9911796707
TMI Blog2016 (6) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) 2005-06 31. 10. 2005 40, 61, 95, 550/- 29. 12. 2008 5, 94, 20, 21, 732/- 11. 05. 2009 2006-07 29. 11. 2006(revised return on 11. 3. 2008) 8, 03, 99, 566/- (declrg taxable income at Rs. 7, 84, 42, 338/-) 15. 12. 2009 41, 96, 97, 240/- 17. 01. 2011 2007-08 12. 11. 2007(revised return on 26. 03. 09 (-) 9, 28, 09, 353/- 23. 12. 2010 1, 04, 23, 69, 746/- 29. 11. 2011 ITA/4336/Mum/2009, AY. 2005-06 2. During the assessment proceedings, the AO found that the assessee had entered into international transactions with its associated enterprises(AEs), as stipulated by the provisions of section 92A of the Act. He made a reference to the transfer pricing officer(TPO)for computing the arm's length price(ALP)of the transaction. During the transfer pricing(TP)proceedings the TPO found that the assessee had acquired the edible oil and fats business of Hindustan lever Ltd. (HLL)during the year under consideration, that the company was formed by the merger of Bunge Agribusiness India Private Ltd. into Geepee Ceval Proteins & Investment Private Ltd. as per the scheme of amalgamation sanctioned by the honorable high courts, that later on Geepee Ceval was renamed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FDR interest income, that all those expenses were directly related to business activity of merchanting trade, that the assessee had drawn the accounts for MTA by including direct expenditure i. e. purchase cost and value of sales, that for the TP purposes the assessee had amended the audited accounts by excluding the cost of purchase for calculating operating cost of MTA, that the operating cost included both direct and indirect expenditure, that the assessee had excluded direct expendi - ture while computing the operating cost, that it was not entitled to amend the basic structure of the audited financials of MTA by excluding the direct cost of purchase, that the purchase and sale invoices were in the name of the assessee. Accordingly, the operating profit margin from MTA was re-computed by the TPO by taking total cost(import price+indirect cost)of Rs. 75, 77, 20, 87, 912/-as the operat -ing cost and total income was taken at Rs. 75, 63, 66, 42, 465/- by excluding interest of Rs. 112. 86 crores. The adjusted operating result i. e. loss was worked out at Rs. 13. 54 crores as against the profit of Rs. 99. 31 crores shown by the assessee for working out the ALP. In light of the cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either of the parties of the transactions, that the AEs made the assessee risk mitigated Trader, that the AEs were involved in the import and export of various agricultural commodities as agreed upon the terms and conditions(price, ports, legal consequences) without the assessee's intervention at all, that the AEs were responsible for failure/default with regard to such transactions, that the assessee would identify and participate in such trade flows only after evaluating the potential to earn interest on the cash flows linked to such transactions, that it had a role limited to preparation of necessary trade documents in the overall trade flow, that it would enter into such purchase and sale transactions without taking physical delivery, that the title to the goods remained with the assessee only for an instant and was simultaneously transferred to the AEs, that it had no control over underlying transactions, that the first leg of the transaction included receiving advance against delivery to be made within 180/360 days, that the assessee would approach a local bank to open L/C for the payment at 180 days from the date of L/C for the import back of the transaction, that the L/C i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchase and sales had to be admitted at arm's length and should not be disregarded in arriving at the operating margin. 4. During the appellate proceedings, the FAA called for a remand report from the TPO. In his remand report, dated 5/5/ 2009, the TPO reiterated his arguments on various issues regarding MTA including the exclusion of interest income for the purpose of computing the ALP. The TPO submitted, in his report, that the assessee had not claimed that interest income on FDR was an international transaction in its form number 3CEB, that interest income of Rs. 26. 70 lakhs only was shown as international transaction, that the direct source of interest income was FDRs, that the assessee could not take an argument that interest income had to be included for computing ALP of international transaction of sale and purchase of agricultural commodities, that the assessee had made claim of clubbing of both trading loss of international transaction of MTA and interest income with a view to jacking up of net operating margin from import and export of agricultural commodities, that the interest derived from borrowed funds were invested in short-term deposits with the banks, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to be reduced, that the assessee had earned gross margin of Rs. 2. 