2017 (6) TMI 582 - AT - Income Tax

TPA - MAM - Berry ratio applicability - Held that - We are of the view that various functions for ship chartering have been outsourced by the AE to one M/s R. M. Martine, since inception of the AE. The AE had its own funds, undertook business risk and many instances of such risk which actually borne by AE pertaining to various vessels have been proved with evidence. The payment of hire charges, bunker charges, port charges have been made by the AE from its own funds evidenced by cash flow statement could not be controverted by revenue. In our studied and considered view the AE has performed proper business functions, assumed business risks by employing its own funds independently without help of appellant and, therefore, in no way AE can be considered as pure distributor. The Berry ratio is not at all applicable in the present case. Our view is fortified by Hon ble Delhi High Court judgment in the case of Sumitomo Corpn. (2016 (7) TMI 1055 - DELHI HIGH COURT) We are of the considered opinion that Berry ratio is not applicable in this case and therefore, appropriate profit indicator in this case is operating profit 7 total cost i.e. OP/TC. In case of pure distributor, only value added expenses are considered and Berry ratio can be applied. The AE made value addition, assumed various risks of business and also incurred damages and losses in the business, as discussed by me in detail earlier. As per TNMM study filed by the appellant, the margin on total cost earned by AE is 4.52% which is less when compared with 5.18% in case of other eleven comparable companies. This is within arm s length. Therefore, otherwise also no transfer pricing adjustment is called for by the safe harbor clause. Disallowance of Administrative & Selling Expenses - Held that - Disallowance has been made by ld. AO without pointing out any specific item of disallowance which is in the nature of purely an ad-hoc disallowance. Assessee s books are audited and the entire expenditure is properly vouched. It is a settled law that business expenditure should not be disallowed without citing specific item and giving reasons for disallowance. In our considered view, ld. CIT(A) has rightly held the disallowance to be ad-hoc and untenable which is upheld. Revenue ground in this behalf is dismissed and assessee s clarificatory CO ground is allowed.

Summary

Issues Involved:
1. Deletion of Transfer Pricing Adjustment
2. Deletion of Disallowance under Administrative & Selling Expenses
3. Admission of Additional Evidence in Violation of Rule 46A
4. General Error in Order of CIT(A)

Detailed Analysis:

1. Deletion of Transfer Pricing Adjustment:
The primary issue was whether the CIT(A) erred in deleting the addition of ?14,69,89,382/- made by the AO on account of transfer pricing adjustment. The assessee, Bagadiya Brothers Private Limited (BBPL), had a 100% subsidiary in Singapore, Bagadiya Brothers (Singapore) Pvt. Ltd. (BBSPL), involved in ship chartering. The AO and TPO questioned the use of the Transactional Net Margin Method (TNMM) and the selection of BBSPL as the tested party, proposing a transfer pricing adjustment based on the Berry Ratio.

The CIT(A) found that the TPO's rejection of the TNMM method and the application of the Berry Ratio were inappropriate. The CIT(A) noted that the AE performed significant entrepreneurial functions and assumed substantial risks, which were not accounted for by the TPO. The CIT(A) also highlighted that the AE had sufficient funds and operated independently without undue financial support from the assessee. The CIT(A) concluded that the TNMM method was appropriate and that the AE's transactions were at arm's length.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the AE's business decisions, risks assumed, and the nature of its operations justified the use of the TNMM method. The Tribunal also noted that the TPO's inclusion of third-party transactions in the transfer pricing adjustment was erroneous.

2. Deletion of Disallowance under Administrative & Selling Expenses:
The second issue was the deletion of the disallowance of ?1,19,000/- under administrative and selling expenses. The AO had disallowed this amount on an ad-hoc basis, citing inadequately maintained vouchers and non-business-related expenses.

The CIT(A) deleted the disallowance, finding that the AO's action was arbitrary and not based on specific evidence. The Tribunal upheld this decision, stating that business expenditure should not be disallowed without specific reasons and evidence. The Tribunal noted that the assessee's books were audited and vouched, and no specific disallowable items were pointed out by the AO.

3. Admission of Additional Evidence in Violation of Rule 46A:
The third issue was whether the CIT(A) was justified in admitting additional evidence in violation of Rule 46A of the Income Tax Rules, 1962. The CIT(A) admitted additional evidence submitted by the assessee, which was not produced before the TPO due to time constraints and other reasons.

The Tribunal found no infirmity in the CIT(A)'s decision to admit additional evidence. The Tribunal noted that the assessee was not given sufficient time to present the evidence before the TPO and that the additional evidence was necessary for a proper adjudication of the issues. The Tribunal also observed that the AO and TPO were given an opportunity to comment on the additional evidence during the remand proceedings.

4. General Error in Order of CIT(A):
The fourth issue was a general ground raised by the revenue, alleging that the CIT(A)'s order was erroneous both in law and on facts. This ground was not supported by specific arguments or evidence.

The Tribunal dismissed this ground, finding no merit in the revenue's general allegations. The Tribunal upheld the CIT(A)'s detailed and reasoned order, which addressed all relevant issues comprehensively.

Conclusion:
The Tribunal dismissed the revenue's appeal and upheld the CIT(A)'s order, confirming the deletion of the transfer pricing adjustment and the disallowance under administrative and selling expenses. The Tribunal also found no fault in the CIT(A)'s admission of additional evidence and rejected the revenue's general ground of error. The assessee's cross-objections were partly allowed, supporting the CIT(A)'s findings.