LANXESS INDIA P.LTD, THANE V. ASST CIT CIR 1, THANE

ITA 7220/MUM/2017

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 5773 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 16-08-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 19-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL Mumbai “K” Bench, Mumbai. Before Shri B.R. Baskaran (AM) & Shri Narender Kumar Choudhry (JM) I.T.A. No. 7220/Mum/2017 (A.Y. 2013-14) Lanxess India Private Limited Lanxess House, Plot No. A/162-164, Road No. 27 Wagle Estate, Opp. ITI College, MIDC, Thane West Pincode – 400 604. PAN : AACCB3880A Vs. ACIT, Circle-1 Room No. 22 6 th Floor, B Wing Ashar IT Park, Road No. 16-Z Wagle Industrial Estate, Thane West Pincode -400 604. (Appellant) (Respondent) Assessee by Shri Dhanesh Bafna, Ms. Chandni Shah & Shri Yogesh Malpanil Department by Shri Ashish Kumar Date of Hearing 17.08.2023 Date of Pronouncement 31.10.2023 O R D E R Per B.R.Baskaran (AM) :- The assessee has filed this appeal challenging the assessment order dated 30-10-2017 passed by the assessing officer u/s 143(3) r.w.s 144C(13) of the Act in pursuance of directions given by Ld Dispute Resolution Panel (DRP). 2. The grounds of appeal urged by the assessee read as under:- On being aggrieved by the order dated October 30, 2017 of the learned Asst. Commissioner of Income-tax, Circle -1, Thane ["AO"] passed under section 143(3) read with section 144C(13) of the Income tax Act, 1961 ("the Act") as also directions issued by the Dispute Resolution Panel -I, Mumbai ("DRP"), present appeal is being preferred on the following grounds amongst others which, it is prayed, may be considered without prejudice to one another. 1. On the facts and circumstances of the case and in law, the learned Asst. Commissioner of Income Tax, Circle - 1, Thane ('the AO')/Jt. Lanxess India Private Limited 2 Commissioner of Income Tax, Transfer Pricing Officer - 3(1), Mumbai ('the TPO') erred in making an adjustment to the arm's length price of the international transaction of export of finished goods (Manufacturing segment) by applying Comparable Uncontrolled Price ('CUP') Method instead of Transactional Net Margin Method (TNMM 1 ) and thereby erred in computing transfer pricing adjustment of Rs. 3,08,95,543/-. It is prayed that the learned AO/TPO be directed to consider the international transaction of the Assessee as arm's length and accordingly the transfer pricing adjustment of Rs. 3,08,95,543/- should be deleted. 2. On the facts and circumstances of the case and in law, the learned AO/TPO erred in considering two methods (TNMM and CUP Method) for calculating Arms' Length Price of international transactions and making adjustment based on the method on which Transfer Pricing adjustment to the Assessee was higher, thereby disregarding the fact that the law specifically requires selection of the Most Appropriate Method. It is prayed that the order of the learned TPO be considered bad in law, and the aforementioned transfer pricing adjustment of Rs. 3,08,95,543/- be deleted. 3. Without prejudice to ground nos. 1 and 2 above, on the facts and in the circumstances of the case and in law, the learned AO/TPO/DRP erred in treating unutilized capacity cost and start-up & downtime cost as operating in nature while calculating margins under TNMM for export of finished goods (Manufacturing segment). It is prayed that the learned AO/TPO be directed to treat the unutilized capacity cost and start-up & downtime cost as non-operating in nature while calculating margins under TNMM for export of finished goods (Manufacturing segment). 4. On the facts and circumstances of the case and in law, the learned AO/TPO erred in making an adjustment of Rs. 1,88,85,905/- to the arm's length price of the international transaction of Technical Support Services using TNMM. It is prayed that the learned AO/TPO be directed to consider the international transaction of the Assessee as arm's length and accordingly the transfer pricing adjustment of Rs. 1,88,85,905/- should be deleted. 5. On the facts and circumstances of the case and in law, the learned AO erred in proposing an adjustment of Rs. 7,37,323/- towards Corporate Social Responsibility. The appellant prays that adjustment of Rs. 7,37,323/- towards Corporate Social Responsibility be deleted. Lanxess India Private Limited 3 6. On the facts and circumstances of the case and in law, the learned AO erred in proposing an adjustment of Rs. 21,714/- towards interest income. The appellant prays that adjustment of Rs. 21,714/- towards interest income be deleted. The above grounds are without prejudice to each other. The appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 3. The facts relating to the case are set out in brief. The assessee is engaged in the business of manufacturing and trading of specialty chemicals and Chemical Intermediaries. It is a subsidiary of M/s Lanxess Deutschland GmbH. It has got three manufacturing units located in India, viz., Madurai, Nagda and Jhagdia. The assessee had entered into many international transactions and hence the AO referred the matter of