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TMI Blog2013 (6) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... t to be gathered from the nature of the assessee's business and its business profile - no substantial questions of law meriting scrutiny of this Court. Whether the appellant is entitled to the benefit of +5% range mentioned in Proviso 92C(2) while computing the Arm’s Length Price - Held that:- This controversy need not detain any more, as it has been put at rest by the amendment made to section 92C by the insertion of sub-section (2A) by the Finance Act, 2012 with retrospective effect from 01.04.2002. Having regard to the amendment made with retrospective effect from the assessment year 2002-03, which is the year before us, no substantial question of law can be said to arise. Expenses relating to closure of the business - whether were abnormal expenses and cannot be considered while arriving at the ALP - Tribunal noted that closure of the Indian units would automatically reduce the costs of the associated enterprisetherefore, would be a relevant issue for inclusion in the operating costs - Held that:- Tribunal failed to keep in mind that even according to the AO the assessee was being compensated for its agency and market support service by way of handling commission and fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs/ customers in India which includes import, export, off shore trade, project management, marketing of finished goods, market research and liaison work; and (ii) trading of a broad range of industrial, agricultural and consumer goods, commodities and natural resources. 3. We may first take up the appeal filed by the assessee in ITA No.1042/2011 relating to the assessment year 2002-03. The assessee filed a return of income on 31.10.2002 declaring nil income. It was revised but even in the revised return the income declared was Rs. nil; however, it was explained that the interest on bank deposit earlier treated as business income was being shown as income from other sources in the revised return, that the brought forward unabsorbed depreciation was being claimed as depreciation of the current year and that the expenses amounting to Rs. 11,23,440/- relating to construction project was being withdrawn. The return was scrutinised and an assessment order was passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act‟) determining the total income at Rs. 2,35,01,470/-. Several additions were made in the assessment order. For the purpose of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that the commission and service fees received by the assessee from MCJ did not represent arm‟s length price. While doing so, the TPO treated the interest income of Rs. 1.72 crores received by the assessee as non-operating income. Because of this treatment accorded to the interest income, the profits of the companies which were taken for comparison purposes were found to be more than the profits earned by the assessee and accordingly the addition on account of transfer pricing adjustment was made. It was the conclusion of the TPO that the income earned by way of interest by investing the surplus funds of the assessee in interest bearing instruments cannot be used to offset the assured return on costs. 5. The TPO was further of the view that in respect of the services rendered by the assessee, it should be remunerated on a cost-plus basis and the total costs should be made the basis of computing its earnings and not merely the commission and fixed fees paid to it. According to the TPO the commission rates and the fixed fees were determined by extraneous unascertainable factors which had no bearing with the corresponding costs incurred by the assessee. As the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee which require an adjustment to the price. Thereafter, he framed the following issues which according to him arose for adjudication on this point: - i. Whether the interest income of Rs. 1.72 crore is part of operating income or not. ii. Whether loss on sale of fixed assets, interest paid to income tax, office closure cost, amount paid to telephone adalat are abnormal costs and are required to be excluded while computing the operating expenses. 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. 8. The submissions of the assessee before the CIT (Appeals) were mainly these. The parking of the surplus funds in interest bearing securities was an integral part of the assessee‟s operations, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the CIT (Appeals) that the interest income was treated as business income in the assessment order. For these reasons, the CIT (Appeals) held that for the purpose of determining the arm‟s length price in respect of the controlled transaction of the assessee, the interest income of Rs. 1.72 crores was to be considered as non-operating income. He thus endorsed the decision of the TPO/AO. 10. The assessee carried the matter in further appeal before the Income Tax Appellate Tribunal. After considering the rival contentions and examining the facts, the Tribunal agreed with the income tax authorities, recording the following findings: - (a) The purpose of the exercise before the TPO is to determine the arm‟s length price of the transactions of the assessee with its associates by comparing the same with un-controlled, comparable transactions and in doing so he has to consider all the components of the operating income from which the costs incurred in earning such income have to be deducted; (b) It was not sufficient to decide whether the interest income fell to be assessed as business income or as income under the residual head for the purpose of making the assessment; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of determining the appropriate head of income under section 14 of the Income Tax Act, 1961 under which the interest would fall to be assessed. It has been rightly observed by the Tribunal that such a consideration is not relevant for the purpose of determining the operating income of an assessee for the purposes of transfer pricing regulations. Moreover, the Tribunal has also found as a fact that the interest arose out of investment of surplus funds which were not immediately required for the core business of the assessee. The Tribunal‟s view that in such circumstances the interest income cannot be considered to be its operating income is essentially a question of fact to be gathered from the nature of the assessee‟s business and its business profile. All these factors have been rightly kept in view by the Tribunal. We are, therefore, of the opinion that the first three questions are not substantial questions of law meriting scrutiny of this Court. 