9911796707
TMI Blog2011 (12) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO proposed addition of Rs. 25.56 crores in the draft assessment order. The assessee filed objections before the DRP, who rejected such objections and confirmed the stand of the Department. Based on the TPO's order and the draft order approved by the DRP, the AO made addition of Rs. 25.56 crores. 4. At this stage, it would be relevant to consider the order of TPO passed on 29-10-2009. From this order it can be seen that during the year in question, the assessee entered into the following international transactions with its AEs: (Figures in Rs. '000) 1. Import of raw materials 57783 Transactional Net Margin Method ('TNMM') 2. Import of finished goods 310098 TNMM 3. Export of finished goods 97766 TNMM 4. Receipt of indenting commission 94481 TNMM 5. Recovery of expenses 27520 Recovery of actual Cost (TNMM) 6. Reimbursement of expenses 405 Reimbursement of Actual cost (TNMM) 5. The TPO noted that the activities of the assessee were largely classified into manufacturing and trading. As regards the manufacturing activity, he observed that the assessee manufactured and sold thermo plastics, polyurethane. For manufacturing these products, the assessee importe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounts being maintained and margins being shown by the assessee. He analyzed the final split-up given by the assessee (copy on page 510 of the paper book) between trading and indenting segments and noticed from it that the assessee had bifurcated all other expenses except Employee cost and Rent on the basis of trading turnover to the indenting turnover (i.e. 42:734). Employee cost was bifurcated by the assessee in the ratio of 1:1 between trading and indenting segments. In the opinion of the TPO, the entire Employee cost was required to be bifurcated on the basis of trading and indenting turnover. He, therefore, allocated a sum of Rs. 4.60 crores to the indenting segment. Similarly, as regards Rent totaling Rs. 53.90 lakhs, the assessee attributed equal amount to both the activities. Applying the same yardstick of apportioning in turnover ratio, the TPO allocated Rs. 50.94 lakhs to indenting segment and Rs. 2.96 lakhs to trading segment. In this way, he revised the segmental accounts in respect of trading and indenting activities as under : (Figures in Rs. ' 000) Trading Indenting Total Sales 427,176,242 7,348,320,873 7,775,497,115 Other Operating Income &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the AE's goods indented in India through the assessee. The TPO opined that arm's length indenting commission should be based as a percentage of sale and not as a percentage of cost inasmuch as the compensation was only for the effective sales made through the assessee. The most appropriate method for compensating such kind of indenting services, in his opinion, was not a cost plus but a percentage of sales method. He noticed that the assessee had shown to have earned margin of 23.73% under indenting segment, which was erroneously depicted as a percentage of its gross commission and hence was meaningless. The assessee was given an opportunity to give the names of the comparable companies which were indulging in such kind of indenting business in chemicals to prove that its price was at ALP. The assessee failed to discharge this burden. Taking strength from the Special Bench order in the case of Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141 (Bang) (SB), the TPO came to hold that, in the absence of the assessee forthcoming with any comparable cases, he will apply a reasonable rate of commission charged in similar activity. It was noticed by him that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roup on sales effected by them through the assessee's assistance. The TPO requested the assessee to segregate the results in respect of trading and indenting activities and furnish segmental accounts separately. Initially it was argued before the TPO on behalf of the assessee that it was not practicable to segregate the results in respect of trading and indenting activities. The assessee revised the calculations of such profit one after the other, for four times, sometimes voluntarily and on others at the instance of the TPO. Final calculation, a copy of which is available on page 510 of the paper book, was filed splitting trading and indenting activities, which has been considered by the TPO for further adjustments. Thus it can be seen that though the assessee was initially hesitant to give segmental accounts in respect of trading and indenting activities separately but eventually complied with and furnished such details. 