DCIT, New Delhi V. M/s Allied Domecq Spirits & Wine India Pvt. Ltd., New Delhi

ITA 54/DEL/2011

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3321 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 27-06-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 05-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ANUBHAV RAS
• Keywords: Depreciation; Transfer pricing; International transaction; Fair market value
• Section: 92C; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES I-2 : DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA.NO.54/DEL./2011 ASSESSMENT YEAR 2005-2006 THE DEPUTY CIT, CIRCLE-2(1), ROOM NO.398D, C.R. BUILDING, NEW DELHI. VS. M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD. (NOW M/S. BEAM GLOBAL SPIRITS & WINE INDIA PVT. LTD.,) 14-A, S-3 LEVEL INTERNATIONAL TRADE TOWER, NEHRU PLACE, NEW DELHI 110 019. PAN AAACA1614R (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI SANJAY KUMAR YADAV, SR. D.R. FOR ASSESSEE : SHRI RAVI SHARMA, ADVOCATE & SHRI ANUBHAV RASTOGI, ADVOCATE DATE OF HEARING : 28.02.2018 DATE OF PRONOUNCEMENT : 09.03.2018 ORDER PER BHAVNESH SAINI, J.M. THIS APPEAL BY REVENUE HAS BEEN DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-XX, NEW DELHI, DATED 29 TH OCTOBER, 2010, FOR THE A.Y. 2005-2006, ON THE FOLLOWING GROUNDS : 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DE LETING ADDITION OF RS.2,31,23,800/- MADE ON ACCOUNT OF 2 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI DIFFERENCE IN ARM'S LENGTH PRICE IGNORING THAT : (A) VALUE OF INTERNATIONAL TRANSACTIONS IS OUTSIDE THE (+ 5%) TOLERANCE BAND, THEREFORE, THE ASSESSEE IS NOT ENTITLED TO THE BENEFIT OF PROVISO TO SUB-SECTION ( 2) TO SECTION 92C OF THE I.T. ACT. (B) THE REVENUE AND EXPENSES RELATED TO THE MANUFACTURING SEGMENT OF THE COMPANY HAS TO BE CULLED OUT AFTER SEPARATING FROM OVERALL FINANCIAL RESULT OF THE COMPANY 2. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) O F APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE A.O. PASSED THE ASSESSMENT ORDER UNDER SECTION 143(3) DATED 18 TH DECEMBER, 2008 WHEREBY THE A.O. DETERMINED THE TOTA L ASSESSED INCOME OF RS.9,63,50,800/- BY MAKING THE DISALLOWANCES/ADDITIONS TO THE RETURNED INCOME OF RS.5,46,81,880/-. ONE OF THE ADDITION WAS ON ACCOUN T OF ARMS LENGTH PRICE (ALP) OF RS.2,31,23,800/-. DURING TH E ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THE FOLLOW ING INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE DURING FINANCIAL YEAR UNDER APPEAL AS REPORTED IN FORM-3CE B AND 3 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI DETAILS FILED BY THE ASSESSEE ALONG WITH THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION. 2.1. THE A.O. THEN REFERRED ASSESSEES CASE TO TPO UNDER SECTION 92CA(1) OF THE I.T. ACT, TO DETERMINE THE A LP IN RESPECT OF THESE INTERNATIONAL TRANSACTIONS AND AN ADJUSTME NT OF RS.2,31,23,800/- WAS MADE BY THE TPO IN RELATION TO THE INTERNATIONAL TRANSACTIONS PERTAINING TO PURCHASE O F CAP FROM A.E. WHILE SO HOLDING, THE TPO - CLUBBED THE BOTTLED IN INDIA SCOTCH (BIIS) AND INDIA MADE FOREIGN LIQUOR (IMFL) SEGMENTS AND COMPARED THE NET PROFIT MARGIN (NPM) OF THE COMBINED MANUFACTURING OPERATIONS OF THE APPELLANT S. NO. PARTICULARS VALUE OF TRANSACTIONS (IN RS.) 1. . PURCHASE OF COMPOUND ALCOHOLIC PREPARATION (CAP) 7,50,42,300/- 2. PROVISION OF MARKET SUPPORT SERVICES 1,09,14,596/- 3. REIMBURSEMENT OF EXPENSES RECEIVED 1,13,07,791/- 4. REIMBURSEMENT OF EXPENSES PAID 225,976/- 5. REIMBURSEMENT OF EXPENSES PAID 503,353/- 4 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI WITH THOSE OF BROADLY COMPARABLE INDEPENDENT COMPANIES. THE TPO ALSO REJECTED 5 COMPANIES OUT OF THE SET OF 12 COMPARABLE COMPANIES SELECTED BY THE APPELLANT FOR BENCHMARKING THE ABOVE TRANSACTION. USED THE FINAL YEAR (FY 2004-05) FINANCIAL DATA FOR THE PURPOSE OF ARRIVING AT AN ARMS LENGTH PRICE FO R THE ABOVE TRANSACTION. 2.2. NO ADVERSE INFERENCE HAS BEEN DRAWN BY TH E TPO WITH REGARD TO INTERNATIONAL TRANSACTIONS RELATED T O MARKET SUPPORT SERVICES AND REIMBURSEMENT OF EXPENSES. 3. THE ASSESSEE AGGRIEVED AGAINST THE FINDINGS OF THE A.O./TPO, FILED APPEAL BEFORE LD. CIT(A) AND IN GRO UND NOS. 3 TO 5, THE ASSESSEE CHALLENGED THE ADDITION OF RS.2, 31,23,800/- FOR DETERMINING THE ALP ON THE BASIS OF TPOS ORDER BY CONTENDING THAT THE ADDITION IS WRONG, UNJUST AND O PPOSED TO THE EVIDENCE ON RECORD AND IS BASED ON SURMISES AND CONJECTURES. IT WAS ALSO CONTENDED THAT A.O. ERRED IN LAW AND 5 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI ON FACTS IN ACCEPTING TPOS OPERATING PROFIT MARGIN AT 7.78% AS AGAINST 6.02% DECLARED BY THE ASSESSEE. 3.1. THE LD. CIT(A) CONSIDERING THE EXPLANATION OF THE ASSESSEE AND FACTS OF THE CASE, FRAMED THE FOLLOWIN G ISSUES FOR ADJUDICATION. 1. WHETHER THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN RESPECT OF INTERNATIONAL TRANSACTION PERTAINING TO PURCHASE OF CAP FOLLOWING A SEGMENTAL APPROACH BY SEGREGATING MANUFACTURING OPERATIONS IN TO BIIS AND IMFL BUSINESS VERTICALS IS IN ACCORDANCE W ITH THE RELEVANT TRANSFER PRICING REGULATIONS ? 2. WHETHER THE INTERNATIONAL TRANSACTION OF THE APP ELLANT COMPLY WITH THE ARMS LENGTH STANDARD EVEN IF THE T POS APPROACH OF CLUBBING THE BIIS AND IMFL SEGMENT IS T O BE FOLLOWED FOR THE YEAR UNDER CONSIDERATION ? 