FIRMENICH AROMATICS (INDIA) P. LTD, MUMBAI V. DCIT 9(3)(1), MUMBAI

ITA 7330/MUM/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3616 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: misc
• Appeal Filed On: 22-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; International transaction; Question of law; Corroborative evidences; Avoidance of tax; Commercial expediency
• Section: 92C; 143(3); 92; 234B; 37(1); 10B; 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI RAJESH KUMAR , ACCOUNTANT MEMBER ITA NO. 7330 / MUM . /2017 ( ASSESSMENT YEAR : 20 0 13 14 ) FIRMENICH AROMATICS INDIA P. LTD. 9 TH FLOOR, ARENA SPACE, CTS 20 NEW SHYAM NAGAR ROAD BEHIND MAJAS BUS DEPOT JOGESHWARI (E), MUMBAI 400 060 PAN AAACF1621M . APPELLANT V/S DY . COMMISSIONER OF INCOME TAX CIRCL E 9( 3 ) ( 1 ), MUMBAI . RESPONDENT ASSESSEE BY : SHRI DHANESH BAFNA A/W MS. HIRALI DESAI REVENUE BY : SHRI ANAND MOHAN DATE OF HEARING 2 7 . 1 1 .201 8 DATE OF ORDER 22.02.2019 O R D E R PER SAKTIJIT DEY, J.M. INSTANT APPEAL BY THE ASSESSEE IS DIRECTED AGAINST ASSESSMENT ORDER DATED 27 TH OCTOBER 2017, PASSED UNDER SECTION 143(3) R/W SECTION 144C(13) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2013 14, PURSUANT TO THE DIRECTION OF THE DISPUTE RESOLUTION PANEL 1 (DRP), MUMBAI. 2 FIRMENICH AROMATICS INDIA P. LTD. 2 . IN GROUND NO.1, THE ASSESSEE HAS CHALLENGED ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RELATION TO EXPORT OF FINISHED GO ODS TO ASSOCIATED ENTERPRISES (A E). 3 . B RIEF FACTS NECESSARY FOR ADJUDICATING THE ISSUE ARE, THE ASSESSEE , AN INDIAN COMPANY , IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND MARKETING OF INDUSTRIAL FLAVOURS, FRAGRANCES AND CHEMICAL SPECIALTIES. AS STATED BY THE TRANSFER PRICING OFFICER , THE OVERSEAS AES OF THE ASSESSEE ARE IN THE BUSINESS OF PRODUCTION AND DISTRIBUTION OF FLAVOU RS AND FRAGRANCES FOR USE IN PRODUCTS RELATING TO BEAUTY , HOUSEHOLD, PHARMACEUTICALS, FOOD AND DRINK INDUSTRIES WITH THE SUPPORT OF CENTRALIZED EXTENSIVE RESEARCH AND DEVELOPMENT. FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE FILED ITS RETURN OF INCO ME ON 30 TH SEPTEMBER 2013, DECLARING TOTAL INCOME OF ` 5,14,23,550. IN COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICING THAT THE ASSESSEE HAS ENTERED INTO VARIOUS INTERNATIONAL TRANSACTION S WITH ITS AES , MADE A REFERENCE TO THE TRANSFER PRICING OFFICER TO DETERMINE THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION S . IN COURSE OF PROCEEDINGS BEFORE HIM, THE TRANSFER PRICING OFFICER NOT ONLY CALLED FOR VARIOUS INFORMATION/ DOCUMENTS AND EXAMINED THEM, BUT HE ALSO EXAMINED THE TRANSFER PRI CING STUDY REPORT FURNISHED BY THE ASSESSEE. ON EXAMINING THE TRANSFER PRICING STUDY REPORT, HE FO UND THAT THE ASSESSEE HAS BENCH MARKED THE INTERNATIONAL TRANSACTIONS RELATING TO 3 FIRMENICH AROMATICS INDIA P. LTD. IMPORT AND PURCHASE OF RAW MATERIAL, EXPORT OF FINISHED GOODS, PAYMENT FOR TE CHNICAL KNOWHOW AND COMMISSION RECEIVED BY APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) AT ENTITY LEVEL WITH OPERATING PROFIT TO OPERATING INCOME AS THE PROFIT LEVEL INDICATOR. THE TRANSFER PRICING OFFICER FOUND THAT BY CONSIDERING ITSELF AS THE TESTED PARTY, THE ASSESSEE HAS MADE A FUNCTION, ASSET, RISK (FAR) ANALYSIS AND SELECTED FIVE COMPANIES AS COMPARABLE S WITH MEAN MARGIN OF 6.06%. SINCE , THE MARGIN SHOWN BY THE ASSESSEE AT 8.00% IS MORE THAN THE MEAN MARGIN OF THE COMPARABLES , THE ASSESSEE CLAIMED THE INTERN ATIONAL TRANSACTIONS WITH THE AES TO BE AT ARM'S LENGTH. 4 . AFTER GOING THROUGH THE MATERIAL ON RECORD, THE TRANSFER PRICING OFFICER NOTICED THAT SOME COMMON PRODUCTS WERE SOLD TO BOTH THE AES AND NON AE S . THEREFORE, HE CALLED UPON THE ASSESSEE T O SUBMIT THE PRICE AT WHICH SUCH COMMON PRODUCTS WERE SOLD TO AES AND NON AES AND IN CASE OF ANY DIFFERENCE IN PRICE , HE CALLED UPON THE ASSESSEE TO EXPLAIN WHY NECESSARY ADJUSTMENT SHOULD NOT BE MADE APPLYING COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. AF TER FURNISHING THE NECESSARY DETAILS, THOUGH , T HE ASSESSEE JUSTIFIED ITS BENCH MARKING OF INTERN ATIONAL TRANSACTIONS WITH THE AE IN ALL SEGMENTS, HOWEVER, THE TRANSFER PRICING OFFICER OBSERVED THAT THE ASSESSEE HAS SOLD SAME PRODUCTS TO NON A ES AT A HIGHER RATE THAN THE RATE AT WHICH IT HAS SOLD SUCH PRODUCTS TO THE A E S . THE TRANSFER PRICING OFFICER OBSERVED , SINCE 4 FIRMENICH AROMATICS INDIA P. LTD. THE SE TRANSACTIONS ARE NOT CLOSELY LINKED , THEY HAVE TO BE SEPARATELY BENCH MARKED APPLYING CUP METHOD. HAVING HELD SO, THE TRANSFE R PRICING OFFICER COMPUTED THE DIFFERENCE IN PRICE OF PRODUCTS SOLD TO NON AES AND AES AT ` 73,04,480, AS PER THE COMPUTATION MADE IN ANNEXURE 1 TO HIS ORDER. THE SAID AMOUNT WAS TREATED AS THE ADJUSTMENT TO BE MADE TO THE ARM'S LENGTH PRICE OF THE TRANSAC TION RELATING TO EXPORT OF FINISHED PRODUCTS. WHILE FRAMING THE DRAFT ASSESSMENT ORDER, THE ASSESSING OFFICER ADDED THE AFORESAID TRANSFER PRICING ADJUSTMENT RECOMMENDED BY THE TRANSFER PRICING OFFICER. THOUGH, THE ASSESSEE OBJ ECTED TO THE AFORESAID ADDITI ON/ ADJUSTMENT BEFORE THE DRP, HOWEVER, THE DRP ALSO UPHELD THE DECISION OF THE TRANSFER PRICING OFFICER ON THE ISSUE. 5 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , OUT OF THE TOTAL SALES TURNOVER OF ` .448 CRORE OF THE ASSESSEE , SALE S TO THE AES FORM A RELATIVELY SMALL AMOUNT OF ` 10.13 CRORE. HE SUBMITTED , OUT OF THE AFORESAID SALES TO THE AES, THE TURNOVER RELATING TO COMMON PRODUCTS WH ICH WERE ALSO SOLD TO THE NON A ES AMOUNTED TO ` 1.23 CRORE AND THE BALANCE ` 9 CRORE ARE IN RELATION TO PRO DUC TS EXCLUSIVELY SOLD TO THE A E S . HE SUBMITTED , SALES TURNOVER RELATING TO COM MON PRODUCTS SOLD BOTH TO THE AES AND NON AE CONSTITUTE S 11% OF THE TOTAL SALES TO A ES LOCATED IN DIFFERENT GEOGRAPHICAL LOCATIONS . W HEREAS , SA LES OF COMMON PRODUCTS TO NON AES ARE IN INDIA ONLY . HE SUBMITTED , IN RESPECT OF 5 FIRMENICH AROMATICS INDIA P. LTD. SALES TO THE A ES, THE ASSESSEE DOES NOT HAVE TO INCUR MARKETING COST. HE SUBMITTED , IN CASE OF SOME PRODUCTS THERE COULD BE DIFFERENCE IN PRICE DUE TO VOLUME AND CREDIT RISK. HE SUBMITTED , WHEN THE TRANSFER P RICING OFFICER HAS ACCEPTED THE ARM'S LENGTH PRICE OF THE PRO DUCTS EXCLUSIVELY SOLD TO THE AE BENCH MARKED BY THE ASSESSEE BY APPLYING TNMM , HE SHOULD NOT HAVE SEGRE GATED A PART OF THE TRANSACTION AND BENCHMARKED IT APPLYING CUP METHOD. HE SUBMITTED , UNDER TNMM MARGIN SHOWN BY THE ASSESSEE AT 8% IS MORE THAN THE MEAN MARGIN OF THE COMPARABLE S . THEREFORE, THE TRANSACTION RELATING TO SA LE OF FINISHED PRODUCT TO THE A ES IS AT ARM'S LENGTH. WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS , LEARNED AUTHORISED REPRESENT ATIVE SUBMITTED , WHEN THE AES AND NON A ES ARE LOCATED IN DIFFERENT GEOGRAPHICAL JURISDICTION S , THE TRANSFER PRICING OFFICER WAS NOT JUSTIFIED IN APPLYING THE PRICE CHARGED TO NON A ES AS CUP. HE SUBMITTED , WHEN NO VALID CUP IS AVAILABLE , THE ONLY METHOD WHI CH CAN BE APPLIED FOR BENCH MARKING THE PARTICULAR TRANSACTION IS TNMM. R EFERRING TO RULE 10B(2) OF I.T. RULES, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THE SAID RULE CLEARLY SPECIFIES THAT COMPARABILITY OF AN INTERNATIONA L TRANSACTION RELATING TO THE AE WITH AN UNCONTROLLED TRANSACTION WILL HAVE TO BE MADE KEEPING IN VIEW THE GEOGRAPHICAL LOCATION AMONGST OTHER THINGS. THUS, HE SUBMITTED , THE TRANSFER PRICING OFFICER COULD NOT HAVE COMPARED THE PRICE CHARGED TO NON AES IN INDIA WITH THE PRICE CHARG ED FOR TRANSACTIONS WITH OVERSEAS A ES . HE SUBMITTED , WHILE DEALING WITH 6 FIRMENICH AROMATICS INDIA P. LTD. IDENTICAL ISSUE IN CASE OF ANOTHER SISTER CONCERN VIZ. FIR MENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. V/S ITO, IN ITA NO.7145/MUM./ 2017, DATED 13 TH NOVEMBER 2018, THE TRIBUNAL HAS E XPRESSED SIMILAR VIEW. IN THIS REGARD, HE DREW OUR ATTENTION TO THE RELEVANT OBSERVATIONS IN THE SAID ORDER. THE LEARNED AUTHORISED REPRESENTATIVE ALSO RELIED UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN PCIT V/S AMPHENOL INTERCONNECT INDI A PVT. LTD., [2018] 91 TAXMANN.COM 441 (BOM.). 