1

ITA Nos.346 & 229/Kol/2015

AKZO Nobel India Ltd. AY- 2010-11

आयकर अपील
य अधीकरण, यायपीठ – “C” कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: KOLKATA
(सम)Before
ी जे. सध
ु ाकर रे डी, लेखा सदय एवं/and
ी ऐ. ट. वक, यायीक सदय)
[Before Shri J. Sudhakar Reddy, AM & Shri A. T. Varkey, JM]
I.T.A. No. 229/Kol/2015
Assessment Year: 2010-11

Deputy Commissioner of Income-tax, Vs. Akzo Nobel India Ltd.

Circle-10(1), Kolkata. (PAN: AAACI6297A)
Appellant Respondent
&
I.T.A. No. 346/Kol/2015
Assessment Year: 2010-11
Akzo Nobel India Ltd. Vs. Deputy Commissioner of Income-tax,
Circle-10(1), Kolkata.
Appellant Respondent

Date of Hearing 15.02.2018

Date of Pronouncement 14.02.2018
For the Revenue Shri G. Mallikarjuna, CIT, DR
For the Assessee Shri Manoneet Dalal, AR

ORDER
Per Shri A.T.Varkey, JM
These are cross appeals filed by the assessee and the revenue against the fair order of
assessment order dated 06.02.2015 of DCIT, Circle-10(1), Kolkata (AO) passed u/s. 143(3)
of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) read with sec. 144C of the
Act for AY 2010-11.

2. Akzo Nobel India Limited, the assessee in this appeal was earlier known as ICI India
Limited. The assessee is engaged in the business of manufacturing and marketing of paints,
speciality chemicals and starch. It has two business divisions – Paints Business Division
(PBD) and National Starch and Chemicals Division (NSC). First we will take up the
assessee’s appeal arising out of the provisions of section 92 of the Act i.e. Transfer Pricing
Regulation and so Ground no 4 alone be decided. There are two transaction which need to
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AKZO Nobel India Ltd. AY- 2010-11

be adjudicated. First we will the assessee’s transaction with Akzo Nobel Paints Asia Pacific
Pte Ltd. (hereinafter referred to as 'ANPAP') .At the outset, both sides agree that this issue is
a recurring issue and the Tribunal in earlier year has decided the issue in favour of assessee.
So, the facts involved being identical and similar to that of AY 2009-10 (previous year) as
noted by Tribunal is that Akzo Nobel group, of which the Assessee is a part, operates
through subsidiaries in various countries. Akzo Nobel N.V. is the ultimate holding
company. Akzo Nobel Paints Asia Pacific Pte Ltd. (hereinafter referred to as 'ANPAP') is
another company belonging to the Akzo Nobel group. ANPAP provides to Akzo Nobel
group companies in various countries support services in the field of human resources,
marketing -support, information technology and similar other areas. Under an Agreement
dated 8.12.2006 which is titled as "Service Level Agreement" (hereinafter referred to as
SLA) between the Assessee and ANPAP, ANPAP agreed to render services set out in
Schedule to the SLA to the Assessee. The services set out in the Schedule to the Agreement
relates to (i) Advise/support in the area of human resources to attain functional excellence
(ii) Advise and assistance on operation relating to Plant (iii) Advise and Support on
strategies to optimise cost structures in purchasing (iv) Provide a range of market support
services; (v) provide range of services in Information Technology; (vi) Advise and
Assistance on reporting/accounting, financial control and planning activities and (vii) other
ancillary services in support of Assessee's business, including public affairs advise or public
relations. Clause 4 of the SLA provides that the consideration payable for services to be
rendered by ANPAP shall be the actual cost incurred by ANP AP for providing services to
the Assessee plus a margin of 5% of such cost. The issue in the Assessee's appeal is as to
whether the payment made by the Assessee under SLA is at Arm's Length as required under
the provisions of Sec.92 of the Act.”

DRP has followed its own order for AY 2009-10 and held as under:

“2.2. The issue raised by the Assessee in the above 3 objections is of the TPO wrongly
classifying the support Services received by the Assessee from Akzo Nobel Paints (Asia
Pacific) Pte Ltd (‘ANPAP') to be in the nature of "Stewardship" Services and has wrongly
determined the arm's length payments for such Services to be nil. The TPO has held that the
Services performed for the Assessee by ANPAP fall into the category of Stewardship activity
and therefore no charges are payable thus he determined the ALP for this transaction at
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AKZO Nobel India Ltd. AY- 2010-11

NIL. It is however seen that the issue was considered in depth by the DRP in A. Y 2009-10 in
its order dated and the operative part of the DRP directions are reproduced as under-

"Thus, the services provided by Akzo Nobel Paints (Asia Pacific) Pvt. Ltd. benefit
the parent as well as the assessee in India. To the extent the services have helped the
parent to exercise supervision and control over the group entities, it amounts to
stewardship services. The remaining services have benefitted both the parent and the
subsidiary in India. How much of the benefit can be attributed to the parent and to
the unit in India is a subjective matter and the dividing line lies in between. The
assessee has not even attempted to discuss this aspect of the services provided from
Akzo Nobel Paints (Asia Pacific) Pvt. Ltd.

From the foregoing discussion, it is evident that the benefit out of intra group
services has accrued to the assessee in India as well as to the group parent also.
However, the proportion of benefits accruing to each party remains indeterminate.
In view of this, we are of the opinion that no interference is called for in the
determination made by the TPO.

Therefore, following the decisi9on as above of the DRP on the same facts on this issue in the
current year also, it is held that these objections of the Assessee are not acceptable and they
are rejected.”

Aggrieved by the aforesaid order of DRP and consequent to it the AO’s fair order the
assessee is before us.

