Income Tax Appellate Tribunal – Mumbai
Si Group India Ltd, Navi Mumbai vs Asst Cit Ltu, Mumbai on 19 June, 2019 IN THE INCOME TAX APPELLATE TRIBUNAL “J”, BENCH MUMBAI BEFORE SHRI SAKTIJIT DEY, JM & SHRI M.BALAGANESH, AM ITA No.1745/Mum/2014 (Assessment Year :2009-10) M/s. SI Group India Limited Vs. Asst. Commissioner of Plot No.D-2/1, TTC Income Tax, Industrial Area, LTU, Mumbai Thane-Belapur Road Opp. Juinagar Railway Station Navi Mumbai – 400 705 PAN/GIR No.AAACH7323L (Appellant) .. (Respondent) ITA No.1307/Mum/2014 (Assessment Year :2009-10) Asst. Commissioner of Vs. M/s. SI Group India Limited Income Tax, Plot No.D-2/1, TTC Industrial Centre-1, 29 t h Floor Area, World Trade Centre Thane-Belapur Road Cuffe Parade, Opp. Juinagar Railway Station Mumbai-400 005 Navi Mumbai – 400 705 PAN/GIR No.AAACH7323L (Appellant) .. (Respondent) Assessee by Shri Ajit Kumar Jain & Shri Siddhesh Chaugule Revenue by Shri Manoj Kumar Singh Date of Hearing 17/05/2019 Date of Pronouncement 19/06/2019 आदे श / O R D E R PER M. BALAGANESH (A.M): These Cross appeals in ITA No.1745/Mum/2014 & 1307/Mum/2014
for A.Y.2009-10 arise out of the order by the ld. Dispute Resolution Panel- 2 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., II, Mumbai in Objection No.50 dated 29/11/2013 (ld. DRP in short)
against the order of assessment passed u/s.143(3) r.w.s. 144C(13) of the
Income Tax Act, 1961 dated 07/01/2014 by the Asst. (hereinafter
referred to as ld. AO). 2. The brief facts of this appeal are that the assessee is engaged in the
manufacture and sale of organic chemicals and phenolic resins having a
wide range of industrial applications. The assessee is a subsidiary of
Schenectady (India) Holdings Pvt. Ltd. which in turn is a wholly owned
subsidiary of SI Inc., USA. The list of international transactions carried
out by the assessee and the Most Appropriate Method (MAM) followed
thereon are as under:- Summary of International Transactions as reported in Form No. 3CEB Sr. Nature of Transaction Amount Method No. (Rs.) 1 Import of materials 77,28,43,438 2 Export of goods 20,76,21,540 3 Payment of royalty 2,83,03,595 TNMM – Mfg. 4 Receipt of indenting commission 1,02,39,075 5 Payment of export commission 4,67,343 6 Reimbursement of expenses 1,29,37,145 7 Receipt of fee from research services 2,37,95,236 TNMM- R&D 8 Recovery of expenses 8,72,529 At Cost 2.1. The assessee had adopted Transactional Net Margin Method (TNMM
in short) and submitted two separate benchmarking in the transfer pricing
study report as below:- 3 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., Search List of Assessee’s Comparables No. of Order of International Margin Margin Comparables ld TPO Transactions Manufacturing SL. No. 1 to 6 3.00% (after 4.75% 32 Pages 3
(OP/OI) on Page 1 of adjustments for &4 (3 years order of ld extra-ordinary/ weighted TPO non-recurring average) expenses) R&D SL. No. 7 on 15.46% 8.39% 8 Pages 4 Page 1 of &5
(OP/OC) (Single year order of ld data) TPO 2.2. The margins of the assessee in Manufacturing function are worked
out as under:- Particulars Amount Amount (Rs. In (Rs. In Lacs) Lacs) Total Income 59,637 Total Expenditure 61,217 Net Profit before Interest and Tax (1,580) Add: Extraordinary/ Non – recurring expenses
adjustments Stock write down costs 1209 Capacity underutilization – Rasai Plant 935 Shut down cost – Rasai Plant 53 Abnormal foreign exchange loss 829 Premium amortised on forward contracts 76 Professional charges for search for new Managing Director 58 Costs relating to R&D segment benchmarked separately 206 4 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., Particulars Amount Amount (Rs. In (Rs. In Lacs) Lacs) Adjusted Operating Profit 1786 Adjusted Net Profit Margin (%) 3.00 2.3. The margins of the assessee in Research & Development (R&D)
services are worked out as under:- Particulars Amount (Rs. In Lacs) Service Income 237.95 Expenditure 206.09 Operating Profit 31.86 NCP% (OP/OE) 15.46 2.4. However, the ld TPO rejected separated benchmarking of R&D and
proceeded to benchmark the international transaction of research fees in
aggregation to other international transactions in manufacturing search. 2.5. The assessee submitted segmental profitability for AE and Non-AE for
all the units during the course of TP assessment proceedings. However,
the ld. TPO rejected the segmental (Internal TNMM) on the ground that it
was not audited and that the same were submitted by the assessee only
after the issuance of show cause notice by the ld TPO. The ld TPO also
observed that segment results are nothing but an ‘afterthought’ resorted
to after the receipt of the show cause notice. 5 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., 2.6. The ld. TPO proceeded with entity level benchmarking and finalized a
list of 68 comparables with OP/OI margin of 6.69%. The ld TPO granted
economic adjustments to the assessee for working out the adjusted
operating profit as under:- Sl.No. Economic Adjustment Claimed by Allowed by ld TPO Assessee (Rs in lacs) (Rs in lacs) 1 Stock Write Down 1209 363
2 Capacity Underutilization (Rasai Plant) 935 0
3 Shutdown Cost (Rasai Plant) 53 0
4 Abnormal Forex Loss 829 829
5 Premium amortised on forward contract 76 0
6 Professional charges for search of new MD 58 0 2.7. The ld. TPO recomputed the margin of assessee as -0.56% after
granting partial economic adjustments and after aggregating R&D income
with Manufacturing income as under:- Total Income 63120 Total Expenditure 64668 Net Profit before Interest and Tax -1548 Add: Economic / Functional Adjustments Stock Write Down 363
Abnormal Forex Loss 829 ——

