FIRMENICHAROMATICS PRODUCTION (INDIA PVT LTD. [SUCCESSOR TO FIRMENICH AROMATICS (INDIA) PVT LTD., MUMBAI V. ASST CIT 9 (3)(1), MUMBAI

ITA 7844/MUM/2019

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 2987 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-10-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2015-2016
• Appeal Filed On: 20-12-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: KIRESH
• Keywords: Capital asset; Transfer pricing; International transaction
• Section: 27; 143(3); 201; 13; 22; 20

Judgement Text

ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 1 IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI , , BEFORE HONBLE SHRI C.N. PRASAD , JM AND HONBL E SHRI MANOJ KUMAR AGGARWAL, AM (HEARING THROUGH VIDEO CONFERENCING MODE) 1 . ./ I.T.A. NO. 7844 /MUM/20 19 ( / ASSESSMENT YEAR : 2015 - 16) FIREMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. (SUCCESSOR TO FIREMENICH AROMATICS (INDIA ) PVT. LTD.) 9 TH FLOOR, PLOT NO. 4, SURVEY NO. 20, MIDC, BEHIND MAJAS BUS DEPOT, JOGESHWARI EAST, MUMBAI - 60. / VS. A CIT 9(3)(1) , R. NO. 215, 2 ND FLOOR, AAYKAR BHAVAN MAHARSHI KARVE ROAD, MARINE LINES MUMBAI - 400 0 20 ./ ./ PAN/GIR NO . A A BCF - 1120 - G /AAACF - 1621 - M ( / APPELLANT ) : ( / RESPONDENT ) ASSESSEE BY : MS. HIRALI DESAI & SHRI KIRESH SHIVKAR LD . AR S REVENUE BY : SHRI SUNIL DESHPANDE LD. SR. DR / DATE OF HEARING : 21 /09 /2021 / DATE OF PRONOUNCEMENT : 26/10/2021 / O R D E R MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1 AFORESAID APPEAL BY ASSESSEE FOR ASSESSMENT YEAR 2015 - 16 ARISES OUT OF FINAL ASSESSMENT ORDER PASSED BY LD. AO U/S 143(3) R.W.S. 144C(13) ON 25 / 10 / 2019 P URSUAN T TO TH E DIRECTIONS OF LD. DISPUTE RESOLUTION PANEL - 1, WZ, MUMBAI (DRP) U /S 144C(5) DATED 22 / 08 / 2019. THE GROUNDS RAISED BY THE ASSESSEE READ AS UNDER: - ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 2 I. GROUND NO. I: TRANSFER PRICING ('TP') ADJUSTMENT IN RELATION TO EXPORT OF FINISHED PRODUCTS 1.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE HON'BLE DRP HAS ERRED IN UPHOLDING THE ACTION OF THE LD. AO/TPO IN DETERMINING THE ARMS' LENGTH PRICE ('ALP') OF THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED PRODUCTS AT RS. 8,34,22,404 INSTE AD OF RS. 7,59,14,928 THEREBY, COMPUTING A TP ADJUSTMENT OF RS. 75,07,476. 1.2. WHILE DOING SO, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN: (A) DISREGARDING THE AGGREGATION APPROACH ADOPTED BY THE APPELLANT THEREBY, REJECTING THE APPLICATION OF ENTIT Y LEVEL TRANSACTIONAL NET MARGIN METHOD ('TNMM') AS THE MOST APPROPRIATE METHOD ('MAM'); (B) APPLYING COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD AS THE MAM VIS - A - VIS THE PRODUCTS SOLD TO BOTH ASSOCIATED ENTERPRISES ('AES') AND NON - AES; AND (C) AP PLYING TWO METHODS I.E., CUP AND TNMM AT THE SAME TIME FOR BENCHMARKING THE IMPUGNED INTERNATIONAL TRANSACTION. 1.3. WITHOUT PREJUDICE TO POINT 1.1. AND 1.2., WHILE APPLYING CUP, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN IGNORING THE DIFFERENCES ON ACCO UNT OF GEOGRAPHICAL MARKET, VOLUME OF TRANSACTIONS, FUNCTIONAL AND RISK PROFILE AND LEVEL OF MARKET WHILE COMPARING THE IMPUGNED INTERNATIONAL TRANSACTION WITH THE COMPARABLE UNCONTROLLED TRANSACTION. 