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TMI Blog2011 (3) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... his amount from the operating cost. Expenses in relation to branches closed - cost of closure – Held that: - Assessee has been receiving the certain charges at cost plus 10%. In such circumstances, this type of receipts would always be considered in the operating expenses. - cost of closure is not to be excluded from computing the operating expenses. Adjustment on account of risk – Held that: - assessee failed to file the details exhibiting risk born by comparables. - In the absence of that comparability, it is difficult to make adjustment. - The assessee ought to have demonstrated this factor before the learned TPO as well as before the Learned CIT(Appeals). - it is difficult to give any benefit on that account. Adjustment on account of global recession – Held that:- It may be a corroborative factor for determination of ALP in the case of assessee, but it is difficult to work out the exact influence of the market condition in the profit making of the assessee. TPO has considered the results of the comparable cases and thereafter recommended adjustment, therefore, we do not deem it appropriate to make any ad hoc adjustment on the basis of this argument at this stage. Variation with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of activities: Handling/Agency Business - MIPL acts as a representative of MCJ and Other Related Enterprises (ORE's). MIPL helps MCJ and ORE's in marketing their products in India. Its role is limited to brokering a deal between two companies and providing pre shipment & post shipment liaison services. In almost all transactions one party would be overseas. Marubeni Group Company or client of overseas Marubeni Group Company. In most cases the Indian parties are very reputed industrial houses whose main procurement needs are regularly provided by Marubeni group or their products are marketed through MIPL. For MIPL's services they are mainly paid commission by their overseas group partner/MCJ in foreign currency. Which may be fixed, by contract, or could be variable and a result of negations. MIPL earns commission from related parties. The Commission is based generally on the invoice value and in some instances based on quantity- depends on the products that are being traded(could range from 0.1% to 5-6%). Principal Business - Sometimes MIPL involves itself in trading i.e. export or import in its own name. Such transactions however are very few. Project activities - MIPL ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of Legal and Professional charges. 3,93,328 6. First common issue is involved in cross appeals for assessment year 2002-03 and department's appeal for assessment year 2003-04. It pertains to determination of arms length price in respect of international transactions with the associate enterprises. The assessee has reported seven international transactions with its associates enterprises in assessment year 2002-03 d six international transactions with its associate enterprises in assessment year 2003-04. The details of the transaction and the method used for demonstrating the arms length price for the purpose of transfer pricing in respect of international transaction adopted by the assessee have duly been noticed by the Learned CIT(Appeals) in paragraph 4.1 of the order in both the assessment years. Assessing Officer has made a reference under sec. 92CA(1) of the Act to the TPO for computation of ALP in respect of all the international transactions. Learned TPO accepted all the transactions and the method used by the assessee except the one transaction, namely, agency and market research. 7. Learned TPO has recommended adjustment in only one international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses. iii. Whether business promotion expenses disallowed by the A.O.and admitted by the appellant should also be excluded while computing the operating expenses iv. Whether, the appellant is entitled for adjustments to the operating profit, on account of differences in the working capital position and differences in the risks profile, between the appellant and the comparable companies. v. Whether the appellant is entitled to the benefit of +/- 5% range mentioned in Proviso 92C(2) while computing the Arm's Length Price." 10. Similarly, in assessment year 2003-04, Learned CIT(Appeals) has propounded nine points which were required to be adjudicated. After going through the orders of the revenue authorities below and the grounds taken by the revenue in this year, in respect of determination of arm's length price, we are of the opinion that point Nos.1, 2 and 6 carved out by the Learned CIT(Appeals) are not at all relevant for discussion in the present order, because parties are not litigating on these issues. They are to the effect, whether Assessing Officer is justified to make reference to the TPO without recording reason whether the Assessing Officer mechanically accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stments in the arm's length remuneration of the assessee relating to international transaction. The first common item involved in both the assessment years is whether interest income of ₹ 1.72 crores received by the assessee in assessment year 2002-03 and ₹ 1,93,95,460 should be formed part of operating income for working out the arm's length price. The learned counsel for the assessee at the time of hearing has placed on record a written note and advanced his arguments by referring the order of the Learned CIT(Appeals) in assessment year 2002-03. The learned counsel for the assessee while impugning the order of the Learned CIT(Appeals) contended that as per clause 21 of the Memorandum of Association, one of the objects of the assessee is to invest surplus funds of the company from time to time in deposits, government securities or other securities including shares, bonds and debentures time to time to be determined by the directors. As per clause 20 of the Memorandum of Association, the assessee is also permitted to lend money not immediately required for the business of the company, either with or without security and generally to such person and upon such terms and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect. For the purpose of determining the value of international transaction as arm's length price, one has to see whether interest income has played any role in either generating receipts for international transaction or had any influence over those transactions. He relied upon the order of the Learned CIT(Appeals). 