ACIT 10(2), MUMBAI V. DOW AGROSCIENCE INDIA P. LTD, MUMBAI

ITA 630/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75271 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 20-01-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 21-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Keywords: Rejection of books of accounts; Transfer pricing; International transaction
• Section: 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . . , . ! , '# ' $ BEFORE SHRI I.P. BANSAL, JM AND SHRI SANJAY AROR A, AM ./ I.T.A. NO. 630/MUM/2011 ( % % % % & & & & / ASSESSMENT YEAR: 2003-04 THE ACIT 10(2), ROOM NO.432, 4 TH FLOOR, AAYKAR BHAVAN, MK ROAD, MUMBAI - 400020 % % % % / VS. M/S. DOW AGROSCIENCES INDIA PVT. LTD., (NOW KNOWN AS DE-NOCIL CORP PROTECTION), CORPORATE PARK, UNIT NO.1, V.N.PURAV MARG, CHEMBER, MUMBAI 400 071 ' '# ./ ( ./ PAN/GIR NO. : AAACD 3812H ( ') / APPELLANT ) .. ( *+') / RESPONDENT ) ') , '/ APPELLANT BY SHRI AJEET KUMAR JAIN *+') 7 , ' /RESPONDENT BY SHRI M.P.LOHIA % 7 8# / DATE OF HEARING : 20/01/2014 9 & 7 8# / DATE OF PRONOUNCEMENT : 20/01/2014 ': / O R D E R PER I.P.BANSAL,J.M: THIS IS AN APPEAL FILED BY THE REVENUE. IT IS DI RECTED AGAINST THE ORDER PASSED BY LD. CIT(A)-15, MUMBAI DATED 15/11/2010 F OR ASSESSMENT YEAR 2003- 04. THE GROUNDS OF APPEAL READ AS UNDER: 1.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE ID. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF ADVERTISEMENT AND SALE S EXPENDITURE OF RS. 1,82,00,000/- MADE BY THE ASSESSING OFFICER ON THE GROUND THAT IT WAS NOT PROPER ON THE PART OF THE AO TO DISALLOW EXPENSES ON ADHOC BASIS AT 50% OF THE EXPENSES CLAIMED IN THE P & L ACCOUNT AND MORE SO, WHEN THE ACCOUNTS HAVE BEEN SUBJECT TO TAX AUDIT U/S.44AB AND NO ADVERSE COMMENT HAS BEEN MADE BY THE AUDITOR ./ I.T.A. NO. 630/MUM/2011 ( % % % % & & & & / ASSESSMENT YEAR: 2003-04 2 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE ID. CIT(A) FAILED TO APPRECIATE THAT THE ASSESSEE IN THE COURSE OF THE A SSESSMENT PROCEEDINGS DID NOT SUBMIT THE COMPLETE DETAILS OF THE ADVERTISEMENT AN D SALES EXPENDITURE TO JUSTIFY AND ESTABLISH THAT THE ENTIRE EXPENDITURE WAS LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF ITS BUSINESS. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE ID. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF MISCELLANEOUS EXPENSES OF RS. 4,65,00,000/- MADE BY THE ASSESSING OFFICER ON THE GROUND THAT IT WAS NOT PROPER ON THE PART OF THE AO TO DISALLOW EXPENSES ON ADHOC BASIS AT 50% OF THE EXPE NSES CLAIMED IN THE P & L A/C. AND MORE SO, WHEN THE ACCOUNTS HAVE BEEN SUBJECT TO TAX AUDIT U/S.44AB AND NO ADVERSE COMMENT HAS BEEN MADE BY THE AUDITOR. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE ID. CIT(A) FAILED TO APPRECIATE THAT THE ASSESSEE IN THE COURSE OF THE A SSESSMENT PROCEEDINGS DID NOT SUBMIT THE COMPLETE DETAILS OF THE MISCELLANEOUS EX PENSES TO JUSTIFY AND ESTABLISH THAT THE ENTIRE EXPENDITURE WAS LAID OUT OR EXPENDE D WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF ITS BUSINESS. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE ID. CIT(A) ERRED IN DELETING THE ADJUSTMENT OF RS. 1,54,45,230/- MADE B Y THE TRANSFER PRICING OFFICER AND ASSESSING OFFICER TOWARDS, THE ROYALTY PAYMENT BY HOLDING THAT THE ROYALTY PAYMENTS MADE BY THE ASSESSEE MEETS THE ARMS LENGTH TEST. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE ID. CIT(A) FAILED TO APPRECIATE THAT THE ASSESSEE HAS RECEIVED KNOW HOW ONLY FOR ONE PRODUCT AND HAS ALSO NOT RECEIVED ANY PATENT BUT HAS ENDED UP PAYIN G MORE ROYALTY THAN THE UK COUNTERPART WHO IS THE ONLY ASSOCIATED ENTERPRISE T O WHOM THE TECHNICAL KNOW HOW IS GRANTED AND WHO IS PAYING ROYALTY AT 3% OF SALES OF THE PRODUCT AND HENCE THE TPO AND AO WERE JUSTIFIED IN RESTRICTING THE ROYALT Y AT 5% OF THE EXPORT SALES INSTEAD OF 8% AS CLAIMED BY THE ASSESSEE. 7. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE ID. CIT(A) FAILED TO CONSIDER THE FACT THAT EVEN IF THE RB! PERMITS A RO YALTY RATE OF 8% ON EXPORTS, BUT CONSIDERING THAT NO [)OW GROUP ENTITY PAYS ROYALTY AT A RATE HIGHER THAN 5%, THE RATES COULD NOT BE SAID TO BE AT ARMS LENGTH AND TH E TPO AND AO WAS JUSTIFIED IN MAKING THE ADJUSTMENT. 2. GROUND NO.1 & 2 RAISE ONE ISSUE REGARDING DISALL OWANCE OF RS.1,82,00,000/- CLAIMED ON ACCOUNT OF ADVERTISEMEN T AND SALES EXPENDITURE. GROUND NO. 3 & 4 RELATE TO DISALLOWANCE OF RS.4,65, 00,000/- ON ACCOUNT OF MISCELLANEOUS EXPENSES. BOTH THESE GROUNDS WERE A RGUED TOGETHER BY BOTH THE PARTIES ON THE BASIS THAT FACTS RELATING TO BOTH TH ESE ISSUES ARE SIMILAR. ACCORDINGLY, THESE GROUNDS ARE DISPOSED OF AS UNDE R. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS ACTIVITY OF MANUFACTURING AND TRADING PESTICIDES, AGRO CHEMICALS AND SEEDS. WHI LE EXAMINING THE CASE OF THE ./ I.T.A. NO. 630/MUM/2011 ( % % % % & & & & / ASSESSMENT YEAR: 2003-04 3 ASSESSEE FOR ADVERTISEMENT AND SALES EXPENSES, W HICH WERE TOTALING RS.3.63 CRORES, THE AO OBSERVED THAT ACCORDING TO DETAILS F URNISH IN THIS REGARD THE ASSESSEE WAS NOT ABLE TO JUSTIFY ITS CLAIM THAT T HESE PAYMENTS ARE MADE FOR ITS BUSINESS. ACCORDINGLY, HE DISALLOWED 