1192 Adjusted Operating Profit -356 Adjusted Net Profit Margin (OP / OI) % -0.56%
6 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., 2.8. The ld TPO made an adjustment to ALP of Rs 4578.73 lacs on an
overall basis instead of restricting the adjustment only to international
transactions of assessee as under:-
Particulars Amount in Lacs
Operating Income 63120
Adjusted PBIT -356
OP / OI (%) – 0.56%
Arm’s Length OP / OI % 6.69%
Arm’s Length OP 4222.73
Variation 4578.73
Transfer Price (Cost side transactions) 8016.14
5 % of TP 400.81
Adjustment 4578.73 Conclusion : Variation > 5% of TP, hence no benefit u/s 92C(2) of the Act.
3. The ld DRP observed that the assessee had undertaken an entity level
benchmarking of the international transactions and had asked for various
adjustments on account of stock write down, capacity underutilization,
abnormal costs, exchange fluctuation etc. The ld DRP observed that the
assessee had worked out an adjusted net profit margin of 3% by
converting loss of Rs 1580 lacs into an income of Rs 1786 lacs after
making these adjustments. The assessee chose 32 comparables whose
average profit margin was 4.75% and accordingly the assessee concluded
that its adjusted profits of 3% falls within the range of +/- 5% from the
international transaction and hence its transactions were at arm’s length.
Apart from manufacturing segment, the assessee also considered R&D
segment in respect of R&D fees received by it from AE of Rs 2.378 crores.
7
ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., The assessee benchmarked the said R&D segment by determining a
margin of 15.46% and chose 8 comparables whose margin was 17.01%
for 3 years period. The assessee accordingly contended that its
international transaction in respect of R&D segment falls within the safe
harbour limits of +/- 5%. The ld TPO held that there is no separate
segment pertaining to R&D and hence proceeded with an entity level
TNMM analysis. After identifying 68 comparables, whose average margin
was determined at 6.69%, the ld TPO made an adjustment on the entity
level costs of the assessee at Rs 45.78 crores. The ld DRP observed that
before the ld TPO, the assessee relied on internal segmental profitability
by bifurcating its profits in respect of its 3 units located at Rasai, Navi
Mumbai and Lote. Since the same was not audited, the ld TPO rejected
the same.
3.1. During the course of proceedings before the ld DRP, the assessee
reiterated its claim for internal TNMM analysis and submitted audited
segmental accounts and separate profitability in respect of 3 units have
been worked out by the assessee. The said segmental accounts were
remanded by the ld DRP to the ld TPO for his comments. The ld DRP
observed in para 5.5 of their order that the ld TPO failed to avail the
opportunity and did not comment on the merits of the segmental
accounts. The ld DRP observed that it was found that assessee was
maintaining separate account of transactions of 3 different units, the
segmental profitability after auditing can present a reliable picture of the
assessee’s profit. The ld DRP also observed that the assessee’s total
turnover was Rs 625 crores , whereas the international transactions are
only to the extent of Rs 77 crores of import and Rs 20 crores of export.
The ld DRP categorically observed that under the TP provision, it is the
profit from the international transaction that has to be considered for
8 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., determining the ALP and not the entity level profits. The ld DRP observed
that for this reason also, the segmental audited profitability of the
assessee deserves to be considered.
3.2. The Ld DRP after due analysis of segment statement then proceeded
to accept the audited segmental accounts of assessee by adopting
Internal TNMM. The ld DRP accordingly gave the directions to the ld TPO
to benchmark the AE segment of each unit with the Non-AE segment.
However, an exception was made for Rasai unit since its Non-AE segment
operations was considered as contract manufacturing by ld DRP. The
summary of the said directions are as below:-
Unit AE Non-AE Total Margin Ld DRP Directions Margin Margin (AE+Non- AE) Rasai (10.18) (20.72)% (9.56)% Non- AE segment rejected by Ld DRP and % proceeded to benchmark import transaction of Rs. 65 crores with total margin (AE+ Non-AE) of Navi Mumbai and Lote Navi 6.08% (0.27)% 0.30% International Transactions accepted at arm’s
Mumbai length Lote 19.08% 1.74% 7.95% International Transactions accepted at arm’s length 3.2.1. The Ld DRP directions also stated that the assessee withdrew his
claim for economic adjustments if Internal TNMM was accepted.
However, the assessee had never withdrew its claim for economic
adjustments either in writing or in hearings during the course of DRP
proceedings.

3.3. Pursuant to the directions of ld DRP, an adjustment of Rs. 10.97
crores was computed by the ld. TPO. The ld. TPO considered the entire
9 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., total operating expenditure (and not restricting only the import
transaction of Rs. 65 crores) of the AE segment of Rasai unit while
computing the adjustment. However, the ld. TPO noted that ld DRP’s
direction of comparison of AE segment margin of Rasai unit with total
margin of other 2 units is conceptually incorrect.

