONAL CAT EGORIES WERE DESCRIBED BY THE ASSESSEE AS GIVE BELOW: INFORMATION TECHNOLOGY THE ASSESSEE RECEIVES ASSISTANCE IN A RANGE OF SERV ICES WHICH INCLUDE SUPPORT IN DEVELOPMENT AND IMPLEMENTATION OF IT PLANS AND STRA TEGIES, MONITORING OF IT SERVICES, PROVIDES TRAINING TO UNDERSTAND VARIOUS IT INTERFAC ES, ASSIST IN DEVELOPING CONTENTS OF WEBSITES, PROVIDES ONSITE/ REMOTE SUPPORT SERVICES TO RESOLVE ISSUES ASSOCIATED WITH CONFIGURING APPLICATIONS, ANTIVIRUS AND IT SECURITY FROM OUTSIDE THREATS. AE ALSO PROVIDES VARIOUS APPLICATIONS/ SOFTWARE, SHARES GLO BAL IT SYSTEMS TO INTEGRATE WORKPLACE AND SERVICE DESK FOR QUICK RESOLVE TO ANY IT CONCERNS. HUMAN RESOURCE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 9 THE RECRUITMENT, RETENTION AND DEVELOPMENT OF TALEN TED / HIGHLY SPECIALIZED TECHNICAL PERSONNEL ARE CRITICAL TO ANY ORGANIZATION'S SURVIV AL AND SUCCESS. THE ASSESSEE IS DEPENDENT ON ITS PERSONNEL FOR LEADERSHIP COMPETENC IES AND SPECIALIZED TECHNICAL SKILLS. THESE SERVICES INCLUDE ADVICE/SUPPORT TO TH E ASSESSEE TO ATTAIN FUNCTIONA1 EXCELLENCE IN THE AREA OF HUMAN RESOURCE AND ASSIST ING IN MAINTAINING PROPER EMPLOYEE RECORDS, RELEVANT JOB/PROJECT CODES FOR RE SPECTIVE EMPLOYEES, CONTINUOUS PERSONNEL TRAINING AND DEVELOPMENT ON EMPLOYEE DATA BASE (PEOPLESOFT). OPERATIONS SUPPLY CHAIN AND PRODUCTION MANAGEMENT IS A VERY CR ITICAL FACTOR IN THE ASSESSEE'S BUSINESS OPERATIONS. THIS ENSURES THAT THE FLOW OF GOODS WITHIN THE SUPPLY CHAIN IS PERFORMED IN A COST-EFFECTIVE MANNER. THE AE PROVID ES ADVICE AND ASSISTANCE ON PLANT ACTIVITIES INCLUDING ASSISTANCE IN ADHERENCE TO ENG INEERING AND TECHNICAL STANDARDS, ASSISTING IN FORECASTING PROJECTIONS IN LINE WITH P LANT CAPACITY, UNDERTAKING WORKSHOPS, ASSISTANCE IN UTILITY, WASTE AND ENVIRONMENTAL MANA GEMENT. IN ADDITION, AE ALSO PROVIDES ASSISTANCE AND GUIDANCE ON VARIOUS COST SA VING MECHANISMS AND ASSISTS IN CAPTURING MARKET TRENDS AND UNCERTAINTIES. PURCHASING THE ASSESSEE RECEIVES SERVICES IN THE NATURE OF ADV ICE AND SUPPORT ON STRATEGIES TO OPTIMISE COST EFFICIENCIES INCLUDING PROCESSES INVO LVING LEVERAGING PRICES FROM SUPPLIERS, ASSISTING ON INVENTORY PLANNING, ETC. FU RTHER AS A PART OF THE AKZO GROUP'S SUPPLIERS SUPPORT PROGRAMME, THE AE ALONG WITH THE ASSESSEE VISIT SUPPLIERS TO LEVERAGE THEIR GLOBAL STANDING AND ACHIEVING ON COS T EFFICIENCIES AND TO HAVE EFFECTIVE CONTROL ON PRODUCT'S QUALITY AND STANDARDS. MARKETING SUPPORT THE ASSESSEE'S OVERALL PERFORMANCE DEPENDS ON REALI ZING ITS GROWTH AMBITIONS. IT IS EXPOSED TO MARKETS WITH HIGH COMPLEXITY AND FACES I NTENSE COMPETITION FROM LOCAL COMPANIES AS WELL AS OTHER GLOBAL PLAYERS FOR RETAI NING / INCREASING ITS MARKET SHARE IN INDIA. ACCORDINGLY, THE ASSESSEE NEEDS TO UNDERSTAN D DEVELOPMENTS IN END-USER PREFERENCES TO STAY COMPETITIVE IN THE MARKET. THE AE PROVIDES A RANGE OF MARKETING SUPPORT SERVICES COVERING ASSISTANCE IN THE NATURE OF FORMULATING AND IMPLEMENTING OF MARKETING STRATEGIES AND POLICIES, UPDATING ON GLOB AL MARKET TRENDS AND INDICES, ASSISTING ON DEVELOPING AND CONDUCTING PRODUCT AWAR ENESS PROGRAMMES - WITH IMPLEMENTATION PERSONNEL, ASSISTING IN BUILDING UP NEW PRODUCT DEMAND, ASSISTING IN EFFECTIVE DESIGNING, ADVERTISING, BRAND DEVELOPMENT , PROMOTION CAMPAIGNS, TRAINING AND COACHING PROGRAMMES. FINANCE AND PLANNING THE ASSESSEE IS EXPOSED TO VARIOUS COMPLIANCE RISKS IN THE COURSE OF ITS ORDINARY ACTIVITIES. ITS IMAGE AND REPUTATION MAY BE ADVERSE LY IMPACTED BY NON-COMPLIANCE WITH THE VARIOUS DATA PRIVACY AND PRODUCT SECURITY LAWS. COMPLIANCE PROCEDURES HAVE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 10 BEEN ADOPTED BY THE ASSESSEE TO ENSURE THAT THE USE OF RESOURCES IS CONSISTENT WITH LAWS, REGULATIONS AND POLICIES, AND THAT RESOURCES ARE SAFEGUARDED AGAINST WASTE, LOSS AND MISUSE. INEFFECTIVE COMPLIANCE PROCEDURES RELAT ING TO THE SAFEGUARDING OF ASSETS COULD HAVE AN ADVERSE EFFECT ON THE FINANCIAL RESUL TS. THE AE PROVIDES A VARIOUS SERVICES IN THE FIELD OF FINANCE AND PLANNING WHICH INCLUDES ADVICE AND ASSISTANCE ON REPORTING/ ACCOUNTING, FINANCIAL CONTROL AND PLANNI NG ACTIVITIES, INTERNAL AUDIT REVIEWS AND PROCESS IMPROVEMENTS, TAX AND TREASURY ASSISTAN CE. 18. EVIDENCE IN SUPPORT OF RENDERING OF SERVICES BY ANP AP AND THE BENEFIT RECEIVED BY THE ASSESSEE: THE ASSESSEE IN SUPPORT OF THE SERVICES HAVING BEEN RENDERED BY ANPAP FILED COPIES OF SAMPLE E-MAIL COMMUNICATIONS BETWEEN ANPA P AND THE ASSESSEE. THE COMMUNICATIONS ARE PLACED AT PAGE 354 TO 756 OF THE ASSESSEES PAPER BOOK. THE GIST OF THE SERVICES AND THE CATEGORY IN WHICH THOSE SER VICES FALL, THE NATURE OF SERVICES RENDERED, THE E-MAIL IN SUPPORT OF THE ASSESSEES C LAIM THAT ANPAP PROVIDED THOSE SERVICES THROUGH E-MAILS AND THE BENEFIT THE ASSE SSEE RECEIVED AS A RESULT OF THOSE SERVICES WAS GIVEN BY THE ASSESSEE BEFORE THE TPO I N THE FORM OF A CHART WITH CROSS REFERENCE TO THE PAGE NUMBER OF THE PAPER BOOK. TH E SAME IS GIVEN AS AN ANNEXURE A TO THIS ORDER. 19. IN THE TRANSFER PRICING STUDY FILED BY THE ASS ESSEE BEFORE THE AO, THE ASSESSEE HAS NOT DONE INDIVIDUAL ANALYSIS OF INTERNATIONAL T RANSACTIONS BUT HAS COMBINED ALL INTERNATIONAL TRANSACTIONS AND COMPARED THE OVERALL PROFITS OF THE ASSESSEE WITH COMPARABLE COMPANIES AND CLAIMED THAT ALL INTERNATI ONAL TRANSACTIONS WERE AT ARMS LENGTH. THIS APPROACH OF AGGREGATION IS NOT CORREC T AND AGAINST THE PROVISIONS OF THE ACT. THEREFORE, IT WOULD NOT BE WORTHWHILE TO DISC USS THE TRANSFER PRICING STUDY OF THE ASSESSEE FILED IN FORM NO.3CEB. HOWEVER THE AS SESSEE MADE UP FOR THIS DEFICIENCY BY FILING ALONG WITH ITS SUBMISSION DATE D 5.11.2012 BEFORE THE TPO REPORT DATED 30.6.2009 OF PRICEWATERHOUSE COOPERS LLP, CHA RTERED ACCOUNTANTS. IN SUCH A REPORT A SEARCH FOR SIMILAR INDEPENDENT SERVICE PR OVIDERS PROVIDING SERVICES THAT WERE PROVIDED BY ANPAP UNDER SLA WAS IDENTIFIED AND IT W AS FOUND ON SUCH ANALYSIS THAT SIMILAR SERVICES PROVIDED BY AND TO UNRELATED PARTI ES WERE AT AN AVERAGE MARGIN OF COST ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 11 + 5.1% AND IT WAS OPINED THAT THE COST + 5% MARGIN FOR SIMILAR SERVICES PAID BY THE ASSESSEE TO ITS AE SHOULD BE REGARDED AS CONFIRMING TO THE ALP. THIS REPORT IS AT PAGES 769 TO 791 OF THE ASSESSEES PAPER BOOK. THE ASSESSEE ALSO FILED A CERTIFICATE OF KPMG, LLP, SINGAPORE, AN INDEPENDENT THIRD PARTY ACCOUNTING EXPERT, CERTIFYING THE BASIS OF COST ALLOCATION BY ANPAP FOR THE VARIO US SERVICES RENDERED BY THE ASSESSEE BASED ON THE EVIDENCE OF SERVICES RENDERED BY ANPAP TO THE ASSESSEE. THIS CERTIFICATE IS AT PAGES 792 TO 801 OF THE ASSESSEE S PAPER BOOK. 20. THE TPO HAS NOT DISPUTED THE ABOVE COST ALLOCA TION AS WELL AS THE FACT THAT THE COMPARATIVE COST CHARGED BY UNRELATED PARTIES FOR S IMILAR SERVICES WAS AT A MARGIN OF 5.1% OF THE COST. THE TPO DID NOT CONSIDER THIS AS PECT AT ALL BECAUSE HE PROCEEDED ON THE BASIS THAT THE NATURE OF SERVICES RENDERED WERE IN THE NATURE OF STEWARDSHIP ACTIVITY AND THEREFORE NO CHARGES OUGHT TO HAVE BEEN PAID BY THE ASSESSEE. HE THEREFORE HELD THAT THE ENTIRE SUM PAID BY THE ASSESSEE TO ANPAP H AD TO BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE RELEVANT OBSERVATION O F THE TPO IN THIS REGARD IS FOUND IN PARA-21 AT PAGE-67 OF HIS ORDER, WHICH READS AS FOLLOWS: 21. IT CAN BE SEEN FROM THE ABOVE THAT THE SERVIC ES PERFORMED BY THE AES OF THE ASSESSEE (DIRECTLY OR THROUGH OTHER AES) FALL I NTO THE CATEGORY OF STEWARDSHIP ACTIVITY AS DEFINED BY HONBLE SUPREME COURT OF INDIA (TO SAY NOTHING ABOUT THE CHARGE FOR SUCH SERVICES BEING NO T IN CONSONANCE WITH THE TYPE OF SERVICES PROVIDED). 21. THEREFORE, IN THIS APPEAL, THE QUESTION WE NEE D TO DECIDE IS AS TO WHETHER THE SERVICES RENDERED BY ANPAP CAN BE SAID TO BE STEWAR DSHIP SERVICES. IF THE ANSWER IS IN THE NEGATIVE, THEN WE NEED NOT GO INTO THE QUEST ION REGARDING RENDERING OF SERVICES, BENEFIT RECEIVED BY THE ASSESSEE, ALP OF THE PRICE PAID BY THE ASSESSEE, AS THESE HAVE NOT BEEN DISPUTED BY THE TPO AND HENCE WE HAVE TO P ROCEED ON THE BASIS THAT THE TPO WAS OTHERWISE SATISFIED THAT THE PRICE PAID UNDER S LA WAS AT ARMS LENGTH. 