3.2. THE LD. CIT(A) IN ORDER TO DECIDE THE ISSUE NOTED THAT IT HAS TO SEE BUSINESS MODEL, ASKED THE ASSESSEE TO GIVE POWER- POINT PRESENTATION, WHICH THE ASSESSEE GAVE ON 22 ND OCTOBER, 2010. THE SAME READS AS UNDER : 6 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI THE APPELLANT IS A WHOLLY-OWNED SUBSIDIARY OF ALLIE D DOMECQ SPIRITS & WINE (EUROPE) BV, NETHERLANDS. THE ULTIMATE PARENT COMPANY OF THE APPELLANT IS ALLIED DOMECQ PIC, UK. THE BUSINESS SEGMENTS UNDER WHICH THE APPE LLANT PROCESSES, BOTTLES AND SELLS LIQUOR IN INDIA COMPRI SE OF BIIS AND IMFL. UNDER THE BIIS SEGMENT, THE APPELLANT PROCESSES CAP IMPORTED BY IT FROM ITS AE, ALLIED DISTILLERIES LIM ITED, SCOTLAND (ALLIED SCOTLAND). THE CAP SO IMPORTED I S FURTHER PROCESSED BY THE APPELLANT INTO SCOTCH WHIS KEY BY WAY OF DILUTION INTO DESIRED ALCOHOLIC STRENGTH, BO TTLED AND SOLD IN INDIA UNDER THE BRAND NAME, TEACHERS SCOT CH, OLD SMUGGLER WHISKEY AND LONG JOHN. THE IMFL SEGMENT PERTAINS TO DOMESTIC BUSINESS OF T HE APPELLANT. THE IMFL IS MANUFACTURED FROM A PURIFIED FORM OF SPIRIT/ ALCOHOL CALLED THE EXTRA NEUTRAL ALCOHOL (ENA). THE ENA IS MANUFACTURED BY THE APPELLANT IN ITS OWN DISTILLERY IN BEHROR, DISTRICT ALWAR, STATE OF RAJA STHAN, 7 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI INDIA. THE IMFL IS SOLD BY THE APPELLANT UNDER THE BRAND NAMES OLD SMUGGLER RUM, OLD SMUGGLER GIN AND CURTIS NO. 1. THE IMFL IS ALSO MANUFACTURED AND BOTTLED BY THE APPELLANT ON A CONTRACT BASIS FOR SEAGRAM MANUFACTU RING PRIVATE LIMITED (SMPL) UNDER A TECHNICAL AND MARK ETING ASSISTANCE AGREEMENT (TMAA). THE IMFL SO MANUFACTURED AND BOTTLED IS SOLD BY THE APPELLANT U NDER THE LATTERS BRAND NAMES (ROYAL STAG, IMPERIAL BLUE , AND FLING VODKA). FOR THIS ACTIVITY, THE APPELLANT RECE IVES INCOME IN THE FORM OF A FIXED FEE ON NUMBER OF CASE S MANUFACTURED AND BOTTLED FOR SMPL. 3.3. IT WAS FURTHER EXPLAINED THAT FOR THE PURPOSE OF BENCHMARKING OF INTERNATIONAL TRANSACTIONS PERTAINI NG TO PURCHASE OF CAP FROM A.E, ASSESSEE HAS SEGREGATED I TS MANUFACTURING OPERATIONS INTO TWO DIFFERENT SEGMENT S ON THE BASIS OF THEIR FUNCTIONAL DIFFERENCES. THIS WAS ALS O STATED IN THE ASSESSEES NOTES TO ACCOUNTS IN THE AUDIT REPORT. ( 1) BOTTLED IN INDIA SCOTCH (BIIS) AND (2) INDIAN MADE FOREIGN L IQUOR 8 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI (IMFL). THE KEY INDICATIVE DIFFERENCE BETWEEN THE TWO BUSINESS SEGMENTS SUMMARIZED AS BELOW : THE RAW MATERIAL IMPORTED BY THE APPELLANT IS THE CAP WHICH IS MATURED UNDER THE CLIMATIC CONDITIONS OF SCOTLAND AND CANNOT BE MANUFACTURED IN INDIA. THEN, THE IMPORTED CAP IS FILTERED AND DILUTED FOR THE BOTTLING OF THE FINAL PRODUCT I.E. SCOTCH. THE MAIN ACTIVITY INVOLVED IN THE MANUFACTURE OF SCOTCH I.E. MANUFACTURING AND MATURING OF THE PRODUCT IS CARRIED OUT BY THE AE IN SCOTLAND. THE APPELLANT ONLY FILTERS, DILUTES (TO REACH THE DESIR ED ALCOHOL STRENGTH) AND BOTTLES THE PRODUCT (CAP) IN ORDER TO PRODUCE SCOTCH TO BE SOLD IN INDIA. THE DOMESTIC MANUFACTURING FUNCTION CONSISTS OF LOCAL PRODUCTION OF GRAIN- BASED EXTRA-NEUTRAL ALCO HOL WHICH DOES NOT REQUIRE RIGOROUS MATURING PROCESS AS IN THE CASE OF IMPORTED RAW MATERIAL. THE ENA IS DILUTED AND BLENDED (GIVEN FLAVOUR) TO PRODUCE IMFL . 9 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI THE MANUFACTURING/BOTTLING PROCESSES UNDERTAKEN BY THE APPELLANT IN THE RESPECTIVE BIIS AND IMFL SEGMENTS ARE DIFFERENT AND COMPLETELY DISTINCT. FURTHER, FOR THE BOTTLING OF SCOTCH THE APPELLANT D OES NOT REQUIRE HUGE PLANT AND MACHINERY SET-UP AS IS REQUIRED IN CASE OF DOMESTIC DISTILLATION AND BOTTL ING FUNCTION. THE BOTTLED SCOTCH IS A PREMIUM PRODUCT WHICH IS HIGHLY PRICED, AND MARKET OF THE PRODUCT IS VERY SM ALL AS COMPARED TO THAT OF THE IMFL DOMESTIC BUSINESS. THE TWO PRODUCTS (BIIS AND IMFL) ARE COMPLETELY DIFFERENT AND REPRESENT DISTINCT PRODUCT LINES. ALS O, THESE ARE SOLD UNDER DIFFERENT BRAND NAMES - O BIIS - TEACHERS(R) SCOTCH, OLD SMUGGLER WHISKEY AND LONG JOHN. O IMFL - OLD SMUGGLER RUM, OLD SMUGGLER GIN AND CURTIS NO. 1, ROYAL STAG, IMPERIAL BLUE, AND FLING VODKA. 10 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI FURTHER, THERE ARE NO INTERNATIONAL TRANSACTIONS WITH AES FOR PRODUCTION OF GRAIN BASED ALCOHOL AND IMFL. 3.4. TO EXPLAIN THE RATIONALE FOR SEGMENTAL ANALYS IS, THE ASSESSEE DRAWS ATTENTION TO THE DEFINITION OF TNMM AS MENTIONED IN RULE 10B(1)(E) OF THE I.T. RULES, 1962 AND SUBMITTED THAT THIS RULE REFERS TO NET PROFIT MARGI N REALISED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A CLASS OF SUCH TRANSACTIONS. THE KEY POINTS AS ENVISAGED IN T HE ABOVE RULE ARE NOTED BELOW : AN ANALYSIS SHOULD CONSIDER ONLY THE PROFITS OF THE ASSOCIATED ENTERPRISE THAT ARE ATTRIBUTABLE TO PARTICULAR CONTROLLED TRANSACTIONS. SIMILARLY, WHEN ANALYZING THE TRANSACTIONS BETWEEN THE INDEPENDENT ENTERPRISES TO THE EXTENT THEY ARE NEEDED, PROFITS ATTRIBUTABLE TO TRANSACTIONS THAT ARE NOT SIMILAR T O THE CONTROLLED TRANSACTIONS UNDER EXAMINATION SHOULD BE EXCLUDED FROM THE COMPARISON. 