4. Aggrieved, both the assessee as well as the revenue are in appeal
before us.

5. We have heard the rival submissions and perused the materials
available on record. It is not in dispute that the Internal TNMM should be
adopted as the MAM in the instant case. We find that the directions of ld
DRP were in effect comparing controlled transaction in Rasai unit with
controlled transaction in other units. But, the comparison of AE segment
of Rasai unit should be made with Non-AE segment of Navi Mumbai and
Lote units. The Non-AE margin of Navi Mumbai is -0.27% and Non-AE
margin of Lote is 1.74%. We find that the ld TPO also disagreed with
the direction of ld DRP in respect of considering the use of entire unit
transactions for Navi Mumbai and Lote unit for computing adjustment in
Rasai unit, as is evident from his giving effect order enclosed in page 295
of the paper book. It is not in dispute that the segmental profitability
statement was rejected by the ld TPO on the ground that the same was
not audited. However, the same was duly audited and submitted before
the ld DRP , which has been taken on record and considered by the ld
DRP. The revenue appeal before us is only on the point that audited
segmental profitability statement submitted by the assessee before the ld
DRP ought not to have been considered by the ld DRP. Moreover, we find
that the Indian Transfer Pricing regulations do not require the need for
audited segmentals. We find that the reliance in this regard has been
rightly placed on the co-ordinate bench decision of Chennai Tribunal in
the caes of 3i Infotech Limited reported in 35 taxmann.com 582 (Chennai
10 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., Trib.) wherein it was held that there is no legal requirement that segment
wise working of ALP submitted before the ld TPO should be audited by
chartered accountant of assessee. Hence we hold that the segmental
profitability statement submitted by the assessee duly audited, needs to
be considered for benchmarking the international transactions of the
assessee with its AE. We find that the reliance has been rightly placed
on the decision of Third Member of Mumbai Tribunal in the case of
Technimont ICB India (P.) Ltd reported in [2012] 138 ITD 23
(Mumbai) (TM) wherein it was held that the internal comparability
should be given preference over external comparability. We find that the
ld DRP erred in giving directions by comparing the total margin (AE+
Non-AE) of Navi Mumbai and Lote with the AE segment margin of Rasai.
It is a very clear proposition in transfer pricing regulations that a
controlled transaction cannot be compared with another controlled
transaction. The Third Member decision in the case of Addl CIT v.
Technimont ICB India (P.) Ltd [2012] 138 ITD 23 (Mumbai) (TM)
is directly on this issue. The question raised before the Hon’ble Third
Member in that case was as under:-

“Whether in the facts and circumstances of the case, the net margin realized from a transaction with an Associated Enterprise (AE) found and accepted at Arm‟s Length Price (ALP) can be taken as a comparable being an internal comparable for computation of ALP of an international transaction with another AE ? ”
It was held as under by the Hon’ble Third Member :-
11. Reverting to the question of making comparison of net profit margin of internally or externally comparable case from uncontrolled transactionm it can be seen that clause (ii) of Rule 10B(e) unequivocally mandates for making an comparison with “uncontrolled transaction” or a number of such transactions.
The word „comparable‟ used in the provision to describe internal or external comparable, is succeeded by the words „uncontrolled transaction‟. When clause
(iii) of Rule 10B(e) is examined, it becomes lucid that there is reference to the net profit margin arising again in „comparable uncontrolled transaction‟. It provides that the net profit margin arising in comparable uncontrolled transaction is adjusted to account for difference, if any, between the
11 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., international transaction and the comparable uncontrolled transaction. When
the net profit margin from a comparable uncontrolled transaction is adjusted in
the light of clause (iii) of Rule 10B(e) , the resulting figure constitutes
benchmark, which is then taken into account to arrive at an ALP in relation to
the international transaction entered into by the assessee with its AEs. Thus it is
evident that Rule 10B(e) vividly refers to making a comparison of net profit
margin with some comparable „uncontrolled transaction‟. There is no reference
to making a comparison of an assessee‟s international transation with a
comparable controlled transaction. Comparable may be internal or external,
but in any case such comparable must be that of uncontrolled transaction or
number of such uncontrolled transactions.
12. In fact, the entire scheme of determining ALP of an international transaction
is based on making comparison with certain comparable uncontrolled
transactions. It is more glaring from the command of Rule 10B given in all the
methods which have been prescribed u/s 92C(1) for determining ALP. The first
method is ‘comparable uncontrolled price method’. Procedure for determining
ALP under this method is given in Rule 10B(a). As the very name of the method
itself suggests that the price charged or paid for the property ‘in a comparable
uncontrolled transaction’ is identified. Such price in a comparable uncontrolled
transaction is adjusted on account of differences, if any. The consequential price
is taken as benchmark for considering the assessee’s international transactions
with its AEs. The second method is ‘resale price method’. The procedure for
determining price under this method is given in Rule 10B(b). Under this method,
the price at which property purchased or services obtained by the enterprise
from an AE is resold or are provided to ‘an unrelated enterprise’ is identified.
This method also compares the gross profit margin in a controlled transaction
with the gross profit margin in an uncontrolled transaction based on specific
functions performed. Next is ‘cost plus method’. The modus operandi for
determining of ALP under this method is provided in section 10B(c) which again
refers to making comparison with ‘uncontrolled transaction’.

13. A brief overview of various methods prescribed for determining ALP clearly
divulges that the comparison is always sought to be made of the assessee’s
international transactions with comparable ‘uncontrolled transactions’. One
common factor permeating through various methods for determining ALP is
comparison of the assessee’s international transactions with those of third
parties similarly situated. The essence is that the comparison is sought with ‘uncontrolled transaction’. The transactional net margin method is no exception
in this regard. It also contemplates comparison of net profit realized by an
enterprise with the net profit realized from a comparable uncontrolled
transaction.