1.4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO HAS ERRED IN NOT FOLLOWING THE ORDER OF THE HON'BLE INCOME TAX APPELLATE TRIBUNAL (TTAT') FOR AY 2013 - 14 AND AY 2014 - 15. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT OF RS. 75,07,476 BE DELETED. 2. GROUND NO . 2: TRANSFER PRICING ('TP') ADJUSTMENT IN RELATION TO PAYMENT OF ROYALTY FOR AVAILING TECHNICAL KNOW - HOW 2.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP HAS ERRED IN UPHOLDING THE ACTION OF THE LD. AO/ TPO IN DETERMINING THE ALP OF ROYALTY PAID TO A E FOR TECHNICAL KNOW - HOW AT RS. 23,08,81,950 INSTEAD OF RS. 26,37,95,683 THEREBY, COMPUTING A TP ADJUSTMENT OF RS.3,29,13,733. 2.2. WHILE DOING SO, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN: (A) DISREGARDING THE FACT THAT PAY MENT OF ROYALTY IS INEXTRICABLY LINKED TO ENTREPRENEURIAL OPERATIONS OF THE APPELLANT AND THEREFORE, IT SHOULD HAVE BEEN BENCHMARKED ON AN AGGREGATION BASIS BY APPLYING TNMM AS THE MAM; AND (B) APPLYING CUP METHOD AS THE MAM TO DETERMINE THE ALP OF THE IMPUGNED INTERNATIONAL TRANSACTION. 2.3. WITHOUT PREJUDICE TO POINT 2.1. AND 2.2., WHILE APPLYING CUP, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN: (A) INAPPROPRIATELY ACCEPTING THE ROYALTY AGREEMENT WHICH IS NOT COMPARABLE TO THE ROYALTY AGREEMENT O F THE APPELLANT; AND (B) INAPPROPRIATELY REJECTING THE ROYALTY AGREEMENTS WHICH ARE COMPARABLE TO THE ROYALTY AGREEMENT OF THE APPELLANT. 2.4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO HAS ERRED IN NOT FOLLOWING THE ORDER OF THE HON'BLE ITAT FOR AY 2012 - 13, AY 2013 - 14 AND AY 2014 - 15 - THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT OF RS. 3,29,13,733 BE DELETED. 3. GROUND NO. 3: TRANSFER PRICING (TP') ADJUSTMENT IN RELATION TO PAYMENT OF INTEREST ON E XTERNAL COMMERCIAL BORROWING ('ECU') ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 3 3.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP ERRED IN UPHOLDING THE ACTION OF THE LD. AO/ TPO IN DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF INTEREST ON ECB AT RS . 48,53,007 INSTEAD OF RS. 1,06,58,345, THEREBY COMPUTING AN ADJUSTMENT OF RS. 58,05,338. 3.2. WHILE DOING SO, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN: (A) NOT FOLLOWING A STRUCTURED/ METHODICAL SEARCH PROCESS IN SELECTING THE COMPARABLE COMPANIES FOR ARRIVING AT THE ARM'S LENGTH INTEREST RATE; (B) NOT APPRECIATING THE FACT THAT THE INTEREST PAID BY THE APPELLANT ON ECB LOAN IS AS PER THE CIRCULAR ISSUED BY RESERVE BANK OF INDIA ('RBI'); AND (C) DISREGARDING THE FACT THAT THE EFFECTIVE RATE OF INTEREST PAID BY THE APPELLANT IS LOWER THAN THE SBI PRIME LENDING RATE ('PLR') FOR THE RELEVANT YEAR. 3.3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO HAS ERRED IN NOT FOLLOWING THE ORDER OF THE HON'BLE ITAT FOR AY 2013 - 14 AND AY 2014 - 15. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT OF RS. 58,05,338 BE DELETED. 4. GROUND NO. 4: TRANSFER PRICING ('TP') ADJUSTMENT IN RELATION TO PAYMENT OF INFORMATION SYSTEM ('IS') CHARGES 4.1. ON THE FACTS AND CI RCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP ERRED IN UPHOLDING THE ACTION OF THE LD. AO/ LD. TPO IN DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF IS SERVICE CHARGE AT RS. 9,41,68,816 INSTEAD OF RS. 11,08,02,230 THEREBY DISALLOW ING THE CLAIM PERTAINING TO INTERNAL COST OF IS CHARGE AMOUNTING TO RS. 1,66,33,414. 