8. The first question in this regard is whether the TPO was justified in proceeding with the exercise of determining the ALP distinctly in respect of trading and indenting activities ? There cannot be any dispute on the proposition that if functions, assets and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading and 23.73% in the case of indenting activities. Here, it is pertinent to note that trading margin at 3.90% was determined by considering the figure of net sales of Rs. 42.71 crores as denominator. On the other hand, the net profit margin in the case of indenting activity at 23.73% was computed by adopting the gross figure of indenting commission along with cost recovery as denominator instead of actual turnover on which such indenting commission was earned. The figure of such indenting turnover was admitted by the assessee as Rs. 734.83 crores. The TPO substituted the figure of indenting turnover with the gross commission adopted by the assessee for the purposes of working out the Operating profit to Sales ratio in the indenting segment. In the fourth and the final financial split, the assessee bifurcated all expenses, except Employee costs and Rent in the ratio of trading to indenting turnover, that is, 42 : 734. However, these two expenses were apportioned equally in the ratio of 1:1. The TPO accepted all other figures given by the assessee except the bifurcation of these expenses. He apportioned these two expenses also in the ratio of trading and indenting turnover. On ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, repel this contention raised on behalf of the assessee and approve the view canvassed by the TPO in adopting the figure of turnover in the indenting segment at Rs. 734.83 crores. 12. The second objection raised by the assessee is on the bifurcation of employee cost between trading and indenting segments. Whereas, the assessee divided employee cost in equal shares between the trading and indenting activities, the TPO apportioned it in the ratio of turnover. The ld. AR argued that the basis adopted by the assessee in bifurcating such cost was correct. We are again unconvinced with the submissions tendered on behalf of the assessee in this regard that the employee costs should be segregated in equal proportion between the two segments. The obvious reason is that the assessee itself admitted before the TPO that "trading and indenting are being undertaken by the company as an integrated trading business with common employees, common facilities and common strategies and common management". If one of the two activities consumes a small fraction of the total time, it cannot be said that expenditure in both is similar. When the employees were common in both the segments, how the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consolidated unit, without there being any segregation for indenting activity. In that view of the matter the comparable cases cited by the assessee lost their significance. Left with no comparable case available for comparison from the side of the assessee, the TPO rightly requested the assessee to give names of companies indulging in such kind of indenting business in chemicals to show that its price was at arm's length. The assessee did not furnish any details of the comparable cases. In the absence of the assessee discharging its onus the TPO took upon himself the duty of finding comparable cases. He noticed that no data was available on such activity in the realm of uncontrolled transactions. He, accordingly, took note of three comparable cases entering into similar indenting business by way of controlled transactions, viz., M/s Huntsman International Pvt. Ltd., M/s INEOS ABS (India) Ltd. and M/s Rathi Properties Madras Ltd. showing the percentage of indenting commission to sales at five percent. Now the question arises as to whether the TPO was justified in considering these three cases as comparable. 14. The ld. counsel argued that the TPO erred in rejecting the comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such the basket of comparable cases is emptied. As the exercise of determining ALP is inconceivable without any comparable case, the TPO will have to afford one more opportunity to the assessee enabling it to give certain other cases which are really comparable. On the receipt of details of such comparable cases, the steps at ii. to iv. shall be undertaken by the TPO. vi. If despite being put to notice as per step v., the assessee fails to give any list of comparable cases or the cases given are again found to be incomparable, then the power of the TPO in voluntarily selecting comparable cases as discussed in step iv. above shall get converted in to his duty. He will have to undertake the exercise of finding comparable cases so as to complete his job. 15. Adverting to the facts of the instant case, it is noted that the assessee initially gave list of comparable cases. All such cases were found to be incomparable as having been given for combined trading and indenting activities. Since the TPO was to benchmark only indenting activity and none of the cases given by the assessee satisfied this functional test of comparability, the TPO requested the assessee to give a list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction" to mean "a transaction between enterprises other than associated enterprises, whether resident or non-resident". When we read sections 92C(1) and 92F(ii) in conjunction with Rules 10A and 10B, it becomes ostensible that ALP is to be determined with reference to uncontrolled transactions or, in other words, the price applied or proposed to be applied in a transaction between other than Associated Enterprises in uncontrolled conditions. 