22. AS WE HAVE ALREADY STATED THE TPO CONCLUDED TH AT THE SERVICES WERE IN THE NATURE OF STEWARDSHIP SERVICES/ACTIVITIES AND THEREFORE NO CONSIDERATION WAS PAYABLE FOR SUCH SERVICES AND THEREFORE WHATEVER CONSIDERATION WAS P AID BY THE ASSESSEE SHOULD BE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 12 ADDED TO THE TOTAL INCOME OF THE ASSESSEE AS ARMS LENGTH PRICE WAS NIL. THE DRP WAS OF THE VIEW THAT THE SERVICES WERE RENDERED BY ANPAP TO THE ASSESSEE AND THAT THE ASSESSEE BENEFITTED FROM SUCH SERVICES. HAVING HELD SO, THE DRP CONTRADICTED ITS OWN FINDING BY HOLDING THAT MAJORITY OF THE SERVICE S HELPED THE PARENT COMPANY IN SUPERVISING AND CONTROLLING SUBSIDIARY COMPANY AND THEREFORE THE SERVICES WERE IN THE NATURE OF STEWARDSHIP SERVICES. THE DRP ALSO CON CLUDED THAT SOME BENEFIT WOULD HAVE ACCRUED TO THE ASSESSEE AS A RESULT OF SUCH SE RVICES BUT SUCH SERVICES CANNOT BE DETERMINED WITH CERTAINTY AND THEREFORE THE CONCLUS ION OF THE TPO SHOULD BE UPHELD. THE FOLLOWING WERE THE CONCLUSIONS OF THE DRP IN TH IS REGARD. 1.4.4. THE EVIDENCES AND OTHER INFORMATION SUBMITT ED BY THE ASSESSEE BEFORE THE TPO HAVE BEEN GONE THROUGH. IT IS EVIDENT THAT THE SERVICES RECEIVED FORM AKZO NOBEL PAINTS (ASIA PACIFIC) PTE LTD HAVE BENEF ITTED THE INDIAN ASSESSEE ALSO. BUT THE ASSESSEE HAS NOT DISCUSSED THE ASPECT OF HOW THESE SERVICES HAVE BEEN USEFUL AND BENEFITTED THE PARENT ALSO IN EXECU TING ITS SUPERVISORY AND CONTROL RESPONSIBILITIES. 1.4.5. SIGNIFICANT PORTION OF SERVICES RENDERED ACR OSS VARIOUS VERTICALS SIGNIFICANTLY HELPED THE PARENT IN SUPERVISING AND CONTROLLING THE SUBSIDIARY COMPANY. TO THIS EXTENT, THESE SERVICES WOULD FALL UNDER THE DEFINITION OF STEWARDSHIP SERVICES. THE TPO HAS EXTENSIVELY DRA WN FROM THE LITERATURE OF OECD, USIRS, INTERNATIONAL JUDICIAL DECISIONS, ETC. TO DISCUSS THE NATURE OF STEWARDSHIP SERVICES AND HOW THE SERVICES AVAILED F ROM SIKA SERVICES FALL UNDER THAT CATEGORY. THE TPO HAS ALSO REFERRED TO THE DEC ISION OF HONBLE SUPREME COURT IN THE CASE OF DIT VS MORGAN STANLEY AND COMP ANY (2007) 292 ITR 416 (SC) TO DISCUSS THE NATURE OF STEWARDSHIP SERVICES. TO THIS EXTENT, THIS JUDICIAL DECISION IS RELEVANT TO THE CASE OF THE ASESSEE THO UGH THE BUSINESS MODEL MAY BE DIFFERENT. 1.4.6. THUS, THE SERVICES PROVIDED BY AKZO NOBEL PA INTS (ASIA PACIFIC) PTE LTD BENEFIT THE PARENT AS WELL AS THE ASSESSEE IN INDIA . TO THE EXTENT THE SERVICES HAVE HELPED THE PARENT TO EXERCISE SUPERVISION AND CONTROL OVER THE GROUP ENTITIES, IT AMOUNTS TO STEWARDSHIP SERVICES. THE R EMAINING SERVICES HAVE BENEFITTED BOTH THE PARENT AND THE SUBSIDIARY IN IN DIA. HOW MUCH OF THE BENEFIT CAN BE ATTRIBUTED TO THE PARENT AND TO THE UNIT IN INDIA IS A SUBJECTIVE MATTER AND THE DIVIDING LINE LIES IN BETWEEN. THE ASSESSEE HAS NOT EVEN ATTEMPTED TO DISCUSS THIS ASPECT OF THE SERVICES PROVIDED FROM A KZO NOBEL PAINTS (ASIA PACIFIC) PTE LTD. 1.4.7. FROM THE FOREGOING DISCUSSION, IT IS EVIDEN T THAT THE BENEFIT OUT OF INTRA GROUP SERVICES HAS ACCRUED TO THE ASSESSEE IN INDIA AS WELL AS TO THE GROUP ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 13 PARENT ALSO. HOWEVER, THE PROPORTION OF BENEFITS AC CRUING TO EACH PARTY REMAINS INDETERMINATE. IN VIEW OF THIS, WE ARE OF THE OPINI ON THAT NO INTERFERENCE IS CALLED FOR IN THE DETERMINATION MADE BY THE TPO. 23. AGGRIEVED BY THE ORDER OF THE AO INCORPORATING THE DIRECTIONS GIVEN BY THE DRP IN THE FAIR ASSESSMENT ORDER, THE ASSESSEE HAS PREF ERRED APPEAL BEING ITA NO.531/KOL/2014. THE GROUNDS OF APPEAL RAISED BY T HE ASSESSEE BEFORE THE TRIBUNAL READS THUS: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE ORDER OF THE TRANSFER PRICING OFFICER (HEREINAFTER REFERRED TO A S 'LD. TPO') PASSED U/ S 92 CA(3) OF THE INCOME-TAX ACT, 1961, (HEREINAFTER REF ERRED TO AS THE 'ACT'), SUBSEQUENTLY CONFIRMED IN PART BY THE DISPUTE RESOL UTION PANEL, KOLKATA (HEREINAFTER REFERRED TO AS 'LD. PANEL') AND CONSEQ UENTLY INCORPORATED BY THE DEPUTY COMMISSIONER OF INCOME TAX (HEREINAFTER REFE RRED TO AS 'LD. AO') IN THE ASSESSMENT ORDER U/S 143(3) R/W SECTION 144C(13) OF THE ACT, IS ERRONEOUS ON FACTS AND BAD IN LAW. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, LD. PANEL ERRED IN CONFIRMING THE ADJUSTMENT OF RS. 39,411,875/- TO TH E INTERNATIONAL TRANSACTIONS OF THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE (HEREI NAFTER REFERRED TO AS 'AE') AKZO NOBEL PAINTS (ASIA PACIFIC) PTE. LTD., SINGAPORE. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. PANEL ON PERUSING THROUGH THE NATURE OF SERVICES, EVIDENCES OF SERVICES, ENSUING BENEFITS AND PRICING OF SERVICES, HAD ACKNOWLEDGED THE RECEI PT OF BENEFITS TO THE APPELLANT IN ITS BUSINESS OPERATION BUT STILL GROSSLY ERRED I N DISALLOWING THE ENTIRE PAYMENT WITHOUT ANY BASIS. 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, LD. PANEL WHILE ACKNOWLEDGING THE RECEIPT OF BENEFIT TO THE APPELLA NT IN ITS BUSINESS OPERATION, HAD ERRED IN NOT PROVIDING DUE COGNIZANCE TO THE AU DITED COST ALLOCATION STATEMENT SHOWING SEGREGATION OF COST INCURRED BY A E IN SUPERVISORY AND CONTROL FUNCTION BENEFITTING THE PARENT AND OTHER FUNCTIONS BENEFITTING THE SERVICE RECIPIENTS (INCLUDING APPELLANT) IN ITS OVERALL DAY TO DAY BUSINESS OPERATION AND FAILED TO PROVIDE DUE COGNISANCE TO THE FACT THAT C OST INCURRED BY AB IN RELATION TO STEWARDSHIP ACTIVITIES (SUPERVISORY AND CONTROL) WERE SEPARATELY IDENTIFIED AND ELIMINATED WHILE ALLOCATING SERVICE COSTS TO THE AP PELLANT. 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, LD. PANEL AND CONSEQUENTLY THE LD. AO HAVE GROSSLY ERRED IN REJEC TING THE TRANSACTIONAL LEVEL ECONOMIC ANALYSIS (SELECTING AE AS THE TESTED PARTY ) UNDERTAKEN BY THE APPELLANT FOR THE SAID TRANSACTION IN ACCORDANCE WITH THE INC OME-TAX RULES, 1962 FOR THE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 14 DETERMINATION OF THE ARM'S LENGTH PRICE FURTHER, LE ARNED PANEL AND CONSEQUENTLY THE LD. AO ERRED IN NOT GIVING ANY REA SON TO REJECT THE TRANSACTIONAL LEVEL ECONOMIC ANALYSIS. 6. THAT THE APPELLANT CRAVES LEAVE TO ADD TO AND/ O R AMEND, ALTER, MODIFY OR RESCIND THE GROUNDS HEREINABOVE BEFORE OR AT THE TI ME OF HEARING OF THE APPEAL. 24. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATE D SUBMISSIONS MADE BEFORE THE DRP/TPO AND DREW OUR ATTENTION TO THE EVIDENCE IN S UPPORT OF THE SERVICES RECEIVED BY THE ASSESSEE FROM ITS AE, THE RATIONALE/NEED FOR SERVICES SO RECEIVED VIS--VIS THE BUSINESS OF THE ASSESSEE, BENEFIT RECEIVED BY THE A SSESSEE, THE BENCHMARKING APPROACH ADOPTED BY THE ASSESSEE FROM RECIPIENTS P ERSPECTIVE AND ALSO FROM THE SERVICE PROVIDERS PERSPECTIVE, MANNER OF ALLOCATIO N OF COSTS BY THE SERVICE PROVIDER VIS--VIS THE ASSESSEE. HE ALSO EXPLAINED THE MEA NING OF NATURE OF STEWARDSHIP SERVICES AND AS TO HOW THE PAYMENT MADE BY THE ASSE SSEE TO ITS AE, ARE NOT IN THE NATURE OF STEWARDSHIP SERVICES. HE DREW OUR ATTENT ION TO CERTAIN DECIDED CASES OF HONBLE HIGH COURTS IN INDIA AND VARIOUS BENCHES OF INCOME TAX APPELLATE TRIBUNAL ON THE APPROACH THAT SHOULD BE ADOPTED IN DETERMINI NG ALP IN CASES OF INTRA GROUP SERVICES RECEIVED FROM GROUP COMPANIES (AE). WE WI LL MAKE A REFERENCE TO THESE DECISIONS LATER. 25. THE LEARNED DR SUPPORTED THE ORDER OF THE DRP/ TPO. ACCORDING TO HIM THE CONCLUSIONS DRAWN BY THE DRP/TPO ARE JUST AND PROPE R AND CALLS FOR NO INTERFERENCE. 26. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. AS PER THE OECD GUIDELINES PARAGRAPH 7.2: NEARLY EVERY MNE GROUP MUST ARRANGE FOR A WIDE SCOP E OF SERVICES TO BE AVAILABLE TO ITS MEMBERS, IN PARTICULAR ADMINISTRAT IVE, TECHNICAL, FINANCIAL AND COMMERCIAL SERVICES. SUCH SERVICES MAY INCLUDE MANA GEMENT, COORDINATION AND CONTROL FUNCTIONS FOR THE WHOLE GROUP. (EMPHASIS ADDED) THE U.S. REGULATIONS DEFINE AN INTRA-GROUP SERVICE IN THE FOLLOWING MANNER (TREAS. REG. 1-482-9(1)(1)): ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 15 CONTROLLED SERVICES TRANSACTION - (I) IN GENERAL. A CONTROLLED SERVICES TRANSACTION INCLUDES ANY ACTIVITY (AS DEFINED IN PA RAGRAPH (1)(2)OF THIS SECTION) BY ONE MEMBER OF A GROUP OF CONTROLLED TAXPAYERS (T HE RENDERER) THAT RESULTS IN A BENEFIT (AS DEFINED IN PARAGRAPH (1)(3) OF THIS S ECTION) TO ONE OR MORE OTHER MEMBERS OF THE CONTROLLED GROUP (THE RECIPIENT(S)). THUS, AS PER THIS DEFINITION OF SERVICES, FIRST THE RE SHOULD BE AN ACTIVITY PERFORMED BY ONE OF THE MEMBERS OF A GROUP OF RELATED PARTIES WH ICH LIES WITHIN THE AMBIT OF DEFINITION OF ACTIVITY (THE 'ACTIVITY TEST') AND SE COND, THAT ACTIVITY SHOULD RESULT IN A BENEFIT (THE 'BENEFIT TEST') TO ONE OR MORE MEMBERS OF THAT GROUP OF RELATED ENTITIES. THE OECD GUIDELINES ALSO CONCUR WITH THIS VIEW IN P ARAGRAPH 7.5: THERE ARE TWO ISSUES IN THE ANALYSIS OF TRANSFER PR ICING FOR INTRA-GROUP SERVICES. ONE ISSUE IS WHETHER INTRA-GROUP SERVICES HAVE IN F ACT BEEN PROVIDED. THE OTHER ISSUE IS WHAT THE INTRA-GROUP CHARGE FOR SUCH SERVI CES FOR TAX PURPOSES SHOULD BE IN ACCORDANCE