14. What is an ‘uncontrolled transaction’ has been clearly defined under Rule
10A(a) to mean ‘a transaction between enterprises other than associated
enterprises whether resident or non-resident’. A plain reading of the meaning
given to the expression ‘uncontrolled transaction’ leaves no room for any doubt
that it is a transaction between two non-associated enterprises. If the transaction
12 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., is between two associated enterprises, it goes out of the ambit of ‘uncontrolled
transaction’ under Rule 10A. When section 92C is read along with Rules 10B(e),
and 10A, it becomes abundantly clear that in computing ALP under the
transactional net margin method, a comparison of the assessee’s net profit
margin from international transactions with its AEs has necessarily to be made
with that of the net profit margin realized by the same enterprise or an unrelated
enterprise from a comparable but definitely uncontrolled transaction i.e., a
transaction between non-associated enterprises. There is no statutory sanction
for roping in a comparable controlled transaction for the purposes of
benchmarking. When it has been clearly mandated in all the relevant methods
for determining ALP that the comparison has to be made by the enterprise’s
international transaction with comparable uncontrolled transaction, by no sheer
logic a comparable controlled transaction can be employed for the purposes of
making comparison. There is no warrant for diluting the prescription given by
the statute or rules when such prescription itself serves the ends of justice
properly and is infallible. If the view of the Revenue that a controlled transaction
should not be shunted out for the purposes of benchmarking, is accepted, then all
the relevant provisions contained in Chapter X in this regard, will become
otiose. If such a contention of making comparison with a comparable controlled
transaction is taken to its logical conclusion, then there will never arise any need
to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is
determined for application in respect of transactions between two AEs so that
the profit likely to arise from such transactions is not under-reported vis-a-
vis from similar transactions with third parties. If the comparison is made again
with net profit margin realized from transactions between two AEs, instead of
third parties, it may demonstrate the same cooked results in both the situations,
thereby leaving no scope for any adjustment. In this eventuality, the very object
of such provisions will be frustrated. Thus it follows that the ALP can be
determined only by making comparison with a comparable uncontrolled
transaction and not a comparable controlled transaction.
15. There is one more dimension of this case. The transactions between ICB and
JTS are not only controlled, but the profit margin of ICB also passed through the
examination by the TPO, who declared it at arm’s length. The ld. DR contended
that once controlled transactions are verified by the TPO and found at ALP, then
the difference between controlled and controlled transactions is obliterated.
Canvassing this point further, he accentuated that even though the transactions
between ICB and JTS were controlled, still they constituted a good basis for
comparison as the TPO found them at arm’s length.
16. This contention of the Id. DR albeit sounds attractive at the first blush, but on
closer examination, fails to endure. The basic purpose behind the transfer
pricing provisions is to ensure that the multinational companies do not arrange
their intra group cross border transactions in such a way as to reduce the
incidence of tax in India. A multinational company, having concerns across the
world, may resort to pricing the intra group transactions in such a manner that
lower income gets offered in countries with high tax rates and higher income
gets reflected in countries with lower tax rates, so that its overall tax liability is
shrinked. If the tax rates in India are relatively higher vis-a-vis the other
country, say A, and the international transaction is between the concerns in
India and country A, there may be an attempt on the part of multinational
13 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., company to value the transaction in such a way that the income to be offered in
India gets sliced away and corresponding income is increased in the hands of the
company situated in country A. There may a converse situation as well. It may
also happen that the tax rates in India are lower than the other country, say B,
and the international transaction is between the concerns in India and country B.
In such a situation, the multinational company may attempt to value the
transaction in such a manner that the income to be offered in India is swelled,
thereby reducing the corresponding income in the hands of the company situated
in country B. It is palpable that in both such situations, the value of transaction
between the associated enterprises is tailor-made to suit the overall interest of
the multinational company. It does not represent the transaction at its true value.
In the first situation, the receipt from the transaction recorded in India will be
lower and its ALP will be higher. In the second situation, the receipt from the
transaction recorded in India will be higher but the benchmark price will be
lower. Whereas the first situation will necessitate the making of an addition on
account of transfer pricing adjustment in the hands of Indian company, the
second situation will not permit any deduction in the declared income of the such
Indian concern to that extent. It is so because if the ALP is higher than the value
of the transaction recorded in the books of account, it requires making addition
on account of transfer pricing adjustment. However, in the opposite situation,
there is no mandate for reducing the income. In such a second situation, the
receipt from the transaction recorded shall be considered at ALP,
notwithstanding the fact that it is at exaggerated figure when compared with a
comparable uncontrolled transaction. This is what has been laid down in sub-
section (3) of section 92. Whereas sub-section (1) of section 92 provides that any
income arising from an international transaction shall be computed having
regard to the arm’s length price, sub-section (3) provides that : ‘The provisions
of this section shall not apply in a case where the computation of income under
sub-section (1) or the determination of the allowance for any expense or interest
under that sub-section, or the determination of any cost or expense allocated or
apportioned, or, as the case may be, contributed under sub-section (2), has the
effect of reducing the income chargeable to tax or increasing the loss, as the
case may be, computed on the basis of entries made in the books of account in
respect of the previous year in which the international transaction was entered
into.’ From the above discussion it is vivid that whereas in the first situation, the
ALP represents the true value of transaction or, profitability as will be there in
the ordinary course without having any regard to the relationship between the
concerns, it is not so in the second situation. In the later case, even though the
value of transaction or profitability will be at more than higher level, still it will
be described as the ALP. In such later case, the ALP of the transaction or the
arm’s length profit cannot be considered as benchmark for the purposes of
making comparison in other cases. That appears to be the probable reason for
which the legislature has ignored the controlled transactions, even though at
ALP, and restricted the ambit only to uncontrolled transactions for computing
ALP in respect of international transactions between two AEs.
17. I, therefore, answer the question referred to me u/s 255(4) in negative by
holding that the net profit margin realized from a transaction with an AE cannot
be taken as a comparable being internal comparable for computation of ALP of
an international transaction with another AE even though the net margin from a
transaction with AE is found and accepted at ALP.
14
ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., 18. Before parting with this matter, I consider it my duty to record that the ld. AR relied on certain decisions including UCB India (P.) Ltd. v.. Asstt. CIT [2009] 121 ITD 131 / 30 SOT 95 (Mum), Bayer. Material Science (P.) Ltd. v. Addl. CIT [2012] 134 ITD 582 /18 taxman.com 60 (Mum.) and Dy. CIT v. BP India Services (P.)Ltd. [2011] 133 ITD 255 / 48 SOT 253 / 15 taxmann.com 125 (Mum) in which it has been held that controlled transactions cannot be considered for determining ALP in other transactions. Per contra, the ld. DR has relied on a solitary decision rendered by the Mumbai bench of the tribunal in NGC Network (India) (P.) Ltd. (supra) to buttress his contention that a controlled transaction can also be considered for benchmarking. I do not propose to embark upon these cases separately for discussion, I clarify that my decision in the foregoing paras is founded on the interpretation of the relevant bare provisions of the Act and Rules, without taking any assistance from decisions cited by the rival parties on the point, which differ in their conclusion as stated by the ld. Representatives before me.
19. For the foregoing reasons I agree with the view expressed by the learned AM. The Registry of the Tribunal is directed to place this matter before the division bench for passing an order in accordance with majority view.
5.1. We find that the ld AR before us also placed reliance on the decision
of co-ordinate bench of this Tribunal in the case of M/s SNC Lavalin
Engineering India Pvt Ltd vs ACIT in ITA No. 287/Mum/2014 (Assessment
Year 2008-09) dated 15.3.2018, wherein it was held as under:-

