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TMI Blog2016 (7) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee in its TP study for the AY 2007-08, rather relied upon his own finding for the earlier years which have undisputedly been set aside by the Tribunal. So, we are of the further opinion that the ld. TPO to benchmark international transactions afresh by examining the suitable comparables by providing opportunity of being heard to the assessee. So, file is ordered to be restored to the TPO to benchmark the international transactions in the light of the observations made hereinbefore. Disallowance of rent expenses being conversion charges paid to the Municipal Corporation of Delhi (MCD) - Held that:- DRP/AO have erred in disallowing the expenses of conversion charges claimed by the assessee and then added the same to the total income of the assessee company which are not to be considered as capital expenditure as the same have been expended for business purpose and without conversion of the property, the business would not have been started even and as such, allowable for deduction - ITA No.1077/Del./2016 - - - Dated:- 17-5-2016 - SHRI R.S. SYAL, ACCOUNTANT MEMBER and SHRI KULDIP SINGH, JUDICIAL MEMBER For The Assessee : S/Shri Rahul K. Mitra, Vinay Verma, Ashis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the Ld. TPO's approach of disregarding the benchmarking approach adopted by the Appellant of selecting companies engaged in providing marketing support low end technical support services in its TP Documentation report for the year to substantiate the arm's length nature of its international transactions. 3. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law in upholding the Ld. TPO's approach of including the value of the goods sourced directly by the AEs of the Appellant from third party vendors in the cost base of the Appellant, for the purpose of computing the arm's length profit margin of the Appellant on the alleged ground that it created supply chain and human asset intangibles in India and generated location savings in India which have not been factored in its prevailing/ current remuneration model. 4. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law in disregarding the detailed submissions and extensive analysis to demonstrate that Appellant is operating on a guaranteed profit margin of 15% on its operating cost and the Appellant does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Appellant's own case in 2006-07 and A Y 2007-08) does not involve unique intangibles or transactions that are interlinked which would warrant such an analysis . 11. The Hon'ble DRP and consequently the Ld. AO erred on facts and in law, in enhancing the income of the Appellant by INR 17,516,800 by disallowing rent expense being conversion charges paid to the Municipal Corporation of Delhi ('MCD'), pursuant to an arrangement between the Appellant and the lessors in connection with the premises occupied by the Appellant. While disallowing the claim of MCD conversion charges, the Hon'ble DRP and Ld. AO (following the directions of the Hon'ble DRP) grossly erred by: 10.1 erroneously relying on the decision of Arun Kumar Gupta (HUF) v. ACIT (2012) 54 SOT 509 (Delhi) on distinguishing facts to hold that one time conversion charges paid by the Appellant to the MCD were capital in nature as it resulted in enduring advantage to the Appellant; 10.2 concluding that the conversion charges paid were for violation of municipal laws, without obtaining! verifying necessary facts / information from the Appellant; 10.3 completely disregarding the fact that such p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s length. 6. However, TPO, while rejecting the transfer pricing study undertaken by the assessee company, observed that the compensation model adopted by the assessee company with Associated Enterprises (AEs) is not at arms length and proposed to use the value of goods sourced by the assessee company as FOB value of the goods sourced through you to arrive at the ALP. TPO further held that in view of the functional profile of the assessee company, which is that of a sourcing agent, it should be compensated in terms of higher commission as assessee company is controlling critical functions, such as, merchandising, fabric sourcing, product integrity, quality assurance, compliance and logistics and major risk arising from the aforesaid functions, such as, poor quality management lies with the assessee company. Assessee s compensation model is based on the cost on service rendered by the provider plus 5%. The ld. TPO observed that since the assessee is owner of supply chain management and intangibles, human assets intangibles, the compensation model in this case is very nominal and routine markup of 15% of the cost without allocating any profit component for development and use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ALP in this case would be commission of FOB cost of the goods sourced from India by taking into consideration the factors inter alia that the assessee is owner of supply chain management intangibles; that the assessee owns human assets intangibles; that the compensation model of the assessee does not include the profit attributable to the assessee on account of location savings; and that the assessee s remuneration should be expressed as a percentage of the FOB price of goods sourced through the assessee. Consequently, the ld. TPO held that functional profile of the assessee company apparently proves that it is not a market support service provider and considering its functional profile and risk borne by it, the assessee was not reasonably compensated in comparison of its effort put in towards sourcing goods to its AE and computed the ALP of international transaction undertaken by the assessee during the period under assessment as under :- 12. Following the discussions in the preceding paras the comparables that shall be used in the assessee s case are :- S. No. Name of the company OP/OC 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Es; that GAP international, AE of the assessee company, has outsourced all its functions and as such, FAR of the taxpayer is the first and foremost to determine the compensation model. 14. However, to repel the argument addressed by the ld. DR, the ld. AR for the assessee simply relied upon the findings returned by the Tribunal in assessee s own case in ITA Nos.5147/Del/2011 and 228/Del/2012 (supra) and further contended that each and every point as to creation of intangibles, location savings, assessee having no human assets intangibles have been set at rest; that the assessee company has been performing normal and routine function and no intangibles are being created. 15. Ld. DRP while rejecting the objections raised by the assessee upheld the findings returned by the TPO by adopting the same reasoning that the assessee is owner of supply chain management intangibles; that the assessee owns human assets intangibles; that the compensation model of the assessee does not include the profit attributable to the assessee on account of locational savings etc. by adopting the findings returned by the DRP in the earlier years i.e. 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.88 AVERAGE 5.33 Accordingly, the arm s length price in your case is calculated as below :- Details Amount in INR Total FOB Value of exports 62,756,195,910 Arm's Length margin @ 5.33% 3,344,905,242 Margin shown by the assessee 79,603,907 Difference 3,265,301,335 The above shortfall of ₹ 326,53,01,335/- is being proposed as an adjustment to the profit shown by the taxpayer in its books of account. 19. Assessee company filed comprehensive reply dated 08.05.2015 raising objection to the TP adjustment made by the TPO by relying upon the decision rendered by ITAT, Delhi in assessee s own case for AYs 2006-07 and 2007-08. However, the ld. TPO without legally controverting the fact that the decisions rendered by ITAT in assessee s own case has not been challenged by the revenue, indulged in recording findings that, the Hon ble ITAT erred in completely disregarding the critical functions carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a capital expenditure. The case is not even hit by Expl. 1 to sec. 32(1) inasmuch as payment of such conversion charges cannot be considered as any capital expenditure on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building . We, therefore, hold that such a payment cannot be considered as capital expenditure. The impugned order on this score is upheld. 24. So, by following the decision rendered by the coordinate Bench, we hereby held that the ld. DRP/AO have erred in disallowing the expenses of conversion charges to the tune of ₹ 1,75,16,800/- claimed by the assessee and then added the same to the total income of the assessee company which are not to be considered as capital expenditure as the same have been expended for business purpose and without conversion of the property, the business would not have been started even and as such, allowable for deduction. So, ground no.11 is determined in favour of the assessee. 25. In view of what has been discussed above, the present appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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