Appeal Details
Counselvise Citation
[2019] 117 COUNSELVISE.COM (IT) 1705 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
7 month(s) 13 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
07-06-2019
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
K
Assessment Year
2014-2015
Appeal Filed On
24-10-2018
Judgement Text
1 ITA 6081/MUM/2018 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K, MUMBAI BEFORE SHRI G MANJUNATHA (ACCOUNTANT MEMBER) AND SHRI RAVISH SOOD (JUDICIAL MEMBER) ITA NO. 6081/MUM/2018 (ASSESSMENT YEAR : 2014-15) FIRMENICH AROMATICS (INDIA) PVT LTD, 9 TH FLOOR, ARENA SPACE, CTS 20, NEW SHYAM NAGAR ROAD, BEHIND MAJAS BUS DEPOT, JOGESHWARI (E), MUMBAI. PAN : AAACF1621M VS ACIT-9(3)(1), MUMBAI APPELLANT RESPONDEDNT APPELLANT BY SHRI DHANESH BAFNA / HIRALI DESAI / KIRESH RESPONDENT BY SHRI RIGNESH K DAS DATE OF HEARING 08-04-2019 DATE OF PRONOUNCEMENT -06-2019 O R D E R PER G MANJUNATHA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST DIRECTIONS OF THE DRP-1 , MUMBAI DATED 06-07-2018 ISSUED U/S 144C(5) OF THE INCOME-TAX ACT, 1961, WHICH, IN TURN, ARISES AGAINST THE ORDER OF T HE AO / TPO PASSED U/S 143(3) 2 ITA 6081/MUM/2018 R.W.S. 144C(1) OF THE INCOME-TAX ACT, 1961 AND IT P ERTAINS TO AY 2014-15. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- EACH OF THE GROUNDS AND/ OR SUB-GROUNDS OF THE APP EAL ARE INDEPENDENT AND WITHOUT PREJUDICE TO THE OTHER: 1. GROUND NO. 1 TRANSFER PRICING (*TP') ADJUSTMENT IN RELATION TO EXPORT OF FINISHED GOODS 1.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE HON'BLE DRP HAS ERRED IN UPHOLDING THE ACTION OF THE LD. AO/TPO IN DETERM INING THE ARMS' LENGTH PRICE ('ALP') OF THE INTERNATIONAL TRANSACTION OF EXPORT OF FINIS HED GOODS AT RS. 10,35,77,048 INSTEAD OF RS. 7,16,95,346 THEREBY, COMPUTING A TP ADJUSTMENT OF RS. 3,18,81,702. 1.2. WHILE DOING SO, THE HON'BLE DRP/ LD. AO/ LD . TPO ERRED IN: (A) DISREGARDING THE AGGREGATION APPROACH ADOPT ED BY THE APPELLANT THEREBY, REJECTING THE APPLICATION OF ENTITY LEVEL TRANSACTIONAL NET M ARGIN METHOD ('TNMM') AS THE MOST APPROPRIATE METHOD ('MAM'); (B) APPLYING COMPARABLE UNCONTROLLED PRICE ('CU P') METHOD AS THE MAM VIS-A-VIS THE PRODUCTS SOLD TO BOTH ASSOCIATED ENTERPRISES (' AES') AND NON-AES; AND (C) APPLYING TWO METHODS I.E., CUP AND TNMM FOR BENCHMARKING THE IMPUGNED INTERNATIONAL TRANSACTION. 1.3. WITHOUT PREJUDICE TO POINT 1.1. AND 1.2., T HE HON'BLE DRP/ LD. AO/ LD. TPO WHILE APPLYING CUP, ERRED IN: (A) COMPARING THE PRICES OF PRODUCTS EXPORTED TO AES WITH THE PRICES OF PRODUCTS SOLD TO NON-AES, DOMESTICALLY; AND (B) IGNORING THE DIFFERENCES ON ACCOUNT OF GEOGR APHICAL MARKET, VOLUME OF TRANSACTIONS, FUNCTIONAL AND RISK PROFILE AND LEVEL OF MARKET WHI LE COMPARING THE IMPUGNED INTERNATIONAL TRANSACTION WITH THE COMPARABLE UNCON TROLLED TRANSACTION. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT B E DELETED. 2. GROUND NO. 2 - TP ADJUSTMENT IN RELATION T O PAYMENT OF ROYALTY FOR USE OF TECHNICAL KNOW-HOW 2.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP HAS ERRED IN UPHOLDING THE ACTION OF THE LD. AO/ TPO IN DETER MINING THE ALP OF ROYALTY PAID TO AE FOR TECHNICAL KNOW-HOW AT RS. 20,09,63,574 INSTEAD OF RS. 24,06,53,880 THEREBY, COMPUTING A TP ADJUSTMENT OF RS. 3,96,90,306. 2.2. WHILE DOING SO, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN: (A) NOT FOLLOWING THE ORDERS OF THE EARLIER YEA RS WHEREIN PAYMENT OF ROYALTY HAS BEEN CONSISTENTLY ACCEPTED TO BE AT ARM'S LENGTH, EVEN T HOUGH WHEN THERE IS NO CHANGE IN THE FACTS; (B) DISREGARDING THE FACT THAT PAYMENT OF ROYAL TY IS INEXTRICABLY LINKED TO ENTREPRENEURIAL OPERATIONS OF THE APPELLANT AND THE REFORE, IT SHOULD HAVE BEEN BENCHMARKED ON AN AGGREGATION BASIS BY APPLYING TNM M AS THE MAM; AND (C) APPLYING CUP METHOD AS THE MAM TO DETERMINE THE ALP OF THE IMPUGNED INTERNATIONAL TRANSACTION. 2.3. WITHOUT PREJUDICE TO POINT 2.1. AND 2.2., W HILE APPLYING CUP, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN CONSIDERING THE ROYALTY AG REEMENTS WHICH WERE NOT COMPARABLE TO THE ROYALTY AGREEMENT ENTERED INTO BY THE APPELL ANT WITH ITS AE. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT B E DELETED. 3. GROUND NO. 3 TP ADJUSTMENT IN RELATION TO PAYMENT OF INTEREST ON EXTERNAL COMMERCIAL BORROWING ('ECB') LOAN 3.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP ERRED IN UPHOLDING THE ACTION OF THE LD. AO/ TPO IN DETERMIN ING THE ALP OF THE INTERNATIONAL 3 ITA 6081/MUM/2018 TRANSACTION OF PAYMENT OF INTEREST ON ECB AT RS. 56 ,10,095 INSTEAD OF RS. 1,07,84,304, THEREBY COMPUTING AN ADJUSTMENT OF RS. 51,74,209. 3.2. WHILE DOING SO, THE HON'BLE DRP/ LD. AO/ LD . TPO ERRED IN: (A) NOT FOLLOWING A STRUCTURED/ METHODICAL SEAR CH PROCESS IN SELECTING THE COMPARABLE COMPANIES FOR ARRIVING AT THE ARM'S LENGTH INTEREST RATE; (B) NOT APPRECIATING THE FACT THAT THE INTEREST PAID BY THE APPELLANT ON ECB LOAN IS AS PER THE CIRCULAR ISSUED BY RESERVE BANK OF INDIA (' RBI'); AND (C) DISREGARDING THE FACT THAT THE EFFECTIVE RA TE OF INTEREST PAID BY THE APPELLANT IS LOWER THAN THE SBI PRIME LENDING RATE ('PLR') FOR THE REL EVANT YEAR. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT B E DELETED. 4. GROUND_NO_. 4 - TP ADJUSTMENT IN RELATION TO AVAILING OF INFORMA TION SYSTEMS ('IS') SERVICES 4.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP ERRED IN UPHOLDING THE ACTION OF THE LD. AO/ LD. TPO IN DETE RMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF IS SERVICE CHARGE AT RS. 8,24,93,129 INSTEAD OF RS. 10,46,55,437 THEREBY DISALLOWING THE CLAIM PERTAINI NG TO INTERNAL COST OF IS CHARGE AMOUNTING TO RS. 2,21,62,308, 4.2. WHILE DOING SO, THE HON'BLE DRP/ LD. AO/ LD. TPO GROSSLY ERRED IN: (A) DETERMINING THE ALP OF THE INTERNATIONAL TR ANSACTION OF PAYMENT OF INTERNAL COST OF IS CHARGE AS 'NIL' PURPORTEDLY APPLYING 'OTHER METH OD' AS PER THE PROVISIONS OF RULE LOAB OF THE INCOME-TAX RULES, 1962; (B) IGNORING THAT THE APPELLANT HAD SUPPORTED T HE CLAIM WITH APPROPRIATE EVIDENCES; AND (C) REJECTING THE COMPARABILITY ANALYSIS CONDUC TED BY THE APPELLANT IN THE TP STUDY REPORT TO DETERMINE THE ALP OF THE IMPUGNED INTERNA TIONAL TRANSACTION. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT B E DELETED. 5. GROUP. CLNO. 5 - ADJUSTMENT IN RELATION TO EMPLOYEES' CONTRIBUTION T O PROVIDENT FUND 5.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP ERRED IN UPHOLDING THE ACTION OF THE LD. AO IN DISALLOWING E MPLOYEES' CONTRIBUTION TO PROVIDENT FUND OF RS. 14,98,505 PAID WITHIN THE DUE DATE FOR FILING THE INCOME-TAX RETURN FOR THE YEAR UNDER CONSIDERATION. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT B E DELETED. 6. GROUND NO. 6 ADJUSTMENT IN RELATION TO 'OTHER MISCELLANEOUS E G EXPENSES' 6.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONTALE DRP ERRED IN UPHOLDING THE ACTION OF THE LD. AO IN DISALLOWING ' OTHER MISCELLANEOUS EG EXPENSES' OF RS. 2,15,229 RELATING TO WRITE OFF OF RENT DEPOSITS MADE BY THE APPELLANT EITHER FOR OFFICE USE OF THE APPELLANT OR ON BEHALF OF ITS EMPLOYEES BY CONSIDERING SUCH EXPENSES AS NOT RELATED TO THE BUSINESS OF THE APPELLANT. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT B E DELETED. 7. GROUND NO. 7 - INITIATING PENALTY PROCEEDINGS UNDER SECTION 27I (I)(C) OF TH ACT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 27I(I)(C) OF THE ACT FOR FURNISHING INACCURATE PARTICULARS OF INCOME. 8. GROUND NO. 8 - LEVY OF INTEREST UNDER SECTION 234B AND 2340 OF THE ACT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD. AO ERRED IN LEVYING INTEREST UNDER SECTION 2346 AND 2340 OF THE ACT. THE APPELLANT PRAYS THAT THE CONSEQUENTIAL INTEREST BE DELETED. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E, M/S FIRMENICH AROMATICS (I) PVT LTD, IS AN INDIAN COMPANY WHICH W AS INCORPORATED IN JANUARY 4 ITA 6081/MUM/2018 20, 1997. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND MARKETING OF NATURAL FLAVOURS, FRAGRANCE AND CHEMIC AL SPECIALITIES. THE MANUFACTURED PRODUCTS OF THE ASSESSEE ARE SUPPLIED TO VARIOUS CUSTOMERS WITHIN AND OUTSIDE INDIA. DURING THE YEAR UNDER CO NSIDERATION, THE ASSESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS AND SPECIFIED DOMESTIC TRANSACTIONS WITH ITS SEVERAL AES, THE DETAILS OF W HICH ARE AS UNDER:- S.NO. NATURE OF INTERNATIONAL TRANSACTIONS F.Y. 2013-14 METHOD USED BY TAXPAYER (I) IMPORT OF RAW MATERIALS 883,266,845 TRANSACTIONAL NET MARGIN METHOD (TNMM) (II) SALE OF FINISHED GOODS 71,695,346 TNMM (III) PAYMENT OF ROYALTY 240,653,880 TNMM (IV) COMMISSION RECEIVED 15,315,067 TNMM (V) PAYMENT OF INTEREST ON ECB LOAN 10,784,304 OTHER METHOD (VI) PAYMENT FOR SOFTWARE CHARGES (S3 AND IS CHARGES) 104,655,437 OTHER METHOD (VII) RECOVERY OF EXPENSES 11,680,908 OTHER METHOD (VIII) REIMBURSEMENT OF EXPENSES 6,129,335 OTHER METHOD (IX) DIVIDEND PAID 77,457,379 OTHER METHOD TOTAL 1,42,15,38,501 10 PURCHASE OF RAW MATERIALS 122,057,695 TNMM 11 PAYMENT OF RENT 2,820,000 OTHER METHOD 12 PAYMENT OF MANAGERIAL REMUNERATION / PROFESSIONAL FEE 21,146,231 OTHER METHOD TOTAL 146,023,926 5 ITA 6081/MUM/2018 3. THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR AY 2014-15 DECLARING TOTAL INCOME OF RS.16,20,01,320. THE CASE WAS SELECTED F OR SCRUTINY AND NOTICES U/S 143(2) AND 142(1) OF THE ACT, ALONGWITH QUESTIONNAI RE CALLING FOR VARIOUS DETAILS WERE ISSUED AND SERVED ON THE ASSESSEE. IN RESPONS E TO THE NOTICES, THE AUTHORISED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FILED VARIOUS DETAILS, AS CALLED FOR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A REFERENCE U/S 92CA(1) OF THE INCOME-TAX ACT, 1961 W AS MADE TO THE ADDITIONAL COMMISSIONER OF INCOME-TAX (TPO). THE TPO, VIDE HI S ORDER DATED OCTOBER 20, 2017, AFTER CONSIDERING SUBMISSIONS OF THE ASSESSEE AND ALSO BY TAKING NOTE OF TP STUDY CONDUCTED BY THE ASSESSEE, SUGGESTED TRANS FER PRICING ADJUSTMENT IN RESPECT OF ASSESSEES INTERNATIONAL TRANSACTIONS WI TH REGARD TO SALE OF FINISHED GOODS, PAYMENT FOR TECHNICAL KNOW HOW, PAYMENT FOR INTEREST ON ECB LOAN AND PAYMENT FOR SOFTWARE CHARGES. THE DETAILS OF TP AD JUSTMENT MADE BY THE TPO ARE AS UNDER:- SR.NO. ADJUSTMENT ON ACCOUNT OF AMOUNT (IN INR) A. SALE OF FINISHED GOODS 3,18,81,702 B. PAYMENTS FOR TECHNICAL KNOWHOW 3,96,90,306 C. PAYMENT FOR INTEREST ON ECB LOAN 51,74,209 D. PAYMENT FOR SOFTWARE CHARGES 2,21,62,308 TOTAL 9,89,08,525 4. THE LD. AO HAS PASSED DRAFT ASSESSMENT ORDER U/S 143(3) R.W.S. 144C(1) OF THE I.T. ACT, 1961 ON 30-11-2017 AND MADE TP ADJUST MENT AS SUGGESTED BY THE 6 ITA 6081/MUM/2018 TPO IN HIS ORDER DATED 20-10-2017 IN RESPECT OF SAL E OF FINISHED GOODS, PAYMENT FOR TECHNICAL KNOW HOW, PAYMENT FOR INTEREST ON ECB LOAN AND PAYMENT FOR SOFTWARE CHARGES. FURTHER, THE AO HAS ALSO MADE DI SALLOWANCE OF A SUM OF RS.14,98,505 TOWARDS D EMPLOYEES CONTRIBUTION TO PF U/S 36(1)(VIIA) OF THE ACT, FOR DELAYED PAYMENT OF EMPLOYEES PROVIDENT FUND CON TRIBUTION TO THE RESPECTIVE FUND. SIMILARLY, THE AO HAS ALSO MADE A DDITION ON ACCOUNT OF DISALLOWANCE OF OTHER MISCELLANEOUS EXPENSES TO THE TUNE OF RS.2,15,229. 