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

ITA 7145/MUM/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2266 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2013-2014
• Appeal Filed On: 18-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAYANT KUMAR; MANOJ KUMAR JCIT
• Assessee Lawyers: MADHUR AGARWALARS; PERCY J PANDIWALA
• Keywords: Business income; Transfer pricing; International transaction
• Section: 92C; 10AA; 10B

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI , BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM AAYAKR APILA SAM AAYAKR APILA SAM AAYAKR APILA SAM AAYAKR APILA SAM . / ITA NO. 7145/MUM/2017 ( INAQA-ARNA BAYA- / ASSESSMENT YEAR 2013-14) FIRMENICH AROMATICS PRODUCTION (INDIA) PVT.LTD. 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 ( APILAAQAI APILAAQAI APILAAQAI APILAAQAI - -- - / APPELLANT) .. ( P`%YAQAAI P`%YAQAAI P`%YAQAAI P`%YAQAAI- -- - / RESPONDENT) . / PAN NO. AABCF1120G / APPELLANT BY : SHRI PERCY J PANDIWALA & MADHUR AGARWAL,ARS ! / RESPONDENT BY : SHRI JAYANT KUMAR CIT DR & MANOJ KUMAR, JCIT %& / DATE OF HEARING: 16-08-2018 %& / DATE OF PRONOUNCEMENT : 13-11-2018 AADOSA AADOSA AADOSA AADOSA / O R D E R PER MAHAVIR SINGH, JM: THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF THE O RDER OF DESPITE RESOLUTION PANEL-I, MUMBAI [IN SHORT DRP], DATED 21.11.2013. THE ASSESSMENT WAS FRAMED BY THE INCOME TAX OFFICER WARD-9(3)(2), MUMBAI (IN SHORT ITO/TPO) FOR THE A.Y. 2013-14 VIDE ORDER DATED 11/09/2017 UNDER SECTION 1 43(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT). 2 ITA NO.7145/MUM/2017 2. THE FIRST ISSUE IN THIS APPEAL OF ASSESSEE IS AG AINST THE ORDER OF DRP, MUMBAI UPHOLDING THE ACTION OF THE AO /TPO IN DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INT ERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS AND COMPUTI NG AND ADJUSTING FOR AN AMOUNTING TO RS.141,13,97,695/-. F OR THIS ASSESSEE HAS RAISED FOLLOWING GROUND NO.1 1. GROUND NO.1- TRANSFER PRICING (TP) ADJUSTMENT IN RELATION TO EXPORT OF GOODS 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW, THE DISPUTE RESOLUTION PANEL-I, MUMBAI (HONBLE DRP) ERRED IN UPHOLDING THE ACTION OF THE INCOME TAX OFFICER-9(3)(2), MUMBAI (LD.AO)/JOINT COMMISSIONER OF INCOME-TAX (TP)-2(1), MUMBAI (LD. TPO) IN DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS (IMPUGNED INTERNATIONAL TRANSACTION) AND COMPUTING AN ADJUSTMENT OF INR 1,41,13,97,695. 1.2 WHILE DOING SO, THE HONBLE DRP/ LD. AO/LD. TPO ERRED IN: 1.2.1COMPARING THE EXPORT PRICES CHARGED ON THE PRODUCTS SOLD TO GROUP COMPANIES WITH THE PRODUCTS SOLD TO THE DOMESTIC THIRD PARTIES I.E. USING COMPARABLE UNCONTROLLED PRICE (CUP) METHOD; 1.2.2. IGNORING THE DIFFERENCES ON ACCOUNT OF GEOGRAPHICAL MARKET, VOLUME OF TRANSACTIONS, FUNCTIONAL PROFILE ETC. WHILE COMPARING THE IMPUGNED INTERNATIONAL TRANSACTION WITH THE INTERNAL COMPARABLE UNCONTROLLED TRANSACTION; 3 ITA NO.7145/MUM/2017 1.2.3 REJECTING THE COMPARABILITY STUDY CONDUCTED BY THE APPELLANT AND DISREGARDING THE APPLICATION OF TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM); AND 1.2.4 SELECTING TWO METHODS I.E., CUP AND TNMM AS THE MAM FOR THE IMPUGNED INTERNATIONAL TRANSACTION. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT BE DELETED. 3. BRIEF FACTS RELATING TO THE ABOVE ISSUE ARE THAT TH E ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF AROMATI C INGREDIENTS, NATURAL AND SYNTHETIC PERFUMERY, FLAVORING AND DERI VATIVES. DURING THE PREVIOUS YEAR 2012-13 RELEVANT TO THE AY 2013-14, T HE ASSESSEE ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIO N: SR. NO. INTERNATIONAL TRANSACTION INR (CRORES) 1. IMPORT OF RAW MATERIAL 95.46 2. EXPORT OF FINISHED PRODUCTS 446.18 3. INTEREST PAID ON ECB LOAN 1.46 4. REIMBURSEMENT OF EXPENSES 0.10 5. FREIGHT REIMBURSEMENT 11.27 6. SUBSCRIPTION OF EQUITY SHARES 50.00 7. AVAILING OF RECURRENT AND SPECIFIC SERVICE (S3 & IS EXPENSES) 11.50 THE ASSESSEE SELECTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMI NING THE ARMS- LENGTH PRICE OF THE AFORESAID INTERNATIONAL TRANSAC TIONS WITH PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT (OP) / OPERATING COST (OC). THE ASSESSEES PLI WAS AT 16.8% AND COMPARA BLES WERE AT 6.9% (5 COMPARABLES SELECTED AND PLI COMPUTED ON MU LTIPLE YEAR DATA BASIS). DURING THE TRANSFER PRICING ASSESSMENT PROCEEDING, ORIGINALLY THE SHOW CAUSE NOTICE WAS ISSUE BY THE T RANSFER PRICING 4 ITA NO.7145/MUM/2017 OFFICER (TPO) ASKING THE ASSESSEE TO SHOW CAUSE A S TO WHY THE DEDUCTION UNDER SECTION 10AA OF THE ACT SHOULD NOT BE REDUCED ON THE GROUND THAT THE PROFIT EARNED ON THE TRANSACTIO NS WITH ASSOCIATED ENTERPRISE (AES) ARE EXCESSIVE. THE ASSESSEE VIDE LETTER DATED 08.09.2016 EXPLAINED THAT ADJUSTMENT SHOULD NOT BE MADE ON THE DEDUCTION CLAIMED UNDER SECTION 10AA OF THE ACT. TH E ASSESSEE ALSO EXPLAINED THAT SOME COMMON PRODUCTS WERE SOLD BY TH E ASSESSEE TO BOTH ASSOCIATED ENTERPRISES (AES) AND NON-AES, AC CORDINGLY, THE TPO ASKED TO SUBMIT THE DETAILS PERTAINING TO THE S ALE OF COMMON PRODUCTS TO BOTH AES AND NON AES. IN RESPONSE, THE ASSESSEE VIDE LETTER DATED 20.09.2016, SUBMITTED THE DETAILS OF 6 2 COMMON PRODUCTS SOLD TO BOTH AES AND NON- AES. THE ASSESSEE ALSO EXPLAINED FACTS THAT OUT OF TOTAL AE SALES OF INR 4 46.19 CRORES, COMMON SALES TO BOTH AES AND NON-AES AMOUNTED TO ON LY INR 136.08 CRORES, I.E. 30% OF THE TOTAL SALES MADE TO AES WERE ALSO SOLD TO NON-AES, THAT TOO VERY INSIGNIFICANT IN VOLUME A S COMPARED TO THE SALES MADE TO THE AES. 4. THE TPO DID NOT TAKE COGNIZANCE OF THE SUBMISSION M ADE BY THE ASSESSEE AND AS ALLEGED IN THE ORIGINAL SHOW CA USE NOTICE THAT THE ASSESSEE IS ALLEGEDLY EARNING MORE PROFIT FROM THE AE TRANSACTIONS, MADE AN ADJUSTMENT OF INR 