50% OF SUCH E XPENDITURE. SIMILAR OBSERVATIONS ARE MADE FOR DISALLOWANCE ON ACCOUN T OF MISCELLANEOUS EXPENDITURE WHICH WERE CLAIMED FOR A SUM OF RS.9.30 CRORES AND 50% DISALLOWANCE WAS MADE. THE DISALLOWANCE WAS AGITAT ED IN AN APPEAL FILED BEFORE LD. CIT(A). IT WAS SUBMITTED THAT ASSESSEE HAD PR ODUCED SOME SAMPLE COPIES OF THE INVOICES WITH SUPPORTING MATERIAL. THE ACCOUN TS OF THE ASSESSEE WERE AUDITED, THEREFORE, ADHOC DISALLOWANCE COULD NOT BE MADE FOR BOTH THE EXPENSES. LD. CIT(A) HAS DELETED THE DISALLOWANCE BY HOLDING THAT SAMPLE COPY OF INVOICES INDICATE NAME AND ADDRESSES OF THE PARTIES REFLECTI NG THE AMOUNTS RAISED BY EACH OF THESE PARTIES. THE ACCOUNTS ARE DULY AUDIT ED AND SAMPLE COPIES WERE ALSO CHECKED BY STATUTORY AUDITOR, THEREFORE, IT WA S PROVED THAT EXPENDITURE ARE GENUINE IN NATURE AND ACTUALLY INCURRED BY THE ASS ESSEE FOR ITS BUSINESS PURPOSES. IT WAS NOT PROPER ON THE PART OF AO TO D ISALLOW THE EXPENSES ON ADHOC BASIS @50% OF THE EXPENSES CLAIMED IN THE P&L ACCO UNT. THERE WAS NO ADVERSE COMMENT BY THE AUDITORS. THE DISALLOWANCE WAS MA DE BY THE AO FOLLOWING THE DOCTRINE OF TOKENISM AND ADHOCISM AND WAS NOT JUSTIFIED. IN THIS MANNER LD. CIT(A) HAS DELETED THE IMPUGNED ADDITIONS. 4. AFTER NARRATING THE FACTS IT WAS SUBMITTED BY LD . DR THAT LD. CIT(A) HAS DELETED THE ADDITION WITHOUT APPLYING HIS MIND SIMP LY ON THE BASIS THAT ACCOUNTS OF THE ASSESSEE ARE AUDITED. HE SUBMITTED THAT SIMPLY BECAUSE THE ACCOUNTS ARE AUDITED AND THERE WAS NO ADVERSE COMME NT BY THE AUDITOR DOES NOT MEAN THAT IT IS PROVED THAT THE EXPENSES ARE GENUI NE. HE SUBMITTED THAT ASSESSEE DID NOT FURNISH FULL DETAILS , THEREFORE, THE DISALLOWANCE OF 50% WAS MADE BY AO. LD. DR FURTHER SUBMITTED THAT WITHOUT RECORDING A FINDING THAT ALL THE EXPENDITURE INCURRED BY THE ASSESSEE ARE VERIFI ED, LD. CIT(A) HAS WRONGLY GRANTED RELIEF TO THE ASSESSEE. HE SUBMITTED THAT THOUGH IT IS TRUE THAT ADHOC DISALLOWANCE CANNOT BE MADE BUT LD. CIT(A) SHOULD H AVE REMANDED THE MATTER TO THE AO FOR VERIFICATION OF THESE EXPENDITU RE OF THE ASSESSEE AND WITHOUT SUCH VERIFICATION LD. CIT(A) HAS COMMITTED AN ERROR IN DELETING THE ./ I.T.A. NO. 630/MUM/2011 ( % % % % & & & & / ASSESSMENT YEAR: 2003-04 4 ADDITION AS THE ASSESSEE HAS CLAIMED LARGE EXPENSES TOWARDS ADVERTISEMENT, SALES AND MISCELLANEOUS EXPENSES. 