11 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI THE TNMM COMPARES THE PROFITABILITY OF THE CONTROLLED TRANSACTION, MEASURED IN RELATION TO (1) COSTS OR SALES OR (2) ASSETS, TO THE PROFITABILITY OF THE UNCONTROLLED TRANSACTION IN SIMILAR CIRCUMSTANCES. THE FOCUS IS ON TRANSACTIONS RATHER THAN BUSINESS LINE OR THE OPERATING INCOME OF THE COMPANY. THE EXPRESSION IN RELATION TO MEANS IN CONNECTI ON WITH AND IMPLIES CONNECTION BETWEEN A THING IN RELATION TO SOMETHING ELSE. THUS, THERE SHOULD BE RELATIONSHIP BETWEEN PROFIT AND ASSETS OR BETWEEN PROFIT AND COSTS OR SALES. THAT RELATIONSHIP MAY BE EXPRESSED AS A RATIO BETWEEN NET PROFIT TO ASSETS, OR BETWEEN PROFIT AND COSTS OR SALES. RELIANCE IS ALSO PLACED ON THE DECISION OF E-GAIN COMMUNICATION (P) LTD. VS. ITO [(2008) 23 SOT 385 (PUNE)] IN WHICH IT WAS HELD AS UNDER : IT IS THUS EVIDENT FROM THAT BOTH OECD GUIDELINES AND US REGULATIONS INSIST ON NECESSARY ADJUSTMENTS FOR 12 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI DIFFERENCE ON ISSUES AFFECTING PROFITABILITY. THE TRANSACTIONAL NET MARGIN METHOD MAY AFFORD PRACTICA L SOLUTION TO OTHERWISE INSOLUBLE TRANSFER PRICING PROBLEMS IF IS USED SENSIBLY AND WITH APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES OF THE TYPE REFERRED TO ABOVE. SIMILARITIES AND DISSIMILARITIES OF THE TRANSACTIONS UNDER COMPARISON ARE TO BE SCRUTINIZED TO DIFFERENCES OF SITUATIONS, CIRCUMSTANCES AND ENVIRONMENT. ANY DIFFERENCE WHICH MATERIALLY AFFECT S MARKET VALUE IS TO BE GIVEN A SERIOUS CONSIDERATION . THE DEGREE OF COMPARABILITY BETWEEN THE TESTED PART Y AND THE UNCONTROLLED TAXPAYER WITH PARAMETERS LIKE NATURE OR LINE OF BUSINESS, PRODUCT OR SERVICE MARK ET , THE ASSETS COMPOSITION EMPLOYED, THE SIZE AND SCOPE OF OPERATION, THE STAGE OF BUSINESS OR PRODUCT CYCLE A RE REQUIRED TO BE SEEN. IN CASE OF UNCONTROLLED ENTITY, 13 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI OPERATIVE INCOME ATTRIBUTABLE TO ASSETS OTHER THAN ASSETS UNDER CONSIDERATION IS TO BE ADJUSTED BEFORE TAKING TRANSACTION FOR WORKING MEAN MARGIN OF PROFI T. INCOME AND EXPENSES OF THE SEGMENT OF TOTAL BUSINES S MAG HAVE TO BE CONSIDERED. DEPENDING ON FACTS AND CIRCUMSTANCES OF THE CASE, IT MAY ALSO BE APPROPRI ATE TO ADJUST THE APPROPRIATE PROFIT OF TESTED PARTY AN D COMPARABLE PARTIES. FURTHER, SUB-RULE (3) OF RULE 10B OF THE RULES, REQUIRES THAT THE DIFFERENCE BETWEEN CONTROLLED AND UNCONTROLLED TRANSACTIONS IS TO BE TAKEN INTO ACCOU NT FOR DEALING AS UNDER:- '(3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF- (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE 14 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. THUS, THE RULE ENVISAGES THAT THE NET PROFIT MARGIN REALISED BY THE TAXPAYER FROM THE INTERNATIONAL TRANSACTIONS NEEDS TO BE COMPARED WITH THE NET PROFIT MARGIN OF THE COMPARABLES. AS DISCUSSED IN PARA ABOVE NOT ONLY THERE ARE FUNCTIONAL DIFFERENCES IN THE BIIS AND IMFL SEGMENT BUT ALSO THE INTERNATIONAL TRANSACTION PERTAINING T O PURCHASE OF CAP PERTAINS TO THE BIIS OPERATIONS OF THE APPELLANT. SINCE THE IMFL SEGMENT DOES NOT INVOLVE ANY INTERNATIONAL TRANSACTIONS, THE EXCLUSION OF THE SAID SEGMENT FOR THE PURPOSE OF ANALYSIS IS CONSISTENT WITH THE RULES. 15 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI 3.5. THE ASSESSEE ALSO REFERRED TO OECD TRANSFER P RICING GUIDELINES JULY, 2010, WHICH ADVOCATES THE SAME PHI LOSOPHY FOR APPLICATION OF TNMM. PARA 3.9 OF OECD GUIDELINE S READS AS FOLLOWS : 3.9. IDEALLY, IN ORDER TO ARRIVE AT THE MOST PRECISE APPROXIMATION OF FAIR MARKET VALUE, THE ARM'S LENGTH PRINCIPLE SHOULD BE APPLIED ON A TRANSACTION-BY-TRANSACTION BASIS . IN ADDITION, PARA 2.58 OF THE OECD GUIDELINES STATE S: 2.58 THE TRANSACTIONAL NET MARGIN METHOD EXAMINES THE NET PROFIT MARGIN RELATIVE TO AN APPROPRIATE BASE (E.G. COSTS, SALES, ASSETS) THAT A TAXPAYER REALIZES FROM A CONTROLLED TRANSACTION 9 3.6. THE ASSESSEE AGAIN RELIED UPON THE ORDER OF T HE PUNE TRIBUNAL IN THE CASE OF E-GAIN COMMUNICATION (P) LTD., VS. ITO (2008) 23 SOT 385 (PUNE) (SUPRA), IN WHICH IT WAS FURTHER HELD IF THE DIFFERENCES ARE SUCH THAT THEY CANNOT BE SUBJECTED TO EVALUATION, THEN TRANSACTION MAY HAVE TO BE 16 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI ELIMINATED FOR THE PURPOSES OF COMPARISON. IT WAS ALSO SUBMITTED THAT ITAT, MUMBAI BENCH HAS AFFIRMED IN T HE CASE OF ACIT VS. TEJ DIAM 37 SOT 341 THAT WHILE APPLYING TNMM, COMPARISON OF ONLY NET PROFIT MARGINS REALISED BY A N ENTERPRISE FROM AN INTERNATIONAL TRANSACTION CAN BE CONSIDERED WHILE MAKING COMPARISON WITH THE PROFIT MARGIN OF THE COM PARABLES. THE ASSESSEE ALSO RELIED UPON ORDER OF ITAT, MUMBAI BENCH IN THE CASE OF UCB INDIA (P) LTD., VS. ACIT 121 ITD 13 1 IN WHICH IT WAS HELD AS UNDER : A PLAIN READING OF THE ABOVE SHOWS THAT TNMM REQUIRES COMPARISON OF NET PROFIT MARGINS REALISED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR AN AGGREGATE OF INTERNATIONAL TRANSACTIONS AND NOT COMPARISONS OF OPERATING MARGINS OF ENTERPRISES. FO R ARRIVING AT THIS CONCLUSION, WE DREW STRENGTH FROM THE DECISION OF MUMBAI L BENCH OF THE TRIBUNAL IN THE CASE OF UCB INDIA (P.) LTD. V. ASSTT. CIT [2009] 12 1 ITD 1311 WHERE IT IS HELD THAT SECTION 92C READ WITH RU LE 17 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI 10B(1)( E) DEALS WITH TRANSACTIONS NET MARGIN METHO D (TNMM) AND IT REFERS TO ONLY NET PROFIT MARGIN REAL ISED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A CLASS OF SUCH TRANSACTION, BUT NOT OPERATIONAL MARGINS OF ENTERPRISES AS A WHOLE. 3.7. SIMILAR DECISION HAS BEEN GIVEN IN THE CASE O F TWINKLE DIAMOND 2010-TII-09-MUM WHEREIN THE MUMBAI BENCH OF THE TRIBUNAL HELD THAT TNMM SHOULD NOT BE APPLIED TO COMPARE ENTERPRISE LEVEL PROFITS. IN THIS CONTEXT RELIANCE WAS ALSO PLACED BY THE APPELLANT ON THE FOLLOWING JUDGM ENTS: (I) DEVELOPMENT CONSULTANTS (P) LTD. VS. DCIT 115 TTJ 577 (KOL). (II) STAR INDIA LIMITED (ITA NO.3846/3585/M/2006) (MUM). 3.8. IT WAS FURTHER SUBMITTED THAT FOR THE PURPOSE OF BENCHMARKING ITS TRANSACTIONS, THE ASSESSEE SELECTE D 12 BROADLY COMPARABLE INDEPENDENT COMPANIES WITH A THR EE YEARS WEIGHTED AVERAGE ARITHMETIC MEAN NPM OF 5.18 %. SINCE THE ASSESSEE EARNED AN NPM OF 12.21% FROM ITS MANUF ACTURING 18 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI FUNCTION PERTAINING TO THE BIIS SEGMENT AS SHOWN BE LOW, THE ASSESSEE DETERMINED THE INTERNATIONAL TRANSACTION P ERTAINING TO PURCHASE OF CAP TO BE AT ARMS LENGTH. NET PROFIT MARGIN (NPM) COMPUTATION PARTICULARS FY 2004-05 INCOME AMT (RS.) NET SALES (NET OF EXCISE DUTY) 511,752,721 OTHER INCOME 835,896 TOTAL INCOME 512,588,617 EXPENDITURE CHANGE IN STOCK (5,103,694) MANUFACTURING EXPENSES 225,034,913 PERSONNEL EXPENSES 29,797,653 NET PROFIT MARGIN (NPM) COMPUTATION PARTICULARS FY 2004 - 05 ADMINISTRATIVE EXPENSES 30,393,463 SELLING & DISTRIBUTION EXPENSES 162,238,311 BANK CHARGES 2,333,240 DEPRECIATION 5,562,673 EXCHANGE DIFFERENCE (NET) (256,690) TOTAL EXPENDITURE 449,999,869 NET OPERATING PROFIT 62,588,748 NPM ( PERCENT) (NET OPERATING PROFIT / TOTAL INCOME ) * 100 12.21% 19 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI 3.9. THE ASSESSEE FOLLOWS A CONSISTENT APPROACH FO R SEGMENTATION OF EXPENSES BETWEEN THE SEGMENTS PERTA INING TO BIIS AND IMFL. SEGMENTAL PROFIT AND LOSS ACCOUNT OF THE A SSESSEE, ALONG WITH THE UNDERLYING ALLOCATION KEYS USED FOR SEGREG ATING REVENUE AND EXPENSES FOR THE YEAR UNDER CONSIDERATION WERE FILE D. THE EXPENSES HAVE PRIMARILY BEEN ALLOCATED EITHER ON THE BASIS O F GROSS REVENUE IN THE RESPECTIVE SEGMENTS I.E., SALES RATIO OR NUMBER OF CASES PRODUCED I.E., BOTTLING RATIO. FURTHER, DIRECT EXPEN SES THAT CAN BE SPECIFICALLY IDENTIFIED WITH BUSINESS SEGMENTS HAVE BEEN CHARGED ACCORDINGLY ON AN ACTUAL BASIS. THE ASSESSEE FURTHE R SUBMITTED THAT THE ALLOCATION OF KEYS USED FOR SEGREGATION ARE ROB UST AND APPLIED CONSISTENTLY ON A YEAR-ON-YEAR BASIS. THE TPO, WHIL E UNDERTAKING THE IMPUGNED TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTION PERTAINING TO PURCHASE OF CAP, CLUBBED THE BIIS AND THE IMFL (DOMESTIC) SEGMENTS OF THE ASSESSEE. THE ENTITY WIDE NPM OF 6.02% ARRIVED IN THE MANUFACTURING SEGMENT (BIIS + I MFL) WAS COMPARED WITH THE ARITHMETIC MEAN OF THE YEAR (F.Y.20 04-05) UPDATED NPM OF 7.78% OF 7 BROADLY COMPARABLE COMPANI ES WHILE ARRIVING AT AN ADJUSTMENT OF RS.2,31,23,800 FOR THE YEAR UNDER CONSIDERATION. THE SAME IS REPRODUCED AS UNDER : 20 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI NPM % FOR COMPARABLE COMPANIES FOR FY 2004-05 S.NO. NAME OF THE COMPANY NPM % FOR FY 2004-05 TPOS SET OF COMPANIES 1 ASSOCIATED ALCOHOLS & BREWERIES LIMITED (4.22) 2 BRIHAN MAHARSHTRA SUGAR SYNDICATE LIMITED 4.61 3 GM BREWERIES LIMITED 1.87 4 IFB AGRO INDUSTRIES LIMITED 1.40 5 RADICO KHAITAN LIMITED 12.83 6 SRI RAMA DISTILLERIES LIMITED 34.76 7 TILAKNAGAR INDUSTRIES LIMITED 3.20 8 ARTHOS BREWERIES LIMITED X 9 BLOSSOM INDUSTRIES LIMITED X 10 KHODAY INDIA LIMITED X 11 RAJASTHAN STATE GANGANAGAR SUGAR MILLS LIMITED X 12 THIRU ARRORAN SUGARS LIMITED X ARITHMETIC MEAN 7.78% TRANSFER PRICING ADJUSTMENT PARTICULARS AMOUNT (RS.) OPERATING INCOME (MANUFACTURING - BUS + IMFL) 132,04,08,637 OPERATING EXPENDITURE 124,08,04,645 NET PROFIT 7,96,03,992 NPM % 6.02% REVENUE RELATED TO MANUFACTURING 132,04,08,637 NPM AT 7.78% 10,27,27,792 NPM EARNED 7,96,03,992 DIFFERENCE (TRANSFER PRICING ADJUSTMENT) 2,31,23,800 21 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI 3.10 FURTHER, IN THE POWER-POINT PRESENTATION, THE ASSESSEE DEPICTED THE T.P. ADJUSTMENT ON SEGMENTAL ANALYSIS BIIS AT 5.18% AND AS PER TPO BY CLUBBING BIIS AND IMFL SEGMENTS CL UBBED TOGETHER AT 7.78%. IT WAS, THEREFORE, SUBMITTED THAT WHILE CLUBBING THE ABOVE TWO SEGMENTS, TPO OBSERVED THAT BIIS AND IMFL ARE NOT DISTINCT AND THAT THE RISK AND REWARD OF THE ENTERP RISE MANUFACTURING OPERATIONS AS A WHOLE IS UNIFORM. THE TPO HAS PLACED RELIANCE ON THE AUDITED ACCOUNTS OF THE ASSE SSEE, ACCORDING TO WHICH, NO SEGMENTAL ACCOUNTS WERE BEIN G MAINTAINED BY THE ASSESSEE. THE TPO OBSERVED THAT V IDE NOTE 22 TO THE NOTES TO ACCOUNTS, THE AUDITORS HAVE SPEC IFICALLY MENTIONED THAT - THE COMPANY PRIMARILY MANUFACTURES AND SELLS ALCOHOLIC BEVERAGES AND RELATED PRODUCTS. ACCORDINGLY, THE COMPANY HAS ONLY ALCOHOLIC BEVERAGES AS ITS BUSINESS SEGMENT. FURTHER, THE ECONOMIC ENVIRONMENT IN WHICH THE COMPANY OPERATES IS SIGNIFICANTLY SIMILAR AND IS NOT SUBJEC T TO 22 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI MATERIALLY DIFFERENT RISKS AND RETURNS ACCORDINGLY, NO SEPARATE DISCLOSURES ARE NECESSARY UNDER THE ACCOUNTING STANDARD 17 (SEGMENT REPORTING) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. 