141,13,97,6 95/- BY COMPARING THE AVERAGE SALES PRICE OF PRODUCT SOLD T O AES WITH THE AVERAGE PRICE OF PRODUCT SOLD TO NON-AES. HE HOWEV ER ACCEPTED THE ARMS-LENGTH PRICE OF THE OTHER TRANSACTIONS COVERE D IN THE TNMM. FURTHER, THE ASSESSEE ALSO ENTERED INTO INFORMATIO N SYSTEMS SERVICE AGREEMENT FOR IMPLEMENTATION OF S3-ERP BEI NG SAP SOFTWARE AND AVAILING SOFTWARE SERVICES PERTAINING TO IS& S3 FROM ITS AE I.E. FIRMENCH SA. THE TPO DISREGARDED THE DETAIL S FILED BY THE ASSESSEE WHICH WERE REGARDING THE ALLOCATION METHOD OLOGY, KPMG CERTIFICATE OF ALLOCATION, SERVICES RECEIVED, NATUR E OF SERVICES ETC. AND MADE AN ADJUSTMENT BY CONTENDING THAT THE PAYMENT O F SOFTWARE CHARGES BY THE ASSESSEE IS NOT JUSTIFIED. THE TPO D ETERMINED THE ALP ON AN AD-HOC BASIS FOR THE SAID TRANSACTION BY APPLYING THE CUP 5 ITA NO.7145/MUM/2017 METHOD. BASED ON ABOVE, TPO PASSED AN ORDER DATED O CTOBER 28, 2016 MAKING THE FOLLOWING TRANSFER PRICING ADJUSTME NTS: S.NO. ADJUSTMENT ON ACCOUNT OF AMOUNT (IN INR) 1. EXPORT FINISHED PRODUCTS 141,13,97,695 2. PAYMENT FOR SOFTWARE CHARGES 9,88,26,934 TOTAL 151,02,24,629 THE DISPUTE RESOLUTION PANEL (DRP) VIDE DIRECTIONS DATED 11.09. 2017 UPHELD THE ORDER OF THE TPO. AGGRIEVED, ASSESS EE CAME IN APPEAL BEFORE TRIBUNAL. 5. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH FA CTS AND CIRCUMSTANCES OF THE CASE. BEFORE US LD COUNSEL FOR THE ASSESSEE ARGUED IN RESPECT TO ADJUSTMENT MADE ON ACCOUNT OF EXPORT OF FINISHED PRODUCTS. HE STATED THAT IT IS NOT OPEN TO THE TPO TO SELECT TWO DIFFERENT METHOD FOR INTERCONNECTED TRANSACTION S. FOR THIS HE NARRATED THE FACTS THAT THE TPO HAS SELECTED TWO ME THODS I.E., TNMM AND CUP AS THE MOST APPROPRIATE METHOD FOR BEN CHMARKING THE EXPORT FINISHED PRODUCTS, OUT OF TOTAL AE SALES OF INR 446.19 CRORES, THE COMMON SALES TO AES AND NON-AES WAS ONL Y AMOUNTING TO INR 136.08 CRORES, I.E. ONLY 30% OF THE PRODUCTS WERE SOLD TO AES AND NON-AES,. THUS, TPO APPLIED CUP FOR SUCH 30% OF THE TRANSACTIONS AND TNMM FOR REST OF THE TRANSACTIONS, WHICH EVENTUALLY LEADS TO APPLICATION OF TWO METHODS FOR THE SAME NA TURE OF TRANSACTION. HE ALSO SUBMITTED THAT TPO HAVING ACCE PTED TNMM AS THE MOST APPROPRIATE METHOD FOR 70% OF THE TRANSACT IONS, IT IS NOT OPEN TO THE TPO TO SELECT ANOTHER METHOD FOR BALANC E TRANSACTIONS. HE EXPLAINED THAT ALL THE TRANSACTIONS OF SALE OF G OODS ARE INTER CONNECTED AND, HENCE, THE SAME OUGHT TO BE BENCH MA RKED ON THE BASIS OF SAME METHOD. THEREFORE, APPLYING CUP FOR P ART OF TRANSACTION IS INCORRECT AND LIABLE TO BE SET ASIDE . MORE SO WHEN THE 6 ITA NO.7145/MUM/2017 TRANSACTIONS ARE OF A SIMILAR NATURE IN AS MUCH AS THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN, IN ALL THE TRANSACTION WITH THE AES WERE IDENTICAL. 