WITH THE ARM'S LENGTH PRINCIPLE. (EMPHASIS ADDED) 27. THE ASSESSEE DOES NOT HAVE A FULL CAPACITY TO PROVIDE A RANGE OF SERVICES TO ITS BUSINESS AND TO THE PERSONNEL WORKING FOR IT. IN T HE INTERESTS OF ECONOMY AND EFFICIENCY THE ASSESSEE DESIRED TO OBTAIN THESE SER VICES FROM ITS ASSOCIATED ENTERPRISE ANPAP. ANPAP HAS EXPERT RESOURCES IN COMMERCIAL, F INANCIAL, ACCOUNTING AND OTHER MATTERS WHICH WOULD BE EMPLOYED FOR THE BENEFIT OF THE INDIVIDUAL COMPANIES OF THE AKZO GROUP. THE GROUP COMPANIES WOULD HAVE ACCESS T O THE RESOURCES AND WOULD PAY APPROPRIATE CONSIDERATION WHICH WOULD BE COMMENSURA TE WITH THE AMOUNT PAID TO THIRD PARTY SERVICE PROVIDERS. THESE SUPPORT SERVI CES RELATE TO CERTAIN FUNCTIONAL CATEGORIES WHICH HAVE SET OUT IN THE EARLIER PART O F THIS ORDER AND HENCE, WE DO NO WISH TO REPEAT THE SAME. AS WE HAVE ALREADY OBSERVED IN THE EARLIER PART OF THIS ORDER, THE PRACTICE OF MULTINATIONAL ENTERPRISES PROVIDING INT RA GROUP SERVICES IS A GLOBAL PRACTICE WHEREIN, VARIOUS ACTIVITIES ARE FREQUENTLY CONCENTR ATED FOR THE BENEFIT OF THE ENTIRE GROUP. SINCE, THE MULTINATIONAL GROUP OPERATES GLOB ALLY, SUCH CONCENTRATION IS ESSENTIAL TO BE ABLE TO REACT IN THE MOST FLEXIBLE AND COST E FFECTIVE MANNER. ACCORDING TO THE ASSESSEE THE BENEFITS DERIVED FROM AVAILING THE ABO VE SERVICES OUTWEIGH THE COST INCURRED IN RECEIVING SUCH SERVICES. IT IS ALSO THE CLAIM OF THE ASSESSEE THAT WITH THE HELP OF SUCH CENTRALIZED SERVICES IT ACHIEVED SUBST ANTIAL COST EFFICIENCIES AND HENCE IT ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 16 WOULD BE INCORRECT TO CATEGORISE SUCH SERVICES TO B E IN THE NATURE OF STEWARDSHIP SERVICES. IT IS THE CLAIM OF THE ASSESSEE THAT THE ABOVE SERVICES ARE ESSENTIAL FOR THE OPERATIONS OF THE ASSESSEE AND HAD IT NOT RECEIVED THE ACCESS TO THE ABOVE INFORMATION, IT WOULD HAVE BEEN REQUIRED TO PERFORM THEM BY ITSE LF (IN-HOUSE) OR BY HIRING EXPERIENCED SERVICE PROVIDERS. THE OECD GUIDELINES IN THIS REGARD (PARA 7.6) LAYS DOWN THE FOLLOWING: UNDER THE ARM'S LENGTH PRINCIPLE, THE QUESTION WHET HER AN INTRAGROUP SERVICE HAS BEEN RENDERED WHEN AN ACTIVITY IS PERFORMED FOR ONE OR MORE GROUP MEMBERS BY ANOTHER GROUP MEMBER SHOULD DEPEND ON WHETHER THE A CTIVITY PROVIDES A RESPECTIVE GROUP MEMBER WITH ECONOMIC OR COMMERCIAL VALUE TO ENHANCE ITS COMMERCIAL POSITION: THIS CAN BE DETERMINED BY CONS IDERING WHETHER AN INDEPENDENT ENTERPRISE IN COMPARABLE CIRCUMSTANCES WOULD HAVE BEEN WILLING TO PAY FOR THE ACTIVITY IF PERFORMED FOR IT BY AN INDE PENDENT ENTERPRISE OR WOULD HAVE PERFORMED THE ACTIVITY INHOUSE FOR ITSELF. IF THE ACTIVITY IS NOT ONE FOR WHICH THE INDEPENDENT ENTERPRISE WOULD HAVE BEEN WILLING TO PAY OR PERFORM FOR ITSELF, THE ACTIVITY ORDINARILY SHOULD NOT BE CONSIDERED AS AN INTRA-GROUP SERVICE UNDER THE ARM'S LENGTH PRINCIPLE. (EMPHASIS ADDED) 28. AS WE HAVE ALREADY OBSERVED THE QUESTION WE NE ED TO DECIDE IS AS TO WHETHER THE SERVICES RENDERED BY ANPAP CAN BE SAID TO BE STEWAR DSHIP SERVICES. IF THE ANSWER IS IN THE NEGATIVE, THEN WE NEED NOT GO INTO THE QUEST ION REGARDING RENDERING OF SERVICES, BENEFIT RECEIVED BY THE ASSESSEE, ALP OF THE PRICE PAID BY THE ASSESSEE, AS THESE HAVE NOT BEEN DISPUTED BY THE TPO AND HENCE WE HAVE TO P ROCEED ON THE BASIS THAT THE TPO WAS OTHERWISE SATISFIED THAT THE PRICE PAID UNDER S LA WAS AT ARMS LENGTH. THE TPOS OBSERVATION ON THE NATURE OF SERVICES RENDERE D BY ANPAP WAS THAT IT WAS IN THE NATURE OF STEWARDSHIP ACTIVITY. ACCORDING TO H IM STEWARDSHIP EXPENSES MEANS THOSE EXPENSES RESULTING FROM EITHER 'SHAREHOLDER A CTIVITIES' OR 'DUPLICATIVE ACTIVITIES' AS DEFINED IN THE SECTION 482 REGULATIONS. THE TPO HAS REFERRED TO THE US REGULATIONS WHICH DESCRIBE STEWARDSHIP EXPENSES AS EXPENSES THA T RESULT FROM OVERSIGHT FUNCTIONS UNDERTAKEN FOR A CORPORATION'S OWN BENEFIT AS AN IN VESTOR IN RELATED CORPORATIONS. HE HAS ALSO REFERRED TO US REGULATIONS UNDER SECTION 8 61 THAT ADOPTS THE 'SOLE EFFECT' STANDARD FOR SHAREHOLDER ACTIVITIES, MEANING THAT S TEWARDSHIP EXPENSES RESULTING FROM SHAREHOLDER ACTIVITIES INCLUDE EXPENSES OF ONLY THO SE ACTIVITIES WHOSE SOLE EFFECT IS TO PROTECT THE PARENT COMPANY'S CAPITAL INVESTMENT IN THE RELATED CORPORATION AND/OR TO ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 17 FACILITATE COMPLIANCE WITH LEGAL REQUIREMENTS APPLI CABLE SPECIFICALLY TO THE PARENT COMPANY. THE TPO HAS HIGHLIGHTED THE FOLLOWING AS STEWARDSHIP ACTIVITY BASED ON THE DECISIONS OF US COURTS: DESCRIPTION NATURE OF SERVICE REQUIREMENTS AND PROCEDURES TO MAINTAIN CONFIDENTIALITY ON ACCOUNT OF WORLD- WIDE OPERATIONS STEWARDSHIP ACTIVITY REQUIRING THE SUBSIDIARY/RELATED ENTITY TO ACT ACCORDING TO THE QUALITY CONTROL SPECIFICATIONS -DO- BRIEFING OF THE STAFF OF THE SUBSIDIARY/RELATED ENTITY TO ENSURE THAT THE OUTPUT MEETS THE REQUIREMENTS OF THE PARENT COMPANY/GROUP -DO- OVERALL MONITORING OF THE OPERATIONS OF THE SUBSIDIARY/RELATED ENTITY (OTHER THAN DAY-TO- DAY MANAGEMENT) -DO- THE TPO BASED ON THE DECISIONS OF THE US COURTS, HA S ALSO CULLED OUT LIST OF SUPERVISORY OR STEWARDSHIP ACTIVITIES, FOR WHICH TH E RECIPIENTS SHOULD NOT HAVE BEEN CHARGED EVEN WHEN THEY BENEFITTED FROM THE SERVICES . REFERENCE SERVICE DETAILS REMARKS PARA 83 SEEING TO IT THAT THE SUBSIDIARY (SERVICE RECIPIENT)DEVELOPS MATERIALS TO THE SATISFACTION(IN OTHER WORDS, SEEING TO IT THAT THE SUBSIDIARY PRODUCES OR PROVIDES GOODS OR SERVICES WHICH ARE UP TO THE STANDARDS EXPECTED OF THE PARENT) SERVICES NOT MANAGERIAL BUT STEWARDSHIP PARA 84 VISITING THE SUBSIDIARY'S CLIENTS, ON THE SPOT SUPERVISION -DO- PARA 86 MAKING PRESENTATIONS FOR GETTING NEW BUSINESS; GETTING THIRD PARTIES TO -DO- ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 18 GIVE BUSINESS TO SUBSIDIARIES IN PARTICULAR MARKETS PARA 88 TO MAKE CERTAIN THAT THE VARIOUS OFFICES MAINTAINED PLAINTIFFS PRODUCTION STANDARDS AND THAT THE SUBSIDIARIES PERFORM THEIR DUTIES TO THEIR CLIENTS SATISFACTION -DO- PARA 89 DECIDING TO CONSOLIDATED FOREIGN OFFICES; TRAVELLING TO SUCH OFFICES TO SOLVE PERSONNEL PROBLEMS. GENERAL SUPERVISORY SERVICES OFFICES; TRAVELLING TO SUCH OFFICES IN ATTEMPT TO CONTROL TO SOLVE PERSONNEL PROBLEMS ACTIVITIES OF SUBSIDIARIES SPECIFIC SERVICES CONSIDERED IN DECISIONS OF THE US COURTS ON STEWARDSHIP ACTIVITY, MONITORING AND SUPERVISORY ACTIVITY AND DIRECT AND PROXIMATE BENEFIT TEST, HAS ALSO BEEN HIGHLIGHTED BY THE TPO IN HIS ORDER: SERVICE TYPE REFERENCE DILIGENT EFFORTS TO PROVIDE THE SUBSIDIARY WITH HIGHEST FEASIBLE SALES REVENUES, INCLUDING SHUTTING DOWN A U.S. PLANT IN ORDER TO KEEP THE SUBSIDIARY IN PRODUCTION; THE ESTABLISHMENT OF ARTIFICIAL AND UNREASONABLY HIGH PRICES TO HELP THE SUBSIDIARY IN PRODUCTION; AND THE PROVISION OF PERSONNEL WHO SERVED AS MEMBERS OF THE BOARD OF DIRECTORS AND OFFICERS OF THE SUBSIDIARY MERCK & CO. V. UNITED STATES, 24 CL.CT.73 (1991) AUDITS BY THE PARENT REPORTING REQUIREMENTS OF THE PARENT, REVIEWING OF CONTRACTS BY THE PARENT, PROVIDING FOR CONSISTENCY OF ACCOUNTING SYSTEMS ETC BUSINESS DEVELOPMENT ACTIVITIES H GROUP HOLDING INC. V. COMMISSIONER, TCM 1999-334 (1999) ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 19 29. AS FAR AS THE INTRA GROUP SERVICES RENDERED BY ANPAP ARE CONCERNED, EXPERTISE IN THE FIELD OF HR, OPERATIONS AND PURCHASING, IT, MAR KETING, FINANCE AND PLANNING AREAS HAVE BEEN DEVELOPED AND WITH A VIEW TO ENABLE THE AKZO GROUP COMPANIES TO HAVE FULL ACCESS TO THIS EXTENSIVE KNOWLEDGE AND EX PERTISE, ANPAP PROVIDES THESE SERVICES TO THE VARIOUS GROUP COMPANIES OF AKZO GRO UP. BESIDES EXPERTISE, THERE HAS BEEN SUBSTANTIAL SAVINGS IN TOTAL COSTS WHEN COMPAR ED WITH THOSE WHICH WOULD OTHERWISE BE INCURRED IF THEY WERE BORNE BY THE IND IVIDUAL COMPANIES IN VARIOUS COUNTRIES. IT IS NOT DISPUTED BY THE TPO THAT HAD THE ASSESSEE NOT RECEIVED SUCH SUPPORT FROM ANPAP, IT WOULD NEED TO PERFORM THE FU NCTIONS IN-HOUSE, OR HIRE EXPERIENCED AND TRAINED SERVICE PROVIDERS. SUCH SER VICES ARE THUS NOT IN THE NATURE OF SIMPLY OVERSIGHT FUNCTIONS, WHICH HAVE BEEN PERFORM ED BY ANPAP TO PROTECT ITS INVESTMENT IN THE COMPANY. WITH REGARD TO THE SERVI CES RECEIVED FROM ANPAP, THE COMPANY HAS SUBMITTED DETAILED EVIDENCES TO THE LD. TPO IN THE FORM OF EMAILS, COMMUNICATIONS AND REPORTS WHICH EVIDENCE THE RENDE RING OF SERVICES AND THE ENSUING BENEFITS. THESE HAVE BEEN GIVEN IN ANNEXURE-A TO THIS ORDER. NATURE OF SERVICE I.E. INFORMATION TECHNOLOGY, HUMAN RESOURCE, OPERATIONS, PURCHASING, MARKETING SUPPORT, FINANCE AND PLANNING HAS BEEN EVIDENCED BY WAY OF SUCH COMMUNICATION/ DOCUMENTS. IT WAS NEITHER DISPUTED BY THE TPO THAT APART FROM SERVICES WHICH ARE RECEIVED IN THE FORM OF EMAILS, REPORTS, DOCUMENTS ETC. FROM ANPAP, THE ASSESSEE ALSO RECEIVED CONSTANT AND CONTINUOUS INFORMATION OVER C ALLS, AUDIO-VIDEO CONFERENCES, PERSONAL VISITS ETC. THEREFORE, THE BENEFITS RECEIV ED IN THE ABOVE FORM OUGHT TO HAVE BEEN GIVEN DUE CONSIDERATION. HENCE, FOR THE PURPOS E OF DEMONSTRATION AND EXPLANATION, THE ASSESSEE HAS SUBMITTED DOCUMENTS E VIDENCING THE REGULAR FLOW OF VALUABLE COMMERCIAL SERVICES. FROM THE ABOVE DETAIL S SUBMITTED BY THE ASSESSEE IT HAS BEEN AMPLY DEMONSTRATED THAT THE BENEFITS GENERATED BY THE SAID SERVICES DURING THE RELEVANT FINANCIAL YEAR HAVE UNDENIABLY ADDED ECONO MIC / COMMERCIAL VALUE TO ENHANCE THE COMMERCIAL POSITION OF THE ASSESSEE AND SUCH SERVICES ARE RECEIVED BY THE ASSESSEE ON A CONTINUOUS BASIS ACROSS ITS OPERATION AL AREAS. HENCE IT IS ERRONEOUS TO CLASSIFY THE SERVICES TO BE IN THE NATURE OF STEWAR DSHIP SERVICES. ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 20 30. THE TPO IN HIS OBSERVATIONS ON EACH OF THE ITE MS OF SERVICE SET OUT IN ANNEXURE A TO THIS ORDER COMMENTED THAT THE SERVICES WERE IN THE NATURE OF CONTROL, SUPERVISORY, MONITORING FUNCTIONS. BY WAY OF ILLUS TRATION LET US TAKE ITEM NO.1 OF THE LIST OF SERVICES, WHICH WERE CLAIMED BY THE ASSESSE E TO BE RELATING TO MARKETING. THE ASSESSEE HAS REFERRED TO A MAIL FROM ANTON (SINGAPO RE) PROVIDING ACCESS TO INTERNET SITE AND ENABLE CONFIGURATION FOR ALL USERS TO FACI LITATE DISTRIBUTION OF CAMPAIGN INFORMATION. THIS WAS IN CONNECTION WITH THE NEW G UIDELINES FOR TEASER CAMPAIGN (MUST BE FOR A NEW PRODUCT LAUNCH). THE BENEFIT WA S TO ENABLE GROUP COMPANIES TO UTILIZE MARKETING STRATEGIES UNIFORMLY SO THAT COMM ERCIALLY ALL GROUP COMPANIES BENEFIT. THIS WAS NAMED AS CONTROL, SUPERVISORY, MONITORING FUNCTION BY THE TPO. SIMILARLY ITEM NO.2 OF THE LIST OF SERVICES GIVEN I N ANNEXURE A TO THIS ORDER, WHICH IS A FUNCTION RELATING TO INFORMATION TECHNOLOGY, MAKES A REFERENCE TO A MAIL FOR UPDATION OF COUNTRY LEVEL LOTUS NOTE USER HEADCOUNT BY EACH ENTITY TO SINGAPORE PERSONNEL. THIS WAS TO ENABLE CREATION OF A DATA B ACK FOR ALL USERS AND ENABLE CARRYING OUT PLANNING AND STRATEGIC ACTIVITIES FOR IT SERVIC ES. THIS WAS TERMED AS CONTROL, SUPERVISORY, MONITORING FUNCTION BY THE TPO. ANNE XURE A LIST CONTAINS ABOUT 69 ITEMS OF SERVICES AND ALL HAVE BEEN BRANDED AS CON TROL, SUPERVISORY, MONITORING FUNCTION BY THE TPO. THIS APPROACH OF THE TPO WAS NOT CORRECT. NONE OF THE SERVICES LISTED IN ANNEXURE A COULD BE TERMED AS EITHER SHAREHOLDER ACTIVITY OR STEWARDSHIP ACTIVITY, APPLYING THE GUIDELINES REFER RED TO EARLIER FOR CONSIDERING AN ACTIVITY AS SHAREHOLDER ACTIVITY OR STEWARDSHIP ACTIVITY. 31. THE DRP IN ITS ORDER HAS ACCEPTED THAT THE FIN DINGS OF THE TPO ARE NOT CORRECT. THE DRP WAS OF THE VIEW THAT THE SERVICES WERE REND ERED BY ANPAP TO THE ASSESSEE AND THAT THE ASSESSEE BENEFITTED FROM SUCH SERVICES . ONCE THIS CONCLUSION IS ARRIVED AT THEN THE CASE OF THE TPO THAT THE NATURE OF SERVICE S WERE SHAREHOLDER ACTIVITY OR STEWARDSHIP ACTIVITY CANNOT BE SUSTAINED. HAVING H ELD SO, THE DRP CONTRADICTED ITS OWN FINDING BY HOLDING THAT MAJORITY OF THE SERVICE S HELPED THE PARENT COMPANY IN SUPERVISING AND CONTROLLING SUBSIDIARY COMPANY AND THEREFORE THE SERVICES WERE IN THE NATURE OF STEWARDSHIP SERVICES. THE DRP HAS NOT SPELT OUT AS TO WHAT WERE THE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 21 SERVICES THAT BENEFITED THE ASSESSEE AND WHAT WERE THE SERVICES THAT BENEFITTED THE PARENT COMPANY. THE DRP ALSO CONCLUDED THAT SOME B ENEFIT WOULD HAVE ACCRUED TO THE ASSESSEE AS A RESULT OF SUCH SERVICES BUT SUCH SERVICES CANNOT BE DETERMINED WITH CERTAINTY AND THEREFORE THE CONCLUSION OF THE TPO S HOULD BE UPHELD. WITHOUT POINTED OUT HOW SERVICES RENDERED CANNOT BE SEGREGATED AS B ENEFITING THE PARENT COMPANY AND THAT BENEFITING THE GROUP COMPANIES, THE DRP COULD NOT HAVE COME TO SUCH A CONCLUSION. 32. WE THEREFORE CONCLUDE THAT THE ASSESSEE HAS ES TABLISHED THE NATURE OF SERVICES INCLUDING QUANTUM OF SERVICES RECEIVED FROM ANPAP, THAT SERVICES WERE PROVIDED IN ORDER TO MEET SPECIFIC NEED OF THE ASSESSEE FOR SUC H SERVICES, THE ECONOMIC AND COMMERCIAL BENEFITS DERIVED BY THE ASSESSEE FROM IN TRA GROUP SERVICES. IN ITS SUBMISSION DATED 5.11.2012 FILED BEFORE THE TPO, TH E ASSESSEE FILED REPORT DATED 30.6.2009 OF PRICEWATERHOUSE COOPERS LLP, CHARTERED ACCOUNTANTS. IN SUCH A REPORT A SEARCH FOR SIMILAR INDEPENDENT SERVICE PROVIDERS PROVIDING SERVICES THAT WERE PROVIDED BY ANPAP UNDER SLA WAS IDENTIFIED AND IT W AS FOUND ON SUCH ANALYSIS THAT SIMILAR SERVICES PROVIDED BY AND TO UNRELATED PARTI ES WERE AT AN AVERAGE MARGIN OF COST + 5.1% AND IT WAS OPINED THAT THE COST + 5% MARGIN FOR SIMILAR SERVICES PAID BY THE ASSESSEE TO ITS AE SHOULD BE REGARDED AS CONFIRMING TO THE ALP. THE ASSESSEE ALSO FILED A CERTIFICATE OF KPMG, LLP, SINGAPORE, AN IND EPENDENT THIRD PARTY ACCOUNTING EXPERT, CERTIFYING THE BASIS OF COST ALLOCATION BY ANPAP FOR THE VARIOUS SERVICES RENDERED BY THE ASSESSEE BASED ON THE EVIDENCE OF S ERVICES RENDERED BY ANPAP TO THE ASSESSEE. THE TPO HAS NOT DISPUTED THE ABOVE COST ALLOCATION AS WELL AS THE FACT THAT THE COMPARATIVE COST CHARGED BY UNRELATED PARTIES F OR SIMILAR SERVICES WAS AT A MARGIN OF 5.1% OF THE COST. IN VIEW OF OUR CONCLUSION THA T THE TPO AND THE DRP WERE IN ERROR IN HOLDING THAT THE NATURE OF SERVICES RENDER ED BY ANPAP WERE IN THE NATURE OF STEWARDSHIP ACTIVITY OR SHAREHOLDER ACTIVITY, WE HO LD THAT THE TPOS CONCLUSION NO CHARGES OUGHT TO HAVE BEEN PAID BY THE ASSESSEE. T HE CHARGES PAID BY THE ASSESSEE TO ANPAP ARE HELD TO BE AT ARMS LENGTH. CONSEQUENTLY , THE ADDITION MADE BY THE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 22 REVENUE AUTHORITIES IN THIS REGARD ARE DIRECTED TO BE DELETED AND THE APPEAL OF THE ASSESSEE ITA NO. 531/KOL/2014 IS ALLOWED. 33. WE SHALL NOW TAKE UP FOR CONSIDERATION THE TRA NSFER PRICING ISSUE THAT ARISES FOR CONSIDERATION IN THE APPEAL BY THE REVENUE. WE HAV E ALREADY SEEN THAT ANDC ANOTHER COMPANY BELONGING TO THE AKZO NOBEL GROUP U NDER TSA PROVIDED SAP SOFTWARE IMPLEMENTATION PROGRAMME DURING THE PERIOD 2008-2010 TO ALL AKZO NOBEL GROUP COMPANIES BELONGING TO THE BUSINESS AREA OF D ECORATIVE PAINTS. THE ASSESSEE MADE PAYMENT FOR ITS SHARE OF SERVICES RECEIVED FRO M ANDC. THE TPO HELD THAT SERVICES SO RECEIVED WERE IN THE NATURE OF CONTROL , SUPERVISORY, MONITORING FUNCTION AND THEREFORE NO CONSIDERATION OUGHT TO HAVE BEEN P AID BY THE ASSESSEE TO ANDC. THE ENTIRE SUM PAID WAS ADDED TO THE TOTAL INCOME A S ADJUSTMENT TO THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. THE DRP DE LETED THE ADDITION MADE BY THE TPO. THE ISSUE IN REVENUES APPEAL IS AS TO WHETHER THE DRP WAS JUSTIFIED IN COMING TO THE CONCLUSION THAT THE PAYMENT MADE BY THE ASSSESSEE T O ANDC UNDER TSA WAS AT ARMS LENGTH. 34. SERVICES RECEIVED BY THE ASSESSEE FROM ANDC : UNDER TSA ANDC A GROUP COMPANY OF 'AKZONOBEL GROUP' IMPLEMENTED SAP PROGRA MME IN ALL THE PARTICIPATING GROUP COMPANIES. THE ASSESSEE ALSO PARTICIPATED IN THE SAID PROGRAMME KNOWN AS PROJECT TRINITY. THE ABOVE ARRANGEMENT REFERS TO THE SUPPORT RECEIVED FOR INSTALLATION OF SAP ERP IN THE LOCATIONS OF THE ASS ESSEE AND OTHER GROUP COMPANIES. THE ABOVE ARRANGEMENT I.E. SAP IMPLEMENTATION IS EX CLUSIVELY FOR AKZO NOBEL N. V. GROUP OF COMPANIES AND SERVICES SIMILAR TO ABOVE HA VE NOT BEEN PROVIDED TO ANY THIRD PARTY. IN RELATION TO SAP DEPLOYMENT AND IMPLEMENT ATION, ANDC ACTS AS A COST POOLING AND RECHARGING CENTRE WHEREIN THE COSTS ARE RECHARGED TO THE AKZO NOBEL N.V. GROUP OF COMPANIES ON THE BASIS OF PRINCIPLES DEFIN ED IN THE AGREEMENT FOR EACH CATEGORY OF COST BY ANDC AND UNDER EACH STAGE FROM DEPLOYMENT OF SAP TO ITS FINAL IMPLEMENTATION I.E. GO-LIVE. THE COSTS RECHARGED PR IMARILY INCLUDE THIRD PARTY COSTS OR ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 23 COSTS INCURRED BY ANDC. AS PER THE AGREEMENT, THE C OSTS ARE RECORDED, CATEGORISED AND RECHARGED BASED ON PRINCIPLES WHICH CAN BE SUMM ARISED AS GIVEN BELOW. SCHEDULE 1 - EXPENSED COSTS THESE COSTS INCLUDE DEPLOYMENT SPECIFIC COSTS AND O PERATIONAL IT SUPPORT COST. SCHEDULE 2 - CAPITALIZED COSTS THESE COSTS INCLUDE KERNEL ENHANCING ASSETS OR ASSE TS ON WHICH THE SYSTEM OPERATES AND ARE DEEMED TO BE GLOBAL IN NATURE AND NOT ABLE TO BE ASSIGNED DIRECTLY TO AN INDIVIDUAL COUNTRY/ DEPLOYMENT. FROM THE DATE OF GO -LIVE THE COSTS ARE ALLOCATED FOR A PERIOD OF 5 YEARS ON A PER USER BASIS TO EACH COUNT RY. SCHEDULE 3 - START UP COSTS THESE COSTS WOULD BE INCURRED AND EXPENSED VIA INVO ICES FROM THIRD PARTY SUPPLIERS AND WOULD BE ALLOCATED ON A PER USER BASIS TO A DEP LOYMENT COUNTRY AS A ONE-TIME START LIP FEE AT THE POINT OF GO-LIVE. SCHEDULE 4 - LOCAL AKZO NOBEL OWN ACCOUNT COSTS THE COSTS REFERRED TO HEREINABOVE WOULD BE INCURRED AND EXPENSED DIRECTLY BY THE LOCAL DEPLOYMENT COUNTRY WITH NO RECHARGE TAKING PL ACE TO THE CENTRAL TRINITY PROJECT. SAP SYSTEM IS ERP SOFTWARE WHICH IS REQUIRED FOR TH E DAY-TO-DAY RUNNING OF THE BUSINESS. IT IMPROVES ALIGNMENT OF STRATEGIES AND O PERATIONS AND HELPS IN ACHIEVING CORPORATE OBJECTIVES BY ALIGNING WORKFORCE AND ORGA NIZATIONAL OBJECTIVES. IMPLEMENTATION OF SAP LEADS TO IMPROVED PRODUCTIVIT Y AND REDUCE COSTS THROUGH INCREASED FLEXIBILITY. IT ALSO HELPS IN INCREASED P ROFITABILITY, IMPROVED FINANCIAL CONTROL, AND MANAGEMENT OF RISK AS WELL AS OPTIMIZA TION OF IT SPENDING. 