3.11. THE TPO FURTHER RELIED UPON A THIRD-PARTY EVIDENCE TO ARRIVE AT A CONCLUSION THAT THE PROCESS OF MANUFACT URING OF IMFL ALSO REQUIRES CONCENTRATE ALCOHOLIC BEVERAGE (CAB) AND ACCORDINGLY REJECTED THE SEGMENTAL APPROACH FOLLOWE D BY THE ASSESSEE ON THE PRETEXT THAT THERE IS NO INTERNATIO NAL TRANSACTION COMPRISED IN THE DOMESTIC SEGMENT. IT W AS SUBMITTED THAT THE ACCOUNTING STANDARD IS NOT A GOV ERNING LAW FOR AN ECONOMIC ANALYSIS AS WARRANTED FOR TRANSFER PRICING PURPOSES. FROM THE PERSPECTIVE OF AS-17, THE ASSESS EE IS ENGAGED IN THE MANUFACTURE AND SALE OF ALCOHOLIC BE VERAGES. FROM THE ACCOUNTING PERSPECTIVE IT IS ONE LINE OF B USINESS AND ACCORDINGLY, THE ASSESSEE IS NOT REQUIRED TO DISCLO SE SEGMENTAL REPORTING IN ITS NOTES TO THE ACCOUNTS. HOWEVER, TH IS DOES NOT PRECLUDE THE ASSESSEE FROM PREPARING INTERNAL ROBUS T SEGMENTS 23 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI FROM AN ECONOMIC AND A TRANSFER PRICING PERSPECTIVE AS UNDERTAKEN BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY FOR THE YEAR UNDER CONSIDERATION. THE ASSESSEE HAS ALSO QUO TED THE FOLLOWING EXAMPLE : COMPANY A IS THE MANUFACTURER OF TELEVISIONS AND MANUFACTURES TWO TYPES OF TELEVISION SETS (A) FLAT CRT COLOR TVS 51 (B) FLAT CRT COLOR TVS 29. FOR MANUFACTU RING OF FLAT CRT COLOR TVS 51 THE COMPANY IMPORTS COMPONE NTS FROM ITS ASSOCIATED ENTERPRISE. THE INTERNATIONAL T RANSACTION OF THE COMPANY PERTAINS TO FLAT CRT COLOR TVS 51 SEGMENT. FROM THE AS-17 PERSPECTIVE THE COMPANY IS ENGAGED I N THE MANUFACTURE AND SALE OF FLAT CRT COLOR TVS. HOWEVE R, FROM THE PERSPECTIVE OF TRANSFER PRICING, TO TEST THE AR MS LENGTH NATURE OF THE IMPORTS FROM ITS AES IT WILL BE PRUD ENT TO ANALYSE THE FLAT CRT COLOR TVS 51 SEGMENT. 3.12. IT WAS, THEREFORE, SUBMITTED THAT THE TPOS FINDING THAT IMFL SEGMENT OF THE ASSESSEE INCLUDE INTERNATI ONAL TRANSACTIONS IS MISLEAD BY AN ERRONEOUS CONCLUSION DRAWN FROM A THIRD-PARTY DATA. IT WAS FURTHER SUBMITTED THAT D URING THE APPELLATE STAGE WHEN LD. CIT(A) ASKED THE ASSESSEE TO SUBMIT THE UPDATED MARGINS FOR THE YEAR UNDER CONSIDERATIO N, THE 24 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI ARITHMETIC MEAN NPM OF THE ABOVE 12 COMPARABLE COMP ANIES WORKED-OUT AT 5.91% BASED ON WHICH ALSO THE ASSESSE ES INTERNATIONAL TRANSACTIONS COMPLIED WITH THE ARMS LENGTH STANDARD. THE COMPARABLES SELECTED BY THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER APPEAL MARGIN IS AS UNDER : NPM % FOR COMPARABLE COMPANIES FOR FY S.NO. NAME OF THE COMPANY NPM % FOR FY 2004-05 APPELLANTS SET OF COMPANIES 1 ASSOCIATED ALCOHOLS & BREWERIES LIMITED (5.73) 2 BRIHAN MAHARSHTRA SUGAR SYNDICATE LIMITED 4.28 3 GM BREWERIES LIMITED 2.01 4 IFB AGRO INDUSTRIES LIMITED 2.06 5 RADICO KHAITAN LIMITED 6.73 6 SRI RAMA DISTILLERIES LIMITED 34.08 7 TILAKNAGAR INDUSTRIES LIMITED 4.20 8 ARTHOS BREWERIES LIMITED 3.59 9 BLOSSOM INDUSTRIES LIMITED 10.07 10 KHODAY INDIA LIMITED (2.41) 11 RAJASTHAN STATE GANGANAGAR SUGAR MILLS LIMITED* 6.03 12 THIRU ARRORAN SUGARS LIMITED 6.01 ARITHMETIC MEAN 5.91 25 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI 3.13. THE LD. CIT(A) CONSIDERING THE EXPLANATION O F ASSESSEE AND MATERIAL ON RECORD, SET ASIDE THE ORDE RS OF THE AUTHORITIES BELOW AND DECIDED THE ISSUE IN FAVOUR O F THE ASSESSEE. THIS GROUND OF APPEAL OF THE ASSESSEE IS ACCORDINGLY ALLOWED. THE FINDINGS OF THE LD. CIT(A) IN PARAS 18 TO 26 OF THE IMPUGNED ORDER ARE REPRODUCED AS UNDER : 18. I HAVE PERUSED THE TPOS OBSERVATION AND RATIO NALE FOR CLUBBING THE TWO SEGMENTS WHILE ANALYSING THE ENTIR E ENTITY AS SUCH. THE APPELLANT IN SLIDE NO.4 OF POWER POINT PRESENTAT ION HAS SHOWN THIS IN THE FOLLOWING MANNER AT PAGE 14 OF MY ORDER. 19. THE TPOS RATIONALE FOR CLUBBING THE TWO SEGMENTS J UST BECAUSE THE APPELLANT HAS NOT DRAWN ANY SEGMENTAL AC COUNTS AS PRESCRIBED UNDER THE ACCOUNTING STANDARD (AS) 17 (SEGMENT REPORTING), IN MY VIEW, IS NOT APPROPRIATE. AS 17 CANNOT BE SAID TO BE A GOVERNING LAW FOR THE ECONOMI C ANALYSIS TO BE UNDERTAKEN FOR TRANSFER PRICING PURP OSES. 20. THE TPO APPEARS TO HAVE BEEN MISLEAD BY THE NOTION THAT THE APPELLANTS IMFL SEGMENT ALSO INCLUDES INTERNAT IONAL TRANSACTION COMPRISING OF IMPORT OF CAP. THERE IS N O CONCRETE EVIDENCE THAT THE TPO COULD PLACE ON RECORD IN THIS R EGARD. 26 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI 21. I HAVE ALSO CONSIDERED THE SUBMISSIONS OF THE APPELLA NT. THE APPELLANT HAS BEEN ABLE TO APTLY DISTINGUISH TH E TWO BUSINESS SEGMENTS (I.E. BUS AND IMFL). THE INTERNAT IONAL TRANSACTION UNDERTAKEN BY THE APPELLANT ONLY WITH R ESPECT OF ITS BUS SEGMENT. FURTHER, THE ALLOCATION KEYS USED FOR SE GREGATION OF BUS AND IMFL SEGMENTS ARE ROBUST AND APPLIED CONSIST ENTLY ON A YEAR-ON-YEAR (YOY) BASIS BY THE APPELLANT. THI S HAS BEEN DISCUSSED IN PARA 7.71 AND 7.72. 