FIRMENICH AROMATICS PRODUCTION P. LTD, MUMBAI V. INCOME TAX OFFICER 9(3)(2), MUMBAI

ITA 6082/MUM/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5506 (ITAT-MUMBAI)
• Duration Of Justice: 3 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2014-2015
• Appeal Filed On: 24-10-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANAND MOHAN LD
• Assessee Lawyers: HIRALI DESAI LD ARS
• Keywords: Transfer pricing; International transaction; Application of stay; Arm length price
• Section: 143(3)

Judgement Text

1 FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR-2014-15 IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE HONBLE SHRI SAKTIJIT DEY, JM AND HONBLE SHRI MANOJ KUMAR AGGARWAL, AM ./ I.T.A. NO.6082/MUM/2018 ( / ASSESSMENT YEAR: 2014-15) FIRMENICH AROMATICS PRODUCTION ( INDIA ) PRIVATE LIMITED 9 TH FLOOR, PLOT NO.4, ARENA SPACE CTS-20, NEW SHYAM NAGAR ROAD BEHIND MAJAS BUS DEPOT JOGESHWARI (EAST), MUMBAI 400 060 / VS. INCOME TAX OFFICER - 9 ( 3 )(2) AAYKAR BHAVAN, M.K. ROAD MUMBAI-400 020. ! ./ ./PAN/GIR NO. AABCF-1120-G ( /APPELLANT ) : ( / RESPONDENT ) & STAY APPLICATION. NO.565/MUM/2018 [ ARISING OUT OF I.T.A. NO.6082/MUM/2018] ( / ASSESSMENT YEAR: 2014-15) FIRMENICH AROMATICS PRODUCTION ( INDIA ) PRIVATE LIMITED 9 TH FLOOR, PLOT NO.4, ARENA SPACE CTS-20, NEW SHYAM NAGAR ROAD BEHIND MAJAS BUS DEPOT JOGESHWARI (EAST), MUMBAI 400 060 / VS. INC OME TAX OFFICER - 9 ( 3 )(2) AAYKAR BHAVAN, M.K. ROAD MUMBAI-400 020. ! ./ ./PAN/GIR NO. AABCF-1120-G ( /APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : DHANESH BAFNA & HIRALI DESAI - LD. ARS / RESPONDENT BY : ANAND MOHAN - LD. CIT-DR / DATE OF HEARING : 15/01/2019 / DATE OF PRONOUNCEMENT : 05/02/2019 2 FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR-2014-15 / O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER):- 1. AFORESAID APPEAL BY ASSESSEE FOR ASSESSMENT YEAR [AY] 2014-15 CONTEST FINAL ASSESSMENT ORDER DATED 24/09/2018 PAS SED BY LD. INCOME TAX OFFICER-9(3)(2) U/S 143(3) READ WITH SECTION 144C(13) PURSUANT TO THE DIRECTIONS OF LD. DISPUTE RESOLUTION PANEL-I (WZ), MUMBAI [DRP] DATED 14/08/2018 QUA CONFIRMATION OF CERTAIN TRANSFER PRICING [TP] ADJUSTMENTS. 2.1 DURING HEARING BEFORE US, AT THE OUTSET, BOTH T HE REPRESENTATIVES CONVERGE ON THE POINT THAT THE ISSUES UNDER APPEAL STOOD COVERED IN ASSESSEES FAVOR BY THE EARLIER ORDER OF THIS TRIBU NAL FOR AY 2013-14, A COPY OF WHICH HAS BEEN PLACED ON RECORD. 2.2 THE BRIEF BACKGROUND IS THAT THE ASSESSEE IS A RESIDENT CORPORATE ENTITY AND STATED TO BE ENGAGED IN THE BUSINESS OF MANUFACTURING OF VARIOUS TYPES OF CHEMICALS / COMPOUNDS / INGREDIENTS / DERI VATIVES ETC. THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSES SEE WITH ITS ASSOCIATED ENTERPRISES [AE] AS REPORTED IN FORM 3CEB WERE SUBJECTED TO REFERENCE U/S 92CA(1) TO LD. TRANSFER PRICING OFFICER [TPO] ON 29/11/2016. 