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2016 (4) TMI 1447 - AT - Income TaxCharacterising of service end commission activities of the assessee company - Performing trading activity for its AE Japan or worked as a service provider? - HELD THAT - As decided in assessee own case 2015 (8) TMI 922 - ITAT DELHI determining the issue in favour of the assessee that the assessee company has performed routine, preparatory and ancillary activities in nature and have not created any intangibles as its role was limited to that of a routine coordination and support service provider. So, the ld. TPO/DRP have erred in recharacterizing the service end commission activities of the assessee company as equivalent to its trading segment. Inflation of total cost by TPO/DRP - The said value was recorded sale/purchase by the AEs and was never a cost to the assessee - HELD THAT - In view of what has been discussed above and by following the order passed by the coordinate Bench in assessee s own case on identical facts qua the AYs 2007-08 and 2008-09, we are of the considered view that the adjustment made by the AO in compliance to the order passed by TPO/DRP for benchmarking the international transaction qua AYs 200910 and 2010-11 is not sustainable in the eyes of law as (i) TPO/DRP have illegally and arbitrarily included the cost of sales incurred by the assessee company s AE, for which the assessee company has rendered support services to work out the profit for determination of the ALP; (ii) Identical and similar issue has been decided by the Tribunal in case of Mitsubishi Corporation India P Ltd. 2014 (10) TMI 702 - ITAT DELHI by following the judgment rendered in case of Li and Fung India Pvt. Ltd. 2014 (1) TMI 501 - DELHI HIGH COURT and held that the TPO was not justified in re-characterizing the transaction as trading transaction and it has also been held that cost of sales incurred by the AE cannot be included to work out the profit for determination of the ALP; (iii) Nature of services rendered by the assessee company to its AE since 2003 are the same and it has been consistently benchmarking its international transaction relating to the business support services using TNMM as the most appropriate method as OP/TC as PLI, as has been used in the instant case; (iv) As has been discussed in the preceding paras and as has been held by the coordinate Bench of the Tribunal in assessee s own case qua the AYs 2007-08 and 2008-09 that when the FOB value of the goods on which commission/ service income is earned amounting to Rs. 4005.37 crores for AY 2009-10 and Rs. 5057 crores for AY 2010-11 is not to be added to the cost base of the assessee s international transaction, the assessee s international transactions computed by using TNMM as the most appropriate method and PLI selected is GP/OC i.e. berry ratio, the international transaction in question are at arm s length; (v) Comparables chosen by the TPO to determine the arm s length price of the international transaction entered into by the assessee company are not correct one because all the comparables are of trading company and not of support services provider as in the case of assessee company. Decided in favour of the assessee. Disallowance u/s 14A - HELD THAT - By applying the law laid down in judgment cited as Cheminvest 2015 (9) TMI 238 - DELHI HIGH COURT in the similar facts and circumstances of the case, when assessee has not earned any exempt income during the years under consideration, as is evident from the documents lying i.e. profit loss account and audited balance-sheet, section 14A would not be applicable in the instant case. Hence, the disallowance confirmed by the DRP is not sustainable in the eyes of law. Disallowance of expenditure on account of leased rent, staff welfare and commission income adjustment relates to prior period - AR contended that the assessee had in fact never claimed the said amount as deduction in the return of income - HELD THAT - A perusal of the audited profit loss account statement apparently shows that assessee has never claimed prior period expenses during the year under consideration in Income-tax return and as such, the question of disallowing the same does not arise. So, we hereby decide this ground in favour of the assessee. Addition u/s 37 (1) - expenditure on account of payment of service fee paid abroad - expenditure has not been incurred wholly and exclusively for the purpose of business and on the ground that the assessee has merely submitted copies of the agreement of the assessee with the aforesaid companies and no evidence is available on the file - HELD THAT - Keeping in view the fact that in the succeeding year, AY 2011-12, the DRP has decided this issue in favour of the assessee and deleted the entire addition of service fee paid to the same parties to whom this fee was paid. So in view of the matter, this issue is required to be restored to the AO to decide afresh in the light of the order dated 14.12.2015 passed by DRP qua AY 2011-12 in assessee s own case after providing an opportunity of being heard to the assessee. Consequently, this ground is determined in favour of the assessee. Expenditure on logistic and warehousing support service - Addition u/s 37 (1) on the ground that the same has not been incurred wholly and exclusively for the purpose of business and the assessee has failed to offer any justification for making the aforesaid payment on account of commercial expediency nor the assessee has furnished copy of agreement with M/s. Panasonic India Pvt. Ltd. and nor placed on record detailed computation of losses - HELD THAT - AR, contention, that the amount in question has been incurred under terms of the outsourcing agreement with respective agencies, and placed on record the copy of agreement, lying at pages 7 onwards of the paper book has been overlooked by the AO as well as DRP and as such, we are of the considered view that this issue is also required to be restored to the AO to decide afresh after providing an opportunity of being heard to the assessee to adduce evidence in this regard. So, this ground is also determined in favour of the assessee. TDS u/s 195 - Purchase from PE in India - HELD THAT - Undisputedly, this issue is covered by the order passed by the DRP in assessee s own case qua AY 2011-12 as held that no TDS is applicable u/s 195 on offshore supplies. When the assessee company has no PE in India it is not liable to deduct tax at source. So in the light of the facts and circumstances of the case and the fact that this issue has been decided by the ld. DRP qua the subsequent AY 2011-12 in favour of the assessee, this issue is also restored to the AO to determine afresh.