13. So far as the fourth question proposed by the assessee is concerned, the controversy arises this way. It was the assessee‟s contention that in determining the ALP, it was denied the benefit of the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed by the assessee in its appeal does not arise out of the order of the Tribunal. 16. As regards question No.5 the contention of the assessee is that the data relating to the earlier two years was available when the matter relating to the applicability of the arm‟s length price was being considered by the TPO and therefore, he ought to have considered that date also in arriving at the ALP. Our attention was drawn to sub-rule (4) of Rule 10B of the Income Tax Rules, 1962 and the proviso thereto. The sub-rule and the proviso are as below :- (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. The argument is that considering the nature of the powers of the transfer pricing officer under Section 92C of the Act, particularly, Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action. The case made out by the income tax department was that since the assessee is a captive unit of its associated enterprise, it was actually the latter which undertook the entire risk, that the associated enterprise was paying the assessee at the rate of cost plus 10% that if the Indian units are closed then the operating costs would correspondingly be reduced and therefore, the compensation paid would form part of the operating costs and would thus be relevant for arriving at the ALP. 18. The aforesaid issues were considered by the Tribunal. It noted that despite a specific direction issued by the CIT(Appeals), the assessee was unable to adduce any documentary evidence to show that the decision to close the Indian units was taken by the assessee independently and without being influenced by the associated enterprise. The Tribunal thus appears to have doubted the assessee‟s claim that it was an independent decision, taken without consulting the associated enterprise, to close down the Indian offices. The Tribunal further agreed that the stand taken by the revenue authorities that the closure of the Indian branches would correspondingly reduce the costs of the associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is being compensated by a fee or commission which has no connection with the costs incurred. This has been referred to even in the assessment order at paragraph 6.3 as follows:- For the agency and market support services, MIPL has received two kinds of remuneration : a. handling commission which varies from transaction to transaction and depends on the product, volume etc.; (during the proceedings the assessee was asked to give transaction wise break up of commission received but inability in this regard was expressed as it was stated that the transactions were numerous and could not collated); b. Services fees fixed fees for rendering marketing support in form of market survey etc. The CIT (Appeals) proceeded to decide the issue on the basis that the assessee was unable to produce any document to show the circumstances under which the decision to close the offices was taken. He also assumed that the relevance of the closure of the Indian units and the payment of compensation both would hinge upon as to whose decision it was to close down the Indian units. He held that the decision was taken at the behest of the associated enterprises and therefore, for transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llocated to trading of goods segment? 23. The Assessee has two segments, one pertaining to trading and the other pertaining to the services. In the course of the transfer pricing analysis, it was noticed by the TPO that the assessee, while computing the operating profit margin has considered the total operating expenditure at only Rs. 15,72,33,860/-, as against the total operating expenditure of Rs. 18,52,26,882/- shown in the audited profit and loss account. This difference was sought to be reconciled by the assessee and from the reconciliation it was noticed by the TPO that the difference of Rs. 2,82,50,502/- was claimed by the assessee against the revenues from the trading segment. When the TPO called for the details of the trading segment the assessee filed the same from which it was noticed that direct cost of Rs. 1,61,16,786/- and indirect costs of Rs. 1,21,75,804/- were claimed in the trading segment against the revenue by way of sales. It may be noted that the aggregate of these two figures accounts for the difference between the operating expenditure as shown in the audited profit and loss account and as considered by the assessee for the purpose of the transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 915,842 2,725,159 Gross profit from trading activities (unrelated party) ----(B) 4,088,444 20,066,010 Total --------------(c) 5,004,286 22,791,169 Total cost of the department (regional offices) Jamshedpur 8,514,581 Kolkatta 13,582,962 1,715,237 Mumbai 336,580 4,444,462 New Delhi 1,300,363 600,652 Total costs ------(D) 15,219,905 15,274,932 Total Direct expenses/ site expenses -----(E) 7,601,935 8,514,581 Grand Total (direct expenses) 16,116,516 Computation of indirect expenses Total cost 15,219,905 15,274,932 Direct costs 7,601,935 8,514,581 Total indirect costs -----(F) 7,617,970 6,760,351 Total allocable expenses Commission segment ----A/C * F) 1,394,176 808,341 Trading Segment -----(B/C * F) 6,223,794 5,952,010 26. The CIT (Appeals) accepted the above statement and directe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation from the assessee and since the information called for was to be supplied only on the basis of the figures of income/ expenditure which are already on record and were scrutinised by the transfer pricing officer, he could act upon the same and was under no statutory duty to call for a remand report from the assessing officer or the TPO. It was further argued that the figures supplied by the assessee which showed that the indirect expenses of Rs. 1,21,75,804/- were bifurcated between two projects on the basis of the income which was a reasonable way of apportioning the overheads and, therefore, neither the CIT (Appeals) nor the Tribunal committed any error in accepting the same. It was further contended for the assessee that the decision of the Tribunal is a pure decision of fact and did not give rise to any question of law. 29. On a careful consideration of the facts and the rival contentions, we are inclined to agree with the learned counsel for the assessee that no question of law or substantial question of law arises out of the decision of the Tribunal on this point. The discussion made above shows that the dispute related only to the allocation of overhead/ indirect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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