15 crores, that the TPO had wrongly concluded that no advance was received against future sale of goods, that all the advances received had been invested in FDRs, that the advance received served two purposes, that it was placed in FDR, that the FDRs acted as a security and Lien against the L/C to be issued to the supplier, that the L/C on maturity was adjusted against the sale proceeds of the first leg though the advance still remained in form of FDRs, that the assessee had merely changed economic analysis of the MTA, that the inherent business model of the assessee did not change-it remained that of a Trader, that even post-merger the MTA continued to remain the same, that the comparability of the international transactions should remain at par, that no material was brought on record to show that any change in the business model of the MTA had taken place, that the only change in the business model that resulted from the merger was the addition of more activities by way of manufacturing apart from continuing the MTA, that on a consistent principal basis the MTA should follow the Trader model as was followed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (DR) contended , that the assessee had not produced any evidence to show that there was an agreement with the suppliers regarding credit period of 180/360 days, that there was no direct nexus between the earning of interest and MTA, that the AO had rightly excluded the interest income for making TP adjustments. He heavily relied upon the order of the TPO along with the remand report sent to the FAA during the appellate proceedings. The Authoried Representative(AR)submitted that while carrying out MTA the assessee would enter into back-to-back purchase and sale transactions instantaneous-without the goods physically entering India, that the interest received by it was an integral part of MTA and that same was factored in the economics of such trade, that nominal trading margin of $. 10/metric ton-when complemented with the embedded interest earning-made the activity economy can visible and profitable, that the assessee had participate in MTA out of its own interest, that there was an opportunity to earn interest income over and above $. 10/metric ton, that interest income was considered and accepted as a part of operating income in the TP orders for the earlier years, that costs L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that it selected operating profit to value added cost as the applicable PLI, that while computing the operating cost it excluded the sale and purchase price, that the assessee calculated its operating profit margin from its MTA@489. 28%, that the TPO had carried out detailed analysis for determining the ALP, that considering the support service nature of the functions performed by the assessee, he compared its margin with the margins of comparable companies engaged in support service activities, that he had proposed the adjustments of Rs. 501. 51crores, that the adjustment was as arrived at by computing the operating profit margin by taking total costs as operating cost and total income by excluding interest under on FDR, that the adjusted operating loss was arrived at Rs. 13. 54 crores, that the loss was worked out by changing the PLI, that the TPO applied operating profit to total cost(including import cost), as compared to the PLI applied by the assessee i. e. operating profit to value added cost (without including import cost). The change of PLI by the TPO vis-a-vis the assessee meant that the TPO had considered the total MTA(including imports and exports), whereas the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d unwarned. Principles of natural justice demand that the assessees should be given a fair chance of hearing before due taxes are collected. The TPO, being a representative of the State, cannot behave like a mere tax gatherer. Collection of 'DUE' taxes presupposes fair play and adhering to principles of affording a reasonable opportunity of hearing to the members of Subject of the State i. e. to the tax-payer. In the case before us, we find that no justification has been given by the TPO as to why he opted for not including the interest portion while passing the final adjustment order. It appears that once he found the transaction falls within the safe limit(margin of +/- 5%), he decided to exclude the interest portion so that adjustment could be made. If that was the reason, it cannot be endorsed. Definitely adjustments can be made while invoking the provisions of chapter X of the Act, but, not in this manner. Such a trend will result in making adjustments at any cost. TP provisions were not introduced for achieving such objects. In other words, the sections governing the TP adjustments were included in the Act to make a meaningful comparison between the controlled and uncontrolle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g margin of the assessee from MTA (including interest income) is 1. 