5. ON THE OTHER HAND, LD. AR SUBMITTED THAT AO COUL D NOT POINT OUT ANY DEFECT IN THE EXPENDITURE CLAIMED BY THE ASSESSEE A ND HE HAS MADE ADHOC DISALLOWANCES. LD. CIT(A) HAS FOUND THAT THE SAMPL E COPY OF INVOICES SUBMITTED BY THE ASSESSEE WERE IN ORDER AND THE ACCOUNTS OF T HE ASSESSEE WERE AUDITED AND THERE WAS NO ADVERSE COMMENT BY THE AUDITORS. HE S UBMITTED THAT IN VIEW OF THESE FACTS LD. CIT(A) WAS RIGHT IN DELETING THE AD DITION AND HIS ORDER SHOULD BE UPHELD. 6. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENT IONS HAVE CAREFULLY BEEN CONSIDERED. IT IS TRUE THAT THE DISALLOWANCE MADE BY THE AO IS ADHOC DISALLOWANCE WITHOUT POINTING OUT ANY DEFECT IN THE CLAIM OF THE ASSESSEE. SUCH COURSE OF ACTION CANNOT BE ADOPTED BY THE AO. IF A SSESSEE HAS MAINTAINED PROPER ACCOUNTS WHICH ARE AUDITED, THEN THE AO, WITHOUT E ITHER REJECTION OF BOOKS OF ACCOUNTS OR WITHOUT POINTING OUT ANY DEFECT IN THE EXPENSES CANNOT MAKE AN ADHOC DISALLOWANCE. AT THE SAME TIME DISALLOWANCE CANNOT ALSO BE DELETED SIMPLY FOR THE REASON THAT THE ACCOUNTS OF THE ASSE SSEE ARE AUDITED AND THERE IS NO ADVERSE COMMENT OF THE AUDITOR IN THE AUDIT REPO RT. THE EXPENSES CLAIMED BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS WERE SUBJ ECT TO EXAMINATION BY THE AO AND EXPENSES CAN BE CLAIMED ONLY IF THEY HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THEREFORE , IN OUR OPINION, LD. CIT(A) HAS WRONGLY DELETED THE ADDITION WITHOUT RECORDING A FI NDING THAT THESE EXPENSES ARE VERIFIED TO BE INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. IN THESE FACTS AND CIRCUMSTANCES, WE CONSIDER IT JUST AND PROPER T O RESTORE THE ISSUE REGARDING BOTH THESE ADDITIONS TO THE FILE OF AO WITH A DIREC TION TO RE-ADJUDICATE THE CLAIM OF THE ASSESSEE AS PER PROVISIONS OF LAW AND ADDITION CAN ONLY BE MADE WITH REGARD TO EXPENSES WHICH DO NOT FALL WITHIN THE AMBIT OF SECTION 37 OF THE ACT. WE DIRECT ACCORDINGLY. FOR STATISTICAL PURPOSES, THESE GROUN DS OF THE REVENUE ARE CONSIDERED TO BE ALLOWED IN THE MANNER AFORESAID. ./ I.T.A. NO. 630/MUM/2011 ( % % % % & & & & / ASSESSMENT YEAR: 2003-04 5 7. GROUND NO.5,6 & 7 RELATE TO TP ADJUSTMENT OF RS. 1,54,45,230/-. THE ASSESSEE HAS SEVERAL INTERNATIONAL TRANSACTION WITH ITS AES. THE TRANSACTION WHICH IS IN DISPUTE IS RELATING TO PAYMENT OF ROYA LTY WHICH IS A TOTAL SUM OF RS. 4,38,05,583/-. THE ROYALTY HAS BEEN PAID BY THE AS SESSEE IN PURSUANCE TO AN AGREEMENT DATED 23/01/1997 WITH DOW NETHERLANDS WIT H REGARD TO A PROCESS TECHNOLOGY RELATING TO CHLOROPYRIFOS. ACCORDING TO THE SAID AGREEMENT ROYALTY WAS TO BE PAID @5% ON NET DOMESTIC SALES AND @ 8% ON NE T EXPORTS. THE ASSESSEE CLAIMED THAT ITS NET PROFIT MARGIN BEFORE TAX OF MA NUFACTURING DIVISION IS AT 11.53%, WHEREAS THE ARITHMETICAL MEAN OF THE NET MA RGIN OF THE COMPARABLES