6. We have heard the parties on this issue and perused the record. We noticed that the assessee has not prepared segmental accounts initially and hence it could furnish only unaudited segmental accounts before TPO. Hence the TPO has rejected the same doubting about its reliability. Subsequently, the assessee has prepared proper segmental accounts and got it audited and frunsihed the same before the learned CIT(A). We notice that the Ld CIT(A) has refused to admit the same for technical reasons. As held by the Co-ordinate Bench in the case of Smt Avan Gidwani (supra) , the additional evidences furnished by the assessee in the form of audited segmental accounts may be vital documents that may be required to adjudicate the issue in judicious matter, particularly in view of the fact that the TPO has changed the methodology altogether to determine the ALP of international transactions. Accordingly, we admit the additional evidences . Since, the issue is required to be examine afresh, as per the plea of learned DR, we restore the issue relating to determination of arm‟s length price to the file of Assessing Officer / TPO for examining it afresh by duly considering the additional evidences furnished by the assessee. After hearing the assessee, they may take appropriate decision in accordance with the law.
15
ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., 5.2. Moreover, we find that the proportionate adjustment is to be made
only on the value of international transactions and not for the entire
transactions at entity level. The total value of international transactions of
Rasai unit in respect of import of raw materials was only Rs 65 crores.
The ld. TPO considered the entire total operating expenditure (and not
restricting only the import transaction of Rs. 65 crores) of the AE segment
of Rasal unit while computing the adjustment. This is now well settled by
the decision of Hon’ble Bombay High Court in the case of PCIT vs Sandvik
Asia Pvt. Ltd in Income Tax Appeal No. 1088 of 2015 dated 26.4.2018
states the adjustment should be restricted only to the international
transactions not all the other third party transactions. In this regard, one
of the questions raised before the Hon’ble Bombay High Court was as
under:-

(a) Whether on the facts and in the circumstance of the case and in law, the Tribunal has erred in directing the AO to compute the TP Adjustment proportionate to AE turnover, whereas the assessee has applied TNMM at entity level and therefore, adjustment would have to be computed at entity level. The law does not provide for a pro-rata adjustment when TNMM is applied at entity level ?
It was held by Hon’ble Bombay High Court as under:-
3. Re. Question (a):-
(i) It is an agreed position between the parties that the issue raised herein stands concluded against the Revenue by the following decisions of this Court:-
(i) CIT v/s M/s Raitlal Becharlal & Sons (Income Tax Appeal No. 1906 of 2013) rendered on 24th November, 2015;
(ii) CIT v/s Goldstar Jewellery Design (P) Ltd., (Income Tax Appeal No. 2237 of 2013) rendered on 4th February, 2016 ;
(iii) CIT v/s Alstom Projects India Ltd., (Income Tax Appeal No. 362 of 2014) rendered on 14th September, 2016 ; and
(iv) CIT v/s M/s. Bhansali & Co., (Income Tax Appeal No. 1066 of 2014) rendered on 9th December, 2016.
16
ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., (ii) Besides the aforesaid decisions of this Court, the issue also stands covered by the decision of the Delhi High Court in CIT v/s. Keihin Panalfa Ltd., (Income Tax Appeal No. 11 of 2015) rendered on 9th September, 2015.
(iii) In all the aforesaid decisions, it has been held that the Transfer Pricing Adjustment is not to be done at the entity level but only in respect of international transactions of the Respondent with its Associated Enterprise (AE). This, on the application of proportionate method.
(iv) In the above view, question as proposed does not give rise to any substantial question of law. Thus, not entertained.
5.3. With regard to the claim of economic adjustments in respect of
certain items, we find that the ld AR argued that the assessee had never
withdrawn its claim for economic adjustments either in writing or in
hearings during the course of the proceedings before the ld DRP. The said
statement mentioned in DRP directions was factually incorrect. In this
regard, the ld AR argued that concession of law made by an assessee or
his authorized representative during the course of any proceedings is not
binding. He placed reliance on the following decisions in this regard:-

