M/S. Taiko Chandernagar Chemicals ... vs Department Of Income Tax

Dy. Commissioner of Income- V/s. M/s. Taiko Chandernagar tax Circle 2(3), Hyderabad Chemicals Pvt. Ltd., Hyderabad

(PAN - AAACT 3663 R)

(Appellant) (Respondent)

Appellant by : Shri D.Sudhakar Rao DR

Respondent by : Shri P.V.S.S.Prasad Date of Hearing 18.02.2015 Date of Pronouncement 11.03.2015

ORDER

Per P.M.Jagtap, Accountant Member:

This appeal is preferred by the Revenue against the order of the learned Dy. Commissioner of Income-tax, Circle 2(3), Hyderabad (Assessing Officer) dated 31.1.2014 passed under S.143(3) read with the directions given by the Dispute Resolution Panel(DRP) under S.144C of the Act.

2. The solitary issue raised by the Revenue in this appeal is that the learned DRP has erred in excluding M/s. Ashapura Clay Tech Ltd. from the list of comparables for the purposes of Transfer Pricing Analysis, in order to determine the Arm's Length Price of the international transactions of the assessee with its AE which resulted in the deletion of transfer pricing Adjustment of Rs.2,55,49,852 worked out by the TPO.

2 ITA No. 102/Hyd/2014 M/s. Taiko Chandernagar Chemicals Pvt. Ltd., Hyderabad

3. The assessee in the present case is a company which is a subsidiary of Premier bleaching Earth Sdn Bhd. Malaysia. The said holding company holds 60% of the share capital of the assessee company with the remaining 40% being held by Talco Chemicals Industries Pte. Ltd., Singapore. The assessee company is engaged in trading of Betonite/Fullers Earth Lumps and also carries out minor processing involving quality check and moisture control before exporting it to its AE. The return of income for the year under consideration was filed by it on 30.9.2009, declaring a total income of Rs.1,90,95,412. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee company has entered into the following international transactions with its Associated Enterprises-

(a) Sale of raw materials Rs.19,26,09,329 (b) Reimbursement of expenses Rs. 5,25,722 (c) Recovery of expense Rs. 24,64,094

In order to determine the Arm's Length price (ALP) of the above international transactions, a reference was made by the Assessing Officer to the Transfer Pricing Officer(TPO) under S.92CA(1) of the Act. In the TP Study report submitted by the assessee, TP Analysis was done by applying Transactional Net Margin Method(TNMM) as the most appropriate method and taking the Operating Profit to Operating Cost (OP/OC) as Price level indicator (PLI). In the said report, five comparables were selected by the assessee by applying certain filters and since the Arithmetic Mean of OP/OC of the said five comparables at 11.52% was within the range of +/-5% of its own OP/OC of 10.53% in relation to the international transactions with AE, the price charged to the AE in respect of these transactions was claimed by the assessee as at Arm's Length.

3 ITA No. 102/Hyd/2014 M/s. Taiko Chandernagar Chemicals Pvt. Ltd., Hyderabad

4. After going through the relevant documents maintained by the assessee and after anlaysing the relevant transactions, the TPO was of the opinion that the method adopted by the assessee for selecting the comparables suffered from certain defects and the same, therefore, had resulted in selection of inappropriate comparables. He, therefore, proceeded to conduct a new search for selecting the appropriate comparables and selected four comparables, namely, (1) M/s. Ashapura Claytech Ltd; (2) M/s.Ashapura international Ltd., (3) M/s.Bombay Minerals Ltd. and (4) M/s.Cochin Minerals Ltd.. Out of these four comparables selected by the TPO, three comparables, viz. M/s.Ashapura International Ltd., M/s.Bombay Minerals Ltd. and M/s.Cochin Minerals Ltd. were already there in the list of comparables selected by the assessee in its TP study report. The inclusion of the new comparable, M/s. Ashapura Claytech Ltd. by the TPO was objected by the assessee by submitting that the said entity was engaged in different manufacturing activity whereas the assessee is into trading activity. It was contended that the said entity was thus functionally different and could not be taken as comparable. In this regard, it was also pointed out that the value of plant and machinery of the said entity as on 31.3.2009 was Rs.2.04 crores out of the total value of fixed assets of Rs.5.86 crores, whereas the assessee company was having only computers and testing equipment and not any plant and machinery as such. It was also submitted by the assessee that M/s. Ashapura Claytech Ltd. having OP/OC of 48.72%, was abnormal/super profit making company and the same could not be taken as comparable on this ground also.