15. We have duly considered the rival contentions and gone through the record carefully. There is no dispute that in assessment year 2000-01, interest income earned on the deposits made out of surplus fund was held to be a business income. There may not be any dispute with regard to the objects available in the MOU that assessee shall invest surplus fund in fixed deposits. The core issue for our adjudication is whether receipts shown by the assessee from international transaction with its associates enterprises are comparable to the receipts earned by any other assessees with independent party. As per the transfer price regulation, the purpose of the TPO is to determine the arm's length price of the transactions of the assessee with its associates by comparing the same with uncontrolled comparable and while doing so this exercise the TPO has to consider all the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration is the cost incurred for the operating activity which has to be taken into account. We find that Learned CIT(Appeals) has examined the issue with different angles also. The assessee has incurred expenses for earning interest income at ₹ 1.22 crores in assessment year 2002-03. It has shown interest income at ₹ 1.72 crores. Both these factors have to be taken into consideration before inclusion of any interest income in the operating income for the purpose of ALP. On due consideration of the order of the Learned CIT(Appeals), we are of the opinion that Learned First Appellate Authority as well as learned TPO has examined this aspect elaborately and has rightly held that interest income is not a relevant receipt which has any influence on the operating income of the assessee for working out the ALP. Therefore, this receipt has rightly been excluded in both the assessment years. 16. Now, we take the other items influencing the international transaction and considered by the learned revenue authorities in assessment year 2002-03. The first two items which have been excluded by the Learned CIT(Appeals) from the computation of total cost for the purpose of calculati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the result, the solitary grievance raised by the revenue in assessment year 2002-03 is de void of any merit. It is rejected. The other grounds raised by the revenue are general in nature and do not require any specific adjudication. 18. In the assessee's appeal, the next item relates to inclusion of following amounts in the operating cost: *Compensation for disclosure of business ₹ 12,19,764 units in Delhi Office * Compensation for closure of business unit ₹ 6,24,221 * Compensation for closure of Chennai office ₹ 50,54,007 Total ₹ 68,97,992 19. The learned counsel for the assessee at the very outset submitted that the Learned CIT(Appeals) has confirmed inclusion of the above amount in the operating cost on the ground that the assessee is primarily engaged in contract service provider to its AE which means that continuity of business is ensured to the MIPL. If the associate enterprises intends to break the relation of which it has enjoyed concessional fruit over the year then on closure of certain branches, the A.E. ought to have adequately compensate the assessee for such severance of relation. The assessee has closed these three offices in order t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue is drawing to tax the A.E., in our understanding this submission is not on a sound footing. The learned counsel for the assessee contended that if this stand of the revenue is accepted then there will never b a loss to an entity in India rather in other words higher the loss the revenue will expect higher income-tax on those losses by treating it as an operating expenses and expecting higher margin on that which would be against the principle of natural justice. It is not the case. The ITAT in the case of Mentorgraphic reported in 109 ITD 101 has observed that transfer pricing is not an exact science. One has to evaluate the transaction and it is difficult to arrive at a certainty, in that process. Element of guess-work would always be there. The analysis carried out by the adjudicating authority should be judicious one and that should be carried out after taking into consideration all the relevant facts and circumstances of the case. In the present case, the compensation received by closure of certain units may not be a regular phenomena. But by virtue of closing down certain branches, assessee has reduced the cost of A.E. It means that closure has a direct link with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. According to the Learned CIT(Appeals), in order to take benefit of this adjustment, information should be submitted along with details under Rule 10D maintained by the assessee. We find that Learned CIT(Appeals) has discussed in detail and observed that under section 92D(i) of the Act provide that every person entering into an international transaction, is required to keep