 Rani Anand Kunwar vs CIT (1940) 8 ITR 126 (Oudh)
 CIT vs Archana R. Dhanwatay (1982) 136 ITR 355 (Bom) (HC)
 Gouri Sahai Ghisa Ram vs CIT (1979) 120 ITR 338 (All.) (HC)
 Narsepalli Oil Mills vs State of Mysore (1973) 32 STC 599 (Mad.)
 Central Council for Research in Ayurveda & Siddha vs Dr. K. Shankara Kumari (2001) 5 SSC 60
 CIT vs Mahalaxmi Sugar Miils Co. Ltd (1986) 160 ITR 920 (SC) at (928) 5.3.1. We are inclined to accept this argument of the ld AR and proceed
to adjudicate the eligibility of claim of economic adjustments sought by
the assessee on merits as under:-

5.3.1.1. Stock Write Down of Rs. 846 lacs:
17
ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., The ld. TPO has allowed stock write down towards Non-AE of Rs 363 lacs but did not allow the same as an economic adjustment towards AE segment. It was explained that the stock write down was on account of steep increase in the cost of raw materials and volatile condition of the industry. This volatility in market conditions and steep increase in the cost of raw materials were duly accepted and allowed by the ld TPO for Non- AE segment but denied for AE segment. It is elementary that for the purpose of comparison, both the tested party and the comparable is to be evaluated under same conditions. We hold that the ld TPO having allowed the same in Non-AE segment to the tune of Rs 363 lacs, ought not to have taken a divergent stand in respect of AE segment in the sum of Rs 846 lacs. Accordingly, we direct the ld TPO to allow the same as an economic adjustment while computing the margins of the AE segment for the purpose of comparability.
5.3.1.2. Capacity Underutilization (Rasai Plant) of Rs. 935 lacs and
Shutdown Cost (Rasai Plant) of Rs. 53 lacs:
It is not in dispute that the Rasai plant was closed down for a period of 4
months from November 2008 to February 2009 due to lack of demand and
pile up of excess inventories. This fact is evident from the Excise Register
placed on record. This is evident from the manufacturing details provided
by the assessee for the financial years 2007-08 and 2008-09 enclosed in
page 253 of the paper book. This resulted in underutilization of capacity in
Rasai plant to 42% during the year and consequent shutdown cost. This is
part of operational cost and hence allowance should be granted to the
assessee as an economic adjustment. We direct the ld TPO accordingly.
5.3.1.3. Professional charges for search of new MD of Rs. 58 lacs:
This is a non-recurring item and extra-ordinary in nature. It is not that a
new MD is appointed in normal course of business every year. During the
18 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., year, the assessee company had paid this fees to recruitment agency in
search of MD and claimed the same as an extraordinary economic
adjustment. Accordingly, we direct the ld TPO to consider the amount
spent on professional charges for search of new MD to be allowed as an
economic adjustment while computing the margins of AE segment for the
purpose of comparability.
5.4. The Transfer Pricing Grounds raised by the assessee as well as by the revenue are disposed off as above.
6. We find that the assessee had raised an additional ground No. 1.1. and 1.2. claiming depreciation on Goodwill arising on account of amalgamation.

6.1. The brief facts of this issue are that during the Financial Year 2002- 03 relevant to Asst Year 2003-04, the assessee acquired an Undertaking of Schenectady Specialties Asia P. Ltd. (‘SSAPL’ or ‘amalgamating company’) under a scheme of amalgamation approved by the Hon’ble Bombay High Court. Pursuant to the Scheme of amalgamation, all the assets, liabilities, and reserves of SSAPL were transferred to and vested in the Company at book values. As per the scheme, the assessee recorded Rs. 8,86,57,302 as ‘Goodwill’ in its books towards the excess liability/outflow of over and above the value of the Undertaking.
6.2. The assessee had not claimed depreciation on such Goodwill in its Return of Income. Based on subsequent development in terms of the law / principle laid down by the Hon’ble Supreme Court in CIT v.Smifs Securities Ltd. 348 ITR 302 (SC), the assessee for the first time made its claim before this Tribunal for Asst Year 2003-04 and subsequently, for Asst Years 2006-07 and 2007-08. This Tribunal in assessee’s own case
19 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., for Asst Year 2003-04 in ITA No. 4384/Mum/2010 dated 16.1.2015 had
remanded the matter back to the file of the ld AO for fresh adjudication.
This Tribunal passed similar order dated 8.3.2017 for the Asst Years
2006-07 and 2007-08 in ITA Nos. 9197/Mum/2013 and ITA No.
1009/Mum/2013 against the additional grounds raised thereon. We deem
it fit and appropriate to give similar directions to the ld AO for the year
under consideration also for fresh adjudication. Needless to mention that
the assesee be given reasonable opportunity of being heard. Accordingly,
the Additional Grounds 1.1. and 1.2. raised by the assessee are allowed
for statistical purposes.
7. We find that the assessee had also raised further additional grounds
vide Additional Grounds 2.1. to 2.3. with regard to disallowance of
expenditure u/s 14A of the Act while computing the book profits u/s
115JB of the Act. During the course of hearing before us, the ld AR
submitted that due to smallness of the amount involved in this issue, the
same is not pressed. The same is reckoned as a statement from the Bar.
Accordingly, these additional grounds are dismissed as not pressed.

8. The Additional Ground No. 3.1. is general in nature and does not
require any specific adjudication.

9. We are now left with Ground No. 2 in Revenue’s appeal in ITA No.
1307/Mum/2014 , wherein the revenue had challenged the action of the
ld DRP in deleting the addition of Rs 30,22,002/- made on account of
capital expenditure on scientific research centre.

9.1. The brief facts of this issue are that the assessee had in-house R&D
Unit recognized / approved by Department of Scientific and Industrial
Research (DSIR). The said approval was valid until 31 March 2007. On
18.12.2006, the assessee had made an application to DSIR for renewal of
20 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., the approval beyond 31.3.2007. However, the approval had not been
received until the completion of the assessment proceedings. During the
year under appeal, the assessee had incurred capital expenditure of Rs.
30.22 Lacs on scientific research which was claimed as a deduction under
section 35(1)(iv) of the Act (deduction of 100% of expenditure and not
weighted deduction). The ld AO in the draft assessment order proposed
to disallow the said expenditure in the absence of DSIR approval for the
year under appeal. Before the ld DRP, the assessee submitted that
deduction of expenditure towards scientific research cannot be denied
once the requirements are fulfilled. It was argued that since the assessee
has filed the renewal application and only procedural requirement is
pending, the deduction should be allowed. The assessee relied on the
decision of Hon’ble Delhi High Court in the case of Sandan Vikas (India)
Ltd reported in 22 taxmann.com 19 (Delhi) in support of its contentions.
The ld DRP allowed the assessee’s claim and directed the ld AO to delete
the proposed disallowance. Aggrieved, the revenue is in appeal before
us.
9.2. We have heard the rival submissions. We find that the only grievance
of the revenue is that since the assessee had not obtained renewed its
approval from DSIR, the assessee is not entitled for deduction. We find
lot of force in the alternative claim of the ld AR before us that the
assessee is entitled for deduction of such capital expenditure in entirety in
view of specific provisions contained in section 35(1)(iv) of the Act ,
wherein there is no condition for having DSIR approval for deduction
under this Section. We find that the ld AR placed reliance on the
following decisions wherein it has been held that approval of DSIR is not
a pre-requisite for claiming deduction under Section 35(1)(iv) of the Act:-
21
ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd.,  Tube Investments of India Ltd. v. CIT [2002] 125 Taxman 421 (Madras HC)
 Shree Pacetronics Ltd. ACIT [2011] 10 Tamann.com 118 (Indore Trib.)
 Coromandel International Ltd. v. ACIT (ITA No. 101/HYD/2012)
 Ayushakti Ayurved P. Ltd. v. ACIT [2010] 37 SOT 313 (Mumbai Trib.) 9.3. We find that the co-ordinate bench decision of Hyderabad Tribunal in
the case of Coromandel International Ltd vs Addl CIT in ITA No.
101/Hyd/2012 dated 28.8.2014 is directly on this impugned issue wherein
it was held that :-

“7. We have considered the arguments of the parties and perused the materials on record as well as the orders of the Revenue authorities. We have also carefully applied our mind to the decisions relied upon by the parties. It is a fact on record that out of the total deduction of Rs. 4,73,31,953/- claimed by the assessee towards R&D expenditure on capital field, DSIR in its approval in form No. 3CL allowed the claim to the extent of Rs. 4,71,08,743 and in the process disallowing the amount of Rs. 2,23,215/-. Whereas the entire revenue expenditure of Rs. 1,31,87,576/- was not approved by DSIR. It is the contention of the learned AR that approval of DSIR as envisaged u/s 35(2AB) is only confined to deduction claimed under that section. Such approval is neither necessary to decide whether expenditure is in the nature of revenue or capital nor it is relevant for considering assessee’s claim under any other provisions of the Act. We find force in the contention of the learned AR. On a reading of the provision contained u/s 35 as a whole and section 35(2AB) in particular and on perusal of form No. 3CL, we are of the view that approval of DSIR as contemplated is only in respect of weighted deduction to be claimed u/s 35(2AB) of the Act. It has no relevance for determining whether the expenditure claimed is allowable under any other provisions of the Act. The only condition prescribed u/s 35(2AB) is, if the claim of the assessee is allowed u/s 35(2AB) it will not be allowable under any another provision. In the present case, no material has been brought on record by the department to controvert assessee’s claim that it has incurred towards salary and wages of employees engaged in revenue expenditure of Rs. 1,31,87,576/-, R&D and capital expenditure of Rs. 4,73,31,953/- on R&D activities. That being the case unapproved revenue expenditure of Rs. 1,31,87,576/- if not allowable u/s 35(2AB) of the Act, in absence of approval from DSIR, certainly can be allowed as deduction u/s 35(1)(i) and 37(1) of the Act as the case may be. ITAT, Delhi Bench in case of ACIT Parabolic Drugs Ltd. (supra) while considering the issue held as follows:
22
ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., “28. Sec. 35(1)(i) falls under Chapter IV under the head “Computation of
business income”. It describes the allowability of the expenditure in case
where business income is computed. It deals with the expenditure
incurred by the assessee on scientific research. It has been prescribed
therein that in respect of expenditure on scientific research the same will
be allowed if the said expenditure has been laid out or expended on
scientific research related to the business. It is not the case of anybody
that Explanation to s. 35(1)(i) is applicable to the facts of the case.
Therefore, the case of the assessee has to be seen in the light of
provisions contained in s. 35(1)(i) without application of Explanation.
The business of the assessee is of manufacturing of bulk drugs and fine
chemicals etc. In the process of its manufacturing of drugs it has to make
R&D so to make the drug more effective and also to bring down the cost.
No material has been brought on record to suggest that by incurring
these expenditure the assessee has entered into any new activity of
manufacturing or new activity of trade. In the business of manufacturing
of drug, process of R&D is continuous process which augments the
business of the assessee. These expenses are not in the nature of any
personal expenditure as no such allegation has been made. Therefore,
the remaining criteria to consider the allowability is only the thing to be
seen is that whether the expenditure is incurred by the assessee is capital
in nature. So as it relates to capital expenditure of Rs. 44.41 lakhs, the
assessee itself has claimed the said expenditure as being capital in
nature. Therefore, there is no dispute with regard to that. So as it relates
to expenses of Rs. 19.57 lakhs on salary and wages the same cannot be
considered to be expenditure of being capital in nature as the said salary
and wages are paid to the manpower deployed for carrying out the R&D
activity which is part and parcel of the business of the assessee.

29. Now coming to the expenses of Rs. 611.78 lakhs relating to
materials/consumables/spares, it is not the case of the AO that the said
material was not consumed in the R&D process and some part thereof
was remaining in the closing stock. Therefore, these expenditure
incurred on material used for lab trials cannot in any manner be
considered as expenditure being in the nature of capital. The next item is “other expenditure directly related to R&D”. With regard to these
expenditure the finding of fact has been recorded by CIT(A) that these
have been incurred by the assessee for registration of products in other
countries or towards obtaining technical know-how fee for producing
new drugs etc. He has recorded in his order that he has called for and
perused the agreements between the assessee company and IS Ltd.
(which is the major sum of Rs. 1 crore comprising of two items of Rs. 50
lakhs each) for transfer of technical know-how. He has also observed
that AO has not given any adverse comment in his report regarding this
agreement and such types of agreements for transfer of technical know-
how are quite common in pharmaceutical industry due to commercial
23 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., exigency. These findings of fact have not been controverted by the
Revenue by brining any material on record to suggest that such findings
of CIT(A) are contrary to the facts existing on record. If it is so, then we
find no infirmity in the findings recorded by learned CIT(A), whereby
following the decisions of Delhi Tribunal in the cases of Jt. CIT Vs. Modi
Olivetti Ltd. (supra) and Asst. CIT Vs. Medicamen Blotech Ltd. (supra),
he has allowed the relief to the assessee.

30. In view of the above discussion, it has to be held that all of these
expenditure were incurred by the assessee in the course of its business
and none of the expenditure can be classified as expenditure in the
nature of capital. Therefore, no infirmity is found in the order of CIT(A)
vide which the assessee has been held eligible for deduction of these
expenditure under both the sections either under s. 35(1)(i) or under s.
37(1). We decline to interfere in such deletion and this ground of revenue
is dismissed.

8. In the present case, the department has not disputed the fact that
expenditure incurred was towards salary and wages. That being the
case, the expenditure is allowable u/s 35(1)(i) or u/s 37(1) as held by
ITAT Delhi Bench (supra). So far as disallowance of capital expenditure
of Rs. 2,23,215 is concerned, undisputedly, no material has been brought
on record by the department to controvert assessee’s claim that such
expenditure incurred was towards scientific research. Disallowance was
only for the reason that it is not approved by DSIR. However, even in
absence of approval from DSIR though assessee may not be eligible for
deduction u/s 35(2AB), still assessee can claim the deduction u/s
35(1)(iv). In this context we refer to the decision of Hon’ble Madras High
Court in case of Tube Investments of India Ltd. Vs. CIT (supra) wherein
it is held a under:

“Sec. 35 of the Act deals with expenditure on scientific research. Section
35(1)(iv) refers to expenditure of a capital nature on scientific research
related to the business carried on by the assessee. Sec. 35(2B) refers to
expenditure, other than capital expenditure incurred on the acquisition
of any land or building or construction of any building, on scientific
research undertaken under a programme approved in that behalf by the
prescribed authority, having regard to the social, economic and
industrial need of India. It is only such expenditure as is incurred on a
programme which has been approved by the authority prescribed
under s. 35(2B), which can be claimed as deduction under that
provision. The capital expenditure on the acquisition of land or building
whether acquired or constructed cannot be claimed under s. 35(2B). The
benefit of s. 35 (1)(iv) can be availed by the assessee in respect of
expenditure of a capital nature on scientific research if that research is
related to the business carried on by the assessee. The approval of the
24 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., authority prescribed under s. 35(2B) is not an essential prerequisite for claiming the allowance unders. 35(1)(iv) if it is found that a part of the claim falls within the ambit of s. 35(1)(iv). The mere fact of a claim not having been found admissible under s. 35(2B) will not constitute a bar to allowing an expenditure under s. 35(1)(iv) if that expenditure is capital expenditure and falls squarely within the ambit of s. 35(1)(iv). Capital expenditure incurred on the acquisition of land or construction of building which is excluded by the very terms of s. 35(2B) can be claimed under s. 35(1)(iv).

9. Following the ratio laid down as above, we hold that assessee is eligible for deduction in respect of revenue expenditure of Rs. 1,31,87,576 and capital expenditure of Rs. 2,23,215/-. Thus, ground nos. 2 & 3 are allowed.”

9.4. Respectfully following the same, we hold that the assessee is entitled
for deduction u/s 35(1)(iv) of the Act. Accordingly, the Ground No. 2
raised by the revenue is dismissed.
10. The Ground Nos. 3 & 4 raised by the revenue are general in nature
and does not require any specific adjudication.
11. To sum up, the appeal of the assessee in ITA No.
1745/Mum/2014 is partly allowed for statistical purposes and
appeal of the revenue in ITA No. 1307/Mum/2014 is dismissed. Order pronounced in the open court on this 19/06/2019 Sd/- Sd/- (SAKTIJIT DEY) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 19/06/2019
Karuna Sr.PS
25 ITA Nos.1745/Mum/2014 & 1307/Mum/2014 M/s. SI Group India Ltd., Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. The CIT(A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai
6. Guard file. BY ORDER, सत्यापित प्रतत //True Copy// (Asstt. Registrar) ITAT, Mumbai

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