5. THE ASSESSEE HAS FILED OBJECTIONS BEFORE THE LD. DRP-MUMBAI AGAINST DRAFT ASSESSMENT ORDER PASSED BY THE AO U/S 143(3) R.W.S. 144C(1) OF THE INCOME-TAX ACT, 1961. THE ASSESSEE HAS FILED ELABORATE WRITTE N SUBMISSIONS ON EACH AND EVERY TRANSFER PRICING ADJUSTMENT MADE BY THE AO AN D ALSO OTHER CORPORATE TAX ISSUES. THE DRP, VIDE ITS DIRECTIONS U/S 144C(5) O F THE INCOME-TAX ACT, 1961 DATED 06-07-2018, REJECTED OBJECTIONS FILED BY THE ASSESSEE AND CONFIRMED TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO IN RESPECT OF SALE OF FINISHED GOODS, PAYMENT OF ROYALTY AND PAYMENT FOR INTEREST ON ECB LOAN. SIMILARLY, THE DRP HAS REJECTED OBJECTIONS FILED BY THE ASSESSEE I NSOFAR AS DISALLOWANCE OF EMPLOYEES CONTRIBUTION TO PF U/S 36(1)(VIIA) ON THE GROUND THAT ALTHOUGH THE ISSUES HAD BEEN COVERED IN FAVOUR OF THE ASSESSEE B Y THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS M/S ALSTORM EXT RUSIONS LTD 319 ITR306 (SC), BUT SINCE THE DECISION OF THE DRP IS BINDING UPON THE REVENUE AND FURTHER 7 ITA 6081/MUM/2018 APPEAL CANNOT BE PREFERRED AGAINST THE SAME, IT WOU LD BE PREJUDICIAL TO THE STAND OF THE REVENUE IF THE DECISION OF THE SUPREME COURT IS NOT AWAITED BECAUSE THE REVENUE HAS CHALLENGED THE ORDER OF THE HIGH COURT BEFORE THE HONBLE SUPREME COURT IN THE CASE OF CIT VS JAIPUR VIDYUT VITRAN NIGAM LTD AND SUCH SLP FILED BY THE REVENUE IS PENDING BEFORE THE SUPREME COURT FOR FINAL DECISION. AS REGARDS DISALLOWANCE OF OTHER EXPENSE S, THE LD.DRP REJECTED OBJECTIONS FILED BY THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS NOT BEEN ABLE TO PRODUCE ANY CORRESPONDENCE WITH THE LANDLOR DS OR WITH ITS OWN EMPLOYEES ON THE ISSUE OF FORFEITURE OR ADJUSTMENT OF DEPOSITS. 6. AGGRIEVED BY THE DIRECTIONS OF THE DRP, THE ASSE SSEE IS IN APPEAL BEFORE US. 7. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND 1 OF THE APPEAL IS TRANSFER PRICING ADJUSTMENT IN RELATION T O EXPORT OF FINISHED GOODS. THE FACTS WITH REGARD TO THE IMPUGNED DISPUTE ARE T HAT THE ASSESSEE HAS EXPORTED FINISHED GOODS TO ITS AE. THE ASSESSEE HA S BENCHMARKED ITS TRANSACTIONS WITH AE IN RESPECT OF SALE OF FINISHED GOODS BY APPLYING TNMM AS MOST APPROPRIATE METHOD. THE AO HAS REJECTED TP ST UDY CONDUCTED BY THE ASSESSEE AND APPLIED TWO METHODS FOR BENCHMARKING I NTERNATIONAL TRANSACTIONS ON EXPORT OF FINISHED GOODS. THE TPO HAS APPLIED C UP ON COMMON FINISHED GOODS EXPORTED TO THE AES AND NON AES. THE TPO HAS ALSO EMPLOYED TNMM ON THE BALANCE EXPORTED GOODS. ACCORDING TO THE ASSES SEE, AS PER SECTION 92C 8 ITA 6081/MUM/2018 R.W.R.10B, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ADOPTING ANY ONE METHOD THEREUNDER AND NOT BY ADOPTING TWO METHODS AS THE MOST APPROPRIATE METHOD. THE AS SESSEE HAS ALSO ARGUED FOR NOT ADOPTING AS MOST APPROPRIATE METHOD, AS PER WHICH, THE PRICE AT WHICH FINISHED GOODS ARE EXPORTED TO ASSOCIATED ENTERPRIS ES ARE NOT COMPARABLE WITH PRICE AT WHICH FINISHED GOODS ARE EXPORTED TO UNREL ATED / THIRD PARTIES FOR THE REASON THAT DIFFERENCE IN THE GEOGRAPHICAL MARKETS, DIFFERENCE IN VOLUME OF BOTH THE TRANSACTIONS, DIFFERENCE IN MARKET AND PRO DUCT RELATED RISK, DIFFERENCE IN FUNCTIONAL PROFILES, DIFFERENCE IN TIMING AND DI FFERENCE IN CONTRACTUAL TERMS. THE TPO REJECTED TNMM METHOD SELECTED BY THE ASSESS EE AND BENCHMARKED ITS TRANSACTIONS WITH AE BY APPLYING CUP METHOD. T HE LD.DRP HAS CONFIRMED THE FINDINGS OF THE TPO BY HOLDING THAT AS PER RUL E 10B(3), ADJUSTMENT IS REQUIRED TO BE MADE ON ACCOUNT OF DIFFERENCE BETWEE N CONTROLLED AND UNCONTROLLED TRANSACTIONS ONLY IF THE DIFFERENCES A RE LIKELY TO MATERIALLY AFFECT THE PRICES CHARGED. SINCE, THE TPO HAS NOTED THAT THE PRODUCTS SOLD BY THE ASSESSEE AND THE COUNTRIES IN WHICH THE PRODUCTS WE RE SOLD ARE PRIMARILY WITHIN ASIA AND AFRICA, THEREFORE, NO EFFECT OF THE GEOGRA PHY ON THE PRICE AND ACCORDINGLY, THERE IS NO ERROR IN THE METHOD SELECT ED BY THE TPO TO BENCHMARK ITS TRANSACTIONS WITH ASSOCIATED ENTERPRISES. 9 ITA 6081/MUM/2018 8. THE LD.AR FOR THE ASSESSEE, AT THE TIME OF HEARI NG, SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE ITAT, MUMBAI BENCH K IN ASSESSEES OWN CASE FOR AY 2013-14 IN ITA NO.7330/MUM/2017 WHERE, UNDER IDENTICAL SET OF FACTS, THE TRIBUNAL H ELD THAT CUP METHOD APPLIED BY THE TPO TO DETERMINE THE ARMS LENGTH PRICE OF T HE PRICE CHARGED FOR SALE OF FINISHED GOODS TO THE AES IS INCORRECT. 9. THE LD.DR, ON THE OTHER HAND, FAIRLY ADMITTED TH AT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT IN A SSESSEES OWN CASE FOR EARLIER YEARS. BUT, FACT REMAINS THAT WHILE DECIDING THE I SSUE, THE TRIBUNAL HAS FOLLOWED THE DECISION O THE TRIBUNAL IN ASSESSEES SISTER CONCERNS CASE. HOWEVER, THE FACTS OF PRESENT CASE MAY NOT BE AT PA R WITH THE CASE CONSIDERED BY THE TRIBUNAL IN ASSESSEES SISTER CONCERNS CASE , BECAUSE THE INDIAN ENTITY MAY NOT BE PAYING ROYALTY; HENCE, BUSINESS MODEL IS DIFFERENT FROM THE ASSESSEE. THEREFORE, THE TPO AS WELL AS THE DRP WE RE RIGHT IN BENCHMARKING ITS INTERNATIONAL TRANSACTIONS BY APPLYING CUP AS MOST APPROPRIATE METHOD AND, THEREFORE, THEIR ORDER SHOULD BE UPHELD. 10. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MAT ERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE REVENUE AUTHORIT IES. WE FIND THAT THE CO- ORDINATE BENCH OF ITAT, MUMBAI BENCH K IN ASSESSE ES OWN CASE FOR AY 2013- 14 IN ITA NO.7330/MUM/2017, HAD AN OCCASION TO CONS IDER AN IDENTICAL ISSUE IN 10 ITA 6081/MUM/2018 LIGHT OF THE FACTS BROUGHT OUT BY THE AO AND RULE 1 0B OF I.T. RULES, 1962 AND HELD THAT WHILE CONSIDERING THE ISSUE OF COMPARABIL ITY WITH AN UNCONTROLLED TRANSACTION, THE CONDITION PREVAILING IN THE MARKET FOR WHICH THE RESPECTIVE PARTIES TO THE TRANSACTION OPERATE, INCLUDING THE G EOGRAPHICAL LOCATION ALONGWITH OTHER FACTORS RELEVANT TO DECIDE WHICH ME THOD IS SUITABLE FOR BENCHMARKING TRANSACTION. 7. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. AS FAR AS THE PRIMARY FACTS ARE CONCERNED, THERE IS NO DISPUTE THAT OUT OF THE SALE S TURNOVER OF FINISHED PRODUCTS SOLD TO THE AE AMOUNTING TO ` 10,13,28,211, BENCHMARKED BY THE ASSESSEE APPLYING TNMM, THE TRANSFER PRICING OFFICER HAS ACCEPTED A M AJOR PART OF THE SALES OF FINISHED PRODUCTS TO THE AES T O BE AT ARM'S LENGTH. HE HAS ONLY RAISED OBJECTIONS IN RESPECT OF THE TURNOVER RELATING TO SPECIFIC FINISHED PRODUCTS SOL D BOTH TO AES AND NONAES. UPON VERIFYING THE PRICE CHARGED FO R SUCH PRODUCTS TO AES AND NONAES, HE HAS OBSERVED THAT T HE PRICE CHARGED TO NONAES IS MORE THAN THE PRICE CHA RGED TO AES. THUS, HE HAS MADE AN UPWARD ADJUSTMENT OF ` 73,04,480, TO THE PRICE CHARGED TO AES FOR SALE OF FINISHED PRODUCTS. ON A PERUSAL OF ANNEXURE1 TO THE ORDER P ASSED BY THE TRANSFER PRICING OFFICER, WHEREIN, HE HAS MA DE COMPARATIVE ANALYSIS OF PRICE CHARGED TO AES AND NO NAES FOR COMMON PRODUCTS, IT IS NOTICED THAT HE HAS SHOR T LISTED EIGHT COMMON PRODUCTS WHICH WERE SOLD BOTH TO AES A ND NONAES. ON A CRITICAL EXAMINATION OF THE DETAILS M ENTIONED IN ANNEXURE1, IT IS NOTICED THAT EXCEPT ONE NON-AE IN U.A.E., ALL OTHER NONAES ARE LOCATED IN INDIA. WHER EAS, THE AES ARE LOCATED OUTSIDE INDIA. EVEN, IN RESPECT OF PRICE CHARGED TO THE SOLITARY NONAE SITUATED OUTSIDE IND IA, THE TRANSFER PRICING OFFICER HAS COMPARED IT TO THE PRI CE CHARGED FOR SIMILAR PRODUCT TO AN AE IN INDIA. THEREFORE, I N STRICT SENSE OF THE TERM, THIS PARTICULAR SALE OF PRODUCT LEMONCELLO TO THE AE IN INDIA CANNOT BE TERMED AS AN INTERNATI ONAL TRANSACTION. BE THAT AS IT MAY, FROM A PERUSAL OF A NNEXURE 11 ITA 6081/MUM/2018 1, IT BECOMES FACTUALLY CLEAR THAT SALE OF SIMILAR PRODUCTS MADE TO BOTH AES AND NONAES ARE IN DIFFERENT GEOGR APHICAL LOCATIONS. WHILE THE AES ARE LOCATED IN FOREIGN COU NTRIES THE NONAES ARE LOCATED IN INDIA. THEREFORE, THE PRICE CHARGED TO NONAES IN INDIA CANNOT BE USED AS A CUP FOR DETERMINING THE ARM'S LENGTH PRICE OF THE SALES OF FINISHED PRODUCTS MADE TO OVERSEAS AES. ONE OF THE CONDITION S OF RULE10B(2) OF THE I.T. RULES, 1962, IS, WHILE CONSI DERING THE ISSUE OF COMPARABILITY WITH AN UNCONTROLLED TRA NSACTION, THE CONDITIONS PREVAILING IN THE MARKETS IN WHICH T HE RESPECTIVE PARTIES TO THE TRANSACTION OPERATE INCLU DING THE GEOGRAPHICAL LOCATION ALONG WITH OTHER FACTORS HAVE TO BE EXAMINED. THEREFORE, GEOGRAPHICAL LOCATION OF THE P ARTY TO WHOM SALES WERE MADE IS A CRUCIAL FACTOR TO BE WEIG HED IN WHILE MAKING COMPARABILITY ANALYSIS. UNDISPUTEDLY, IN THE FACTS OF THE PRESENT APPEAL, THE TRANSFER PRICING O FFICER HAS COMPARED THE PRICE CHARGED TO NONAES LOCATED IN IN DIA WITH THE PRICE CHARGED TO AES IN FOREIGN COUNTRIES. THEREFORE, THE AES AND NONAES BEING SITUATED IN DI FFERENT GEOGRAPHICAL LOCATIONS, THERE MAY BE VARIOUS FACTORS/REASONS WHICH COULD HAVE INFLUENCED THE PRI CE CHARGED BY THE ASSESSEE TO THE AES AND NONAES. HEN CE, THE PRICE CHARGED TO NONAES CANNOT BE CONSIDERED T O BE A CUP TO DETERMINE THE ARM'S LENGTH PRICE OF THE PRICE CHARGED FOR SALE OF FINISHED PRODUCTS TO THE AES. 3. THE COORDINATE BENCH, WHILE DECIDING AN APPEAL REL ATING TO ASSESSEES SISTER CONCERN VIZ. FIRMENICH AROMATI CS PRODUCTION (INDIA) PVT. LTD., IN ITA NO.7145/ MUM./ 2017, DATED 13 TH NOVEMBER 2018, HAD AN OCCASION TO DEAL WITH IDENTICAL ISSUE RELATING TO COMPARABILITY OF THE PR ICE CHARGED TO AES AND NONAES SITUATED IN DIFFERENT GEOGRAPHICAL LOCATIONS. THE TRIBUNAL HELD THAT IN S UCH CIRCUMSTANCES CUP CANNOT BE APPLIED AS THE MOST APPROPRIATE METHOD. IN THIS REGARD, THE DETAILED FI NDING OF THE COORDINATE BENCH IS REPRODUCED HEREUNDER: 7. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. AS FAR AS THE PRIMARY FACTS ARE CONCERNED, THERE IS NO DISPUTE THAT OUT OF THE SALES TURNOVER OF FINISHED PRODUCTS SOLD TO THE AE AMOUNTING TO 10,13,28,211, BENCHMARKED BY THE ASSESSEE APPLYING TNMM, THE TRAN SFER PRICING OFFICER HAS ACCEPTED A MAJOR PART OF THE SA LES OF 12 ITA 6081/MUM/2018 FINISHED PRODUCTS TO THE AES TO BE AT ARM'S LENGTH. HE HAS ONLY RAISED OBJECTIONS IN RESPECT OF THE TURNOVER RELATI NG TO SPECIFIC FINISHED PRODUCTS SOLD BOTH TO AES AND NONAES. UPO N VERIFYING THE PRICE CHARGED FOR SUCH PRODUCTS TO AES AND NON AES, HE HAS OBSERVED THAT THE PRICE CHARGED TO NONAES IS M ORE THAN THE PRICE CHARGED TO AES. THUS, HE HAS MADE AN UPWA RD ADJUSTMENT OF 73,04,480, TO THE PRICE CHARGED TO A ES FOR SALE OF FINISHED PRODUCTS. ON A PERUSAL OF ANNEXURE1 TO THE ORDER PASSED BY THE TRANSFER PRICING OFFICER, WHEREIN, HE HAS MADE COMPARATIVE ANALYSIS OF PRICE CHARGED TO AES AND NO NAES FOR COMMON PRODUCTS, IT IS NOTICED THAT HE HAS SHORT LI STED EIGHT COMMON PRODUCTS WHICH WERE SOLD BOTH TO AES AND NON AES. ON A CRITICAL EXAMINATION OF THE DETAILS MENTIONED IN ANNEXURE 1, IT IS NOTICED THAT EXCEPT ONE NON-AE IN U.A.E., ALL OTHER NON AES ARE LOCATED IN INDIA. WHEREAS, THE AES ARE LOCA TED OUTSIDE INDIA. EVEN, IN RESPECT OF PRICE CHARGED TO THE SOL ITARY NONAE SITUATED OUTSIDE INDIA, THE TRANSFER PRICING OFFICE R HAS COMPARED IT TO THE PRICE CHARGED FOR SIMILAR PRODUC T TO AN AE IN INDIA. THEREFORE, IN STRICT SENSE OF THE TERM, THIS PARTICULAR SALE OF PRODUCT LEMONCELLO TO THE AE IN INDIA CANNOT BE TERMED AS AN INTERNATIONAL TRANSACTION. BE THAT AS IT MAY, FR OM A PERUSAL OF ANNEXURE1, IT BECOMES FACTUALLY CLEAR THAT SALE OF SIMILAR PRODUCTS MADE TO BOTH AES AND NONAES ARE IN DIFFER ENT GEOGRAPHICAL LOCATIONS. WHILE THE AES ARE LOCATED I N FOREIGN COUNTRIES THE NONAES ARE LOCATED IN INDIA. THEREFO RE, THE PRICE CHARGED TO NONAES IN INDIA CANNOT BE USED AS A CUP FOR DETERMINING THE ARM'S LENGTH PRICE OF THE SALES OF FINISHED PRODUCTS MADE TO OVERSEAS AES. ONE OF THE CONDITION S OF RULE 10B(2) OF THE I.T. RULES, 1962, IS, WHILE CONSIDERI NG THE ISSUE OF COMPARABILITY WITH AN UNCONTROLLED TRANSACTION, THE CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTIVE PARTIES TO THE TRANSACTION OPERATE INCLUDING THE GE OGRAPHICAL LOCATION ALONG WITH OTHER FACTORS HAVE TO BE EXAMIN ED. THEREFORE, GEOGRAPHICAL LOCATION OF THE PARTY TO WH OM SALES WERE MADE IS A CRUCIAL FACTOR TO BE WEIGHED IN WHIL E MAKING COMPARABILITY ANALYSIS. UNDISPUTEDLY, IN THE FACTS OF THE PRESENT APPEAL, THE TRANSFER PRICING OFFICER HAS COMPARED T HE PRICE CHARGED TO NONAES LOCATED IN INDIA WITH THE PRICE CHARGED TO AES IN FOREIGN COUNTRIES. THEREFORE, THE AES AND NO NAES BEING SITUATED IN DIFFERENT GEOGRAPHICAL LOCATIONS, THERE MAY BE VARIOUS FACTORS/REASONS WHICH COULD HAVE INFLUENCED THE PRICE CHARGED BY THE ASSESSEE TO THE AES AND NONAES. HEN CE, THE PRICE CHARGED TO NONAES CANNOT BE CONSIDERED TO BE A CUP TO DETERMINE THE ARM'S LENGTH PRICE OF THE PRICE CHARG ED FOR SALE OF FINISHED PRODUCTS TO THE AES. 8. THE COORDINATE BENCH, WHILE DECIDING AN APPEAL RELATING TO ASSESSEES SISTER CONCERN VIZ. FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD., IN ITA NO.7145/ MUM./2017, DATED 13 TH NOVEMBER 2018, HAD AN OCCASION TO DEAL WITH IDENTICAL ISSUE RELATING T O COMPARABILITY OF THE 13 ITA 6081/MUM/2018 PRICE CHARGED TO AES AND NONAES SITUATED IN DIFFER ENT GEOGRAPHICAL LOCATIONS. THE TRIBUNAL HELD THAT IN SUCH CIRCUMSTA NCES CUP CANNOT BE APPLIED AS THE MOST APPROPRIATE METHOD. IN THIS REG ARD, THE DETAILED FINDING OF THE COORDINATE BENCH IS REPRODUCED HERE UNDER: 8. FIRST OF ALL IT IS PERTINENT TO CONSIDER THAT THE PRICE AT WHICH FINISHED PRODUCTS ARE EXPORTED TO AES ARE NOT COMPA RABLE WITH THE DOMESTIC PRICES FOR THE FOLLOWING REASONS: * DIFFERENCES IN THE LEVEL OF MARKET OF THE PRODUCT BY EITHER PARTIES (I.E. TRADERS / MANUFACTURERS); AND * DIFFERENCE IN FUNCTIONAL AND RISK PROFILES; * DIFFERENCES IN VOLUME OF BOTH THE TRANSACTIONS; * DIFFERENCES IN THE GEOGRAPHIC MARKETS; THE REASONS OF DIFFERENCE IN PRICES IS TABULATED BE LOW: REASONS FOR DIFFERENCE EXPORT TO AE LOCAL SALES TO THIRD PARTIES LEVEL OF MARKET THERE ARE DIFFERENT LEVELS OF MARKET IN THE ENTIRE VALUE CHAIN. THE APPELLANT SELLS MANUFACTURED PRODUCTS TO THIRD PARTIES WHO ARE IN THE LAST STEP OF THE ENTIRE VALUE CHAIN VIS--VIS GROUP COMPANIES WHO ARE IN THE SECOND LAST STEP OF THE VALUE CHAIN. FUNCTIONAL DIFFERENCES APPELLANT IS NOT REQUIRED TO UNDERTAKE MARKETING FUNCTIONS, DISTRIBUTION AND OTHER SALES RELATED FUNCTIONS VIS--VIS SALES TO THIRD PARTIES, 14 ITA 6081/MUM/2018 WHERE THE INTENSITY OF SUCH FUNCTIONS ARE VERY HIGH. RISKS DIFFERENCES THE MARKET RISK, BUSINESS RISK, INVENTORY RISK AND CAPACITY UTILIZATION RISK (ON ACCOUNT OF LARGE ORDERS) AND CREDIT RISK (SUPPLY TO GROUP COMPANY) IN CASE OF TRANSACTIONS WITH AES ARE SIGNIFICANTLY LOWER AS COMPARED TO THE TRANSACTIONS WITH THIRD PARTIES. THEREFORE, CONSIDERING THE RISK DIFFERENCES, THE PRICES CHARGED TO THIRD PARTIES ARE HIGHER THAN THE PRICES CHARGED TO AES IN CERTAIN CASES. VOLUME DIFFERENCES HIGH VOLUME (LARGE BULK ORDERS CATERING THE GROUPS REQUIREMEN T RESULTS BETTER MANAGEME NT OF PRODUCTION SUPPLY CHAIN AND RESOURCE MANAGEME NT. LOWER VOLUME (SMALL ORDERS SPECIFIC TO THE REQUIREME NT OF EACH CUSTOMERS ) GEOGRAPHIC AL DIFFERENCE EXPORT PRICES OF SAME PRODUCTS ARE BOUND TO BE DIFFERENT IN DIFFERENT GEOGRAPHICAL LOCATIONS / MARKETS, AS THESE PRICES ARE FACTOR OF BUYING POWER, MARKET SENSITIVITY AND LOCAL COMPETITIONS ETC. THUS IT WOULD NOT BE ECONOMICALLY RIGHT TO COMPARE EXPORT PRICES OF DIFFERENT MARKET OF LOCATIONS. 15 ITA 6081/MUM/2018 9. ACCORDING TO US, THE PRICE AT WHICH FINISHED PRO DUCTS WERE SOLD TO AES ARE NOT COMPARABLE WITH PRICES AT WHICH THEY HAVE BEEN SOLD TO NON-AES FOR THE BELOW MENTIONED REASONS:- I). DIFFERENCES IN VOLUME OF BOTH THE TRANSACTIONS - IT IS GENERAL KNOWLEDGE THAT VOLUMES COMMANDS THE PRICES. PURCHAS E OR SALE OF LOWER QUANTITIES ARE EXPENSIVE, THIS IS USUALLY BEC AUSE OF COST OF TRANSPORTATION FOR DELIVERIES AND ADMINISTRATION CO ST INVOLVED IN HANDLING SMALLER DELIVERIES. THE ASSESSEE IS ENGAGE D IN MANUFACTURING OF AROMATIC INGREDIENTS, NATURAL AND SYNTHETIC PERF UMERY, FLAVORING AND DERIVATIVES. SPECIFIC AND MAJORITY OF THE PRODUCTS MANUFACTURED ARE SOLD TO THE GROUP COMPANIES. HOWEVER, IN THE CIRCUM STANCES WHERE THE GROUP ENTITIES DO NOT WANT A PRODUCT THEN IT IS SOL D IN THE MARKET AT A PRICE BEST NEGOTIATED BY THE ASSESSEE. IN THE TABLE BELOW, THE ASSESSEE HAS PROVIDED THE DETAILS OF THE QUANTITATIVE DIFFER ENCES IN RESPECT OF SALES MADE TO THE AE AND THE NON-AE. SR.NO IN TPO ORDER MATERIAL DESCRIPTION QUANTITY IN KG SOLD TO NON AES QUANTITY IN KG SOLD TO AES ADDITION VALUE (INR) AE SALES TIMES OF NON AE SALES 59 NEOBUTENONE ALPHA 25 32,343 490,680,563 1,294 56 DAMASCENONE TOTAL 25 19,734 490,873,437 789 45 GREAT HEART 28,080 303,840 95,340,394 11 55 ALDEHYDE SUPRA 245 38,528 96,920,377 157 57 DAMASCONE ALPHA 2,175 33,610 84,185,258 15 60 NORLIMBANOL 250 10,825 73,314,292 43 1,331,314,321 THUS, WE FIND FROM THE FACTS OF THE CASE THAT THE Q UANTITIES SOLD TO NON-AES IS SIGNIFICANTLY LOWER AS COMPARED WITH SAL ES MADE TO AES. IN FACT THE DIFFERENCE IN QUANTITIES IS TO THE EXTE NT OF 1,294 TIMES TO 11 TIMES. IT IS NOTEWORTHY THAT THE CUP ANALYSIS O F COMMON PRODUCTS SOLD TO AE AND NON-AE,ONE OF THE EXAMPLE T AKEN FROM THE FACTS OF THE CASE IS THAT W.R.T. PRODUCT DAMASCENO NE TOTAL, THE ASSESSEE HAD SOLD 25 KG TO A NON-AE AT THE RATE OF INR 38,000 PER 16 ITA 6081/MUM/2018 KG AND SOLD 1,260 KG AND 16,299 KG AT THE RATE OF I NR 9,800 AND INR 9,664 RESPECTIVELY TO ITS AE NAMELY, FIRMENICH AROMATICS (CHINA) COMPANY LIMITED AND FIRMENICH SA. SIMILARLY , THE ASSESEE HAS SOLD 50 KG OF THE SAME PRODUCT AT THE RATE OF I NR 36,408 TO OTHER AE. THUS, TPO ERRED IN COMPARING SMALL; QUANT ITIES WITH LARGE QUANTITIES, THEREBY IGNORING THE VOLUME DIFFERENCE. WE ALSO NOTED THAT WHEN THE QUANTITY SOLD TO A NON-AE IS HIGHER T HAN THAT SOLD TO AN AE, THEN THE PRICE CHARGED FROM THE AE IS MORE T HAN NON-AE. THE ASSESSEE ALSO EXPLAINED THAT THIS WOULD SHOW TH AT THE COMPARISON DONE BY THE TPO IS WHOLLY ERRONEOUS. 10. FURTHER ACCORDING TO US, DIFFERENCES IN THE GEOGRAP HIC MARKETS EXPORT PRICES OF SAME PRODUCTS ARE BOUND TO BE DIFFERENT IN DIFFERENT GEOGRAPHICAL LOCATIONS / MARKETS, AS T HESE PRICES ARE FACTOR OF RAW MATERIAL PRICES IN THOSE RESPECTIVE L OCATIONS AND ALSO BECAUSE OF MARKET SENSITIVITY, BARGAINING POWER AND LOCAL COMPETITION. THE FOLLOWING TABLE HIGHLIGHTS THE DIF FERENCES IN GEOGRAPHY AND COVERS MORE THAN 80% OF THE ADJUSTMEN T MADE BY THE TPO. ALSO, TPO HAS COMPARED LOCAL SALES TO THIR D PARTIES WITH EXPORTS TO AES AS UNDER:- SR.NO IN TPOS ORDER MA TERIAL DESCRIPTION NON AE COUNTRY AE COUNTRY ADJUSTMENT MADE (INR) 55 ALDEHYDE SUPRA INDIA BRAZIL, CHINA, SINGAPORE 96,920,377 56 DAMASCENONE TOTAL INDIA SWITZERLAND, SINGAPORE 490,873,437 59 NEOBUTENONE ALPHA INDIA SWITZERLAND, SINGAPORE 490,680,563 60 NORLIMBANOL INDIA BRAZIL, CHINA, SINGAPORE 73,314,292 11. FURTHER, WITH RESPECT TO THE DRP OBSERVATIONS ON GEOGRAPHICAL DIFFERENCES, WE FIND FROM THE FACTS OF THE CASE THAT THE ADJUSTMENT MADE WITH RESPECT TO SALES MADE @ ITEM N O 55, THE MAJORITY OF THE SALES ARE MADE TO AN AE IN SWITZERL AND. OUT OF THE TOTAL AE SALES OF 38,528 KGS OF SALES MADE, 23,310 KGS OF SALES IS MADE TO FIRMENCH SA IN SWITZERLAND WHICH COMPRISES OF 61% OF SALES TO AE. ACCORDING TO US THE TPO ERRED IN SIMPL Y COMPARING THE PRICES OF COMMON PRODUCTS SOLD TO BOTH AES AND NON- AES WITHOUT APPRECIATING THAT THE TWO TRANSACTIONS ARE NOT COMP ARABLE OWING TO DIFFERENCES ON ACCOUNT OF VOLUME, GEOGRAPHY, FUNCTI ONS PERFORMED AND RISKS ASSUMED WHILE TRANSACTING WITH AES AND NO N-AES.ALSO, SUB-RULE (3) OF RULE 10B PROVIDES THAT, UNCONTROLLE D TRANSACTION WOULD NOT BE REGARDED AS BEING COMPARABLE UNLESS AN Y OF THE 17 ITA 6081/MUM/2018 DIFFERENCES BETWEEN THE TRANSACTIONS IF COMPARED AR E LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR THE PROFIT ARISING FROM SUCH TRANSACTION IN THE OPEN MARKET. T HEREFORE, IT IS ESSENTIAL TO ADJUST FOR THE ABOVE MENTIONED DIFFERE NCES IN ORDER TO CREATE LEVEL PAYING FILED IE.. IN ORDER TO ENSURE L IKE BY LIKE COMPARISON. SINCE, THE TPO WAS UNABLE TO QUANTIFY T HE SAME, THE CUP SHOULD NOT BE USED AS THE MOST APPROPRIATE METH OD. 12. WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF THE CO- ORDINATE BENCH OF THIS ITAT IN THE CASE OF M/S. AMP HENOL INTERCONNECT INDIA PVT. LTD., IN ITA NO. 477/PUN/20 15 [TS-201- ITAT-2014(PUN)-TP], WHEREIN IT IS HELD AS UNDER: 8. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSE E BROUGHT OUR ATTENTION TO THE DRP'S ORDER DATED 24-12-2014 AND R EAD OUT THE CONTENTS OF PARA NOS. 3.15 TO 3.17 WHICH READ AS UN DER : '3.15 THE ASSESSEE SUBMITTED THAT THE TPO ALSO DISR EGARDED AND IGNORED TRIBUNAL RULINGS WHICH HAVE LAID DOWN PRINC IPLES THAT THE TRANSACTIONS WILL NOT BE CONSIDERED AS SIMILAR FOR THE PURPOSE OF BENCHMARKING TRANSACTIONS UNDER CUP METHOD MERELY O N ACCOUNT OF SIMILAR PRODUCTS SOLD TO AES TO THIRD PARTIES. THES E RULINGS ARE AS UNDER: INTERVET INDIA PRIVATE LIMITED VS ACIT (ITA NO.31 85/MUM/2006 ACIT VS. DUFON LABORATIORIES (2010-TII-26-ITAT-MUM- TP) RANBAXY LABORATORIES LTD. VS. ASSTT. CIT (208-TII-0 1-ITAT- DEL-TP) GHARDA CHEMICALS LTD. VS. THE DEPUTY COMMISSIONER OF INCOME TAX (ITA NO.2242/MUM/06) SCHUTZ DISHMAN BIOTECH P VT. LTD. VS. DCIT (ITA NO.3590 & 3751/AHD/2007) ITA NO.477/PUN/2 015 DRESSER-RAND INDIA PVT. LTD. VS. ACIT (ITA NO.8753/ MUM/2010 AY 2006-07) AZTEC SOFTWARE AND TECHNOLOGY (ITAT BANG ALORE) AND MSS INDIA PVT. LTD., (ITAT, PUNE). DCIT VS. QUARK SYSTEMS (P) LTD. (ITAT NO.100/CHD/ 2009 - AY 2004-05) AND QUARK SYSTEMS (P) LTD. ITO (ITA NO.115 /CHD/2009 - AY 2004-05) 3.16 THE ASSESSEE HAS SUBMITTED THAT FO R AY 2006-07, 2007-08 AND 2008-09, ON SIMILAR FACTS, THE THEN DRP HAD REJECTED THE OBJECTIONS OF THE ASSESSEE AND UPHELD THE ORDER OF THE TPO. THE ASSESSEE PREFERRED APPEAL BEFORE THE HON'BLE ITAT,P UNE. THE ITAT, 18 ITA 6081/MUM/2018 PUNE VIDE ITS ORDER DATED 30TH MAY, 2014 HAS UPHELD THE STAND OF THE ASSESSE AND ALLOWED ITS APPEAL AGAINST THE ORDE RS OF THE DRP. FINDINGS : 3.17 WE HAVE CONSIDERED THE SUBMISSIONS OF THE ASSE SSEE AS WELL AS THE FINDINGS AND ORDER OF THE TPO. WE HAVE ALSO CON SIDERED THE ORDER DATED 30TH MAY, 2014 OF THE ITAT, PUNE FOR TH E EARLIER ASSESSMENT YEARS 2006-07, 2007-08 AND 2008-09. IN T HE EARLIER ASSESSMENT YEARS, THE ISSUES INVOLVED BEFORE THE IT AT WERE ADJUSTMENTS MADE BY THE TPO TO SOME OF THE TRANSACT IONS IN RESPECT OF EXPORTS AND IMPORTS AND PAYMENT OF COMMI SSION BY THE ASSESSEE TO ITS AE. THE ITAT HAS DEALT WITH ALL THE THREE ISSUES AND GIVEN ITS FINDING IN FAVOUR OF THE ASSESSEE. THE AS SESSEE HAS SUBMITTED BEFORE US A NOTE ON THE ITAT ORDER AND PO INTS OF SIMILARITY WITH THE FACTS OF THE ASSESSEE'S CASE IN THE CURRENT AY 2010-11. UPON GOING THROUGH THE SAME, WE FIND THAT THE ISSUES INVOLVED BEFORE THE DRP IN THE CURRENT ASSESSMENT Y EAR RELATE TO ADJUSTMENTS MADE BY THE TPO IN RELATION TO SOME OF THE EXPORTS AND IMPORTS ON REASONING SIMILAR TO THE EARLIER ASS ESSMENT YEARS WHICH HAVE NOW BEEN ADJUDICATED BY THE ITAT, PUNE I N FAVOUR OF THE ASSESSEE. IN THE CIRCUMSTANCES, RESPECTFULLY FOLLOWING THE RA TIO LAID DOWN BY THE HON'BLE ITAT, PUNE IN THE ASSESSEE'S OWN CASE F OR THE EARLIER ASSESSMENT YEARS, THE ASSESSEE'S OBJECTION IS ALLOW ED. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED NOT TO MAKE ANY A DJUSTMENT WITH REGARD TO THE EXPORT OF FINISHED GOODS AND IMPORT O F RAW MATERIALS.' 9. FROM THE ABOVE, WE FIND IN PRINCIPLE THE FACTS A RE THE SAME. IN THOSE YEARS TOO, TRANSFER PRICING ADJUSTMENTS WERE MADE TO THE TRANSACTIONS WITH ASSOCIATED ENTERPRISES WITH REFER ENCE TO THE EXPORT OF GOODS AND IMPORT OF THE RAW MATERIALS. AP PROPRIATENESS OF THE TNMM METHOD WAS ALSO THE ISSUE IN THOSE YEAR S. TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND DIS MISSED THE APPEAL OF THE REVENUE ON THOSE ISSUES. AFTER HEARIN G BOTH THE ITA NO.477/PUN/2015 SIDES AND PERUSING THE CONTENTS OF THE DRP, WE ARE OF THE OPINION THAT THE ORDER PASSED BY THE DRP WITH REFERENCE TO THE MOST APPROPRIATE ACCOUNTING METHOD FOR TP ST UDY, IS FAIR AND 19 ITA 6081/MUM/2018 REASONABLE AND SAME DOES NOT CALL FOR ANY INTERFERE NCE. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DI SMISSED. 13. FURTHER, HONBLE BOMBAY HIGH COURT DISMISSED TH E APPEAL OF THE DEPARTMENT FILED BY THE DEPARTMENT AGAINST THE ITAT S ORDER AND NOTED THAT IN THIS CASE, SINCE THE FINISHED GOODS A RE CUSTOMIZED GOODS AND THE GEOGRAPHICAL DIFFERENCES, VOLUME DIFF ERENCES, TIMING DIFFERENCES, RISK DIFFERENCES AND FUNCTIONAL DIFFER ENCES, THE CUP METHOD WOULD NOT BE THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP. IT UPHELD THE STAND OF THE ASSESSEE THAT TNMM IS THE MOST APPROPRIATE METHOD TO ARRIVE AT ALP. THIS JUDGEMENT IS REPORTED AS PCIT VS. M/S. AMPHENOL INTERCONNECT INDIA PVT. LTD. , (SUPRA). 14. IN VIEW OF THE ABOVE FACTS OF THE CASE AND THE ISSUE BEING COVERED BY THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF PCIT VS. M/S. AMPHENOL INTERCONNECT IND IA PVT. LTD., (SUPRA)AND WHICH IS AFFIRMED BY THE HONBLE BOMBAY HIGH COURT, RESPECTFULLY FOLLOWING THE SAME WE DELETE THE ADDIT ION AND ALLOW THIS ISSUE OF ASSESSEES APPEAL. 9.THE PRINCIPLE/RATIO LAID DOWN BY THE COORDINATE BENCH IN THE AFORESAID DECISION SQUARELY APPLIES TO THE FACT S OF THE PRESENT APPEAL AS WELL. THEREFORE, WE HOLD THAT CUP METHOD APPLIED BY THE TRANSFER PRICING OFFICER TO DETERMIN E THE ARM'S LENGTH PRICE OF THE PRICE CHARGED FOR SALE OF FINISHED PRODUCTS TO THE AES IS INVALID. ACCORDINGLY, ACCEPT ING ASSESSEES CLAIM WE DELETE THE ADDITION MADE BY THE ASSESSING OFFICER. GROUND RAISED IS ALLOWED. 11. IN THIS VIEW OF THE MATTER AND CONSISTENT WITH THE VIEW TAKEN BY THE CO- ORDINATE BENCH, WE ARE OF THE CONSIDERED VIEW THAT THE TPO AS WELL AS THE LD.DRP WERE ERRED IN APPLYING CUP AS MOST APPROPRIA TE METHOD TO DETERMINE THE ARMS LENGTH PRICE OF TRANSACTIONS OF THE ASSES SEE WITH ITS AES FOR SALE OF 20 ITA 6081/MUM/2018 FINISHED GOODS. ACCORDINGLY, WE DIRECT THE AO / TP O TO DELETE TP ADJUSTMENT OF RS.3,18,81,702 IN RELATION TO EXPORT OF FINISHED GO ODS. 12. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND 2 IS TP ADJUSTMENT OF RS.3,96,903,06 IN RELATION TO PAYMENT OF ROYALTIES FOR USE OF TECHNICAL KNOW HOW. THE BRIEF FACTS OF THE IMPUGNE D DISPUTE ARE THAT IN THE COURSE OF TRANSFER PRICING PROCEEDINGS, ON EXAMINAT ION OF THE TP STUDY CONDUCTED BY THE ASSESSEE, THE TPO NOTICED THAT THE ASSESSEE HAS AGGREGATED ALL INTERNATIONAL TRANSACTIONS AND BENCHMARKED IT A T ENTRY LEVEL BY APPLYING TNMM AS THE MOST APPROPRIATE METHOD. FURTHER, THE TPO, AFTER CONSIDERING SUBMISSIONS OF THE ASSESSEE, HELD THAT ROYALTY PAYM ENT TO THE AE WAS NOT JUSTIFIED DUE TO REASONS THAT THE ASSESSEE HAS NOT SUBMITTED ANY DOCUMENTARY EVIDENCE REGARDING TRANSFER OF TECHNICAL KNOW HOW B Y THE AE WHICH SHOULD HAVE BEEN USED BY THE ASSESSEE IN THE MANUFACTURING PROCESS AND ALSO THE ASSESSEE HAS FAILED TO EXPLAIN THE MANUFACTURING PR OCESS USED BY IT. FURTHER, THE TPO HELD THAT SINCE THE ASSESSEE WAS PAYING ROY ALTIES SINCE 1997, IT IS NOT REQUIRED TO BE PAID ANY MORE, BECAUSE THE ASSESSEE NO MORE NEEDS TECHNICAL KNOW HOW FROM THE AE. HE, FURTHER OBSERVED THAT TH E AE HAS NOT COLLECTED ANY ROYALTY FOR TECHNICAL KNOW HOW FROM ANOTHER SUBSIDI ARY IN INDIA. THUS, ON THE BASIS OF THE AFORESAID REASONS, THE TPO FINALLY CON CLUDED THAT THE ASSESSEE HAVING FAILED TO MAKE OUT A CASE THAT THE PAYMENT O F ROYALTY TO THE AE IS FOR THE 21 ITA 6081/MUM/2018 PURPOSE OF BUSINESS, AND IT HAS TO BE ALLOWED U/S 3 7(1) OF THE ACT. THE LD.DRP HAS CONFIRMED TP ADJUSTMENT SUGGESTED BY THE TPO IN RESPECT OF PAYMENT OF ROYALTY FOR USE OF TECHNICAL KNOW HOW. 13. THE LD.AR FOR THE ASSESSEE , AT THE TIME OF HEA RING, SUBMITTED THAT THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF OF THE ITAT, MUMBAI BENCH K IN ASSESSEES OWN CASE FOR AY 2013 -14 IN ITA NO.7330/MUM/2017, WHERE IT WAS HELD THAT CUP METHOD CANNOT BE APPLIED FOR BENCHMARKING INTERNATIONAL TRANSACTIONS WITH REGARD TO PAYMENT OF ROYALTY FOR USE OF TECHNICAL KNOW HOW BECAUSE OF GEOGRAPHICAL D IFFERENCES. 14. THE LD.DR, ON THE OTHER HAND, FAIRLY ACCEPTED T HAT THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F DECISION OF THE ITAT, MUMBAI BENCH K IN ASSESSEES OWN CASE FOR AY 2013 -14 IN ITA NO.7330/MUM/2017. HOWEVER, HE REITERATED THE OBSER VATIONS OF THE TPO AND LD.DRP. 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED MATE RIAL AVAILABLE ON RECORD. WE FIND THAT THE TRIBUNAL HAD AN OCCASION TO CONSID ER AN IDENTICAL ISSUE IN ASSESSEES OWN CASE FOR AY 20-13-14 AND AFTER CONSI DERING RELEVANT SUBMISSIONS OF THE ASSESSEE AND ALSO BY FOLLOWING ITS EARLIER O RDER IN ASSESSEES OWN CASE FOR AY 2012-13 HELD THAT CUP IS NOT MOST APPROPRIATE ME THOD FOR BENCHMARKING 22 ITA 6081/MUM/2018 ROYALTY PAYMENT FOR USE OF TECHNICAL KNOW HOW BECAU SE OF GEOGRAPHICAL DIFFERENCES. THE RELEVANT FINDINGS OF THE TRIBUNAL ARE AS UNDER:- 14. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUS ED MATERIAL ON RECORD. FACTUAL MATRIX RELATING TO THE DISPUTED ISS UE REVEALS THAT THE ASSESSEE HAS BENCHMARKED THE TRANSACTIONS RELATING TO ROYALTY PAYMENT ALONG WITH OTHER TRANSACTIONS ADOPTING TNMM AS THE MOST APPROPRIATE METHOD. THE TRANSFER PRICING OFFICER HA S REJECTED THE BENCHMARKING OF THE ASSESSEE PRIMARILY FOR THE REAS ON THAT THE PAYMENT OF ROYALTY NOT BEING FOR THE PURPOSE OF BUS INESS HAS TO BE DISALLOWED UNDER SECTION 37(1) OF THE ACT. HOWEVER, ULTIMATELY, HE HAS ALLOWED, ON ADHOC BASIS, 10% OF THE AMOUNT PAID BY THE ASSESSEE TO THE AE TOWARDS ROYALTY. OF COURSE, REFERRING TO CER TAIN AGREEMENTS BETWEEN UNRELATED PARTIES, WHICH ACCORDING TO HIM C AN BE USED AS EXTERNAL CUP, THE TRANSFER PRICING OFFICER HAS CONC LUDED THAT 1% OF THE NET VALUE ADDED SALES CAN BE DETERMINED AS THE ARM' S LENGTH PRICE OF THE ROYALTY PAID TO THE AE. IT IS VERY MUCH CLEAR, WHILE COMING TO SUCH CONCLUSION, THE TRANSFER PRICING OFFICER HAS WHOLLY RELIED UPON THE ORDER PASSED BY HIM IN ASSESSEES OWN CASE FOR ASSE SSMENT YEAR 201213. IT IS RELEVANT TO OBSERVE, WHILE DECIDING IDENTICAL ISSUE ARISING IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 201213, THE TRIBUNAL IN ITA NO.2590/MUM./2017, DATED 23 RD JULY 2018, HAS DECIDED THE ISSUE IN THE FOLLOWING MANNER: 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS AND PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO APPLIED OUR MI ND TO THE DECISIONS RELIED UPON BY BOTH THE PARTIES. THE DISPUTE IN THI S GROUND RELATES TO DETERMINATION OF ARM'S LENGTH PRICE OF THE ROYALTY PAID BY THE ASSESSEE TO ITS AE. AS COULD BE SEEN FROM THE FACTS ON RECOR D, THE ASSESSEE IS AVAILING TECHNICAL KNOWHOW FROM ITS AE IN SWITZERLA ND SINCE PAST SO MANY YEARS AND PAYING ROYALTY FOR THE SERVICES AVAI LED. FOR THIS PURPOSE, THE ASSESSEE HAS ENTERED INTO A LICENSE AG REEMENT WITH THE AE FROM THE VERY INCEPTION OF CARRYING OUT THE MANU FACTURING ACTIVITY OF INDUSTRIAL FLAVOURS AND FRAGRANCES, WHICH HAS BE EN RENEWED FROM TIMETOTIME. THE TRANSACTIONS IN THE IMPUGNED ASSE SSMENT YEAR WERE UNDER A LICENSE AGREEMENT EXECUTED ON 1 ST APRIL 2009. THOUGH, THE ASSESSEE WAS REQUIRED TO PAY ROYALTY @ 5% ON LOCAL SALES AND @ 8% ON EXPORT SALES, NET OF INDIAN TAXES, HOWEVER, THER E IS NO MAJOR CHANGE IN THE TERMS OF THE CONTRACT, EXCEPT FOR THE FACT THAT THE IN THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE HAS PAID ROY ALTY ON THE GROSS SALES INSTEAD OF NET SALES AS WAS DONE IN THE PRECE DING ASSESSMENT YEARS. IN THE TRANSFER PRICING STUDY THE ASSESSEE H AS BENCHMARKED THE ROYALTY PAYMENT BY APPLYING TNMM AS THE MOST APPROP RIATE METHOD AND HAS AGGREGATED IT WITH OTHER INTERNATIONAL TRAN SACTIONS IN THE MANUFACTURING SEGMENT WITH OPERATING PROFIT / SALES AS THE PROFIT LEVEL INDICATOR. THE ASSESSEE HAS SELECTED A SET OF SIX C OMPARABLES WITH AVERAGE MARGIN OF 7.40% AS AGAINST ITS OWN MARGIN O F 5.23%. HENCE, THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSAC TION WAS CLAIMED TO 23 ITA 6081/MUM/2018 BE AT ARM'S LENGTH. NOTABLY, THE TRANSFER PRICING O FFICER HAS ACCEPTED ASSESSEES BENCHMARKING BY APPLY TNMM IN RESPECT OF ALL TRANSACTIONS IN MANUFACTURING SEGMENT EXCEPT PAYMENT OF ROYALTY. PERTINENTLY, ON A PERUSAL OF THE ORDER OF THE TRANSFER PRICING OFFICE R, IT IS EVIDENT THAT THE TRANSFER PRICING OFFICER HAS RAISED DOUBT / SUS PICION WITH REGARD TO PAYMENT OF ROYALTY BASICALLY FOR THE REASON OF BUSI NESS EXPEDIENCY. THE TRANSFER PRICING OFFICER HAS OBSERVED, SINCE TH E ASSESSEE WAS AVAILING THE TECHNICAL KNOWHOW FROM THE AE AND PAYI NG ROYALTY SINCE 1997, IT DOES NOT REQUIRE ANY FURTHER TECHNICAL HEL P FROM THE AE WITH REGARD TO ITS MANUFACTURING ACTIVITY OF INDUSTRIAL FLAVOURS AND FRAGRANCES. THUS, THE TRANSFER PRICING OFFICER HAS ULTIMATELY CONCLUDED THAT THE ROYALTY PAYMENT NEEDS TO BE DISALLOWED UND ER SECTION 37(1) OF THE ACT IN THE ABSENCE OF ANY EVIDENCE TO SUGGEST T RANSFER OF TECHNICAL KNOWHOW DURING THE YEAR. HAVING HELD SO, THE TRANSF ER PRICING OFFICER AGAIN OBSERVED THAT SINCE THE ASSESSEE MIGHT BE GET TING SOME TECHNICAL INPUTS TO RUN HIS MANUFACTURING PLAN, HE IS REQUIRED TO PAY 10% OF THE ROYALTY PAID TO THE AE DURING THE YEAR. ACCORDINGLY, HE DETERMINED THE ARM'S LENGTH PRICE OF THE ROYALTY PA YMENT AT ` 2,01,19,124 AS AGAINST THE AMOUNT OF ` 18,10,72,120 ACTUALLY PAID BY THE ASSESSEE. THUS, IT IS EVIDENT THAT THE TRANSFER PRICING OFFICER HAS DETERMINED THE ARM'S LENGTH PRICE OF ROYALTY PAYMEN T BY MAKING AN ADHOC ADJUSTMENT PURELY ON ESTIMATE BASIS WITHOUT FOLLOWING ANY APPROVED METHOD FOR DETERMINATION OF ARM'S LENGTH P RICE AS PRESCRIBED UNDER THE STATUTORY PROVISIONS. THUS, THE PRIMARY I SSUE WHICH ARISES FOR CONSIDERATION IS, WHETHER THE TRANSFER PRICING OFFICER HAS POWER UNDER THE STATUTE TO DETERMINE THE ARM'S LENGTH PRI CE OF INTERNATIONAL TRANSACTION ON ESTIMATE BASIS BY WEIGHING IN THE BU SINESS EXPEDIENCY FACTOR. IN OUR CONSIDERED OPINION THE LEGAL PRINCIP LE ON THE ISSUE IS QUITE CLEAR. AS COULD BE SEEN FROM THE SCHEME OF TH E INCOME TAX ACT, 1961, CHAPTERX CONTAINS SPECIAL PROVISIONS RELATIN G TO AVOIDANCE OF TAX WITH REGARD TO INTERNATIONAL TRANSACTION BETWEE N RELATED PARTIES. SECTION 92 OF THE ACT PROVIDES FOR COMPUTATION OF I NCOME ARISING FROM INTERNATIONAL TRANSACTION AT ARM'S LENGTH PRICE. SE CTION 92C OF THE ACT PROVIDES FOR DETERMINATION OF ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION BY APPLYING THE MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION FOR CLASS OF TRANSACTION OR FUNCTIONS PERFORMED, ETC. THE MOST APPROPRIATE METHOD PRESCRI BED ARE AS UNDER: I) COMPARABLE UNCONTROLLED PRICE METHOD; II) RESALE PRICE METHOD; III) COST PLUS METHOD; IV) PROFIT SPLIT METHOD; V) TRANSACTIONAL NET MARGIN METHOD; AND VI) SUCH OTHER METHODS, AS MAY BE PRESCRIBED BY THE BOA RD. 12. RULE 10B OF INCOME TAX RULES, 1962 (FOR SHORT THE RULES), PROVIDES THE MECHANISM FOR DETERMINATION OF ARM'S L ENGTH PRICE UNDER THE AFORESAID METHODS PRESCRIBED UNDER SECTION 92C OF THE ACT. IF THE 24 ITA 6081/MUM/2018 ASSESSING OFFICER IN COURSE OF ASSESSMENT PROCEEDIN GS FINDS THAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION S WITH ITS AE, HE MAY WITH THE PREVIOUS APPROVAL OF THE AUTHORITY CON CERNED MAKE A REFERENCE TO THE TRANSFER PRICING OFFICER UNDER SEC TION 92CA(1) OF THE ACT TO COMPUTE THE ARM'S LENGTH PRICE OF THE INTERN ATIONAL TRANSACTION BY APPLYING ANY OF THE METHODS PRESCRIBED UNDER SEC TION 92C OF THE ACT. AFTER RECEIVING SUCH A REFERENCE FROM THE ASSE SSING OFFICER, THE TRANSFER PRICING OFFICER IS REQUIRED TO DETERMINE T HE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION AS PER THE PROVISI ONS CONTAINED UNDER SECTION 92C AND 92CA OF THE ACT READ WITH RELEVANT RULES. THUS, AS COULD BE SEEN FROM THE READING OF THE AFORESAID PRO VISIONS, THE DUTY OF THE TRANSFER PRICING OFFICER IS RESTRICTED ONLY TO THE DETERMINATION OF ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION BETWEEN TWO RELATED PARTIES BY APPLYING ANY OF THE METHODS PRESCRIBED U NDER SECTION 92C OF THE ACT R/W RULE 10B OF THE RULES. THUS, THERE I S NO PROVISION UNDER THE ACT EMPOWERING THE TRANSFER PRICING OFFICER TO DETERMINE THE ARM'S LENGTH PRICE ON ESTIMATION BASIS, THAT TOO, BY ENTE RTAINING DOUBTS WITH REGARD TO THE BUSINESS EXPEDIENCY OF THE PAYMENT AN D IN THE PROCESS STEPPING INTO THE SHOES OF THE ASSESSING OFFICER FO R MAKING DISALLOWANCE UNDER SECTION 37(1) OF THE ACT. THIS, IN OUR CONSIDERED OPINION, IS NOT IN CONFORMITY WITH THE STATUTORY PR OVISION, HENCE, UNACCEPTABLE. THE TRANSFER PRICING OFFICER IS DUTY BOUND TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSAC TION BY ADOPTING ONE OF THE METHOD PRESCRIBED UNDER THE STATUTE AND CANN OT DEVIATE FROM THE RESTRICTIONS / CONDITIONS IMPOSED UNDER THE STA TUTE. THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S JOHNSON & JOHN SON LTD., ITA NO.1030/2014, DATED 7 TH MARCH 2017, WHILE DEALING WITH IDENTICAL ISSUE OF DETERMINATION OF ARM'S LENGTH PRICE OF ROYALTY B Y RESORTING TO ESTIMATION BY THE TRANSFER PRICING OFFICER HAS HELD AS UNDER: (D) WE FIND THAT THE IMPUGNED ORDER OF THE TRIBUNA L UPHOLDING THE ORDER OF THE CIT(A) IN THE PRESENT FACTS CANNOT BE FOUND FAULT WITH. THE TPO IS MANDATED BY LAW TO DETERMINE THE ALP BY FOLL OWING ONE OF THE METHODS PRESCRIBED IN SECTION 92C OF THE ACT READ W ITH RULE 10B OF THE INCOME TAX RULES. HOWEVER, THE AFORESAID EXERCISE O F DETERMINING THE ALP IN RESPECT OF THE ROYALTY PAYABLE FOR TECHNICAL KNOWHOW HAS NOT BEEN CARRIED OUT AS REQUIRED UNDER THE ACT. FURTHER , AS HELD BY THE CIT(A) AND UPHELD BY THE IMPUGNED ORDER OF THE TRIB UNAL, THE TPO HAS GIVEN NO REASONS JUSTIFYING THE TECHNICAL KNOW HOW ROYALTY PAID BY THE ASSESSING OFFICER TO ITS ASSOCIATED ENTERPRISE BEIN G RESTRICTED TO 1% INSTEAD OF 2%, AS CLAIMED BY THE RESPONDENT ASSESSE E. THIS DETERMINATION OF ALP OF TECHNICAL KNOW HOW ROYALTY BY THE TPO WAS ADHOC AND ARBITRARY AS HELD BY THE CIT(A) AND THE TRIBUNAL. 13. THE TRIBUNAL, HYDERABAD BENCH IN R.A.K. CERAMI CS INDIA PVT. LTD. (SUPRA) WHILE DEALING WITH IDENTICAL NATURE OF DISP UTE RELATING TO 25 ITA 6081/MUM/2018 DETERMINATION OF ARM'S LENGTH PRICE OF ROYALTY PAYM ENT BY ESTIMATION HELD AS UNDER: 7. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY LEAR NED COUNSELS FROM BOTH THE SIDES AND PERUSED THE ORDERS OF DEPAR TMENTAL AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. WE HAVE ALSO CAREFULLY EXAMINED THE DECISIONS PLACED BEFORE US. AT THE OUTSET, IT N EEDS TO BE MENTIONED, THE ONLY DISPUTE ARISING FOR CONSIDERATI ON BEFORE US IS DETERMINATION OF ALP OF ROYALTY AT 2% BY TPO AS AGA INST 3% CLAIMED BY ASSESSEE. UNDISPUTEDLY, ASSESSEE ON 01/04/2009 H AS ENTERED INTO A ROYALTY AGREEMENT WITH ITS AE, RAK, UAE. AS PER CLA USE 1.1 OF THE AGREEMENT, RAK, UAE WILL PROVIDE THE TECHNOLOGY ASS ISTANCE AND ON- GOING PROCESS, PRODUCT IMPROVEMENT AND COMPLETE KNO W-HOW ASSISTANCE TO ASSESSEE. CLAUSE 2.1 OF THE AGREEMENT STIPULATES, ASSESSEE SHALL MANUFACTURE THE PRODUCTS IN KEEPING WITH THE HIGHEST QUALITY STANDARDS, RULES, AND SPECIFICATIONS INTERN ATIONALLY AVAILABLE AND IN ACCORDANCE WITH GUIDELINES ESTABLISHED FROM TIME TO TIME BY RAK, UAE. FURTHER, ASSESSEE SHALL USE APPARATUS, ANCILLA RY EQUIPMENT, ACCESSORIES AND MATERIALS THAT WILL ENSURE THAT SUC H STANDARDS, RULES, SPECIFICATIONS AND GUIDELINES ARE MET. CLAUSE 3.1 O F THE AGREEMENT PROVIDES, IN CONSIDERATION OF THE ONGOING TECHNICAL ASSISTANCE ON PROCESS AND PRODUCT IMPROVEMENT TO BE PROVIDED OR A NY OTHER SERVICES AS SPECIFIED IN THE AGREEMENT, INCLUDING ANY TECHNO LOGY OR SERVICES PROVIDED, ASSESSEE SHALL PAY TO RAK, UAE ROYALTY EQ UIVALENT TO 3% OF THE NET EX-FACTORY SALE PRICE OF THE PRODUCTS ON BO TH DOMESTIC AS WELL AS EXPORT SALES DURING THE TENURE OF THE ROYALTY AG REEMENT. 8. FROM THE CLAUSES OF THE ROYALTY AGREEMENT REFERR ED TO ABOVE, IT BECOMES CLEAR NOT ONLY RAK, UAE, WILL PROVIDE THE T ECHNICAL KNOW-HOW AND ASSISTANCE FOR MANUFACTURING PRODUCTS, BUT, ASS ESSEE WILL ALSO HAVE TO MANUFACTURE BY USING SUCH TECHNICAL KNOW-HO W, ASSISTANCE IN ACCORDANCE WITH INTERNATIONAL STANDARDS AND GUIDELI NES SET BY RAK, UAE. FOR USING SUCH TECHNICAL KNOW-HOW, ASSISTANCE, ETC. ASSESSEE IS REQUIRED TO PAY ROYALTY OF 3% TO ITS AE BOTH ON DOM ESTIC AND EXPORT SALES. DEPARTMENT HAS NOT DENIED EXISTENCE OF ROYAL TY AGREEMENT NOR THE FACT THAT PAYMENT OF ROYALTY AT 3% IS AS PER TH E TERMS OF THE AGREEMENT. TPO HAS ALSO NOT DISPUTED THE FACT THAT THERE IS TRANSFER OF TECHNICAL KNOW-HOW AND ASSISTANCE FROM THE AE TO AS SESSEE. WHAT THE TPO DISPUTES IS THE QUANTUM OF ROYALTY PAID. AS CAN BE SEEN FROM THE TP REPORT OF THE ASSESSEE AS WELL AS OTHER MATERIAL S ON RECORD, ASSESSEE HAS BENCHMARKED ALP OF ROYALTY PAID TO AE BY APPLYING TNMM. AS AVERAGE MARGIN OF COMPARABLES SELECTED WAS 4.32% AS AGAINST ASSESSEE'S MARGIN OF 11.69%, PAYMENT OF ROY ALTY WAS FOUND TO BE WITHIN ARM'S LENGTH. ASSESSEE ALSO UNDERTOOK ALT ERNATIVE ANALYSIS UNDER CUP METHOD. ASSESSEE HAS SEARCHED ROYALSTAT D ATABASE WHICH YIELDED THREE COMPANIES AS COMPARABLES WITH AVERAGE ROYALTY PAID OF 3.65% ON NET SALES AS AGAINST 3% BY ASSESSEE. THERE FORE, EVEN UNDER CUP METHOD ALSO PAYMENT OF ROYALTY AT 3% WAS FOUND TO BE WITHIN ARM'S LENGTH. THE TPO DID NOT ACCEPT ASSESSEE'S TP ANALYSIS UNDER TNMM BY OBSERVING THAT PAYMENT OF ROYALTY BEING AN INTANGIBLE 26 ITA 6081/MUM/2018 TRANSACTION SHOULD NOT HAVE BEEN AGGREGATED WITH TA NGIBLE TRANSACTIONS. AS FAR AS, ASSESSEE'S ANALYSIS UNDER CUP METHOD IS CONCERNED, TPO HAS REJECTED IT CITING FOLLOWING REA SONS: I ) IT IS AN ALTERNATE ANALYSIS I I ) DATABASE USED IS FOR US BASED COMPANIES I I I ) COPIES OF AGREEMENTS NOT FURNISHED; AND I V ) BENCH MARKING HAS TO BE DONE FOR INDIAN COMPANIES IN SIMILAR TRADE MAKING ROYALTY PAYMENT. 