18. In order to appreciate the rival contentions in this regard, it will be pertinent to note that sections 92 to 92F dealing with computation of income from international transactions having regard to the ALP are placed in Chapter X with the marginal note : "Special provisions relating to avoidance of tax". The very purpose of introducing these provisions under Chapter X is to curb the tendency of avoiding the payment of lawful tax in certain circumstances. When two Associated Enterprises enter into transactions with each other, the possibility of arranging the affairs in such a manner that due tax is not paid in India cannot be ruled out. Albeit such a tendency is not omnipresent, yet it is not difficult to find out the instances where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an admitted position between the tax payer and the tax collector that there is no comparable uncontrolled transaction due to the nature of transaction being such that it is ordinarily between associated enterprises, in such a case, a transaction between two associated enterprises at arm's length price, though technically called 'controlled transaction', would partake of the character of 'uncontrolled transaction' for the purposes of determining the ALP in a later international transaction between two AEs. In such a situation, no fetters can be placed on the powers of the TPO to consider such comparable controlled transaction - having adorned the garb of uncontrolled transaction -for the purposes of benchmarking. If the contention of the ld. A.R. is accepted that controlled transaction should be altogether shunted out for the purpose of transfer pricing provision, even in rare circumstances as are presently prevailing, then the very rationale and purpose of sections 92 to 92F, being the determination of ALP, which is otherwise achieved from the controlled transaction, will be defeated. It is in such exceptional circumstances that the principle of purposive interpretation will co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. When the very purpose of these provisions is to determine arm's length price and there is admittedly no record of any uncontrolled transaction, in our considered opinion, it is perfectly in order to consider a controlled transaction genuinely entered in an uncontrolled manner between some other associated enterprises, for the purposes of benchmarking of such a transaction. 21. Reverting to the facts of the instant case, it is seen that the list of comparable cases initially given by the assessee was meaningless for benchmarking the transactions in the indenting business. Despite the TPO's request, the assessee failed to furnish the names of any comparable cases. The TPO did not find any data of uncontrolled transactions in this activity because of its peculiar nature. It was only thereafter, that he proceeded with the three cases, namely, M/s Huntsman International Pvt. Ltd., M/s INEOS ABS (India) Ltd. and M/s Rathi Brothers Madras Ltd. In our considered opinion the TPO, in the absence of having been pointed out any comparable uncontrolled case by the assessee or himself finding any such case, was right on the question of picking up the cases having controlled transactions for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evious year relevant to the assessment year under consideration M/s INEOS ABS (India) Ltd. was not an associated enterprise of M/s Bayer Material Science Ltd. Hongkong, and hence, satisfies the test of uncontrolled transaction. The third company namely M/s Rathi Brothers Madras Ltd. also did the business of indenting and received commission @ 5% to 6%. The learned A.R. while referring to pages 848 of the paper book, being the balance sheet of this company distinguished it again on the basis of its low turnover of only Rs. 10.65 crores 23. Thus it is evident that the similarity in the nature of business and other relevant facts in these cases with that of the assessee, except the volume of turnover, is not in doubt. Now the question is whether these cases, which are otherwise comparable, should be disregarded simply on the ground of smallness of turnover when compared with that of the assessee. Considering the fact that the assessee did not come out with any comparable case to justify its price at arm's length and further the TPO found out these cases having functionally identical activities duly confronted to the assessee, it is not possible to disregard such cases merely on the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36.74 crores. As against that, the assessee showed only a sum of Rs. 11.17 crores as indenting commission. In our considered opinion, the AO was right in making addition of Rs. 25.56 crores. 26. The learned A.R. has raised one more objection by contending that the TPO was not correct in rejecting the Transactional Net Marginal Method (TNMM) applied by the assessee and choosing the Comparable Uncontrolled Price Method (CUP) for determining the ALP. Again we are unable to accept this contention advanced on behalf of the assessee. The TNMM compares net profit margin realized by an enterprise from an international transaction in relation to cost incurred or sales effected or assets employed or having regard to any other relevant base. Here the comparison is that of net profit margin and not the gross income with the sales effected etc. As we are dealing with a case of commission income which is normally allowed as a percentage of turnover effected, the ratio of net profit to sales cannot be held as appropriate. On the other hand, the CUP method is useful where the A.Es buy or sell similar goods or services. In the present case, we are concerned with the rendering of services by one A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of Rule 8D are prospective. Respectfully following the precedent, we set aside the impugned order and direct the AO to compute disallowance u/s 14A in accordance with the ratio laid down by the Hon'ble jurisdictional High Court in the aforenoted case of Godrej & Boyce Mfg Co. Ltd. (supra). 