5. The Transfer Pricing Officer did not find merit in the objections raised by the assessee to the inclusion of M/s.Ashapura Claytech Ltd. According to him, Bentonite was a natural product on 4 ITA No. 102/Hyd/2014 M/s. Taiko Chandernagar Chemicals Pvt. Ltd., Hyderabad

which only processing was required to be done to be made useful in final consumption. He observed that it is not a manufactured product and even the assessee carried out minor processing which included removing of impurities and moisture, making lumps of specified sizes, drying, storing etc., before selling it. He also noted that the value of plant and machinery of the assessee company was 17.40% out of its total assets. He held that M/s. Ashapura Claytech Ltd. thus was not functionally different from the assessee company and the objection raised by the assessee in this regard was not sustainable. He also overruled the objection of the assessee that M/s. Ashapura Claytech Ltd. being abnormal/super profit making company, could not be taken as comparable, relying inter alia on the decision of the Mumbai Bench of ITAT in the case of Exxon Mobil Com.India Pvt. Ltd. in ITA No.8311/Mum/2010. Accordingly taking the Arithmetic Mean of OP/OC of 23.90% of the four comparables selected by him as Arithmetic Mean Margin and applying the same to the corresponding Operating Costs (including reimbursement of expenses) of Rs.17,87,16,588, the Arm's Length Price of the international transactions of the assessee company with its AE was worked out by the TPO at Rs.22,14,29,852 as against the price of Rs.19,58,79,890 charged by the assessee. The difference of Rs.2,55,49,952 thus was worked out by the TPO as TP adjustment that is required to be made in respect of international transactions of the assessee with its AE.

6. When the addition on account of TP adjustment worked out by the TPO was proposed to be made by the Assessing Officer to the total income of the assessee in the draft assessment, objections were filed by the assessee, before the Dispute Resolution Panel which mainly included the objection of the assessee for inclusion of the M/s.Ashapura Claytech Ltd. as comparable.

5 ITA No. 102/Hyd/2014 M/s. Taiko Chandernagar Chemicals Pvt. Ltd., Hyderabad

7. In support of its claim for exclusion of M/s. Ashapura Claytech Ltd. from the list of final comparables, the following submissions were made on behalf of the assessee before the Dispute Resolution Panel.

"(i) The company is into trading activity only. There is no manufacturing activity involved. The fixed assets comprises only of computers and lab testing equipment used to test the materials purchased. There is no Plant & Machinery in our fixed assets. From this it is obvious that we are not into manufacturing activity of any kind. The TPO in his order has observed that the Tax payer has also 17.40% plant & Machinery out of the total assets. This is however incorrect. There is no Plant & Machinery in the fixed assets.

(ii) Ashapura Claytech Ltd is into production of Bentonite Granules and has produced 9924 MT out of total production of 13524 MT of all products. Hence even though it is into primarily into activities of Bentonite it is into production /manufacturing activity as against trading activity conducted by the company. From the website of Ashapura Claytecgh Ltd, it is evident that they are into manufacturing activity only.

(iii) The assessee has relied on the decisions in the cases of Glenmark Exports Ltd vs ACIT Mumbai I.T.A. No.8611/Mum/2011, Deputy Commissioner of Income-tax v.

Quark Systems (P.) Ltd ITAT Chandigarh Bench (Special Bench) [2010] 38 SOT 307 (CHD.)(SB) and Teua India Put Ltd vs DCIT Mumbai ITA No. 6107/Mum/2009.

It is submitted that high /abnormal profit companies should be rejected has been endorsed in several judicial pronouncements, as they have a tendency to skew the results and cannot be considered as representative of the industry based on the following case laws -

 Capital IQ Information Systems (India) (P) Ltd vs DCIT (2013)32taxmann.com 21 (Hyd- Trib) .......