and maintain such information and document in respect of thereof as is being prescribed under rule. Rule 10D(1) of the IT Rules. This rule requires maintenance of a record of the analysis performed to evaluate comparable as well as a record of the actual working carried out for determining the ALP. Rule 10D(4) of the Rules requires that the information and documentation to be maintained under Rule 10D(1) should be contemporaneous as far as possible and should exist latest by the due date of filing of the return. With regard to adjustment on account of risk, according to the Learned CIT(Appeals), assessee failed to file the details exhibiting risk born by comparables. In the absence of that comparability, it is difficult to make adjustment. As far as the decision of the ITAT is concerned, that relates to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t point of time. It may be a corroborative factor for determination of ALP in the case of assessee, but it is difficult to work out the exact influence of the market condition in the profit making of the assessee. TPO has considered the results of the comparable cases and thereafter recommended adjustment, therefore, we do not deem it appropriate to make any ad hoc adjustment on the basis of this argument at this stage. This ground of appeal is rejected. 29. In ground No.12, grievance of the assessee is that benefit of proviso appended to section 92C of the Income-tax Act, 1961 has been denied to the assessee. The arithmetic mean of profit level indicator of five comparable is 9.33%. If benefit of minus five i.e. range under the proviso is given to the assessee on the PLIs determined by the Learned CIT(Appeals) then arithmetic mean of the PLI would be 3.8%. Similarly, if plus five is added then it would be 14.8%. According to the learned counsel, benefit of this proviso ought to have been extended to the assessee. Learned DR on the other hand pointed out that benefit of minus 5% provided in the proviso is not a standard deduction. He relied upon the order of the ITAT in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m operating income for the purpose of computing ALP then estimated expenses on account of administrative, salary etc. be computed and excluded from the operating cost. He made a reference to the decision of Hon'ble Kerala High Court in the case of CIT vs. Wandoor Jupitor Chittry. He pointed out that in this case, 10% of expenses have been estimated for earning interest income. He claimed that at least 10% of interest income be considered towards interest cost. This issue was not raised before the learned revenue authorities below. To some extent, arguments of the learned counsel for the assessee is logical one. We remit this issue to the file of the Assessing Officer for readjudication and grant necessary benefit to the assessee. In view of the above discussion, the appeal of the assessee in assessment year 2002-03 is partly allowed whereas appeal of the revenue is dismissed. 33. In assessment year 2003-04, as observed earlier, only revenue is disputing the determination of the ALP. We have extracted the relevant points expounded by the Learned CIT(Appeals) for determination of ALP in paragraph 10 page 11 of this order. The first item is exclusion of interest income from operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the Trading activities the appellant has incurred direct site expenses to the tune of ₹ 1,61,16,786 and the balance ₹ 12,175,804 (₹ 2,82,92,590 - ₹ 1,61,16,786) is towards of allocation of indirect expenses/overheads. The TPO did not allow the allocation of indirect expenses towards the trading segment and instead treated these expenses as part of the Commission segment only. 9.3 During the appellate proceedings the appellant submitted that they are maintainiang segmental accounts of the Trading and Commission business, especially the projects which are part of the Trading segment. Since apart from the direct costs incurred on a project, there are other indirect costs which are incurred for the overall supervision of these projects, the cost of which cannot be directly identified and allocated, therefore, it is reasonable to conclude that some portion of these indirect costs also known as corporate overheads need to be allocated to the trading segment as well as particular project department. Hence, I agree with the appellant's contention that in the absence of any allocation of such expenses it is prudent to use income as the appropriate "allocation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 2004-05. Thus, interest under section 234D is not chargeable in this year. We allow the ground of appeal raised by the assessee partly and direct the Assessing Officer not to charge interest under sec. 234D of the Act. 39. In ground No.3, assessee has pleaded that learned revenue authorities have erred in withdrawing the interest granted under sec. 244A of the Act. At the time of hearing, learned counsel for the assessee did not press this ground of appeal, hence it is rejected. 40. The assessee has moved an application under Rule 11 of the IT Rules for admission of additional ground of appeal in both the years. It is pleaded in the application that assessee has been showing interest income as income from business. Assessing Officer did not accept this stand of the assessee and the dispute traveled up to the ITAT. The ITAT has held that interest income is to be treated as business income. Revenue took the matter in the Hon'ble High Court and thereafter to the Hon'ble Supreme Court. Hon'ble Supreme Court has accepted the stand of the assessee and in assessment year 2000-01, it has been held that interest income would be assessed as business income. In order to avoid lit ..... 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