6. HE ALSO ARGUED THAT CUP IS NOT THE MOST APPROPRIATE METHOD ON THE FACTS OF THE PRESENT CASE. HE ELABORATED THA T BOTH THE ASSESSEE AND TPO ARE REQUIRED TO COMPUTE THE ARMS LENGTH PRICE APPLYING THE MOST APPROPRIATE METHOD. IN THE PRESEN T CASE, THE DIFFERENCES, WHICH ARE ENUMERATED HEREIN BELOW, BET WEEN THE PRICE CHARGED, MARKET CONDITIONS, ETC. BY THE ASSESSEE TO ITS AES AND NON AES ARE OF SUCH MAGNITUDE THAT THE CUP METHOD CANNO T BE SAID TO BE THE MOST APPROPRIATE METHOD AND TNNM OUGHT TO HA VE BEEN APPLIED BY THE TPO. IN FACT THE REASON WHY THE CUP METHOD WAS REJECTED AS THE MOST APPROPRIATE METHOD IS DESCRIBE D IN THE TRANSFER PRICING STUDY. HE ALSO REFEREED TO RULE 10B OF TH E INCOME-TAX RULES, 1962 (THE RULES) PROVIDES THAT WHILE APPLYING THE CUP METHOD ONE NEEDS TO ADJUST OR ACCOUNT FOR THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTION, WHICH COULD MATERIALLY AFFECT THE PRIC E IN THE OPEN MARKET. HENCE HE FINALLY ARGUED THAT WHEN IT IS NOT POSSIBLE TO QUANTIFY OR MAKE APPROPRIATE ADJUSTMENT, THEN CUP M ETHOD CANNOT BE APPLIED TO BENCHMARK THE INTERNATIONAL TRANSACTI ONS. IN FACT THAT IS WHY THE TPO HAS NOT EVEN ATTEMPTED TO MAKE SUCH ADJ USTMENT. 7. ON THE OTHER HAND LD CIT-DR SH JAYANT KUMAR SUPPORT ED THE ORDERS OF TPO AND DRP. 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); AN D * 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: 7 ITA NO.7145/MUM/2017 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, 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 REQUIREMENT RESULTS BETTER MANAGEMENT OF PRODUCTION SUPPLY CHAIN AND RESOURCE MANAGEMENT. LOWER VOLUME (SMALL ORDERS SPECIFIC TO THE REQUIREMENT OF EACH CUSTOMERS) GEOGRAPHICAL 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. 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. PURCHASE OR SALE OF LOWER QUANTITIES ARE EXPENSIVE, THIS IS 8 ITA NO.7145/MUM/2017 USUALLY BECAUSE OF COST OF TRANSPORTATION FOR DELIV ERIES AND ADMINISTRATION COST INVOLVED IN HANDLING SMALLER DE LIVERIES. THE ASSESSEE IS ENGAGED IN MANUFACTURING OF AROMATI C INGREDIENTS, NATURAL AND SYNTHETIC PERFUMERY, FLAVO RING AND DERIVATIVES. SPECIFIC AND MAJORITY OF THE PRODUCTS MANUFACTURED ARE SOLD TO THE GROUP COMPANIES. HOWEV ER, IN THE CIRCUMSTANCES WHERE THE GROUP ENTITIES DO NOT W ANT A PRODUCT THEN IT IS SOLD IN THE MARKET AT A PRICE BE ST NEGOTIATED BY THE ASSESSEE. IN THE TABLE BELOW, THE ASSESSEE H AS PROVIDED THE DETAILS OF THE QUANTITATIVE DIFFERENCE S 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 OF C OMMON PRODUCTS SOLD TO AE AND NON-AE, ONE OF THE EXAMPLE TAKEN FRO M THE FACTS OF THE CASE IS THAT W.R.T. PRODUCT DAMASCENONE TOTAL , THE ASSESSEE HAD SOLD 25 KG TO A NON-AE AT THE RATE OF INR 38,00 0 PER KG AND SOLD 1,260 KG AND 16,299 KG AT THE RATE OF INR 9,80 0 AND INR 9,664 RESPECTIVELY TO ITS AE NAMELY, FIRMENICH AROMATICS (CHINA) 9 ITA NO.7145/MUM/2017 COMPANY LIMITED AND FIRMENICH SA. SIMILARLY, THE AS SESEE HAS SOLD 50 KG OF THE SAME PRODUCT AT THE RATE OF INR 36,408 TO OTHER AE. THUS, TPO ERRED IN COMPARING SMALL; QUANTITIES WITH LARGE QUANTITIES, THEREBY IGNORING THE VOLUME DIFFERENCE. WE ALSO NOT ED THAT WHEN THE QUANTITY SOLD TO A NON-AE IS HIGHER THAN THAT SOLD TO AN AE, THEN THE PRICE CHARGED FROM THE AE IS MORE THAN NON-AE. THE ASSESSEE ALSO EXPLAINED THAT THIS WOULD SHOW THAT THE COMPARISON DONE BY THE TPO IS WHOLLY ERRONEOUS. 