HAVE BEEN 5.15%. THEREFORE, IT WAS CLAIMED THAT T HE ASSESSEES TRANSACTIONS SHOULD BE CONSIDERED AT ARMS LENGTH. HOWEVER, THE TPO FOUND THAT DOW NETHERLANDS HAD ALSO ENTERED INTO AN AGREEMENT WITH ITS UK AE, WHERE ROYALTY WAS BEING PAID @3% ON NET SALES. THEREFORE, TPO RE QUIRED THE ASSESSEE TO EXPLAIN THE SAME. A CHART HAS ALSO GIVEN IN THE TP OS ORDER COMPARING THE TRANSACTIONS OF THE ASSESSEE WITH UK AE OF DOW NET HERLANDS AND THE SAME IS REPRODUCED AS UNDER: S.NO. AGREEMENT WITH DE NOCIL INDIA AGREEMENT WITH DASL (UK) 1. AGREEMENT DATED 23 RD JAN 1997 AGREEMENT DATED 12 TH MARCH 1998 2. PROVIDES ONLY MANUFACTURING TECHNOLOGY FOR CHLOROPYROFOS - PROVIDES LICENCED KNOW HOW FOR 9 PRODUCTS AS PER APPENDIX A OF THE AGREEMENT. - PROVIDES LICENCED PATENTS AS PER ANNEXURE B OF THE AGREEMENT 3. - ROYALTY TO BE PAID@ ON NET DOMESTIC SALES - ROYALTY TO BE PAID @3% ON NET SALES (NO RATE DIFFERENCE BETWEEN EXPORTS AND DOMESTIC SALES) (NET OF RETURNS, ALLOWANCES, REBATES, DISCOUNTS, TRANSPORT.) 4. SEPARATE CHARGES OF USD 12,00,000 FOR PROCESS DESIGN PACKAGE TO BE PAID IN 4 INSTALLMENTS. - NO SUCH CHARGES. 7.1 THE ASSESSEE SUBMITTED THAT ITS TRANSACTIONS C OULD NOT BE COMPARED WITH UK AE AND SEVERAL CIRCUMSTANCES WERE EXPLAINED , AC CORDING TO WHICH THE ROYALTY WAS PLEADED TO BE ALLOWED AS PER AGREEMENT OF THE A SSESSEE. THE ARGUMENTS INTER-ALIA INCLUDE THE ADJUSTMENTS TO BE MADE AS PE R AGREEMENT OF THE ASSESSEE WITH DOW NETHERLANDS AND AGREEMENT OF DOW NETHERLAN DS WITH UK AE. ./ I.T.A. NO. 630/MUM/2011 ( % % % % & & & & / ASSESSMENT YEAR: 2003-04 6 7.2 DURING THE COURSE OF PROCEEDINGS BEFORE LD. CIT (A) A CHART WAS SUBMITTED BY WHICH IT WAS SHOWN THAT IF SUCH ADJUSTMENT ARE G RANTED THEN THE ASSESSEES TRANSACTION WITH ITS AE REGARDING ROYALTY IS AT ARM S LENGTH. COPY OF THIS CHART HAS BEEN PLACED AT PAGE 434 OF THE PAPER BOOK AND F OR THE SAKE OF CONVENIENCE SUCH CHART IS BEING REPRODUCED BELOW: DOW AGROSCIENCES INDIA PVT. LTD. ASSESSMENT YEAR 2003-04 PARTICULARS A.Y.2002-03 A.Y.2003 -04 LOCAL SALES EXPORTS LOCAL SALES EXPORTS GROSS SALES 643,945,371 260,518,161 457,789,156 99,793,237 LESS: INPUT COST 410,027,043 156,015,676 163,286,436 41,735,440 NET SALES 233,918,328 104,502,485 294,502,720 58,057,797 ROYALTY PAID BY DAS @ 5% ON NET SALES 11,695,916 14,725,136 ROYALTY PAYABLE BY DAS UNDER DOW UK FORMULA I.E. 3% ON GROSS SALES 19,318,361 13,733,675 ROYALTY PAID BY DAS @ 8% ON NET SALES 8,360.199 4,644,624 ROYALTY PAYABLE BY DAS UNDER DOW UK FORMULA I. 5% ON GROSS SALES 13,025,908 4,989,662 ADJUSTMENT (7,622,445) (4,665,709) 