4.2. WHILE DOING SO, THE HON'BLE DRP/ LD. AO/ LD. TPO GROSSLY ERRED IN: (A) DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF INTERNAL COST OF IS CH ARGE AS 'NIL' PURPORTEDLY APPLYING 'OTHER METHOD' AS PER THE PROVISIONS O F RULE 10 AB OF THE INCOME - TAX RULES, 1962; AND (B) IGNORING THAT THE APPELLANT HAD SUPPORTED THE CLAIM WITH APPROPRIATE EVIDENCES. 4.3. ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO HAS ERRED IN NOT FOLLOWING THE ORDER OF THE HON'BLE ITAT FOR AY 2012 - 13, AY 2013 - 14 AND AY 2014 - 15 - THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT OF RS.1,66,33,414 BE DELETED. 5. GROUND NO. 5: INITIATI NG PENALTY PROCEEDINGS UNDER SECTION 27 1 ( 1 )(C) OF THE ACT 5.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 27 1 ( 1 )(C) OF THE ACT FOR FURNISHING INACCURATE PARTICULARS OF INCO ME. 6. GROUND NO. 6: LEVY OF INTEREST UNDER SECTION 2346 AND 234C OF THE ACT 6.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN LEVYING INTEREST UNDER SECTION 2346 AND 2340 OF THE ACT. 2. THE LD. AR, A T THE OUTSET, PLACED ON RECORD GROUND - WISE CHART TO SUBMIT THAT SUBSTANTIAL ISSUES ARE SQUARELY COVERED BY EARLIER ORDER S OF TRIBUNAL IN ASSESSEES OWN CASE FOR A YS 2012 - 13 (ITA NO.2590/MUM/2017 DATED 23/07/2018) ; 2 013 - 14 (ITA NO.7330/MUM/2017 DATED 22/02/2019) ; 2014 - 15 (ITA ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 4 NO.6081/MUM/2018 DATED 07/06/2019) . THE COPIES OF THE ORDER S HAVE BEEN PLACED ON RECORD. THOUGH LD. DR JUSTIFIED THE ASSESSMENT FRAMED BY LD. AO, HOWEVER, THIS POSITION COULD NOT BE CONTROVERTED BY THE REVENUE. IN THE SAID BACKGROUND, OUR ADJUDICATION TO T HE APPEAL WOULD BE AS GIVEN IN SUCCEEDING PARAGRAPHS . 3. FOR EASE OF REFERENCE, THE ASSESSEES GRIEVANCE COULD BE TABULATED IN THE FOLLOWING MANNER: - NO. NATURE OF ADDITION ADJUSTMENT (IN RS.) 1. TP ADJUSTMENT ON EXPORT OF FINISHED PRODUCTS RS.75.07 LAC S 2. TP ADJUSTMENT AGAINST P AYMENT FOR TECHNICAL KNOW - HOW RS.329.13 LACS 3. TP ADJUSTMENT AGAINST P AYMENT OF INTEREST ON ECB LOAN RS.58.05 LACS 4. TP ADJUSTMENT AGAINST P AYMENT OF IS SERVICES RS.166.33 LACS 4. THE A SSESSEE BEING RESIDENT COR PORATE ENTITY IS S TATED TO BE ENGAGED IN MANUFACTURING OF VARIOUS TYPES OF CHEMICALS / COMPOUNDS / INGREDIENTS / DERIVATIVES ETC. SINCE THE ASSESSEE CARRIED OUT CERTAIN INTERNATIONAL TRANSACTION WITH IT S A SSOCIAT ED E NTERPRISES (AE) , THE SAME WERE RE FERRED U /S 92CA(1) TO LD. TRANSFER PRICING OFFICER [TPO] F OR DETERMINATION OF ARMS LENGTH PRICE (ALP) . THE LD. TPO, VIDE ITS ORDER DATED 24/10/2018, PROPOSED CERTAIN ADJUSTMENTS WHICH ARE THE SUBJECT MATTER OF APPEAL BEFORE US. THESE ADJUSTMENTS WERE INCORPORATE D BY LD. AO IN DRAFT ASSESSMENT ORDER DATED 21/12/2018 WHICH WAS SUBJECTED TO OBJECTIONS BEFORE LD. DRP. THE LD. DRP ISSUED DIRECTIONS ON 22/08/2019 PURSUANT TO WHICH THE FINAL ASSESSMENT ORDER WAS PASSED BY LD. AO ON 25/10/2019 WHICH IS UNDER CHALLENGE BE FORE US. ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 5 5. TP ADJUSTMENT ON EXPORT OF FINISHED PRODUCTS 5.1 THE LD. TPO NOTED THAT THE ASSESSEE WAS INTO MANUFACTURING AND MARKETING OF I NDUSTRIAL FLAVORS, FRAGRANCES AND CHEMICAL SPECIALTIES. ITS AES WERE IN THE BUSINESS OF PRODUCTION AND THE DISTRIBUTI ON OF FLAVORS AND FRAGRANCES FOR USE IN PRODUCTS IN THE BEAUTY, HOUSEHOLD , PHARMACEUTICAL AND FOOD AND DRINK INDUSTRIES WITH THE SUPPORT OF CENTRA LIZED EXTENSIVE RESEARCH AND DEVELOPMENT. 5.2 DURING THE YEAR, THE ASSESSEE EXPORTED FINISHED GOOD S OF RS. 759 .14 LACS TO ITS AES . THE ASSESSEE BENCHMARKED THE TRANSACTIONS OF IMPORT OF RAW MATERIAL, EXPORT OF FINISHED GOODS, PAYMENT OF ROYALTY, COMMISSION RECEIVED & PURCHASE OF RAW MATERIAL (DOMESTIC) USING ENTITY LEVEL TRANSACTIONAL NET MARGIN METHOD (TNMM). TAK ING ASSESSEE AS THE TESTED PARTY AND USING PROFIT LEVEL INDICATOR (PLI) AS OPERATING PROFIT TO OPERATING INCOME, THE ASSESSEE ARRIVED AT MEAN MARGIN OF 4.55% OF 5 COMPARABLE ENTITIES AS AGAINST ASSESSEES OWN MARGIN OF 7.74%. ACCORDINGLY , NO TRANSFER PRICI NG (TP) ADJUSTMENT WAS PROPOSED BY THE ASSESSEE IN ITS TP STUDY REPORT. 5.3 HOWEVER, REJECTING THE SAME, LD. TPO DIRECTED ASSESSEE TO PROVIDE COMPARABLE UNCONTROLLED PRICE (CUP) DATA SINCE COMMON GOODS WERE SOLD TO AES AS WELL AS NON - AES ENTIT IES . THE SAM E WAS OPPOSED BY THE ASSESSEE ON THE GROUND THAT THERE WERE MULTIPLE FACTORS WHICH LEADS TO NON - APPLICABILITY OF INTERNAL CUP VIZ. L EVEL OF MARKET, FUNCTIONAL DIFFERENCES, RISK DIFFERENCES, VOLUME DIFFERENCE, GEOGRAPHICAL DIFFERENCE ETC. AT THE SAME TIME, THE ASSESSEE BENCHMARKED THE TRANSACTIONS UNDER CUP METHOD ALSO. ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 6 5.4 THE LD. TPO, AFTER CONSIDERING CUP METHOD, ARRIVED AT TP ADJUSTMENT OF RS.75.07 LACS WHICH HAS BEEN ATTACHED BY WAY OF ANNEXURE TO LD. TPOS ORDER. IT COULD BE SEEN THAT PRODUCT - WISE AVE RAGE SALE RATE TO AE HAS BEEN COMPARED WITH AVERAGE SALE RATE TO NON - AES AN D ADJUSTMENT HAS BEEN ARRIVED AT. THIS ADJUSTMENT, UPON CONFIRMATION BY LD. DRP, IS IN FURTHER CHALLENGE BEFORE US. OUR FINDINGS AND ADJUDICATION 6. WE FIND THAT THIS ISSUE HAS BEEN DEALT WITH BY COORDINATE BENCH OF TRIBUNAL IN ASSESSEES OWN CASE FOR AY 201 3 - 14 , ITA NO. 7330/MUM/2017 DATED 22/02/2019 WHEREIN THE BENCH HELD AS UNDER: - 7. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. AS FAR AS THE PRIMARY FAC TS ARE CONCERNED, THERE IS NO DISPUTE THAT OUT OF THE SALES TURNOVER OF FINISHED PRODUCTS SOLD TO THE AE AMOUNTING TO RS.10,13,28,211, BENCHMARKED BY THE ASSESSEE APPLYING TNMM, THE TRANSFER PRICING OFFICER HAS ACCEPTED A MAJOR PART OF THE SALES OF FINISHE D PRODUCTS TO THE AES TO BE AT ARM'S LENGTH. HE HAS ONLY RAISED OBJECTIONS IN RESPECT OF THE TURNOVER RELATING TO SPECIFIC FINISHED PRODUCTS SOLD BOTH TO AES AND NON AES. UPON VERIFYING THE PRICE CHARGED FOR SUCH PRODUCTS TO AES AND NON AES, HE HAS OBSERVE D THAT THE PRICE CHARGED TO NON AES IS MORE THAN THE PRICE CHARGED TO AES. THUS, HE HAS MADE AN UPWARD ADJUSTMENT OF ` 73,04,480, TO THE PRICE CHARGED TO AES FOR SALE OF FINISHED PRODUCTS. ON A PERUSAL OF ANNEXURE 1 TO THE ORDER PASSED BY THE TRANSFER PRIC ING OFFICER, WHEREIN, HE HAS MADE COMPARATIVE ANALYSIS OF PRICE CHARGED TO