6 . THE LEARNED DEPARTMENTAL REPRESENTATIVE RELYING UPON THE REASONING OF THE TRANSFER PRICING OFFICER AND THE DRP SUBMITTED , SINCE THERE IS A DIFFERENCE IN THE PRICING OF TRANSACTION S OF SIMILAR PRODUCTS SOLD T O AES AND NON A ES, THE TRANSFER PRICING OFFICER WAS JUSTIFIED IN APPLYING CUP METHOD IN RELATION TO THAT PART OF THE TRANSACTION. AS REGARDS THE DECISION OF THE TRIBUNAL IN CASE OF ASSESSEES SISTER CONCERN, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTE D , THE DECISION OF THE TRIBUNAL IN CASE OF ASSESSEES SISTER CONCERN MAY NOT BE APPLICABLE , SINCE , IN THAT CASE THE INDIAN ENTITY MAY NOT BE PAYING ROYALTY, HENCE, BUSINESS MODEL IS DIFFERENT FROM THE ASSESSEE. 7 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PER USED MATERIAL ON RECORD. AS FAR AS THE PRIMARY FACTS ARE CONCERN ED, THERE IS NO DISPUTE THAT OUT OF THE SALE S TURNOVER OF FINISHED PRODUCTS SOLD TO THE AE AMOUNTING TO ` 10,13,28,211, BENCH MARKED B Y THE ASSESSEE APPLYING 7 FIRMENICH AROMATICS INDIA P. LTD. TNMM, T HE TRANSFER PRICING OFFICER HAS ACCEPTED A MAJOR PART OF THE SALE S OF FINISHED PRODUCTS TO THE A ES TO BE AT ARM'S LENGTH. HE HAS ONLY RAISED OBJECTIONS IN RESPECT OF THE TURNOVER RELATING TO SPECIFIC F INISHED PRODUCTS SOLD BOTH TO AES AND NON A ES. UPON VERIFYING THE PRICE CHARG ED FOR SUCH PRODUCTS TO AES AND NON A ES, HE HAS OBSERVED THAT THE PRICE CHARGED TO NON AES IS M ORE THAN THE PRICE CHARGED TO A ES. THUS, HE HAS MADE AN UPWARD ADJUSTMENT OF ` 73 ,04 ,480, TO THE PRICE CHARGED TO A ES FOR SALE OF FINISHED PRODUCTS. ON A PERUSAL OF ANNEXURE 1 TO THE ORDER PASSED BY THE TRANSFER PRICING OFFICER , WHEREIN , HE HAS MADE COMPARATIVE ANALYSIS OF PRICE CHARGED TO AES AND NON A ES FOR COMMON PRODUCT S , IT IS NOTICED THAT HE HAS SHORT LISTED EIGHT COMMON PRODUCTS WHICH WERE SOLD BOTH T O AES AND NON A ES. ON A CRITICAL EXAMINATION OF THE DETAILS MENTIONED IN ANNEXURE 1, IT IS NO TICED THAT EXCEPT ONE NON - AE IN U.A.E., ALL OTHER NON A ES ARE L OCATED IN INDIA. WHEREAS, THE A ES ARE LOCATED OUTSIDE INDIA. EVEN , IN RESPECT OF PRICE CHARGED TO THE SOLITARY NON AE SITUAT ED OUTSIDE INDIA , THE TRANSFER PRICING OFFICER HAS COMPARED IT TO THE PRICE CHARGED FOR SIMILAR PRODUCT 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, FROM A PERUSAL OF ANNEXURE 1, IT BECOMES FACTUALLY CLEAR THAT SALE OF SIMILAR PRODUCTS MADE TO BOTH AES AND NON A ES ARE IN DIFFERENT GEOGRAPHICAL LOCATION S . WHILE THE A ES ARE LOCATED IN FOREIGN COUNTRIES THE NON A ES 8 FIRMENICH AROMATICS INDIA P. LTD. ARE LOCATED IN INDIA. THEREF ORE, THE PRICE CHARGED TO NON A ES IN INDI A CANNOT BE USED AS A CUP FOR DETERMINING THE ARM'S LENGTH PRICE OF THE SALES OF FINIS HED PRODUCTS MADE TO OVERSEAS A ES. ONE OF THE CONDITIONS OF RULE 10B(2) OF THE I.T. RULES, 1962, IS , WHILE CONSIDERING THE ISSUE OF COMPARABILITY WITH AN UNCONTROLLED TRANSACTION, THE CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTION OPERATE INCLUDING THE GEOGRAPHICAL LOCATION ALONG WITH OTHER FACTORS HAVE TO BE EXAMINED. THEREFORE , GEOGRAPHICAL LOCATION OF THE PARTY TO W H OM SALES WERE MADE IS A CRUCIAL FACTOR TO BE WEIGHED IN WHILE MAKING COMPARABILITY ANALYSIS . UNDISPUTEDLY, IN THE FACT S OF THE PRESENT APPEAL, THE TRANSFER PRICING OFFICER HAS COMPARE D THE PRI C E CHARGED TO NON AE S LOCATED IN INDIA WITH THE PRICE CHARGED TO AES I N FORE IGN COUNTRIE S. THEREFORE, THE AES AND NON AE S BEING SITUATED IN DIFFERENT GEOGRAPHICAL LOCATION S, THERE MAY BE VARIOUS FACTORS/ REASONS WHICH COULD HAVE INFLUENCED THE PRIC E CHARGED BY THE ASSESSEE TO THE AES AND NON A ES. HENCE, THE PRICE CHARGED TO NON A ES CANNOT BE CONSIDERED TO BE A CUP TO DETERMINE THE ARM'S LENGTH PRICE OF THE PRICE CHARGED FOR SALE OF FINISHED PRODUCTS TO THE A ES. 8 . THE CO ORDINATE BENCH, WHILE DECIDING AN APPEAL RELATING TO ASSESSE ES SISTER CONCERN VIZ. FIRM ENICH 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 TO COMPARABILITY OF THE 9 FIRMENICH AROMATICS INDIA P. LTD. PRICE CHARGED TO A ES AND NON A ES SITUATED IN DIFFERENT GEOGRAPHICAL LOCATIONS . THE TRIBUNAL HELD THAT IN SUCH CIRCUMSTANCES CUP CANNOT BE APPLIED AS THE MOST APPROPRIATE METHOD. IN THIS REGARD, THE DETAILED FINDING OF THE CO ORDINATE BENCH IS REPRODUCED HEREUNDER: 8 . FIRST OF ALL IT IS PERTINENT TO CONSIDER THAT THE PRICE AT WHICH FINISHED PRODUCTS ARE EXPORTED TO AES ARE NOT COMPARABLE 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 BELOW: REASONS FOR DIFFERENCE EXPORT T O 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 V ERY 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 10 FIRMENICH AROMATICS INDIA P. LTD. T RANSACTIONS 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 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 PRODUCTS 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 USUALLY BECAUSE OF COST OF TRANSPORTATION FOR DELIVERIES AND ADMINISTRATION COST INVOLVED IN HANDLING SMALLER DELIVERIES. THE ASSESSEE IS ENGAGED IN MANUFACTURING OF AROMATIC INGREDIENTS, NATURAL AND SYNTHETIC PERFUMERY, FLAVORING AND DERIVATIVES. SPECIFIC AND MAJORITY OF THE PRODUCTS MANUFACTURED ARE SOLD TO THE GROUP COMPANIES. HOWEVER, IN THE CIRCUMSTANCES WHERE THE GROUP ENTITIES DO NOT WANT A PRODUCT THEN IT IS SOLD IN THE MARKET AT A PRICE BEST NEGOTIATED BY THE ASSESSEE. IN THE TABLE BELOW, THE ASSESSEE HAS PROVIDED THE DETAILS OF THE QUANTITATIVE DIFFERENCES IN RESPECT OF SALES MADE TO THE AE AND THE NON - AE. 11 FIRMENICH AROMATICS INDIA P. LTD. 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 QUANTITIES SOLD TO NON - AES IS SIGNIFICANTLY LOWER AS COMPARED WITH SALES MADE TO AES. IN FACT THE DIFFERENCE IN QUANTITIES IS TO THE EXTENT OF 1,294 TIMES TO 11 TIMES. IT IS NOTEWORTHY THAT THE CUP ANALYSIS OF COMMON PRODUCTS SOLD TO AE AND NON - AE,ONE OF THE EXAMPLE TAKEN FROM THE FACTS OF THE CASE IS THAT W.R.T. PRODUCT DAMA SCENONE TOTAL, THE ASSESSEE HAD SOLD 25 KG TO A NON - AE AT THE RATE OF INR 38,000 PER KG AND SOLD 1,260 KG AND 16,299 KG AT THE RATE OF INR 9,800 AND INR 9,664 RESPECTIVELY TO ITS AE NAMELY, FIRMENICH AROMATICS (CHINA) COMPANY LIMITED AND FIRMENICH SA. SIM ILARLY, THE ASSESEE 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 NOTED THAT WHEN THE QUANTITY SOLD TO A NON - A E 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 GEOGRAPHIC M ARKETS EXPORT PRICES OF SAME PRODUCTS ARE BOUND TO BE DIFFERENT IN DIFFERENT GEOGRAPHICAL LOCATIONS / MARKETS, AS THESE PRICES ARE FACTOR OF RAW MATERIAL PRICES IN THOSE RESPECTIVE LOCATIONS AND ALSO BECAUSE OF MARKET SENSITIVITY, BARGAINING POWER AND LO CAL COMPETITION. THE FOLLOWING TABLE HIGHLIGHTS THE DIFFERENCES IN GEOGRAPHY AND COVERS MORE THAN 80% OF THE ADJUSTMENT MADE BY THE TPO. ALSO, TPO HAS COMPARED LOCAL SALES TO THIRD PARTIES WITH EXPORTS TO AES AS UNDER: - 12 FIRMENICH AROMATICS INDIA P. LTD. SR.NO IN TPOS ORDER MATERIAL DESCR IPTION 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 NO 55, THE MAJORITY OF THE SALES ARE MADE TO AN AE IN SWITZERLAND. 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 SIMPLY COMPARING THE PRICES OF COMMON PRODUCTS SOLD TO BOTH AES AND NON - AES WITHOUT APPRECIATING THAT THE TWO TRANSACTIONS ARE NOT COMPARABLE OWING TO DIFFERENCES ON ACCOUNT OF VOLUME, GEOGRAPHY, FUNCTIONS PERFORMED AND RISKS ASSUMED WHILE TRANSACTING WITH AES AND NON - AES.ALSO, SUB - RULE (3) OF RULE 10B PROVIDES THAT, UNCONTROLLED TRANSACTION WOULD NOT BE REGARDED AS BEING COMPARABLE UNLESS ANY OF THE DIFFERENCES BETWEEN THE TRANSACTIONS IF COMPARED ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR THE PROFIT ARISING FR OM SUCH TRANSACTION IN THE OPEN MARKET. THEREFORE, IT IS ESSENTIAL TO ADJUST FOR THE ABOVE MENTIONED DIFFERENCES IN ORDER TO CREATE LEVEL PAYING FILED IE.. IN ORDER TO ENSURE LIKE BY LIKE COMPARISON. SINCE, 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 DECISION OF THE CO - ORDINATE BENCH OF THIS ITAT IN THE CASE OF M/S. AMPHENOL INTERCONNECT INDIA PVT. LTD., IN ITA NO. 477/PUN/2015 [TS - 201 - ITAT - 2014(PUN) - TP], WHER EIN IT IS HELD AS UNDER: 8. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE DRP'S ORDER DATED 24 - 12 - 2014 AND READ OUT THE CONTENTS OF PARA NOS. 3.15 TO 3.17 WHICH READ AS UNDER : '3.15 THE ASSESSEE SUBMITTED THAT THE TPO ALSO DISREGARDED AND IGNORED TRIBUNAL RULINGS WHICH HAVE LAID DOWN PRINCIPLES THAT THE 13 FIRMENICH AROMATICS INDIA P. LTD. TRANSACTIONS WILL NOT BE CONSIDERED AS SIMILAR FOR THE PURPOSE OF BENCHMARKING TRANSACTIONS UNDER CUP METHOD MERELY ON ACCOUNT OF SIMILAR PRODUCTS SOLD TO AES TO THIRD PARTIES. THESE RULINGS ARE AS UNDER: INTERVET INDIA PRIVATE LIMITED VS ACIT (ITA NO.3185/MUM/2006 ACIT VS. DUFON LABORATIORIES (2010 - TII - 26 - ITAT - MUM - TP) RANBAXY LABORATORIES LTD. VS. ASSTT. CIT (208 - TII - 01 - IT AT - DEL - TP) GHARDA CHEMICALS LTD. VS. THE DEPUTY COMMISSIONER OF INCOME TAX (ITA NO.2242/MUM/06) SCHUTZ DISHMAN BIOTECH PVT. LTD. VS. DCIT (ITA NO.3590 & 3751/AHD/2007) ITA NO.477/PUN/2015 DRESSER - RAND INDIA PVT. LTD. VS. ACIT (ITA NO.8753/MUM/2010 A Y 2006 - 07) AZTEC SOFTWARE AND TECHNOLOGY (ITAT BANGALORE) 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 FOR 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,PUNE. THE ITAT, PUNE VIDE ITS ORDER DA TED 30TH MAY, 2014 HAS UPHELD THE STAND OF THE ASSESSE AND ALLOWED ITS APPEAL AGAINST THE ORDERS OF THE DRP. FINDINGS : 3.17 WE HAVE CONSIDERED THE SUBMISSIONS OF THE ASSESSEE 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 THE EARLIER ASSESSMENT YEARS 2006 - 07, 2007 - 08 AND 2008 - 09. IN THE EARLIER ASSESSMENT YEARS, THE ISSUES INVOLVED BEFORE THE ITAT WERE ADJUSTMENTS MADE BY THE TPO TO SOME OF THE TRANSACTIONS IN RESPECT OF EXPORTS A ND IMPORTS AND PAYMENT OF COMMISSION 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 ASSESSEE HAS SUBMITTED BEFORE US A NOTE ON THE ITAT ORDER AND POINTS OF SIMILARITY WITH THE FA CTS 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 MADE BY THE TPO IN RELATION TO SOME OF THE EXPORTS AND IMPORTS ON REASON ING SIMILAR TO THE EARLIER ASSESSMENT YEARS WHICH HAVE NOW BEEN ADJUDICATED BY THE ITAT, PUNE IN FAVOUR OF THE ASSESSEE. IN THE CIRCUMSTANCES, RESPECTFULLY FOLLOWING THE RATIO LAID DOWN BY THE HON'BLE ITAT, PUNE IN THE ASSESSEE'S OWN CASE FOR THE EARLIER ASSESSMENT YEARS, THE ASSESSEE'S OBJECTION IS ALLOWED. 14 FIRMENICH AROMATICS INDIA P. LTD. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED NOT TO MAKE ANY ADJUSTMENT WITH REGARD TO THE EXPORT OF FINISHED GOODS AND IMPORT OF RAW MATERIALS.' 9. FROM THE ABOVE, WE FIND IN PRINCIPLE THE FACTS AR E THE SAME. IN THOSE YEARS TOO, TRANSFER PRICING ADJUSTMENTS WERE MADE TO THE TRANSACTIONS WITH ASSOCIATED ENTERPRISES WITH REFERENCE TO THE EXPORT OF GOODS AND IMPORT OF THE RAW MATERIALS. APPROPRIATENESS OF THE TNMM METHOD WAS ALSO THE ISSUE IN THOSE YEA RS. TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND DISMISSED THE 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 INTERFERENCE. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 13. FURTHER, HONBLE BOMBAY HIGH COURT DISMISSED THE AP PEAL OF THE DEPARTMENT FILED BY THE DEPARTMENT AGAINST THE ITATS ORDER AND NOTED THAT IN THIS CASE, SINCE THE FINISHED GOODS ARE CUSTOMIZED GOODS AND THE GEOGRAPHICAL DIFFERENCES, VOLUME DIFFERENCES, TIMING DIFFERENCES, RISK DIFFERENCES AND FUNCTIONAL DIF FERENCES, 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 INDIA PVT. LTD., (SUPRA)AND WHICH IS AFFIRMED BY THE HON BLE BOMBAY HIGH COURT, RESPECTFULLY FOLLOWING THE SAME WE DELETE THE ADDITION AND ALLOW THIS ISSUE OF ASSESSEES APPEAL. 9 . THE PRINCIPLE/ RATIO LAID DOWN BY THE CO ORDINATE BENCH IN THE AFORESAID DECISION SQUARELY APPL IES TO THE FACTS OF THE PRESENT APPEAL AS W ELL. THEREFORE, WE HOLD THAT CUP METHOD APPLIED BY THE TRANSFER PRICING OFFICER TO DETERMINE THE ARM'S LENGTH PRICE OF THE PRICE CHARGED FOR SAL E OF FINISHED PRODUCTS TO THE A ES IS INVALID. ACCORDINGLY, ACCEPTING ASS ESSEES CLAIM WE DELETE THE ADDITION MADE BY THE 15 FIRMENICH AROMATICS INDIA P. LTD. ASSESSING OFFICER. GROUND RAISED IS ALLOWED. 10 . IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE ADDITION MADE OF ` 20,76,49,475, ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT MADE TO THE PAYMENT OF ROYALTY FOR USE OF TECHNICAL KNOWHOW. 11 . BRIEF FACTS ARE, IN THE COURSE OF TRANSFE R PRICING PROCEEDINGS, ON EXAMINING THE TRANSFER PRICING STUDY THE TRANSFER PRICING OFFICER NOTICED THAT THE ASSESSEE HAS AGGREGATED ALL INTERNATIONAL TRANSACTION S AND BENCH MARKED IT AT ENTIT Y LEVEL BY APPLYING TNMM AS THE MOST APPROPRIATE METHOD . THEREFORE, HE CALLED UPON THE ASSESSEE TO FURNISH THE DETAILS AND ALSO TO EXPLAIN WHY ARM'S LENGT H PRICE OF ROYALTY PAYMENT TO AE SH OULD NOT BE INDEPENDENTLY BENCH MARKED AS WAS DONE IN THE PRECEDING ASSESSMENT YEAR. IN RESPONSE TO THE QUERY RAISED BY THE TRANSFER PRICING OFFICER, THOUGH, THE ASSE SSEE OBJECTED TO SEPARATE BENCH MARK ING OF ROYALTY PAYMENT TO THE AE AND SUBMITTED THAT ROYALTY PAYMENT BEING INTRINSICALLY AND CLOSELY INTER LINKED TO THE BUS INESS OF MANUFACTURE OF FLAVOURS AND FRAGRANCES HAS TO BE BENCH MARKED BY AGGREGATING ALL THE TRANSACTIONS, HOWEVER, THE ASSESSING OFFICER DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE AND HELD THAT THE ROYALTY PAYMENT OF ` 20.12 CRORE TO THE A.E. W AS NOT JUSTIFIED DUE TO THE FOLLOWING REASONS, (I) T HE ASSESSEE HAS NOT SUBMITTED ANY DOCUMENTARY EVIDENCES REGARDING TRANSFE R OF TECHNICAL KNOWHOW BY THE AE WHICH COULD HAVE BEEN USED BY THE ASSESSEE IN THE 16 FIRMENICH AROMATICS INDIA P. LTD. MANUFACTURING PROCESS; (II) THE ASSESSEE HAS FAI LED TO EXPLAIN THE MANUFACTURING PROCESS USED BY IT , (III) SINCE THE ASSESSEE WAS PAYING ROYALTY SINCE 1997, IT IS NOT REQUIRED TO BE PAID ANY MORE BECAUSE THE ASSESSEE NO MORE NEEDS THE TECHNICAL KNOWHOW FROM THE AE, (IV) THE AE HAS NOT COLLECTED ANY ROYA LTY FOR TECHNICAL KNOWHOW FROM ANOTHER SUBSIDIARY IN INDIA. THUS, ON THE BASIS OF THE AFORESAID REASON S , THE TRANSFER PRICING OFFICER ULTIMATELY CONCLUDED THAT T HE ASSESSEE HAVING FAILED TO MAK E OUT A CASE THAT THE PAYMENT OF ROYALTY TO THE AE IS FOR THE P URPOSE OF BUSINESS, IT HAS TO BE DISALLOWED UNDER SECTI ON 37(1) OF THE ACT. HOWEVER, OBSERVING THAT THE ASSESSEE MIGHT BE GETTING SOME TECHNICAL INPUT TO RUN HIS MANUFACTURING PLANT, HE ULTIMATELY HELD THAT 1 0% OF THE ROYALTY PAID TO THE A ES CAN BE ALLOWED . THEREFORE, HE PROPOSED AN ADJUSTMENT OF ` 20,76,49,475, AFTER DETERMINING THE ARM'S LENGTH PRICE OF ROYALTY PAID TO THE A.E. AT ` 2,30,72,163. WITHOUT PREJUDI CE TO ABOVE FINDING , HE OBSERVED THAT THE ARM'S LENGTH PRICE OF THE ROYALTY PAID TO THE AES CAN BE DETERMINED AT 1% ON NET VALUE ADDED SALES AS PER THREE SIMILAR AGREEMENT S BETWEEN UNRELATED PARTIES WHICH , ACCORDING TO THE TRANSFER PRICING OFFICER , CA N BE USED AS EXTERNAL CUP . ON THE BASIS OF TRANSFER PRICING ADJUSTMENT PROPOSED BY THE TRANSFER PRICING OFFICER, THE ASSESSING OFFICER MADE THE ADDITION IN THE DRAFT ASSESSMENT ORDER. THOUGH, THE ASSESSEE OBJECTED TO THE TRANSFER PRICING ADJUSTMENT MADE ON ACCO UNT OF ROYALTY PAYMENT TO THE AE BEFORE THE DRP, HOWEVER, IT WAS UNSUCCESSFUL. 17 FIRMENICH AROMATICS INDIA P. LTD. 12 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE BY THE TRIBUNAL IN ASSESSMENT YEAR 2012 13, VIDE ITA NO.2590/MUM./2017, DATED 23TH JULY 2018. HE SUBMITTED , FACTS BEING IDENTICAL, TRIBU NALS DECISION FOR ASSESSMENT YEAR 2012 13 WOULD SQUARELY APPLY TO THE FACTS OF THE PRESENT APPEAL ALSO. 13 . THE LEARNED DEPARTMENTAL REPRESENTATIVE , THOUGH, AGREED THAT SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN ASSESSEES OW N CASE IN ASSESSMENT YEAR 2012 13, HOWEVER, HE RELIED UPON THE OBSERVATIONS OF THE TRANSFER PRICING OFFICER AND LEARNED DRP. 14 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. FACTUAL MATRIX RELATING TO THE DISPUTED ISSUE REVE ALS THAT THE ASSESSEE HAS BENCH MARKED THE TRANSACTIONS RELATING TO ROYALTY PAYMENT ALONG WITH OTHER TRANSACTIONS ADOPTING TNMM AS THE MOST APPROPRIATE METHOD. THE TRANSFER PRICING OFFICER HAS REJECTED THE BENCH MARKING OF THE ASSESSEE PRIMARILY FOR THE REASON THAT T HE PAYMENT OF ROYALTY NOT BEING FOR THE PURPOSE OF BUSINESS HAS TO BE DISALLOWED UNDER SECTION 37(1) OF THE ACT. HOWEVER, ULTIMATELY, HE HAS ALLOWED , ON AD HOC BASIS , 10% OF THE AMOUN T PAID BY THE ASSESSEE TO THE AE TOWARDS ROYALTY. OF COURSE, REFERRING TO CERTAIN AGREEMENTS 18 FIRMENICH AROMATICS INDIA P. LTD. BETWEEN UNRELATED PARTIES, WHICH ACCORDING TO