determination of Arms Length Price (ALP) of those transactions to the Transfer pricing Officer (TPO). The TPO proposed following transfer pricing adjustments:- In Manufacturing Segment - 3,08,95,543 In Fees for ITES - 2,82,25,867 ----------------- 5,91,21,410 ============= The assessee filed Objections before Ld DRP, which confirmed the Transfer pricing adjustment made in Manufacturing segment. In respect of adjustment made in “Fees for ITES”, it directed for inclusion of one more comparable company, which resulted in reduction of Transfer pricing adjustment in “Fess for ITES” to Rs.1,88,85,905/-. Accordingly, the AO passed final assessment order and hence the assessee has filed this appeal challenging the additions made by the AO. 4. Ground Nos. 1 to 3 relates to the transfer pricing adjustment made in Manufacturing segment. At the outset, the Ld A.R submitted that the assessee had determined the ALP of the transaction of export of goods to its Associated Enterprises (AEs) under TNM method (Internal TNMM for certain Lanxess India Private Limited 4 units and External TNMM for one unit). The TPO has, however, adopted CUP method to determine the ALP of transactions. He submitted that the CUP method was held to be inapplicable to the facts of the assessee by the Tribunal in the assessee’s own case in AY 2010-11 passed in ITA No.971/Mum/2015 dated 06-12-2022. Accordingly, he prayed that the AO/TPO may be directed to determine ALP by adopting TNM method as followed by the assessee. 5. We heard Ld D.R and perused the record. We notice that the co- ordinate bench has held in the assessee’s own case in AY 2010-11 (referred supra) that CUP method cannot be adopted as most appropriate method in the case of the assessee owing to differences on account of volume, geography, functions performed and risks assumed, while transacting with AEs and non-AEs in case such differences cannot be eliminated or adjusted. In this regard, the Tribunal has followed following decisions rendered by other co-ordinate benches:- (a) Firmenich Aromatics Production (India) P Ltd vs. ITO (ITA No.7145/Mum/2017) (b) Amphenol Interconnect India P Ltd vs. ACIT, Pune (2019)( 105 taxmann.com 382)(Pune). In view of the above, consistent with the view taken in the earlier year, we set aside the transfer pricing adjustment made in the manufacturing segment and direct the TPO/AO to re-compute ALP of that segment under TNM method. 6. In Ground no.3, the assessee is objecting in not excluding certain expenses treating them as non-operational in nature. The Ld A.R submitted that this ground may be treated as academic, if ground no.1 & 2 of the assessee is decided in its favour. Since we have decided the first two grounds in favour of the assessee, there is no necessity to adjudicate ground no.3 as submitted by Ld A.R. Lanxess India Private Limited 5 7. Ground no.4 is related to the transfer pricing adjustment made in respect of fees paid for technical support services. The assessee has provided IT technical support services to its Associated Enterprises. It benchmarked the transactions under TNM method by selecting 9 comparable companies. It selected OP/TC (Operating Margin/Total Cost) as Profit level Indicator (PLI). The margin earned by the assessee was 11.07%, while the average margin of comparable companies was 13.52%. Accordingly, the assessee claimed that its transactions are at arms length. The TPO, however, rejected all the nine comparable companies selected by the assessee. He introduced following four new comparable companies:- Microgenetics Systems Ltd 17.03% Acropetal Technologies Ltd (Health service segment) 16.93% Excel Infoways Ltd (segmental) 75.90% Hartron Communications Ltd 30.37% The average margin of above said four comparable companies was 35.05%. Accordingly, the TPO made transfer pricing adjustment of Rs.2,82,25,867/-. 8. The Ld DRP sustained all the four comparable companies selected by TPO and directed inclusion of one more comparable company, viz., Jindal Intellicom Ltd. As noticed earlier, the same resulted in reduction of transfer pricing adjustment to Rs.1,88,85,905/-. 9. In this appeal, the assessee seeks exclusion of two comparable companies, viz., M/s Excel Infoways Ltd and M/s Hartron Communications Ltd. 10. We notice that M/s Excel Infoways Ltd was not considered to be a good comparable in many decisions by the Tribunal. The Ld A.R brought to our notice the decision dated 15.09.2020 rendered in ITA No.158/Mum/2018 relating to AY 2013-14 in the case of M/s M Model Global Services Pvt Ltd (Known as Aquity Solutions India Pvt Ltd), wherein M/s Excel Infoways Ltd Lanxess India Private Limited 6 was excluded. In this regard, the co-ordinate bench has followed the decision rendered in the above said assessee’s case in AY 2012-13. In the said decision relating to AY 2012-13, the Tribunal has followed the decision rendered in the case of Clear Info Analytics Private Ltd, which in turn has relied upon the decision rendered by the Tribunal in the case of M/s Ocwen Financial Solutions P Ltd (ITA No.2669/PUN/2016 dated 21-01-2019), which in turn had