35. THE ASSESSEE ALSO SUBMITTED EVIDENCE OF COMMUN ICATION, TRAINING MANUALS AND OTHER DOCUMENTS SHARED WHICH EVIDENCE THE VALUABLE ASSISTANCE PROVIDED BY ANDC AS WELL AS THE NATURE OF SERVICES RECEIVED UNDER THE T SA FRAMEWORK. THE DETAILS OF BENEFITS EMANATING FROM RECEIPT OF SERVICES WAS EXP LAINED BY THE ASSESSEE AS EMBEDDED IN THE FACT THAT ANDC IS A RECHARGING ENTI TY FOR THE COSTS INCURRED WITH RESPECT TO THE IMPLEMENTATION OF SAP PLATFORM IN PA RTICIPATING ENTITIES. THE ASSESSEE, ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 24 THROUGH EXECUTION OF THE TSA, HAS EFFECTIVELY SUBSC RIBED TO A COST EFFECTIVE MEANS OF IMPLEMENTATION OF SAP PLATFORM WHICH WOULD LEAD TO AN INCREASE IN ITS OPERATIONAL, ACCOUNTING AND MANAGEMENT REPORTING EFFICIENCIES. S AP SYSTEM IS ERP SOFTWARE WHICH IS REQUIRED FOR THE DAY-TO-DAY RUNNING OF THE BUSINESS. IT IMPROVES ALIGNMENT OF STRATEGIES AND OPERATIONS AND HELPS IN ACHIEVING CO RPORATE OBJECTIVES BY ALIGNING WORKFORCE AND ORGANIZATIONAL OBJECTIVES. IMPLEMENTA TION OF SAP LEADS TO IMPROVED PRODUCTIVITY AND REDUCE COSTS THROUGH INCREASED FLE XIBILITY. IT ALSO HELPS IN INCREASED PROFITABILITY, IMPROVED FINANCIAL CONTROL, AND MANA GEMENT OF RISK: AS WELL AS OPTIMIZATION OF IT SPENDING. 36. THE TPO DETERMINED THE VALUE OF THE INTERNATIO NAL TRANSACTION TO BE NIL, AND HELD THAT THE PROVISION OF SERVICES BY ANDC WERE IN THE NATURE OF STEWARDSHIP FUNCTIONS. THE TPO CHALLENGED THE COMMERCIAL EXPEDIENCY AND WI SDOM OF THE ASSESSEE IN INSTALLATION OF SAP SOFTWARE BASED ON THE LEGITIMAT E BUSINESS REQUIREMENTS OF THE ASSESSEE AND CONCLUDED THAT THE ASSESSEE'S OPERATIO N LEVELS DO NOT JUSTIFY SAP IMPLEMENTATION. THE TPO REFUSED TO ACCEPT THE PLEA OF THE ASSESSEE THAT SAP IMPLEMENTATION WAS MEANT TO AUGMENT THE OPERATIONAL EFFICIENCY OF ASSESSEE AND CONSEQUENTLY CONCLUDED THAT THE ENTIRE PROCESS IS A PART OF QUALITY CONTROL, SUPERVISION AND MONITORING FUNCTION OF THE GROUP. 37. BEFORE DRP THE ASSESSEE REITERATED SUBMISSION S MADE BEFORE THE TPO. IN PARTICULAR, IT WAS HIGHLIGHTED THAT THE FOLLOWING S ERVICES WERE PROVIDED BY ANDC TO THE ASSESSEE, VIZ., : - RESOURCES - DEPLOYMENT OF SAP FOR THE USERS OF TH E ASSESSEE INCLUDING ESTABLISHING A CENTRAL DEPLOYMENT TEAM AND TRAINING OF LOCAL RES OURCES TO PROVIDE SUPPORT AT HAND TO THE ASSESSEE. TRAINING - THE AE ALSO CONDUCTS TRAINING OF USERS TO ENABLE THEM TO ADAPT TO THE NEW SYSTEM ONCE IT IS IMPLEMENTED. INFRASTRUCTURE SUPPORT - ONCE THE SAP SYSTEM IS I MPLEMENTED I.E. FROM THE 'GO LIVE' DATE THE AB PROVIDES SUPPORT IN SETUP AND MAINTENAN CE OF SOFTWARE INFRASTRUCTURE. ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 25 IMPROVEMENT IN FUNCTIONALITY - A TEAM IS SETUP CO MPRISING OF TECHNICAL AND BUSINESS RESOURCES WHO ARE INVOLVED IN ENHANCING THE SAP KER NEL, INCLUDING IMPLEMENTING NEW FUNCTIONALITY AND EXTENDING/ENHANCING CURRENT FUNCT IONALITY. IDENTIFICATION OF RESOURCES - SEPARATELY, THE AE IDENTIFIES AND EMPLOYS RESOURCES AND EXTERNAL CONSULTANTS FOR ASSISTANCE IN UPGRADING TH E SYSTEM IMPLEMENTING VARIOUS FUNCTIONALITIES. 38. IT WAS REITERATED THAT IN RELATION TO SAP DEPL OYMENT AND IMPLEMENTATION, ANDC ACTED AS A COST POOLING AND RECHARGING CENTRE WHERE IN THE COSTS ARE RECHARGED TO THE AKZO NOBEL N.V. GROUP OF COMPANIES ON THE BASIS OF PRINCIPLES DEFINED IN THE AGREEMENT FOR EACH CATEGORY OF COST BY ANDC AND UND ER EACH STAGE FROM DEPLOYMENT OF SAP TO ITS FINAL IMPLEMENTATION I.E. GO-LIVE. TH E COSTS RECHARGED PRIMARILY INCLUDE THIRD PARTY LICENSING COSTS OR COSTS INCURRED BY AN DC (WHICH INCLUDE REIMBURSEMENT COSTS AND OTHER EXPENSES INCURRED BY ANDC). IT WAS REITERATED THAT THE TPO HAS ERRED IN JUDGING THE COMMERCIAL EXPEDIENCY OF THE TRANSAC TION OF INSTALLATION OF SAP BY VIEWING THAT THE DECISION WAS NOT FEASIBLE FROM THE POINT OF VIEW OF A COMPANY WITH TURNOVER SIMILAR TO THE ASSESSEE'S. RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES (SUP RA) WHEREIN IT WAS HELD THAT RULE 10B(L)(A) DOES NOT AUTHORISE DISALLOWANCE OF ANY EX PENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE I NCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUNERATIVE O R THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CON SIDERATIONS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION I S FOR THE ASSESSEE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXPEND ITURE, HE HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A PART THEREOF O N THE GROUND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EXPENSE; THERE IS CERTAINL Y NO AUTHORITY FOR THAT. IT WAS SUBMITTED THAT THE TPO IS EXPECTED TO EXAMINE THE I NTERNATIONAL TRANSACTION AS HE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 26 ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJU STMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON TH E GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 39. IT WAS SUBMITTED THAT EVIDENCE OF COMMUNICATIO NS, TRAINING MANUALS AND OTHER DOCUMENTS AND EVIDENCE OF VALUABLE ASSISTANCE PROV IDED BY ANDC AS WELL AS THE NATURE OF SERVICES RECEIVED UNDER THE FRAMEWORK WER E FULLY EXPLAINED. THE SAME IS ALSO GIVEN IN THE FORM OF A CHART AND GIVEN AS ANNEXURE B TO THIS ORDER. 40. AFTER CONSIDERING THE SUBMISSIONS MADE BEFORE IT, THE DRP DELETED THE ADDITION MADE BY THE TPO FOR THE FOLLOWING REASONS: 2.5.1 THE ASSESSEE THROUGH EXECUTION OF THIS AGREE MENT, HAS SUBSCRIBED TO A COST EFFECTIVE MEANS OF IMPLEMENTATION OF SAP PLATF ORM: WHICH WOULD LEAD TO AN INCREASE IN ITS OPERATIONAL ACCOUNTING AND. MAN AGEMENT 'REPORTING EFFICIENCIES. 2.5.2 THE ASSESSEE HAS SUBMITTED, EVIDENCES OF COM MUNICATIONS, TRAINING MANUALS AND OTHER DOCUMENTS SHARED WHICH EVIDENCE; THE VALUABLE ASSISTANCE PROVIDED BY ANDC AS WELL AS THE NATURE OF SERVICES RECEIVED' UNDER THE FRAMEWORK. . 2.5.3 FURTHER, THE ASSESSEE SUBMITTED THAT IT RUNS SAP HOSTED THROUGH THE HEAD OFFICE AT GURGAON. THE SAP SYSTEM IS USED BY THE FO LLOWING TEAMS OF THE ASSESSEE SPREAD ACROSS INDIA: 1. 60 DEPOTS: OF THE ASSESSEE, WHICH ARE SPREAD ACR OSS THE COUNTRY FOR SALES ORDER AND BILLING, SALES RETURN, MATERIAL REC EIPT FROM FACTORIES, INTER DEPOT STOCK TRANSFER PAYMENT RECEIPTING AND ADHOC R EQUISITION 2. 4 REGIONAL SALES OFFICES FOR CREDIT MANAGEMENT,' BANK RECONCILIATION, BILL BOOKING, ACCOUNTS PAYABLE AND JOURNAL VOUCHER 3. 3 FACTORIES FOR BACK-END OPERATIONS LIKE MANUFAC TURING, SHOP FLOOR CONTROL, PURCHASING, ACCOUNTS PAYABLE ETC. 4. HEAD OFFICE FOR MASTER DATA MANAGEMENT (CUSTOMER , VENDOR, PRODUCT, PRICE), BILL BOOKING AND .ACCOUNTS PAYABLE, ASSET A CCOUNTING, JOURNAL VOUCHER AND OVERALL CONTROLLING. SAP IS USED FOR PR ODUCT COSTING AND FINISHED PRODUCTS STOCK VALUATION. THE' DATA RELAT ED TO PRODUCTION QUANTITIES AND VALUES AS .WELL AS RM/PM CONSUMPTIO N VALUES AND ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 27 QUANTITIES ARE DOWN LOADED FROM BPCS RUNNING IN THE THREE FACTORIES AND ALL STOCK , MOVEMENT DATA FROM DEPOTS ARE DOWN LOAD ED FROM SAP FOR THIS PURPOSE. THE COMPANY HAS USED THE SAID SOFTWARE FOR INTEGRAT ING THE PROCESSES AT THE ABOVE VARIED LOCATIONS OF THE BUSINESS. THIS ENSURE S THAT THERE IS ONE VERSION OF THE DATA AVAILABLE AT ALL LOCATIONS THEREBY PROVIDI NG HUGE BENEFITS TO THE ACCOUNTING AND MANUFACTURING PROCESSES AT THE ASSES SEE'S BUSINESS. 2.5.4 APART FROM: THE ABOVE, SAP USES FOR THE ASSES SEE INCLUDE PLANNING AND MANUFACTURING PROCESSES - THE ASSESSEE: CAN PERFORM-DEMAND PLANNING AND, DISP ATCH REQUIREMENT PLANNING SYSTEMS USED BY SUPPLY CHAIN FUNCTION TO G ENERATE PRODUCTION PLANS, DISPATCH PLANS AT EACH DEPOT. SUCH, PLANS 'C AN BE CREATED FOR EACH SKU AND SPECIFIC FOR EACH DEPOT ' APPROVAL PROCESSES - THE SAP SYSTEM HELPS TO IMPLEMENT A LOTUS NOTES BAS ED SYSTEM FOR APPROVALS IN VARIOUS AREAS AS WELL AS FOR ALL MASTE R DATA UPLOADS E.G. CUSTOMER MASTER, MATERIAL MASTER, VENDOR MASTER UPL OADS IN SAP. THE LOTUS NOTES WORKFLOW TOOL SENDS OUT MAILS TO DIFFERENT PEOPLE IN THE HIERARCHY AND HELPS THEM IN, FORWARDING FOR APP ROVAL, APPROVING OR REJECTING THE EXCEPTIONS / .BLOCKS HAPPENING IN THE SAP SYSTEM. IT USES LOTUS' ENTERPRISE INTEGRATOR-PRODUCT TO PULL / PUSH DATA FROM SAP. THE SYSTEM IS USED IN CREDIT APPROVAL, MATERIAL RETURNS APPROVAL, ADHOCS APPROVAL AND CHEQUE DISHONOR WORKFLOW SUPPORT FOR S AP. ALL-THE ABOVE SYSTEM ARE SEAMLESSLY INTEGRATED WITH EACH OTHER THROUGH A SET OF COMPLEX INTERFACE PROGRAMS, WHICH RUN AUTOMATICALLY WITHOUT ANY MANUAL INTERVENTIONS IN MOST OF THE CASES. 2.5.5 THUS, THE TOP FIVE BENEFITS OF SAP INCLUDE: 1) INFORMATION AVAILABLE ACROSS ORGANISATION AS A W HOLE RATHER THAN 'MULTIPLE VERSIONS OF THE TRUTH 2) BETTER FINANCIA1 REPORTING:. ' 3) LESS DUPLICATION' AND TIME WASTING ACROSS THE BO ARD 4) BETTER ALIGNED CROSS-DEPARTMENTAL PROCESSES 5) ENABLING BETTER REGULATORY COMPLIANCE 2.5.6 THE OBSERVATION OF THE TPO THAT SAP IS NOT F EASIBLE FOR THE ASSESSEE CONSIDERING ITS TURNOVER' IS VERY SUBJECTIVE AND NO T SUPPORTED BY ANY CRITERIA. NOR HE MENTIONED THE LEVEL OF TURNOVER WHICH WOULD JUSTIFY THE IMPLEMENTATION OF SAP. ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 28 2.5.7 FURTHER, REFERENCE IS DRAWN TO PARAGRAPH 7.9. OF THE OECD TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AN D TAX ADMINISTRATIONS OECD GUIDELINES - CHAPTER ON INTRA-GROUP SERVICES) , WHICH PROVIDES THAT: IN A NARROW RANGE OF SUCH CASES, AN INTRA GROUP AC TIVITY MAY BE PERFORMED RELATING TO GROUP MEMBERS EVEN THOUGH TH OSE GROUP MEMBERS DO NOT NEED THE ACTIVITY (AND WOULD NOT BE; WILLING TO PAY FOR IT WERE THEY INDEPENDENT ENTERPRISES), SUCH AN ACTIVIT Y WOULD BE ONE THAT A GROUP MEMBER (USUALLY THE PARENT COMPANY OR A REGIO NAL HOLDING COMPANY) PERFORMS SOLELY BECAUSE OF ITS OWNERSHIP I NTEREST IN ONE OR MORE OTHER GROUP MEMBERS, I. E. IN ITS CAPACITY AS SHAREHOLDER. THIS TYPE OF. ACTIVITY WOULD NOT .JUSTIFY A CHARGE TO THE' R ECIPIENT COMPANIES. IT MAY BE REFERRED TO AS A SHAREHOLDER ACTIVITY. IN VIEW OF THE NATURE OF SERVICES BEING; RECEIVED B Y THE ASSESSEE, WE ARE OF THE OPINION THAT HAD THE ASSESSEE NOT RECEIVED SUCH SUP PORT FROM ITS AE, IT WOULD TO PERFORM THE FUNCTIONS IN-HOUSE, OR HIRE EXPERIENCED AND TRAINED SERVICE PROVIDERS. HENCE, SUCH SERVICES ARE NOT IN THE NATU RE OF SIMPLY OVERSIGHT IONS, WHICH' HAVE BEEN PERFORMED BY ANDC TO PROTECT ITS I NVESTMENT IN THE COMPANY. 2.5.8. SAP SYSTEM IS ERP SOFTWARE WHICH IS REQUIR ED FOR THE DAY-TO-DAY RUNNING OF THE BUSINESS. IN VIEW OF THE ABOVE FACTS , WE ARE OF THE OPINION THAT IT IMPROVES ALIGNMENT OF STRATEGIES AND OPERATIONS AND HELPS IN' ACHIEVING CORPORATE OBJECTIVES BY ALIGNING WORKFORCE AND ORGA NIZATIONAL OBJECTIVES. IMPLEMENTATION OF SAP. LEADS TO IMPROVED PRODUCTIVI TY AND REDUCE COSTS THROUGH INCREASED FLEXIBILITY. IT ALSO HELPS IN I NCREASED PROFITABILITY, IMPROVED FINANCIAL CONTROL, AND MANAGEMENT OF RISK AS WELL AS OPTIMIZATION OF IT SPENDING. HENCE IT WOULD BE ERRONEOUS TO CLASSIFY T HE SERVICES TO BE IN THE NATURE OF STEWARDSHIP SERVICES. HENCE, IT SHOULD B E JUDGED TO BE LEGITIMATE BUSINESS EXPENDITURE OF THE ASSESSEE. 2.5.9. THE ASSESSEE HAS UNDERTAKEN THE BENCH MARKIN G STUDY OF INTERNATIONAL TRANSACTION, PAYMENT OF MANAGEMENT FEE, AT A OVERAL L COMPANY LEVEL PROFITABILITY WHEREIN THE ASSESSEE HAS SELECTED ITS ELF AS THE TESTED PARTY AND COMPARED ITS OPERATING PROFIT LEVEL WITH SIMILAR U NCONTROLLED COMPARABLE COMPANIES. THE AVERAGE OF MARGINS EARNED BY FUNCTIO NALLY COMPARABLE COMPANIES IS 8.29%. THE PROFITABILITY OF THE COMPAN Y AFTER TAKING INTO ACCOUNT THE PAYMENTS FOR INTRA-GROUP SERVICES IS:9.54% WHIC H IS AS PER THE ARM'S LENGTH STANDARD. 2.5.10. THE NATURE OF SERVICES RECEIVED FROM THE AE ARE IN CONJUNCTION WITH ITS PRIMARY AND ONLY BUSINESS SEGMENT I.E. MANUFACTURIN G AND SELLING OF PAINTS. THESE SERVICES ARE CONTINUOUS IN NATURE TO THE PRIM ARY AND ONLY BUSINESS SEGMENT OF THE ASSESSEE. OWNING TO, THIS FACT AND B USINESS REALITY OF THE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 29 ASSESSEE IT HAS ALSO BENCHMARKED THE PRICES OF THIS INTERNATIONAL TRANSACTION BY UNDERTAKING ENTITY LEVEL BENCH MARKING. EVEN AFTER CONSIDERING THE PAYMENT OF MANAGEMENT SERVICE CHARGE, THE, ASSESSEE'S NET MARG IN . IS GREATER THAN ITS COMPARABLE COMPANIES. 2.5.11. IN VIEW OF THE ABOVE THIS PANEL HOLDS THI S ISSUE IN FAVOUR OF THE ASSESSEE AND THE GROUNDS RAISED IN THIS REGARD ARE ALLOWED. 41. AGGRIEVED BY THE ORDER OF THE DRP DELETING THE ADDITION MADE CONSEQUENT TO DETERMINATION OF ALP AS ABOVE, THE REVENUE HAS PREF ERRED GR.NO.3 BEFORE THE TRIBUNAL IN ITS APPEAL. GR.NO.3 RAISED BY THE REVE NUE READS AS FOLLOWS: 3. THAT IS THE FACTS AND IN LAW OF THE CASE THE LD . MEMBERS OF THE DRP ERRED IN ADMITTING THE FACT THAT THE SUPPORT SERVICES RECEIV ED BY THE ASSESSEE COMPANY FROM ITS ASSOCIATED GROUPS LOCATED IN USA HAD NO UN TOWARD ADJUSTMENT MADE BY THE TPO. IN THE SECOND ADJUSTMENT AS WELL, THE LD. MEMBERS OF THE DRP HAD FAILED TO PROVIDE SOUND REASONS BEHIND THE DELETION OF TP ADJUSTMENT OF RS. 3,75,20,000/-WHICH IS BEYOND DOUBT THAT THE TPO HAD CLASSIFIED EVERY DETAILS OF THE SUPPORT SERVICES WITH SUBTLETY. 42. THE LEARNED DR RELIED ON THE ORDER OF THE TPO. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED SUBMISSIONS MADE BEFORE DRP AND RELIED ON THE ORDER OF THE DRP AND DREW OUR ATTENTION TO THE EVIDENCE IN SUPPORT O F BENEFITS RECEIVED BY THE ASSESSEE, MANNER OF COST ALLOCATION AND THE BENCH MARKING APP ROACH ADOPTED BY THE ASSESSEE. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. 43. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A V OLUMINOUS SET OF DOCUMENTARY EVIDENCE SUCH AS SAMPLE EVIDENCES OF COMMUNICATIONS , TRAINING MANUALS, AND OTHER RELEVANT DOCUMENTS WAS SUBMITTED WITH THE TRANSFER PRICING OFFICER VIDE ANNEXURE 1 TO SUBMISSION DATED 15 JANUARY 2013 ( PAGE 907 - 2305 OF THE PAPERBOOK). THE DOCUMENTARY EVIDENCE SHOWS VALUABLE COMMERCIAL SERV ICES RECEIVED FROM ANDC. IT IS ALSO NOT DISPUTED THAT THE SAP IMPLEMENTATION SE RVICES WAS RENDERED EXCLUSIVELY FOR AKZO NOBEL N.V GROUP OF COMPANIES AND THAT SERV ICES SIMILAR TO THIS WAS NOT PROVIDED TO ANY THIRD PARTY. THE COMMERCIAL ESSENCE OF TRINITY AGREEMENT IS EMBEDDED IN THE FACT THAT ANDC WAS A RECHARGING ENT ITY FOR THE COSTS INCURRED WITH RESPECT TO IMPLANTATION OF SAP PLATFORM IN PARTICIP ATING ENTITIES AND THUS, THE ASSESSEE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 30 THROUGH EXECUTION OF THE AGREEMENT HAD SUBSCRIBED T O A COST EFFECTIVE MEANS OF IMPLEMENTATION OF SAP PLATFORM WHICH LED TO AN INCR EASE IN ITS OPERATIONAL, ACCOUNTING AND MANAGEMENT REPORTING EFFICIENCIES. S AP SYSTEM IS ERP BASED SOFTWARE WHICH IS REQUIRED FOR DAY TO DAY RUNNING O F BUSINESS. IT IMPROVES ALIGNMENT OF STRATEGIES AND OPERATIONS AND HELPS IN ACHIEVING CORPORATE OBJECTIVES BY ALIGNING WORKFORCE AND ORGANIZATIONAL OBJECTIVES. IT IS NOT DISPUTED THAT IMPLEMENTATION OF SAP LEADS TO IMPROVED PRODUCTIVITY AND REDUCE COSTS THROUGH INCREASED FLEXIBILITY. IT ALSO HELPS IN INCREASED PROFITABILITY, IMPROVED FIN ANCIAL CONTROL, AND MANAGEMENT OF RISK AS WELL AS OPTIMIZATION OF IT SPENDING. THE DR P PANEL HAS ACKNOWLEDGED THAT THE ASEESSEE RUNS SAP HOSTED THROUGH HEAD OFFICE AT GUR GAON AND THAT THE SYSTEM IS USED BY THE FOLLOWING TEAMS OF THE ASSESSEE SPREAD ACROS S INDIA: 1. 60 DEPOTS OF THE ASSESSEE ACROSS INDIA, FOR SALE S ORDER AND BILLING, SALES RETURN, MATERIAL RECEIPT FROM FACTORIES, INTER DEPO T STOCK TRANSFER, ETC.; 2. 4 REGIONAL SALES OFFICES FOR CREDIT MANAGEMENT, BANK RECONCILIATION, BILL BOOKING, ACCOUNTS PAYABLE AND JOURNAL VOUCHER; 3. 