 SAP Labs India Pvt Ltd vs. ACIT Banqalore/2011 44 SOT 156 Bangalore  Teva India (P) Ltd (2011) 44 SOT 105 (Mum) (URD)  Adobe Systems India Put Ltd vs ACIT 44 SOT 49 (Delhi) (URO)  Saunay Jewels (P) Ltd vs ITO (2010) 42 SOT 4 (Mum.) (URO)  Sapient Corporation (P) Ltd (2011) 46 SOT 56 (Delhi) (URO) 6 ITA No. 102/Hyd/2014 M/s. Taiko Chandernagar Chemicals Pvt. Ltd., Hyderabad

To sum up Ashapura Claytech Ltd has to be rejected both on grounds of functional difference and being a high profit company."

8. The Dispute Resolution Panel found merit in the above submissions made on behalf of the assessee and directed the Assessing Officer to exclude M/s. Ashapura Claytech Ltd. from the list of comparables for the purpose of computing the ALP of the international transactions of the assessee company with its AE by observing as under-

"9· We have considered the submission of the appellant. The issue in dispute is regarding inclusion of Ashapura Claytech Limited as one of the comparables. The assessee has not controverted rejection of two of its comparables neither the method applied or choice of PLI. The objection is restricted to mostly inclusion of Ashapura Claytech Limited. On going through the detailed submission of the assessee as mentioned in earlier paragraph, we find that the following comparables were selected by TPO while arriving at ALP price as under:

Sl. Name of OR OC OP OP/OR OP/OC No. the assessee

1. Ashapura Claytech Ltd. 6.38 4.29 2.09 32.76 48.72 2. Ashapura International 46.55 42.12 4.43 9.52 10.52 Ltd 3. Bombay Minerals Ltd. 55.75 45.34 10.41 18.67 22.96 4. Cochin Minerals Ltd. 12.36 107.9 14.46 11.82 13.4

Arithmetic Mean 18.19 23.9

On analysis of financial results of Ashapura Claytech Ltd, it is clear that this company cannot be taken as comparable on the following grounds.

a) Financial comparability

b) Product comparability

c) Economic comparability 7 ITA No. 102/Hyd/2014 M/s. Taiko Chandernagar Chemicals Pvt. Ltd., Hyderabad

10. The assessee's claim, is supported by number of decisions including decision of Capital IQ Inforamtion Systems (India)(P)Ltd. vs. . DCIT, ITAT, Hyderabad . We are of the view that the AO is not justified in including Ashapura Claytech Ltd. as comparable. Accordingly, we direct the TPO to compute ALP excluding Ashapura Claytech Ltd."

Aggrieved by the direction issued by the DRP under S.144C(5) of the Act in pursuance of which the Assessing Officer has passed the impugned order under S.143(3), the Department has preferred this appeal before the Tribunal.

9. The Learned Departmental Representative submitted that abnormal profit cannot be taken as the basis for the exclusion of an entity from the list of final comparables and the Dispute Resolution Panel, therefore, was not correct in directing the exclusion of M/s. Ashapura Claytech Ltd. from the list of final comparables holding that the same was not financially and economically comparable with the assessee company due to high/abnormal profit. As regards the product/functional comparability, the Learned Departmental Representative contended that the product of M/s Ashapura Claytech Ltd. is similar to that of the assessee company and even the activity carried on by these two entities is also almost similar. He submitted that this aspect was elaborately dealt with by the Transfer Pricing Officer in his order, while rejecting the claim of the assessee for exclusion of M/s Ashapura Claytech Ltd. from the list of comparables on the ground of product/functional differences. He contended that the observations/findings recorded by the Transfer Pricing Officer in this regard have not been properly appreciated by the Dispute Resolution Panel, while directing the exclusion of M/s Ashapura Claytech Ltd. from the list of comparables on the ground of difference in product/functions.