991,461 (345,038) TOTAL IMPACT (11,641,731) IT WAS FURTHER FOUND BY THE TPO THAT INTERNATIONAL TRANSACTION OF RS.4,38,05,583/- CONSISTS OF PAYMENT RELATING TO A SSESSMENT YEAR 2002-03, 2003-04 AND THE SAME READ AS UNDER: ASSESSMENT YEAR TOTALS (RS.) FOR A.Y 2002-03 2,22,83,628 FOR A.Y 2003-04 2,15,21,955 TOTAL 4,38,05,583 7.3 ACCORDINGLY, THE ADDITION WAS COMPUTED AS UNDE R: A.Y.2002-03 A.Y.2003-04 NET INTERNAL SALES A 23,39,18,328 29,45,02,720 3% ROYALTY ON ABOVE AS ARMS LENGTH PRICE B=3%OF A 70,17,550 88,35,081 ROYALTY CLAIMED BY ASSESSEE 5% ON NET SALES) C 1,16,95,916 1,47,25,136 DIFFERENCE TO BE ADDED D=C- B1 46,78,366 58 ,90,055 NET EXPORT SALES A 10,45,02,485 5,80,57,797 5% ROYALTY ON ABOVE ARMS LENGTH ROYALTY B=5% OF A 52,25,124 29,02,890 CLAIMED BY ASSESSEE 8% ON NET SALES C 83,60,199 46,44,624 ./ I.T.A. NO. 630/MUM/2011 ( % % % % & & & & / ASSESSMENT YEAR: 2003-04 7 DIFFERENCE TO BE ADDED D=C - B2 31,35,075 17 ,41,734 TOTAL ADJUSTMENTS ON ACCOUNT OF ROYALTY B1+B2 7 8,13,441 76,31,789 TO SUM UP, THE FOLLOWING UPWARD ADJUSTMENTS ARE RE QUIRED TO BE MADE BY THE ASSESSING OFFICER TO THE INCOME OF THE COMPANY ON ACCOUNT OF ADJUSTMENTS TO THE ARMS LENGTH PRICINGS. THESE ARE : (RS.) ON ACCOUNT OF EXCESS INTEREST PAYMENT OF 20,19, 356 ON ACCOUNT OF PURCHASE OF TRADED MATERIAL 4,52 ,023 ON ACCOUNT OF ROYALTY NOT ALLOWABLE FOR A.Y 2002-03 78,13,441 ON ACCOUNT OF ROYALTY NOT ALLOWABLE FOR A.Y 2003-04 76,31,789 TOTAL UPWARD ADJUSTMENT TO THE INCOME OF THE COMPAN Y 1,79,16,609 7.4 WHILE CONTESTING THE ADDITION BEFORE LD. CIT(A) IT WAS ONE OF THE SUBMISSIONS OF THE ASSESSEE THAT DOW UK PAYS ROYAL TY @3% ON GROSS SALES WITHOUT REDUCING THE COST OF IMPORTED INPUT, WHEREA S IT MAY BE NOTED THAT THE ASSESSEE PAYS ITS AE ROYALTY @5% ON NET SALE OF PRO DUCTS FOR DOMESTIC CONSUMPTION IN INDIA AND 8% ROYALTY ON NET SALE OF PRODUCTS EXPORTED. IT WAS SUBMITTED THAT NET SALES MEAN GROSS SALES LESS LAND ED COST OF IMPORTED INPUTS, RETURNS, ALLOWANCES, REBATES, DISCOUNT AND TRANSPOR T. THUS IT WAS PLEADED THAT THE BASE ON WHICH THE ROYALTY CALCULATED IS ALSO SI GNIFICANTLY DIFFERENT. ON THE BASIS OF SUBMISSIONS MADE BY THE ASSESSEE, LD. CIT( A) HAS ARRIVED AT A CONCLUSION THAT THE MARGIN OF THE ASSESSEE ON ITS A E TRANSACTIONS IS 11.53% AS AGAINST MARGIN OF COMPARABLES WHICH @5.15% AS PER FOLLOWING TABLE: NAME OF THE COMPANY OPERATING MARGIN ON SALES (%) AIMCO PESTICIDES LTD. 5.77 BHARAT INSECTICIDES LTD. 5.86 HIM PULVERISING MILLS LTD. 3.56 HYDERABAD CHEMICAL PRODUCTS LTD. 8.54 AGRIMORE LTD. 3.00 SULPHUR MILLS LTD. 12.48 JAI SHREE