2.3 THE FIRST TRANSACTION OF TP ADJUSTMENT, UNDER DISPUTE, STEM FROM THE FACT THAT THE ASSESSEE MADE PAYMENT OF RS.10.20 CRO RES FOR AVAILING CERTAIN SERVICES AND MADE PAYMENTS TERMED AS S3 & IS EXPENSES / CHARGES TO ONE OF ITS AE NAMELY FIRMENICH SA PURSUANT TO AN AGREEMENT DATED 14/10/2011. THE DETAILED SUBMISSIONS EXPLAINI NG THE NATURE OF SERVICES AVAILED, BENEFITS RECEIVED ETC. WERE MADE BY THE ASSESSEE BEFORE 3 FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR-2014-15 LD. TPO WHICH HAVE ALREADY BEEN EXTRACTED IN THE OR DER OF LD. TPO U/S 92CA(3) DATED 20/10/2017. IT TRANSPIRED THAT IS CHARGES AMOUNTING TO RS.9.35 CRORES WERE FOR RECURRING SERVICES AND WERE DIVIDED INTO EXTERNAL COST AS WELL AS INTERNAL COST. THE EXTERNAL COST WA S THE COST WHICH CAME FROM THE THIRD SERVICE PROVIDER I.E. COGNIZANT TECHNOLOGY SOLUTIONS PURSUANT TO ASSESSEES AGREEMENT WITH THE SAID ENTI TY. THE S3 CHARGE AMOUNTING TO RS.85.16 LACS WAS CHARGES FOR SAP SOFTWARE WHICH WAS ENTIRELY THIRD-PARTY COST. AS PER CERTIFICATE ISSUE D BY KPMG, THE THIRD-PARTY COSTS UNDER THESE TWO HEADS AGGREGATED TO RS.6.75 C RORES WHEREAS INTERNAL COST AGGREGATED TO RS.3.45 CRORES. THE LD. TPO, WHILE ACCEPTING THE EXTERNAL COST, DETERMINED THE ARM LENGTH PRICE [ALP] OF THESE TRANSACTIONS AS RS.6.75 CRORES AND PROPOSED UPWARD ADJUSTMENT OF RS.3.45 CRORES. IN OTHER WORDS, TP ADJUSTMENT TO THE EXTENT OF INTERNAL COST OF RS.3.45 CRORES WAS PROPOSED. WHILE CONCLUDING SO , LD. TPO OPINED THAT THE ASSESSEE FAILED TO SUBMIT SUBSTANTIAL EVIDENCE TO SUBSTANTIATE ITS CLAIM OF INTERNAL COST THAT WAS RENDERED BY ASSESSEES AE . 2.4 THE SECOND TRANSFER PRICING ADJUSTMENT PERTAINS TO EXPORT OF GOODS BY THE ASSESSEE, WHICH WAS BENCHMARKED USING TRANSACTIONAL NET MARGIN METHOD [TNMM] WITH OPERATING PROFIT /OPERATING COST [OP/OC] AS PROFIT LEVEL INDICATOR [PLI] & THE ASSESSEE BEING THE TESTED PARTY. THE EXPORT TURNOVER AGGREGATED TO RS.601.71 CRORES. THE ASSESS EE HAD ALSO MADE IMPORT FROM ITS AE AMOUNTING TO RS.115.34 CRORES. AS PER ITS OWN TP S TUDY, THE ASSESSEE WORKED OUT OWN MARGIN OF 22.50% AS AGA INST MEAN MARGIN OF 8.5% REFLECTED BY 5 COMPARABLE BASED ON MULTIPLE YE AR DATA. HOWEVER, THE 4 FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR-2014-15 MEAN MARGIN OF 3 COMPARABLE BASED ON CURRENT YEAR D ATA WORKED OUT TO BE 4.64% AS AGAINST ASSESSEES 22.5% AND THEREFORE, TH E TRANSACTIONS WERE STATED TO BE AT ARM LENGTH PRICE . HOWEVER, IT TRANSPIRED THAT THE ASSESSEE WAS SELLING SOME OF THE PRODUCTS TO NON-AE AS WELL WHICH LED THE LD. TPO TO APPLY INTERNAL COMPARABLE UNCONTROLLED PRICE [CUP] METHOD TO BENCHMARK THE TRANSACTIONS OF EXPORT OF GOODS. THE ASSESSEE OPPOSED APPLICATION OF CUP METHOD AND JUSTIFIED THE PRICE DIFFERENCES ON THE GROUND OF DIFFERENCE IN GEOGRAPHICAL LOCATIONS, LEVEL OF MARK ETS, RISK DIFFERENCES, FUNCTIONAL DIFFERENCE, DIFFERENCES IN VOLUMES ETC. RELIANCE WAS PLACED ON SEVERAL JUDICIAL PRONOUNCEMENTS TO SUPPORT THE SUBM ISSIONS. HOWEVER, NOT