8 ITA No. 102/Hyd/2014 M/s. Taiko Chandernagar Chemicals Pvt. Ltd., Hyderabad

10. The learned counsel for the assessee, on the other hand, took us through the profile of the assessee company as well as that of M/s Ashapura Claytech Ltd. placed in his paper-book to explain that not only the products of the two companies are different, but even the functions performed by them are entirely different. He submitted that the product, viz. Grey Bentonite Clay/Fullers Earth Lump, is purchased by the assessee from the mine owners and the same is sold in the same form, after removing impurities and moisture and making lumps of specified sizes after drying. He contended that no major process thus is carried on by the assessee and the product is sold almost in the same form, which does not constitute any manufacturing. He contended that the assessee thus is engaged merely in the trading of Grey Bentonite Clay/Fullers Earth Lumps whereas M/s Ashapura Claytech Ltd. is converting Grey Bentonite Clay/Fullers Earth Lump into Bentonite Bio-green Granules, after carrying out different operations with the help of plant and machinery. He contended that the said entity thus is clearly carrying out the manufacturing activity, and this fact is evident from the substantial value of plant and machinery owned and used by the said entity for the purpose of its operations. He submitted that the assessee company, on the other hand, does not have any plant and machinery except some computers and testing equipment, which is sufficient to show that it is not into any manufacturing activity at all.

11. We have considered the rival submissions and perused the relevant material on record. Although we agree with the contention of the Learned Departmental Representative that M/s.Ashapura Claytech Ltd. cannot be excluded from the list of comparables only on the ground of high/abnormal profits, we find on comparative analysis of the functional profile of the said 9 ITA No. 102/Hyd/2014 M/s. Taiko Chandernagar Chemicals Pvt. Ltd., Hyderabad

company that the same is not functionally comparable with the assessee company. It is observed that the assessee company is purchasing Grey Bentonite Clay/Fullers Earth Lump extracted from the mines and selling the same almost in the same form, after removing impurities and moisture in specified lumps of different sizes. It is also involved in manual breaking of lumps using hammer in order to reduce the lumps into required sizes. All this minor processing work being done by the assessee does not change the basic nature and character of the product and what is ultimately sold by the assessee company remains to be the same commercial product, viz. Grey Bentonite Clay/Fullers Earth Lump.

12. On the other hand, M/s Ashapura Claytech Ltd. is using Grey Bentonite Clay/Fuller's Earth Lump as raw material and after carrying out different operations, such as crushing, milling, sieving, etc., it is producing Bentonite/Bio-green Granules which is highly efficient and economic material for use in agricultural pesticides, catlitter and floor absorbents. All its operations to convert Grey Bentonite Clay/Fullers Earth Lump into Bentonite/Biogreen Granules are carried out with the help of different machinery at different stages and what is ultimately produced, namely Bentonite/Biogreen Granules is a new product which is commercially different from the Grey Bentonite Clay/Fullers Earth Lump used as raw material. The activities carried on by the assessee company as well as the M/s.Ashapura Claytech Ltd. thus clearly show that the assessee company is engaged only in trading of Grey Bentonite Clay/Fullers Earth Lump, whereas M/s Ashapura Claytech Ltd. is engaged in the manufacturing of Bentonite Biogreen Granules, where Grey Bentonite Clay/Fullers Earth Lump is used as raw material. Keeping in view this position, which is clearly apparent from the functional profile of both the companies, we find ourselves in agreement with 10 ITA No. 102/Hyd/2014 M/s. Taiko Chandernagar Chemicals Pvt. Ltd., Hyderabad

the Dispute Resolution Panel that the product/function of M/s. Ashapura Claytech Ltd. is not similar with that of the assessee company and the same therefore, cannot be taken as a comparable for the purpose of TP Analysis, in order to determine the ALP of the international transactions of the assessee company with its AE. In this view of the matter, we do not find any merit in this appeal of the Revenue and accordingly dismiss the same.

13. In the result, Revenue's appeal is dismissed.

Order pronounced in the court on 11th March, 2015

Sd/- Sd/-

(Saktijit Dey) (P.M.Jagtap) Judicial Member Accountant Member

Dt/- 11th March, 2015 Copy forwarded to:

1. M/s. Taiko Chandernagar Chemicals Pvt. Ltd., 3-16-724 Road no.3, Sardar Patel Colony, Trimulgherry, Secundrabad 500 015.

2. Dy. Commissioner of Income-tax, Circle 2(3), Hyderabad

3. Dispute Resolution Panel Hyderabad

4. Director of Income-tax, International Taxation, Hyderabad

5. Departmental Representative, ITAT, Hyderabad.

B.V.S