AGRO INDUSTRIES LTD. 5.00 TROPICAL AGROSYSTEM (INDIA) LTD. 0.62 MAHARASHTRA INSECTICIDES 1.50 AVERAGE 5.15% 7.5 THUS IT WAS HELD THAT THE TPO WAS WRONG IN APPL YING 3% ROYALTY RATE ON DOMESTIC SALES AND 5% RATE ON GROSS EXPORTS SALES AND THE SAID METHOD ADOPTED BY TPO WAS INHERENTLY FLAWED. THE REVENUE IS AGG RIEVED, HENCE, HAS FILED AFOREMENTIONED GROUNDS. ./ I.T.A. NO. 630/MUM/2011 ( % % % % & & & & / ASSESSMENT YEAR: 2003-04 8 7.6 WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUES. DURING THE COURSE OF HEARING IT WAS BROUGHT TO OUR NOTICE THAT IN SUBSEQ UENT YEARS THE ASSESSEE HAD SUBMITTED THE CALCULATIONS REGARDING CALCULATION O F NET DOMESTIC / EXPORT SALES FOR THE PURPOSE OF CALCULATING THE PAYMENT OF ROYA LTY AND DESCRIBED THAT IF THE ROYALTIES CALCULATED ON THE BASIS OF AGREEMENT OF T HE ASSESSEE WITH DOW NETHERLAND THEN ROYALTY PAID BY THE ASSESSEE WILL B E ON LOWER SIDE AND SUCH CONTENTION OF THE ASSESSEE HAS BEEN ACCEPTED BY THE TPO IN RESPECT OF ASSESSMENT YEAR 2005-06, 2006-07 AND 2007-08, COPIE S OF THESE ORDERS OF TPO ARE PLACED ON OUR RECORD AND WERE ALSO GIVEN TO L D. DR. 7.7 IT WAS OBSERVED FROM THE AFOREMENTIONED ORDERS PASSED BY TPO THAT HE HAS GIVEN THE REBATE OUT OF EXPORT SALES AS WELL AS LOCAL SALES AND FOR ASSESSMENT YEAR 2005-06 THE CHART IS AS FOLLOWS: SR.NO. PARTICULARS AMOUNT IN RS. 1 EXPORT SALES A 219,921,415 2. LESS: COST OF IMPORTED GOODS(AS PER RBI GUIDELINE) B 91,964,535 3. NET SALES AMOUNT FOR ROYALTY (1-2) C 127,956,8 80 4. ROYALTY ON NET SALES @ 5% D 6,397,844 5. ROYALTY PAID BY THE ASSESSEE (8% ON THE NET SALES AS PER RBI APPROVAL) E 10,236,550 6. DIFFERENCE TO BE ADDED (5-4) I 3,838,706 ON ACCOUNT OF DOMESTIC SALES: S.NO. PARTICULARS AMOUNT IN RS. 1. LOCAL SALES A 322,871,599 2. LESS: COST OF IMPORTED GOODS ( AS PER RBI GUIDELINE) B 96,778,430 3. NET SALES AMOUNT FOR ROYALTY C 226,093,169 4. ROYALTY ON NET SALES @3% D 6,782,795 5. ROYALTY PAID BY THE ASSESSEE (5% ON THE NET SALES AS PER RBI APPROVAL) E 11,304,658 6. DIFFERENCE TO BE ADDED (5-4) II 4,521,863 FOR ASSESSMENT 2006-07 THE CHART IS AS UNDER SR.NO. PARTICULARS AMOUNT IN RS. 1 EXPORT SALES A 313,030,922 2. LESS: COST OF IMPORTED GOOD(AS PER RBI GUIDELINE) B 100,792,130 3. NET SALES AMOUNT FOR ROYALTY (1-2) C 212,238,7 92 4. ROYALTY ON NET SALES @ 5% D 15,651,546 5. ROYALTY PAID BY THE ASSESSEE (8% ON THE NET E 16,979,103 ./ I.T.A. NO. 630/MUM/2011 ( % % % % & & & & / ASSESSMENT YEAR: 2003-04 9 SALES AS PER RBI APPROVAL) 6. DIFFERENCE TO BE ADDED (5-4) I 1,327,557 ON ACCOUNT OF DOMESTIC SALES: S.NO. PARTICULARS