31% on cost, as appearing in the show cause notice of the TPO(dated 16/10/2008), as compared to the trading comparable mean margin of 0. 94% on cost (as submitted to the TPO by the assessee in its submission dated 20/10/2008). As it is higher, so it could safely be concluded that assessee's inter - national transactions of MTA were at arm's length. 6. 2. We are also of the opinion that the TPO had wrongly relied upon the judgments dealing with deduction under section 80 HHC/10 A of the Act, that the cases relied upon by the TPO were not relevant for computing the ALP, that classification of income under the heads like business income/income from other sources had no bearing on the TP analysis, that for TP purposes he had to consider the functional profiling of the assessee and had to evaluate income attributable to the international transactions, while invoking the provisions of chapter X of the Act, that there was link of interest income with the functional analysis, that the assets were deployed in the business of the assessee, that same were not dependent on the chargeability under the different sets of income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e notice issued by TPO, the assessee contended that it had correctly used the CUP method, that in the earlier two years TPO had accepted the said method for determining the ALP, that the rates of CUP with regard to import of crude oil could not be compared to rates of merchantingtrade of the same commodity. The TPO observed under the TP Regulation ALP of a transaction could vary year to year depending upon economic conditions and comparability of the provisions, that CUP rates, applied by the assessee, were not exactly identifiable, that the same commodity was transacted at different rates in MTA, that assessee was not able to provide the resale margin of the crude oil sold in the local market, that soyabean meal was sold at a different rate as compared to the export to the AEs. 8. During the appellate proceedings, the FAA directed the TPO to submit a remand report. The TPO issued a show cause notice and proposed operating profit margin of Rs. 2. 92 crores to be applied on the operating income of Rs. 806. 56 crores as against assessee's operating loss of Rs. 56. 01 crores. After considering the submission of the assessee, the TPO re-worked the operating margin of comparable compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non operating expenses, resulting from abnormal items, were correctly accounted for, that the contention of the TPO was not factually correct, that the TPO had allowed, while considering the claim for reduction of operating expenditure, due to unutilised capacity as abnormal depreciation on tangible assets, that he had adopted 50% of the total expenditure, that he had considered the optimum capacity at 60%and not 100% that he had arrived at abnormal expense of 50% of total expenses by the assessee as against 70%. The FAA allowed Rs. 3. 81 crores under the head power and fuel, repairs and maintenance of building plant and machinery to the extent of 5/7th of the expenses and observed that the loss would be reduced by Rs. 2. 72crore. The FAA allowed Rs. 5. 46crore under the heads salary and wages(5/7th of the expenses) further reducing the loss by Rs. 3. 90crore. Deferred Revenue expenditure of Rs. 1. 05 crore was also allowed, increasing the loss by the same amount. The FAA re-worked the segment account to determine the ALP and arrived at the conclusion that there was a difference of Rs. 43. 07crore to the operating cost of the assessee. He observed that if the difference was to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, the FAA reworked the ALP of international transaction of import of goods in manufacturing activity as under: Rupees Adjusted operating expenses of the assessee shown in (E) above. 7, 90, 44, 26, 285 105% of the above (applying +/- 5% as per Proviso to Section 92C(2)-Arms length operating cost-(F) 8, 29. 96, 47, 599 Total Operating expenses of the assessee as per (B) above 8, 33, 51, 92, 616 Difference to be adjusted towards international transctions of import of goods from AEs assessee (F-B)assesseeG (3, 55, 45, 017) International transactions of goods imported from AEs - (H) 138, 28, 94, 614 Arms length price of international transactions of goods imported from AEs assessee (H-G)assesseeI 134, 73, 49, 597 On the basis of above adjustment, the import price of goods was determined at Rs. 3. 55Crore as against Rs. 48. 65 Crores determined by the TPO. As a result, the assessee got a relief of Rs. 45. 09 Crores. 9. Before us, the DR relied upon the order of the TPO. The AR argued that the assessee had acquired DALDA brand from HLL, that the said acquisition would take some years to fructify, that the assessee had to be extra ordinary costs in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wels Exports Pvt. Ltd(ITA No. 1814 of 2013)and Thyssen Krupp Industries India Pvt. Ltd. (ITA No. 2201 of 2013), the honorable Bombay High Court has held that for making adjustment as per the provisions of chapter X of the act transaction with AEs of an assessee had to be considered. We would like to reproduce the relevant portion of the judgement of Thyssen Krupp Industries India Pvt. Ltd. (supra) "We find that in terms of chapter X of the Act, the determination of the consideration is to be done only with regard to income arising from international transactions on determination of ALP. The adjustment which is mandated is only in respect of international transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. The adjustment is beyond the scope and ambit of chapter X of the Act. We find that while reworking the adjustment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively dealt with the issue and have noted the facts. We have held that the placing of money in the banks in the forms of FDRs was directly linked with the carrying out of business of the assessee. We further find that interest income and by the assessee has been accepted to be taxable under the head income from dismiss a profession in the earlier as well as in the subsequent AY. s i. e. AY. s. 2003-04, 2004-05, 2008-09 and 2011-12. The AO has not brought anything on record to prove that the facts of the earlier and subsequent years were different from the facts for the year under consideration. The rule of consistency stipulates that in absence of distinguishing facts and circumstances, the AO should not deviate from the stand taken/followed in the earlier years. Therefore, we are of the opinion that order of the FAA does not suffer from any legal infirmity. Confirming the same, we decide fourth ground of appeal against the AO. 15. Fifth Ground deals with non-compete fee of Rs. 2, 46, 34, 254/-. During the assessment proceedings, the AO found that the assessee had claimed revenue expenditure of Rs. 2. 45 crores, that it had claimed that it had acquired edible oil and fats business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the provisions of section 35(D) of the Act allowed to amortization of certain preliminary expenses and the assessee were allowed to claim such expenses during a period of 5 years, that five year period could not be considered a long period, that the assessee required entering into non-compete agreement was only in the form of forbearance undertaken by the seller for a limited period, that no enduring benefit had occurred to the assessee, that the expenses incurred by it could not be considered as capital expenditure. Following the order of the earlier year, the FAA allowed the appeal. 17. During the course of hearing before us, the AR fairly conceded that the issue is covered against the assessee by the order of the Tribunal delivered for the AY. 2004-05. We find that while deciding the appeal for the earlier year (ITA/ 1779/M/2008) the Tribunal had held as under: 28. In addition to the above, assessee has raised two additional grounds. The first additional ground raised is as under: "The learned Assessing Officer erred in not allowing a deduction for the entire non compete fee of Rs. 5, 29, 00, 000/- paid by the appellant company to Hindustan Lever Limited even though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the decision the Chennai Tribunal in the case of ACIT vs. Real Image Tech (P) Ltd. [supra]. " Respectfully following the above we hold that expenditure incurred under the head non-compete fee is to be treated as capital expenditure, that same is eligible for depreciation. Ground number five is decided in favour of the AO. 18. Last ground of appeal pertains to disallowance of Rs. 57. 27 lakhs. During the assessment proceedings, the AO found that the assessee had claimed market research expenses of Rs. 57, 27, 009/- under the head miscellaneous expenditure of Trichy Unit. The AO directed the assessee, vide order sheet entry dated 11. 12. 2008 and 16. 12. 2008, to explain as to how the expenditure could be allowed as revenue expenditure. The assessee contended that during the FY 2004-05 it had paid Rs. 57. 27 lakhs to A. C. Neilson(ACN) for providing market share data on monthly basis, that the data provided by ACN included the market share achieved by Dalda brand in each of the months, that such expenses were incurred every year and the benefits arising out of such expenditure would exhaust in that year only, that no enduring benefit was derived by the assessee and no capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the assessee directly connected with the grounds number 2&3, raised by the AO in his appeal. Following the same, effective ground of appeal is decided accordingly. ITA/2697/MUM/2011-AY. 2006-07: 23. First ground of appeal is about application of CUP and rejection of TNMM for import of oil. Following our order for the earlier years(Grounds 2&3), we restore back the issue to the file of the AO. Ground No. 1 is decided accordingly. 24. Second Ground deals with interest income and by the assessee. While deciding the appeal for the last year, we have held that interest income has to be treated as business income instead of income from other sources. Following the earlier years order, Ground 2 is decided against the AO. 25. Treatment to be given to non-compete fee is the subject matter of next ground of appeal. Following our order for the earlier year the issue is decided against the assessee. 26. Last ground of appeal is about market research expenses of Rs. 32. 30 Lacs. We had dismissed the appeal filed by the AO while deciding the appeal for the last assessment year. Following the same ground number four is decided against the AO. Cross objection/174/MUM/2011-AY. 2006- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO rejected the claim made by the assessee. 32. Before the FAA, the assessee argued that the payments, being made on the leasehold property for 20 years, were made in advance, that the annual instalment payments spread over a period of 20 years, that amount claimed should be allowed. After considering the assessment order and the submissions of the assessee, the FAA held, in his appellate order, that held that the appellant had made lump sum payment called "Salami" at the time of obtaining a lease, that by its very nature such transactions were capital in nature as they provide enduring benefit to a businessman. Confirming the order of the AO, he upheld the disallowance 33. Before us, the AR contended that the expenditure was incurred for business purposes, that same was interlinked with acquisition of lease hold rights of lands, that the assessee had incurred an expenditure of Rs. 2. 81 crores for a period of twenty years, that proportionate expenditure should be allowed. He relied upon the case of Madras Industrial Investment Corporation Ltd. (225ITR802), and Sun Pharmaceutical Ind. Ltd. (329ITR479). Alternatively, it was argued that depreciation should be allowed if the expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted the order of the FAA. 37. We have heard the rival submissions and perused the material before us. We find that though the assessee had claimed that it had followed a scientific method with regard to the obsolete stores, but it has not furnished any documentary evidence before the AO or the FAA or even before us. Making a claim is not sufficient it has to be backed by hard core evidences. In the case under considera - tion, the assessee has made only a provision. Historical data or analysis which could have tilted the scale in favour of the assessee, is not available. Therefore, we are of the opinion that the FAA had rightly upheld the order of the AO. The was not able to rebut the fact that the amount in question was only a provision. As far as the case relied upon by the assessee is concerned it is found that the assessee in that matter was a government owned company and had changed its method of valuation as per the directions of the C&AG. The facts of the present case are totally different. Confirming the order of the FAA, we decide ground no. 5 against the assessee. ITA/607/MUM/2012-AY. 2007-08: 38. All the three grounds, raised by the AO (application of CUP/rejection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Biocon Ltd. (144 ITD 21) and stated that the assessee would actually make payment of the amount to the group company against the debit notes, that the provision made in the books was towards the payment for actual expenditure to be incurred by the assessee, that it was not merely an entry. The DR supported the order of the FAA. 44. We have heard the rival submissions and perused the material before us. We find that the issue of allowability of expenditure related with ESOPs has been deliberated upon and discussed extensively in the case of Biocon Ltd. (supra). We would like to reproduce the relevant portion of the order and same reads as under "Once it is held as a consideration for employment, the natural corollary which follows is that such discount (i) is an expenditure (ii) such expenditure is on an ascertained (not contingent) liability and (iii) it cannot be treated as short capital receipt. In view of the foregoing discussion, we are of the considered opinion that discount on shares under the ESOP is an allowable deduction. " Respectfully following the order of Biocon Ltd. (supra) , we decide ground number eight in favour of the assessee. 45. Last ground is about d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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