HIM CAN BE USED AS EXTERNAL CUP, THE TRANSFER PRICING OFFICER HAS CONCLUDED 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 ASSESSMENT YEAR 2012 13. IT IS RELEVANT TO OBSERVE , WHILE DECIDING IDENTICAL ISSUE ARISING IN ASSES SEES OWN CASE FOR ASSESSMENT YEAR 2012 13, 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 SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE HAVE AL SO APPLIED OUR MIND TO THE DECISIONS RELIED UPON BY BOTH THE PARTIES. THE DISPUTE IN THIS 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 RECORD, THE ASSESSEE IS AVAILI NG TECHNICAL KNOWHOW FROM ITS AE IN SWITZERLAND SINCE PAST SO MANY YEARS AND PAYING ROYALTY FOR THE SERVICES AVAILED. FOR THIS PURPOSE, THE ASSESSEE HAS ENTERED INTO A LICENSE AGREEMENT WITH THE AE FROM THE VERY INCEPTION OF CARRYING OUT THE MANUFACTURING ACTIVITY OF INDUSTRIAL FLAVOURS AND FRAGRANCES, WHICH HAS BEEN RENEWED FROM TIME TO TIME. THE TRANSACTIONS IN THE IMPUGNED ASSESSMENT 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, THERE IS NO MAJOR CHANGE IN THE TERMS OF THE CONTRACT, EXCEPT FOR THE FACT THAT THE IN THE IMPUGNED ASSESSMENT YEAR, T HE ASSESSEE HAS PAID ROYALTY ON THE GROSS SALES INSTEAD OF NET SALES AS WAS DONE IN THE PRECEDING ASSESSMENT YEARS. IN THE TRANSFER PRICING STUDY THE ASSESSEE HAS BENCHMARKED THE ROYALTY PAYMENT BY APPLYING TNMM AS THE MOST APPROPRIATE METHOD AND HAS AGGRE GATED IT WITH OTHER INTERNATIONAL TRANSACTIONS IN THE 19 FIRMENICH AROMATICS INDIA P. LTD. MANUFACTURING SEGMENT WITH OPERATING PROFIT / SALES AS THE PROFIT LEVEL INDICATOR. THE ASSESSEE HAS SELECTED A SET OF SIX COMPARABLES WITH AVERAGE MARGIN OF 7.40% AS AGAINST ITS OWN MARGIN OF 5.23%. HEN CE, THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION WAS CLAIMED TO BE AT ARM'S LENGTH. NOTABLY, THE TRANSFER PRICING OFFICER HAS ACCEPTED ASSESSEES BENCHMARKING BY APPLY TNMM IN RESPECT OF ALL TRANSACTIONS IN MANUFACTURING SEGMENT EXCEPT PAYMENT O F ROYALTY. PERTINENTLY, ON A PERUSAL OF THE ORDER OF THE TRANSFER PRICING OFFICER, IT IS EVIDENT THAT THE TRANSFER PRICING OFFICER HAS RAISED DOUBT / SUSPICION WITH REGARD TO PAYMENT OF ROYALTY BASICALLY FOR THE REASON OF BUSINESS EXPEDIENCY. THE TRANSFER PRICING OFFICER HAS OBSERVED, SINCE THE ASSESSEE WAS AVAILING THE TECHNICAL KNOWHOW FROM THE AE AND PAYING ROYALTY SINCE 1997, IT DOES NOT REQUIRE ANY FURTHER TECHNICAL HELP FROM THE AE WITH REGARD TO ITS MANUFACTURING ACTIVITY OF INDUSTRIAL FLAVOURS AND F RAGRANCES. THUS, THE TRANSFER PRICING OFFICER HAS ULTIMATELY CONCLUDED THAT THE ROYALTY PAYMENT NEEDS TO BE DISALLOWED UNDER SECTION 37(1) OF THE ACT IN THE ABSENCE OF ANY EVIDENCE TO SUGGEST TRANSFER OF TECHNICAL KNOWHOW DURING THE YEAR. HAVING HELD SO, T HE TRANSFER PRICING OFFICER AGAIN OBSERVED THAT SINCE THE ASSESSEE MIGHT BE GETTING 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 PR ICE OF THE ROYALTY PAYMENT 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 PAYMENT BY MAKING AN AD HOC ADJUSTMENT PURELY ON ESTIMATE BASIS WITHOUT FOLLOWING ANY APPROVED METHOD FOR DETERMINATION OF ARM'S LENGTH PRICE AS PRESCRIBED UNDER THE STATUTORY PROVISIONS. THUS, THE PRIMARY ISSUE WHICH ARISES FOR CONSIDERATION IS, WHETHER THE TRANSFER PRICING OFFICER HAS POWER UNDER THE STATUTE TO DETERMINE THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION ON ESTIMATE BASIS BY WEIGHING IN THE BUSINESS EXPEDIENCY FACTOR. IN OUR CONSIDERED OPINION THE LEGAL PRINCIPLE ON THE ISSUE IS QUITE CLEAR. AS COULD BE SEEN FROM THE SCHEME OF THE INCOME TAX ACT, 1961, CHAPTER X CONTAINS SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX WITH REGARD TO INTERNATIONAL TRANSACTION BETWEEN RELATED PARTIES. SECTION 92 OF THE ACT PROVIDES FOR COMPUTATION OF INCOME ARISING FROM INTERNATIONAL TRANSACTIO N AT ARM'S LENGTH PRICE. SECTION 92C OF THE ACT PROVIDES FOR DETERMINATION OF ARM'S LENGTH 20 FIRMENICH AROMATICS INDIA P. LTD. PRICE OF AN INTERNATIONAL TRANSACTION BY APPLYING THE MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION FOR CLASS OF TRANSACTION OR FUNCTIONS PERFOR MED, ETC. THE MOST APPROPRIATE METHOD PRESCRIBED 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 BOARD. 12. RULE 10B OF INCOME TAX RULES, 1962 (FOR SHORT THE RULES) , PROVIDES THE MECHANISM FOR DETERMINATION OF ARM'S LENGTH PRICE UNDER THE AFORESAID METHODS PRESCRIBED UNDER SECTION 92C OF THE ACT. IF THE ASSESSING OFFICER IN COURSE OF ASSESSMENT PROCEEDING S FINDS THAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AE, HE MAY WITH THE PREVIOUS APPROVAL OF THE AUTHORITY CONCERNED MAKE A REFERENCE TO THE TRANSFER PRICING OFFICER UNDER SECTION 92CA(1) OF THE ACT TO COMPUTE THE ARM'S LENGTH PR ICE OF THE INTERNATIONAL TRANSACTION BY APPLYING ANY OF THE METHODS PRESCRIBED UNDER SECTION 92C OF THE ACT. AFTER RECEIVING SUCH A REFERENCE FROM THE ASSESSING OFFICER, THE TRANSFER PRICING OFFICER IS REQUIRED TO DETERMINE THE ARM'S LENGTH PRICE OF THE IN TERNATIONAL TRANSACTION AS PER THE PROVISIONS CONTAINED UNDER SECTION 92C AND 92CA OF THE ACT READ WITH RELEVANT RULES. THUS, AS COULD BE SEEN FROM THE READING OF THE AFORESAID PROVISIONS, 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 UNDER SECTION 92C OF THE ACT R/W RULE 10B OF THE RULES. THUS, THERE IS NO PROVISION UNDER THE ACT EMPOWERING THE TRANS FER PRICING OFFICER TO DETERMINE THE ARM'S LENGTH PRICE ON ESTIMATION BASIS, THAT TOO, BY ENTERTAINING DOUBTS WITH REGARD TO THE BUSINESS EXPEDIENCY OF THE PAYMENT AND IN THE PROCESS STEPPING INTO THE SHOES OF THE ASSESSING OFFICER FOR MAKING DISALLOWANCE UNDER SECTION 37(1) OF THE ACT. THIS, IN OUR CONSIDERED OPINION, IS NOT IN CONFORMITY WITH THE STATUTORY PROVISION, HENCE, UNACCEPTABLE. THE TRANSFER PRICING OFFICER IS DUTY BOUND TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION BY ADOP TING ONE OF THE METHOD PRESCRIBED UNDER THE STATUTE AND CANNOT DEVIATE 21 FIRMENICH AROMATICS INDIA P. LTD. FROM THE RESTRICTIONS / CONDITIONS IMPOSED UNDER THE STATUTE. THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S JOHNSON & JOHNSON LTD., ITA NO.1030/2014, DATED 7 TH MARCH 2017, WHILE DEAL ING WITH IDENTICAL ISSUE OF DETERMINATION OF ARM'S LENGTH PRICE OF ROYALTY BY RESORTING TO ESTIMATION BY THE TRANSFER PRICING OFFICER HAS HELD AS UNDER: (D) WE FIND THAT THE IMPUGNED ORDER OF THE TRIBUNAL 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 FOLLOWING ONE OF THE METHODS PRESCRIBED IN SECTION 92C OF THE ACT READ WITH RULE 10B OF THE INCOME TAX RULES. HOWEVER, THE AFORESAID EXERCISE OF DETERMINING THE ALP IN RE SPECT 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 TRIBUNAL, THE TPO HAS GIVEN NO REASONS JUSTIFYING THE TECHNICAL KNOW HOW ROYALTY P AID BY THE ASSESSING OFFICER TO ITS ASSOCIATED ENTERPRISE BEING RESTRICTED TO 1% INSTEAD OF 2%, AS CLAIMED BY THE RESPONDENT ASSESSEE. THIS DETERMINATION OF ALP OF TECHNICAL KNOW HOW ROYALTY BY THE TPO WAS AD HOC AND ARBITRARY AS HELD BY THE CIT(A) AND THE TRIBUNAL. 13. THE TRIBUNAL, HYDERABAD BENCH I N R.A.K. CERAMICS INDIA PVT. LTD. (SUPRA) WHILE DEALING WITH IDENTICAL NATURE OF DISPUTE RELATING TO DETERMINATION OF ARM'S LENGTH PRICE OF ROYALTY PAYMENT BY ESTIMATION HELD AS UNDER: 7. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY LEARNED COUNSELS FROM BOTH THE SIDES AND PERUSED THE ORDERS OF DEPARTMENTAL 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 CONSIDERATION BEFORE US IS DETERMINATION OF ALP OF ROYALTY AT 2% BY TPO AS AGAINST 3% CLAIMED BY ASSESSEE. UNDISPUTEDLY, ASSESSEE ON 01/04/2009 HAS ENTERED INTO A ROYALTY AGREEMENT WITH ITS AE, RAK, UAE. A S PER CLAUSE 1.1 OF THE AGREEMENT, RAK, UAE WILL PROVIDE THE TECHNOLOGY ASSISTANCE AND ON - GOING PROCESS, PRODUCT IMPROVEMENT AND COMPLETE KNOW - HOW ASSISTANCE TO ASSESSEE. CLAUSE 2.1 OF THE AGREEMENT STIPULATES, ASSESSEE SHALL MANUFACTURE THE PRODUCTS IN KE EPING WITH THE HIGHEST QUALITY STANDARDS, RULES, AND SPECIFICATIONS INTERNATIONALLY AVAILABLE AND IN ACCORDANCE WITH GUIDELINES ESTABLISHED FROM TIME TO TIME BY RAK, UAE. FURTHER, ASSESSEE SHALL USE APPARATUS, ANCILLARY EQUIPMENT, ACCESSORIES AND MATERIALS THAT WILL ENSURE THAT SUCH STANDARDS, RULES, SPECIFICATIONS AND GUIDELINES ARE MET. CLAUSE 3.1 OF THE AGREEMENT PROVIDES, IN CONSIDERATION OF THE ONGOING 22 FIRMENICH AROMATICS INDIA P. LTD. TECHNICAL ASSISTANCE ON PROCESS AND PRODUCT IMPROVEMENT TO BE PROVIDED OR ANY OTHER SERVICES AS SPECI FIED IN THE AGREEMENT, INCLUDING ANY TECHNOLOGY OR SERVICES PROVIDED, ASSESSEE SHALL PAY TO RAK, UAE ROYALTY EQUIVALENT TO 3% OF THE NET EX - FACTORY SALE PRICE OF THE PRODUCTS ON BOTH DOMESTIC AS WELL AS EXPORT SALES DURING THE TENURE OF THE ROYALTY AGREEME NT. 8. FROM THE CLAUSES OF THE ROYALTY AGREEMENT REFERRED TO ABOVE, IT BECOMES CLEAR NOT ONLY RAK, UAE, WILL PROVIDE THE TECHNICAL KNOW - HOW AND ASSISTANCE FOR MANUFACTURING PRODUCTS, BUT, ASSESSEE WILL ALSO HAVE TO MANUFACTURE BY USING SUCH TECHNICAL KNOW - HOW, ASSISTANCE IN ACCORDANCE WITH INTERNATIONAL STANDARDS AND GUIDELINES 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 DOMESTIC AND EXPORT SALES. DEPARTMENT HAS NOT DENIED EXISTENCE OF ROYALTY AGREEMENT NOR THE FACT THAT PAYMENT OF ROYALTY AT 3% IS AS PER THE 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 ASSESSEE. 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 MATERIALS 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 ASSESS EE'S MARGIN OF 11.69%, PAYMENT OF ROYALTY WAS FOUND TO BE WITHIN ARM'S LENGTH. ASSESSEE ALSO UNDERTOOK ALTERNATIVE ANALYSIS UNDER CUP METHOD. ASSESSEE HAS SEARCHED ROYALSTAT DATABASE WHICH YIELDED THREE COMPANIES AS COMPARABLES WITH AVERAGE ROYALTY PAID OF 3.65% ON NET SALES AS AGAINST 3% BY ASSESSEE. THEREFORE, 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 INTANG IBLE TRANSACTION SHOULD NOT HAVE BEEN AGGREGATED WITH TANGIBLE TRANSACTIONS. AS FAR AS, ASSESSEE'S ANALYSIS UNDER CUP METHOD IS CONCERNED, TPO HAS REJECTED IT CITING FOLLOWING REASONS: I) IT IS AN ALTERNATE ANALYSIS II) DATABASE USED IS FOR US BASED COMPANIES III) COPIES OF AGREEMENTS NOT FURNISHED; AND IV) BENCH MARKING HAS TO BE DONE FOR INDIAN COMPANIES IN SIMILAR TRADE MAKING ROYALTY PAYMENT. 9. FURTHER, IT IS EVIDENT FROM TP ORDER, THOUGH, TPO HAS NOT BROUGHT ANY MATERIAL TO CONTROVERT ASSESS EE'S CLAIM OF RECEIVING PECUNIARY BENEFIT FROM THE TECHNICAL KNOW - HOW PROVIDED BY AE, IN TERMS OF SIZEABLE SALES, GARNERING OF CREDITABLE MARKET SHARE, MINIMAL PRODUCT RECALLS, LOW AFTER SALES MAINTENANCE COST ETC. BUT HE TRIED TO OVERCOME IT BY OBSERVING THAT SUCH INCREASE IN 23 FIRMENICH AROMATICS INDIA P. LTD. SALE IS AS A RESULT OF INCREASE IN ADVERTISEMENT & MARKETING EXPENSES AND ALSO ON PAYMENT OF COMMISSION AND DISCOUNT. TPO OBSERVED, UPGRADATION IN TECHNICAL EXPERTISE OF AE IS AS A RESULT OF INPUTS BY THE ASSESSEE WITH REGARD TO MARKE T TRENDS IN INDIA. TPO ALSO OBSERVED THAT ROYALTY PAYMENT WILL ALSO DEPEND UPON MARKET SHARE, WHICH ACCORDING TO TPO, 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 SA LES TO AE IS NOT JUSTIFIED. TPO, THEREFORE, HELD THAT ARM'S LENGTH 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 TPO'S ORDER HE HAS REJECT ED ASSESSEE'S TP ANALYSIS UNDER TNMM. FURTHER, IN PARA 6.4 OF HIS ORDER, TPO HAS MENTIONED OF UNDERTAKING AN INDEPENDENT ANALYSIS UNDER TNMM FOR SELECTING COMPARABLES AND DETERMINING ALP. HOWEVER, EVEN AFTER REPEATEDLY SCANNING THROUGH HIS ORDER, WE 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 INTANGIBLE 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 PRESCRIBED U/S 92C OF THE ACT. MODE AND MANNER OF COMPUTATION OF ALP UNDER DIFFERENT METHODS HAVE BEEN LAID DOWN IN RULE 10B. EVEN, ASSUMING THAT TPO HAS FOLLOWED CUP METHOD FOR DETE RMINING ALP OF ROYALTY PAYMENT, AS HELD BY LD. DRP, IT NEEDS TO BE EXAMINED IF IT IS STRICTLY IN COMPLIANCE WITH STATUTORY PROVISIONS. RULE 10B(1)(A) LAYS DOWN THE PROCEDURE FOR DETERMINING ALP UNDER CUP METHOD. AS PER THE SAID PROVISION, TPO AT FIRST HAS TO FIND OUT THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS. THEREAFTER, MAKING NECESSARY ADJUSTMENTS TO SUCH PRICE, ON ACCOUNT OF DIFFERENCES BETWEEN THE IN TERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, 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 TNMM METHOD. ON THE CONTRARY, OBSERVATIONS MADE BY TPO GIVES AMPLE SCOPE TO CONCLUDE THAT ADOPTION OF ROYALTY AT 2% IS NEITHER ON THE BASIS OF ANY APPROVED METHOD NOR ANY REASONABLE BASIS. RATHER IT IS ON ADHOC OR ESTIMATE BASIS, HENCE, NOT IN ACCORDANCE WITH STATUTORY PROVISIONS. THE APPROACH OF TPO IN ESTIMA TING ROYALTY AT 2% BY APPLYING THE BENEFIT TEST, IN OUR VIEW, IS NOT ONLY IN COMPLETE VIOLATION OF TP PROVISIONS BUT AGAINST THE SETTLED PRINCIPLES OF 24 FIRMENICH AROMATICS INDIA P. LTD. LAW. ITAT, MUMBAI BENCH IN CASE OF CASTROL INDIA LTD. (SUPRA) WHILE EXAMINING IDENTICAL ISSUE OF DETERMIN ATION OF ALP AT 'NIL' BY APPLYING THE BENEFIT TEST HELD AS UNDER: '11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE IMPUGNED ROYALTY WAS PAID BY THE ASSESSEE COMPANY TO ITS AE NAMELY CASTROL LTD. UK AT 3.5 % OF THE NET EXFACTORY SALE PRICE OF PRODUCTS MANUF ACTURED AND SOLD IN INDIA AS PER THE TECHNICAL COLLABORATION AGREEMENT. THIS INTERNATIO NAL TRANSACTION INVOLVING PAYMENT OF ROYALTY TO ITS AE WAS BENCH - MARKED BY THE ASSESSEE BY FOLLOWING CUP METHOD IN ITS TP STUDY REPORT AND SINCE AVERAGE RATE OF ROYALTY OF THREE COMPARABLES SELECTED BY IT WAS HIGHER AT 4.67% THAN THE RATE AT WHICH ROYALTY WAS PAID BY THE ASSESSEE TO ITS AE, THE TRANSACTION INVOLVING PAYMENT 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 WERE REJECTED BY HER NOR ANY NEW COMPARABLES WERE SELECTED BY HER BY MAKING 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 ON THE APPROVAL OF SIA TO HOLD THAT ANY ROYALTY PAID BY THE ASSESSEE ON 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 R OYALTY PAID BY THE ASSESSEE IN RESPECT OF EXPORTS SALE AND OTHER INCOME. 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 NOT 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 TRANSACTION IN RESPECT OF PAYMENT OF ROYALTY NOR HAS BEEN ADOPTED ANY RECOGNIZED METHOD TO DETERMINE THE ALP OF THE SAID TRANSACTIONS. THE APPROVAL OF SIA ADOPTED BY THE TPO AS BASIS TO MAKE TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WAS UNTENABLE AND EVEN GOING BY THE SAID BASIS WRONGLY ADOPTED BY THE TPO, NO TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WAS LIABLE TO BE MADE. AS PER THE SAID BASIS, THE NET SALES OF THE AS SESSEE AFTER EXCLUDING EXPORT SALE AND OTHER INCOME WERE TO THE EXTENT OF RS. 1118.70 CRORES AND THE ROYALTY PAID THEREON 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 ASSESS EE THAN APPROVED BY SIA TO JUSTIFY ITS DISALLOWANCE BY WAY OF TP ADJUSTMENT. IN OUR OPINION, THE LD. CIT (A) COULD NOT APPRECIATE THESE INFIRMITIES IN THE ORDER OF THE TPO DESPITE THE SAME WERE SPECIFICALLY BROUGHT TO HIS NOTICE ON BEHALF OF THE ASSESSEE A ND 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 25 FIRMENICH AROMATICS INDIA P. LTD. CONFIRMED BY THE LD. CIT ON ACCOUNT OF TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT AND ALLO W GROUND NO. 3 OF THE ASSESSEE'S APPEAL.' 11. SIMILAR VIEW HAS ALSO BEEN EXPRESSED IN THE OTHER DECISIONS RELIED UPON BY LD. AR. AT THE COST OF REPETITION, IT NEEDS REITERATION, ASSESSEE HAS BENCHMARKED THE ROYALTY PAYMENT BY BRINGING COMPARABLES BOTH UNDE R TNMM AS WELL AS CUP. WHEREAS, TPO HAS REJECTED THE ANALYSIS DONE BY ASSESSEE UNDER BOTH THE METHODS WITHOUT ANY REASONABLE BASIS NOR HAS BROUGHT A SINGLE COMPARABLE TO JUSTIFY ALP OF ROYALTY AT 2%. UNFORTUNATELY, LD. DRP HAS APPROACHED THE ENTIRE ISSUE I N RATHER MECHANICAL MANNER WITHOUT EXAMINING WHETHER APPROACH OF THE TPO IS IN ACCORDANCE WITH STATUTORY MANDATE. THEREFORE, DETERMINATION OF ALP OF ROYALTY AT 2% CANNOT BE SUPPORTED, HENCE, DESERVES TO BE STRUCK DOWN. MOREOVER, THEORY OF BENEFIT TEST APPL IED BY TPO ALSO FALLS FLAT CONSIDERING THE FACT THAT TPO DOES NOT QUESTION THE NECESSITY OF PAYING ROYALTY BUT ONLY OBJECTS TO THE QUANTUM. FURTHER, QUANTUM INCREASE IN SALE WITH NO APPARENT INCREASE IN PRODUCTION, MINIMAL PRODUCT RECALLS, LOW AFTER SALES MAINTENANCE COST CERTAINLY GOES TO PROVE ASSESSEE'S CLAIM THAT THESE COULD BE ACHIEVED DUE TO UTILIZATION OF ADVANCED TECHNICAL KNOW - HOW TRANSFERRED BY AE. THE TPO HAS NOT BEEN ABLE DISPROVE THESE FACTS WITH ANY SOUND ARGUMENT. CONSIDERING 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 