4. At the outset itself, it has been brought to our notice that the Tribunal has decided the
issue in assessee’s favour and answered the issue in assessee’s own case for AY 2009-10 at
para 15 to 32 of paper book and drew our attention to it. According to him, the facts are the
similar and there is no change in facts as well as in law, therefore the order of the authorities
below need to be corrected and the assessee’s ground of appeal needs to be allowed. The
Ld. CIT, DR supported the order of the DRP/TPO. According to him the conclusion drawn
by DRP/TPO is just and proper and calls for no interference.

5. We have heard rival submissions and gone through facts and circumstances of the
case. We note that the same issue cropped up in AY 2009-10 and the Ld. DRP has followed
its order for AY 2009-10 which has been adjudicated by the Tribunal at para 26 to 32 which
is as under:

“26. We have given a careful consideration to the rival submissions. As per the OECD Guidelines
paragraph 7.2:
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Nearly every MNE group must arrange for a wide scope of services to be available to its
members, in particular administrative, technical, financial and commercial services. Such services
may include management, coordination and control functions for the whole group.
(emphasis added)
The U.S. regulations define an intra-group service in the following manner (Treas. reg. § 1-482-
9(1)(1)):

Controlled services transaction - (i) In general. A controlled services transaction includes

any activity (as defined in paragraph (1)(2)of this section) by one member of a group of
controlled taxpayers (the renderer) that results in a benefit (as defined in paragraph (1)(3)
of this section) to one or more other members of the controlled group (the recipient(s)).

Thus, as per this definition of services, first there should be an activity performed by one of the
members of a group of related parties which lies within the ambit of definition of activity (the
'activity test') and second, that activity should result in a benefit (the 'benefit test') to one or more
members of that group of related entities.
The OECD Guidelines also concur with this view in paragraph 7.5:
There are two issues in the analysis of transfer pricing for intra-group services. One issue is
whether intra-group services have in fact been provided. The other issue is what the intra-
group charge for such services for tax purposes should be in accordance with the arm's
length principle.
(emphasis added)
27. The Assessee does not have a full capacity to provide a range of services to its business and to the
personnel working for it. In the interests of economy and efficiency the assessee desired to obtain these
services from its associated enterprise ANPAP. ANPAP has expert resources in commercial, financial,
accounting and other matters which would be employed for the benefit of the individual companies of
the Akzo group. The group companies would have access to the resources and would pay appropriate
consideration which would be commensurate with the amount paid to third party service providers.
These support services relate to certain functional categories which have set out in the earlier part of
this order and hence, we do no wish to repeat the same. As we have already observed in the earlier
part of this order, the practice of multinational enterprises providing intra group services is a global
practice wherein, various activities are frequently concentrated for the benefit of the entire group.
Since, the multinational group operates globally, such concentration is essential to be able to react in
the most flexible and cost effective manner. According to the assessee the benefits derived from
availing the above services outweigh the cost incurred in receiving such services. It is also the claim of
the Assessee that with the help of such centralized services it achieved substantial cost efficiencies and
hence it would be incorrect to categorise such services to be in the nature of stewardship services. It is
the claim of the Assessee that the above services are essential for the operations of the Assessee and
had it not received the access to the above information, it would have been required to perform them
by itself (in-house) or by hiring experienced service providers. The OECD Guidelines in this regard
(para 7.6) lays down the following:

Under the arm's length principle, the question whether an intragroup service has been rendered when
an activity is performed for one or more group members by another group member should depend on
whether the activity provides a respective group member with economic or commercial value to
enhance its commercial position: This can be determined by considering whether an independent
enterprise in comparable circumstances would have been willing to pay for the activity if performed
for it by an independent enterprise or would have performed the activity inhouse for itself. If the
activity is not one for which the independent enterprise would have been willing to Pay or perform for
itself, the activity ordinarily should not be considered as an intra-group service under the arm's length
principle.
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(emphasis added)
28. As we have already observed the question we need to decide is as to whether the services
rendered by ANPAP can be said to be stewardship services. If the answer is in the negative, then we
need not go into the question regarding rendering of services, benefit received by the Assessee, ALP of
the price paid by the Assessee, as these have not been disputed by the TPO and hence we have to
proceed on the basis that the TPO was otherwise satisfied that the price paid under SLA was at Arm’s
length. The TPO’s observation on the nature of services rendered by ANPAP was that it was in the
nature of Stewardship activity. According to him Stewardship expenses means those expenses
resulting from either 'shareholder activities' or 'duplicative activities' as defined in the Section 482
regulations. The TPO has referred to the US Regulations which describe stewardship expenses as
expenses that result from oversight functions undertaken for a corporation's own benefit as an investor
in related corporations. He has also referred to US regulations under Section 861 that adopts the 'sole
effect' standard for shareholder activities, meaning that stewardship expenses resulting from
shareholder activities include expenses of only those activities whose sole effect is to protect the
parent company's capital investment in the related corporation and/or to facilitate compliance with
legal requirements applicable specifically to the parent company. The TPO has highlighted the
following as stewardship activity based on the decisions of US Courts:

Description Nature of service

Requirements and procedures to maintain Stewardship activity
confidentiality on account of world-wide
operations
Requiring the subsidiary/related entity to act -Do-
according to the quality control
specifications
Briefing of the staff of the subsidiary/related
entity to ensure that the output meets the -Do-
requirements of the parent company/group
Overall monitoring of the operations of the
subsidiary/related entity (other than day-to- day -Do-
management)

The TPO based on the decisions of the US Courts, has also culled out list of supervisory or
stewardship activities, for which the recipients should not have been charged even when they
benefitted from the services.