relied upon the decision rendered in the case of Emerson Climate Technologies (India) P Ltd. In all these cases, fluctuating margin of this comparable company has been considered as negative point and accordingly, this company was excluded. The observations made by the Tribunal in the case of Emerson Climate Technologies (India) P Ltd are extracted below:- "18. We have heard rival contentions and perused the record. The limited issue which arises is against benchmarking of ALP of the IT(TP)A No. 2299/Mum/2017 international transactions on account of provisions of Oracle Support Services (JT-enables services) by assessee to its associated enterprise and for benchmarking of ALP of the international transactions to the said concern ie. Excel Infoways Ltd. which has been finally selected by the DRP, is to be excluded since it is showing fluctuating margins. It is further observed that the operating margin of the company had shown drastic fluctuations ranging from 247.74% in F.Y. 2008-09 to 2% in FY 2014-15. The assessee has pointed out the margins shown by the said concern were as under: Financial Year OP/TC margin 2008-09 247.74% 2009-10 267.31% 2010-11 238.71% 2011-12 41.48% 2012-13 75.70% 2013-14 30% 2014-15 2% 19. We find that the Tribunal in assessee's own case in assessment years 2011-12 & 2012-13 vide para 16 & 17 of the order of Tribunal has excluded Excel infoways Ltd., because of its fluctuating margins shown by the said concern. The Tribunal held that the said concern i.e. Excel Infoways Limited which is in the process of closing down its ITES segment and also because of the factum of fluctuating margins, could not be selected as functionally comparable to the assessee. Following the same parity of the reasons, we hold that the said concern i.e. Excel Infoways Limited, because of different factors and also fluctuating to be excluded from final set of comparables. Accordingly, we h ld The Assessing Officer is directed to recompute mean margin of the comparables and Lanxess India Private Limited 7 determine ALP of the international transactions of provision of Oracle support services (ITes) by the assessee to its AEs after affording reasonable opportunity of hearing to the assessee. Thus, ground No. 3 raised in appeal by assessee is allowed." Since the Tribunal has held M/s Excel Infoways Ltd as not a good comparable company in many of its decisions, following the same, we direct exclusion of this company from the list of comparable companies. 11. The assessee seeks exclusion of M/s M/s Hartron Communications Ltd. We notice that this company has also been excluded by Bangalore bench of Tribunal in the case of M/s ISG Novasoft Technologies Ltd (IT(TP)A No.42/Bang/2018 dated 29-04-2019 relating to AY 2013-14). We notice that the Bangalore bench has referred to the decision rendered by Chennai bench of Tribunal in the case of M/s Cameron Manufacturing India P Ltd vs. DCIT in ITA no.336/Chny/2018 dated 16/10/2018, wherein it was held that M/s Hatron Communications Ltd was not a good comparable with the following observations:- “7. Ground No.2.3: M/s. Hartron Communications as the comparable company:- The Ld.AR submitted before us that M/s. Hartron Communications had diversified operations amongst which many relates to activities that are not similar to the activity of the assessee company. Further it was submitted that the company M/s. Hartron Communication's profit from BPO business both export and domestic for the current year is 18.43 crores while as for the previous year the profit was 3.81 crores which shows an increase of profit to the tune of 483.72%. Therefore in the relevant assessment year there was extraordinary operations and hence cannot be taken as comparable company. Before us the facts presented by the Ld.AR could not be disputed by the Ld.DR. After considering the issue, we are of the view that when the company is functionally dissimilar and when in a particular year there is an extraordinary profit, then the company cannot be taken as a comparable company. In the case of M/s. Hartron Communication, it is apparent that the company has achieved extraordinary profits during the relevant assessment year and further it has diversified activities and therefore functionally dissimilar to that of the assessee company. Hence as pleaded by the Ld.AR, we are of the considered view that M/s. Hartron Communication cannot be accepted as a comparable company.” Lanxess India Private Limited 8 Accordingly, the Bangalore bench of Tribunal that M/s Hatron Communications cannot be considered as a comparable company. Following above said decisions, we direct exclusion of this company. 12. The AO/TPO may re-compute the ALP of the transactions in terms of our decision rendered above. 13. In the result, the appeal filed by the assessee is treated as allowed. Order pronounced in on 31.10.2023. Sd/- Sd/- (Narender Kumar Choudhry) (B.R. Baskaran) Judicial Member Accountant Member Mumbai.; Dated : 31/10/2023 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai. 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) PS ITAT, Mumbai