9. FURTHER, IT IS EVIDENT FROM TP ORDER, THOUGH, TP O HAS NOT BROUGHT ANY MATERIAL TO CONTROVERT ASSESSEE'S CLAIM OF RECE IVING PECUNIARY BENEFIT FROM THE TECHNICAL KNOW-HOW PROVIDED BY AE, IN TERMS OF SIZEABLE SALES, GARNERING OF CREDITABLE MARKET SHAR E, MINIMAL PRODUCT RECALLS, LOW AFTER SALES MAINTENANCE COST ETC. BUT HE TRIED TO OVERCOME IT BY OBSERVING THAT SUCH INCREASE IN SALE IS AS A RESULT OF INCREASE IN ADVERTISEMENT & MARKETING EXPENSES AND ALSO ON PAYM ENT OF COMMISSION AND DISCOUNT. TPO OBSERVED, UPGRADATION IN TECHNICAL EXPERTISE OF AE IS AS A RESULT OF INPUTS BY THE ASS ESSEE WITH REGARD TO MARKET TRENDS IN INDIA. TPO ALSO OBSERVED THAT ROYA LTY PAYMENT WILL ALSO DEPEND UPON MARKET SHARE, WHICH ACCORDING TO T PO, RAK, UAE IS NOT HAVING. THUS, TPO FINALLY CONCLUDED AS ASSESSEE HAS FAILED TO SATISFY THE BENEFIT TEST, PAYMENT OF ROYALTY AT 3% ON NET SALES TO AE IS NOT JUSTIFIED. TPO, THEREFORE, HELD THAT ARM'S LENG TH PERCENTAGE OF ROYALTY PAYMENT SHOULD BE 2%. 10. WE ARE REALLY SURPRISED TO SEE THE REASONING OF TPO IN FIXING THE ALP OF ROYALTY PAYMENT AT 2%. IT IS MANIFEST FROM T PO'S ORDER HE HAS REJECTED ASSESSEE'S TP ANALYSIS UNDER TNMM. FURTHER , IN PARA 6.4 OF HIS ORDER, TPO HAS MENTIONED OF UNDERTAKING AN INDEPEND ENT ANALYSIS UNDER TNMM FOR SELECTING COMPARABLES AND DETERMININ G ALP. HOWEVER, EVEN AFTER REPEATEDLY SCANNING THROUGH HIS ORDER, W E FAILED TO FIND ANY SUCH ANALYSIS BEING DONE BY HIM. SIMILARLY, THOUGH IN PARA 5.1.1, LD. DRP HAS OBSERVED THAT TPO HAS BENCHMARKED INTANGIBL E TRANSACTIONS BY USING CUP, BUT, THE ORDER PASSED BY TPO DOES NOT SUPPORT SUCH CONCLUSION. IT IS AN ACCEPTED PRINCIPLE OF LAW THAT TPO HAS TO DETERMINE THE ALP BY ADOPTING ANY ONE OF THE METHODS PRESCRIB ED U/S 92C OF THE ACT. MODE AND MANNER OF COMPUTATION OF ALP UNDER DI FFERENT METHODS HAVE BEEN LAID DOWN IN RULE 10B. EVEN, ASSUMING THA T TPO HAS FOLLOWED CUP METHOD FOR DETERMINING ALP OF ROYALTY PAYMENT, AS HELD BY LD. DRP, IT NEEDS TO BE EXAMINED IF IT IS STRICT LY IN COMPLIANCE WITH STATUTORY PROVISIONS. RULE 10B(1)(A) LAYS DOWN THE PROCEDURE FOR 27 ITA 6081/MUM/2018 DETERMINING ALP UNDER CUP METHOD. AS PER THE SAID P ROVISION, TPO AT FIRST HAS TO FIND OUT THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED T RANSACTION, OR A NUMBER OF SUCH TRANSACTIONS. THEREAFTER, MAKING NEC ESSARY ADJUSTMENTS TO SUCH PRICE, ON ACCOUNT OF DIFFERENCE S BETWEEN THE INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLL ED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET, TPO WILL DETERMINE THE ALP. IT IS PATENT AND OBVIOUS FROM TPO'S ORDER, THE DETERMINATION OF ALP AT 2% IS NOT AT ALL IN CONFORMITY WITH RULE 10B (1)(A). THE TPO HAS NOT BROUGHT EVEN A SINGLE COMPARABLE TO JUSTIFY ARM 'S LENGTH PERCENTAGE OF ROYALTY AT 2% EITHER UNDER CUP OR TNM M METHOD. ON THE CONTRARY, OBSERVATIONS MADE BY TPO GIVES AMPLE SCOPE TO CONCLUDE THAT ADOPTION OF ROYALTY AT 2% IS NEITHER ON THE BA SIS OF ANY APPROVED METHOD NOR ANY REASONABLE BASIS. RATHER IT IS ON AD HOC OR ESTIMATE BASIS, HENCE, NOT IN ACCORDANCE WITH STATUTORY PROV ISIONS. THE APPROACH OF TPO IN ESTIMATING ROYALTY AT 2% BY APPL YING THE BENEFIT TEST, IN OUR VIEW, IS NOT ONLY IN COMPLETE VIOLATIO N OF TP PROVISIONS BUT AGAINST THE SETTLED PRINCIPLES OF LAW. ITAT, MUMBAI BENCH IN CASE OF CASTROL INDIA LTD. (SUPRA) WHILE EXAMINING IDENT ICAL ISSUE OF DETERMINATION OF ALP AT 'NIL' BY APPLYING THE BENEF IT TEST HELD AS UNDER: '11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT TH E IMPUGNED ROYALTY WAS PAID BY THE ASSESSEE COMPANY TO ITS AE NAMELY C ASTROL LTD. UK AT 3.5 % OF THE NET EXFACTORY SALE PRICE OF PRODUCTS M ANUFACTURED AND SOLD IN INDIA AS PER THE TECHNICAL COLLABORATION AG REEMENT. THIS INTERNATIONAL TRANSACTION INVOLVING PAYMENT OF ROY ALTY TO ITS AE WAS BENCH-MARKED BY THE ASSESSEE BY FOLLOWING CUP METHO D IN ITS TP STUDY REPORT AND SINCE AVERAGE RATE OF ROYALTY OF THREE C OMPARABLES SELECTED BY IT WAS HIGHER AT 4.67% THAN THE RATE AT WHICH RO YALTY WAS PAID BY THE ASSESSEE TO ITS AE, THE TRANSACTION INVOLVING P AYMENT OF ROYALTY WAS CLAIMED TO BE AT ARM'S LENGTH. A PERUSAL OF THE ORDER PASSED BY THE TPO U/S 92CA (3) OF THE ACT SHOWS THAT NEITHER THESE COMPARABLES SELECTED BY THE ASSESSEE IN ITS TP STUDY REPORT WER E REJECTED BY HER NOR ANY NEW COMPARABLES WERE SELECTED BY HER BY MAK ING A FRESH SEARCH IN ORDER TO SHOW THAT THE PAYMENT OF ROYALTY BY THE ASSESSEE TO ITS AE WAS NOT AT ARM'S LENGTH. SHE SIMPLY RELIED O N THE APPROVAL OF SIA TO HOLD THAT ANY ROYALTY PAID BY THE ASSESSEE O N EXPORTS AND OTHER INCOME WAS NOT ALLOWABLE AND DISALLOWED THE ROYALTY PAYMENT TO THE EXTENT OF RS. 40,51,486/- TREATING THE SAME AS THE ROYALTY PAID BY THE ASSESSEE IN RESPECT OF EXPORTS SALE AND OTHER INCOM E. WE ARE UNABLE TO AGREE WITH THIS STRANGE METHOD FOLLOWED BY THE TPO TO MAKE A TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WHICH IS N OT SUSTAINABLE EITHER IN LAW OR ON THE FACTS OF THE CASE. SHE HAS NEITHER REJECTED THE METHOD FOLLOWED BY THE ASSESSEE TO BENCH-MARK THE T RANSACTION IN RESPECT OF PAYMENT OF ROYALTY NOR HAS BEEN ADOPTED ANY RECOGNIZED METHOD TO DETERMINE THE ALP OF THE SAID TRANSACTION S. THE APPROVAL OF SIA ADOPTED BY THE TPO AS BASIS TO MAKE TP ADJUSTME NT IN RESPECT OF 28 ITA 6081/MUM/2018 ROYALTY PAYMENT WAS UNTENABLE AND EVEN GOING BY THE SAID BASIS WRONGLY ADOPTED BY THE TPO, NO TP ADJUSTMENT IN RES PECT OF ROYALTY PAYMENT WAS LIABLE TO BE MADE. AS PER THE SAID BASI S, THE NET SALES OF THE ASSESSEE AFTER EXCLUDING EXPORT SALE AND OTHER INCOME WERE TO THE EXTENT OF RS. 1118.70 CRORES AND THE ROYALTY PAID T HEREON AT RS. 24.38 CRORE BEING LESS THAN THE RATE OF 3.5% APPROVED BY SIA, THERE WAS NO CASE OF ANY EXCESS PAYMENT MADE OF ROYALTY BY ASSES SEE THAN APPROVED BY SIA TO JUSTIFY ITS DISALLOWANCE BY WAY OF TP ADJUSTMENT. IN OUR OPINION, THE LD. CIT (A) COULD NOT APPRECIAT E THESE INFIRMITIES IN THE ORDER OF THE TPO DESPITE THE SAME WERE SPECIFIC ALLY BROUGHT TO HIS NOTICE ON BEHALF OF THE ASSESSEE AND CONFIRMED THE TP ADJUSTMENT MADE BY THE TPO IN RESPECT OF ROYALTY PAYMENT WHICH WAS TOTALLY UNJUSTIFIED. WE THEREFORE, DELETE THE ADDITION MADE BY THE AO/TPO AND CONFIRMED BY THE LD. CIT ON ACCOUNT OF TP ADJUSTMEN T IN RESPECT OF ROYALTY PAYMENT AND ALLOW GROUND NO. 3 OF THE ASSES SEE'S APPEAL.' 11. SIMILAR VIEW HAS ALSO BEEN EXPRESSED IN THE OTH ER DECISIONS RELIED UPON BY LD. AR. AT THE COST OF REPETITION, IT NEEDS REITERATION, ASSESSEE HAS BENCHMARKED THE ROYALTY PAYMENT BY BRINGING COM PARABLES BOTH UNDER TNMM AS WELL AS CUP. WHEREAS, TPO HAS REJECTE D THE ANALYSIS DONE BY ASSESSEE UNDER BOTH THE METHODS WITHOUT ANY REASONABLE BASIS NOR HAS BROUGHT A SINGLE COMPARABLE TO JUSTIF Y ALP OF ROYALTY AT 2%. UNFORTUNATELY, LD. DRP HAS APPROACHED THE ENTIR E ISSUE IN RATHER MECHANICAL MANNER WITHOUT EXAMINING WHETHER APPROAC H OF THE TPO IS IN ACCORDANCE WITH STATUTORY MANDATE. THEREFORE, DE TERMINATION OF ALP OF ROYALTY AT 2% CANNOT BE SUPPORTED, HENCE, DESERV ES TO BE STRUCK DOWN. MOREOVER, THEORY OF BENEFIT TEST APPLIED BY T PO ALSO FALLS FLAT CONSIDERING THE FACT THAT TPO DOES NOT QUESTION THE NECESSITY OF PAYING ROYALTY BUT ONLY OBJECTS TO THE QUANTUM. FURTHER, Q UANTUM INCREASE IN SALE WITH NO APPARENT INCREASE IN PRODUCTION, MINIM AL PRODUCT RECALLS, LOW AFTER SALES MAINTENANCE COST CERTAINLY GOES TO PROVE ASSESSEE'S CLAIM THAT THESE COULD BE ACHIEVED DUE TO UTILIZATI ON OF ADVANCED TECHNICAL KNOW-HOW TRANSFERRED BY AE. THE TPO HAS N OT BEEN ABLE DISPROVE THESE FACTS WITH ANY SOUND ARGUMENT. CONSI DERING THE TOTALITY OF FACTS AND CIRCUMSTANCES, WE ARE OF THE OPINION, REDUCTION OF RATE OF ROYALTY BY TPO FROM 3% TO 2% IS WITHOUT ANY BASIS, HENCE, CANNOT BE ACCEPTED. ACCORDINGLY, WE DELETE THE ADDITION MADE ON ACCOUNT OF TP ADJUSTMENT TO ROYALTY PAYMENT. GROUNDS RAISED ARE A LLOWED. 14. THE AFORESAID VIEW OF THE TRIBUNAL, HYDERABAD BENCH, WAS AFFIRMED BY THE HON'BLE HIGH COURT OF TELANGANA AND ANDHRA PRADESH, IN ITTA NO.590/2016, DATED 23 RD DECEMBER 2016. WHILE UPHOLDING THE DECISION OF THE TRIBUNAL, THE HON'BLE HIGH COURT HE LD AS UNDER: HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE FIND T HAT THE ASSESSEE OFFERED TWO TRANSFER PRICING STUDIES IN RELATION TO PAYMENT OF ROYALTY. IN SO FAR AS THE ACCEPTABLE STUDY ADOPTING THE COMP ARABLE UNCONTROLLED PRICE METHOD IS CONCERNED, IT IS NOT I N DISPUTE THAT THE 29 ITA 6081/MUM/2018 ASSESSEE OFFERED THREE COMPARABLES WITH AN AVERAGE ROYALTY PAYMENT OF 3.65% AS AGAINST ITS OWN RATE OF ROYALTY AT 3%. SIGNIFICANTLY, THE TPO REJECTED THESE COMPARABLE ON THE GROUND THAT TH EY WERE US BASED, WHILE THE AE OF THE ASSESSEE WAS UAE BASED. HAVING REJECTED THESE COMPARABLES, IT WAS FOR THE TPO TO COME UP WI TH OTHER COMPARABLES, IT WAS FOR THE TPO TO COME UP WITH OTH ER COMPARABLES, IT WAS FOR THE TPO TO COME UP WITH OTHER COMPARABLES S O AS TO JUSTIFY REDUCTION OF THE ROYALTY PAYMENT. HOWEVER, NO SUCH EXERCISE WAS UNDERTAKEN BY THE TPO DETERMINED THAT THE REASON FO R THE SAME WAS INCREASED MARKETING ALONG WITH OFFER OF DISCOUNTS A ND THAT THERE WAS NO JUSTIFICATION FOR PAYMENT OF ROYALTY AT 3% TO TH E AE BY THE ASSESSEE. THIS REASONING IS WITHOUT LEGAL BASIS OF LAW AS IT IS NOT FOR THE TPO TO DECIDE THE BEST BUSINESS STRATEGY FOR THE AS SESSEE. IN WALCHAND AND CO. PRIVATE LTD. THE SUPREME COURT OBSERVED IN THE CONTEXT OF THE INCOMETAX ACT, 1922 THAT WHEN A CLAIM IS MADE FOR AN ALLOWANCE BY THE ASSESSEE, THE INCOME TAX AUTHOR ITIES HAVE TO DECIDE WHETHER THE EXPENDITURE CLAIMED AS AN ALLOWA NCE WAS INCURRED VOLUNTARILY AND ON GROUNDS OF COMMERCIAL EXPEDIENCY . THE SUPREME COURT POINTED OUT THAT IN APPLYING THE TEST OF COMM ERCIAL EXPEDIENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, IT HAS TO BE ADJUDGED FROM THE POINT OF VIEW OF THE BUSINESSMEN AND NOT OF THE REVENUE. THE SUPREME COURT CONCLUDED THAT IT IS OPEN TO THE REVENUE TO COME TO THE CONCLUSION THAT THE ALLEGED PAYMENT WAS NOT REAL OR THAT IT HAD NOT BEEN INCURRED BY THE ASSESSEE IN THE CHARACTER OF A TENDER OR THAT I T WAS NOT LAID OUT EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS SO AS T O DISALLOW IT BUT IT IS NOT THE FUNCTION OF THE REVENUE TO DETERMINE WHAT R EMUNERATION SHOULD BE PAID TO AN EMPLOYEE BY THE ASSESSEE. APPLYING THE SAME LOGIC TO THE CASE ON HAND, ONCE I T IS ADMITTED BY THE REVENUE THAT THE ASSESSEE ENTERED INTO A ROYALTY AG REEMENT WITH THE A.E. AND THE ASSESSEE CLAIMED BENEFIT FROM SUCH AGR EEMENT, IN THE FORM OF QUANTUM INCREASE IN SALES WITH NO APPARENT INCREASE IN PRODUCTION, MINIMAL PRODUCT RECALLS AND LOW AFTER S ALES MAINTENANCE COST, AND CONSEQUENTLY PAID ROYALTY IN TERMS THEREO F, IT WAS NOT FOR THE TPO TO DETERMINE AS TO WHAT WOULD BE THE OTHER REAS ONS FOR INCREASE IN THE ASSESSEES SALES AND PROFIT. ABOVE ALL, THERE IS NO EXPLANATION FORTHCOMING AS T O WHY THE TPO DECIDED UPON 2% INSTEAD OF THE CONTRACTUAL RATE OF 3% FOR PAYMENT OF ROYALTY. NO REASON IS OFFERED BY THE TPO FOR PICKIN G ON 2%. THIS WHIMSICAL FIXATION BY THE TPO AMOUNTS TO AN ARBITRA RY AND UNBRIDLED EXERCISE OF POWER. IN CONSEQUENCE, WE FIND THAT THE TPO HAVING REJECTED THE COMPARABLES CITED BY THE ASSESSEE, DID NOT TAKE THE TROUBLE TO EXAMINE ALTERNATE COMPARABLES SO AS TO J USTIFY REDUCTION OF 30 ITA 6081/MUM/2018 THE RATE OF PAYMENT OF ROYALTY AND BY APPLYING A WH OLLY INAPPLICABLE METHODOLOGY OF DETERMINING THE BENEFIT FROM PAYMENT OF SUCH ROYALTY, HE CAPRICIOUSLY REDUCED THE RATE FOR PAYMENT OF SUC H ROYALTY FROM 3% TO 2%. ON THE ABOVE ANALYSIS, WE FIND NO GROUNDS TO INTERF ERE WITH THE COGENT AND WELL REASONED ORDER PASSED BY THE TRIBUNAL. NO QUESTION OF LAW, MUCH LESS A SUBSTANTIAL QUESTION OF LAW, THEREFORE, ARISES FOR CONSIDERATION IN THIS REGARD. 