Pr. Commissioner Of Income Tax-2 v. M/S. Beam Global Spirits & Wine India Pvt. Ltd

$~1 *IN THE HIGH COURT OF DELHI AT NEW DELHI+ITA 1344/2018 PR. COMMISSIONER OF INCOME TAX-2..... AppellantThrough :Mr. Zoheb Hossain, Sr. StandingCounsel versus M/S. BEAM GLOBAL SPIRITS & WINE INDIA PVT. LTD ..... RespondentThrough :Mr. Harpreet Singh Ajmani, Adv. CORAM:HON'BLE MR. JUSTICE SANJIV KHANNAHON'BLE MR. JUSTICE ANUP JAIRAM BHAMBHANIO R D E R%11.12.2018 -CM No. 49395/2018 (condonation of delay in refiling) The application for condonation of delay in re-filing of theappeal is not opposed. Application is allowed. ITA 1344/2018 This appeal by the Revenue under Section 260A of the IncomeTax Act, 1961 (‘Act’ for short) pertains to assessment year 2005-06and assails the order dated 09.03.2018 passed by the Income TaxAppellate Tribunal (‘Tribunal’, for short) in the case of M/s AlliedDomecq Spirits and Wine India Pvt. Ltd. ('respondent-assessee' forshort), now known as M/s. Beam Global Spirits & Wine India Pvt.Ltd. 2.Respondent-assessee, a subsidiary of Allied Domecq Spirits and Wine, United Kingdom, during the assessment year was engagedin manufacture and sale of Indian Made Foreign Liquor (‘IMFL’ forshort) and processing, bottling and sale of scotch whisky bottled inIndia known as Bottled in India Scotch (‘BIIS’ for short). 3.Respondent-assesseehadimportedCompoundAlcoholicPreparation(CAP,forshort)fromassociatedenterprisesforprocessing and sale of BIIS in India as Teacher's highland Cream,Teacher's 50, Teacher's Royal Highland, Long John and Old SmugglerScotch Brands. 4.IMFL, as per the assessee, was manufactured using purelydomestic process not involving use of CAP imported from associatedenterprises. 5.Respondent-assessee had adopted Transactional Net MarginMethod (‘TNM Method’, for short) with net profit margin based onsales as the profit level indicator for BIIS segment for transfer pricinganalysis to justify purchase price of CAP imported from Scotland. 6.Transfer Pricing Officer ('TPO', for short), held that the IMFLand BIIS segments i.e. manufacture and sales of IMFL andprocessing, bottling and sale of BIIS should be bunched for tworeasons. Firstly, he referred Note No. 22 ('Note', for short) to theaccounts of the auditors, which reads as under:- "Thecompanyprimarilymanufacturesandsellsalcoholic beverages and related products. Accordingly,the Company has only alcoholic beverages as its businesssegment. Further, the economic environment in which theCompany operates is significantly similar and is notsubjecttomateriallydifferentrisksandreturns.Accordingly, no separate disclosure are necessary underAccounting standard 17 (Segment Reporting) issued bythe Institute of Chartered Accountants of India." Secondly, the Transfer Pricing Report/study in the case of anotherassessee, namely M/s. Seagram India Pvt. Ltd., it was stated thatimported Concentrated Alcoholic Beverage (‘CAB’ for short) wasalso used in manufacture of IMFL. Same person had authored transferpricing report in the case of the Respondent-assessee and M/sSeagram India Private Limited. 7.On this basis, the TPO held and the assessment order holds thatthe net profit margin of 6.02% on clubbing the two segments waslower than the net profit margin of 7.78% of the comparables.Accordingly, addition of Rs. 2,31,23,800/- by way of transfer pricingadjustments was made. 8.The Commissioner of Income Tax (Appeals) and the Tribunalhave rejected the TPO’s rationale in clubbing of IMFL and BIISsegments for the purpose of transfer pricing. They have held that BIISand IMFL were two distinct segments, with different marketpositioning of the products, manufacturing process involved, rawmaterial used and returns generated. The two cannot be equated and treated as one segment. The respondent-assessee had followedsegmental approach by segregating operations into BIIS and IMFLbusiness verticals. 7.On this basis, the TPO held and the assessment order holds thatthe net profit margin of 6.02% on clubbing the two segments waslower than the net profit margin of 7.78% of the comparables.Accordingly, addition of Rs. 2,31,23,800/- by way of transfer pricingadjustments was made. 8.The Commissioner of Income Tax (Appeals) and the Tribunalhave rejected the TPO’s rationale in clubbing of IMFL and BIISsegments for the purpose of transfer pricing. They have held that BIISand IMFL were two distinct segments, with different marketpositioning of the products, manufacturing process involved, rawmaterial used and returns generated. The two cannot be equated and treated as one segment. The respondent-assessee had followedsegmental approach by segregating operations into BIIS and IMFLbusiness verticals. 9.Appellate authorities have held that the Accounting Standardsdo not preclude an assessee from preparing internal segments from aneconomic and transfer pricing perspective as was undertaken by therespondent-assessee in the transfer pricing report for the year underconsideration.NoadversefindingwasrecordedbytheTPO/Assessing Officer on this separation. 10.In our opinion the appellate authorities have rightly held thatthe TPO/Assessing Officer were guided by third party evidence tohold the IMFL manufactured by the respondent-assessee includes andhad used imported CAP. There was no evidence, material and basisfor this finding, except assumption purely predicated on the transferpricing study in case of a third person. Statement made by therespondent-assessee that CAP imported was used for manufacture ofthe BIIS and not IMFL segment, cannot be rejected as false andpretence on a mere conjecture and surmise. 11.International transaction, as held by the appellate authorities,was undertaken by the assessee for BIIS segment. The Note states thatsegmented data was not prescribed by Accounting Standard 17(Segment Reporting). The Note cannot be the basis for adding the twosegments for benchmarking the international transaction to check the transfer price of CAP, even if CAP was not used for manufacture ofIMFL. Segmented accounts for BIIS were prepared and madeavailable. These were not rejected as unreliable, nor was anyadjustment or modification made by the TPO/Assessing Officer.Revenue does not dispute that the net profit margin of the BIISsegment was higher than the net profit margin of the comparableuncontrolled and arm’s length transactions. 12.In the view of the above discussion, we hold that no substantialquestion of law arises for consideration in the present appeal. Appealis dismissed, with no order as to costs. SANJIV KHANNA, J DECEMBER 11, 2018sr ANUP JAIRAM BHAMBHANI, J