Reference Service Details Remarks

Para 83 Seeing to it that the subsidiary Services not managerial but

(service recipient)develops materials stewardship
to the satisfaction(in other words,
seeing to it that the subsidiary
produces or provides goods or
services which are up to the
standards expected of the parent)
Para 84 Visiting the subsidiary's clients, on -Do-
the spot supervision

Para 86 Making presentations for getting -Do-

new business; getting third
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AKZO Nobel India Ltd. AY- 2010-11

parties to give business to

subsidiaries in particular
markets
Para 88 To make certain that the various -Do-
offices maintained plaintiff’s
production standards and that the
subsidiaries perform their duties to
their client’s satisfaction
Para 89 Deciding to consolidated foreign General supervisory services
Offices; travelling to such offices to offices; travelling to such offices
solve personnel problems. in attempt to control to
solve personnel problems
activities of subsidiaries

Specific services considered in decisions of the US Courts on stewardship activity, monitoring and
supervisory activity and ‘direct and proximate benefit test’, has also been highlighted by the TPO in
his order:

Service Type Reference

Diligent efforts to provide the subsidiary with Merck & Co. V. United States, 24 Cl.Ct.73
highest feasible sales revenues, including (1991)
shutting down a U.S. plant in order to keep the
subsidiary in production;
The establishment of artificial and
unreasonably high prices to help the
subsidiary in production; and
The provision of personnel who served as
members of the board of directors and officers
of the subsidiary
Audits by the parent H Group Holding Inc. V. Commissioner, TCM
Reporting requirements of the parent, 1999-334 (1999)
Reviewing of contracts by the parent,
Providing for consistency of accounting
systems etc
Business development activities

“29. As far as the Intra group services rendered by A PAP are concerned, expertise in the
field of HR, Operations and Purchasing, IT, Marketing, Finance and Planning areas have
been developed and with a view to enable the Akzo group companies to have full access to
this extensive knowledge and expertise, ANPAP provides these services to the various group
companies of Akzo group. Besides expertise, there has been substantial savings .in total
costs when compared with those which would otherwise be incurred if they were borne by
the individual companies in various countries. It is not .disputed by the TPO that had the
assessee not received such support from ANPAP, it would need to perform the functions in-
house, or hire experienced and trained service providers. Such services are thus not in the
nature of simply oversight functions, which have been performed by ANP AP to protect its
investment in the company. With regard to the services received from ANPAP, the company
has submitted detailed evidences to the Ld. TPO in the form of emails, communications and
reports which evidence the rendering of services and the ensuing benefits. These have been
given in Annexure-“A” to this order. Nature of service i.e. Information Technology, Human
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Resource, Operations, Purchasing, Marketing Support, Finance and Planning has been
evidenced by way of such communication/documents. It was neither disputed by the TPO
that apart from services which are received in the form of emails, reports, documents etc.
from ANPAP, the assessee also received constant and continuous information over calls,
audio-video conferences, personal visits etc. Therefore, the benefits received in the above
form ought to have been given due consideration. Hence, for the purpose of demonstration
and explanation, the assessee has submitted documents evidencing the regular flow of
valuable commercial services. From the above details submitted by the assessee it has been
amply demonstrated that the benefits generated by the said services during the relevant
financial year have undeniably added economic / commercial value to enhance the
commercial position of the assessee and such services are received by the assessee on a
continuous basis across its operational areas. Hence it is erroneous to classify the services
to be in the nature of stewardship services.

30. The TPO in his observations on each of the items of service set out in Annexure "A" to
this order commented that the services were in the nature of control, supervisory, monitoring
functions. By way of illustration let us take item No.1 of the list of services, which were
claimed by the Assessee to be relating to Marketing. The Assessee has referred ,to a mail
from Anton (Singapore) providing access to internet site and enable configuration for all
users to facilitate distribution of campaign information. This was in connection with the new
guidelines for Teaser Campaign (must be for a new product launch), The benefit was to
enable group companies to utilize marketing strategies uniformly so that commercially all
group companies benefit. This was named as "Control, supervisory, monitoring function" by
the TPO. Similarly item No.2 of the list of services given in Annexure HA" to this order,
which is a function relating to "Information Technology", makes a reference to a mail for
updation of country level lotus note user headcount by each entity to Singapore personnel.
This was to enable creation of a data back for all users and enable carrying out planning
and strategic activities for IT services. This was termed as "Control, supervisory, monitoring
function" by the TPO. Annexure HA" list contains about 69 items of services and all have
been branded as "Control, supervisory, monitoring function" by the TPO. This approach of
the TPO was not correct. None of the services listed in Annexure "A" could be termed as
either shareholder activity or stewardship activity, applying the guidelines referred to
earlier for considering an activity as "Shareholder activity" or "Stewardship activity".

31. The DRP in its order has accepted that the findings of the TPO are not correct. The DRP
was of the view that the services were rendered by ANP AP to the Assessee and that the
Assessee benefitted from such services. Once this 'conclusion is arrived at then the case of
the TPO that the nature of services were shareholder activity or stewardship activity cannot
be sustained. Having held so, the DRP contradicted its own finding by holding that majority
of the services helped the parent company in supervising and controlling subsidiary
company and therefore the services were in the nature of “Stewardship Services”. The DRP
has not spelt out as to what were the services that benefited the Assessee and what were the
services that benefitted the parent company. The DRP also concluded that some benefit
would have accrued to the Assessee as a result of such services but such services cannot be
determined with certainty and therefore the conclusion of the TPO should be upheld.
Without pointed out how services -rendered cannot be segregated as benefiting the parent
company and that benefiting the group companies, the DRP could not have come to such a
conclusion.

