2014 (1) TMI 395 - AT - Income Tax

Arm s length price for purchase of raw material - Held that - When the services rendered by the MKR is inseparable and composite ie FPF, the TP studies should also be done after considering all the price components of the said services - In ALP studies, the assessee needs to travel extra mile to demonstrate that the raw material purchase price of the assessee is at arm s length after considering the entire cost attributable to the said purchases by the assessee - TPO cannot restrict his TP studies to only to the international transaction of reimbursements. In the fresh TP studies, the assessee needs to consider the composite transactions ie purchase cost incurred by the MKR, finance cost incurred by the MKR, administrative cost incurred by MKR, corporate guarantee commission etc - The duty of the TPO is determine the ALP and not to determine the justification of the said payments claimed by the assessee - The TPO has gone into the justification issues ie if the said reimbursement is rightly paid or not by the assessee - TPO must determine the ALP after merging all the relevant cost segments. His aim should be to determine after making requisite and appropriate adjustments - The MKR is not just a material seller to the assessee - The approach of the TPO cannot be appreciated in accepting - The international transactions involving the payment of cost for import of the raw materials and rejecting the reimbursement of the finance cost, interest cost etc amounting to Rs 17.81 cr and not charging of the corporate guarantee commission on the MKR - The TPO must determine ALP of the purchase price of the raw material as a whole after considering all the relevant segments of the price ie purchase cost, administrative cost and the finance cost and interest cost, guarantee commission etc. Regarding the principle of commercial expediency Following SA Builders 2006 (12) TMI 82 - SUPREME COURT The issue was restored for fresh adjudication - AO/TPO is directed to consider the said judgement and pass a speaking order on this issue.

Summary

Issues Involved:
1. Adjustment of Arm's Length Price (ALP) for reimbursement of interest and finance costs.
2. Nature of the transaction between the appellant and its Associated Enterprise (AE).
3. Applicability of transfer pricing provisions to the reimbursement of expenses.
4. The role and function of the AE in the context of the appellant's business operations.
5. Determination of whether the reimbursement of finance costs is at Arm's Length.

Issue-wise Detailed Analysis:

1. Adjustment of Arm's Length Price (ALP) for Reimbursement of Interest and Finance Costs:
The appellant contested the adjustment made by the Transfer Pricing Officer (TPO) in determining the ALP of the international transaction related to the reimbursement of interest and finance costs at NIL, as opposed to Rs. 17,81,06,522/-. The TPO's rationale was that these expenses should be borne by the AE, MRK International, and not the appellant. The TPO concluded that reimbursing these costs reduced the appellant's profits in India and shifted profits to a tax haven abroad.

2. Nature of the Transaction Between the Appellant and Its AE:
The appellant argued that the AE, MRK International, was set up to facilitate the import of raw materials by procuring finance from overseas banks at lower costs. The AE acted as a facilitator, procurement agency, and financier, and not merely as a raw material supplier. The TPO, however, viewed the AE primarily as a supplier of goods, not as a financing or funding arrangement for the appellant.

3. Applicability of Transfer Pricing Provisions to the Reimbursement of Expenses:
The appellant contended that the reimbursement of finance costs did not result in any income for the AE and thus should not be subject to transfer pricing adjustments under section 92(1) of the Income Tax Act. The CIT(A) disagreed, citing the newly inserted Explanation to section 92(1), which covers any expense or interest arising from an international transaction. The CIT(A) held that the reimbursement of finance costs fell within the scope of section 92(1).

4. The Role and Function of the AE in the Context of the Appellant's Business Operations:
The appellant emphasized that MRK International played a vital role in the appellant's business growth by facilitating cheaper financing for raw material imports. The AE's functions were composite, including procurement, financing, and facilitation. The TPO and CIT(A) did not fully acknowledge this composite role, focusing instead on the AE as a mere supplier of raw materials.

5. Determination of Whether the Reimbursement of Finance Costs is at Arm's Length:
The Tribunal noted that the TPO did not conduct a proper transfer pricing study to determine the ALP of the reimbursement of finance costs. The appellant argued that the total cost, including the finance cost, administrative cost, and raw material cost, was competitive in the open market. The Tribunal directed the TPO to conduct a fresh transfer pricing study, considering all relevant cost components and determining if the final price of raw materials, including the finance costs, was at Arm's Length.

Conclusion:
The Tribunal set aside the order of the CIT(A) and remanded the matter to the AO/TPO for a fresh assessment. The AO/TPO was directed to consider the composite functions of the AE, conduct a comprehensive transfer pricing study, and determine the ALP of the raw material purchase price, including all relevant costs. The Tribunal emphasized the need for a detailed examination of whether the reimbursement of finance costs was at Arm's Length, considering the appellant's argument of composite functions performed by the AE. The appeal was allowed for statistical purposes, and the AO/TPO was instructed to pass a speaking order after considering the principles of natural justice.