IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI GEORGE GEORGE K. JM
ITA No.282/Del/2012
Assessment Year : 2003-04
DCIT, Vs. Insilco Ltd.,
Circle 11(1), 3rd Floor,
Room No.312, Central Wing,
CR Building, 124, Janpath,
New Delhi. New Delhi.
PAN: AAACI1203N
(Appellant) (Respondent)
Assessee By : Shri Peeyush Jain, CIT, DR
Department By : Shri V.P. Gupta, Advocate
ORDER
PER R.S. SYAL, AM:
This appeal by the Revenue arises out of the order passed by
the CIT(A) on 22.11.2011 in relation to the assessment year 2003-
04.
2. First ground is against the deletion of addition of `50,10,463/-
made by the AO on account of transfer pricing adjustment. Briefly
stated, the facts of the case are that the assessee was initially
ITA No.282/Del/2012
formed as a joint venture in 1988. Subsequently, in April, 1999, it
became a subsidiary of Degussa A.G., Germany, which holds
68.25% of the shares in the assessee company. The assessee is
engaged in the business of manufacturing and sale of silica.
During the year under consideration, it entered into international
transactions with three of its associated enterprises, namely,
Degussa AG, Germany; J.J. Degussa Chemicals, Indonesia; and
J.J. Degussa Chemicals, Philippines. These international
transactions were on account of export of silica with sale value of
`5,12,00,053/-. The assessee benchmarked these international
transactions by using Comparable uncontrolled price (CUP) as the
most appropriate method. On comparison of the rates charged
by the assessee from its AEs and unrelated parties, it was found
by the TPO that in certain transactions, the price charged from its
AEs was lower as compared to that charged from non-AEs and
further such difference was more than 5%. On being show-
caused to explain the reasons for charging lower price from its
AEs, the assessee contended that there were certain geographical
differences and economic adjustments which led to the difference
in the rates charged from AEs and non-AEs. Apart from that,
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certain other objections were also taken by the assessee to the
working of the TPO, divulging difference in the rate charged from
non-AEs. The TPO required the assessee to supply information
about the resale price of the goods sold by the AEs as, in some
cases, the goods purchased by the AEs from the assessee were
resold to other customers. No such information was supplied by
the assessee. It was also noticed that the assessee made sale to
group entities in South Africa and Latin America through Degussa,
West Germany. On the analysis of the transfer pricing report, the
TPO noted that the 2/3rd of the related enterprises were located in
Indonesia and Philippines and the unrelated enterprises were
located in Indonesia, Philippines, Sri Lanka and Bangladesh. The
only other AE was located in Germany. After taking into
consideration of the relevant arguments made on behalf of the
assessee, the TPO proposed the transfer pricing adjustment of
`54,10,463/-, which was made by the AO. In the appeal before
the ld. CIT(A), the assessee raised additional ground to the effect
that Transactional net margin method (TNMM) should be adopted
as the most appropriate method for computing the arm's length
price (ALP). The ld. CIT(A) remitted the additional ground along
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with the necessary documents to the TPO for comments. The TPO,
vide his remand report dated 13.09.2011, objected to the
admission of additional ground and contended that the same be
rejected. Taking into consideration the Special Bench decision in
the case of Quark Systems Pvt. Ltd. Vs. ITO 2010-TIOL-31-ITAT-
CHD-SB, the ld. CIT(A) admitted the assessee's additional ground.
The assessee contended that the internal TNMM should be
applied to benchmark the international transactions undertaken
by it. Creating the segmental accounts for this purpose, the
assessee allocated expenses and incomes in certain percentage
and demonstrated to the CIT(A) that the profit charged from AEs
was higher than that charged from non-AEs. The ld. CIT(A) got
convinced with the assessee's submissions and ordered for the
deletion of addition. In reaching this conclusion, the ld. CIT(A)
also referred to the Tribunal order passed for the immediately
preceding assessment year, namely, 2002-03, remanding the
matter to the AO/TPO and also the view taken by the TPO for the
AYs 2007-08 and 2008-09 accepting the application of TNMM.
3. We have heard the rival submissions and perused the
relevant material on record. It is observed that the assessee
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applied CUP as the most appropriate method for benchmarking
the international transactions undertaken by it. The assessee did
not dispute before the TPO that the CUP was the most appropriate
method. However, it was only during the course of first appellate
proceedings that the assessee came out with an additional
ground contending that the most appropriate method was TNMM
and the same should be applied. The reason advanced for not
applying the CUP method was that there were no instances of
uncontrolled transactions in Germany and the assessee had also
entered into certain international transactions with Degussa AG,
Germany. The ld. AR vehemently argued that the Tribunal was
pleased not to accept the application of CUP as the most
appropriate method in its order for the AY 2002-03 because in
that year also, like the current year, there were international
transactions with Degussa AG, Germany and no transactions with
non-AEs situated at Germany were undertaken by the assessee.
These facts indicate that the facts and circumstances of the
instant year are, mutatis mutandis, similar to those for the
assessment year 2002-03. We have perused the order dated
05.08.2011 passed by the Tribunal in assessee's case for the AY
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2002-03, a copy of which has been placed on record. In such
earlier year also, the assessee applied the CUP method for
benchmarking its international transactions. It was contended
before the Tribunal that no exports were made to any
uncontrolled parties in South American countries and, hence, CUP
method could not be applied in respect of sales made through
Degussa AG, Germany to various jurisdictions in South American
countries. After considering the entire gamut of the contentions
and the factual position, the Tribunal held in para 8.4 of its order
as under:-
"8.4 We have considered the facts of the case and
rival submissions. We do agree with the submissions of
the learned counsel that CUP method is not appropriate
in respect of sales made to the Degussa, AG, Germany.
The reason is that there is no instance of uncontrolled
sale either to Germany or to South American countries
where the goods were actually shipped by the assessee
on CIF basis. In these circumstances, we think it fit to
restore the whole matter to the file of the Assessing
Officer for fresh determination of the arm's length price
of international transactions with AEs by applying an
appropriate method and after hearing the assessee. It
is specifically mentioned that the Assessing Officer is
not bound by any argument made before us or
observation made by us and he shall proceed in a
manner as if this issue is being decided for the first
time. Thus, ground No.2 in the appeal of the assessee
and ground No.1 in the appeal of the revenue are
treated as allowed for statistical purposes."
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4. A cursory look at the observations made by the Tribunal in
assessee's case for the immediately preceding year divulges that
the Tribunal did not uphold the application of TNMM. Rather, the
entire matter for fresh determination of the ALP, by applying an
appropriate method, stood restored.
5. The contention of the ld. AR that the viewpoint taken by the
ld. CIT(A) in adopting TNMM should be upheld, in our considered
opinion, is not capable of acceptance at this stage. The larger
question before us is not only the application of a particular
method for determination of ALP, but also the calculation part. It
can be seen from the impugned order that in order to
demonstrate that the price charged from its AEs was at ALP, the
assessee created segmental accounts. It is not a case where the
assessee had prepared separate accounts in respect of different
segments, which were produced before the TPO during the course
of original proceedings. Rather, the consolidated accounts were
bifurcated into the transactions with AEs and non-AEs by
allocating expenses/incomes, mainly based on sales. Such
allocation never came to be considered by the TPO because it was
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done for the first time before the ld. CIT(A). When the ld. first
appellate authority sent such calculations and the assessee's
request for admission of additional ground on this aspect, the TPO
raised a preliminary issue by objecting to the admission of this
additional ground and, as such, did not have any occasion to
verify the correctness of allocation of expenses/income.