32. We therefore conclude that the assessee has established the nature of services including
quantum of services received from ANP AP, that services were provided in order to meet
specific need of the assessee for such services, the economic and commercial benefits
derived by the assessee from intra group services. In its submission dated 5.1l.2012 filed
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before the TPO, the Assessee filed report dated 30.6.2009 of Pricewaterhouse Coopers LLP,
Chartered Accountants. In such a report a search for similar independent service providers
providing services that were provided by ANPAP under SLA was identified and it was found
on such analysis that similar services provided by and to unrelated parties were at an
average margin of cost + 5.1 % and it was opined that the cost + 5% margin for similar
services paid by the Assessee to its AE should be regarded as confirming to the ALP. The
Assessee also filed a certificate of KPMG, LLP, Singapore, an independent third party
accounting expert, certifying the basis of cost allocation by ANPAP for the various services
rendered by the Assessee based on the evidence of services rendered by ANP AP to the
Assessee. The TPO has not disputed the above cost allocation as well as the fact that the
comparative cost charged by unrelated parties for similar services was at a margin of 5.1 %
of the cost. In view of our conclusion that the TPO and the DRP were in error in holding that
the nature of services rendered by ANP AP were in the nature of stewardship activity or
shareholder activity, we hold that the TPO's conclusion no charges ought to have been paid
by the Assessee. The charges paid by the Assessee to ANPAP are held to be at Arm's Length.
Consequently, the addition made by the revenue authorities in this regard are directed to be
deleted and the appeal of the Assessee ITA No. 531/Kol/2014 is allowed.”

Since issue is covered in favour of the assessee in its own case cited supra and the Ld. DR is
unable to controvert the aforesaid finding of the Tribunal and is unable to drew our attention
to any change in law and the facts, we respectfully following the order of the tribunal allow
the appeal of the assessee on this issue.

6. Coming to the next Transfer Pricing Issue i.e. whether the payment made by the
assessee as consideration payable for the services rendered by Akzo Nobel Car Refinisher
(Singapore) Pvt. Ltd. (in short ANCR) should be the actual cost incurred by ANCR for
providing services to the assessee plus margin of 7% of such cost is at Arm’s Length or not.
On this issue the TPO has not addressed this issue on the ground that assessee has not
furnished the agreement with ANCR whereas the grievance of the assessee is that it was in
fact produced before TPO vide submission before TPO dated 21.01.2014. On this issue the
Ld. DRP has held as under:

“3.2 Although this issue has not been addressed by the TPO on the grounds that the Assessee
had not furnished the agreement with ANCR, however It is seen from the Services provided
that the same were in the nature of Services for strategies and operations and helps in
achieving corporate objectives by aligning workforce and organizational objectives in the
field of marketing HR, Finance, Management Services, Purchases etc. Thus, the Services
provided by ANCR benefit the AE as well as the Assessee in India. To the extent the services
have helped the parent to exercise supervision and control over the group entities, it amounts
to Stewardship services. The remaining Services may have benefitted both the parent and the
subsidiary in India. How much of the benefit can be attributed to the parent and to the unit in
India is a subjective matter and the dividing line lies in between. It is therefore evident that the
benefit out of intra group services has accrued to the Assessee in India as well as to the group
parent also. However, the proportion of benefits accruing to each party remains
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indeterminate. In view of this, we are of the opinion that no interference is called for in the
determination made by the TPO.”

7. We have heard both the parties. We note that the TPO has not carried out the
exercise for computing the arm’s length price on the plea that assessee did not provide the
agreement with ANCR, whereas the assessee claims to have provided a copy on 21.01.2014.
Though the DRP observes that nature of service provided by ANCR are in the nature of
service for strategic and operations and helps in achieving corporate objectives by aligning
workforce and organizational objectives in the field of marketing HR, Finance, Management
Services, Purchases etc., held it as stewardship services. We note that TPO has not carried
out any exercise to determined the arms length price of benefit, service etc. as per the most
appropriate method as envisaged in sec. 92C(1) of the Act. Since the TPO has not carried
out the exercise which he ought to have carried out as envisaged by the Act on the erroneous
plea that agreement between assessee and ANCR was not placed before him, we set aside
the order of ld. DRP/AO & TPO and remand the matter back to TPO for fresh consideration
and pass order in the light of the Tribunal’s detailed analysis of the agreement between
assessee and ANPAP which we decided supra. The TPO is directed to pass speaking order
after giving proper opportunity to assessee on this issue.

Since no other grounds raised in assessee’s appeal were pressed before us other
grounds are dismissed as not pressed.

8. Now, we take up the departmental appeal. Grounds of appeal are as under:

“1. That on the fact and circumstances of the case, the Ld. DRP has erred in deleting
addition of Rs. 2,96,88,774/- made by the A.O. treating the claim of depreciation on slump
sale as itemized sale, by taking into consideration of the DRP's order in the assessee s case
for the earlier years, without considering the fact that the department is in appeal before the
ITAT against the said order of the DRP, which is pending for disposal.

2. That on the fact & circumstances of the case, the Id. DRP has erred in deleting
disallowance of depreciation of Rs.1,13,51,990/- on colour solution machines installed at the
premises of dealers by treating the same as furniture & fixtures instead of plant and
machineries as claimed by the assessee without considering the following facts:

(a) Finished products of the assessee are Paint liquid, paints stiff and thinners are
transported to the dealers in sealed pack.
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(b) The machines are used by the dealers for adding the various colours and then shaking
and moving only which cannot be said as manufacturing process.

(c) The colour solution machines are leased out by the assessee to its dealers and dealers
are allowed to stall according to their choice. The machines are handled by the dealers
being actual user had been paying rent in such machines.

3. That on the facts and circumstances of the case, the Ld. DRP has erred in deleting
disallowance made by denying the claim of additional depreciation of Rs.1,33,19,699/- on
certain assets which are not directly use for manufacturing process, considering the
submission of the assessee.

4. That on the facts and circumstances of the case, the Ld. DRP has erred in deleting the
addition of Rs. 31,81,727/- u/s.14A following the decision of DRP in the assessee's case for
A/Y- 2009-10, without considering that the department is in appeal before the Hon’ble ITAT
against the decision of DRP for the Ld Assessment Year which is pending for disposal.”

9. First we take up Ground No 1 of Revenue appeal; Brief facts of the case are that the
assessee in its return of income has claimed depreciation amounting to Rs.17,31,23,505/-
which assessee computed by considering the opening WDV of the assets at
Rs.85,71,36,043/-. The AO while dealing with this issue taking note of his own stand in the
draft assessment order for AY 2009-10 recomputed the depreciation at Rs.14,34,34,731/- by
considering the opening WDV of the block of assets of Rs.66,23,64,684/- as per the draft
assessment order for AY 2009-10 which in turn is based on the assessment order for AY
2008-09 wherein in the opening WDV of block of assets was based on closing WDV
computed in AY 2007-08. This action of the AO, according to assessee, resulted in lower
allowance of depreciation to the tune of Rs.2,96,88,774/-. It was brought to the notice of
the DRP that similar disallowance was proposed by the AO in the draft assessment order
dated 26.03.2013 passed for AY 2009-10. Against this proposed addition, the assessee
preferred objection before the DRP wherein the proposed depreciation allowance was
deleted vide order dated 23.12.2013 and effect to the proposed disallowance was given by
the AO in the order passed u/s. 143(3) of the Act dated 31.03.2014. It was further brought
to the notice of the DRP that the Ld. CIT(A) for AY 2006-07 while passing the order dated
11.03.2013 u/s. 251 has accepted the treatment adopted by the assessee. It was brought to
the notice of the Ld. DRP that in doing so, the Ld. CIT(A) has placed reliance on the order
of the Tribunal in assessee’s own case for AY 1997-98 and AY 2004-05 in which the
Tribunal has accepted the contention of the assessee that what should be adjusted from the
block is only the WDV of the assets transferred. It was brought to the notice of the Ld.
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DRP that the Ld. CIT(A) has followed his own order for AY 2006-07 and granted relief to
the assessee for AY 2007-08. The Tribunal in assessee’s own case for AY 1997-98 vide
order dated 20.07.2007 had directed the AO to reduce the written down value of assets of
sold units from the written down value of block assets of the entire business for computation
of depreciation. The assessee brought to the notice of the Ld. DRP that the Tribunal has
followed its own order in assessee’s own case for AY 2000-01, 2001-02, 2004-05 and 2005-
06. Thus, the assessee prayed for allowance of depreciation to the tune of Rs.2,96,88,774/-.
Thereafter, the DRP decides as under:

“1.2 It is seen from the facts in this case that during the A.Y 2006-07, the appellant sold its
Rubber Chemical business to M/s PMC Rubber Chemicals on slump sale basis. Consequently
the Appellant reduced the wdv of the Assets transferred under slump sale from the block of
Assets in accordance with the provisions of section 43(6)(c)(lC) of the Act. The AO however
adjusted the sale proceeds. of the undertaking transferred under slump sale against. the
relevant block of asset Instead of adjusting the wdv of the assets as mandated by the
provisions of section 43(6)(c)(lC) of the Act. This treatment of the AO resulted in lower
closing wdv of the block of assets (for AY 2006-07 as also lower opening wdv of the block for
subsequent periods (Ay 2007-08 onwards). Based on the closing wdv as per assessment order
of AY 2006-07, the AO recomputed the depreciation in the Assessment orders for AY 2007-08,
AY 2008-09 and AY 2009-10. However as mentioned by the Assessee above, this issue is
directly covered by the decision of DRP in 2009-10 in the Assesses's own case and by the
Order Hon'ble ITAT for earlier years. It has been held by the ITAT Order for A.Y.2005-06 as
under-

"we have heard the contentions and gone through the cited orders. The issue has been
consistently decided by the coordinate Benches of this Tribunal in favour of the
assessee. This Tribunal had held that sale consideration could not be considered
under section 50 and block of assets could not be reduced to nil. Considering this view
taken by the Tribunal for assessment year 1997-98 and 2004-05, we are of the opinion
that Ld. CIT(A) was justified in deleting the disallowance. We do not find any reason
to interfere with the order of Ld. CIT(A). Ground No.2 of the Appeal of Revenue
stands dismissed.”

The DRP in its Order for A.Y. 2009-10 has also held on this issue as under-

"Hence, once the A. O. gives effect to the order of CIT(A) for A. Y. 2006-07 and A.Y.
2007-08, the same will have a consequential impact for A. Y. 2009-10 as well. Hence,
we are of the opinion that the claim of the assessee is allowable and the A. O. is
directed to allow depreciation accordingly."

Therefore following the above decision of the !TAT Kolkata and the DRP in A.Y. 2009-10 it is
held that the claim of Assessee is allowable and the A.O. is directed to allow depreciation
accordingly. Further, if there is consequential impact in this year upon giving effect to the
Order of CIT Appeal for 2006-07 and 2007-08 the consequential effect if any may be given by
the A.O. in this year also.”
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AKZO Nobel India Ltd. AY- 2010-11

10. We note that the Ld. DRP has followed the tribunal’s decision and consequently
directed the AO to allow depreciation. Respectfully following the orders of the Tribunal,
we do not find any change in facts or law so, we are not inclined to interfere in the order of
the Ld. DRP and we confirm the same. This ground of revenue’s appeal is dismissed.

11. The next ground of appeal of revenue is against the deletion of disallowance of
depreciation (normal and additional) of Rs.1,13,51,990/- pertaining to colour solution
machines. Brief facts of the case are that the assessee claimed for its colour solution
machines normal depreciation and classified to it under plant and machinery and claimed
15% block whereas the AO reclassified it under furniture and fixture (10% block) which
resulted in reduction in allowance of normal depreciation of the assessee. The AO
disallowed the claim of the assessee for additional depreciation on the colour solution
machines. The AO while reaching the aforesaid conclusion has stated that these colour
solution machines are akin to electric appliance and according to AO, colour solution
machines do not aid the assessee in the manufacturing process. According to AO, the
colour solution machines being installed at the premises of the dealers are in no way
connected with the mother/main machines responsible for producing the paint and he
compared the colour solution machines like Air conditioner etc. and hence, the AO treated
the colour solution machines as furniture and fixture instead of plant and machinery. In the
process, the AO disallowed depreciation on the colour solution machines as under:

Particulars Amount (Rs.)

Disallowance of Additional Depreciation 90,81,593/-
Disallowance of Normal Depreciation 22,70,397/-
Total : 1,13,51,990/-

Aggrieved, the assessee preferred an appeal before the Ld. DRP and the Ld. DRP allowed
the prayer of the assessee. Aggrieved, revenue is before us.

12. We have heard rival submissions and gone through facts and circumstances of the
case. We note that the assessee company is engaged in the business of manufacture and sale
of decorative paints under the name and style of ‘Dulux’ brand which are mainly used for
interior and exterior painting of homes and buildings. These paints are offered to the end
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AKZO Nobel India Ltd. AY- 2010-11

consumer in thousands of colour sheds for providing the consumer with a wide choice of
colour. The assessee company prepares best paints and colourants at its factory which is
then delivered to the dealers. According to the colour preference of the consumer, the
colourants are added to the base paints in a definitive proportion to obtain the desired paint
colour with the help of colour solution machines. This process is called tinting. It has been
contended by the assessee that even a small difference in the composition of the colourants
resulted in a different shade, and the colour solution machines delivered precise and
accurate mix up the colourants with the base paints. It was brought to our notice that
colourants are also supplied and manufactured by the assessee and sold to dealers. It was
also brought to our notice that colour solution machines given to its dealer are exclusive to
the assessee’s products and in case the dealer wishes to use machines of other paints
manufacturers, consumer would not get desired colour and the machines supplied by the
assessee (colour solution machine) are calibrated via a computer program provided by the
assessee detailing precise measurements so that the output is of the highest standards. It
was brought to our notice that the assessee had entered into agreement with the dealers to
the effect that the dealers are prohibited from selling only base paint (i.e. without adding
colourants) since this is not the final product i.e. to be sold to the end consumer and
according to the agreement, the paint can be sold only to the customer only after tinting
(clause 6 of the agreement). The aforesaid facts will reveal that the company had invested
significant capital on colour solution machines itself and the said machines play integral part
in the profit earning apparatus of the assessee company by creating thousands of colour
shades as per the preference and choice of the consumers. Therefore, it is the case of the
assessee that the assessee would not have been able to give this wide array of choice of
colours to the customers without these machines. In view of the aforesaid activity
undertaken by the colour solution machines in no circumstances we can term it as a
furniture as done by the AO. It was also brought to our notice that by taking into
consideration the very nature of the product i.e. the end product (tinting product) excise duty
is levied. The AO erred in observing that in order to be eligible for additional depreciation
machinery has to be used within the factory premises of the assessee is erroneous. The
Hon’ble Jurisdictional High Court in the case of CIT Vs. Birla Jute & Industries Ltd. (2003)
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AKZO Nobel India Ltd. AY- 2010-11

260 ITR 55 wherein it was held that there is no requirement under the provisions of the Act
that machine has to be situated/installed within the factory premises of the assessee has to be
eligible for claim of additional depreciation. We note that the Ld. DRP decided the issue in
favour of the assessee by observing as under:

“2.2. This ground of objection has basically 2 sub grounds. The first is regarding the lower rate of
depreciation and the claim of additional depreciation on “Colour Mixing Machines” disallowed by
the AO by treating them as Furniture & Fixture. The second being lower rate of depreciation
allowed on certain Assets not considered by the AO as Plant and Machinery but reclassified as
Furniture & Fixture. The first issue is regarding depreciation and addl. Depreciation on Colour
Solution Machines it is seen that during the financial year relevant to the Assessment Year under
consideration, the Assessee was engaged in the business, of manufacturing decorative paints under
the name of "Dulux" brand these are offered to the end consumer in thousands of colour shades. As
per industry practice, the consumer can choose the colour of the paint from a shade card which
lists out the various colours offered by the company. On the basis of the shades chosen by the
consumer, the dealer prepares the paint by adding colorants (these are generally in primary
colours) to base paint both of which are supplied to the .dealer by the company in a precise ratio
so that the desired shade can be achieved. the company appoints various dealers who are located
at various parts of the country. In order to enable the dealers to meet the individual requirement of
the end consumers, the company provides the base paint and colour shades to the dealers along
with Colour Solution Machines. These Colour Solution Machines consists of two parts - Dispenser
and Shaker. The main function of this machine is to provide the desired colour as per the colours
available in the shade cards. Thus, the ultimate colour/paint is produced by tinting the raw
material and the desired shade with the help of Colour Solution Machine. This Colour Solution
Machine is an input-output machine which tints the base paint and desired shade to get the final
colour which is sold to the end consumers.

2.2.1. The Appellant has satisfactorily explained that not only these machines are part of its
business activities but also that the same could not be categorized as anything other than Plant &
Machinery. The Assesses contentions are found to be valid and justified, it is clear that the product
of the Assessee i.e. its "Dulux" brand paints are sold by its dealers by preparing the end product
through these machines i.e. the paint shade chosen by the customer from the "Shade Card"
provided by the Assessee company. It is also clear that such paints could not be sold without them
being first mixed through such 'Colour Solutions Machine'. Therefore the conclusion of the A.O.
that such machines were not Plant & Machinery but furniture and fixture is not justified. It is also
clear in view of the decision in the case of CIT Vs Diamines & Chemicals Ltd. 221 Taxman 218,
that such machines need not be installed only in the factory premises of the Assessee. A similar
view has been taken by the jurisdictional High Court in CIT Vs Birla Jute & Industries Ltd. supra
wherein the Hon'ble Court has examined the phrase "business of manufacture" used in section
32(iia) of the Income Tax Act. Therefore, considering the above facts and the decision cited, it is
held that the "Colour Mixing Machines" were plant & machinery of the Assessee and eligible for
depreciation at the applicable rate as well as the claim of additional depreciation. Accordingly the
disallowance made by the A.O. of the depreciation and additional depreciation of Rs,l,13,51,990/-
is held to be not justified and this ground of objection is allowed.

2;2.2. With regards to the action of the A.a. reclassifying certain Assets as furniture and fixture
instead of Plant & Machinery and thus allowing lesser claim of depreciation to the extent of
Rs.1,33,19,699/-, it is seen that the A.O. had not given any opportunity to the Assessee before
undertaking such an exercise which by itself is not justified. Further more on the merits of the case
it is seen that from the description of the Assets listed by the Assessee and reproduced in para 2.2.1
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ITA Nos.346 & 229/Kol/2015
AKZO Nobel India Ltd. AY- 2010-11

above, the same were basically in the nature of Plant & Machinery other than the few items
discussed separately below. It is further seen in respect of the items listed below the Assessee itself
had not claimed any additional depreciation therefore the disallowance of additional depreciation
which had actually not been claimed by the Assessee in the first place, has wrongly been
disallowed by the A,O.

It is however noted that in respect of the following Assets in the list submitted by the Assessee, the
following Assets cannot be considered as plant & machinery and have to be considered as
electrical installation or furniture and fixture and depreciation would be allowable to the Assessee
on the same at the given rates for such Block of Assets in the Income Tax Act-

Assets Remarks Amount (Rs.)

Battery Block for Emergency Lights, Electrical Installations 16,01,926/-
Street Light & Elect fittings, Water
Cooler & Aquaguard
Fire Alarm Systems Furniture & Fixtures 1,00,761/-
Lights Electrical Installations 13,19,580/-
Substations electrical Fittings Electrical Installations 21,69,899/-

Accordingly other than the .above mentioned Assets, In respect of the remaining Assets classified
by the A.O under the block of Furniture & Fixtures such action by the A.O is held to be unjustified
and the objection of the Assessee to this extent is allowed. The AO is directed to recomputed the
depreciation on the basis of the above directions.”

13. We note that the AO erred in reclassifying the colour solution machines under
furniture and fixture when its claim was correctly made under plant and machinery. We
note that the AO erred in considering the colour solution machines akin to some electrical
appliances and that the machines did not aid the company in the manufacturing process is
also erroneous on the reasons given above and in fact the machines are able to give
thousands of colours components to the end consumer by mixing base colour sheds with the
colourants (tinting product) which could not have been possible without the aid of the
colour solution machine and it is an integral part in the profit earning apparatus of the
company. The AO erred in stating that the colour solution machines installed in the dealer’s
premises is not in any way connected with the mother/main machines responsible for
producing the paints and the colour solution machines are comparable to air conditioner etc.
due to their nature of functioning and hence, need to be treated as furniture and fixture is
erroneous and baseless as discussed by us above and for the sake of brevity is not repeated
again. We also note that the AO in the earlier assessment year and in subsequent
assessment year i.e. 2012-13 and 2013-14 has not disputed the allowability of normal and
additional depreciation on colour solution machines for the assessment year prior to the
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AKZO Nobel India Ltd. AY- 2010-11

subject assessment year and in subsequent assessment years (i.e. AYs 2012-13 and 2013-14)
post issuance of direction by Ld. DRP in the subject assessment year. In the aforesaid facts
and circumstances of the case, the AO ought to have been consistent in his approach and,
therefore, for the reasons stated aforesaid, we do not find any reason to interfere in the order
of the Ld. DRP and we confirm the same. This ground of appeal of revenue is dismissed.

14. Ground no. 3 of the revenue is against the action of the Ld. DRP in deleting the
disallowance of depreciation (normal and additional of Rs.1,33,19,699/-) on certain assets.
The assessee company had claimed depreciation (normal and additional) on certain assets
under the category of plant and machinery. The AO reclassified it as furniture and fixtures
instead of plant and machinery and thus allowing lesser claim of depreciation to the extent
of Rs.1,33,19,699/-. The Ld. DRP has noted that the AO has not given any opportunity to
the assessee before reclassifying the certain assets as furniture and fixture. The Ld. DR also
could not point out as to whether any opportunity was granted to the assessee before the AO
reclassifying certain assets furniture and fixture instead of assessee’s claim that those are
plant and machinery, so the action of the AO is against the principle of natural justice. We
note that the Ld. DRP has taken note of the description of the assets listed by the assessee
and taken note of the assets which were reproduced at para 2.1.2 onwards and had made a
finding on fact that those assets are plant and machinery. However, the following assets
were treated as furniture and fixture:
Assets Remarks Amount (Rs.)
Battery Block for Emergency Lights, Electrical Installations 16,01,926/-
Street Light & Elect fittings, Water
Cooler & Aquaguard
Fire Alarm Systems Furniture & Fixtures 1,00,761/-
Lights Electrical Installations 13,19,580/-
Substations electrical Fittings Electrical Installations 21,69,899/-

15. We have gone through the description of the assets reproduced from page nos. 35 to
39 of the ld. DRP’s order and we find from the asset and the remarks given that these are
assets which were rightly claimed to be plant and machinery. The Ld. DRP has rightly
excluded the aforesaid assets from the list of plant and machinery and reclassified it as
furniture and fixture. We do not find any infirmity in the order of the Ld. DRP and,
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ITA Nos.346 & 229/Kol/2015
AKZO Nobel India Ltd. AY- 2010-11

therefore, we confirm the finding of the Ld. DRP. This ground of appeal of revenue is also
dismissed.

16. Ground no. 4 of revenue’s appeal is against the deletion of addition u/s. 14A of the
Act of Rs.31,81,727/-. The assessee has earned an income of Rs.8,60,13,541/-. The
assessee explained that this amount was on account of dividend received from various
mutual fund investment made by the assessee during the year. It was brought to the notice
of the AO against the income of Rs.86,01,354/- the company has made suo moto
disallowance of Rs.4,72,192/-. On an enquiry by the AO, the assessee company stated that
the said disallowance suo moto made was based on the company’s estimate of proportionate
man power cost and operating cost incurred during the period. According to the assessee,
operating cost has been estimated at Rs. 22000/- per month on stationery, Fax, postage,
telephone conveyance etc. For computation of proportionate man power cost the company
has estimated the total man power cost at Rs.22,01,428/-. Thereafter the assessee has
computed income earned out of the investment held in shares and mutual fund. Thereafter
the company has computed the proportion of exempt income and upon the total income
from investments (taxable and non-taxable) has applied to the rate with the manpower cost.
According to the assessee, the figure of proportionate man power cost comes to
Rs.2,08,192/-. This methodology by which the amount of expenditure offered by the
assessee was unacceptable to the AO. According to the AO, an amount of Rs.22,000/- per
month on stationery, Fax, postage, telephone, conveyance etc. appears to be on the lower
side and hence, took the monthly expenditure for the aforesaid expenses at an estimated
figure of Rs.1,20,000/- per month. The AO found no logic for proportionate manpower cost
as considered by the assessee, so he took the entire manpower cost amounting to
Rs.22,01,428/- as the direct expenses incurred by the assessee under Rule 8D(i) of the Rules
for the purpose of rule 8D(ii) since the assessee had represented that no interest expenses
has been incurred for the purpose of earning exempt income because the company does not
have any determinate books of account and the entire amount of investment is out of its own
funds. According to the assessee, no disallowance under Rule 8D(ii) of the Rule is
warranted. The AO did not accept the said contention of the Ld. AR of the assessee and
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ITA Nos.346 & 229/Kol/2015
AKZO Nobel India Ltd. AY- 2010-11

disallowed an amount of Rs.1,14,92,204/- as interest expenses under Rule 8D(ii) of the

Rules and as per Rule 8D(iii) 0.5% of the average value of investment was computed at
Rs.10,677/- and thus making a disallowance of Rs.36,53,919/-. Aggrieved, the assessee
preferred an appeal before the Ld. DRP, who was pleased to delete the disallowance relying
on the decision in assessee’s own case for AY 2009-10. Aggrieved, revenue is before us.

17. We have heard rival submissions and gone through the facts and circumstances of the
case. At the outset itself, it has been brought to our notice that the Ld. DRP relied on its
earlier order for AY 2009-10 to delete the disallowance made by the AO on this account. It
was brought to our notice that the revenue has preferred an appeal before the Tribunal
against the decision of the Ld. DRP for AY 2009-10. Our attention was also drawn to page
no. 32 of the order of the Tribunal and para 46 onwards wherein the Tribunal adjudicated
the Ld. DRP’s order for AY 2009-10 and decided to uphold the order of the Ld. DRP on this
issue. We note that the Tribunal has upheld the order of the Ld. DRP by holding as under:
“52. We find in the light of the admitted factual position that no loan funds were in the books
of accounts of the company, there cannot be any question of payment of interest against the
loan funds and consequently disallowance of interest expenses in terms of Rule 8D(2)(i) or
(ii) of the Rules. Since there is no unallocable interest the DRP has rightly held that no
interest expenses can be disallowed. We find no grounds to interfere with the order of the
DRP. Consequently ground no.1 raised by the revenue is dismissed.”

Since the facts and the law are similar and there is no change in facts and law
respectfully following the decision of the Tribunal we confirm the order of the ld. DRP and
dismiss this ground of appeal of the revenue.

18. In the result, appeal of the revenue is dismissed and appeal of the assessee is partly
allowed.
Order is pronounced in the open court on 14.05.2018
Sd/- Sd/-
(J. Sudhakar Reddy) (Aby. T. Varkey)
Accountant Member Judicial Member

Dated : 14th May, 2018

Jd.(Sr.P.S.)
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ITA Nos.346 & 229/Kol/2015
AKZO Nobel India Ltd. AY- 2010-11

Copy of the order forwarded to:

1. Appellant – M/s. Akzo Nobel India Ltd. Geetanjali Apartment, 1st floor,
8-B, Middleton Street, Kolkata-700 071.
2 Respondent – DCIT, circle-10(1), Kolkata.

3. The CIT(A) Kolkata

4. CIT Kolkata
5. DR, ITAT, Kolkata.
/True Copy, By order,

Sr. Pvt. Secretary