10. FURTHER ACCORDING TO US, DIFFERENCES IN THE GEO GRAPHIC MARKETS EXPORT PRICES OF SAME PRODUCTS ARE BOUND TO BE DI FFERENT IN DIFFERENT GEOGRAPHICAL LOCATIONS / MARKETS, AS THES E PRICES ARE FACTOR OF RAW MATERIAL PRICES IN THOSE RESPECTIVE LOCATION S AND ALSO BECAUSE OF MARKET SENSITIVITY, BARGAINING POWER AND LOCAL C OMPETITION. THE FOLLOWING TABLE HIGHLIGHTS THE DIFFERENCES IN GEOGR APHY AND COVERS MORE THAN 80% OF THE ADJUSTMENT MADE BY THE TPO. AL SO, TPO HAS COMPARED LOCAL SALES TO THIRD PARTIES WITH EXPORTS TO AES AS UNDER:- SR.NO IN TPOS ORDER MATERIAL 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 O N 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 10 ITA NO.7145/MUM/2017 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 ANY OF T HE DIFFERENCES BETWEEN THE TRANSACTIONS IF COMPARED ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR THE PROFIT ARI SING FROM SUCH TRANSACTION IN THE OPEN MARKET. THEREFORE, IT IS ES SENTIAL TO ADJUST FOR THE ABOVE MENTIONED DIFFERENCES IN ORDER TO CREATE LEVEL PAYING FILED IE.. IN ORDER TO ENSURE LIKE BY LIKE COMPARISON. SI NCE, THE TPO WAS UNABLE TO QUANTIFY THE SAME, THE CUP SHOULD NOT BE USED AS THE MOST APPROPRIATE METHOD. 12. WE FIND THAT THIS ISSUE IS COVERED BY THE DECIS ION 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 - 11 ITA NO.7145/MUM/2017 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, 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 CONSIDERED 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 COMMISSION BY THE ASSESSEE TO ITS AE. THE ITAT HAS DEALT WITH ALL THE THREE IS SUES AND GIVEN ITS FINDING IN FAVOUR OF THE ASSESSEE. THE ASSESSEE HAS SUBMITTED BEFORE US A NOTE ON THE ITAT ORDER AND POINTS OF SI MILARITY 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 YEAR RELATE TO ADJUSTMENTS M ADE BY THE TPO IN RELATION TO SOME OF THE EXPORTS AND IMPORTS ON R EASONING SIMILAR TO THE EARLIER ASSESSMENT YEARS WHICH HAVE NOW BEEN AD JUDICATED BY THE ITAT, PUNE IN 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 FOR T HE 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. APPROPRIA TENESS OF THE TNMM METHOD WAS ALSO THE ISSUE IN THOSE YEARS. TRIB UNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND DISMISSED T HE APPEAL OF THE REVENUE ON THOSE ISSUES. AFTER HEARING 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 STUDY , IS FAIR AND REASONABLE AND SAME DOES NOT CALL FOR ANY INTERFERE NCE. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 13. FURTHER, HONBLE BOMBAY HIGH COURT DISMISSED TH E APPEAL OF THE DEPARTMENT FILED BY THE DEPARTMENT AGAINST T HE ITATS ORDER AND NOTED THAT IN THIS CASE, SINCE THE FINISH ED GOODS ARE CUSTOMIZED GOODS AND THE GEOGRAPHICAL DIFFERENCES, VOLUME 12 ITA NO.7145/MUM/2017 DIFFERENCES, TIMING DIFFERENCES, RISK DIFFERENCES A ND FUNCTIONAL DIFFERENCES, 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 M ETHOD TO ARRIVE AT ALP. THIS JUDGEMENT IS REPORTED AS PCIT V S. 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 INTE RCONNECT INDIA PVT. LTD., (SUPRA) AND WHICH IS AFFIRMED BY T HE HONBLE BOMBAY HIGH COURT, RESPECTFULLY FOLLOWING THE SAME WE DELETE THE ADDITION AND ALLOW THIS ISSUE OF ASSESSEES APP EAL. 15. THE SECOND ISSUE IN THIS APPEAL OF ASSESSEE AGA INST THE ORDER OF DRP UPHOLDING THE ACTION OF AO/TPO IN DETE RMINING THE ALP OF INTERNATIONAL TRANSACTION OF PAYMENT OF INFORMATION SYSTEM (IS) SERVICES CHARGES. FOR THIS ASSESSEE HA S RAISED FOLLOWING GROUND NO.2. GROUND NO.2- TP ADJUSTMENT IN RELATION TO VAILING OF INFORMATION SYSTEMS (IS) SERVICES 2.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP ERRED IN UPHOLDING THE ACTION OF THE LD. AO/ LD. TPO IN DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF IS SERVICE CHARGES AT INR 1,62,05,000 INSTEAD OF INR 11,50,31,934 AS DETERMINED BY THE APPELLANT, THEREBY COMPUTING TP ADJUSTMENT OF INR 9,88,26,934 13 ITA NO.7145/MUM/2017 2.2 WHILE DOING SO, THE HONBLE DRP/LD. AO/LD. TPO ERRED IN: 2.2.1 HOLDING THAT THE APPELLANT HAS NOT PROVIDED ANY EVIDENCES IN RELATION TO RECEIPT OF SERVICE AND COST ALLOCATION THEREBY DISREGARDING THE EVIDENCES SUBMITTED BY THE APPELLANT; 2.2.2. CHALLENGING THE COMMERCIAL RATIONALE AND EXPEDIENCY OF AVAILING SERVICES BY THE APPELLANT; 2.2.3. APPLYING CUP METHOD AND REJECTING THE COMPARABILITY ANALYSIS I.E., ALLOCATION OF ACTUAL C OST AS PER THE COST SHARING AGREEMENT BETWEEN THE APPELLANT AND ITS ASSOCIATED ENTERPRISE (AE), TO DEMONSTRATE THE ARMS LENGTH PRICE (ALP) 2.2.4 DISREGARDING THE AGGREGATION APPROACH ADOPTED BY THE APPELLANT AND APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD (MAM); AND 2.2.5. ARBITRARILY ESTIMATION THE ALP FOR BENCHMARKING UNDER CUP METHOD WITHOUT FOLLOWING ANY PARTICULAR ANY PARTICULAR METHOD PRESCRIBED UNDER SECTION 92C OF THE ACT. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT BE DELETED. 16. BRIEF FACTS ARE THAT ACTS ARE THAT THE ASSESSEE ENTERED INTO INFORMATION SYSTEMS SERVICE AGREEMENT ON OCTOBER 14, 2011 FOR IMPLEMENTATION OF S3-ERP SOFTWARE AND AVAILING SERVICES PERTAINING TO IS & S3 FROM ITS AE I.E. FIRMENCH SA. THE ASSESSEE HAD SWITCHED OVER FROM THE OLD ACCOUNTING SOFTWARE, 14 ITA NO.7145/MUM/2017 STOCK MAINTENANCE SOFTWARE AND SOFTWARE FOR OTHER P URPOSES INTO S3-ERP BEING SAP SOFTWARE IN AY 2011-12 WHICH WAS DEVELOPED / ACQUIRED BY AE FOR ALL ITS ENTITIES ARO UND THE WORLD. THE TPO, RELIED ON THE PREVIOUS YEARS ORDER FOR AY 2012-13 WHEREIN BASED ON ESTIMATES OF MAN HOURS OF SERVICES AND SALARY, AN ALP OF INR 1,62,05,000 WAS DETERMINED. T HE TPO IN AY 2013-14, FOLLOWED THE SAME MECHANISM (CONSIDERIN G THE SAME MAN HOURS AND SALARY) AND DETERMINED THE SAME ALP OF INR 1,62,05,000. THIS RESULTED IN AN ADJUSTMENT OF INR 9,88,26,934 (I.E. INR 11,50,31,934/- MINUS INR 1,62 ,05,000). AT THE OUTSET IT IS STATED BY LD. COUNSEL THAT THIS ISSUE SQUARELY COVERED BY TRIBUNAL DECISION IN ASSESSEES GROUP CO MPANY IN CASE OF ITA NO. 2590/MUM/2017 (A.Y.2012-13) FIRMEN ICH AROMATICS INDIA PVT.LTD VS DY. COMMISSIONER OF INCO ME TAX, DATED 23.07.2018, WHEREIN THE TRIBUNAL HELD AS UND ER: 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 ASSESSEE FAILE D TO FURNISH ANY EVIDENCE TO SUBSTANTIATE ITS CLAIM THAT THE PAYMENT MADE TO THE AE FOR AVAILING INFORMATION SYSTEM SERVICES, HOWEVER, THE MATERIAL ON RECORD REVEAL THAT THE ASSESSEE HAS NOT ONLY UNDERT AKEN A BENCH MARKING PROCESS FOR DETERMINING THE ARM'S LENGTH PR ICE OF THE TRANSACTION IN THE TRANSFER PRICING STUDY REPORT WH ICH WAS FILED BEFORE THE TRANSFER PRICING OFFICER, BUT, OTHER RELEVANT A ND NECESSARY DOCUMENTS LIKE COPY OF THE AGREEMENT, INVOICES RAIS ED, CERTIFICATE FROM INDEPENDENT CHARTERED ACCOUNTANT FIRM, KPMG, D ETAILS OF USERS WERE ALSO FURNISHED BEFORE THE TRANSFER PRICI NG OFFICER. THEREFORE, THE ALLEGATION OF THE TRANSFER PRICING O FFICER THAT THE ASSESSEE HAS NOT FURNISHED THE NECESSARY DETAILS IS NOT TOTALLY CORRECT. IN ANY CASE OF THE MATTER, NONFURNISHING OF CERTAIN DOCUMENTARY EVIDENCES, AS ALLEGED BY THE TRANSFER P RICING OFFICER, DOES NOT EMPOWER HIM TO EMBARK UPON DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ON ESTIMATIO N BASIS. FURTHER, A READING OF THE TRANSFER PRICING OFFICER'S ORDER MAK ES IT CLEAR THAT HIS FINDING ON THE ISSUE IS CONTRADICTORY. ON THE ONE H AND, HE HAS OBSERVED THAT THE ASSESSEE HAS FAILED ALL THE THREE TESTS, INCLUDING, WHETHER THE SERVICES HAVE ACTUALLY BEEN PROVIDED, O N THE OTHER HAND, HE HAS ACCEPTED THAT THE AE HAS PROVIDED THE SOFTWARE. THUS, ULTIMATELY, WHAT THE TRANSFER PRICING OFFICER DISBE LIEVES IS THE QUANTUM OF PAYMENT. ACCORDINGLY, HE HAS PROCEEDED T O ESTIMATE THE 15 ITA NO.7145/MUM/2017 PRICE OF THE SERVICES RENDERED BY THE AE AT 7 1,62, 05,000. THOUGH, THE TRANSFER PRICING OFFICER HAS OBSERVED THAT HE H AS APPLIED CUP METHOD FOR DETERMINING THE ARM'S LENGTH PRICE, HOWE VER, HE HAS NOT BROUGHT ON RECORD EVEN A SINGLE COMPARABLE TO SUPPO RT THE ARM'S LENGTH PRICE DETERMINED BY HIM EVEN ON ESTIMATE BAS IS. THE ESTIMATION OF SERVICE CHARGES ON SO CALLED MAN HOUR BASIS IS WITHOUT ANY SUPPORTING MATERIAL. SIMILARLY, THE ESTIMATION OF COST OF SOFTWARE AT 7. 