Issues Involved:
1. Transfer Pricing Adjustments 2. Disallowance under Section 14A 3. Disallowance of Prior Period Expenses 4. Disallowance under Section 43B 5. Disallowance of Service Fee 6. Disallowance of Logistics and Warehousing Support Services 7. Disallowance on Non-Deduction of Withholding Tax Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustments: The Tribunal addressed the addition to the total income under Chapter-X of the Income Tax Act, 1961, for the assessment years 2009-10 and 2010-11. The Tribunal found that the TPO/DRP/AO erred in including transactions that did not belong to the assessee and changing its functional profile. The Tribunal held that the assessee performed routine, preparatory, and ancillary activities and did not create any intangibles. Consequently, the Tribunal ruled that the TPO/DRP erred in recharacterizing the service and commission activities of the assessee as equivalent to its trading segment. Furthermore, the Tribunal concluded that the TPO/DRP inflated the total cost of the assessee by including the cost of sales incurred by the AE, which was not a cost to the assessee. The Tribunal followed the judgment in the case of Mitsubishi Corporation India (P) Ltd. vs. DCIT and the Hon'ble Delhi High Court in Li & Fung India Pvt. Ltd. vs. CIT, holding that the TPO was not justified in recharacterizing the transaction as a trading transaction and including the cost of sales incurred by the AE to determine the ALP. 2. Disallowance under Section 14A: The Tribunal addressed the disallowance of Rs. 18,73,472/- for AY 2009-10 and Rs. 23,17,869/- for AY 2010-11 under Section 14A of the Act. The Tribunal noted that the decision of the Special Bench in Cheminvest Ltd. vs. ITO was overruled by the Hon'ble jurisdictional High Court, which held that Section 14A would not apply if no exempt income is received or receivable during the relevant previous year. Since the assessee had not earned any exempt income during the years under consideration, the Tribunal ruled that the disallowance under Section 14A was not sustainable. 3. Disallowance of Prior Period Expenses: The Tribunal addressed the disallowance of Rs. 11,11,510/- on account of prior period expenses. The Tribunal found that the assessee had not claimed the said amount as a deduction in the return of income. The Tribunal concluded that the question of disallowing the same did not arise and decided this ground in favor of the assessee. 4. Disallowance under Section 43B: The Tribunal addressed the disallowance of Rs. 2,29,831/- on account of service tax payable under Section 43B of the Act. The assessee conceded that this ground went against it and did not press it. Consequently, the Tribunal determined this ground against the assessee. 5. Disallowance of Service Fee: The Tribunal addressed the disallowance of Rs. 40,78,906/- on account of payment of service fees to related parties. The Tribunal noted that in the succeeding year, AY 2011-12, the DRP had decided this issue in favor of the assessee and deleted the entire addition of service fees paid to the same parties. The Tribunal restored this issue to the AO to decide afresh in light of the order passed by the DRP for AY 2011-12. 6. Disallowance of Logistics and Warehousing Support Services: The Tribunal addressed the disallowance of Rs. 1,10,01,931/- on account of expenditure on logistics and warehousing support services. The Tribunal found that the AO and DRP had overlooked the agreements placed on record by the assessee. The Tribunal restored this issue to the AO to decide afresh after providing an opportunity to the assessee to adduce evidence. 7. Disallowance on Non-Deduction of Withholding Tax: The Tribunal addressed the disallowance of Rs. 5,93,513/- on account of non-deduction of withholding tax on purchases from Mitsui & Co. Ltd., Japan. The Tribunal noted that this issue was covered by the order passed by the DRP in the assessee's own case for AY 2011-12, where it was held that no TDS was applicable under Section 195 on offshore supplies. The Tribunal restored this issue to the AO to determine afresh in light of the stand taken by the revenue in the subsequent year. Conclusion: The Tribunal allowed the appeals concerning TP issues for statistical purposes and partly allowed the appeals concerning corporate issues, restoring the file to the AO to decide afresh after providing an opportunity of being heard to the assessee.
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