31. Ground no. 10 is against the confirmation of disallowance amounting to Rs. 2,96,26,000/- made by the AO u/s 40(a)(ia) of the Act. 32. On the perusal of the Profit and loss account of the assessee, it was observed by the AO that the assessee had claimed deduction for a sum of Rs. 2.96 crores under the head "Cost sharing expenses". On being called upon to explain as to why the deduction of tax at source was not made before making the payment, the assessee stated that it was only reimbursement of costs to its group concern, namely, Bayer Corp Science Ltd. (BCS) and no profit element was involved in such payment. Not convinced, the AO held that the payment made by the assessee was liable to suffer deduction of tax at source u/s 194C. As the assessee had not deducted tax at source from such payment, the AO disallowed the amount of Rs. 2.96 crores u/s 40(a)(ia) of the Act. 33. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the assessee, it is seen under Schedule 18 that the assessee independently incurred various expenses such as Stores and spares consumed, Power and fuel, Freight, Rent, Repairs and Travelling, etc., apart from paying Cost sharing expenses of Rs. 2.96 crores. The P & L account of BCS is also available on record. It can be seen from it that the amount recovered by BCS from the assessee and other group companies towards cost sharing has been excluded from the expenditure incurred by it. The net effect of these transactions is that BCS provided its personnel and services to the assessee on cost to cost basis which the assessee included in its expenditure, whereas the BCS reduced the amount recovered from the assessee and other group concerns from its expenses. The contention that there was no profit element in such reimbursement of expenses was also raised before the AO, which remained uncontroverted. Now, the position which emerges is that BCS incurred certain costs on employees and facilities which were utilized by the assessee and the other group concerns for which there was reimbursement of actual expenditure incurred to BCS without any profit element. The ld. DR also failed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch addition in the value of the closing stock of last year was finally sustained. Before the AO, it was stated on behalf of the assessee that the appellate proceedings for the immediately preceding assessment year i.e. 2005-06 were still pending. The AO, therefore, refused to allow any adjustment on this score. 35. After considering the rival submissions and perusing the relevant material on record we find that there cannot be any doubt on the proposition that if the value of closing stock of the immediately preceding year has been increased u/s 145A by CENVAT credit in the shape of addition in the assessment u/s 143(3), the corresponding increase is also required to be allowed in the value of opening stock for the current year. The logic is simple that the value of the closing stock of one year becomes opening stock for the next year. The ld. A.R. has admitted that the addition made in the immediately preceding year on this issue has been challenged by it before the ld. CIT(A) and the matter is still pending. The effect of allowing this adjustment in the value of the opening stock at this stage will be lead to the presumption that the value of closing stock has been finally deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount by which the advance tax paid falls short of the assessed tax. Explanation 1 to section 234B(1) defines 'assessed tax' to mean 'the tax on the total income determined under sub-section (1) of section 143 and where regular a assessment is made, the tax on the total income determined under such regular assessment as reduced by the amount of' tax deducted or collected at source or any relief u/s 90 or 90A etc. From the above prescription of section 234B(1) read with Explanation (1) it becomes apparent that the interest under this section is charged with reference to the 'assessed tax' or the amount of assessed tax as reduced by the advance tax paid, if any, as the case may be. The assessed tax has been defined to mean tax on total income determined under regular assessment in case such assessment is made. We are concerned with a case in which a regular assessment has been made under section 143(3). In such a case, assessed tax can only mean the tax on the total income determined by the A.O. under section 143(3) as reduced by the advance tax etc. There is no reference whatsoever to the proposition that the additions which could not have been foreseen by the assessee at the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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