15. THE SAME VIEW HAS ALSO BEEN EXPRESSED BY THE TR IBUNAL, DELHI BENCH, IN CASE OF REEBOK INDIA CO. (SUPRA). AS COUL D BE SEEN FROM THE FACTS OF THE PRESENT CASE, THERE IS NO DISPUTE THAT THE ASSESSEE BY VIRTUE OF A LICENSE AGREEMENT ENTERED WITH THE AE F ROM PAST SEVERAL YEARS HAD BEEN AVAILING TECHNICAL KNOWHOW FOR UTILI ZATION IN MANUFACTURING OF FLAVOURS AND FRAGRANCES. IT IS ALS O EVIDENT ON RECORD, THE ASSESSEE DOES NOT UNDERTAKES ANY RESEARCH AND D EVELOPMENT ACTIVITY AND ALL RESEARCH AND DEVELOPMENT ACTIVITIE S ARE CARRIED OUT BY THE AE IN SWITZERLAND. ALL INTELLECTUAL PROPERTY RI GHT IN RELATION TO R&D ACTIVITIES REMAINS WITH THE AE. IT IS ALSO A FACT O N RECORD THAT THE ASSESSEE IS PAYING ROYALTY TO THE AE FOR AVAILING T ECHNICAL KNOWHOW FROM THE VERY INCEPTION OF ITS MANUFACTURING ACTIVI TY. THEREFORE, ONLY BECAUSE THE MANUFACTURING ACTIVITY IS BEING CARRIED ON FROM PAST SEVERAL YEARS, IT DOES NOT MEAN THAT THE ASSESSEE W OULD NOT REQUIRE THE TECHNICAL KNOWHOW OF THE AE, HENCE, THERE IS NO NECESSITY FOR PAYING ROYALTY TO THE AE. MORE SO, WHEN THE DEPARTM ENT ACCEPTS AVAILING OF TECHNICAL KNOWHOW WHILE ALLOWING A PART OF ROYALTY EVEN ON ESTIMATE BASIS. THEREFORE, KEEPING IN VIEW THE RELE VANT STATUTORY PROVISIONS AND THE PRINCIPLES LAID DOWN IN THE JUDI CIAL PRECEDENTS DISCUSSED HEREIN ABOVE, WE HOLD THAT DETERMINATION OF ARM'S LENGTH PRICE @ 10% OF THE AMOUNT PAID BY THE ASSESSEE ON M ERE ASSUMPTION AND PRESUMPTION AND WITHOUT ANY REASONABLE BASIS CA NNOT BE UPHELD. UNFORTUNATELY, THE DRP HAS NOT EXAMINED THE ISSUE I N PROPER PERSPECTIVE KEEPING IN VIEW THE RELEVANT STATUTORY PROVISIONS. HAVING HELD SO, IT IS NECESSARY TO DEAL WITH THE TRANSFER PRICING OFFICERS ALTERNATIVE BENCH MARKING UNDER CUP METHOD. THOUGH, DRP HAS NOT DEALT WITH THIS ISSUE, HOWEVER, WE DEEM IT APPROPRI ATE TO RENDER OUR FINDING WITH REGARD TO THE ALTERNATIVE BENCHMARKING SUGGESTED BY THE TRANSFER PRICING OFFICER . AS COULD BE SEEN FROM THE ORDER PASSED BY THE TRANSFER PRICING OFFICER, REFERRING TO THREE AGREEM ENTS / COMPARABLES STATED TO HAVE BEEN SELECTED BY HIM ON SEARCH OF A PARTICULAR DATA BASE, HE FOUND THAT THE ARM'S LENGTH PRICE OF THE R OYALTY PAYMENT TO THE AE SHOULD BE @ 1% OF THE NET SALES. HOWEVER, TH E FACT ON RECORD REVEAL THAT DURING THE TRANSFER PRICING PROCEEDINGS , IN RESPONSE TO A SHOW CAUSE NOTICE ISSUED BY THE TRANSFER PRICING OF FICER, THE ASSESSEE HAS SPECIFICALLY OBJECTED TO THE COMPARABLES PROPOS ED BY THE TRANSFER PRICING OFFICER BY STATING THAT NONE OF THE COMPARA BLE ARE FUNCTIONALLY SIMILAR TO THE ASSESSEE SINCE ALL OF THEM RELATED T O ASSET PURCHASE 31 ITA 6081/MUM/2018 AGREEMENT AND FURTHER ALL THE PARTIES RELATING TO S UCH AGREEMENT ARE LOCATED OUTSIDE INDIA, HENCE, ARE NOT GOVERNED BY I NDIAN RULES AND REGULATIONS. THE AFORESAID OBJECTION OF THE ASSESSE E HAS NEITHER BEEN DEALT WITH NOR CONTROVERTED BY THE TRANSFER PRICING OFFICER. THUS, WHEN THE COMPARABLE PROPOSED BY THE TRANSFER PRICING OFF ICER ARE IN DIFFERENT GEOGRAPHICAL LOCATION WE DO NOT UNDERSTAND HOW THEY CAN BE COMPARED TO THE ASSESSEE. IT IS FURTHER NECESSARY TO OBSERVE THAT THE PAYMENT OF ROYALTY BY THE ASSESSEE IN THE PRECEDING ASSESSMENT YEARS, THOUGH, IDENTICAL IN NATURE BUT THEY HAVE BEEN ACCEPTED BY THE TRANSFER PRICING OFFICER IN COURSE OF TRANSFER PRICING PROCEEDINGS F ROM ASSESSMENT YEAR 200607 ONWARDS. THIS IS EVIDENT FROM THE TRANSFER PRICING OFFICERS ORDER PASSED FOR THE ASSESSMENT YEAR 201011 AND 20 1112, COPIES OF WHICH ARE PLACED BEFORE US. FURTHER, THE TRANSFER P RICING OFFICER HAVING NOT DETERMINED THE ARM'S LENGTH PRICE IN CONFORMITY WITH STATUTORY PROVISION AND IN THE PROCESS HAVING FAILED TO DEMON STRATE THAT ARM'S LENGTH PRICE SHOWN BY THE ASSESSEE IS INCORRECT, TH E CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE TO RESTORE THE ISSUE TO TRANSFER PRICING OFFICER FOR FRESH DETERMINATION OF ARM'S LE NGTH PRICE IS UNACCEPTABLE. THUS, ON OVERALL CONSIDERATION OF FAC TS AND MATERIAL ON RECORD, WE HOLD THAT THE ADJUSTMENT MADE TO THE ARM 'S LENGTH PRICE OF ROYALTY PAYMENT IS UNSUSTAINABLE; HENCE, THE ADDITI ON MADE IN THIS REGARD IS DELETED. THIS GROUND IS ALLOWED. 15. FACTS BEING IDENTICAL, RESPECTFULLY FOLLOWING THE D ECISION OF THE COORDINATE BENCH IN ASSESSEES OWN CASE, AS REFERR ED TO ABOVE, WE DELETE THE ADDITION MADE ON ACCOUNT OF TRANSFER PRI CING ADJUSTMENT ON ROYALTY PAYMENT TO THE AE. THIS GROUND IS ALLOWED. 16. IN THIS VIEW OF THE MATTER AND CONSISTENT WITH THE VIEW TAKEN BY THE CO- ORDINATE BENCH, WE DIRECT THE AO / TPO TO DELETE TP ADJUSTMENT OF RS.3,96,90,306 IN RELATION TO PAYMENT OF ROYALTY FO R USE OF TECHNICAL KNOW HOW. 17. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND 3 IS TP ADJUSTMENT OF RS.51,74,209 IN RELATION TO PAYMENT O F INTEREST ON EXTERNAL COMMERCIAL BORROWINGS (ECB) LOAN. THE FACTS WITH R EGARD TO THE IMPUGNED DISPUTE ARE THAT THE ASSESSEE HAS AVAILED EXTERNAL COMMERCIAL BORROWINGS WITH THE PERMISSION OF RBI. THE ASSESSEE HAS PAID INTER EST ON THE BASIS OF LIBOR (+) 32 ITA 6081/MUM/2018 300 BASIS POINTS, AND SUCH RATE OF INTEREST HAS B EEN DETERMINED ON THE BASIS OF CIRCULAR ISSUED BY RBI. THE TPO REJECTED THE AR MS LENGTH INTEREST RATE PAID BY THE ASSESSEE ON THE BASIS OF LIBOR (+) 300 BPS. THE AO HAS DETERMINED ARMS LENGTH INTEREST RATE ON THE BASIS OF DATA AVA ILABLE IN BLOOMBERG DATA BASE WHERE INTEREST ON THE ECB RATE HAS BEEN TAKEN USD L IBOR (+) 143.62 BASIS. ACCORDINGLY, DETERMINED ARMS LENGTH INTEREST RATE. THE LD.DRP HAS CONFIRMED TP ADJUSTMENT SUGGESTED BY AO / TPO ON THE GROUND T HAT THE ASSESSEE WAS REQUIRED TO CARRY OUT AN ECONOMIC ANALYSIS AND SUBM IT THE TPSR AFTER DUE DILIGENCE IN ORDER TO BENCHMARK INTEREST PAID TO IT S AE. HOWEVER, EVEN IN THE TPSR, THE ASSESSEE HAS MERELY RELIED ON THE RBI LET TER AND HENCE, THE SAME CANNOT BE TERMED AS TP STUDY AND THE TPO WAS FREE T O CHOOSE HIS OWN METHOD. 18. THE LD.AR FOR THE ASSESSEE, AT THE TIME OF HEAR ING SUBMITTED THAT THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT, MUMBAI BENCH K IN ASSESSEES OWN CASE FOR AY 2013 -14 IN ITA NO.7330/MUM/2017, WHERE UNDER IDENTICAL SET OF FACT S, THE TRIBUNAL HELD THAT ARMS LENGTH PRICE OF THE INTEREST TO BE CHARGED ON THE ECB LOAN AVAILED FROM THE AE HAS TO BE DETERMINED AT SIX MONTHS USD LIBOR RATE (+) 300 BASIS POINTS. THE LD.DR, ON THE OTHER HAND, FAIRLY ACCEPTED THAT THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT FOR AY 2013-14. 33 ITA 6081/MUM/2018 19. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MAT ERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE FIND THAT THE CO- ORDINATE BENCH OF THE ITAT, MUMBAI BENCH K IN ASS ESSEES OWN CASE FOR AY 2013-14 IN ITA NO.7330/MUM/2017 HAD CONSIDERED AN I DENTICAL ISSUE AND BY FOLLOWING ITS EARLIER DECISION IN THE CASE OF ION E XCHANGE INDIA LTD VS ADIT IN ITA NO.5109/MUM/2013 HELD THAT ARMS LENGTH PRICE OF TH E INTEREST TO BE CHARGED ON THE ECB LOAN AVAILED FROM THE AE HAS TO BE DETER MINED AT SIX MONTHS USD LIBOR RATE (+) 300 POINTS. THE RELEVANT PARAS OF T HE ORDER OF THE TRIBUNAL ARE AS UNDER:- 2. 34 ITA 6081/MUM/2018 20. IN THIS VIEW OF THE MATTER AND CONSISTENT WITH THE VIEW TAKEN BY THE CO- ORDINATE BENCH, WE DIRECT THE AO / TPO TO DELETE TP ADJUSTMENT OF 35 ITA 6081/MUM/2018 RS.51,74,209 MADE IN RELATION TO PAYMENT OF INTERES T ON EXTERNAL COMMERCIAL BORROWING LOAN. 21. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND 4 IS TP ADJUSTMENT OFRS.2,21,62,308 IN RELATION TO AVAILING OF INFORMATION SYSTEMS (IS) SERVICES. THE BRIEF FACTS OF THE IMPUGNED DISPUTE ARE THAT DURING THE COURSE OF TP PROCEEDINGS, THE TPO REJECTED TP STUDY CONDUCTED BY THE ASSESSEE TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS IN RELATIO N TO INFORMATION SYSTEM SERVICES BY APPLYING TNMM AS MOST APPROPRIATE METHO D. THE TPO FURTHER OBSERVED THAT THE ASSESSEE HAS FAILED TO PROVE WITH SUPPORTING EVIDENCES, THE FACT THAT THE AE HAS PROVIDED SERVICES TO THE ASSES SEE. THEREFORE, HE PROCEEDED TO DETERMINE THE ARMS LENGTH PRICE OF TH E SOFTWARE USAGE CHARGES PAID TO THE AE ON ESTIMATE BASIS BY APPLYING MAN HO UR RATE OF RS.8,500 PER HOUR FOR TWO MAN HOUR A DAY. ACCORDINGLY, HE DETER MINED THE ARMS LENGTH PRICE ON IT SERVICES RENDERED BY THE AE FOR MAINTAI NING SOFTWARE AT RS.8,24,93,129. SINCE THE ASSESSEE HAS PAID AN AMO UNT OF RS.10,46,55,347, THE DIFFERENTIAL AMOUNT OF RS.2,21,62,308 HAS BEEN ADJU STED IN RELATION TO AVAILING OF INFORMATION SYSTEM SERVICES. 22. THE LD.AR FOR THE ASSESSEE, AT THE TIME OF HEAR ING SUBMITTED THAT THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT, MUMBAI BENCH K IN ASSESSEES OWN CASE FOR AY 2013 -14 IN ITA 36 ITA 6081/MUM/2018 NO.7330/MUM/2017, WHERE UNDER IDENTICAL SET OF FACT S, THE TRIBUNAL HELD THAT, WHERE THE ASSESSEE PLACED ON RECORD DETAILS OF EMPL OYEES RENDERING IS SERVICE, COMPLETE DETAILS OF DOCUMENTS RAISED DURING THE YEA R AND THE QUANTUM OF INTERNAL AND EXTERNAL COST WAS DULY CERTIFIED BY TH E EXTERNAL AUDITORS, THE DISALLOWANCE OF IS CHARGE WAS NOT SUSTAINABLE. 23. THE LD.DR, ON THE OTHER HAND, THOUGH AGREED THA T THE ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE F OR AY 2013-14; HOWEVER, HE RELIED UPON THE OBSERVATION OF THE TPO AND DRP. 24. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MAT ERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE FIND THAT THE CO- ORDINATE BENCH OF THE ITAT, MUMBAI BENCH K IN ASS ESSEES OWN CASE FOR AY 2012-13 HAD CONSIDERED AN IDENTICAL ISSUE. WE FURT HER NOTED THAT THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2013-14, AFTER CONSID ERING RELEVANT FACTS, HELD THAT THE TPO WAS ERRED IN NOT FOLLOWING ANY ONE OF THE MOST APPROPRIATE METHOD PRESCRIBED UNDER THE STATUTE TO DETERMINE AR MS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE, BUT MADE ADJUSTMENT ON AN ADHOC OR ESTIMATE BASIS WITHOUT ANY VALID REASON S. THE RELEVANT FINDING OF THE TRIBUNAL ARE AS UNDER:- 30. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MA TERIAL ON RECORD. UNDISPUTEDLY, THE TRANSFER PRICING OFFICER HAS MADE AN ADJUSTMENT TO THE ARM'S LENGTH PRICE OF THE PAYMENT MADE TOWARDS INFORMATION SERVICES TO THE AE BY FOLLOWING THE SAME REASONING ON THE BASIS OF WHICH HE HAS MADE 37 ITA 6081/MUM/2018 SIMILAR ADJUSTMENT IN ASSESSMENT YEAR 201213. MORE OVER, IT IS EVIDENT, THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER IS NOT BY FOLLOWING ANYONE OF THE MOST APPROPRIATE METHODS PRESCRIBED UNDER THE S TATUTE BUT ON AN ADHOC OR ESTIMATE BASIS. IN FACT, LEARNED DRP HAS UPHELD THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER SIMPLY RELYING UPON TH EIR DECISION IN ASSESSMENT YEAR 201213. WHILE DOING SO, THE DRP HAS EVEN OBSE RVED THAT THE FACTS IN THE IMPUGNED ASSESSMENT YEAR ARE SIMILAR TO THOSE P REVAILING IN ASSESSMENT YEAR 201213. NOTABLY, WHILE DECIDING IDENTICAL ISS UE IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 201213, IN THE DECISION REFERRE D TO ABOVE, THE TRIBUNAL HAS DELETED THE ADDITION MADE ON ACCOUNT OF TRANSFE R PRICING ADJUSTMENT WITH THE FOLLOWING OBSERVATIONS: 21. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUS ED MATERIALS ON RECORD IN THE LIGHT OF DECISIONS RELIED UPON. TH OUGH, THE TRANSFER PRICING OFFICER HAS ALLEGED THAT THE ASSES SEE FAILED TO FURNISH ANY EVIDENCE TO SUBSTANTIATE ITS CLAIM THAT THE PAYMENT MADE TO THE AE FOR AVAILING INFORMATION SYSTEM SERV ICES, HOWEVER, THE MATERIAL ON RECORD REVEAL THAT THE ASS ESSEE HAS NOT ONLY UNDERTAKEN A BENCH MARKING PROCESS FOR DETERMI NING THE ARM'S LENGTH PRICE OF THE TRANSACTION IN THE TRANSF ER PRICING STUDY REPORT WHICH WAS FILED BEFORE THE TRANSFER PRICING OFFICER, BUT, OTHER RELEVANT AND NECESSARY DOCUMENTS LIKE COPY OF THE AGREEMENT, INVOICES RAISED, CERTIFICATE FROM INDEPE NDENT CHARTERED ACCOUNTANT FIRM, KPMG, DETAILS OF USERS WERE ALSO F URNISHED BEFORE THE TRANSFER PRICING OFFICER. THEREFORE, THE ALLEGATION OF THE TRANSFER PRICING OFFICER THAT THE ASSESSEE HAS NOT FURNISHED THE NECESSARY DETAILS IS NOT TOTALLY CORRECT. IN ANY CA SE OF THE MATTER, NONFURNISHING OF CERTAIN DOCUMENTARY EVIDENCES, AS ALLEGED BY THE TRANSFER PRICING OFFICER, DOES NOT EMPOWER HIM TO EMBARK UPON DETERMINING THE ARM'S LENGTH PRICE OF THE INTE RNATIONAL TRANSACTION ON ESTIMATION BASIS. FURTHER, A READING OF THE TRANSFER PRICING OFFICERS ORDER MAKES IT CLEAR THAT HIS FIN DING ON THE ISSUE IS CONTRADICTORY. ON THE ONE HAND, HE HAS OBSERVED THA T THE ASSESSEE HAS FAILED ALL THE THREE TESTS, INCLUDING, WHETHER THE SERVICES HAVE ACTUALLY BEEN PROVIDED, ON THE OTHER HAND, HE HAS ACCEPTED THAT THE AE HAS PROVIDED THE SOFTWARE. THU S, ULTIMATELY, WHAT THE TRANSFER PRICING OFFICER DISBELIEVES IS TH E QUANTUM OF PAYMENT. ACCORDINGLY, HE HAS PROCEEDED TO ESTIMATE THE PRICE OF THE SERVICES RENDERED BY THE AE AT ` 1,62,05,000. T HOUGH, THE TRANSFER PRICING OFFICER HAS OBSERVED THAT HE HAS A PPLIED CUP METHOD FOR DETERMINING THE ARM'S LENGTH PRICE, HOWE VER, HE HAS NOT BROUGHT ON RECORD EVEN A SINGLE COMPARABLE TO S UPPORT THE ARM'S LENGTH PRICE DETERMINED BY HIM EVEN ON ESTIMA TE BASIS. THE ESTIMATION OF SERVICE CHARGES ON SO CALLED MAN HOUR BASIS IS WITHOUT ANY SUPPORTING MATERIAL. SIMILARLY, THE EST IMATION OF COST 38 ITA 6081/MUM/2018 OF SOFTWARE AT `. 1 CRORE IS WITHOUT ANY BASIS. THU S, IT IS VERY MUCH CLEAR THAT THE DETERMINATION OF ARM'S LENGTH PRICE BY THE TRANSFER PRICING OFFICER IS NOT AS PER ANY ONE OF THE METHOD S PRESCRIBED UNDER SECTION 92C OF THE ACT R/W RULE 10B. AS DISCU SSED ELSEWHERE IN THIS ORDER, SUCH DETERMINATION OF ARM'S LENGTH P RICE ON ADHOC / ESTIMATION BASIS IS NOT PERMISSIBLE UNDER THE SCHEM E OF THE ACT AS THE TRANSFER PRICING OFFICER IS DUTY BOUND TO DETER MINE THE ARM'S LENGTH PRICE BY FOLLOWING ANY ONE OF THE MOST APPRO PRIATE METHOD PRESCRIBED UNDER THE STATUTE. IT IS RELEVANT TO OBS ERVE, THE DRP HAS APPROVED THE DETERMINATION OF THE ARM'S LENGTH PRICE BY THE TRANSFER PRICING OFFICER WITHOUT PROPERLY APPRECIAT ING THE IMPLICATION OF THE RELEVANT STATUTORY PROVISIONS. A S REGARDS THE OBSERVATIONS OF THE DRP REGARDING THE REPORT OF THE KPMG, IT IS NECESSARY TO OBSERVE THAT THE KPMG REPORT IS NOT AN AUDIT REPORT BUT WAS FURNISHED BY THE ASSESSEE TO SUPPORT THE AT TRIBUTION OF COST. THEREFORE, IT CANNOT BE SAID THAT IT IS A QUA LIFIED REPORT. IT IS FURTHER RELEVANT TO OBSERVE, THE MATERIAL SUBMITTED BEFORE US, WHICH ALSO FORMS PART OF THE TRANSFER PRICING OFFIC ERS RECORD, INDICATES THAT THE COST OF THE SOFTWARE HAS BEEN AL LOCATED TO 40 GROUP COMPANIES ACROSS THE GLOBE WHO ARE USING THE SOFTWARE AND RELATED SERVICES AND ASSESSEES SHARE IN COST ALLOC ATION WORKS OUT TO 2.3%. MOREOVER, WHEN THE TRANSFER PRICING OFFICE R HIMSELF AGREES THAT THE AE HAS PROVIDED SOFTWARE AND CERTAI N SERVICES, THERE IS NO REASON FOR NOT ACCEPTING THE PAYMENT MA DE TO THE AE TO BE AT ARM'S LENGTH IN THE ABSENCE OF ANY CONTRAR Y EVIDENCE BROUGHT ON RECORD AND BY SIMPLY APPLYING THE BENEFI T TEST. IF THE TRANSFER PRICING OFFICER DID NOT AGREE TO THE ARM'S LENGTH PRICE SHOWN BY THE ASSESSEE IT WAS OPEN FOR HIM TO DETERM INE THE ARM'S LENGTH PRICE BY APPLYING ONE OF THE MOST APPROPRIAT E METHODS BEING BACKED BY SUPPORTING MATERIAL. WITHOUT COMPLY ING TO THE STATUTORY PROVISIONS, THE TRANSFER PRICING OFFICER CERTAINLY CANNOT DETERMINE THE ARM'S LENGTH PRICE ON ADHOC / ESTIMA TION BASIS. OUR REASONING IN PARAGRAPH 11 TO 15 WILL EQUALLY AP PLY TO THIS ISSUE ALSO. ACCORDINGLY, WE DELETE THE ADJUSTMENT M ADE TO THE ARM'S LENGTH PRICE OF PAYMENT MADE TOWARDS AVAILING INFORMATION SYSTEM SERVICES FROM AE. THIS GROUND IS ALLOWED. FACTS RELATING TO THE DISPUTED ISSUE BEING IDENTICA L IN THE IMPUGNED ASSESSMENT YEAR, RESPECTFULLY FOLLOWING TH E DECISION OF THE COORDINATE BENCH IN ASSESSEES OWN CASE, WE DE LETE THE ADDITION MADE ON ACCOUNT OF ADJUSTMENT TO THE ARM'S LENGTH PRICE OF PAYMENT MADE TO THE AE TOWARDS AVAILING OF INFOR MATION SYSTEM SERVICES. GROUND RAISED IS ALLOWED. 39 ITA 6081/MUM/2018 25. IN THIS VIEW OF THE MATTER AND CONSISTENT WITH THE VIEW TAKEN BY THE CO- ORDINATE BENCH, WE DIRECT THE AO / TPO TO DELETE TP ADJUSTMENT OF RS.2,21,62,308 IN RELATION TO AVAILING OF INFORMATI ON SYSTEM SERVICES. 26. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND 5 OF ASSESSEES APPEAL IS DISALLOWANCE OF RS.14,19,805 I N RESPECT OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND. THE AO HAS DISALLO WED EMPLOYEES CONTRIBUTION TO PF U/S 36(1)(VIIA) ON THE GROUND THAT THE ASSESS EE HAS MADE DELAYED PAYMENT OF EMPLOYEES CONTRIBUTION TO PF AND ACCORDI NGLY, HE HELD THAT EMPLOYEES CONTRIBUTION TO PF BEYOND THE DUE DATES S PECIFIED UNDER THE RESPECTIVE ACT IS INCOME OF THE ASSESSEE U/S 2(24)( X) R.W. EXPLANATION TO SECTION 36(1)(VIIA) OF THE ACT. 27. THE LD.AR FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE B OMBAY HIGH COURT IN THE CASE OF CIT VS GHATGE PATIL TRANSPORT 368 ITR 793 ( BOM) WHERE IT WAS HELD THAT EMPLOYEES CONTRIBUTION TO PF, EVEN IF MADE BEYOND T HE DUE DATE PRESCRIBED UNDER THE RELEVANT ACT IS LIABLE FOR DEDUCTION U/S 43B OF THE I.T. ACT, 1961, IF THE SAME IS PAID ON OR BEFORE THE DUE DATE OF FILING TH E RETURN OF INCOME U/S 139(1) OF THE ACT. THE LD.AR FURTHER SUBMITTED THAT THE A SSESSEE, ALTHOUGH REMITTED EMPLOYEES CONTRIBUTION TO PF BEYOND THE DUE DATE SP ECIFIED UNDER THE RESPECTIVE ACT, BUT SUCH PAYMENT HAS BEEN MADE ON O R BEFORE THE DUE DATE FOR 40 ITA 6081/MUM/2018 FILING RETURN OF INCOME U/S 139(1) OF THE ACT AND H ENCE, IN VIEW OF SPECIFIC PROVISIONS OF SECTION 43B, IF SUCH PAYMENT IS MADE BEFORE DUE DATE OF FILING RETURN OF INCOME, NO DISALLOWANCE COULD BE MADE. 28. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THERE IS NO DISPUTE WITH REGARD TO THE FAC T THAT ALTHOUGH THE ASSESSEE HAS REMITTED EMPLOYEES CONTRIBUTION TO PF BEYOND TH E DUE DATE PRESCRIBED UNDER THE PF AND MISCELLANEOUS ACT, BUT SUCH PAYMEN T HAS BEEN MADE ON OR BEFORE THE DUE DATE OF FILING RETURN OF INCOME U/S 139(1) OF THE ACT. ONCE EMPLOYEES CONTRIBUTION TO PF IS PAID ON OR BEFORE T HE DUE DATE OF FILING THE RETURN OF INCOME, THEN THE SAME IS REQUIRED TO BE C ONSIDERED AT PAR WITH EMPLOYERS CONTRIBUTION TO PF FOR THE PURPOSE OF PR OVISIONS OF SECTION 43B OF THE INCOME-TAX ACT, 1961; HENCE, ANY PAYMENT OF EMP LOYEES CONTRIBUTION TO PF ON OR BEFORE THE DUE DATE OF FILING RETURN OF INCOM E U/S 139(1), SHALL BE ALLOWED U/S 43B OF THE INCOME-TAX ACT, 1961. THIS LEGAL PR OPOSITION IS SUPPORTED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT VS GHATGE PATIL TRANSPORT (SUPRA). THIS LEGAL PROPOSITION IS FURTH ER SUPPORTED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS JAIPUR VIDYUT VITRAN NIGAM LTD 49 TAXMAN.COM 560 WHERE THE HONBLE SUPREME COURT HAS DISMISSED SLP FILED BY THE REVENUE AGAINST THE DECISION OF HONBLE RAJASTH AN HIGH COURT BY HOLDING THAT AMOUNT CLAIMED ON PAYMENT OF PF & ESI HAVING B EEN DEPOSITED ON OR 41 ITA 6081/MUM/2018 BEFORE DUE DATE OF FILING OF RETURN, SAME CANNOT BE DISALLOWED U/S 43B OR U/S 36(1)(VIIA). IN THIS VIEW OF THE MATTER AND RESPEC TFULLY FOLLOWING THE CASE LAWS DISCUSSED HEREINABOVE, WE ARE OF THE CONSIDERED VIE W THAT THE AO WAS ERRED IN DISALLOWING EMPLOYEES CONTRIBUTION TO PF U/S 43B, E VEN THOUGH SUCH PAYMENT HAS BEEN MADE ON OR BEFORE DUE DATE OF FILING RETUR N OF INCOME U/S 139(1) OF THE INCOME-TAX ACT, 1961. HENCE, WE DIRECT THE AO TO DELETE ADDITION MADE TOWARDS DISALLOWANCE OF EMPLOYEES CONTRIBUTION TO P F. 29. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND 6 OF ASSESSEES APPEAL IS DISALLOWANCE OF OTHER MISCELLA NEOUS EXPENSES RELATING TO WRITE OFF OF RENT DEPOSITS. THE LD.AR FOR THE ASSE SSEE, AT THE TIME OF HEARING SUBMITTED THAT DUE TO SMALLNESS OF AMOUNT, THE ASSE SSEE DOES NOT WANT TO PRESSS THIS GROUND. THEREFORE, THE SAME IS DISMISS ED, AS NOT PRESSED. 30. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 07 -06-2019 . SD/- SD/- (RAVISH SOOD) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 07 TH JUNE, 2019 PK/- 42 ITA 6081/MUM/2018 COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI
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