6. Further, the ld. CIT(A) appears to have been swayed by the
application of TNMM by the TPO for the A.Ys. 2007-08 and 2008-
09 in holding that this was the most appropriate method for
application, despite the fact that the order of the tribunal for the
immediately preceding A.Y. 2002-03 was before him in which the
question of the application of the appropriate method was
restored. There is no material on record that pursuant to such
direction given by the tribunal for the preceding year, the TPO/AO
have accepted the application of TNMM as the most appropriate
method.
7. We do not find any force in the argument of the ld. AR that
simply because the TPO has applied TNMM for the A.Ys 2007-08
and 2008-09 and hence the application of the same by the ld.
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ITA No.282/Del/2012
CIT(A) be upheld. This factor, though significant, but is not
conclusive. What persuaded the TPO to observe departure in
these two later years from the consistent stand taken by him in
the immediately preceding four years up to A.Y. 2006-07 in
following the CUP method, is not available on record. There may
have been some change in the factual position necessitating the
adoption of TNMM in these later years. Further, the mere fact that
the TPO adopted TNMM in a later year can be no ground to argue
before the tribunal that the same method be followed in a
preceding year, which stand has been specifically rejected by him
in the instant years. As such, we cannot uphold the application of
TNMM on this reason alone, more specifically, when in the
immediately preceding year, where the facts are admittedly
similar, the tribunal has restored the matter to the TPO for de
novo adjudication. Since the facts and circumstances of the
instant year are admittedly similar to those of the immediately
preceding year, in respect of which the Tribunal has given
unambiguous direction for de novo determination, respectfully
following the precedent, we set aside the impugned order and
remit the matter to the file of TPO/AO for fresh determination of
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the issue in accordance with the directions given by the Tribunal
for the AY 2002-03.
8. Ground No.2 of the appeal is against the deletion of addition
of `5,04,072/- made by the AO on account of disallowance of
renovation and maintenance expenses. The facts apropos this
ground are that the assessee claimed deduction of `2.24 crore
under the head `Miscellaneous expenses'. This included a sum of
`25,20,361/- incurred on account of renovation and maintenance
of Vasant Vihar office. In the absence of any details furnished on
behalf of the assessee, the AO disallowed 20% of such expenses,
which resulted into addition of `5,04,072/-. The ld. CIT(A) ordered
for the deletion of this appeal.
9. After considering the rival submissions and perusing the
relevant material on record, it is observed that the sum of `25.20
lac was not towards any renovation of building, but, paid to a
company, namely, Towerbase Services Pvt. Ltd., as maintenance
charges for Vasant Vihar office on monthly basis. Month-wise
details of such payment made aggregating to `25.20 lac were
made available to the ld. CIT(A), which were sent to the AO for
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comments. No objection was taken by the AO to the correctness
of the nature of amount in the remand report. Under such
circumstances, we are of the considered opinion that the view
taken by the ld. CIT(A) in allowing deduction for the full amount,
which was incurred for the maintenance of office on monthly
basis, does not require any interference. This ground is not
allowed.
10. The last ground of this appeal is against the deletion of
addition out of `88,000/- made by the AO on account of ISO
certification fee paid by the assessee. The assessee paid a sum
of `88,000/- towards ISO certification fee. Considering certain
judgments, the AO came to hold that the assessee acquired an
enduring advantage by getting approval of Quality Management
System to ISO-9002 norms and, hence, it was a capital
expenditure liable for depreciation @ 25%. That is how, the
addition of `66,000/- was made. The ld. CIT(A) deleted this
addition.
11. After considering the rival submissions and perusing the
relevant material on record, it is noticed that the payment of ISO
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certification fee is a routine expenditure incurred on annual basis.
By no stretch of imagination it can be considered as amounting to
acquisition of a capital asset or advantage of an enduring nature.
We, therefore, approve the view taken by the ld. CIT(A) on this
issue. This ground fails.
12. In the result, the appeal is partly allowed for statistical
purposes.
The order pronounced in the open court on 31.10.2014.
Sd/- Sd/-
[GEORGE GEORGE K.] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 31st October, 2014.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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