22. I AM OF THE OPINION THAT THE APPELLANTS SUBMISSION S THAT WHILE APPLYING TNMM, COMPARISON OF ONLY NET PROFIT MARGINS REALIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRAN SACTION NEED TO BE CONSIDERED. THE ABOVE POSITION IS IN ACCORDANC E WITH THE RULES AND ALSO SUPPORTED BY THE OECD GUIDELINES AND VA RIOUS ITAT DECISIONS AS SUBMITTED BY THE APPELLANT (REFER P ARA ABOVE). BY CLUBBING THE TWO SEGMENTS, ONE WOULD BE IGNORING THE FACT THAT IMFL AND BUS ARE TWO DISTINCT SEGMENTS, WITH DI FFERENT MARKET POSITIONING OF THE PRODUCT, MANUFACTURING PR OCESS INVOLVED, RAW MATERIAL USED AND RETURNS GENERATED. TH E IMFL SEGMENT REPRESENTS THE DOMESTIC TRANSACTIONS AND THE BUS SEGMENT REPRESENTS INTERNATIONAL TRANSACTION WITH T HE AE AND HENCE THE TWO CAN NOT BE EQUATED AND TREATED AS A SI NGLE SEGMENT. IN VIEW THE ABOVE, I HOLD THAT THE ECONOMIC ANALYSI S UNDERTAKEN BY THE APPELLANT IN RESPECT OF INTERNATIO NAL TRANSACTION PERTAINING TO PURCHASE OF CAP FOLLOWING A SEGMENTAL 27 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI APPROACH BY SEGREGATING MANUFACTURING OPERATIONS IN TO BUS AND IMFL BUSINESS VERTICALS IS IN ACCORDANCE WITH T HE RELEVANT TRANSFER PRICING REGULATIONS. THE APPELLANTS INTER NATIONAL TRANSACTION PERTAINING TO PURCHASE OF CAP, THUS, CO MPLIES WITH THE ARMS LENGTH STANDARD FOR THE YEAR UNDER CONSID ERATION. IN THE RESULT, GROUND NO. 3 TO 8 OF THE GROUNDS OF A PPEAL FILED BY THE APPELLANT IN RELATION TO TRANSFER PRICI NG ADJUSTMENT ARE ALLOWED. ISSUE 2 : WHETHER THE INTERNATIONAL TRANSACTION OF THE APPELLANT COMPLY WITH THE ARMS LENGTH STANDARD EVEN IF THE TP OS APPROACH OF CLUBBING THE BUS AND IMFL SEGMENT IS TO B E FOLLOWED FOR THE YEAR UNDER CONSIDERATION? 23. PRIMA FACIE RELIEF OF RS.1,29,40,005/- THE APPELLANT HAS FILED THE UPDATED (FY 2004-05) NPM COMPUTATIONS OF THE COMPARABLE COMPANIES BASED ON TH EIR ANNUAL REPORTS AND SELECTED THE SAME SEVEN FINAL COM PARABLES AS ADOPTED BY THE TPO IN HIS ORDER AT PAGE 11. THE REASONS FOR REJECTING THE FIVE COMPARABLES HAVE BEEN GIVEN AT P AGE 10 OF TPOS ORDER. THE ARITHMETIC MEAN OF WHICH NOW WORKS OUT AT 6.80 PERCENT (SEE TABLE BELOW) AS AGAINST 7.78 PERC ENT COMPUTED BY THE TPO. AS A RESULT, THE TRANSFER PRICING ADJUS TMENT GETS REDUCED TO RS. 1,01,83,795/- FROM RS.2,31,23,800/- (A CONSEQUENTIAL RELIEF OF RS.1,29,40,005/-) AS UNDER 28 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI NPM % FOR COMPARABLE COMPANIES FOR FY 2004 - 05 S.NO. NAME OF THE COMPANY NPM % FOR FY 2004-05 TPOS SET OF COMPANIES 1 ASSOCIATED ALCOHOLS 8S BREWERIES LIMITED (5.73) 2 BRIHAN MAHARSHTRA SUGAR SYNDICATE LIMITED 4.28 3 GM BREWERIES LIMITED 2.01 4 IFB AGRO INDUSTRIES LIMITED 2.06 5 RADICO KHAITAN LIMITED 6.73 6 SRI RAMA DISTILLERIES LIMITED 34.08 7 TILAKNAGAR INDUSTRIES LIMITED 4.20 8 ARTHOS BREWERIES LIMITED X 9 BLOSSOM INDUSTRIES LIMITED X 10 KHODAY INDIA LIMITED X 11 RAJASTHAN STATE GANGANAGAR SUGAR MILLS LIMITED X 12 THIRU ARRORAN SUGARS LIMITED X ARITHMETIC MEAN 6.80 TRANSFER PRICING ADJUSTMENT PARTICULARS AMOUNT (RS.) OPERATING INCOME (MANUFACTURING - BUS + IMFL) 132,04,08,637 OPERATING EXPENDITURE 124,08,04,645 NET PROFIT 7,96,03,992 NPM % 6.02% REVENUE RELATED TO MANUFACTURING 132,04,08,637 NPM AT 6.80% 8,97,87,787 NPM EARNED 7,96,03,992 DIFFERENCE (TRANSFER PRICING ADJUSTMENT) 1,01,83,795 29 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI 23. EXCLUDE THE OUTLIERS. THE APPELLANT ALSO CONTENDED THAT THE FOLLOWING COM PARABLE COMPANIES SHOULD BE EXCLUDED FROM THE FINAL SET AS THESE WERE OUTLIERS AND REPRESENT EXTREME POSITIONS. THE INCLUSION OF COMPARABLES WITH EXTREME RESULTS (HEAVY LOSSES O R EXTRAORDINARY PROFITS) TENDS TO SKEW THE ARITHMETIC MEAN OF THE COMPARABLE SET AND DISTORT THE ARMS LENGTH RES ULTS. THE APPELLANTS NPM OF 6.02% WILL ACCORDINGLY BE ABOVE THE ARMS LENGTH MARGIN OF 3.60 % OF THE REMAINING 5 COMPARABLE COMPANIES. NPM % FOR COMPARABLE COMPANIES FOR FY 2004-05 S.NO. NAME OF THE COMPANY NPM % FOR FY 2004-05 TPO'S SET OF COMPANIES 1 ASSOCIATED ALCOHOLS & BREWERIES LIMITED (4.22) 6 SRI RAMA DISTILLERIES LIMITED 34.76 NPM % FOR COMPARABLE COMPANIES FOR FY 2004-05 30 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI THE APPELLANT PLACED RELIANCE ON THE FOLLOWING ITAT DECISIONS : DCIT VS M/S QUARK SYSTEM PRIVATE LIMITED (2010- TIOL-31 -ITAT-CHD-SB) M/S. SAP LABS INDIA PVT. LTD. VS. ACIT (2010-TII-44- ITAT-BANG-TP) AZTEE SOFTWARE AND TECHNOLOGY, VS ACIT (294 ITR 32) MENTOR GRAPHICS (NOIDA) PRIVATE LIMITED (109 ITD 101 ) SONY INDIA (P) LIMITED V. DY. COMMISSIONER OF INCOME TAX (118 TTJ 865) S.NO. NAME OF THE COMPANY NPM % FOR FY 2004-05 TPO'S SET OF COMPANIES 1 ASSOCIATED ALCOHOLS 8S BREWERIES LIMITED X 2 BRIHAN MAHARSHTRA SUGAR SYNDICATE LIMITED 4.61 3 GM BREWERIES LIMITED 1.87 4 IFB AGRO INDUSTRIES LIMITED 1.40 5 RADICO KHAITAN LIMITED 12.83 6 SRI RAMA DISTILLERIES LIMITED X 7 TILAKNAGAR INDUSTRIES LIMITED 3.20 8 ARTHOS BREWERIES LIMITED X 9 BLOSSOM INDUSTRIES LIMITED X 10 KHODAY INDIA LIMITED X 11 RAJASTHAN STATE GANGANAGAR SUGAR MILLS LIMITED X 12 THIRU ARRORAN SUGARS LIMITED X ARITHMETIC MEAN 3.60% 31 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI PROPORTIONATE TRANSFER PRICING ADJUSTMENT BASED ON RATIO OF TRANSACTION WITH AE AND NON AE. 25. THE APPELLANT SUBMITS THAT THE TPO HAS ERRED IN APPLYING THE ENTIRE TRANSFER PRICING ADJUSTMENT OF RS.23.12 MN /- (COMPUTED USING TNMM AT AN ENTITY LEVEL WITH NPM AS THE PLI) TO THE TRANSACTION PERTAINING TO PURCHASE OF CAP FROM THE AE. SINCE THE PURCHASE OF CAP (RELATED-PARTY TRANSACTIO N) AMOUNTING TO RS.75.04 MN/- COMPRISE OF ONLY 6 PERCE NT OF THE TOTAL OPERATING EXPENSES, A PROPORTIONATE TRANS FER PRICING ADJUSTMENT AMOUNTING TO RS.1.40 MN /- (I.E. 6% X RS . 23.12 MN /-) IS WARRANTED IN THE INSTANT CASE. THE APPELLANT PLACES RELIANCE ON THE DECISION BY TH E JURISDICTIONAL DELHI ITAT IN THE CASE OF II JIN ELE CTRONICS (INDIA) PVT. LTD. V. ACIT [ITA NO. 438/ DEL/ 2008, (2010) 36 SOT 227} THE CONSEQUENTIAL ARMS LENGTH PRICE OF RS. 73.64 M N /- (I.E. RS. 75.04 MN LESS RS.1.40 MN) WILL MEET THE ARMS L ENGTH STANDARD AS PER PROVISO TO SECTION 92C(2) OF THE AC T (+/- 5 PERCENT TOLERANCE BAND) AS UNDER : 32 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI PARTICULARS AMOUNT (RS.MN) ARMS LENGTH PRICE (ALP) 73.64 1.05* ALP (+/- 5 PERCENT TOLERANCE BAND) 77.63 VALUE OF INTL. TRANSACTION 75.04 NET PROFIT MARGIN TO AN APPROPRIATE BASE 26. THE APPELLANT SUBMITS THAT THE TPO ERRED IN NOT CONSIDERING THE ACTUAL TURNOVER OF ITS IMFL OPERATI ONS PERTAINING TO CONTRACT MANUFACTURING AND BOTTLING F OR A THIRD PARTY, NAMELY SEAGRAM MANUFACTURING PRIVATE LIMITED (SMPL) UNDER THE TECHNICAL MARKETING ASSISTANCE AGREEMENT (TMAA), THE APPELLANT HIGHLIGHTED THAT THAT THE MANUFACTURI NG ACTIVITY IN THE IMFL SEGMENT LARGELY COMPRISES OF C ONTRACT MANUFACTURING AND BOTTLING OF LIQUOR FOR SMPL UNDER A TMAA FOR WHICH IT RECEIVES A FIXED RETURN PER CASE MANUFACTURED. ACCORDINGLY, THE NET PROFIT MARGIN CO MPUTED BY EXCLUDING THE PSEUDO TURNOVER AND TAKING INTO AC COUNT THE TRUE TURNOVER FOR BOTTLING ACTIVITIES UNDERTAKE N FOR SMPL, WOULD WORK OUT AT 9.82 PERCENT WHICH IS MORE THAN 7.78 PERCENT ARMS LENGTH NPM ARRIVED AT BY THE TPO. THE APPELLANTS ALSO FILED DETAILED WORKING CALCULATION S IN RELATION THERETO. 33 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI SINCE ISSUE NO. 1 HAS ALREADY BEEN DECIDED IN FAVOU R OF THE APPELLANT BASED ON WHICH THE APPELLANT IS ENTITLED FOR A FULL RELIEF ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT, I SSUE NO. 2 AS DISCUSSED ABOVE DOES NOT REQUIRE SEPARATE ADJUDI CATION. HOWEVER BASED ON SUBMISSIONS AND EXPLANATIONS PROVI DED BY THE APPELLANT, I FIND MERIT IN APPELLANTS ALTER NATE CONTENTIONS WHICH HAVE BEEN BRIEFLY DISCUSSED IN TH E ABOVE PARAGRAPHS 23 AND 24 OF MY ORDER. 4. THE LD. D.R. RELIED UPON THE ORDER OF THE A.O./ TPO. HE HAS SUBMITTED THAT NO SEGMENTAL ACCOUNTS HAVE BE EN PREPARED BY THE ASSESSEE. THE ASSESSEE PREPARED COM BINED ACCOUNTS OF BOTH THE SEGMENTS. THEREFORE, NO SEPARA TE ACCOUNTS OF BIIS SEGMENT HAVE BEEN PREPARED. THE RISK AND RE TURN OF BOTH SEGMENTS ARE SAME. PRODUCT MAY BE DIFFERENT BUT RIS K AND RETURN ON BOTH SEGMENTS ARE SAME. THE AUDITOR HAS T AKEN BOTH THE SEGMENTS TOGETHER. THE LD. D.R. ALSO REFERRED T O PAGE 244 ON AS-17. HE HAS, THEREFORE, SUBMITTED THAT ONCE AU DITOR HAS REPORTED BOTH THE SEGMENTS TOGETHER, THE LD. CIT(A) , SHOULD NOT HAVE DELETED THE ADDITION. 34 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI 5. ON THE OTHER HAND, LEARNED COUNSEL FOR THE ASSESSEE, REITERATED THE SUBMISSIONS MADE BEFORE TH E AUTHORITIES BELOW AND SUBMITTED THAT BIIS AND IMFL ARE TWO DIFFERENT SEGMENTS. THE RAW MATERIAL ARE DIFFERENT. AS-17 IS IRRELEVANT TO COMPUTATION OF ARMS LENGTH PRICE. IT IS RELATING TO FINANCIAL ANALYSIS ONLY. FOR PROFIT, AUDITOR TOOK B OTH THE SEGMENTS TOGETHER. PURCHASE OF MATERIAL FROM A.E. I S REQUIRED FOR BIIS SEGMENT ONLY AND NOT FOR IMFL. BIIS SEGMEN T IS TO BE CONSIDERED FOR INTERNATIONAL TRANSACTIONS ONLY BECA USE IMFL IS A DOMESTIC TRANSACTION. HE HAS REFERRED TO PB-330 W HICH IS SUBMISSION FILED BEFORE THE LD. CIT(A) TO EXPLAIN B IIS SEGMENT REGARDING BOTTLING PROCESS IS UNDERTAKEN IN INDIA A ND SIMILARLY, FOR BIIS SEGMENT PROCESSES ARE UNDERTAKEN IN SCOTLA ND. HOWEVER, IMFL PROCESS IS UNDERTAKEN IN INDIA ONLY. PB-332 IS PROCESS UNDERTAKEN BY ASSESSEE ON BOTTLING AND PROC ESS UNDERTAKEN BY A.E. IN SCOTLAND. PB-335 IS IMFL SEGM ENT AND PROCESS UNDERTAKEN BY THE ASSESSEE IN INDIA ONLY. P B-360 IS SEGMENTAL ACCOUNTING OF BOTH THE SEGMENTS FILED BEF ORE THE AUTHORITIES BELOW, ON WHICH, NO ADVERSE INFERENCE H AVE BEEN 35 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI DRAWN AGAINST THE ASSESSEE. PB-291 IS SEGMENTATION ALLOCATION KEY WHICH WAS FILED BEFORE THE AUTHORITIES BELOW, O N WHICH, NO ADVERSE INFERENCE HAVE BEEN DRAWN. HE HAS RELIED UP ON THE ORDER OF THE ITAT, MUMBAI BENCH IN THE CASE OF PARA DIGM GEOPHYSICAL (I) (P.) LTD. VS. DCIT (2016) 72 TAXMAN N.COM 108 (MUM.) (TRIBU.) AND REFERRED TO PARA-9 OF THE ORDER IN WHICH THE TRIBUNAL OBSERVED THAT TPO IN HIS ORDER CONTENDED THAT AUDITED ANNUAL REPORTS OF THE ASSESSEE DID NOT CONTAIN ANY SEGMENTAL REPORTING AND REJECTED THE AUDITED SEGMENTAL FILED DURING THE COURSE OF TRANSFER PRICING ASSESSMENT PROCEEDINGS. HOWEVER, FAILED TO APPRECIATE THAT ASSESSEE HAD ALREADY FILE D SEGMENTAL ACCOUNTS AS PART OF ITS T.P. DOCUMENTATION. THE SEG MENT, IF ANY, OUGHT TO HAVE BEEN RESTRICTED TO THE INTERNATIONAL TRANSACTION UNDER REVIEW. THE TRIBUNAL HELD IN THIS CASE AS UNDER : WHERE IN COURSE OF TRANSFER PRICING PROCEEDINGS, A SSESSEE HAD FURNISHED SEGMENTAL REPORTS, TPO COULD NOT HAVE ADOPTED ENTITY LEVEL REPORTS FOR BENCHMARKING INTER NATIONAL TRANSACTION. 