AMOUNT IN RS. 1. LOCAL SALES A 269,872,414 2. LESS: COST OF IMPORTED GOODS ( AS PER RBI GUIDELINE) B 73,581,211 3. NET SALES AMOUNT FOR ROYALTY C 196,291,203 4. ROYALTY ON NET SALES @3% D 8,096,172 5. ROYALTY PAID BY THE ASSESSEE (5% ON THE NET SALES AS PER RBI APPROVAL) E 9,814,560 6. DIFFERENCE TO BE ADDED (5-4) II 1,718,388 FOR ASSESSMENT YEAR 2007-08 THE CHART IS AS UNDER: SR.NO. PARTICULARS AMOUNT IN RS. 1 EXPORT SALES A 323,372,104 2. LESS: COST OF IMPORTED GOODS(AS PER RBI GUIDELINES) B 99,487,850 3. NET SALES AMOUNT FOR ROYALTY (1-2) C 223,884,2 54 4. ROYALTY ON NET SALES @ 5% D 16,168,605 5. ROYALTY PAID BY THE ASSESSEE (8% ON THE NET SALES AS PER RBI APPROVAL) E 17,910,740 6. DIFFERENCE TO BE ADDED (5-4) I 1,742,135 ON ACCOUNT OF DOMESTIC SALES: S.NO. PARTICULARS AMOUNT IN RS. 1. LOCAL SALES A 284,683,612 2. LESS: COST OF IMPORTED GOODS ( AS PER RBI GUIDELINES) B 86,943,807 3. NET SALES AMOUNT FOR ROYALTY C 197,739,805 4. ROYALTY ON NET SALES @3% D 8,540,508 5. ROYALTY PAID BY THE ASSESSEE (5% ON THE NET SALES AS PER RBI APPROVAL) E 9,886,990 6. DIFFERENCE TO BE ADDED (5-4) II 1,346,482 THE ABOVE CHARTS SHOW THAT OUT OF EXPORT AS WELL A S LOCAL SALES THE COST OF IMPORTED GOODS HAVE BEEN REDUCED AND NET SALES HAVE BEEN COMPUTED ACCORDINGLY, ON WHICH ROYALTY PAYABLE IS CALCULATED . FOR THE YEAR UNDER CONSIDERATION ALSO THE CHART HAS ALREADY BEEN REPR ODUCED ABOVE IN PARA 7.2 AND COMPUTATION IS MADE IN THE SIMILAR MANNER AND IT HA S BEEN SHOWN THAT OVERALL THE ASSESSEE HAS PAID LESS ROYALTY AS COMPARED TO R OYALTY PAID BY UK AE TO DOW NETHER LAND. IN VIEW OF ACCEPTANCE OF CALCULATIO N OF NET EXPORTS AND LOCAL SALES BY THE TPO IN SUBSEQUENT YEARS, WE DECLINE TO INTER FERE IN THE RELIEF GRANTED BY ./ I.T.A. NO. 630/MUM/2011 ( % % % % & & & & / ASSESSMENT YEAR: 2003-04 10 LD. CIT(A) TO THE ASSESSEE THOUGH ON DIFFERENT BASI S. THESE GROUNDS OF THE REVENUE ARE DISMISSED. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S PARTLY ALLOWED IN THE MANNER AFORESAID. ORDER PRONOUNCED IN THE OPEN COURT ON 20/ 01/2014 . ': 7 & #' ; <%= 20/01/2014 7 > SD/- SD/- ( SANJAY ARORA) (I.P.BANSAL) /ACCOUNTANT MEMBER '# /JUDICIAL MEMBER MUMBAI; <% DATED 20/01/2014 ': ': ': ': 7 77 7 *8?@ *8?@ *8?@ *8?@ A'@&8 A'@&8 A'@&8 A'@&8 / COPY OF THE ORDER FORWARDED TO : 1. ') / THE APPELLANT 2. *+') / THE RESPONDENT. 3. B ( ) / THE CIT(A)- 4. B / CIT 5. @C> *8% , , / DR, ITAT, MUMBAI 6. >D E / GUARD FILE. ':% ':% ':% ':% / BY ORDER, +@8 *8 //TRUE COPY// F FF F / G G G G (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . % . SR. PS-VM