HELD AS UNDER: HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE FIND THAT THE ASSESSEE OFFERED TWO TRANSFER PRICING STUDIES IN RELATION TO PAYMENT OF ROYALTY. IN SO FAR AS T HE ACCEPTABLE STUDY ADOPTING THE COMPARABLE UNCONTROLLED PRICE METHOD IS CONCERNED, IT IS NOT IN DISPUTE THAT THE ASSESSEE OFFERED THREE COMPARABLES WITH AN AVERAGE ROYALTY PAYMENT OF 3.65% AS AGAINST ITS OWN RATE OF ROYALTY AT 3%. SIGNIFICANTLY, THE TPO R EJECTED THESE COMPARABLE ON THE GROUND THAT THEY WERE US BASED, WHILE THE AE OF THE ASSESSEE WAS UAE BASED. HAVING REJECTED THESE COMPARABLES, IT WAS FOR THE TPO TO COME UP WITH OTHER COMPARABLES, IT WAS FOR THE TPO TO COME UP WITH OTHER COMPARABLES, IT WA S FOR THE TPO TO COME UP WITH OTHER COMPARABLES SO AS TO JUSTIFY REDUCTION OF 26 FIRMENICH AROMATICS INDIA P. LTD. THE ROYALTY PAYMENT. HOWEVER, NO SUCH EXERCISE WAS UNDERTAKEN BY THE TPO DETERMINED THAT THE REASON FOR THE SAME WAS INCREASED MARKETING ALONG WITH OFFER OF DISCOUNTS AND THAT TH ERE WAS NO JUSTIFICATION FOR PAYMENT OF ROYALTY AT 3% TO THE 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 ASSESSEE. IN WALCHAND AND CO. PRIVATE LTD. THE SUPREME COUR T OBSERVED IN THE CONTEXT OF THE INCOME TAX ACT, 1922 THAT WHEN A CLAIM IS MADE FOR AN ALLOWANCE BY THE ASSESSEE, THE INCOME TAX AUTHORITIES HAVE TO DECIDE WHETHER THE EXPENDITURE CLAIMED AS AN ALLOWANCE WAS INCURRED VOLUNTARILY AND ON GROUNDS OF COMMERCIA L EXPEDIENCY. THE SUPREME COURT POINTED OUT THAT IN APPLYING THE TEST OF COMMERCIAL 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 A ND 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 IT WAS NOT LAID OUT EXCL USIVELY FOR THE PURPOSE OF THE BUSINESS SO AS TO DISALLOW IT BUT IT IS NOT THE FUNCTION OF THE REVENUE TO DETERMINE WHAT REMUNERATION SHOULD BE PAID TO AN EMPLOYEE BY THE ASSESSEE. APPLYING THE SAME LOGIC TO THE CASE ON HAND, ONCE IT IS ADMITTED BY THE RE VENUE THAT THE ASSESSEE ENTERED INTO A ROYALTY AGREEMENT WITH THE A.E. AND THE ASSESSEE CLAIMED BENEFIT FROM SUCH AGREEMENT, IN THE FORM OF QUANTUM INCREASE IN SALES WITH NO APPARENT INCREASE IN PRODUCTION, MINIMAL PRODUCT RECALLS AND LOW AFTER SALES MAINT ENANCE COST, AND CONSEQUENTLY PAID ROYALTY IN TERMS THEREOF, IT WAS NOT FOR THE TPO TO DETERMINE AS TO WHAT WOULD BE THE OTHER REASONS FOR INCREASE IN THE ASSESSEES SALES AND PROFIT. ABOVE ALL, THERE IS NO EXPLANATION FORTHCOMING AS TO WHY THE TPO DECIDE D UPON 2% INSTEAD OF THE CONTRACTUAL RATE OF 3% FOR PAYMENT OF ROYALTY. NO REASON IS OFFERED BY THE TPO FOR PICKING ON 2%. THIS WHIMSICAL FIXATION BY THE TPO AMOUNTS TO AN ARBITRARY AND UNBRIDLED EXERCISE OF POWER. IN CONSEQUENCE, WE FIND THAT THE TPO HAVI NG REJECTED THE COMPARABLES CITED BY THE ASSESSEE, DID NOT TAKE THE TROUBLE TO EXAMINE ALTERNATE COMPARABLES SO AS TO JUSTIFY REDUCTION OF THE RATE OF PAYMENT OF ROYALTY AND BY APPLYING A WHOLLY INAPPLICABLE METHODOLOGY OF DETERMINING THE BENEFIT FROM PAYM ENT OF SUCH ROYALTY, HE CAPRICIOUSLY REDUCED THE RATE FOR PAYMENT OF SUCH ROYALTY FROM 3% TO 2%. 27 FIRMENICH AROMATICS INDIA P. LTD. ON THE ABOVE ANALYSIS, WE FIND NO GROUNDS TO INTERFERE WITH THE COGENT AND WELL REASONED ORDER PASSED BY THE TRIBUNAL. NO QUESTION OF LAW, MUCH LESS A SUBSTAN TIAL QUESTION OF LAW, THEREFORE, ARISES FOR CONSIDERATION IN THIS REGARD. 15. THE SAME VIEW HAS ALSO BEEN EXPRESSED BY THE TRIBUNAL, DELHI BENCH, IN CASE OF REEBOK INDIA CO. (SUPRA). AS COULD BE SEEN FROM THE FACTS OF THE PRESENT CASE, THERE IS NO DISPUT E THAT THE ASSESSEE BY VIRTUE OF A LICENSE AGREEMENT ENTERED WITH THE AE FROM PAST SEVERAL YEARS HAD BEEN AVAILING TECHNICAL KNOWHOW FOR UTILIZATION IN MANUFACTURING OF FLAVOURS AND FRAGRANCES. IT IS ALSO EVIDENT ON RECORD, THE ASSESSEE DOES NOT UNDERTAKES ANY RESEARCH AND DEVELOPMENT ACTIVITY AND ALL RESEARCH AND DEVELOPMENT ACTIVITIES ARE CARRIED OUT BY THE AE IN SWITZERLAND. ALL INTELLECTUAL PROPERTY RIGHT IN RELATION TO R&D ACTIVITIES REMAINS WITH THE AE. IT IS ALSO A FACT ON RECORD THAT THE ASSESSEE IS PAYING ROYALTY TO THE AE FOR AVAILING TECHNICAL KNOWHOW FROM THE VERY INCEPTION OF ITS MANUFACTURING ACTIVITY. THEREFORE, ONLY BECAUSE THE MANUFACTURING ACTIVITY IS BEING CARRIED ON FROM PAST SEVERAL YEARS, IT DOES NOT MEAN THAT THE ASSESSEE WOULD NOT REQ UIRE THE TECHNICAL KNOWHOW OF THE AE, HENCE, THERE IS NO NECESSITY FOR PAYING ROYALTY TO THE AE. MORE SO, WHEN THE DEPARTMENT 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 JUDICIAL PRECEDENTS DISCUSSED HEREIN ABOVE, WE HOLD THAT DETERMINATION OF ARM'S LENGTH PRICE @ 10% OF THE AMOUNT PAID BY THE ASSESSEE ON MERE ASSUMPTION AND PRESUMPTION AND WITHOUT ANY REASONABL E BASIS CANNOT BE UPHELD. UNFORTUNATELY, THE DRP HAS NOT EXAMINED THE ISSUE IN 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 APPROPRIATE 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 PRIC ING OFFICER, REFERRING TO THREE AGREEMENTS / 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 ROYALTY PAYMENT TO THE AE SHOULD BE @ 1% OF THE NET SALES. HOWEVER, THE FACT ON RE CORD 28 FIRMENICH AROMATICS INDIA P. LTD. REVEAL THAT DURING THE TRANSFER PRICING PROCEEDINGS, IN RESPONSE TO A SHOW CAUSE NOTICE ISSUED BY THE TRANSFER PRICING OFFICER, THE ASSESSEE HAS SPECIFICALLY OBJECTED TO THE COMPARABLES PROPOSED BY THE TRANSFER PRICING OFFICER BY STATING THAT NONE OF THE COMPARABLE ARE FUNCTIONALLY SIMILAR TO THE ASSESSEE SINCE ALL OF THEM RELATED TO ASSET PURCHASE AGREEMENT AND FURTHER ALL THE PARTIES RELATING TO SUCH AGREEMENT ARE LOCATED OUTSIDE INDIA, HENCE, ARE NOT GOVERNED BY INDIAN RULES AND REGULATIONS. THE AFO RESAID OBJECTION OF THE ASSESSEE HAS NEITHER BEEN DEALT WITH NOR CONTROVERTED BY THE TRANSFER PRICING OFFICER. THUS, WHEN THE COMPARABLE PROPOSED BY THE TRANSFER PRICING OFFICER ARE IN DIFFERENT GEOGRAPHICAL LOCATION WE DO NOT UNDERSTAND HOW THEY CAN BE CO MPARED 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 FROM ASSESSMENT YEAR 2006 07 ONWARDS. THIS IS EVIDENT FROM THE TRANSFER PRICING OFFICERS ORDER PASSED FOR THE ASSESSMENT YEAR 2010 11 AND 2011 12, COPIES OF WHICH ARE PLACED BEFORE US. FURTHER, THE TRANSFER PRICING OFFICER HAVING NOT DETERMINE D THE ARM'S LENGTH PRICE IN CONFORMITY WITH STATUTORY PROVISION AND IN THE PROCESS HAVING FAILED TO DEMONSTRATE THAT ARM'S LENGTH PRICE SHOWN BY THE ASSESSEE IS INCORRECT, THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE TO RESTORE THE ISSUE TO TR ANSFER PRICING OFFICER FOR FRESH DETERMINATION OF ARM'S LENGTH PRICE IS UNACCEPTABLE. THUS, ON OVERALL CONSIDERATION OF FACTS AND MATERIAL ON RECORD, WE HOLD THAT THE ADJUSTMENT MADE TO THE ARM'S LENGTH PRICE OF ROYALTY PAYMENT IS UNSUSTAINABLE; HENCE, THE ADDITION MADE IN THIS REGARD IS DELETED. THIS GROUND IS ALLOWED. 15 . FACTS BEING IDENTICAL, RESPECTFULLY FOLLOWING THE DECISION OF THE CO ORDINATE BENCH IN ASSESSEES OWN CASE , AS REFERRED TO ABOVE, WE DELETE THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTM ENT ON ROYALTY PAYMENT TO THE A E. THIS GROUND IS ALLOWED. 16 . IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED THE ADDITION MADE 29 FIRMENICH AROMATICS INDIA P. LTD. ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT MADE IN RELATION TO PAYMENT OF INTEREST ON EXTERNAL COMMERCIAL BORROWING ( ECB ) LOAN. 17 . BRIEF FACTS ARE, THE TRANSFER PRICING OFFICER NOTICING THAT THE ASSESSEE HAS PAID INTEREST AGAINST ECB LOAN OF U.S. $ 4.5 MILLION AVAILED FROM ITS AE IN SWITZERLAND FOR SETTI NG UP OF A NEW PREMISE FOR CORPORATE OFFICE AND PURCHASE OF CAPITAL ASSET CALLED FOR THE NECESSARY DETAILS. FROM THE DETAILS FURNISHED, HE FOUND THAT THE ECB LOAN WAS TAKEN BY THE ASSESSEE ON 15 TH JUNE 2012, VIDE RBI APPROVAL DATED 8 TH JUNE 2012 AND AT THE INTEREST RATE OF SIX MONTHS USD LIBOR RATE PLUS 350 BASIS POINTS AS ON THE DATE OF EVERY INTEREST PAYMENT. THE TRANSFER PRICING OFFICER REFERRING TO THE DA TA AVAILABLE IN BLOOMBERG DATAB ASE NOTED THAT INTEREST C HARGED ON ECB LOAN CAN BE BENCH MARKED AT USD LIBOR PLUS 143.62 BASIS POINTS , CALLED UPON THE ASSESSEE TO SHOW CAUSE WHY THE INTEREST PAID TO T HE AE ON ECB LOAN SHOULD NOT BE BENCH MARKED ACCORDINGLY, AS IT REPRESENTS THE AVERAGE OF 46 COMPANIES IN BLOOMBERG DATAB ASE. IN REPLY, THE ASSESSEE OBJ ECTED TO THE PROPOSED ADJUSTMENT BY THE TRANSFER PRICING OFFICER. HOWEVER, THE TRANSFER PRICING OFFICER DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE AND ULTIMATELY DETERMINED THE ARM'S LENGTH PRIC E OF THE INTEREST PAID TO THE AE ON ECB LOAN AT LIB OR PLUS 14 3 .62 BASIS POINTS WHICH RESULTED IN AN ADJUSTMENT OF ` 30,53,362. 