1 CRORE IS WITHOUT ANY BASIS. THUS, IT IS VER Y MUCH CLEAR THAT THE DETERMINATION OF ARM'S LENGTH PRICE BY THE TRANSFER PRICING OFFICER IS NOT AS PER ANY ONE OF THE METHODS PRESCRIBED UNDER SECTION 92C OF THE ACT NOW RULE LOB. AS DISCUSSED ELSEWHERE IN THI S ORDER, SUCH DETERMINATION OF ARM'S LENGTH PRICE ON ADHOC / EST IMATION BASIS IS NOT PERMISSIBLE UNDER THE SCHEME OF THE ACT AS THE TRANSFER PRICING OFFICER IS DUTY BOUND TO DETERMINE THE ARM'S LENGTH PRICE BY FOLLOWING ANY ONE OF THE MOST APPROPRIATE METHOD PRESCRIBED U NDER THE STATUTE. IT IS RELEVANT TO OBSERVE, THE DRP HAS APP ROVED THE DETERMINATION OF THE ARM'S LENGTH PRICE BY THE TRAN SFER PRICING OFFICER WITHOUT PROPERLY APPRECIATING THE IMPLICATI ON OF THE RELEVANT STATUTORY PROVISIONS. AS REGARDS THE OBSERVATIONS O F THE DRP REGARDING THE REPORT OF THE KPMG, IT IS NECESSARY T O OBSERVE THAT THE KPMG REPORT IS NOT AN AUDIT REPORT BUT WAS FURNISHE D BY THE ASSESSEE TO SUPPORT THE ATTRIBUTION OF COST. THEREF ORE, IT CANNOT BE SAID THAT IT IS A QUALIFIED REPORT. IT IS FURTHER R ELEVANT TO OBSERVE, THE MATERIAL SUBMITTED BEFORE US, WHICH ALSO FORMS PART OF THE TRANSFER PRICING OFFICER'S RECORD, INDICATES THAT THE COST O F THE SOFTWARE HAS BEEN ALLOCATED TO 40 GROUP COMPANIES ACROSS THE GLO BE WHO ARE USING THE SOFTWARE AND RELATED SERVICES AND ASSESSE E'S SHARE IN COST ALLOCATION WORKS OUT TO 2.3%. MOREOVER, WHEN THE TR ANSFER PRICING OFFICER HIMSELF AGREES THAT THE AE HAS PROVIDED SOF TWARE AND CERTAIN SERVICES, THERE IS NO REASON FOR NOT ACCEPTING THE PAYMENT MADE TO THE AE TO BE AT ARM'S LENGTH IN THE ABSENCE OF ANY CONTRARY 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 DETERMINE TH E ARM'S LENGTH PRICE BY APPLYING ONE OF THE MOST APPROPRIATE METHO DS BEING BACKED BY SUPPORTING MATERIAL. WITHOUT COMPLYING TO THE ST ATUTORY PROVISIONS, THE TRANSFER PRICING OFFICER CERTAINLY CANNOT DETER MINE THE ARM'S LENGTH PRICE ON ADHOC / ESTIMATION BASIS. OUR REAS ONING IN PARAGRAPH 11 TO 15 WILL EQUALLY APPLY TO THIS ISSUE ALSO. ACCORDINGLY, WE DELETE THE ADJUSTMENT MADE TO THE ARM'S LENGTH P RICE OF PAYMENT MADE TOWARDS AVAILING INFORMATION SYSTEM SERVICES F ROM AE. THIS GROUND IS ALLOWED. 16 ITA NO.7145/MUM/2017 AS THE ISSUE IS SQUARELY COVERED BY THE TRIBUNALS DECISION IN ASSESSEES OWN CASE IN IMMEDIATE PRECEDING YEAR, RE SPECTFULLY FOLLOWING THE SAME, WE DELETE THE ADDITION AND ALLO W THIS ISSUE OF ASSESSEES APPEAL. 17. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 13-11-2018 SD/- SD/- SD/- ( / RAJESH KUMAR) ( /MAHAVIR SINGH) ( / ACCOUNTANT MEMBER) ( / JUDICIAL MEMBER) , , - / MUMBAI, DATED: 13-11-2018 , . / SUDIP SARKAR, SR.PS 17 ITA NO.7145/MUM/2017 !'#$%&%'# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. ! / THE RESPONDENT. 3. /% 0 1 / THE CIT(A) 4. /% / CIT 5. 234 %56 , &56 , , / DR, ITAT, MUMBAI 6. 4789 / GUARD FILE. / BY ORDER, !2% % //TRUE COPY// ()* ( ASSTT.REGISTRAR) + , / ITAT, MUMBAI