3 FACTORIES FOR BACK-END OPERATIONS LIKE MANUFAC TURING, SHOP FLOOR CONTROL, PURCHASING, ACCOUNTS PAYABLE, ETC; 4. HEAD OFFICE FOR MASTER DATA MANAGEMENT (CUSTOMER , VENDOR, PRODUCT, PRICE). IT IS USED FOR PRODUCT COSTING AND FINISHED PRODUCT S STOCK VALUATION. THUS, THE FACT THAT THE ASSESSEE HAD USED SAP SOFTW ARE FOR INTEGRATING THE PROCESS AT THE ABOVE VARIED LOCATIONS FOR THE BUSINESS STANDS ESTABLISHED. THIS ENSURES THAT ONE VERSION OF THE DATA IS AVAILABLE AT ALL LOCATIONS T HEREBY PROVIDING HUGE BENEFITS TO ACCOUNTING AND MANUFACTURING PROCESSES OF THE ASSES SEE'S BUSINESS. APART FROM ABOVE, THE USE OF SAP BY THE ASSESSEE IN ITS BUSINE SS INCLUDES: 1. PLANNING AND MANUFACTURING PROCESSES; 2. APPROVAL PROCESSES 3. APPLICATION OF LOTUS NOTES WORKFLOW TOOL ALL THE ABOVE SYSTEMS ARE SEAMLESSLY INTEGRATED WIT H EACH OTHER THROUGH A SET OF COMPLEX INTERFACE PROGRAMS, WHICH RUN AUTOMATICALLY WITHOUT ANY MANUAL INTERVENTION IN MOST OF THE CASES. IT IS ALSO NOT DISPUTED THAT THE ASSESSEE ALSO RECEIVES CONSTANT AND CONTINUOUS INFORMATION OVER CALLS, AUDIO-VIDEO CONF ERENCES, PERSONNEL VISITS, ETC. THE ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 31 LD. TPO DID NOT CONSIDER THE PLETHORA OF FACTS, JUS TIFICATIONS, DETAILS AND ARGUMENTS AS PRESENTED BY THE ASSESSEE AND PROCEEDED ON THE BASI S THAT BECAUSE THE GROUP DECIDED TO IMPLEMENT SAP, THE ASSESSEE HAD TO BEAR THE COST ALLOCATED TO IT AND THUS IMPLEMENTATION OF SAP IS PART OF QUALITY CONTROL, S UPERVISION AND MONITORING FUNCTION OF THE GROUP (THROUGH GROUP ENTITIES) WHICH INTEGRA TES ALL INFORMATION AND DATA ON ONE SYSTEM AND THEREFORE THE SERVICES SHOULD BE CONSTRU ED AS STEWARDSHIP SERVICES. THE THIS APPROACH OF THE TPO WAS ERRONEOUS. ASSESSEE H AS SUBSTANTIALLY GROWN IN THE HIGHLY COMPETITIVE MARKET AND WITH THE HELP OF OPER ATIONAL EFFICIENCY ACHIEVED HAS BEEN ABLE TO POST A ROBUST REVENUE GROWTH. THE SAME IS EVIDENT FROM THE TABLE PRESENTED UNDERNEATH: PARTICULARS FY 2007-08 FY 2008-09 FY 2009- 10 FY 2010-11 SALES 8,988 9,970 9,909 11,732 OPERATING MARGIN 9.25% 10.73% 12.96% 10. 08% 44. AS PER TRINITY AGREEMENT COSTS WERE RECORDED, CATEGORIZED AND RECHARGED BASED ON PRINCIPLES WHICH HAVE ALREADY BEEN GIVEN WHILE D ISCUSSING THE FACTS AND CIRCUMSTANCES UNDER WHICH THE ISSUE IN QUESTION ARI SE FOR CONSIDERATION. SUFFICE IT TO SAY THAT THE MANNER OF ALLOCATION OF COST IS SCIENT IFIC AND CORRECT. WE MAY ADD THAT THE BASIS OF DETERMINATION OF COST HAS NOT BEEN DISPUTE D BY THE TPO. THEREFORE WE PRESUME THAT THE TPO HAS NO GRIEVANCE IN SO FAR AS THE MANNER OF ARRIVING AT THE COST FOR SAP IMPLEMENTATION AND THAT THE COST IS AT ARM S LENGTH. THUS BASED ON THE ABOVE, THE PAYMENT TOWARDS SAP DEPLOYMENT SERVICES ARE IN ACCORDANCE WITH TRANSFER PRICING REGULATIONS OF INDIA. WE THEREFORE DISMISS GR.NO.3 RAISED BY THE REVENUE. 45. GR.NO.1 & 2 RAISED BY THE REVENUE READS AS FOL LOWS: 1.THAT IS THE FACTS AND IN LAW OF THE CASE THE LD. MEMBERS OF THE DRP ERRED IN NOT CONSIDERING THE UNALLOCABLE INTEREST NOT ATTRIB UTABLE TO EXEMPT/NON-EXEMPT INCOME COMES UNDER THE PURVIEW OF RULE 8D COMPUTATI ON. ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 32 2. THAT IS THE FACTS AND IN LAW OF THE CASE THE LD . MEMBERS OF THE DRP ERRED IN NOT TAKING THE FACT INTO ACCOUNT THAT THE ASSESSEE COMPANY FAILED TO PROVE THE IDENTICAL AMOUNT CLAIMED FOR BAD DEBT WHICH OTHERWI SE TURNS .SQUARELY REVERSE. THE REVENUE HAS FILED AN APPLICATION SEEKING TO RAI SE THE FOLLOWING ADDITIONAL GROUND OF APPEAL. THAT IN THE FACTS AND IN LAW OF THE CASE LD. MEMBE RS OF THE DRP ERRED IN CONSIDERATION OF SALE OF RUBBER CHEMICAL BUSINESS O F THE COMPANY AS SLUMP SALE IN LIEU OF ITEMIZED SALE OF ASSETS AND THEREBY DISA LLOWING THE ADJUSTMENT OF SALE CONSIDERATION WITH THE BLOCK OF ASSETS AND THEREBY LOWERING THE WDV OF THE BLOCK OF ASSETS. 46. AS FAR AS GROUND NO.1 RAISED BY THE REVENUE I S CONCERNED THE SAME RELATES TO THE DISALLOWANCE U/S 14A OF THE ACT. DURING THE RELEVAN T PREVIOUS YEAR, THE ASSESSEE EARNED INCOME OF RS. 10,27,44,063/- WHICH IS NOT CH ARGEABLE TO TAX UNDER CHAPTER III OF THE ACT, WHICH DEALS WITH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. SEC.14-A OF THE ACT PROVIDES THAT NO EXPENDITURE WH ICH IS INCURRED FOR THE PURPOSE OF EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTA L INCOME UNDER THE ACT, SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING TOTAL INCOME. RULE 8D OF THE INCOME TAX RULES, 1962 (RULES) PROVIDES THE MANNER IN WHICH DISALLOWA NCE U/S.14A OF THE ACT HAS TO E MADE. THE ASSESSEE MADE A SUO-MOTO DISALLOWANCE OF RS.2,41,131/- IN THE COMPUTATION OF TOTAL INCOME AS EXPENDITURE INCURRED IN EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE DISALLOWANCE WAS MADE BY THE ASSESSEE ON THE BASIS OF ITS ESTIMATE OF PROPORTION ATE MANPOWER COST AND OPERATING COST INCURRED DURING THE RELEVANT PREVIOUS YEAR. TH E ASSESSEE ESTIMATED ITS OPERATING COST AT RS.20,000/- PER MONTH ON STATIONERY, FAX, POSTAGE, TELEPHONE, CONVEYANCE ETC., AT MADE DISALLOWANCE OF RS.2,40,000/-. FOR COMPUT ATION OF PROPORTIONATE MANPOWER COST, THE ASSESSEE ESTIMATED TOTAL MANPOWER COST AT RS. 17,36,078/-. THEREAFTER, ASSESSEE HAS COMPUTED AVERAGE OF OPENING AND CLOSIN G OF TOTAL INVESTMENTS AND SIMILARLY AVERAGE OF INVESTMENTS YIELDING EXEMPT IN COME AND OFFERED MANPOWER COST AS DISALLOWANCE IN PROPORTION TO THE PROPORTION OF INVESTMENTS YIELDING EXEMPT INCOME TO AVERAGE TOTAL INVESTMENTS. THE FIGURE OF PROPORTIONATE MANPOWER COST COMES TO RS. 1,131/-. ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 33 47. THE AO HOWEVER WAS OF THE VIEW THAT THE EXPEND ITURE OFFERED BY THE ASSESSEE UNDER SECTION 14A BY THE ABOVE METHODOLOGY WAS NOT ACCEPTABLE. HE PROCEEDED TO APPLY RULE 8D OF THE RULES BY ESTIMATING OPERATING COST OF RS.1,00,000 PER MONTH AND MANPOWER COST RS.29,36,078/- WHICH WAS THE TOTAL E XPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT BY THE ASSESSEE UNDER THIS HEAD. THE ASSESSEE DID NOT DISALLOW ANY INTEREST EXPENDITURE BECAUSE THERE WAS NO BORROWED FUNDS ON WHICH INTEREST WAS PAID THAT WERE USED TO MAKE INVESTMENTS THAT YIELDED TAX FREE INCOME. THE AO HOWEVER PROCEEDED TO COMPUTE DISALLOWANCE U/S.14A OF THE AC T, AS FOLLOWS: RULE 8D(I) (AS DISCUSSED) 2,936,078 RULE 8D(II) A.INTEREST EXPENSES 29,300,000 B.AVG. VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF TOTAL INCOME 5,237,725 C.TOTAL ASSETS AS PER COMPUTATION BELOW 12,442,200,000 A*B/C 12,334 RULE 8D(III) 0.5. OF AVG. VALUE OF INVESTMENTS 26,189 TOTAL 2,974,601 AVG. TOTAL ASSETS 31.03.2009 31.03.2008 FIXED ASSETS 1,346,800,000 1,437,200,000 INVESTMENTS 9,152,100,000 6,926,000,000 CURRENT ASSETS, LOANS AND ADVANCES 2,826,000,000 3, 196,300,000 13,324,900,000 11,559,500,000 AVERAGE OF OP AND CLOSING ASSETS 12,442,200,000 PARTICULARS OF EXEMPT INVESTMENTS 31.03.2009 31.03. 2008 6.75% GOVERNMENT OF INDIA TAX FREE BONDS 6,204,630 ICICI BANK LIMITED 2,135,410 2,135,410 TOTAL 2,135,410 8,340,040 AVERAGE INVESTMENTS 5,237,725 48. SINCE TOTAL EXPENSES DISALLOWABLE UNDER SECTIO N 14A WORKS OUT TO RS. 29,74,601/- (RS.29,36,078 UNDER RULE 8D(2)(I), + RS.12,334/- U NDER RULE 8D(2)(II) + AND RS.26,189/- UNDER RULE 8D(2)(III)) AND SINCE ASSESS EE HAS ALREADY SUO MOTTO ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 34 DISALLOWED RS.2,41,131/- THE BALANCE AMOUNT OF RS.2 7,33,470/- WAS DISALLOWED BY THE AO AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 49. BEFORE THE DRP THE ASSESSEE SUBMITTED THAT THE RE WAS NO BORROWED FUNDS ON WHICH INTEREST WAS PAID THAT WAS USED TO MAKE INVES TMENTS WHICH YIELDED TAX PAYABLE INCOME AND THAT THE ENTIRE INVESTMENTS WERE MADE OU T OF ASSESSEES OWN FUNDS. THE ASSESSEE ACCORDINGLY PRAYED THAT THERE CAN BE NO DI SALLOWANCE OF INTEREST EXPENSES IN TERMS OF RULE 8D(2)(I) & (II) OF THE RULES. AS FAR A DISALLOWANCE OF EXPENSES UNDER RULE 8D(2)(III) IS CONCERNED THE ASSESSEE SUBMITTE D THAT THE MANNER OF ESTIMATION OF OPERATING COST FOR EARNING TAX FREE INCOME AND THE MANNER OF DETERMINATION OF MAN POWER COST TO EARN TAX FREE INCOME AS DONE BY THE A SSESSEE WAS REASONABLE AND THE COMPUTATION DONE BY THE AO WAS ARBITRARY. 50. THE ABOVE ARGUMENT FOUND FAVOUR WITH CIT(A) AN D THE DRP DELETED THE ADDITION MADE BY AO OBSERVING AS FOLLOWS :- 4.5 THE AO HAS TAKEN THE HELP OF THE METHOD OF CO MPUTATION MADE BY THE ASSESSEE AND MERELY ENHANCED THE AMOUNT OF. OPERATI NG COST FROM RS. 20,000 PER MONTH TO RS.1,00,000 PER MONTH AND DISREGARDED THE BIFURCATION OF SALARY COST ATTRIBUTABLE TO TAXABLE INCOME AND THAT ATTRIBUTABL E TO NON-TAXABLE INCOME. THIS SHOWS THAT THE AO HAS NOT DISPUTED THE METHOD OF CO MPUTATION MADE BY THE ASSESSEE. IN THIS REGARD, THE AO IS NOT SATISFIED W ITH THE COMPUTATION MADE BY THE ASSESSEE, THEN HE HAS TO GIVE COGENT REASONS FOR TH E SAME. MERELY STATING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE .CLAIM WOULD NOT SUFFICE. 