18 . THE LEARNED AUTHORISED REPRESENTATIVE , AT THE OUTSET SUBMITTED , THE ASSESSEE HAS RAISED TWO ADDITIONAL GROUNDS CHALLENGING THE 30 FIRMENICH AROMATICS INDIA P. LTD. AFORESAID TRANSFER PRICING ADJUSTMENT. IN THIS CONTE XT, HE DREW OUR ATTENTION TO THE SAID ADDITIONAL GROUNDS WHICH ARE AS UNDER: 3.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DISPUTE RESOLUTION PANEL HAS ERRED IN UPHOLDING THE ACTION OF THE TRANSFER PRICING OFFICER IN MAKING ADJUSTMENT TO THE ENTIRE AMOUNT OF INTEREST ON EXTERNAL COMMERCIAL BORROWINGS (ECB) IN A.Y. 2013 14 ONLY WITHOUT APPRECIATING THE FACT THAT THE ENTIRE INTEREST AMOUNT HAS BEEN DEBITED TO CAPITAL WORK IN PROGRESS ACCOUNT AND IS NEITHER DEBITED TO THE PROFIT & LOSS ACCOUNT NOR CLAIMED AS DEDUCTION BY THE APPELLATE IN THE RETURN OF INCOME FILED FOR A.Y. 2013 14. 3.4 WITHOUT PREJUDICE TO GROUND NOS.3.1 AND 3.2 OF THE ORIGINAL GROUNDS OF APPEAL AND ADDITION GROUND OF APPEAL NO.3.3, THE ADJUSTMENT, IF ANY FOR THE INTEREST ON ECB CAN BE MADE ONLY AFTER THE AMOUNT IS CAPITALIZED UNDER FIXED ASSET BY THE APPELLANT AND DEPRECIATION IS CLAIMED ON THE SAME. 19 . HE SUBMITTED , SINCE THE ADDITIONAL GROUNDS HAVE A CRUCIAL BEARING ON THE ISSUE, THEY SHOULD BE ADM ITTED. IN THIS CONTEXT, HE RELIED UPON CERTAIN JUDICIAL PRECEDENTS. 20 . THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY OPPOSING THE ADMISSION OF ADDITIONAL GROUNDS SUBMITTED , AT NO STAGE, THE ASSESSEE HAS RAISED THE ISSUES RAISED IN THE ADDITIONAL GROUNDS. HE SUBMITTED , THE ISSUES RAISED IN THE ADDITIONAL GROUNDS ARE NOT PURELY LEGAL ISSUES BUT REQUIRES VERIFICATION OF FRESH FACTS BY THE ASSESSING OFFICER AND THE TRANSFER PRIC ING OFFICER . HENCE, THESE GROUNDS SHOULD NOT BE ADMITTED. IN SUPPORT OF HIS CONTENTION, THE LEARNED DEPARTMENTAL REPRESENTATIVE 31 FIRMENICH AROMATICS INDIA P. LTD. RELIED UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN ULTRATECH CEMENT LTD. V/S ACIT, [2017] 81 TAXMANN.COM 74 (B OM.). 21 . AS REGARDS THE MAIN GROUNDS RAISED ON THE ISSUE, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , SINCE THE ECB LOAN AVAILED BY THE ASSESSEE WAS AS PER THE PERMISSION OF THE RBI, THE RATE OF INTEREST ON SUCH LOAN HAS TO BE CHARGED AT SIX MONTH LIBOR PLUS 300 BASIS POINTS. HE SUBMITTED , THE RATE OF INTEREST PROVIDED BY THE RBI IN THE CIRCULAR ISSUED IS A VALID METHOD FOR DETERMINING THE ARM'S LENGTH PRICE AS PER RULE 10AB OF THE I.T. RULES, 1962. HE SUBMITTED , THOUGH , THE TRANSFER PRICING OFFICER HAS REFERRED TO THE DATA OBTAINED FROM BLOOMBERG DATAB ASE, HOWEVER, HE HAS NOT PROVIDED THE MATERIALS ON THE BASIS OF WHICH HE APPLIED IT. HE SUBMITTED , 46 COMPARABLES REFERRED TO BY THE TRANSFER PRICING OFFICER MAY HAVE GIVEN LOANS FOR VARIOUS PURPOSES , WHEREAS , THE ASSESSEE HAS AVAILED THE LOAN FOR SETTING UP OF ITS OFFICE PREMISES AND PURCHASING CAPITAL ASSET. HE SUBMITTED , THE TRANSFER PRICING OFFICER HAS COMPARED SECURED LOAN WITH UNSECURED LOAN WHICH CANNOT BE DONE. 22 . THE LEARNED DEPARTMENTAL REPRESE NTATIVE SUBMITTED , THE RATE PRESCRIBED BY THE RBI CANNOT BE APPLIED SINCE IT DOES NOT FIT INTO ANY OF THE METHOD PROVIDED UNDER THE STATUTE FOR DETERMINING THE ARM'S LENGTH PRICE. HE SUBMITTED , THE METHOD ADOPTED BY THE TRA NSFER PRICING OFFICER FOR BENCH MARKING THE ARM'S LENGTH PRICE OF INTEREST PAID 32 FIRMENICH AROMATICS INDIA P. LTD. ON ECB LOAN BEING A BETTER METHOD , THE ADJUSTMENT MADE IS VALID. 23 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. AT THE OUTSET, WE MUST ADDRESS THE ISSUE RELATING TO THE ADMISSION OF ADD ITIONAL GROUNDS RAISED BY THE ASSESSEE. I N THIS CONTEXT, WE MUST OBSERVE, THE ISSUES RAISED IN THE ADDITIONAL GROUNDS WERE NEVER RAISED BY THE ASSESSEE AT ANY STAGE AND HAVE ONLY BEEN RAISED IN COURSE OF APPEAL HEARING BEFORE US. THE ASSESSEE HAS NOT EVEN CLAIMED DEPRECIATION IN THE RETURN OF INCOME WHICH IS THE ISSUE RAISED IN THE ADDITIONAL GROUND NO.3.4. THE PRINCIPLE OF LAW ON THE ISSUE OF ADMISSION OF ADDITIONAL GROUND IS VERY MUCH CLEAR. IF THE ADDITIONAL GROUNDS REQUIRE EXAMINATION OF FRESH FACT S WHI CH HAVE NOT BEEN EXAMINED AT ANY STAGE, THE ADDITIONAL GROUNDS CANNOT BE ALLOWED. AFTER EXAMINING THE FACTUAL AND LEGAL POSITION RELATING TO THE ADMISSION OF ADDITIONAL GROUND S , WE ARE OF THE VIEW THAT TAKING A DECISION ON THE ADDITIONAL GROUNDS RAISED BY TH E ASSESSEE REQUIRES EXAMINATION / VERIFICATION OF FRESH FACT S RELATING TO UTILIZATION OF LOAN, ETC., WHICH HAVE NOT BEEN EXAMINED AT ANY STAGE. THAT BEING THE CASE, WE DECLINE TO ADMIT THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE AT THIS STAGE. 24 . HAVING HELD SO, IT IS NECESSA RY TO EXAMINE WHETHER THE BENCH MARKING OF THE TRANSFER PRICING OFFICER INSOFAR AS IT RELATES TO INTEREST PAYMENT TO THE AE ON ECB LOAN IS CORRECT. ON PERUSAL OF THE FACTS AND MATERIAL ON REC ORD, WE ARE OF THE VIEW THAT DETERMINATION OF 33 FIRMENICH AROMATICS INDIA P. LTD. ARM'S LENGTH PRICE OF INTEREST CHARGED ON ECB LOAN AT USD LIBOR RATE PLUS 143.62 BASIS POINTS IS ARRIVED AT ON THE BASIS OF AVERAGE OF 46 COMPANIES IN BLOOMBERG DATAB ASE. FROM THE DISCUSSION OF THE TRANSFER PRICING OFFICER IN THE TRANSFER PRICING ORDER IT IS NOT CLEAR WHETHER THE TRANSFER PRICING OFFICER HAS OBTAINED ALL THE DATA RELATING TO 46 COMPARABLES , SUCH AS , THE NATURE OF LOAN , WHETHER SECURED OR UNSECURED, THE PERIOD OF LOAN, THE PURPOSE FOR WH ICH THE LOAN WAS GRANTED, ETC. IT ALSO APPEARS, ALL RELEVANT DATA AVAILABLE WITH THE TRANSFER PRICING OFFICER WAS NOT PROVIDED TO THE ASSESSEE. IN THESE CIRCUMSTANCES, THE DETERMINATION OF ARM'S LENGTH PRICE OF THE INTEREST CHARGED ON ECB LOAN ON THE BASIS OF 46 COMPARABL ES APPEARING IN BLOOMBERG DATAB ASE C ANNOT BE SAID TO BE VALID COMPARABLE. IN CONTRAST, THE TRANSFER PRICING OFFICER HIMSELF HAS STATED THAT WHILE GRANTING PERMISSION TO THE ASSESSEE FOR AVAILING ECB LOAN , THE RBI VIDE LETTER DATED 8 TH JUNE 2012, HAS FIXED THE INTEREST RATE AT SIX MONTHS USD LIBOR PLUS 350 BASIS POINTS. EVEN , THE RBI CIRCULAR REFERRED TO BY THE LEARNED AUTHORISED REPRESENTATIVE , A COPY OF WHICH IS AT PAGE 311 OF THE PAPER BOOK , THE INTEREST RATE FOR ECB LOAN AVAILED FOR A PERIOD OF THREE YEARS AND UP TO FIVE YEARS HAS BEEN FIX ED AT SIX MONTHS LIBOR PLUS 350 BASIS POINTS. IN VIEW OF THE AFORESAID FACTS, WE ARE OF THE OPINION THAT ARM'S LENGTH PRICE O F THE INTEREST CHARGED TO THE AE CAN BE MORE ACCURATELY DETERMINED BY FOLLOWING THE RATE OF INTEREST FIXED BY THE RBI IN RESPECT OF ECB LOAN. FOR COM ING TO SUCH CONCLUSION, WE FIND SUPPORT FROM THE DECISION OF THE COORDINATE BENCH IN ION EX C HANGE 34 FIRMENICH AROMATICS INDIA P. LTD. INDIA LTD. V/S ADIT, ITA NO.5109/MUM./2013, DATED 10 TH FEBRUARY 2014, CITED BY THE LEARNED AUTHORISED REPRESENTATIVE. IN VIEW OF THE AFORESAID, WE ACCEPT LEARNED AUTHORI SED REPRESENTATIVES CONTENTION THAT THE ARM'S LENGTH PRICE OF THE INTEREST TO BE CHARGED ON TH E ECB LOAN AVAILED FROM THE AE HAS TO BE DETERMINED AT SIX MONTHS USD LIBOR RATE PLUS 300 BASIS POINTS. THE ASSESSING OFFICER IS DIRECTED TO CARRY OUT THE ADJUSTMENT ACCORDINGLY. THIS GROUND IS PARTLY ALLOWED. 25 . IN GROUND NO.4, THE ASSESSEE HAS CHALLENGED THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RELATION TO AVAILING OF INFORMATION SYSTEMS (IS) SERVICES . 