CABOT INDIA LTD, MUMBAI V. DCIT 1(1), MUMBAI

ITA 8495/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9223 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 11-12-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 06-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN; SASMITA NISAD DT OF HEARING
• Assessee Lawyers: M M GOLWALA SH AMEYWAGLE
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Rule of consistency; Additional evidence; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3); 10B; 145; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI K BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI P M JAGTAP, AM & SHRI VIJAY PAL RAO, J M ITA NO. 8495/MUM/2010 (ASST YEAR 2006-07 ) CABOT INDIA LTD KALYANIWALLA & MISTRY ARMY & NAVY BLDG 3 RD FLOOR, 148 M G ROAD, FORT MUMBAI 400 001 VS THE DY COMMR OF INCOME TAX 1(1), MUMBAI (APPELLANT) (RESPONDENT) PAN NO. AAACU1414F ASSESSEE BY SH M M GOLWALA/ SH AMEYWAGLE REVENUE BY SH AJEET KUMAR JAIN & SMT SASMITA NISAD DT.OF HEARING 11 TH DEC 2012 DT OF PRONOUNCEMENT 19 TH , DEC 2012 ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ASSESSMENT ORDER DATED 12.10.2010 PASSED U/S 143(3) IN PURSUANT TO THE DIR ECTIONS DATED 17.9.2010 OF DISPUTE RESOLUTION PANEL ( DRP) U/S 144C(5) OF THE I T ACT FOR THE ASSESSMENT YEAR 2006-07. 2 THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN THIS APPEAL: 1) THE ASSESSING OFFICER ERRED IN MAKING AN ADDITION TO THE CLOSING STOCK OF RS.4,00,47,285/- ON ACCOUNT OF UNUTILISED CENVAT CRE DIT UNDER SECTION 145A. 2) THE ASSESSING OFFICER ERRED IN IGNORING THE ORDERS O F THE TRIBUNAL AND THE BOMBAY HIGH COURT IN FAVOUR OF THE APPELLANT ON THE ISSUE OF SECTION 145A IN EARLIER YEARS. 3) THE ASSESSING OFFICER ERRED IN NOT CONSIDERING THAT AS PER SECTION 145A, PURCHASES WERE ALSO REQUIRED TO BE GROSSED UP. 4) WITHOUT PREJUDICE TO GROUND NOS. 1 AND 2 ABOVE, TH E ASSESSING OFFICER ERRED IN MAKING AN ADDITION OF RS.59,81,648/- ON AC COUNT OF UNUTILISED CENVAT CREDIT UNDER SECTION 145A, WHEN, IN FACT, HE HAD CORRE CTLY PROPOSED A DECREASE OF THE SAID FIGURE IN HIS DRAFT ASSESSMENT ORD ER. ITA NO.8495/M/2010 CABOT INDIA LTD . 2 5) THE ASSESSING OFFICER ERRED IN DISALLOWING RS.4 ,30,05,713/- ON THE GROUND THAT ROYALTY PAID BY THE APPELLANT WAS IN THE NATUR E OF A CAPITAL EXPENDITURE. THE APPELLANT SUBMITS THE EXPENDITURE IS OF REVENUE NATURE, AND THAT THE DISALLOWANCE BE DELETED. 6) THE AO ERRED IN DISALLOWING PROVISION FOR OLD AND OBSOLETE STORES RS.35,50,000/-. THE APPELLANT SUBMITS THAT THE DISA LLOWANCE IS UNCALLED FOR, AND REQUIRES TO BE DELETED. 7) THE ASSESSING OFFICER/TRANSFER PRICING OFFICER (AO /TPO) ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT IN RESPECT OF ROYALTY PAI D TO THE TUNE OF RS.1,99,13,521/-. HAVING REGARD TO THE FACTS AND CIRC UMSTANCES OF THE CASE, THE APPELLANT SUBMITS THAT THE ASSESSING OFFICER BE DIRECTED TO DELETE THIS ERRONEOUS TRANSFER PRICING ADJUSTMENT. 8) WITHOUT PREJUDICE TO GROUND NO. 6 ABOVE, THE APP ELLANT SUBMITS THAT THE UPWARD ADJUSTMENT MADE IS HIGHLY EXCESSIVE AND ARBIT RARY, AND THE SAME REQUIRES TO BE REDUCED SUBSTANTIALLY. 9) THE AO/TPO ERRED IN NOT GRANTING 5% BENEFIT AVAIL ABLE TO THE APPELLANT UNDER THE PROVISO BELOW SECTION 92C OF THE ACT. 3 GROUND NOS. 1 TO 4 REGARDING THE ADDITION TO THE CLOSING STOCK ON ACCOUNT OF UNUTILISED CENVAT CREDIT U/S 145A. 3.1 THE ASSESSING OFFICER HAS NOTED THAT THE ASSESS EE HAS SHOWN UNUTILISED CENVAT CREDIT FOR ` 4,00,47,285/-. THE ASSESSING OFFICER PROPOSED TO ADD THE SAID AMOUNT TO THE CLOSING STOCK IN VIEW OF THE PROVISIONS OF SEC. 145A OF THE ACT. IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE INCLUSIVE AND EXCLUSIVE METHOD WILL HAVE THE SAME NET EFFECT. SINCE THERE WAS A SIMILAR ADDITION FOR TH E ASSESSMENT YEAR 2005-06 FOR AN AMOUNT OF ` 1,43,70,856/-; THEREFORE, THE ASSESSING OFFICER TO OK THE DIFFERENCE OF THE AMOUNT FOR CONSIDERING THE NET EFFECT ON THE TOTAL INCOME OF THE ASSESSEE AND ACCORDINGLY PROPOSED IN THE PROPOSED ASSESSMENT ORD ER DT 15.12.2009. 3.2 THE DRP HAS CONCURRED WITH THE VIEW OF THE ASSE SSING OFFICER AS FAR AS THE APPLICABILITY OF THE PROVISIONS OF SEC. 145A IS CON CERNED AND HELD THAT THE INCLUSIVE METHOD OF ACCOUNTING U/S 145A IS TO BE APPLIED IN T OTALITY I.E. TO THE OPENING STOCK ITA NO.8495/M/2010 CABOT INDIA LTD . 3 AS WELL AS CLOSING STOCK AND NOT PIECE-MEAL ONLY TO THE CLOSING STOCK. HENCE, THE ASSESSING OFFICER WAS DIRECTED TO MAKE CORRESPONDIN G ADJUSTMENT ON ACCOUNT OF CENVAT IN THE OPENING STOCK. CONSEQUENTLY, THE AS SESSING OFFICER HAS MADE A NET ADDITION OF ` 59,81,648/-, WHICH IS A DIFFERENCE OF ADDITION IN THE CLOSING STOCK MADE FOR THE ASSESSMENT YEAR 2005-06 OF ` 4,60,28,933/- AND THE UNUTILISED CREDIT OF CENVAT FOR THE ASSESSMENT YEAR UNDER CONSIDERATION OF ` 4,00,47,285/-. 4 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT IN THE DRAFT ORDER, THE ASSESSING OFFICER HAS RIGHTLY PROPOSED TO REDUCE TH E TOTAL INCOME OF THE ASSESSEE BY THE DIFFERENCE AMOUNT OF ` 59,81,648/- WHEREAS IN THE FINAL ORDER, THE ASSESS ING OFFICER INSTEAD OF REDUCING THE TOTAL INCOME HAS MA DE ADDITION OF THE SAID AMOUNT IN THE TOTAL INCOME OF THE ASSESSEE. THE LD AR HA S FURTHER SUBMITTED THAT THE ISSUE HAS BEEN CONSIDERED AND DECIDED IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2001-02 WHERE THE ADDITION MADE ON ACCOUNT OF CENVAT CREDIT U/S 145 HAS BEEN DELETED BY THE TRIBUNAL AFTER TAKING INTO CONS IDERATION THAT THE ASSESSEE IS FOLLOWING EXCLUSIVE METHOD OF ACCOUNTING AND NOT IN CLUDING CENVAT AMOUNT EITHER IN THE INVENTORY OR PURCHASE AS WELL AS IN THE SA LES; THEREFORE, THERE IS NO POINT IN MAKING THE ADDITION TO THE CLOSING STOCK. HE HAS F URTHER SUBMITTED THAT THE REVENUE HAS ACCEPTED THE ORDER OF THE TRIBUNAL AS NO FURTHE R APPEAL WAS FILED. HOWEVER, FOR THE ASSESSMENT YEAR 2002-03, THE REVENUE HAS CHALLE NGED THE ORDER OF THE TRIBUNAL BEFORE THE HONBLE HIGH COURT, WHICH HAS BEEN DISMI SSED VIDE ORDER DATED 16.10.2009. THE LD AR HAS FURTHER SUBMITTED THAT F OR THE SUBSEQUENT ASSESSMENT YEAR UPTO THE ASSESSMENT YEAR 2005-06, THE DEPARTMENT HA S ACCEPTED THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) DELETING THE A DDITION MADE BY THE ASSESSING OFFICER U/S 145A. THE LD AR HAS SUBMITTED THAT T HE ASSESSEE HAS FIELD ALL THE DETAILS ITA NO.8495/M/2010 CABOT INDIA LTD . 4 AND ALSO COMPARATIVE CHART TO SHOW THAT EVEN BY FOL LOWING THE INCLUSIVE METHOD OF ACCOUNT, THE NET EFFECT WILL BE NIL. 4.1 ON THE OTHER HAND, THE LD DR HAS SUBMITTED THAT AS PER THE PROVISIONS OF SECTION 145A, INCLUSIVE METHOD OF ACCOUNTING HAS TO BE APPLIED AT ALL THE STAGES; THEREFORE, THE ASSESSING OFFICER HAS TO GIVE EFFECT TO THE DIRECTIONS OF THE DRP BY MAKING ADJUSTMENTS AT ALL THE STAGES OF INVENTORY, PURCHASE AS WELL AS SALES. 5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE AS FAR AS THE MANDATE O F PROVISIONS OF SEC. 145A IS CONCERNED, WHICH REQUIRES THE VALUATION OF THE PURC HASE, SALES OF GOODS AND INVENTORY FOR THE PURPOSE OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD PROFIT AND GAIN OF BUSINESS BY MAKING THE ADJUSTM ENTS ON ACCOUNT OF ANY TAX, DUTY, CESS OR FEE ACTUALLY PAID OR INCURRED BY THE ASSESS EE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITIONS ON THE DATE OF VALUA TION. THE PROVISIONS OF SEC. 145A, UNAMBIGUOUSLY MANIFEST THAT THE EFFECT OF ANY DUTY, TAX, CESS OR FEE ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITIONS AS ON THE DATE OF THE VALUATION HAS TO B E GIVEN FOR THE PURPOSE OF VALUATION OF PURCHASE, SALES AND INVENTORY. 5.1 IT APPEARS THAT THE ASSESSING OFFICER IN THE DR AFT ASSESSMENT ORDER DATED 15.12.2009 HAS PROPOSED TO DECREASE THE INCOME OF THE ASSESSEE BY THE DIFFERENCE OF ADDITION MADE U/S 145A IN THE CLOSING STOCK OF T HE EARLIER ASSESSMENT YEAR 2005-06 AND THE UNUTILISED CENVAT CREDIT FOR THE ASSESSMENT YEAR UNDER CONSIDERATION . TH E DRP HAS CONSIDERED THE ISSUE AS UNDER: THE FIRST GROUND OF OBJECTION RELATES TO THE ADDITI ON MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNUTILIZED CENVAT TO CLOSING STOCK AMOUNTING TO ` ITA NO.8495/M/2010 CABOT INDIA LTD . 5 4,00,47,285/- U/S 145A OF THE ACT. THE INCLUSIVE ME THOD OF ACCOUNTING U/S 145A IS TO BE APPLIED IN TOTALITY I.E. TO THE OPENI NG STOCK AS WELL AS THE CLOSING STOCK AND NOT PIECE MEAL ONLY TO THE CLOSING STOCK. THE ASSESSING OFFICER IS DIRECTED TO MAKE CORRESPONDING ADJUSTMENT ON ACCOUNT OF CENVAT IN THE OPENING STOCK AS WELL AND COMPLETE THE ASSESSMENT A CCORDINGLY. 5.2 IT IS CLEAR FROM THE DIRECTIONS OF THE DRP THAT THE ASSESSING OFFICER WAS ASKED TO MAKE THE CORRESPONDING ADJUSTMENT ON ACCOUNT OF CENVAT CREDIT IN THE OPENING STOCK AS WELL. HOWEVER, WHILE COMPLETING THE ASSES SMENT IN PURSUANT TO THE DIRECTIONS OF THE DRP, THE ASSESSING OFFICER, THOUG H NOTED THE FACT AS PROPOSED IN THE DRAFT ORDER; BUT FINALLY MADE AN ADDITION OF ` 59,81,648/- AS AGAINST IT WAS PROPOSED TO BE DECREASED IN THE TOTAL INCOME IN THE DRAFT ORDER. THUS, THERE IS AN APPARENT CONTRADICTION IN THE PROPOSED DRAFT ORDER AND THE FINAL ORDER WITHOUT EXPLAINING THE REASONS FOR THE SAME. FURTHER, THE ASSESSEE HAS CONTENDED THAT THE ASSESSEE IS FOLLOWING EXCLUSIVE METHOD OF ACCOUNTIN G AND NOT INCLUDING THE AMOUNT TAXED IN THE PURCHASE AS WELL AS IN SALES. SINCE A LL THESE FACTS HAVE NOT BEEN EXAMINED AND CONSIDERED BY THE AUTHORITIES BELOW; T HEREFORE, THIS ISSUE REQUIRES TO BE PROPERLY EXAMINED BY CONSIDERING ALL THE RELEVAN T FACTS AS CLAIMED BY THE ASSESSEE. 5.3 AS REGARDS THE ADDITION DELETED IN THE EARLIER ASSESSMENT YEAR, THE EFFECT OF THE SAME WOULD BE ONLY TO THE EXTENT THAT A CORRESP ONDING ADJUSTMENT IS REQUIRED TO BE MADE IN THE OPENING STOCK, PURCHASE AS WELL AS S ALES APART FROM CLOSING STOCK. 5.4 WE FIND THAT A SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. MAHALAXMI GLASS WORKS P LTD.,318 ITR 116(BOM) AND ALSO THE BY THE HONBLE DELHI HIGH COURT IN THE CASE O F CIT VS. MAHA VEER ALUMINIUM LTD, 297 ITR 77. ITA NO.8495/M/2010 CABOT INDIA LTD . 6 5.5 EVEN IN THE CASE OF CIT VS NICHOLAS PIRAMAL IND IA LTD., THE HONBLE JURISDICTIONAL HIGH COURT IN I T APPEAL NO. 8 OF 20 09 DATED 24 TH MARCH 2009 HAS HELD AS UNDER: ON THE OTHER HAND ON BEHALF OF THE ASSESSEE,, THE L D COUNSEL SUBMITS THAT CONSIDERING THE ACCOUNTING PRACTICES ADDITIONS HAVE TO BE MADE AT THREE STAGES WHICH ARE (1) PURCHASE OF GOODS, (2) SA1S OF GOODE AND (3) INVENTORY. IN THE INSTANT1 CASE, IT IS SUBMITTED THAT WHAT HAS BEEN ALLOWED IS ONLY IN THE INVENTORY AND NOT IN THE CASE OF PURCHASE AND SALE CONSIDERING THAT THE APPELLANT WAS FOLLOWING THE NON-INCLUSIVE METHOD OF ACCOUNTING. CONSIDERING THE ABOVE, IN OUR OPINION, THE ORDER DOES NOT REQUIRE TO BE INTERFERED WITH EXCEPT TO EXTEND THAT THE ASSESSING OFFICER WILL F OLLOW THE LAW IN TERMS OF SECTION 145A CONSIDERING THAT THE JUDGMENT OF DELHI HIGH COURT DID NOT DEAL WITH THIS ISSUE. 5.6 ACCORDINGLY, WE SET ASIDE THIS ISSUE TO THE REC ORD OF THE ASSESSING OFFICER TO RECONSIDER AND DECIDE THE SAME AS PER LAW. 6 GROUND NO.5 IS REGARDING DISALLOWANCE OF ROYALTY BY TREATING AS CAPITAL EXPENDITURE. 6.1 THE ASSESSEE HAS DEBITED THE ROYALTY PAYMENT FO R THE ACQUIRING THE TECHNICAL KNOW-HOW. THE ASSESSING OFFICER WAS OF THE VIEW THA T THE PAYMENT FOR ACQUISITION OF TECHNICAL KNOW-HOW IS CLEARLY A PART OF SECTION 32( 1)(II) OF THE ACT AND THE SAME IS CAPITAL ASSET AND THE DEPRECIATION HAS TO BE PROVID ED ON THE SAME. ACCORDINGLY, THE ASSESSING OFFICER TREATED THE ROYALTY EXPENDITU RE OF ` 6,29,19,234/- AS CAPITAL EXPENDITURE AND DISALLOWED THE CLAIM OF THE ASSESSE E. AFTER CONSIDERING THE TRANSFER PRICING ADJUSTMENT ON ROYALTY PAYMENT TO THE TUNE O F ` 1,99,13,521/-, THE BALANCE AMOUNT OF ` 4,30,05,713/- WAS ADDED BACK AS CAPITAL EXPENDITU RE AND CONSEQUENTLY DEPRECIATION @ 25% WAS ALLOWED ON THE SAID AMOUNT. HENCE, THE NET ADDITION OF ` 3,22,54,285/- WAS MADE ON THIS ACCOUNT. ITA NO.8495/M/2010 CABOT INDIA LTD . 7 7 WE HAVE HEARD THE LD AR AS WELL AS THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD AR HAS SUBMITTED THAT TH IS ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL FOR THE ASSESSMENT YEAR 2005-06 AND AC CORDINGLY, THE SAME IS COVERED IN FAVOUR OF THE ASSESSEE. 7.1 ON THE OTHER HAND, THE LD DR HAS RELIED UPON TH E ORDER OF THE ASSESSING OFFICER. 8 HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL A S THE RELEVANT MATERIAL ON RECORD, AT THE OUTSET, WE NOTE THAT FOR THE ASSESSM ENT YEAR 2005-06, THE TRIBUNAL HAS CONSIDERED AND DECIDED THIS ISSUE AND HELD IN PARAS 19 TO 22 AS UNDER: 19. THE LEARNED CIT(APPEALS) ALSO NOTED THAT PAYMENT OF ROYALTY MADE BY THE ASSESSEE TO M/S CABOT CORPORATION, USA RIGHT FROM YEAR 1990 WAS CLAIMED AND ALLOWED AS A REVENUE EXPENDITURE. HE FURTHER NOTED THAT THIS ISSUE WAS A SUBJECT MATTER OF PROCEEDINGS U/S 263 FOR ASSESSMENT YEAR 2003-04 AND THE LEARNED C.I.T. AFTER EXAMINING ALL THE RELEVANT ASPE CTS DID NOT CONSIDER IT FIT TO WITHDRAW THE DEDUCTION ALLOWED BY THE AO ON ACCOUNT OF ROYALTY PAYMENT TREATING THE SAME AS REVENUE EXPENDITURE. KEEPING IN VIEW THE RULE OF CONSISTENCY AS WELL AS THE REASONS GIVEN IN PARAGRA PH NO. 4.12 AND 4.13 OF HIS IMPUGNED ORDER EXTRACTED ABOVE, THE LEARNED CIT(APPEALS ) HELD THAT ROYALTY PAID BY THE ASSESSEE TO CABOT CORPORATION, USA WAS A LLOWABLE AS REVENUE EXPENDITURE AND ACCORDINGLY HE DELETED THE DISALLOWAN CE MADE BY THE AO ON THIS ISSUE. 20. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE LEARNED DR AT THE TIME OF HEARING BEFORE US HAS MAINLY RELIED ON ARTICLE 2 OF THE TECHNOLOGY AGRE EMENT BETWEEN ASSESSEE AND CABOT CORPORATION, USA WHEREBY PLANS, L AYOUTS, DESIGNS AND TECHNICAL DATA REQUIRED FOR A CARBON BLACK REACTOR WERE TO BE SUPPLIED BY THE USA COMPANY TO THE ASSESSEE COMPANY AS PART OF TECHNOLOGY PACKAGE. SHE HAS POINTED OUT THAT TECHNICAL DATA, STANDARD D ESIGNS AND PLANS FOR IMPROVING THE PROCESSING AND HANDLING, PELLETIZING AN D DRYING SYSTEMS WAS ALSO TO BE SUPPLIED BY THE USA COMPANY TO THE ASSES SEE COMPANY. SHE CONTENDED THAT IT WAS THUS A CLEAR CASE OF TRANSFER OF TECHNOLOGY BY THE USA COMPANY TO THE ASSESSEE COMPANY AND THE PAYMENT MAD E FOR SUCH TRANSFER IN THE FORM OF ROYALTY WAS A CAPITAL EXPENDITURE AS RIGHTLY HELD BY THE AO. HOWEVER, AS POINTED OUT BY THE LEARNED COUNSEL FOR TH E ASSESSEE, PLANS, LAYOUTS, DESIGNS AND TECHNICAL DATA AS PER ARTICLE 2 OF THE TECHNOLOGY AGREEMENT WERE TO BE SUPPLIED BY THE USA COMPANY TO THE ASSESSEE COMPANY FOR REINFORCING CARBON BLACK REACTOR CAPABLE O F UTILIZING PREHEATED ITA NO.8495/M/2010 CABOT INDIA LTD . 8 AIR AT 650 DEGREE C. SIMILARLY, ESSENTIAL DATA, STAND ARD DESIGNS AND PLANS WERE TO BE SUPPLIED FOR IMPROVING THE PROCESSING AND HANDL ING, PELLETIZING AND DRYING SYSTEMS IN USE BY THE COMPANY AT THE PLANT A S ON THE DATE OF THE AGREEMENT IN ORDER TO INCREASE THE THROUGHPUT OF CARBO N BLACK. AS RIGHTLY HELD BY THE LEARNED CIT(APPEALS) ON INTERPRETATION OF ARTICLE 2 OF THE TECHNOLOGY AGREEMENT, THE THRUST WAS THUS FOR THE BE TTERMENT AND IMPROVEMENT OF THE VERY SAME LINE OF BUSINESS IN WHI CH THE ASSESSEE COMPANY WAS ENGAGED FOR MORE THAN 40 YEARS. MOREOVER, THE ASSESSEE WAS GIVEN ONLY THE RIGHT TO USE THE RELEVANT INFORMATION AND KNOWLEDGE BY THE US COMPANY AND IT WAS NOT ALLOWED TO TRANSFER OR DISCLO SE THE SAME TO ANY THIRD PARTY. THE ASSESSEE THUS CANNOT BE SAID TO HAVE ACQU IRED ANY ASSET OR ADVANTAGE OF ENDURING NATURE AND THE EXPENDITURE ON P AYMENT OF ROYALTY WAS INCURRED MERELY TO IMPROVE ITS EFFICIENCY AND PROFI TABILITY. 21. IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. V /S C.I.T. (SUPRA),HONBLE SUPREME COURT HAS HELD THAT THE IMPROVISATION IN THE PROCESS AND TECHNOLOGY IN SOME AREAS OF THE ENTERPRISE WAS SUPPLEMENTAL TO T HE EXISTING BUSINESS AND THERE BEING NO MATERIAL TO HOLD THAT IT ACCOUNTED T O A NEW OR FRESH VENTURE, THE PAYMENT MADE WAS ON ACCOUNT OF REVENUE EXPENDITU RE. HONBLE SUPREME COURT FURTHER HELD THAT THE RELEVANT AGREEMEN T PERTAINED TO A PRODUCT ALREADY IN THE LINE OF THE ASSESSEES ESTABL ISHED BUSINESS AND NOT TO A NEW PRODUCT. WHAT WAS STIPULATED IN THE AGREEMENT WA S IN RESPECT OF IMPROVEMENT IN THE OPERATIONS OF EXISTING BUSINESS A ND ITS PROFITABILITY NOT REMOVED FROM THE AREA OF THE DAY TO DAY BUSINESS OF T HE ASSESSEES ESTABLISHED ENTERPRISE. IT WAS HELD THAT THE FINANCI AL OUTLET UNDER THE AGREEMENT WAS FOR THE BETTER CONDUCT AND IMPROVEMEN T OF THE EXISTING BUSINESS AND IT WAS THUS EXPENDITURE OF REVENUE NATU RE. IN THE CASE OF KIRLOSKAR PNEUMATIC CO. LTD. V/S C.I.T (SUPRA), THE ASSESSEE WAS MANUFACTURING AIR COMPRESSOR. IT ENTERED INTO AN AGREEMENT WITH G MAI NLY TO ACQUIRE TECHNICAL KNOW-HOW FOR MANUFACTURE AND SALE OF CERTAI N PRODUCTS. G AGREED TO PROVIDE DRAWINGS AND INFORMATION AND KEEP THE ASSE SSEE INFORMED ABOUT RESEARCH AND DEVELOPMENT. THE FEES AGREED TO BE PAID W AS INCLUSIVE OF LUMP-SUM CONSIDERATION FOR THE DRAWINGS AND ROYALTY O F 2% FOR THE RIGHT TO USE PATENTS IN THE NAME OF G. IN THESE FACTS AND CIRCUMS TANCES, IT WAS HELD BY THE HONBLE BOMBAY HIGH COURT THAT WHILE CONSTRUING SUCH AGREEMENT, THEY MUST BE CONSIDERED AS A WHOLE WITHOUT PUTTING EMPHAS IS ON VARIOUS CLAUSES IN ISOLATION. IT WAS HELD THAT THE INTENTION OF THE AS SESSEE WAS TO ACQUIRE TECHNICAL KNOWLEDGE OR KNOW-HOW FOR CERTAIN PERIOD AN D THE DRAWINGS ACQUIRED WERE PART OF TECHNICAL KNOWLEDGE. IT WAS HEL D THAT THE ASSESSEE THUS DID NOT ACQUIRE ANY ASSET OR BENEFIT OF ENDURING NATURE AND THE PAYMENTS MADE UNDER THE AGREEMENT WERE ALLOWABLE AS RE VENUE EXPENDITURE. 22. IT MAY ALSO BE PERTINENT TO NOTE HERE THAT A SIM ILAR PAYMENT OF ROYALTY UNDER THE SAME TECHNOLOGY AGREEMENT WAS MADE BY THE A SSESSEE RIGHT FROM THE YEAR 1990 AND THE DEDUCTION CLAIMED FOR THE SAME AS REVENUE EXPENDITURE WAS ALLOWED CONSISTENTLY BY THE DEPARTME NT IN THE EARLIER YEARS. AS FURTHER NOTED BY THE LEARNED CIT(APPEALS) IN HIS IMPUGNED ORDER, THIS ISSUE WAS THE SUBJECT MATTER OF PROCEEDING U/S 263 FOR ASSE SSMENT YEAR 2003-04 ITA NO.8495/M/2010 CABOT INDIA LTD . 9 AND THE LEARNED C.I.T. AFTER EXAMINING THE SAME, DID NOT FIND ANY ERROR IN THE ORDER OF THE AO ALLOWING THE DEDUCTION CLAIMED BY T HE ASSESSEE ON ACCOUNT OF PAYMENT OF ROYALTY BEING EXPENDITURE OF REVENUE NA TURE. AS SUCH, CONSIDERING ALL THE FACTS OF THE CASE AND KEEPING I N VIEW THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. V/S C.I.T. (SUPRA) AS WELL AS THAT OF HONBLE BOMBAY HIG H COURT IN THE CASE OF KIRLOSKAR PNEUMATIC CO. LTD. V/S C.I.T (SUPRA) AND TH E RULE OF CONSISTENCY, WE FIND NO JUSTIFIABLE REASON TO INTERFERE WITH THE IMP UGNED ORDER OF THE LEARNED CIT(APPEALS) HOLDING THAT THE EXPENDITURE INCURRED B Y THE ASSESSEE ON PAYMENT OF ROYALTY WAS REVENUE IN NATURE AND DELETING THE DISALLOWANCE MADE BY THE AO TREATING THE SAME AS CAPITAL EXPENDIT URE. THE SAME IS, THEREFORE, UPHELD AND GROUND NO.1 OF THE REVENUE S AP PEAL IS DISMISSED. 8.1 FOLLOWING THE EARLIER ORDER OF THIS TRIBUNAL, W E DECIDE THIS ISSUE OF ROYALTY PAYMENT IN FAVOUR OF THE ASSESSEE AND ACCORDINGLY, DELETE THE ADDITION ON THIS ACCOUNT. 9 GROUND NOS 6 & 8 REGARDING DISALLOWANCE OF PROVIS ION FOR OLD AND OBSOLETE STORES. 9.1 THE ASSESSING OFFICER PROPOSED TO DISALLOW THE PROVISIONS FOR OLD AND OBSOLETE STORES OF ` 7,22,22,292/- ON THE GROUND THAT IT IS MERE PROVIS IONS AND AS AND WHEN THE STORES/SPARES ARE SOLD, THE LOSS CAN BE CLAIMED BY THE ASSESSEE. THE DRP, AFTER CONSIDERING THE CASE OF THE ASSESSEE DIRECTED THE A SSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE AFTER TAKING INTO ACCOUNT THE CLOSING STOCK AT COST OR MARKET VALUE, WHICHEVER IS LESS IN RESPECT OF THESE ITEMS. CONSEQUENTLY, THE ASSESSING OFFICER TOOK THE NET REALISABLE MARKET VALUE OF THE OBSOLETE STORES AT ` 35,50,000/- AND ACCORDINGLY, DISALLOWED THE CLAIM OF THE ASSESS EE TO THAT EXTENT. 9.2 THE GRIEVANCE OF THE ASSESSEE AGAINST THE ACTIO N OF THE ASSESSING OFFICER IS THAT WHILE REDUCING THE NET REALISABLE MARKET VALUE WITH RESPECT TO OLD AND OBSOLETE STORES, THE ASSESSING OFFICER TOOK THE VALUE OF RE- SALE VALUE OF THE DISCARDED PLANT AND MACHINERY. THEREFORE, THE ASSESSING OFFICER HAS TOOK WRONG AMOUNT WHICH IS ITA NO.8495/M/2010 CABOT INDIA LTD . 10 RESALE VALUE OF PLANT AND MACHINERY WHICH IS A SEP ARATE ITEM NOT PART OF THE PROVISIONS OF OLD AND OBSOLETE STORES. HE HAS REFE RRED THE EXPLANTIONS OF THE ASSESSEE TO THE ASSESSING OFFICER INCLUDING THE LETTER DATED 14.12.2009 AS WELL AS DT 8.10.2010, WHICH WERE SUBMITTED BEFORE THE ASSESSING OFFICER A FTER THE DIRECTIONS OF THE DRP. 9.3 THE LD AR HAS FURTHER SUBMITTED THAT THE ASSESS EE HAS OFFERED THE INCOME FROM SALE OF SCRAP OF OBSOLETE STORES IN THE SUBSEQUENT YEAR; THEREFORE, NO ADJUSTMENT CAN BE MADE ON THIS ACCOUNT AS FAR AS THE PROVISIONS FO R THE OLD AND OBSOLETE STORES IS CONCERNED. IN SUPPORT OF HIS CONTENTION, HE HAS R ELIED UPON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF COMMISSION ER OF INCOME-TAX V. SOUTH INDIA CORPORATION (AGENCIES) LTD., REPORTED IN 293 ITR 23 7. 9.4 ON THE OTHER HAND, THE LD DR HAS SUBMITTED THAT THE DRP HAS RIGHTLY DIRECTED THE ASSESSING OFFICER TO TAKE INTO CONSIDERATION TH E REALISABLE VALUE OF THE OBSOLETE STORES WHILE ALLOWING THE CLAIM OF THE ASSESSEE WHI CH IS REASONABLE AND JUSTIFIED. SHE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW . 10 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE ONLY GRIEVANCE OF THE ASSESSEE IS REGA RDING THE DISALLOWANCE OF THE CLAIM TO THE EXTENT OF NET REALISABLE MARKET VALUE TAKEN BY THE ASSESSING OFFICER AT ` 35,50,000. 10.1 FROM THE RECORDS FILED BY THE ASSESSEE, IT AP PEARS THAT THE ASSESSEE HAS CONTENDED BEFORE THE ASSESSING OFFICER THAT THESE STORES ARE WORTHLESS; HOWEVER, THE DETAILS OF NET REALISABLE VALUE WITH RESPECT TO THE PLANT AND MACHINERY ARE APPEARS TO HAVE BEEN TAKEN INTO CONSIDERATION BY T HE ASSESSING OFFICER WHILE DEALING WITH THE ISSUE. ITA NO.8495/M/2010 CABOT INDIA LTD . 11 10.2 AS FAR AS THE ALLOWABILITY OF THE CLAIM OF THE ASSESSEE, THE DRP HAS DIRECTED THE ASSESSING OFFICER TO ALLOW THE CLAIM SUBJECT TO REALISATION OF MARKET VALUE OF THE OBSOLETE STORES. THE ASSESSEE, VIDE ITS LETTER DAT ED 8.10.2010 HAS SUBMITTED THAT THE REALISABLE VALUE OF THE STORES WOULD NOT EXCEED 5% OF THE VALUE AND THEREFORE, REQUESTED THE ASSESSING OFFICER TO RESTRICT THE MA RKET VALUE TO 5% AMOUNTING TO ` 3,61,146/- AND THE BALANCE OF ` . 68,61,776/- WAS CLAIMED TO BE ALLOWED. 10.3 THIS IS A CASE OF TAKING INTO ACCOUNT WRONG AM OUNT WHICH PERTAINS TO THE PLANT AND MACHINERY; THEREFORE, ALL THE RELEVANT FA CTS AND DETAILS ARE REQUIRED TO BE EXAMINED PROPERLY. ACCORDINGLY, IN THE INTEREST O F JUSTICE, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE ASSESSING OFFICER TO RECONSIDER A ND DECIDE THE SAME AFTER TAKING INTO ACCOUNT ALL THE RELEVANT FACTS AND DETAILS AS WELL AS THE FACT THAT THE ASSESSEE HAS OFFERED THE INCOME FROM THE SALE OF SCRAP , IF ANY, IN THE SUBSEQUENT YEAR. 11 GROUND NO.7 IS REGARDING TRANSFER PRICING ADJUST MENTS IN RESPECT OF ROYALTY PAID TO THE ASSOCIATED ENTERPRISE (AE). 11.1 DURING THE YEAR UNDER CONSIDERATION, THE ASSES SEE HAS PAID ROYALTY TO THE PARENT COMPANY (AE) ON ACCOUNT OF TECHNICAL KNOW-HO W OF CARCASS GRADE CARBON BLACK (TGCB) @ 3% OF SALE OF TREAD GRADE PRODUCT AN D @ 5% ON CARCASS PRODUCTS. THE TPO HAS ASKED THE ASSESSEE TO JUSTIFY THE REASO N FOR INCREASE IN ROYALTY ON CARCASS TREAD GRADE FROM 2 % TO 5%. THE ASSESSEE SUBMITTED THAT IN THE ASSESSMENT YEAR 2005-06, THE PARENT COMPANY HAS INCREASED THE RATE OF ROYALTY ON CARCASS GRADE FROM 2% TO 5% AS PER THE AGREEMENT ENTERED INTO BET WEEN THE ASSESSEE AND THE AE. THE TPO OBSERVED THAT THERE IS NO CHANGE IN THE TER MS OF THE AGREEMENT GOVERNING THE FLOW OF TECHNOLOGY/KNOW-HOW ETC. SINCE 1990; AC CORDINGLY, THE INCREASE OF 3% IN ITA NO.8495/M/2010 CABOT INDIA LTD . 12 ROYALTY WAS DISALLOWED AS THE ALP OF THE ROYALTY WA S DETERMINED AT 2%. CONSEQUENTLY, AN ADJUSTMENT OF ` 1,99,13,521/- WAS MADE ON THIS ACCOUNT. 12 BEFORE US THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT THOUGH THIS ISSUE WAS CONSIDERED AND DECIDED IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2005-06 WHEREBY THE TRIBUNAL HAS SET ASIDE THE ISSUE AND RE STORED THE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO DO THE EXERCISE OF DETERMINING ALP BY APPLYING MOST APPROPRIATE METHOD; HOWEVER, ACCORDIN G TO THE LD AR THIS DIRECTIONS OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2005-06 SHO ULD NOT BE FOLLOWED WHEN NEITHER THE ASSESSEE NOR THE REVENUE HAS DISPUTED THE METHO D ADOPTED FOR THE PURPOSE OF DETERMINING THE ALP IN RESPECT OF INTERNATIONAL TRA NSACTION. THE LD AR HAS SUBMITTED THAT BOTH THE ASSESSEE AND THE TPO APPLIED COMPARAB LE UNCONTROLLED PRICE (CUP) METHOD AND THEREFORE, THE TRIBUNAL HAS NO JURISDICT ION TO DIRECT THAT OTHER APPROPRIATE METHOD SHOULD BE APPLIED. IN SUPPORT O F HIS CONTENTION, THE LD AR HAS RELIED UPON THE DECISION OF THE HONBLE GUJARAT HIG H COURT IN THE CASE OF DEEPAK NITRITE LTD. V. COMMISSIONER OF INCOME-TAX REPORTED IN 307 ITR 289 AS WELL AS THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF TOPSTAR MERCANTILE P. LTD. V. ASSISTANT COMMISSIONER OF INCOME-TAX REPORT ED IN 334 ITR 374(BOM) AS WELL AS 333 ITR 379(AP). 12.1 ON THE OTHER HAND, THE LD DR HAS SUBMITTED THA T WHEN THE ISSUE IS COVERED BY THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2 005-06, THEN A DIFFERENT VIEW CANNOT BE TAKEN ON THE SAME ISSUE IN THE ABSENCE OF CHANGE OF CIRCUMSTANCES. HE HAS FURTHER SUBMITTED THAT UNDER RULE 10B, ALP HAS TO BE DETERMINED BY APPLYING THE MOST APPROPRIATE METHOD AND THEREFORE, WHEN THIS TR IBUNAL HAS NOTED THE FACT THAT ITA NO.8495/M/2010 CABOT INDIA LTD . 13 NO COMPARABLES WERE PRODUCED BY THE ASSESSEE, THEN THE C.U.P METHOD CANNOT BE APPLIED BY TAKING THE TRANSACTION BETWEEN THE RELAT ED PARTIES. 12.2 SO FAR AS THE CONTENTION OF THE LD AR OF THE A SSESSEE REGARDING JURISDICTION OF THIS TRIBUNAL IN DIRECTING THE ASSESSING OFFICER TO ADOPT APPROPRIATE METHOD FOR DETERMINING THE ALP IS CONCERNED, WE DO NOT FIND AN Y MERIT IN THE SAME; BECAUSE AS PER SEC 92C, ALP IN RELATION TO AN INTERNATIONAL TR ANSACTION SHALL BE DETERMINED BY ANY OF THE METHOD, BEING THE MOST APPROPRIATE METHO D HAVING REGARD TO THE NATURE OF THE TRANSACTION OR CLASS OF THE TRANSACTION ETC. THE VARIOUS METHODS AS PRESCRIBED IN THE SAID SECTION ARE AS UNDER: (A) COMPARABLE UNCONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTIONAL NET MARGIN METHOD; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BO ARD. 12.3 FROM THE METHODS AS ENLISTED IN SECTION 92C A METHOD HAS TO BE SELECTED BEING THE MOST APPROPRIATE METHOD KEEPING IN VIEW T HE NATURE OF TRANSACTION OR ASSOCIATED PERSON OR FUNCTION PERFORMED BY SUCH PER SON. THE BASIC CONCEPT OF ALP IS BASED ON THE PRINCIPLE THAT THE PRICE BETWEEN TH E TWO ASSOCIATED/RELATED PARTIES SHOULD BE THE SAME AS IF AN IDENTICAL TRANSACTION IS BETWEEN UNRELATED PARTIES AND THEREFORE, THE PRICE CHARGED OR PAID IN A CONTROLLE D TRANSACTION IS COMPARABLE WITH THE UNCONTROLLED TRANSACTION BETWEEN THE UNRELATED PARTIES. ITA NO.8495/M/2010 CABOT INDIA LTD . 14 12.4 THE ASSESSEE IN THE CASE IN HAND HAS APPLIED C OMPARABLE UNCONTROLLED PRICE METHOD (C U P METHOD). SECTION 92F(II) DEFINES ARM S LENGTH PRICE (ALP), A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRA NSACTION BETWEEN PERSON OTHER THAN ASSOCIATED ENTERPRISE (AE) IN AN UNCONTROLLED CONDITION. THE PROCEDURE FOR DETERMINATION OF ALP BY ADOPTING THE MOST APPROPRIA TE METHOD HAS BEEN PROVIDED UNDER RULE 10B(1) AND AS PER CLAUSE (A) OF RULE 10B (1), THE MANNER FOR DETERMINATION OF ALP BY THE COMPARABLE UNCONTROLLED PRICE METHOD IS PROVIDED AS UNDER: (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERR ED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPAR ABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (II) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRA NSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; 12.5 THUS, IT IS PRE-REQUISITE ESSENTIAL CONDITION FOR DETERMINATION OF ALP APPLYING CUP METHOD IN RELATION TO THE INTERNATIONAL TRANSAC TION THAT THE PRICE PAID IN A COMPARABLE UNCONTROLLED TRANSACTION HAS TO BE TAKEN INTO CONSIDERATION. IN OTHER WORDS, FOR THE PURPOSE OF COMPUTATION OF ALP IN REL ATION TO AN INTERNATIONAL TRANSACTION, THE PRICE CHARGED OR PAID FOR A UNCONT ROLLED TRANSACTION, WHICH IS COMPARABLE WITH THE NATURE OF INTERNATIONAL TRANSAC TION; BUT AT THE SAME TIME AN UNCONTROLLED TRANSACTION. THEREFORE, BOTH THESE CON DITIONS I.,E. COMPARABLE AND UNCONTROLLED TRANSACTIONS MUST EXIST FOR TAKING A P RICE AS ALP FOR AN INTERNATIONAL TRANSACTION. ITA NO.8495/M/2010 CABOT INDIA LTD . 15 12.6 AS IT IS EVIDENT FROM THE RECORD THAT THE ASSE SSEE HAS BEEN TAKING THE ROYALTY PAID TO AE HAS BEEN TAKEN BY THE ASSESSEE AS COMPA RABLE FOR THE PURPOSE OF DETERMINATION OF ALP, WHICH IS ABSOLUTELY CONTRARY TO THE VERY BASIC AND FUNDAMENTAL REQUIREMENT OF THE PROVISIONS OF CHAPTE R X AS WELL AS RULE 10B. WHEN THE MOST ESSENTIAL REQUIREMENT OF A COMPARABLE BEIN G UNCONTROLLED TRANSACTION IS NOT SATISFIED, THEN THE METHOD ADOPTED BY THE ASSES SEE CANNOT BE ACCEPTED. THOUGH THE AUTHORITIES BELOW INCLUDING THE TPO HAS NOT SPECIFICALLY DISPUTED THE CUP METHOD USED BY THE ASSESSEE FOR DETERMINATION OF AL P. HOWEVER, WHEN THE ASSESSEE CHALLENGED THE ACTION OF THE AUTHORITIES B ELOW, THEN THE ONUS IS ON THE ASSESSEE TO JUSTIFY THE PRICE PAID BY THE ASSESSEE IS AT ALP AS PER THE PROVISIONS OF THE ACT. 12.7 THE TRIBUNAL FOR THE ASSESSMENT YEAR 2005-06 H AS TAKEN NOTE OF THE RELEVANT FACTS AND THEN OBSERVED IN PARAS 8 TO 11 AS UNDER: 8. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. ALTHOUGH THE LEARNED COUN SEL FOR THE ASSESSEE HAS MADE ELABORATE SUBMISSIONS WITH REFERENCE TO THE D ETAILS AND DOCUMENTS FURNISHED IN HIS PAPER BOOK INCLUDING THE WRITTEN SUBM ISSIONS FILED BEFORE THE AUTHORITIES BELOW IN AN ATTEMPT TO EXPLAIN AND JUSTI FY THE INCREASE IN THE RATE OF ROYALTY FROM 2% TO 5% AGREED TO BE PAID BY THE ASS ESSEE TO CABOT CORPORATION, USA, WE FIND THAT THE ISSUE INVOLVED IN THE PRESENT CASE IS RELATING TO THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AND FOR DECIDING THE SAID ISSUE, WHAT IS RELEVANT TO BE SEEN IS WHETHER THE RATE AT WHICH ROYALTY WAS PAID BY THE ASSESSEE TO ITS ASSOCI ATE ENTERPRISE VIZ. CABOT CORPORATION, USA IS AT ARMS LENGTH PRICE OR NOT. THE J USTIFIABILITY OF INCREASE IN RATE OF ROYALTY FROM 2% AS PAID IN THE EARLIER YEAR TO 5% IN THE YEAR CONSIDERATION ALONE, THEREFORE, IS NOT RELEVANT TO DECI DE THE SAID ISSUE. AS A MATTER OF FACT, THE ROYALTY AT THE RATE OF 2% WAS PAID BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE ITSELF AND THE SAID TRANSACTION THUS WAS A CONTROLLED TRANSACTION WHICH CANNOT BE TAKEN AS A BENCH MARK F OR DECIDING AS TO WHETHER THE ROYALTY PAID BY THE ASSESSEE TO M/S CABO T CORPORATION AT THE RATE OF 5% WAS AT ARMS LENGTH. THIS EXERCISE OF ASC ERTAINING WHETHER THE ROYALTY SO PAID IS AT ARMS LENGTH HAS TO BE DONE IND EPENDENTLY AS PER THE PROCEDURE LAID DOWN IN THE RELEVANT PROVISIONS OF THE ACT AS WELL AS THE RULES PRESCRIBED. IN THIS REGARD, IT IS OBSERVED THAT ROYAL TY PAID AT THE RATE OF 5% WAS ITA NO.8495/M/2010 CABOT INDIA LTD . 16 CLAIMED TO BE AN ARMS LENGTH PRICE BY THE ASSESSEE ON THE BASIS OF CUP METHOD. THE AO, ON THE OTHER HAND, HAS NOT REFERRED TO ANY METHOD SPECIFICALLY AND MADE THE ADDITION ON ACCOUNT OF TRA NSFER PRICING ADJUSTMENT TAKING THE RATE OF 2% AT WHICH ROYALTY WAS PAID BY THE ASSESSEE IN THE EARLIER YEARS AS A BENCH MARK. AS ALREADY OBSERVED BY US, THE SAID ROYALTY AT THE RATE OF 2% WAS PAID BY THE ASSESSEE COMPANY TO ITS ASSOC IATE ENTERPRISE AND THE SAME, THEREFORE, COULD NOT BE TAKEN AS A COMPARABLE UNCONTROLLED PRICE. 9. AT THE TIME OF HEARING BEFORE US, THE LEARNED REPRE SENTATIVES OF BOTH THE SIDES HAVE ACCEPTED IN REPLY TO A QUERY RAISED BY T HE BENCH THAT THE PRODUCT MANUFACTURED BY THE ASSESSEE BEING UNIQUE AND THE TE CHNOLOGY OR TECHNICAL INPUT PROVIDED BY CABOT CORPORATION, USA ALSO BEING U NIQUE ONE, IT IS VERY DIFFICULT TO FIND OUT A CASE INVOLVING SUPPLY OF SI MILAR TECHNOLOGY OR TECHNICAL INPUT SO AS TO ASCERTAIN A COMPARABLE UNCONTROLLED PR ICE PAID FOR THE ROYALTY. IT IS NO DOUBT TRUE THAT THE RESULTS DERIVED FROM APPL YING THE CUP METHOD WILL GENERALLY BE THE MOST DIRECT AND RELIABLE MEASURE OF AN ARMS LENGTH PRICE FOR THE CONTROLLED TRANSACTION. HOWEVER, IT IS ALSO TRUE THAT THE SUCCESS OF THE SAID METHOD IS SUBJECT TO THE CONDITION THAT AN UNCONTRO LLED TRANSACTION HAS NO DIFFERENCES WITH THE CONTROLLED TRANSACTION THAT WO ULD AFFECT THE PRICE AND IF AT ALL THERE ARE ANY DIFFERENCES, THEY ARE ONLY MINO R DIFFERENCES THAT HAVE A DEFINITE AND REASONABLY ASCERTAINABLE EFFECTS ON PRI CE FOR WHICH APPROPRIATE ADJUSTMENTS CAN BE MADE. WHILE MANY FACTORS ARE TO B E CONSIDERED IN DETERMINING THE COMPARABILITY OF TRANSACTION, SIMILAR ITY OF PRODUCTS OR SERVICES WILL HAVE THE GREATEST EFFECT ON COMPARABILITY UNDER THIS METHOD. COMPARABILITY UNDER THIS METHOD DEPENDS ON CLOSE SIM ILARITY WITH RESPECT TO VARIOUS FACTORS INCLUDING ESPECIALLY THE QUALITY OF PRODUCT, THE CONTRACTUAL TERMS ETC. 10. IT IS OBSERVED THAT THERE IS, HOWEVER, NO DATA A VAILABLE IN THE PRESENT CASE IN RESPECT OF UNCONTROLLED COMPARABLE TRANSACTIONS WH ICH HAVE A SIMILARITY OR AT LEAST A CLOSE SIMILARITY WITH THE TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISE M/S CABOT CORPORATION, USA INVO LVING PAYMENT OF ROYALTY AND IN THE ABSENCE OF THE SAME, WE ARE OF THE CONSIDERED VIEW THAT CUP METHOD ADOPTED BY THE ASSESSEE FOR TRANSFER PRIC ING ANALYSIS CANNOT BE CONSIDERED AS MOST APPROPRIATE METHOD TO DETERMINE THE ARMS LENGTH PRICE. IN OUR OPINION, THE ARMS LENGTH PRICE NEEDS TO BE D ETERMINED BY THE MOST APPROPRIATE METHOD, DETERMINATION OF WHICH WOULD DEPE ND, INTER ALIA, ON THE NATURE OF TRANSACTIONS, FUNCTIONS PERFORMED BY THE ASS OCIATED ENTERPRISE ETC. RULE 1OC(2) OF INCOME TAX RULES, 1962 PRESCRIBES THE FOLLOWING FACTORS WHICH ARE RELEVANT FOR DETERMINATION OF THE MOST APPROPRIATE METHOD (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SPE CIFIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCO UNT NAMELY (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRANSAC TION; (B) THE C/ASS OR C/ASSES OF ASSOCIATED ENTERPRISES EN TERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKIN G INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISE; ITA NO.8495/M/2010 CABOT INDIA LTD . 17 (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF DA TA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION AND BET WEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTM ENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION, AND THE COMPARABLE UNCONTROLLED TRANSAC TION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTION S REQUIRED TO BE MADE IN APPLICATION OF A METHOD. 11. IN OUR OPINION, IF THE FACTS OF THE PRESENT CASE ARE CONSIDERED IN THE LIGHT OF THE ABOVE FACTORS, CUP METHOD CANNOT BE REGARDED AS M OST APPROPRIATE METHOD FOR DETERMINING ARMS LENGTH PRICE OF THE ROY ALTY PAID BY THE ASSESSEE TO M/S CABOT CORPORATION, USA AS THERE IS NO DATA A VAILABLE IN RESPECT OF UNCONTROLLED TRANSACTIONS WHICH ARE SIMILAR OR AT LEA ST CLOSELY SIMILAR TO THE TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS ASSOC IATED ENTERPRISE CABOT CORPORATION, USA. WE, THEREFORE, SET ASIDE THE ORDER OF THE LEARNED CIT(APPEALS) AS WELL AS THAT OF THE ASSESSING OFFIC ER ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE AC WITH A DIRECTION TO DO THE EXERCISE OF DETERMINING THE ARMS LENGTH PRICE BY APPLYING THE MO ST APPROPRIATE METHOD KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF THE C ASE AND AFTER AFFORDING PROPER AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. THE RELEVANT GROUNDS OF THE ASSESSEES APPEAL ON THIS ISSUE AS W ELL AS GROUND NO.2 OF THE REVENUES APPEAL ARE ACCORDINGLY TREATED AS ALLOWED FO R STATISTICAL PURPOSES. 12.8 THERE IS NO CHANGE IN THE MATERIAL FACTS FOR T HE ASSESSMENT YEAR UNDER CONSIDERATION TO THOSE OF THE ASSESSMENT YEAR 2005- 06 SO FAR AS THE DETERMINATION OF ALP UNDER CUP METHOD IS CONCERNED AS WELL AS THE C OMPARABLES ARE TAKEN AS CONTROLLED TRANSACTIONS INSTEAD OF UNCONTROLLED TRA NSACTIONS. THEREFORE, AS IT WAS FOUND FOR THE ASSESSMENT YEAR 2005-06, THE ENTIRE E XERCISE OF DETERMINATION OF ALP IS ABSOLUTELY AGAINST THE BASIC CONCEPT OF ALP UNDER T HE PROVISIONS OF LAW. 12.9 THE DECISION RELIED UPON BY THE LD AR IN SUPP ORT OF HIS CONTENTION THAT THE TRIBUNAL HAS NO JURISDICTION TO DIRECT THE ASSESSIN G OFFICER TO ADOPT A PARTICULAR METHOD ARE BASED ON THE PRINCIPLE THAT SINCE THE TR IBUNAL HAS NO JURISDICTION TO ITA NO.8495/M/2010 CABOT INDIA LTD . 18 ENHANCE THE ASSESSMENT AND THEREFORE, THIS TRIBUNAL CANNOT PASS AN ORDER OR ISSUE DIRECTIONS, WHICH COULD BE PREJUDICIAL TO THE ASSES SEE AND PUT THE ASSESSEE IN A DISADVANTAGEOUS POSITION IN COMPARISON TO THE GRIE VANCE OF THE ASSESSEE AGAINST THE AUTHORITIES BELOW. 12.10 IT IS PERTINENT TO NOTE THAT BY SETTING ASIDE THE ISSUE TO THE RECORD OF THE ASSESSING OFFICER WITH THE DIRECTIONS TO APPLY AN APPROPRIATE METHOD FOR DETERMINATION OF ALP DOES NOT RESULT IN ENHANCEMEN T OF ASSESSMENT SO FAR AS THE ADJUSTMENT ON TRANSFER PRICING. EVEN IF BY APPLYIN G ANY ANOTHER METHOD FOR DETERMINATION OF ALP, THE RESULTANT ADDITION IS MOR E THAN THE ADDITION IN THE ORIGINAL ASSESSMENT, THE ADDITION WOULD BE RESTRICTED TO TH E EXTENT AS MADE IN THE ORIGINAL ASSESSMENT. THEREFORE, WE DO NOT FIND ANY SUBSTANC E IN THE CONTENTIONS OF THE LD AR. 12.11 IN ANY CASE, WHEN THE ONUS IS ON THE ASSESSEE TO PROVIDE ALL RELEVANT DATA FOR THE PURPOSE OF DETERMINATION OF ALP, THEN THE ASSES SEE CANNOT ESCAPE FROM THE RESPONSIBILITY BY TAKING AN EXCUSE THAT THE RELEVAN T DATA ARE NOT AVAILABLE AND THEREBY COMPUTING ALP IN A MANNER WHICH IS APPARENT ON THE FACE OF IT CONTRARY TO THE BASIC CONCEPT AND PROVISIONS OF LAW. HENCE, SO FAR AS THE ISSUE IN PRINCIPLE IS SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER BY FOL LOWING THE EARLIER ORDER OF THIS TRIBUNAL. 13 THE ASSESSEE HAS ALSO FILED ADDITIONAL EVIDENCE IN THE SHAPE OF TWO ROYALTY AGREEMENTS ENTERED BETWEEN THE AE OF THE ASSESSEE A ND THIRD PARTY NAMELY (I) DELAWARE USA & (II) NEGROSERVIA, SA WHEREIN T HE ROYALTY WAS PAID BY THESE THIRD PARTIES @ 5% ON SALE PRICE AND 4.5% ON THE SALE PR ICE RESPECTIVELY. THE LD AR HAS SUBMITTED THAT THESE AGREEMENTS ARE RELEVANT FOR C ONSIDERING THE PAYMENT OF ITA NO.8495/M/2010 CABOT INDIA LTD . 19 ROYALTY PAID BY THE ASSESSEE TO THE AE BEING AT ALP AND THEREFORE, PLEADED THAT THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE MAY BE AD MITTED. 13.1 ON THE OTHER HAND, THE LD DR HAS VEHEMENTLY OB JECTED THE PROPOSED ADDITIONAL EVIDENCE FILED BY THE ASSESSEE AT THIS S TAGE AND SUBMITTED THAT THESE AGREEMENTS ARE WITH RESPECT TO THE PARTIES AT DIFFE RENT GEOGRAPHICAL JURISDICTION AND THEREFORE, THEY CANNOT BE THE COMPARABLE FOR DETERM INATION OF ALP OF INTERNATIONAL TRANSACTIONS BETWEEN THE ASSESSEE AND AE. HE HAS REFERRED RULE 10B(2)(B) AND SUBMITTED THAT THERE SHOULD BE GEOGRAPHICAL SIMILA RITY FOR TAKING THE COMPARABLE IN ORDER TO DETERMINE THE ALP. THE LD DR HAS THUS, SUBMITTED THAT THE PROPOSED ADDITIONAL EVIDENCE IS NOT ADMISSIBLE AS THE SAME I S NOT RELEVANT FOR DETERMINATION OF THE ALP. HE HAS ALSO SUBMITTED THAT THERE IS VARIAT ION OF TIME PERIOD OF THE AGREEMENT AS FILED BY THE ASSESSEE AND THE TRANSACT IONS IN THE CASE OF THE ASSESSEE. 14 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WEL L AS THE FACTS AND CIRCUMSTANCES OF THE CASE. THE ASSESSEE HAS FILED F IRST TIME THIS ADDITIONAL EVIDENCE AT THIS STAGE, WHICH IS CLAIMED TO HAVE BEEN BETWE EN THE AE OF THE ASSESSEE AND THE THIRD PARTIES. HOWEVER, APART FROM THE AGREE MENTS, THERE IS NO OTHER MATERIAL TO SHOW THE ACTUAL PAYMENT OF THE ROYALTY BETWEEN THES E PARTIES AND FURTHER, WHETHER THE ROYALTY WAS PAID FOR TRANSFER OF THE SIMILAR TE CHNICAL KNOW-HOW OR TECHNOLOGY. THEREFORE, AT THIS STAGE, THE ADMISSIBILITY OF THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE CANNOT BE DECIDED IN THE ABSENCE OF PROPER ENQUIRY AND VERIFICATION OF THE RELEVANT FACTS. 14.1 SINCE THE ISSUE WITH REGARD TO THE MOST APPROP RIATE METHOD HAS BEEN SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER; THERE FORE, IN THE INTEREST OF JUSTICE, THE ASSESSING OFFICER MAY CONSIDER THE ADDITIONAL EVIDE NCE FILED BY THE ASSESSEE. THE ITA NO.8495/M/2010 CABOT INDIA LTD . 20 ASSESSING OFFICER MAY ALSO DECIDE THE ADMISSIBILITY OF THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE. 15 GROUND NO.9 IS REGARDING NOT GRANTING 5% BENEFIT UNDER THE PROVISO OF SEC. 92C OF THE I T ACT. 16 AT THE TIME OF HEARING, THE LD AR OF THE ASSESSE E STATED THAT THE ASSESSEE DOES NOT PRESS THIS GROUND AND THEREFORE, THE SAME MAY BE DISMISSED. THE LD DR HAS NO OBJECTION, IF THE GROUND NO,9 OF THE ASSESSEE IS DI SMISSED AS NOT PRESSED. ACCORDINGLY, THE GROUND NO.9 IS DISMISSED BEING NOT PRESSED. 17 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND PARTLY FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 19 TH , DAY OF DEC 2012. SD/- SD.- ( P M JAGTAP ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 19 TH , DEC 2012 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI