9911796707
TMI Blog2015 (9) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... ees from its customer for sale of holiday packages. This function is totally different from the functions carried out by the appellant and therefore, this company should be excluded for the purposes of comparison while determine the arm’s length price of the international transaction in question. Publicity Society of India Ltd. company engaged in the business of publication of news papers and publications should be excluded for the purposes of comparison while determine the arm’s length price of the international transaction in question. Addition under Section 40A(2)(a) - disallowance of 50% of profession paid to M/s Metso Minerals (Mumbai) Pvt. Ltd. - Held that:- Assessing Officer is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to any one of the three requirements prescribed. This opinion has to be formed by the Assessing Officer based on the material evidence available on the record. The Assessing Officer is duty bound to bring on record the comparable fair market value of the services rendered to say that the value paid by the assessee is excessive or unreasonable. We find no evidence on record to notice that the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law in making adjustment of ₹ 4,85,04,301 to the income of the appellant on account of the alleged difference in the arm's length price of the international transaction of marketing support services undertaken by the appellant with its associated enterprises. 2.1 That the assessing officer/DRP erred on facts and in law in recharacterizing the transaction of provision of marketing support services undertaken by the appellant as commission agent services, by misinterpreting the following clauses of the agreement: (i) The assessee is under no obligation to increase the turnover of its AE. (ii) The assessee shall not be responsible for acting as mediator between its foreign AE and its customers. (iii) There is no responsibility towards the customer neither there is any clause of obligation towards any after sales service. (iv) The assessee has no obligation for recovery from the customers. (v) The assessee does not have any authority to execute contract. (vi) The payment mode is fixed percentage of sale value of goods. 2.2 That the assessing officer/ORP erred on facts and in law in not appreciating that in terms of Marketing Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able and are showing abnormally high profit margin in the relevant segment, in the final set of comparable companies. 2.10 That the assessing officer/ DRP erred on facts and in law in considering British Metal Corpn. India Private Limited, Priya International Limited and Publicity Society of India Ltd. as part of the comparable companies for bench marking of international transaction of market support services when these companies were not considered as comparable in the previous years nor in the subsequent years. 2.11 Without prejudice, that the assessing officer/ DRP erred on facts and in law in considering incorrect profit margin of certain comparable companies: Name of the company Margin considered by TPO Actual margin PL Worldways Ltd. 39.60% 4.52% Publicity Society of India Ltd. (Seg.) 71.17% 37.14% 3. That the assessing officer/DRP erred on facts and in law in making an ad- hoc disallowance of 50% of the professional fees of ₹ 60,29,221 paid by the appellant to Metso Mineral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f information furnished by AIR as transaction against credit card -bills, alleging the same as unexplained expenditure. 4.1 That the assessing officer failed to follow the directions of DRP by not providing the appellant the details of the information furnished by the AIR based on which the disallowance is made. 5. That the assessing officer erred on facts and in law in levying interest under Section 2348 and Section 234C of the Act. 2. Briefly stated the facts of the case are that the appellant [Mesto Minerals (India) Pvt. Ltd.] is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing and trading of mineral processing equipment. The return of income for the assessment year 2009-10 was filed on 27th September, 2009, disclosing taxable income of ₹ 10,73,56,150/-. The case was selected for scrutiny assessment. Since the appellant reported international transaction in its report in form 3CEB, a reference under Section 92CA(3) was made to Transfer Pricing Officer (TPO)-1(3), New Delhi. 3. It is reported that during the year under consideration, the appellant entered into the following internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.37% 16. Trade Wings Limited 15.61 % 17. Travel Corporation (India) Ltd.- 20.15% Arithmetic Mean 5.82% 5. The appellant claimed that since the margin for marketing supportive services segment was at 10.23% in its case, which was more than the comparables profit margin of 5.82%. The international transaction for provisions for marketing support services was at arm s length price. As against this, the Transfer Pricing Officer (TPO), made the flowing observations: It has been obs e rved that in earlier y ear s th e commission b e ing c harg e d b y the assessee from its US AE was at the rate of 10 % . For e.g . in the F. Y 200 7 - 08 the commission from US on the sale of Rs . 9 , 02,36, 684 was RS.904 8 360 i . e.10% and this was based on written agreement bet w een them . The sale in the US segment increased in the year under consideration from 9.02 crores to 23.09 crores . But the ass e s s ee instead of showing the commission @ 10 % ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed the TPO to exclude Killick Agencies Marketing Ltd. And Cox Kings as these companies had substantially high related party transactions. Accordingly, the Assessing Officer passed final assessment order dated 28th February, 2014 making upward adjustment of on account of Transfer Pricing of ₹ 4,85,04,301/-; for profession fees paid to Metso Minerals (Mumbai) Pvt. Ltd. of ₹ 30,14,610/- and for unexplained expenditure reflecting in ITS Report of ₹ 2,07,137/-. Being aggrieved, the appellant as well the Revenue had come up with the present appeals before us. 7. During the course of hearing, the learned Counsel for the appellant had submitted that the level of value addition in a distribution activity can be compared with an agency/marketing support function only at gross margin level. All functions related to trading such as procurement, storage, distribution and other related activities are not undertaken for agency/ marketing support function. Further, in the market support segment the appellant neither performs any function related to inventory management nor assume inventory risk. Hence, selling and administration costs should ideally be split in gros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross Profit then the international transaction of rendering market support services is at arm's length price. Hence, no transfer pricing adjustment is warranted. 7.2 Without prejudice to the above argument, the learned counsel had assailed the rejection of transfer pricing study undertaken by the appellant and the comparables identified therein without assigning any reason. He contended that the TPO has summarily rejected the transfer pricing study undertaken by the appellant and the comparables identified therein without ascribing any reason. In this connection, he placed reliance on the decision of Hon ble Jurisdictional High Court in the case of Li Fund India (P) Ltd.: 361 ITR 85, before this Hon'ble Court, the assessee adopted TNMM and computed PLI at operating profit margin/total cost. The Hon'ble Delhi High Court, held that where all elements of a proper TNMM were detailed and disclosed in the assessee s study reports, care ought to be taken by the tax administrators and authorities to analyze the same in detail and then proceed to record reasons why some or all of them were unacceptable. The Hon ble Court also referred to Circular Nos. 12 and 14 of 2001, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ariety of newspaper and publications. The company derives majority of its income from sale of newspapers and advertisement revenue. Further, the company also has a website freepressjournal.in which is a major source of revenue through its e-advertisement initiatives. As the majority of income comprises of advertisement revenue and sale from newspaper, the company is not functionally comparable to the marketing support services rendered by the appellant. After removing the above companies, average operating profit margin of the final list of comparable companies with an 11.83% as under: Sl. No. Company Name OP/TC 1. ICC International Agencies Ltd. 11.83% Arithmetic mean 11.83% Therefore, it is submitted that since the OP/OC ratio of the appellant in marketing support services segment at 10.23% falls within the +/-5% range of the mean operating margin of 11.83% of the above comparable companies, it was submitted that the international transaction of provision of marketing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. Officer Care Services Ltd. 4.72 13. Overseas Development Employment Promotion Consultants Ltd. 9.88 7.21 Persistent losses during FY 2006 and 2007 14. Pearl International Tours and Travels Ltd. -3.28 4.06 2.91 15. Sharyans Resourses Ltd. 3.21 3.33 Different business profile Financial Service prove 16. Trade Wings Ltd. 17.36 15.61 8.52 17. Travel Corporation(India) Ltd. 22.58 20.15 18.01 18. A2Z Maintenance Engineering Service Pvt. Ltd. Not in base set 0.99 0.99 19. Ambal s Advertisers (India) Ltd. Turnover less than 1 Crores 0.77 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances, the Revenue should have felt bound by the previous decisions and no attempt should have been made to reopen the question. He relied upon some authorities in support of his stand. A Full Bench of the Madras High Court considered this question in T.M.M. Sankaralinga Nadar and Bros. Vs. CIT [1929] 4 ITC 226. After dealing with the contention, the Full Bench expressed the following opinion (p.242). The principle to be deduced from these two cases is that where the question relating to assessment does not vary with the income every year but depends on the nature of the property or any other question on which the rights of the parties to be taxed are based, e.g., whether a certain property is trust property or not, it has nothing to do with the fluctuations in the income; such questions, if decided by a court on a reference made to it would be res judicata in that the same question cannot be subsequently agitated. The Supreme Court in the recent decision in the case of Excel Industries Limited 358 ITR295, following its earlier decision supra reiterated the law in this regard. Reliance is also' placed on' the forgoing decisions, wherein the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparables companies: The TPO vide its order has considered incorrect margin of the following companies in the comparable set: Name of the comparables companies Incorrect margin Correct margin PL Worldways Limited 39.60% 4.52% Publicity Society of India Limited 71.17% 37.14% The appellant pointed out the above computational error before the TPO and DRP and the same was not accepted or considered by them without giving any reason. After considering the correct margins the revised arithmetic mean of the comparable companies is as follows : No. Company Name OP/TC 1. P L World ways Ltd. 4.52% 2. Publicity Society of India Limited 37.14% 3. ICC International Agencies Limited 11.83% 4. British Metal Corporation (India) Pvt. Ltd. 62. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE. Therefore, we direct that this company be omitted from the list of comparables for the period under consideration for the purpose of determining arm s length price of the international transaction in question. (ii) Priya International This company was selected as comparable by the Transfer Pricing Officer. It is seen from the record that the Transfer Pricing Officer included this company in the final set of comparables selected by him. The appellant brought on record substantial factual evidence to establish that this company is functionally dissimilar and different from the appellant and therefore is not comparable. It is evident from page no. 740 to 743 of the paper book that this company is engaged in the provision of commissioning agency and trading of chemicals. This function is totally different from marketing services for the equipment of minerals and therefore, this company should be excluded for the purposes of comparison while determine the arm s length price of the international transaction in question. (iii) PL Worldways Ltd. This company was selected as comparable by the Transfer Pricing Officer. It earns commission from air ticket sold and also t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engineering services. The appellant, during the year has also received payment of ₹ 9,67,387 for similar services rendered to Metso Mumbai. The assessing officer, in the impugned order, disallowed 50% of the aforesaid payment made by the appellant to Metso Mumbai under section 40A(2)(a) of the Act, allegedly holding that: (i) There is no justification for the payment at the rate of ₹ 600 per hour; (ii) There are no details of what work has been done by the engineers of Met so Mumbai and what has been the contribution to revenue of the appellant; (iii) The appellant is also rendering such services to its related parties. Accordingly, there is rationale to receive such services from Metso Mumbai; (iv) The appellant has not furnished any comparable case which would show that the rates are as per prevailing market rates; (v) Professional services have been rendered to Metso Mumbai and other third parties in spite of tight delivery schedules. It is submitted before us that the aforesaid disallowance made by the assessing officer is without appreciating the following underlying facts of the case of the appellant and the need for receiving services from M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the quantum thereof has to be judged from the point of view of the businessman and not of the Revenue: - CIT v. Malayalam Plantations Limited: 53 ITR 140 (SC) - CIT v. Wa1chand Co. etc. (1967) 65 ITR 381 - J K Woollen Manufacturers v. CIT: 72 ITR 612(SC) - CIT v. Birla Cotton Spg. And Wvg. Mills: 82 ITR 166 (SC) - Madhav Prasad Jatia v. CIT UP, 118 ITR 200 (SC) - S. A. Builders Ltd. vs. CIT : 288 ITR 1 (SC) - CIT v. Rockman Cycle Industries Ltd.: 331 ITR 401 (P H) (FB) - CIT v. Bharti Televentures Ltd: 331 ITR 502 (Del) - CIT vs. EKL Appliances Ltd. : ITA No. 1068/2011 1070/2011 (Del HC) It was further submitted that for invoking the provisions of section 40A(2) of the Act, the onus lies upon the assessing officer to prove that the payment is excessive or unreasonable having regard to the fair market value of goods or legitimate needs of the business, as has been held in the following decisions: - CIT vs. Modi Revlon (P.) Ltd.:210 Taxman 161 (Del) - CIT vs. Nestle India Ltd: 337 ITR 103 (Del.) - CIT vs. Forbes Tea Brokers: 315 ITR 405 (Mad.) - CIT v. Modi Xerox Ltd.: ITA No.31120011 Lex Doc Id 405888 (All.) - Voltamp Transformers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter concern merely guided by the fact that the appellant had been incurring losses and also placed reliance on the decision of Hon ble Gujarat High Court in the case of Coronation Flour Mills Vs. ACIT, [2009] 314 ITR 1 (Guj.). This, in our view, would not meet the requirement of the provisions of Section 40A(2). A plain reading of the provisions of Section 40A(2) reveals that where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person referred to in clause (b) of section 40A(2) of the Act and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to (a) fair market value of the goods, services or facilities for which the payment is made; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities, then the Assessing Officer shall not allow as a deduction so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable. Therefore, it becomes apparent that the Assessing Officer is required to record a finding as to whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bias of any kind from the view-point of a reasonable and honest person in business. 14. The aforesaid judgement of Calcutta High Court was affirmed by the Apex Court in CIT Vs. Edward Keventer (P.) Ltd. [1978] 115 ITR 149. In the same line is the judgment of Bombay High Court in the case of CIT Vs. Shtrunjay Diamonds [2003] 261 ITR 258/128, Taxmann, 759. 15. In the light of aforesaid legal position, we hold that 50% of professional charges paid to M/s Metso Minerals (Mumbai) Private Limited cannot be disallowed and accordingly these grounds of appeal are allowed. 16. Ground no. 4 to 4. 1 relates to challenge of disallowance of ₹ 2,07,137/- on account of unexplained expenditure made against credit card bills. 16.1. During the assessment proceedings, the assessing officer required the appellant to explain the transaction amounting to ₹ 207,137/- against the credit card bills as per individual transaction statement (' ITS ') furnished by Citi Bank. Since no such transaction was entered into by the appellant during the year and no transaction was recorded in the books of accounts of the appellant, the appellant sought information from Citi Bank. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be understood. In our view, the DRP should have examined the transactions, which could not be done before AO due to lack of time and details. Reliance is placed on decision of Bangalore Tribunal in case of DCIT vs. Shri G. Selva Kumar (ITA No. 868/ Bang/2009) where in it has been held that onus would be on the revenue if the adjustment is made on the basis of AIR. The Tribunal held as follows: 10 ..... Assessment order based only on the AIR report will not stand in the eye of law. The assessee is also directed to co-operate with the proceedings by promptly producing the relevant documents and books of account required by the Id. AO .. Since the grounds raised by the Revenue and CO by the assessee pertains to the same issue, the delay in filing the CO is condoned and admitted for hearing. In the light of the above arguments, it is submitted that adjustment made by the assessing officer on account of credit card transaction may be deleted. 16.4 Having heard the rival submissions, we are of the considered opinion that the interest of justice would be met, if the matter is restored to the file of the Assessing Officer for fresh adjudication in accordance with law. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