4.6: FURTHER, WHILE APPLYING RULE 8D, ONLY UNALLOCA BLE INTEREST EXPENSE NEEDS TO BE TAKEN INTO ACCOUNT FOR COMPUTING DISALLOWANCE U/ S 14A. HOWEVER; THE AO ERRED IN ALLOCATING THE INTEREST EXPENSES TO THE E XEMPT INCOME EARNED. WHEREAS THERE WERE NO INTEREST EXPENSES INCURRED BY THE AS SESSEE DURING THE F.Y. 2008- 09. THE AMOUNT DISCLOSED AS INTEREST WAS MAINLY ON ACCOUNT OF BILL DISCOUNTING CHARGES AND CHEQUE COLLECTION CHARGES PAID TO THE B ANKS FOR CONDUCTING THE BUSINESS OPERATIONS OF THE ASSESSEE. 4.7. IN VIEW OF THE AFORESAID, APPLICATION OF RULE 8D IS NOT WARRANTED AND DIRECTION IS GIVEN TO THE AO TO ACCEPT THE COMPUTAT ION OF ASSESSEE. ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 35 51. AGGRIEVED BY THE ORDER OF DRP THE REVENUE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. THE LD. DR REITERATED THE STAND OF THE R EVENUE AS REFLECTED IN GROUND NO.1. 52. WE FIND IN THE LIGHT OF THE ADMITTED FACTUAL POSITION THAT NO LOAN FUNDS WERE IN THE BOOKS OF ACCOUNTS OF THE COMPANY, THERE CANNOT BE A NY QUESTION OF PAYMENT OF INTEREST AGAINST THE LOAN FUNDS AND CONSEQUENTLY DISALLOWANC E OF INTEREST EXPENSES IN TERMS OF RULE 8D(2)(I) OR (II) OF THE RULES. SINCE THERE IS NO UNALLOCABLE INTEREST THE DRP HAS RIGHTLY HELD THAT NO INTEREST EXPENSES CAN BE DISAL LOWED. WE FIND NO GROUNDS TO INTERFERE WITH THE ORDER OF THE DRP. CONSEQUENTLY G ROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. 53. AS FAR AS GROUND NO.2 RAISED BY THE REVENUE IS CONCERNED THE FACTS ARE THAT THE ASSESSEE CLAIMED DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF OF A SUM OF RS.3,24,04,575/-. THE ASSESSEE FILED PARTY-WISE BRE AK UP OF THE BAD DEBTS WRITTEN OFF DURING THE PREVIOUS YEAR. THE AO HOWEVER DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBTS FOR THE REASON TH AT THE ASSESSEE FAILED TO PROVIDE THE EVIDENCE IN SUPPORT OF WRITE OFF OF BAD DEBTS. IN O THER WORDS, THE AO WAS OF THE VIEW THAT THE DEBT IN QUESTION HAS NOT BEEN ESTABLISHED BY THE ASSESSEE TO HAVE BECOME BAD AND THEREFORE DEDUCTION ON ACCOUNT OF BAD DEBTS WRI TTEN OFF CANNOT BE ALLOWED. 54. ON OBJECTIONS BY THE ASSESSEE AGAINST THE ABOV E ORDER OF THE AO, THE DRP ALLOWED THE CLAIM OF THE ASSESSEE OBSERVING AS FOLL OWS :- 6.2. WITH THE AMENDMENT TO 36(1)(VII) AND 36(2) VI DE DIRECT TAX LAWS (AMENDMENT) ACT, 1987, THERE IS NO MORE REQUIREMENT TO PROVE THAT THE DEBT HAS ACTUALLY GONE BAD. IT IS ENOUGH IN CASE THE DEBTS A RE WRITTEN OFF AS BAD IN THE ACCOUNT OF THE ASSESSEE. 6.3. FURTHER, ATTENTION IS INVITED TOWARD CIRCULAR NO.551 DATED 23-01-1990 (1990) 183 ITR ST 37 ISSUED BY CBDT WHEREIN THE PROVISIONS OF SECTION 36(1)(VII) WAS EXPLAINED POST THE AMENDMENT BROUGHT VIDE DIRECT TA X LAWS (AMENDMENT)ACT, 1987. THE CIRCULAR READS AS UNDER : AMENDMENTS TO SECTIONS 36(1)(VII) AND 36(2) TO RATI ONALISE PROVISIONS REGARDING ALLOWABILITY OF BAD DEBTS - THE OLD PROVISIONS OF CLAUSE (VII) OF SUB-SECTION (1) READ WITH SUBSECTIO N (2) OF THE SECTION LAID DOWN CONDITIONS NECESSARY FOR ALLOWABILITY OF BAD D EBT. IT WAS PROVIDED ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 36 THAT THE DEBT MUST BE ESTABLISHED TO HAVE BECOME BA D IN THE PREVIOUS YEAR. THIS LED TO ENORMOUS LITIGATION ON THE QUESTI ON OF ALLOWABILITY OF BAD DEBT IN A PARTICULAR YEAR, BECAUSE THE BAD DEBT WAS NOT NECESSARILY ALLOWED BY THE ASSESSING OFFICER IN THE YEAR IN WHI CH THE SAME HAD BEEN WRITTEN OFF ON THE GROUND THAT THE DEBT WAS NOT EST ABLISHED TO HAVE BECOME BAD IN THAT YEAR . IN ORDER TO ELIMINATE THE DISPUTES IN THE MATTER OF DETERMINING THE YEAR IN WHICH A BAD DEBT CAN BE ALLOWED AND ALSO TO RATIONALISE THE PROVISIONS, THE AMENDING ACT, 1987 HAS AMENDED CLAUSE (VII) OF SUBSECTION (1) AND CLAUSE (I) OF SUB-SECTI ON (2) OF THE SECTION TO PROVIDE THAT THE CLAIM FOR THE BAD DEBT WILL BE ALLOWED IN THE YEAR IN WHICH SUCH A BAD DEBT HAS BEEN WRITTEN OFF AS IRREC OVERABLE IN THE ACCOUNTS OF THE ASSESSEE. 6.4. IN AS MUCH AS THE ASSESSEE IN THE ANNUAL ACCO UNTS FOR FY 2008-09 HAS WRITTEN OFF AN AMOUNT OF RS.3,24,04,575/- AS BAD DE BTS WHICH WAS CLAIMED IN THE RETURN OF INCOME THE AO IS DIRECTED TO ALLOW THE CL AIM OF THE ASSESSEE AS IT IS IN ACCORDANCE WITH THE LAW. 55. AGGRIEVED BY THE ORDER OF DRP THE REVENUE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. THE LD.DR REITERATED THE STAND OF THE RE VENUE AS REFLECTED IN THE GROUNDS OF APPEAL. WE ARE OF THE VIEW THAT THERE IS NO MERIT I N GROUND NO.2 RAISED BY THE REVENUE. THE DRP HAS PLACED RELIANCE ON THE AMENDMENT TO THE LAW AND THE CBDT CIRCULAR. THE AMENDMENT TO THE LAW AND CBDT CIRCULAR WHICH WE RE CONSIDERED BY THE DRP WAS ALSO CONSIDERED BY THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. VS CIT 323 ITR 397 (SC) AND IT WAS HELD BY THE HONBLE SUP REME COURT THAT W.E.F. 01.04.1987 IT IS NO LONGER NECESSARY FOR A CLAIM FO R DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF THAT THE ASSESSEE SHOULD ESTABLISH THAT THE DEBT IN QUESTION HAS BECOME BAD. IN VIEW OF THE ABOVE LEGAL POSITION WE DISMISS GROU ND NO.2 RAISED BY THE REVENUE. 56. GROUND NO.3 HAS ALREADY BEEN DECIDED WHILE DEC IDING THE TRANSFER PRICING ISSUES IN THE EARLIER PART OF THIS ORDER. 57. AS FAR AS THE ADDITIONAL GROUND OF APPEAL RAIS ED BY THE REVENUE IS CONCERNED THE FACTS ARE THAT THE ASSESSEE SOLD ITS RUBBER CHEMICA L BUSINESS TO M/S PMC RUBBER CHEMICALS ON SLUMP SALE BASIS DURING THE PREVIOUS Y EAR RELEVANT TO AY 2006-07. HOWEVER, IN THE ORDER PASSED U/S 143(3) FOR AY 2006 -07, THE ASSESSING OFFICER DID ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 37 NOT ACCEPT THAT THERE WAS A SLUM SALE AND TREATED T HE SALE AS AN ITEM WISE SALE OF ASSETS U/S 41(2) OF THE ACT. CONSEQUENTLY, THE ASSESSING O FFICER DID NOT ACCEPT THE VALUE OF OPENING WRITTEN DOWN VALUE (WDV) OF BLOCK OF ASSETS AS CLAIMED BY THE ASSESSEE, WHICH HE DETERMINED AT A LOWER FIGURE CONSEQUENT TO HIS FINDING THAT THERE WAS ITEMISED SALE OF ASSETS AND NOT A SLUMP SALE. THE ACTION OF THE AO RESULTED IN DISALLOWANCE OF DEPRECIATION IN AY 2006-07 AND CONS EQUENTLY THE WDV OF THE DEPRECIABLE ASSETS ALSO WAS SHOWN AT A LESSER FIGUR E. THE DEPRECIATION CLAIMED BY THE ASSESSEE IN THIS YEAR AS PER THE RETURN OF INCOME W AS ALSO SUBSTANTIALLY REDUCED BECAUSE OF THE LOWER WDV ON WHICH DEPRECIATION WAS TO BE ALLOWED AS A CONSEQUENCE OF THE ACTION OF THE AO IN AY 2006-07. THIS RESU LTED IN LOWER ALLOWANCE OF INCOME- TAX DEPRECIATION AMOUNTING TO RS. 2,60,93,160/-. 58. BEFORE DRP, IT TRANSPIRED THAT AGAINST THE ORD ER OF THE AO FOR AY 2006-07 ON THE ISSUE, AN APPEAL WAS FILED BEFORE THE CIT(A). IN T HE APPEAL FOR AY 2006-07, LD. COMMISSIONER OF INCOME-TAX (APPEALS) HAS PASSED THE ORDER DATED 11-03-2013 U/S 251 FOR AY 2006-07 WHEREIN THE TREATMENT ADOPTED BY THE ASSESSEE THAT THE SALE OF THE UNIT WAS A SLUMP SALE WAS ACCEPTED. BASED ON HIS OW N ORDER FOR AY 2006-07, THE LD. CIT(A) HAS ALSO GRANTED RELIEF TO THE ASSESSEE FOR AY 2007-08, IN WHICH YEAR ADDITION SIMILAR TO THE ONE MADE IN THE PRESENT AY WAS MADE BY THE AO. THE DRP HELD THAT THE CLAIM OF THE ASSESEE IS ALLOWABLE AND THE AO WA S DIRECTED TO ALLOW DEPRECIATION ACCORDINGLY. 59. AGGRIEVED BY THE ORDER OF DRP THE REVENUE HAS RAISED THE ADDITIONAL GROUNDS OF APPEAL BEFORE THE TRIBUNAL. 60. THE ADDITIONAL GROUNDS OF APPEAL IS ADMITTED F OR ADJUDICATION AS IT ARISES OUT OF THE ORDER OF DRP /AO. AS RIGHTLY OBSERVED BY THE DR P THE DETERMINATION OF DEPRECIATION IS DEPENDENT ON THE OUTCOME OF THE VIE W TAKEN BY THE REVENUE FOR A.Y.2006-07 TREATING THE SALE OF RUBBER CHEMICAL BU SINESS AS NOT SLUMP SALE. IN VIEW OF THE DECISION OF CIT(A) FOR A.Y.2006-07 HOLDING T HAT THE SALE IN QUESTION WAS A ITA NOS.531&335/KOL/2014-M/S. AKZO NOBEL INDIA LIMI TED A.Y.2009-10 38 SLUMP SALE, THE DISALLOWANCE OF DEPRECIATION BY THE AO IN THE PRESENT A.Y.2009-10 WHICH WAS A FALL OUT OF THE FINDING OF THE AO IN AY 2006-07 WAS RIGHTLY DELETED BY DRP. WE HOWEVER WISH TO ADD THAT THIS ISSUE IS CONS EQUENTIAL AND DEPENDENT ON THE ULTIMATE OUTCOME ON THE QUESTION WHETHER THE SAME I S A SLUMP SALE OR NOT IN A.Y.2006-07. WITH THESE OBSERVATIONS WE DISMISS THE ADDITIONAL GROUND OF APPEAL RAISED BY THE REVENUE. 61. IN THE RESULT APPEAL BY THE REVENUE IS DISMISS ED. 62. IN THE RESULT, APPEAL BY THE ASSESSEE IS ALLOW ED AND APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 03.05.2017. SD/- SD/- [DR.ARJUN LAL SAINI] [ N.V.VASUDEVA N ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 03.05.2017. [RG PS] COPY OF THE ORDER FORWARDED TO: 1. M/S. AKZO NOBEL INDIA LIMITED, GEETANJALI APARTM ENT, 1 ST FLOOR, 8-B, MIDDLETON STREET, KOLKATA-700071. 2. D.C.I.T., CIRCLE-10, KOLKATA. 3. DRP CELL, KOLKATA 4. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSTT.REGISTRAR, ITAT, KOLKATA BENCHES