26 . BRIEF FACTS ARE, IN THE COURSE OF PROCEEDINGS BEFORE HIM, THE TRANSFER PRICING OFFICER WANTED TO DETERMINE THE ARM'S LENGTH PRICE OF THE PAYMENT OF ` 14,26,34,846, TO THE AE TOWARDS CHARGES FOR USAGE OF SOFTWARE DURING THE YEAR. HE, THEREFORE, CALLED UPON THE ASSESSEE TO SUBMIT DOCUMENTARY EVIDENCES FOR USE OF SOFTWARE, AC TUAL SERVICES PROVIDED BY THE AE, BASIS FOR ALLOCATION OF COST TO THE A SSESSEE, COST INCURRED BY THE AE AND EVIDENCE F OR THIRD PARTY PAYMENT BY THE A E. FURTHER, THE TRANSFER PRICING OFFICE R CALLED UPON THE ASSESSEE TO EXPLAIN WHY THE ARM'S LENGTH PRICE OF SOFTWARE CHARGES SHOULD NOT BE TAKEN AS NIL IN CASE THE ASSESSEE FAILS TO SUBSTANTIATE THAT THE SERVICES WERE AVAILED BY IT . THOUGH, IN REPLIES DATED 8 TH SEPTEMBER 2016 AND 20 TH SEPTEMBER 2016, THE ASSESSEE APART FROM FURNISHING DOCUMENTARY 35 FIRMENICH AROMATICS INDIA P. LTD. EVIDENCES JUSTIFIED ITS CLAIM THAT THE PAYMENT MADE TO THE AE FOR USAGE OF SOFTWARE CHARGES IS AT ARM'S LENGTH, HOWEVER, THE TRANSFER PRICING OFFICER DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE . HE OBSERVED , THE ASSESSEE HAS FAILED TO PROVE WITH SUPPORTING EVIDENCE THE FACT THAT THE AE HAS PROVIDED THE SERVICES TO THE ASSESSEE. THUS, THE CLAIM OF THE ASSESSEE THAT PAYMENT TO THE AE IS AT ARM'S LENGTH CANNOT BE ACCEPTED. HAVING HELD SO, THE TRANS FER PRICING OFFICER PROCEEDED TO DETERMINE THE ARM'S LENGTH PRICE OF THE SOFTWARE USAGE CHARGES PAID TO THE AE ON ESTIMATE BASIS BY APPLYING THE MAN HOUR RATE OF ` 8,500 PER HOUR FOR TWO MAN HOUR A DAY. ACCORDINGLY, HE DETERMINED THE ARM'S LENGTH PRICE OF I.T. SERVICES RENDERED BY THE A E FOR MAINTAINING SOFTWARE AT ` 62.05 LAKH. FURTHER, HE ESTIMATED A SUM OF ` 1 CRORE TO BE ANNUAL FEE TO THE AE AS COST OF SOFTWARE. THUS, HE DETERMINED THE ARM'S LENGTH PRICE OF THE PAYMENT MADE BY THE ASSESSEE TO AE FOR SOF TWARE SERVICES AT ` 1,62, 05,0 00. THE ASSESSEE HAVING PAID AN AMOUNT OF ` 14,26,34,846, HE PROPOSED AN ADJUSTMENT OF ` 12,64,29,846. 27 . THOUGH, THE ASSESSEE OBJECTED TO THE AFORESAID TRANSFER PRICING ADJUSTMENT, HOWEVER, LEARNED DRP REJECTED THE OBJECTIONS OF THE ASSESSEE BY SIMPLY FOLLOWING THEIR ORDER IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2012 13. 28 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , WHILE DECIDING 36 FIRMENICH AROMATICS INDIA P. LTD. IDENTICAL ISSUE ARISING IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2012 13, THE TRIBUNAL IN ITA NO.2590/MUM./2017, DATED 23 RD JULY 2018, HAS DELETED THE ADDITION WITH DETAILED R E ASONING. THUS, HE SUBMITTED , THE AFORESAID DECISION OF THE TRIBUNAL IS SQUARELY APPLICABLE TO THE PRESENT APPEAL ALSO. 29 . THE LEARNED DEPARTME NTAL REPRESENTATIVE, THOUGH, AGREED THAT THE ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE IN ASSESSMENT YEAR 2012 13, HOWEVER, RELIED UPON THE OBSERVATIONS OF THE DRP AND THE TRANSFER PRICING OFFICER. 30 . WE HAVE CONSIDERED RIVAL SUBMISSIO NS AND PERUSED MATERIAL ON RECORD. UNDISPUTEDLY, THE TRANSFER PRICING OFFICER HAS MADE AN ADJUSTMENT TO THE ARM'S LENGTH PRICE OF THE PAYMENT MADE TOWARD S INFORMATION SERVICES TO THE AE BY FOLLOWING THE SAME REASONING ON THE BASIS OF WHICH HE HAS MADE SIMI LAR ADJUSTMENT IN ASSESSMENT YEAR 2012 13. MOREOVER, IT IS EVIDENT , THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICE R IS NOT BY FOLLOWING ANY ONE OF THE MOST APPROPRIATE METHODS PRESCRIBED UNDER THE STATUTE BUT ON AN AD HOC OR ESTIMATE BASIS. IN FACT, LEA RNED DRP HAS UPHELD THE ADJUSTMENT M ADE BY THE TRANSFER PRICING OFFICER SIMPLY RELYING UPON THEIR DECISION IN ASSESSMENT YEAR 2012 13. WHILE DOING SO, THE DRP HAS EVEN OBSERVED THAT THE FACTS IN THE IMPUGNED ASSESSMENT YEAR ARE SIMILAR TO THOSE PREVAILING IN ASSESSMENT YEAR 2012 13. NOTABLY, WHILE DECIDING 37 FIRMENICH AROMATICS INDIA P. LTD. IDENTICAL ISSUE IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2012 13, IN THE DECISION REFERRED TO ABOVE, THE TRIBUNAL HAS DELETED THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT WITH THE FOLLOWIN G OBSERVATIONS: 21. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIALS ON RECORD IN THE LIGHT OF DECISIONS RELIED UPON. THOUGH, THE TRANSFER PRICING OFFICER HAS ALLEGED THAT THE ASSESSEE FAILED TO FURNISH ANY EVIDENCE TO SUBSTANTIATE ITS CLAIM T HAT THE PAYMENT MADE TO THE AE FOR AVAILING I NFORMATION SYSTEM SERVICES, HOWEVER, THE MATERIAL ON RECORD REVEAL THAT THE ASSESSEE HAS NOT ONLY UNDERTAKEN A BENCH MARKING PROCESS FOR DETERMINING THE ARM'S LENGTH PRICE OF THE TRANSACTION IN THE TRANSFER PRICING STUDY REPORT WHICH WAS FILED BEFORE THE T RANSFER PRICING OFFICER, BUT, OTHER RELEVANT AND NECESSARY DOCUMENTS LIKE COPY OF THE AGREEMENT, INVOICES RAISED, CERTIFICATE FROM INDEPENDENT CHARTERED ACCOUNTANT FIRM, KPMG, DETAILS OF USERS WERE ALSO FURNISHED BEFORE THE TRANSFER PRICING OFFICER. THEREF ORE, THE ALLEGATION OF THE TRANSFER PRICING OFFICER THAT THE ASSESSEE HAS NOT FURNISHED THE NECESSARY DETAILS IS NOT TOTALLY CORRECT. IN ANY CASE OF THE MATTER, NON FURNISHING OF CERTAIN DOCUMENTARY EVIDENCES, AS ALLEGED BY THE TRANSFER PRICING OFFICER, DO ES NOT EMPOWER HIM TO EMBARK UPON DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ON ESTIMATION BASIS. FURTHER, A READING OF THE TRANSFER PRICING OFFICERS ORDER MAKES IT CLEAR THAT HIS FINDING ON THE ISSUE IS CONTRADICTORY. ON THE ONE HAND, HE HAS OBSERVED THAT 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. THUS, ULTIMATELY, WHAT THE TRANSFER PRICING OFFIC ER DISBELIEVES IS THE QUANTUM OF PAYMENT. ACCORDINGLY, HE HAS PROCEEDED TO ESTIMATE THE PRICE OF THE SERVICES RENDERED BY THE AE AT ` 1,62,05,000. THOUGH, THE TRANSFER PRICING OFFICER HAS OBSERVED THAT HE HAS APPLIED CUP METHOD FOR DETERMINING THE ARM'S LE NGTH PRICE, HOWEVER, HE HAS NOT BROUGHT ON RECORD EVEN A SINGLE COMPARABLE TO SUPPORT THE ARM'S LENGTH PRICE DETERMINED BY HIM EVEN ON ESTIMATE BASIS. THE ESTIMATION OF SERVICE CHARGES ON SO CALLED MAN HOUR 38 FIRMENICH AROMATICS INDIA P. LTD. BASIS IS WITHOUT ANY SUPPORTING MATERIAL. SIMILAR LY, THE ESTIMATION OF COST OF SOFTWARE AT ` . 1 CRORE IS WITHOUT ANY BASIS. THUS, 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 METHODS PRESCRIBED UNDER SECTION 92C OF THE ACT R/W RULE 10B. AS DISCUSSED ELSEWHERE IN THIS ORDER, SUCH DETERMINATION OF ARM'S LENGTH PRICE ON AD HOC / ESTIMATION 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 F OLLOWING ANY ONE OF THE MOST APPROPRIATE METHOD PRESCRIBED UNDER THE STATUTE. IT IS RELEVANT TO OBSERVE, THE DRP HAS APPROVED THE DETERMINATION OF THE ARM'S LENGTH PRICE BY THE TRANSFER PRICING OFFICER WITHOUT PROPERLY APPRECIATING THE IMPLICATION OF THE R ELEVANT STATUTORY PROVISIONS. AS 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 ATTRIBUTION OF COST. THEREFORE, I T CANNOT BE SAID THAT IT IS A QUALIFIED REPORT. IT IS FURTHER RELEVANT TO OBSERVE, THE MATERIAL SUBMITTED BEFORE US, WHICH ALSO FORMS PART OF THE TRANSFER PRICING OFFICERS RECORD, INDICATES THAT THE COST OF THE SOFTWARE HAS BEEN ALLOCATED TO 40 GROUP COMP ANIES ACROSS THE GLOBE WHO ARE USING THE SOFTWARE AND RELATED SERVICES AND ASSESSEES SHARE IN COST ALLOCATION WORKS OUT TO 2.3%. MOREOVER, WHEN THE TRANSFER PRICING OFFICER HIMSELF AGREES THAT THE AE HAS PROVIDED SOFTWARE 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 BENEFIT TEST. IF THE TRANSFER PRICING OFFICER DID NOT AGREE TO THE ARM'S LENGTH PRICE SHOWN BY T HE ASSESSEE IT WAS OPEN FOR HIM TO DETERMINE THE ARM'S LENGTH PRICE BY APPLYING ONE OF THE MOST APPROPRIATE METHODS BEING BACKED BY SUPPORTING MATERIAL. WITHOUT COMPLYING TO THE STATUTORY PROVISIONS, THE TRANSFER PRICING OFFICER CERTAINLY CANNOT DETERMINE THE ARM'S LENGTH PRICE ON AD HOC / ESTIMATION BASIS. OUR REASONING IN PARAGRAPH 11 TO 15 WILL EQUALLY APPLY TO THIS ISSUE ALSO. ACCORDINGLY, WE DELETE THE ADJUSTMENT MADE TO THE ARM'S LENGTH PRICE OF PAYMENT MADE TOWARDS AVAILING INFORMATION SYSTEM SERVICE S FROM AE. THIS GROUND IS ALLOWED. 39 FIRMENICH AROMATICS INDIA P. LTD. 31 . FACTS RELATING TO THE DISPUTED ISSUE BEING IDENTICAL IN THE IMPUGNED ASSESSMENT YEAR, RESPECTFULLY FOLLOWING THE DECISION OF THE CO ORDINATE BENCH IN ASSESSEES OWN CASE, WE DELETE THE ADDITION MADE ON ACCOUNT OF ADJUST MENT TO TH E ARM'S LENGTH PRICE OF PAYMENT MADE TO THE AE TOWARDS AVAILING OF INFORMATION SYSTEM SERVICES. GROUND RAISED IS ALLOWED. 32 . GROUND NO.5, RELATING TO LEVY OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT BEING CONSEQUENTIAL, DO ES NO T REQUIRE ADJU DICATION AT THIS STAGE, HENCE, DISMISSED. 33 . IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22.02.2019 SD/ - RAJESH KUMAR ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 22.02.2019 COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (SR. PRIVATE SECRETARY) ITAT, MUMBAI