36 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND DO NOT FIND ANY JUSTIFICATION TO INTERFERE WITH THE ORDER OF THE LD. CIT(A). THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTION WITH RESPECT TO PURCHASE OF COMPOUND ALCOHOLIC PREPARATION (CAP) WHICH WAS CONSIDERED BY THE TPO/AO. THE TPO CLUBBED BIIS AND IMFL SEGMENTS AND COMPARED THE NET MARGIN OF THE COMBINE D MANUFACTURING OPERATIONS OF THE ASSESSEE WITH THOSE OF THE BROADLY COMPARABLE INDEPENDENT COMPANIES. THE ASSES SEE, HOWEVER, EXPLAINED THAT UNDER BIIS SEGMENT, ASSESSE E PROCESSES CAP IMPORTED BY IT FROM ITS A.E. IN SCOT LAND. THE CAP SO IMPORTED, IS FURTHER PROCESSED BY THE ASSESSEE I NTO THE SCOTCH, WHISKY BY WAY OF DILUTION INTO DESIRED ALCO HOLIC STRENGTH BOTTLED AND SOLD IN INDIA. FURTHER, IN IMFL SEGMENT , IT PERTAINS TO DOMESTIC BUSINESS OF THE ASSESSEE. THE IMFL IS M ANUFACTURED FROM A PURIFIED FORM OF SPIRIT/ALCOHOL CALLED THE E XTRA NEUTRAL ALCOHOL (ENA). THE ENA IS MANUFACTURED BY THE ASS ESSEE IN INDIA AND IMFL IS SOLD UNDER DIFFERENT NAMES. THE A SSESSEE, THEREFORE, EXPLAINED THAT THERE IS A KEY INDICATIVE DIFFERENCE 37 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI BETWEEN THE TWO BUSINESS SEGMENTS AS REPRODUCED ABO VE. IT WAS, THEREFORE, PROVED THAT RAW MATERIAL IMPORTED B Y THE ASSESSEE IS CAP WHICH IS MATURED UNDER THE CLIMATIC CONDITIONS OF SCOTLAND AND CANNOT BE MANUFACTURED IN INDIA. TH EN, THE IMPORTED CAP IS FILTERED AND DILUTED FOR THE BOTTLI NG OF THE FINAL PRODUCT I.E., SCOTCH. THE MANUFACTURING ULTIMATE PR ODUCT, MARKET CONDITION, PRICE AND FUNCTIONS OF BOTH SEGME NTS I.E., BIIS AND IMFL ARE COMPLETELY DIFFERENT AND DISTINCT . THEREFORE, BOTH THE SEGMENTS OF THE ASSESSEE ARE TOTALLY DIFFE RENT AND INDEPENDENT. FURTHER, THERE WAS NO INTERNATIONAL TR ANSACTION WITH A.ES. FOR PRODUCTION OF IMFL. THE ABOVE DISSIM ILARITY IN BOTH THE SEGMENTS HAVE NOT BEEN SCRUTINIZED BY THE TPO/AO. TO SEE THE DIFFERENCE OF SITUATION, CIRCUMSTANCES AND ENVIRONMENT. THE ASSESSEE FILED COMPLETE DETAILS BEFORE THE AUTH ORITIES BELOW TO EXPLAIN THAT BOTH THE SEGMENTS ARE DISTINCT AND INDEPENDENT AND ALSO FILED SEGMENTAL ACCOUNTING OF BOTH THE SEG MENTS, ON WHICH, AUTHORITIES BELOW, HAVE NOT ADVERSELY COMMEN TED UPON THE SAME. AS-17 IS NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE CASE FOR UNDERTAKING TRANSFER PRICING 38 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI ADJUSTMENTS. THE ASSESSEE ADOPTED THE SAME METHOD O F ACCOUNTING ON YEAR-TO-YEAR BASIS, WHICH HAVE NOT BE EN DISPUTED BY THE AUTHORITIES BELOW. THE AO/TPO CLUBBED THE DO MESTIC TRANSACTION OF IMFL WITH INTERNATIONAL TRANSACTION WHILE APPLYING TNMM. THE CONTENTION OF THE ASSESSEE HAS B EEN SUPPORTED BY THE DECISIONS OF ITAT REFERRED TO ABOV E. THEREFORE, THE ECONOMIC ANALYSIS UNDERTAKEN BY THE ASSESSEE IN RESPECT OF INTERNATIONAL TRANSACTION PERTAINING TO THE PURCHAS E OF CAP FOLLOWING SEGMENTAL APPROACH BY SEGREGATING MANUFAC TURING OPERATIONS INTO BIIS AND IMFL BUSINESS VERTICALS IS IN ACCORDANCE WITH THE RELEVANT TRANSFER PRICING REGUL ATIONS. THE ASSESSEES INTERNATIONAL TRANSACTION PERTAINING TO PURCHASE OF CAP, THUS, COMPLIES WITH THE ARMS LENGTH STANDARD FOR THE YEAR UNDER CONSIDERATION. THE LD. D.R. MERELY RELIE D UPON THE AUDITORS NOTE IN THE ACCOUNTS, WHICH, ACCORDING TO ASSESSEE, IS NOT RELEVANT BECAUSE FROM THE ACCOUNTING PERSPECTIV E, IT IS ONE LINE OF BUSINESS AND ACCORDINGLY, ASSESSEE WAS NOT REQUIRED TO DISCLOSE SEGMENTAL REPORTING IN ITS NOTE TO THE ACC OUNTS. HOWEVER, THE ASSESSEE FILED THE SEGMENTAL ACCOUNTIN G ON BOTH 39 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI THE SEGMENTS BEFORE THE AUTHORITIES BELOW, WHICH HA VE NOT BEEN DISPUTED BY THEM. THEREFORE, THERE IS NOTHING WRONG IN THE ANALYSIS SUBMITTED BY THE ASSESSEE FOR THE PURPOSE OF BENCHMARKING OF ALP. BOTH THE SEGMENTS CANNOT BE CL UBBED TOGETHER TO DETERMINE THE ALP. 6.1. THE LD. CIT(A), EVEN ON THE ALTERNATIVE POINT CONSIDERED THAT EVEN IF THE TPOS APPROACH OF CLUBB ING OF BOTH THE SEGMENTS IS TO BE FOLLOWED FOR THE YEAR UNDER C ONSIDERATION AND CERTAIN COMPARABLES WHICH ARE NOT RELEVANT TO T HE ISSUE ARE EXCLUDED, THE ASSESSEES WOULD BE ENTITLED FOR FULL RELIEF ON ACCOUNT OF T.P. ADJUSTMENT. THE REASON GIVEN BY THE LD. CIT(A) HAVE NOT BEEN DISPUTED BY THE LD. D.R. THROUGH ANY EVIDENCE OR MATERIAL ON RECORD. THE LD. CIT(A) ALSO CONSIDERED THAT MANUFACTURING ACTIVITY IN THE IMFL SEGMENT LARGELY COMPRISES OF CONTRACT MANUFACTURING AND BOTTLING OF LIQUOR FO R OTHER COMPANIES, FOR WHICH, FIXED RETURN ARE RECEIVED AND IN CASE OF BOTTLING, PROFIT IS EXCLUDED, THEN ALSO, THE ALP DE CLARED BY THE ASSESSEE WAS CORRECT. IN THE ABSENCE OF ANY SERIOUS CHALLENGE TO 40 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI THE FINDINGS OF THE LD. CIT(A) ON THIS ISSUE ALSO, NO INTERFERENCE IS CALLED FOR IN THE MATTER. IN VIEW OF THE ABOVE D ISCUSSION AND IN THE LIGHT OF FINDINGS OF FACT ARRIVED AT BY THE LD. CIT(A), WE DO NOT FIND ANY JUSTIFICATION TO INTERFERE WITH THE FI NDING OF FACT RECORDED BY THE LD. CIT(A). NO INTERFERENCE IS CALL ED FOR IN THE MATTER. THE DEPARTMENTAL APPEAL HAS NO MERIT AND IS ACCORDINGLY, DISMISSED. 7. IN THE RESULT, DEPARTMENTAL APPEAL IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (L.P. SAHU) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DELHI, DATED 09 TH MARCH, 2018 VBP/- COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. CIT(A) CONCERNED 4. CIT CONCERNED 5. D.R. ITAT I - 2 BENCH, DELHI 6. GUARD FILE. 41 ITA.NO.54/DEL./2011 M/S. ALLIED DOMECQ SPIRITS & WINE INDIA PVT. LTD., NEW DELHI // BY ORDER // ASSISTANT REGISTRAR : ITAT DELHI BENCHES : DELHI.