AES AND NON AES FOR COMMON PRODUCTS, IT IS NOTICED THAT HE HAS SHORT LISTED EIGHT COMMON PRODUCTS WHICH WERE SOLD BOTH TO AES AND NON AES. ON A CRITICAL EXAMINATION OF THE DETAILS MENTIONED IN ANNEXURE 1, IT IS NOTICED THAT EXCEPT ONE NON - AE IN U.A.E., ALL OTHER NON AES ARE LOCATED IN INDIA. WHEREAS, THE AES ARE LOCATED OUTSIDE INDIA. EVEN, IN RESPECT OF PRICE CHARGED TO THE SOLITARY NON AE SITUATED OUTSIDE INDIA, THE TRANSFER PRICI NG 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 AES ARE IN DIFFERENT GEOGRAPHICAL LOCATIONS. WHILE THE AES ARE LOCATED IN FOREIGN COUNTRIES THE NON AES ARE LOCATED IN INDIA. THEREFORE, THE P RICE CHARGED TO NON AES IN INDIA CANNOT BE USED AS A CUP FOR DETERMINING THE ARM'S LENGTH PRICE OF THE SALES OF FINISHED PRODUCTS MADE TO OVERSEAS AES. ONE OF THE CONDITIONS OF RULE 10B(2) OF THE I.T. RULES, 1962, IS, WHILE CONSIDERING THE ISSUE OF COMPARA BILITY 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 WHOM SALES WERE MADE IS A CRUCIAL FACTOR TO BE WEIGHED IN WHILE MAKING COMPARABILITY ANALYSIS. UNDISPUTEDLY, IN THE FACTS OF THE PRESENT APPEAL, THE TRANSFER PRICING OFFICER HAS COMPARED THE PRICE CHARGED TO ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 7 NON AES LOCATED IN INDIA WITH TH E PRICE CHARGED TO AES IN FOREIGN COUNTRIES. THEREFORE, THE AES AND NON AES BEING SITUATED IN DIFFERENT GEOGRAPHICAL LOCATIONS, THERE MAY BE VARIOUS FACTORS/REASONS WHICH COULD HAVE INFLUENCED THE PRICE CHARGED BY THE ASSESSEE TO THE AES AND NON AES. HENCE , THE PRICE CHARGED TO NON AES 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 AES. 8. THE CO ORDINATE BENCH, WHILE DECIDING AN APPEAL RELATING TO ASSESSEES SISTER CONCERN VIZ. FIRMENICH 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 PRICE CHARGED TO AES AND NON AES SITUATED IN DIFFERENT GEOGRAPHICAL LOCATI ONS. 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: XXXXX 9. THE PRINCIPLE/RATIO LAID DOWN BY THE CO ORDINATE BENCH IN THE AFORESAID DECISION SQUARELY APPLIES TO THE FACTS OF THE PRESENT APPEAL AS WELL. THEREFORE, WE HOLD THAT CUP METHOD APPLIED BY THE TRANSFER PRICING OFFICER TO DETERMINE THE ARM'S LENGTH PRICE OF THE PRICE CHARGED FOR SALE OF FINISHED PRODUCTS TO THE AES IS INVALID. ACCORDINGLY, ACCEPTING ASSESSEES CLAIM WE DELETE THE ADDITION MADE BY THE ASSESSING OFFICER. GROUND RAISED IS ALLOWED. IN THE ABOVE DECISION, THE BENCH HAS REJECTED THE APPLICATION OF CUP METHOD. THE AFORESAID DECISION HAS SUBSEQUENTLY B EEN FOLLOWED BY ANOTHER COORDINATE BENCH IN AY 2014 - 15, ITA NO.6081/MUM/2018 ORDER DATED 07/06/2019 (PARA NOS. 10 - 11) . IT HAS BEEN HELD THAT WHILE CONSIDERING THE ISSUE OF COMPARABILITY WITH AN UNCONTROLLED TRANSACTION, THE CONDITION PREVAILING IN THE MARK ET IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTION OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION ALONG WITH OTHER FACTORS WOULD BE RELEVANT TO DECIDE WHICH METHOD WOULD BE SUITABLE FOR BENCHMARKING THE TRANSACTION S . FINALLY, THE APPLICATION OF CUP METHOD HAS BEEN REJECTED BY THE BENCH AND THE ADJUSTMENT HAS BEEN DELETED. RESPECTFULLY FOLLOWING THE CONSISTENT STAND OF TRIBUNAL, WE REJECT APPLICATION OF CUP METHOD AND DELETE THE IMPUGNED ADJUSTMENT AS PROPOSED BY LD. TPO. THIS GROUND STAND ALLOWED. ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 8 7 . TP ADJUSTMENT AGAINST PAYMENT FOR TECHNICAL KNOW - HOW (ROYALTY) THE ASSESSEE PAID ROYALTY FOR USE OF TECHNICAL KNOW - HOW TO ITS AE @ 5% ON LOCAL SALE AND @ 8% ON EXPORT SALES. IT WAS STATED THAT TECHNICAL KNOW - HOW OWNED BY THE AE WAS IN THE NATURE OF SECRET FORMULAE, TRADE SECRETS, MANUFACTURING PROCEDURE, METHODS AND OTHER TECHNICAL INFORMATION RELATING TO THE MANUFACTURING, COMPOUNDING, QUALITY CONTROL, TESTING AND SER VICING OF THE LICENSED PRODUCTS. THE ASSESSEE BENCHMARKED THE SAME APPLYING TNMM METHOD. H OWEVER, LD. AO ADOPTED THE BENCHMARKED ROYALTY RATE OF 4 % AS AGAINST EFFECTIVE RATE OF 4.57% PAID BY THE ASSESSEE AND PROPOSED AN ADJUSTMENT OF RS.329.13 LACS. THIS ADJUSTMENT, UPON CONFIRMATION BY LD. DRP, IS IN FURTHER CHALLENGE BEFORE US. OUR FINDI NGS AND ADJUDICATION 8. WE FIND THAT SIMILAR ADJUSTMENT WAS PROPOSED BY LD. TPO IN EARLIER YEARS. IN AYS 2012 - 13 & 2013 - 14, LD. TPO DISALLOWED THE ROYALTY PAYMENT ON ADHOC BASIS AND BENCHMARKED THE TRANSACTIONS USING CUP METHOD. HOWEVER, TRIBUNAL DELETED T HE ADJUSTMENT ON THE PREMISES THAT LD. TPO WAS BOUND TO DETERMINE THE ALP BY FOLLOWING ANY ONE OF THE PRESCRIBED METHOD AND DETERMINATION OF ALP ON ADHOC BASIS COULD NOT BE SUSTAINED. IT WAS ALSO HELD THAT CUP METHOD COULD NOT BE APPLIED SINCE COMPARABLE A GREEMENTS WERE BETWEEN ENTITIES LOCATED OUTSIDE INDIA. IN AY 2014 - 15, LD. TPO APPLIED CUP METHOD TO BENCHMARK THE T RANSACTIONS. H OWEVER, THE COORDINATE BENCH, IN ITS ORDER FOR AY 2014 - 15, HELD THAT CUP WAS NOT MOST APPROPRIATE METHOD FOR BENCHMARKING THE T RANSACTIONS BECAUSE OF GEOGRAPHICAL DIFFERENCES. WE FIND THAT IN THIS ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 9 YEAR, LD. TPO HAS FOLLOWED SAME METHODOLOGY AS IN AY 2014 - 15 AND APPLIED CUP METHOD WHICH HAS ALREADY BEEN REJECTED BY TRIBUNAL IN AY 2014 - 15. THEREFORE, FOLLOWING CONSISTENT VIEW OF TRI BUNAL, WE DELETE THIS ADJUSTMENT. THE GROUND THUS RAISED STANDS ALLOWED. 9. TP ADJUSTMENT AGAINST P AYMENT OF INTEREST ON ECB LOAN THE A SSESSEE OBTAINED LOAN IN THE NATURE OF EXTERNAL COMMERCIAL BORROWINGS ( ECB ) FROM ITS AES FOR THE PURPOSE OF SETTING UP NEW PREMISES FOR CORPORATE OFFICE AND PURCHASING OF THE CAPITAL ASSETS. THE ECB LOAN WAS TAKEN ON 10 TH JUNE 2012 VIDE RBI APPROVAL AT INTEREST RATE OF 6 MONTHS USD L IBOR RATE + 350 BASIS POINTS. THE ASSESSEE BENCHMARKED THE SAME RELYING UPON RBI CIRCU LAR NO. 12/2012 - 13 WHICH ALLOW E CB LOAN ON AUTOMATIC ROUTE AT THOSE RATES . HOWEVER, LD. TPO COMPUTED BENCHMARKING RATE OF LIBOR+ 143.62 BASIS POINTS AS PER THE BLOOMBERG DATABASE. THEREFORE, THE DIFFERENTIAL OF 206.38 BASIS POINTS (350 BPS 143.62 BPS) WAS CON SIDERED AS EXCESS PAYMENT AND TP ADJUSTMENT OF RS. 58.05 LACS WAS PROPOSED . THIS ADJUSTMENT, UPON CONFIRMATION BY LD. DRP, IS IN FURTHER CHALLENGE BEFORE US. OUR FINDINGS AND ADJUDICATION 10. WE FIND THAT THIS ISSUE IS COVERED BY TRIBUNAL S ORDER FOR AY 2013 - 14 (PARA - 24) WHEREIN IT HAS BEEN HELD THAT ALP OF SUCH TRANSACTION COULD BE MORE ACCURATELY DETERMINED BY FOLLOWING RATE OF INTEREST FIXED BY RBI IN RESPECT OF ECB LOAN. THIS DECISION HAS SUBSEQUENTLY BEEN FOLLOWED IN AY 2014 - 15. THE ASSESSEE HAS FOL LOWED THE SAME RBI RATE TO BENCHMARK THE TRANSACTIONS IN THIS YEAR. THEREFORE, RESPECTFULLY FOLLOWING EARLIER STAND OF TRIBUNAL, WE DELETE THE IMPUGNED ADJUSTMENT. THE GROUNDS THUS RAISED STAND ALLOWED. ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 10 11 . TP ADJUSTMENT AGAINST P AYMENT TO AE FOR SOFTWARE CHARGES 11 .1 THE ASSESSEE PAID SUM OF RS.11.08 CRORES FOR SOFTWARE US AGE DURING THE YEAR. ACCORDINGLY, ASSESSEE WAS ASKED TO SUBSTANTIATE THE USE OF SOFTWARE AND ACTUAL SERVICES PROVIDED BY THE AE AND BASIS FOR ALLOCATION OF COST TO THE TAXPAYER, COST INC URRED BY ITS AE AND EVIDENCE FOR THIRD PARTY PAYMENTS MADE BY THE AE. THE ASSESSEE SUBMITTED THAT DURING F INANCIAL YEAR 2010 - 11 , IT SWITCHED OVER FROM OLD ACCOUNTING SOFTWARE, STOCK MAINTENANCE SOFTWARE AND SOFTWARE FOR OTHER PURPOSES INTO S3 - ERP BEING SAP SOFTWAR E. THE SOFTWARE WAS DEVELOPED / ACQUIRED BY ITS AE NAMELY FIRMENI CH SA, SWITZERLAND FOR ALL THE G ROUP ENTITIES AROUND THE WORLD. PRE VIOUSLY, THE ASSESSEE WAS USING THREE DIFFERENT SOFTWARE I.E. ACCOUNTING SOFTWARE, S TOCK MAINTENANCE SOFTWARE AND SO FTWARE FOR OTHER PURPOS ES AND IT SWITCHED OVER TO COMBINE S3 - ERP BEING SAP SOFTWARE FOR ALL PURPOSES. THE COST OF DEVELOPMENT OF SUCH SOFT WARE WAS SUBSTANTIAL AND WOULD REQUIRE REGULAR UP - GRADATION FOR ITS SUCCESSFUL USAGE. MOREOVE R, ASSESSEES ENTIRE BUSI NESS WAS RUN, CONTROLLED AND MANAGED BY COMPUTER SYSTEM WITH THE HELP O F APPLICATION SOFTWARE AND THEREFORE, SUCH EXPENDITURE WAS NECESSARY. FOR THE SAID PURPOSE, T HE ASSESSEE ENTERED INTO 'INFORMATION SYSTEMS SERVICE AGREEMENT' ON 14 TH OCTOBER, 2011 FOR I MPLEMENTATION OF S3 - ERP BEING SAP SOFTWARE AND AVAILING SERVICES PER TAINING TO INFORMATION SYSTEM (IS ) SERVICE FROM FIRMENI CH SA . ACCORDING TO THE TERMS OF AGREEMENT, THE ASSESSEE WAS REQUIRED TO PAY TWO (2) CHARGES NAMELY, IS CHARGE (A RECURRENT SERVICE F EE FOR REGULAR RECURRENT SERVICES) AND S3 CHARGE (A SPECIFIC SERVICE FEE FOR D EVELOPMENT /ACQUIRING AND IMPL EMENTATION OF ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 11 'S3 ERP PROGRAM'). THE DETAILS OF INTRA - GROUP INVOICES OF RS. 11.08 CRORES TOWARDS IS AND S3 SERVICES WAS SUBMITTED BEFORE LD. TPO. 11 .2 REGARDING IS CHARGES, THE D ETAILS OF EMPLOYEES OF AE WHICH RENDERED THE SERVICES WERE FURNISHED. IT WAS SUBMITTED THAT D URING THE YEAR, THE A SSESSEE EMPLOYED APPROXIMATELY 190 PLUS EMPLOYEES WHO WERE AVAILING IS SERVICES IN DIFFERENT DEPARTMENTS. THE C OST RELATING TO IS SERVICE S WAS PAID ONLY UP - TO 30 TH JUNE 2014. IN SUPPORT OF THE COST OF IS SERVICES , THE ASSESSEE SUBMITTED THE THIRD PARTY AUDIT CERTIFICATE CERTIFYING THE NUMBER OF USERS AVAILING SERVICES. MERELY 2.8% OF TOTAL COST WAS ALLOCATED TO THE ASSESSEE AS IS CHARGES ON THE BASIS OF NUMBER OF IS USERS AND IT PERTAINED TO PERIOD 1 ST JULY 2013 TO 30 TH JUNE 2014 ONLY . 11 .3 THE OTHER CHARGE VIZ. S3 CHARGE PERTAINED TO SAP SOFTWARE COST WHICH WAS ALLOCATED ON THE BASIS OF SAP LICENSES. THE SOFTWARE WAS INSTALLED AT THE SERVER OF ITS AE WHO MAINTAINED, CONTROLLED AND MANAGED THE SAME. ACCORDINGLY, PROPORTIONATE COSTS WERE ALLOCATED TO THE ASSESSEE ON ACTUAL BASIS. IN SUPPORT OF COST ALLOCATION, THE ASSESSEE FURNISHED THIRD PART AUDIT CERTIFICATE ALONG WITH SAMPLE THIRD PARTY INVOICES RAISED BY THE VENDORS ON ITS AE. 11 .4 IN SUPPORT OF BENEFITS, THE ASSESSEE SUBMITTED A FLOWCHART OF THE MANUFACTURING OPERATIONS, DEPICTING THE INTER - LINKAGE BETWEEN THE MANUFACTURING OPERATION AND APPLICATION PROVIDED /S ERVICES RECEIVED AS PART OF IS AND S3 SERVICES. THE DETAILS OF THE SAME HAVE BEEN EXTRACTED IN THE ORDER OF TPO. IT WAS ALSO SUBMITTED THAT THE COST BENEFIT ANALYSIS WAS NEVER QUESTIONED OR LITIGATED BEFORE THE TAX AUTHORITIES IN EARLIER YEARS . THEREFORE, THE ASSESSEE JUSTIFIED THE SAID AMOUNT AND RELIED ON THE TRIBUNALS ORDER IN ITS OWN CASE FOR ASSESSMENT YEAR 2012 - 13. ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 12 11 .5 THE LD.TPO, AFTER CONSIDERING ASSESSEES SUBMISSIONS, ACCEPTED THE S3 CHARGE TO BE AT ARMS LENGTH PRICE BUT PROPOSED ADJUSTMENT O F RS.166.33 LACS BEING IS CHARGES PAID BY THE ASSESSEE SINCE THE ASSESSEE COULD NOT SUBMIT SUBSTANTIAL EVIDENCE IN THIS REGARD. THIS ADJUSTMENT, UPON CONFIRMATION BY LD. DRP, IS IN FURTHER CHALLENGE BEFORE US. OUR FINDINGS AND ADJUDICATION 12. WE FIND THAT IS CHARGES WERE PAID BY THE ASSESSEE FOR OBTAINING ACCESS TO ERP SOFTWARE AND FOR REGULAR RECURRENT SERVICES AND SUCH CHARGES WERE PAID IN EARLIER YEARS ALSO. IN AY 2012 - 13, SIMILAR ADJUSTMENT PROPOSED BY LD. TPO WAS DELETED BY COORDINATE BENCH ON TH E PREMISES THAT LD. TPO WAS DUTY BOUND TO DETERMINE ALP BY FOLLOWING ANY ONE OF THE PRESCRIBED METHODS AND DETERMINATION OF ALP ON ADHOC BASIS COULD NOT BE SUSTAINED. IT WAS ALSO OBSERVED THAT THE ASSESSEE HAD SUBMITTED SUBSTANTIA L EVIDENCES IN SUPPORT OF THE CLAIM. THIS ORDER WAS FOLLOWED SUBSEQUENTLY IN AY 2013 - 14. IN AY 2014 - 15, LD. TPO ALLOWED EXTERNAL COST BUT DID NOT ALLOW COST ALLOCATED TO THE ASSESSEE ON THE GROUND THAT THE CLAIM WAS UNSUBSTANTIATED. THIS ADJUSTMENT WAS ALSO DELETED BY THE TRIBUNAL. THEREFORE, WE FIND THAT THIS ISSUE IS RECURRING IN NATURE. THE CHARGES HAVE BEEN PAID PURSUANT TO THE AGREEMENT AND THE ASSESSEE HAS ALREADY PLACED ON RECORD THIRD PART AUDIT CERTIFICATE ALONG WITH SAMPLE THIRD PARTY INVOICES RAISED BY THE VENDORS ON ITS AE. IN SUPPORT OF BENEFITS, THE ASSESSEE SUBMITTED A FLOWCHART OF THE MANUFACTURING OPERATIONS, DEPICTING THE INTER - LINKAGE BETWEEN THE MANUFACTURING OPERATION AND APPLICATION PROVIDED /SERVICES RECEIVED AS PART OF IS AND S3 SERVICES. THEREFORE, LD. TPO, I N OUR ITA NO.7844/MUM/2019 M/S FIRMENICH AROMATICS PRODUCTION (INDIA) PVT. LTD. ASSESSMENT YEAR: 2015 - 16 13 OPINION, WAS NOT JUSTIFIED IN DENYING TH IS COST TO THE ASSESSEE . RESPECTFULLY FOLLOWING EARLIER VIEW OF TRIBUNAL, WE DELETE THIS ADJUSTMENT AND ALLOW THE RELEVANT GROUNDS OF APPEAL. 13. THE REMAINING GROUND ARE CONSEQUENTIAL OR PRE - MATURE IN NATURE WHICH WOULD NOT REQUIRE ANY SPECIFIC ADJUDICATION ON OUR PART. CONCLUSION 14. THE APPEAL STANDS PARTLY ALLOWED IN TERMS OF OUR ABOVE ORDER. ORDER PRONOUNCED ON 26 TH OCTOBER, 2021. SD/ - SD/ - ( C. N. PRASAD ) (MANOJ KUMAR AGGARWA L) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 26/10/2021 SR.PS, DHANANJAY / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBA I.