CONVINCED, LD. TPO OPINED THAT APPLICATION OF TNMM AT ENTERPRISE LEVEL WOULD NOT MEAN THAT ALL THE INTERNATIONAL TRANSACTI ONS WERE AT ALP AND TNMM , WHEN APPLIED TO EACH INTERNATIONAL TRANSACTIONS O F SALE OF EACH PRODUCT TO AE AGAINST THE CORRESPONDING INTERNAL TN MM ON SALE OF SAME PRODUCT TO NON-AE WILL LEAD TO SAME RESULT AS IN CU P. FURTHER, WHEN THE TAXPAYER WAS INVOLVED IN DISTINCT ACTIVITIES, THESE HAVE TO BE ANALYZED SEPARATELY BY APPLYING THE MOST APPROPRIATE METHOD [MAM] IN EACH CASE AND APPROPRIATE METHOD COULD BE APPLIED TO EACH CLA SS OF TRANSACTIONS. THEREFORE, THE APPLICATION OF TNMM AT ENTITY LEVEL COULD NOT BE CONSIDERED AS MOST APPROPRIATE METHOD SINCE BOTH PURCHASES AS WELL AS SALES WERE VITIATED BY NON-AE TRANSACTIONS AT THE ENTITY LEVEL AND ACCORDINGLY THE ALP WAS NOT IN ACCORDANCE WITH SECTION 92C(1) AND THERE FORE, SPECIFIC EXAMINATION OF EACH INTERNATIONAL TRANSACTION U/S 9 2C(3) WAS REQUIRED TO BE DONE TO WORK OUT THE ALP. APPLYING INTERNAL CUP, CO MPARING THE AES 5 FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR-2014-15 TRANSACTIONS VIS--VIS EXPORT TO THIRD NON-AE PARTI ES, THE DIFFERENTIAL WAS WORKED OUT TO RS.216.12 CRORES, THE ADJUSTMENT OF W HICH WAS PROPOSED IN THE ORDER. THE WORKING OF THE PROPOSED ADJUSTMENT H AS BEEN PROVIDED BY WAY OF ANNEXURES TO LD. TPOS ORDER. INCORPORATING THE SAME, DRAFT ASSESSMENT ORDER DATED 20/12/2017 WAS PASSED WHICH WAS SUBJECTED TO OBJECTIONS BEFORE LD. DISPUTE RESOLUTION PANEL [DRP]. 3. THE LD. DRP NOTED THAT IS CHARGES WERE APPORTIONED ON THE BASIS OF COST-SHARING AGREEMENT ENTERED INTO BETWEEN THE ENT ITIES. IT WAS ALSO NOTED THAT THE REPORT OF EXTERNAL AUDITOR I.E. KPMG WAS HIGHLY QUALIFIED ONE AND MOREOVER, THE AUDITOR HAD NOT CERTIFIED THE ACTUAL COST AND FURTHER, THE ASSESSEE HAD NOT PRODUCED THE RELEVANT DOCUMENTS & ANNUAL REPORTS OF THE AE TO SUBSTANTIATE HIS STAND. THEREFORE, THE STAND OF LD. TPO QUA TP ADJUSTMENT ON ACCOUNT OF IS / S3 CHARGES WAS CONFIRMED. THE OTHER PROPOSED TP ADJUSTMENT ON ACCOUNT OF EXPORT OF GOODS WAS ALSO CONFIRMED ON THE GROUND THAT THERE WERE LARGE VARIATIONS IN T HE PRICES CHARGED FROM AE AND NON-AE AND FURTHER CUP WAS MOST APPROPRIATE METHOD UNDER THE CIRCUMSTANCES. AGGRIEVED, THE ASSESSEE IS IN FURTHE R APPEAL BEFORE US WHEREIN OUR ATTENTION HAS BEEN DRAWN TO THE ORDER O F THIS TRIBUNAL RENDERED IN ASSESSEES OWN CASE VIDE ITA NO.7145/MUM/2017 OR DER DATED 13/11/2018 FOR AY 2013-14 & ALSO THE DECISION OF TH IS TRIBUNAL IN THE CASE OF ASSESSEES SISTER CONCERN NAMELY FIRMENICH AROMATICS INDIA P. LTD. VIDE ITA NO. 2590/MUM/2017 ORDER DATED 23/07/2018 FOR AY 2012-13. THE COPIES OF THE SAME HAS BEEN PLACED ON RECORD. 6 FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR-2014-15 4. UPON CAREFUL CONSIDERATION OF THE CITED ORDER OF THE TRIBUNAL, WE FIND THAT SIMILAR TP ADJUSTMENT PROPOSED ON ACCOUNT OF E XPORT OF GOODS IN AY 2013-14 HAS BEEN DELETED BY THE TRIBUNAL BY OBSERVI NG THAT THE PRICES AT WHICH FINISHED GOODS WERE SOLD TO ITS AE COULD NOT BE COMPARED WITH PRICES AT WHICH THESE WERE SOLD TO NON-AES DUE TO MULTIPL E FACTORS VIZ. DIFFERENCE IN VOLUME, LEVEL OF MARKET, GEOGRAPHICAL LOCATIONS, FUNCTIONAL DIFFERENCES ETC. & THEREFORE, CUP COULD NOT BE USED AS MOST APP ROPRIATE METHOD. WHILE CONCLUDING SO, RELIANCE WAS PLACED ON THE DECISION OF THIS TRIBUNAL RENDERED IN AMPHENOL INTERCONNECT INDIA PVT. LTD. [ITA NO. 477/ PUN/2015] AS CONFIRMED BY HONBLE BOMBAY HIGH COURT. NO CHANGE I N MATERIAL FACTS OR CIRCUMSTANCES COULD BE DEMONSTRATED BEFORE US FOR T HE IMPUGNED AY. THIS BEING THE POSITION, RESPECTFULLY FOLLOWING THE EARL IER ORDER OF THE TRIBUNAL, WE DELETE THE IMPUGNED ADDITIONS. THE GROUND STANDS AL LOWED. 5. SO FAR AS SECOND TP ADJUSTMENT IS CONCERNED, UPO N PERUSAL OF DOCUMENTS ON RECORD, IT EMERGES THAT THE ASSESSEE H AS PAID THE AFORESAID CHARGES PURSUANT TO INFORMATION SYSTEM SERVICE AGREEMENT ENTERED BETWEEN THE ASSESSEE AND ITS AE. THE ADDITIONS, ON SIMILAR GROUND, WERE PROPOSED AY 2013-14 WHICH WAS THE SUBJECT MATTER OF DISPUTE BEFORE TRIBUNAL IN ASSESSEES OWN CASE WHEREIN TP ADJUSTME NT ON ACCOUNT OF IS/S3 CHARGES WAS DELETED BY THE TRIBUNAL AFTER REL YING UPON THE ORDER IN THE CASE OF ASSESSEES GROUP CONCERN ITA NO. 2590/MUM/2017 DATED 23/07/2018 FIRMENICH AROMATICS INDIA P. LTD. THE ASSESSEE HAS ALREADY PLACED ON RECORD, DETAILS OF EMPLOYEES OF FIRMENICH SA RENDERING IS SERVICES ON PAGE NO. 494 OF THE PAPER-BOOK . THE COMPLETE DETAILS OF TICKETS 7 FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR-2014-15 RAISED DURING THE YEAR HAVE BEEN KEPT ON PAGE NOS. 525 TO 664 WHICH LEND CREDENCE TO THE FACT THAT THE SERVICES, WERE IN FAC T, AVAILED BY THE ASSESSEE DURING THE YEAR AND THE REVENUE WAS NOT JUSTIFIED I N DENYING THE COST TO THE ASSESSEE. SECONDLY, THE QUANTUM OF EXTERNAL COST AS WELL AS INTERNAL COST WAS DULY CERTIFIED BY THE EXTERNAL AUDITOR WHICH HA S NOT BEEN CONTROVERTED BY THE REVENUE. THEREFORE, IN THE LIGHT OF THE ABOV E FACT COUPLE WITH THE DECISION OF TRIBUNAL FOR AY 2013-14 IN ASSESSEES O WN CASE, WE DELETE THE IMPUGNED ADDITION. THIS GROUND STAND ALLOWED. 6. CONSEQUENTLY, THE STAY APPLICATION FILED BEFORE US BECOMES INFRUCTUOUS AND THEREFORE, THE SAME STAND DISMISSED IN LIMINE. 7. IN NUTSHELL, THE APPEAL STANDS ALLOWED IN TERMS OF OUR ABOVE ORDER WHEREAS THE STAY APPLICATION STAND DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 05 TH FEBRUARY, 2019. SD/- SD/- (SAKTIJIT DEY) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 05.02.2019 SR.PS:-JAISY VARGHESE ! / COPY OF THE ORDER FORWARDED TO : 1. !& / THE APPELLANT 2. '(!& / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT CONCERNED 5. ) *' + , + , / DR, ITAT, MUMBAI 6. * -./ / GUARD FILE 8 FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR-2014-15 / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI