1. This is an appeal filed by the assessee and is directed against the order dated 13th January 2017, passed by the Assessing Officer in the matter of assessment under section 143(3) r.w.s. 144C of the Income Tax Act, 1961, for the assessment year 2013-14. As the impugned order after taking into account directions of the Dispute Resolution Panel, this appeal is filed directly against the order of the Assessing Officer.
2. In ground nos. 1 to 7, which we will take up together, the assessee has raised the following grievances:
Adjustment relating to international transaction pertaining to manufacturing operation of SABIC Innovative Plastics India Private Limited ("the Appellant"):
1. The Learned Assessing Officer ("Ld. AO") [along with the Learned Transfer Pricing Officer ("Ld. TPO")] under the directions of Hon'ble DRP erred on facts and in law in determining the arm's length price for purchase of raw material pertaining to manufacturing activity at INR 3,874,663,557 instead of INR 4,081,684,747 under the provisions of section 92CA(4) of the Income Tax Act, 1961 (" the") and thereby making an upward adjustment of INR 207,021,190 to the taxable income of the Appellant.
2. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in proposing to modify the economic analysis carried out by the Appellant in the Transfer Pricing ("TP") documentation maintained under section 92D of theread with Rule 10D of the Income-tax Rules, 1962 ("the Rules"), without providing any cogent reasons.
3. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in rejecting various comparable companies based on certain parameters and ignoring the that the same are functionally comparable to the Appellant.
4. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in rejecting Kemrock Industries & Exports Ltd as a comparable to the Appellant on account of having a different accounting year.
5. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in inappropriately considering only the PVC segment of Finolex Industries Ltd as comparable to the Appellant instead of both the "Pipes and Fittings & PVC segment".
6. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in proposing to apply arbitrarily, quantitative filter in respect of import of raw material and thereby rejecting various companies which are functionally comparable to the Appellant.
7. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in not granting proportionate adjustment for the value of international transactions, thereby extending the quantum of transfer pricing adjustment to transactions with the non- associated enterprises also.
3. So far as these grievances of the assessee are concerned, only a few material facts need to be taken note of. The assessee before us is a subsidiary of Singaporean company by the name of SABIC Innovative Plastic Holdings Pte Ltd, and is engaged in the manufacturing and trading of Advanced Engineering Thermoplastics and is also engaged in trading of polycarbonate sheets. During the relevant previous year, the assessee had a large number of transactions with its associated enterprises, including in respect of purchase of raw material relating to manufacturing activity. The assessee had employed transactional net margin method for ascertaining the arm's length price in respect of these transactions. During the proceedings before the Transfer Pricing Officer, it was noted that the assessee had as much as 85% import content in the raw material but then no imported raw material content filter was applied on the comparable cases selected by the assessee. The TPO thus proceeded to apply 75% import content filter and thus narrowed down to only four comparable cases- DCW Ltd, Finolex Ltd, Kemrock Industries Ltd and Supreme Petrochem Limited. It was then noted that Kemrock Industries Ltd had a different accounting year i.e. from July 2012 to September 2013, and, for this short reason, this comparable cannot be taken into account. It was further noted that so far as DCW Limited is concerned, "its product profile is totally different from product profile of the assessee company, and DCW Ltd is also in the manufacturing of caustic soda, liquid chlorine, HCL, Feeric Chloride, i.e. chemicals while the assessee is into manufacturing of plastics" and "hence DCW Ltd is also rejected from the list of final comparables". The final comparables were thus Finolex Ltd and Supreme Petrochem Ltd. The average margin OP/OR of these two comparables worked out to 7.97% as against the margin of the manufacturing segment computed at 5.58%.. It was on this basis that an arm's length expenses were computed at Rs 561,93,77,896 as against the actual related expenses of Rs 582,63,99,086, and, accordingly, an arm's length price adjustment of Rs 20,70,21,190 was recommended by the Transfer Pricing Officer. When the Assessing Officer proposed to make the resultant addition, assessee did raise a grievance before the Dispute Resolution Panel, but without any success. The DRP confirmed the action of the authorities below and declined to interfere in the matter. The assessee is not satisfied and is in further appeal before us. For the reasons we will set out in a short while, it is not really necessary to take note of any further facts at this stage and for our purposes.
4. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
5. To begin with this adjudication, it is sufficient to deal with correctness of excluding DCW Ltd from the final list of comparables. We have noted that in the course of written submissions filed by the learned Departmental Representative, a stand is taken that "the company has made consistent losses for the period financial year 2011-12 to financial year 2014-15 in the PVC segment" and that "as per the annual reports of the assessee company for these financial years, DCW Ltd was undergoing automation and debottlenecking program for its PVC segment during such financial years". The stand was thus taken that "In these circumstances, wherein the comparable company has made continuously losses for more than 3 years, it will not be proper to include DCW Ltd in the final comparables". The legal position is fairly well settled. It is only when losses are continuously incurred for three or more years that a comparable can be excluded, but the question really is as to which three years are to be taken into account. The question that needs our consideration is whether the period to be taken into account is any three years in the past, or the current year and two immediately preceding years. We find guidance from Rule 10B(4) which provides that "the data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction has been entered into" and proviso to this rule further provides that "data relating to a period not being more than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared". What essentially follows is that the current year is to be taken into account, and, since the test is for three consecutive years, two years preceding the current year are also to be taken into account. Viewed thus, it would appear that in order to disqualify from being taken into account, a comparable unit must be a loss making unit in the present year as also two immediately preceding year. Viewed in this perspective, when we examine the facts of this case, we find that the while there is PVC segment loss in the financial year 2012-13 (i.e. current year) @ 4.53%, and in the immediately preceding year 2011-12 (5.87%), there is in fact profit in the financial year 2010-11 at 2.88% net profit margin. The fact about profit in the financial year 2010-11, as also in the financial year 2015-16 onwards, is not even disputed by the revenue authorities below. In view of these discussions, the exclusion of DCW Ltd from the list of final comparables is not justified on the ground that it is a persistent loss making company. As regards the automation and debottlenecking program in the DCW Ltd in the relevant financial years, that is an ongoing process and cannot result in comparability. In view of these discussions, in our considered view, the exclusion of DCW Ltd was not justified. We, therefore, direct the Assessing Officer to recompute the arm's length margin after taking into account DCW Ltd as valid comparable.
6. Learned representatives agree that in the event of DCW Ltd being accepted as a valid comparable, there will be no need to deal with other issues raised with respect to this arm's length price determination, as, in that event, the profitability of the tested party will be well within acceptable range. That aspect, however, is to be examined by the Assessing Officer. We uphold the plea of the assessee in principle, remit the matter to the file of the Assessing Officer for fresh adjudication on the ALP in the light of observations above, and decline to deal with other grievances raised by the assessee which are, given these conclusions, academic at this stage.
7. Ground nos. 1 to 7 are allowed for statistical purposes in the terms indicated above.
8. In ground nos. 8 to 12, which we will take up together, the assessee has raised the following grievances:
Adjustment relating to international transactions pertaining to availing of management services—
8. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in determining the arm's length price for payment of management services fees under the provisions of section 92CA(4) of theand thereby making an adjustment of INR 31,458,460 to the taxable income of the Appellant in respect of following services:.
a. Legal services
b. Human resource services
c. Financial services
d. Manufacturing services
e. Marketing services
f. Information technology services
9. The Ld. TPO, Ld. AO and Hon'ble DRP erred in law in determining the arm's length price at "NIL" for various services mentioned above which is against the principles laid down by various judicial precedents.
10. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in disregarding the benchmarking approach of the Appellant of applying Transactional Net Margin Method ("TNMM") as the most appropriate method for determining the arm's length price of management services fees.
11. The Ld. TPO, Ld. AO and Hon'ble DRP erred in law, in applying the "Comparable Uncontrolled Price" method as prescribed under Rule 10B(1)(a) for determining the arm's length price for management services, in the absence of any finding of "the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction."
12. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in ignoring the fact that the associated enterprises filed their "return of income" in India and offered to tax their taxable income in India.
9. So far as this grievance of the assessee is concerned, the relevant material facts are as follows. In the course of proceedings before the Transfer Pricing Officer, it was noticed that the assessee has made payments of (i) Rs 1,27,70,479 to Sabic Innovative Plastics US LLC USA; (ii) Rs 7,20,92,912 to Sabic Innovative Plastic Management (Shanghai) Co Ltd China; and (iii) Rs 13,02,53,476 to Sabic Innovative Plastics (SEA) Pte Ltd, Singapore. When the TPO probed the arm's length price determination of these transactions, he found that the assessee has clubbed the payment of management service charges with manufacturing/ trading and benchmarked such aggregated transactions together using Transactional Net Margin Method as the Most Appropriate Method, using the assessee as the tested party. The TPO was of the view that this benchmarking was incorrect and observed that the payments were for specific services rendered by different AEs, the assessee should have conducted benchmarking separately for each type of payment. It was noted that no such study was carried out. It was also noted that benefit test and receipt of actual services should have examined for such payments. The TPO thus held that proper benchmarking was not done. He proposed an ALP adjustment of US $ 9,38,910, which was converted into INR 5,09,82,812. When the Assessing Officer proposed to make this ALP adjustment, assessee carried the matter before the Dispute Resolution Panel but without any success. That is how the impugned adjustment was made. The assessee is aggrieved and is in appeal before us.
10. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position.
11. As learned representatives fairly agree, even as the learned Departmental Representative dutifully relies upon the stand of the authorities below and urges us to take an independent view on the subject, this issue in appeal is squarely covered, in favour of the assessee, by decisions of the coordinate benches in assessee's own cases for the three immediately preceding assessment years. While dealing with the appeals of the assessee for the assessment years 2009-10 and 2011-12, a coordinate bench of this Tribunal, in a judgment Sabic Innovative Plastics India (P.) Ltd. v. Asstt. CIT [2017] 88 taxmann.com 810 (Ahd. - Trib.) and through one of us (i.e. the Vice President), has observed as follows:
8. We may at the outset note that the DRP's observations justifying the impugned ALP adjustment on the ground of benefit not reaching the assessee from rendition of services, are somewhat irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining ALP of that service. When evaluating the ALP of a service the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. This process of determination of arm's length price has to be done on the basis of a recognized method of determining arm's length price, rather than on the basis of subjective perceptions, divorced from ground realities of business, of the TPO. While on this issue, we may also refer to the following observations made by a coordinate bench of this Tribunal in the case of AWB India (P.) Ltd. v. Dy. CIT [2014] 50 taxmann.com 323/[2015] 152 ITD 770 (Delhi - Trib.) and which are equally applicable in the present context:
15. One of the very basic pre condition for use of CUP method is availability of the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT v. EKL Appliances Limited (345 ITR 241), "Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same".
16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO's case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions.
17. As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments.
18. We are also of the considered view that in the absence of prerequisites for application of CUP methods being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO's impugned action cannot meet our judicial approval.
19. For the detailed reasons set out above, we uphold the grievance of the assessee and direct the AO to delete the impugned ALP adjustment of Rs. 31,23,325. The assessee gets the relief accordingly.
9. The only justification for taking ALP of services at NIL is under CUP but then there has to be something on record to show that in an arm's length situation these services are rendered without consideration. The worth of services cannot be decided by the TPO, nor is it open to him to question, as such an approach implicitly does, the commercial expediency of these services. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for them to decide what is necessary for an assessee and what is not. It is not for the TPO to question assessee's wisdom in making payment for the services, which, in the opinion of the TPO, are not of "much" use. The TPO has travelled much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of its AEs. The DRP is also in error, in the light of these discussions, evaluating the worth of services on the basis of benefit of these services. The very foundation of the impugned ALP adjustment was thus devoid of any legally sustainable basis.
10. In any case, we have carefully perused the evidence of services rendered and the nature of services in question, on random sample basis. In our considered view, there is reasonable evidence of the rendition of service and it cannot be open to TPO to proceed on the basis that the services were not rendered. The method of ascertaining the arm's length price, on the basis of TPO's subjective perception about worth of services, is not sustainable in law either. In view of these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the impugned ALP adjustments.
12. These views were also followed by another coordinate bench, in assessee's own case for the assessment year 2010-11, as well.
13. We see no reasons to, nor is it open to us to, take any other view than the view so taken by the coordinate benches. No distinguishing features on facts have been pointed out to us to make any such deviation.
14. Admittedly, there is no difference on the facts and circumstances of the case and the services in question are under the same agreements. In this view of the matter, and respectfully following the coordinate bench decisions in assessee's own case for the earlier assessment years, we uphold the plea of the assessee and delete this ALP adjustment of Rs 3,14,58,460. The assessee gets the relief accordingly.
15. Ground nos. 8 to 12 are thus allowed in the terms indicated above.
16. The other grounds of appeal were not pressed before us.
17. In the result, the appeal is allowed in the terms indicated above.
