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TMI Blog2020 (2) TMI 422X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s 10AA on the profits derived by SEZ Unit in respect of trading activity of importing the goods for reexport. Accordingly, the ground raised by the revenue on this issue is dismissed Addition made by the AO u/s 40(a)(ia) of the Act in respect of Ocean Freight charges paid to the agents of foreign shipping company for non deduction of tax at source - HELD THAT:- In the instant case section 172 is applicable, since the payment is made to Shipping Agents. The department has not called for the return of income of the non resident shipping owners at the time of assessment. Therefore, we are of the considered opinion that the payment is squarely covered by Circular No. 723 of CBDT and there is no case for deduction of tax u/s 194C or 195 and consequent disallowance u/s 40(a)(ia) of the Act. Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. Transfer pricing adjustment - Arms Length Price on sales and the interest charged on outstanding receivables treating the outstanding receivables as International transactions - Assessee has objected for adopting TNMM as MAM instead of CPM adopted by the assessee - HELD THAT:- In view of the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014-15 are identical. Though ground No.5 and 6 are on transfer pricing issues, no such issues are involved for the A.Y.2012-13 and 2014-15. For the A.Y.2013-14, transfer pricing adjustments were made by the Assessing Officer(AO) which are being agitated by the Revenue in this appeal. 3 During the pendency of appeal proceedings, the department has filed the revised grounds and the Ld.DR submitted that the grounds raised originally in appeal memo in Form No.36 were lengthy and argumentative, therefore, the department has filed the revised grounds and requested to admit the same in the place of original grounds. After hearing both the parties, we take up the revised grounds for adjudication. The department has raised the common grounds in appeal Nos.510/Viz/2018, 511/Viz/2018 and 53/Viz/2018 as under: 1) The order of the Commissioner of Income Tax (Appeals) Guntur, for the AY: 2013-14, is erroneous both on facts and in law. 2) The Ld. CIT (Appeals), Guntur, erred in deleting thee addition made by AO in respect of disallowance of claim u/s.1OAA of the act as the assessee company has not engaged in any manufacturing activity in SEZ. 3) The Ld. CIT (Appeals), Guntur, erred in hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Z unit is set up in Special Economic Zone, Cochin, during the F.Y.2005-06 relevant to the A.Y.2006-07, as per letter of approval dated 14.03.2005 issued by the Development Commissioner, Chochin, SEZ. The assessee's unit in the SEZ is engaged in the business of import of cigarettes and alcoholic beverages and re-export of the same. The assessee maintained separate books of accounts for the tobacco division and the SEZ division. During the previous year relevant to the A.Y.2012-13, the assessee has computed the profits from SEZ unit at ₹ 5,48,87,579/- and claimed 50% of the same as deduction u/s 10AA of the Act, being the 7th year, which worked out to ₹ 2,74,21,882/-. The AO viewed that the assessee is not entitled for exemption u/s 10AA, since, the assessee is not engaged in the manufacturing activity and only engaged in the trading activity. Therefore, the AO issued show cause notice calling for the explanation of the assessee as to why the deduction claimed u/s 10AA should not be disallowed and added back to the income? The assessee submitted it's explanation stating that the trading activity carried on by the assessee in it's SEZ unit is importing of goods for re-exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1OAA by the Assessing Officer. It was the contention of the assessee that the expression "services" under rule 71 of the SEZ rules include trading and further that trading mean import for the purpose of re-export. It was also pointed out by the assessee that the clarification issued by the Department of Commerce, Ministry of Commerce and Industry vide instruction No. 4/2006 permits the units in SEZ in whose case letter of approval was given for carrying out trading activities of all forms of trading but the benefits of u/s 10AA will exclude the trading other than trading in the nature of reexport of imported goods. From the perusal of the said instruction it can be noticed that the said instruction, while allowing SEZ units to carry out all forms of trading had stated that the benefits of u/s 10AA will exclude trading other than trading in the nature of re-export of imported goods. At the same time it was also mentioned in the same circular that "appropriate amendments in this regard are being issued". It is submitted that no such amendments whatsoever have been issued pursuant there to nor any consequential amendment was made to under section 10AA of the Act to incorpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 10AA of the Act. Admittedly, the assessee has established a unit at Cochin SEZ, which was approved by the Development Commissioner vide his letter no.9/05/2005/IL/CSEZ/1563 dated 14.3.2005. The assessee is engaged in the business of trading activity in the nature of importing Cigars, Cigarettes & Alcoholic beverages and re-exporting the same. The assessee claims that units located in SEZ, engaged in the business of import and export falls within the definition of the term 'services' as defined in clause 'Z' of section 2 of SEZ Act, 2005 and rule 76 of SEZ Rules, 2006, which defines the term 'services', which includes 'trading'. As per explanation given in SEZ Rules, 2006, the expression 'trading' for the purpose of second schedule of SEZ Act, shall mean import for the purpose of re-export and such trading is included in the list of services for the purpose of section (2) of SEZ Act. The term 'services' is not defined u/s 10AA of the Act. Since, the term 'services' has not been defined u/s 10AA of the Act, the definition provided under the relevant Act, has to be considered for the purpose of the term 'services' used in the section 10AA of the Act, for the purpose of determination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the revenue is hereby dismissed. 11. The assessee relied upon the decision of ITAT, Jaipur 'B' Bench in the case of DCIT Vs. Goenka Diamonds & Jewellers Ltd. 509/JP/2011 dated 31.1.2012, wherein the coordinate bench of this Tribunal, under similar circumstances has held as under: "We have also reproduced Section 51 of the SEZ Act. As per this Section, it is mentioned that notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act, the provision of SEZ Act will prevail. The Hon'ble Apex Court in the case of Tax Recovery Officer, Vs. Custodian Appointed under the Special Court, 293 ITR 369 had an occasion to consider the meaning of language employed in Section 13 of the Special Court Act. In Section 13 of the Special Court Act, it was stated that provision of the Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. The Hon'ble Apex Court held that there can be no manner of doubt that the provision of Special Court Act wherever they are applicable shall prevail over the provision of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible for deduction u/s 10AA on the profits derived by SEZ Unit in respect of trading activity of importing the goods for reexport. Accordingly, the ground raised by the revenue on this issue is dismissed. The cross objections of the assessee are supportive and becomes infructuous hence dismissed. The appeals of the revenue as well as cross objections of the assessee on this issue for the A.Y. 2012-13 to 2014-15 are dismissed. 14. Ground No.4 is related to the issue of addition made by the AO u/s 40(a)(ia) of the Act in respect of Ocean Freight charges paid to the agents of foreign shipping company for non deduction of tax at source. This issue is also common for all the assessment years of 2012-13 to 2014-15. Brief facts are that during the assessment proceedings, the AO found that for the A.Y.2012-13 the assessee has made the payment of ₹ 21,51,939/- towards transportation & shipping and out of which TDS was deducted only on the sum of ₹ 4,41,606/- and on the balance amount of ₹ 17,10,263/- the assessee has failed to deduct the tax at source. The assessee did not furnish any explanation before the A.O. as to why the assessee has not deducted the TDS. The details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under : A.Y. Disallowance u/s 40(a)(ia) (Rs.) Relief granted by CIT(A) in respect of Ocean Freight Charges (Rs.) 2012-13 ₹ 17,10,263/- ₹ 4,14,988/- 2013-14 ₹ 24,96,779/- ₹ 13,90,000/- 2014-15 30% of ₹ 65,13,221/- ₹ 77,540/- = ₹ 19,53,967/- 19. There is no dispute that the assessee has paid the Ocean Freight charges to the shipping agents. The payments made to shipping agents are covered by the Circular No. 723 of CBDT dated 19.09.1995. As per Circular No.723, in case of payments made to foreign shipping agents of nonresident ship owners or charterers for carriage of passengers etc., shipped at a port in India, the agent acts on behalf of the non-resident ship-owner and steps into the shoes of the principal. Accordingly, the provisions of section 172 shall apply and sections 194C and 195 have no application. 20. The department has filed appeal stating that the Ld. CIT(A) erred in not considering the fact that the assessee did not furnish the copy of the return of income that is required to be filed by agent u/sec. 172 of the Act, and hence under the impression that section 194C is applicable in this case. The Ld.AR su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 2.88 5. OP/OC*100 2.96 With regard to sale transactions, the assessee had adopted the internal CPM as MAM and it has given detailed analysis of AE and non AE transactions. From the perusal of information, the TPO observed that the assessee is manufacturing different types of products, i.e. unprocessed tobacco, cut tobacco and packing material, chemicals and flavours. Since the assessee has not provided the basis of allocation of expenses in internal CPM, the TPO rejected the CPM as MAM and adopted TNMM as MAM. The TPO selected the following comparables for bench marking the international transaction. Sl.No. Name of the company Operating Revenue Operating Cost Operating Income OP/OR OP/OC 1 V.S.T.Industries 668.68 510.88 157.8 23.60 30.89 2. Godfrey Philips 2096.48 1863.25 233.23 11.12 12.52 3. Sinnar Bidi Udyog 10.6 9.8 0.8 7.55 8.16 4. Dharampal Satya 2094.96 1699.47 395.49 18.88 23.27 5. Ethinic Tobacco 400.19 377.27 22.92 5.73 6.08 6. Virat Crane 34.05 31.59 2.46 7.22 7.79 7. ITC Ltd. 29901.27 20049.88 9851.39 32.95 49.13 15.29 19.69 From the comparables selected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in rejecting the method adopted by the assessee and rejecting the economic analysis of the assessee without making any FAR analysis and without making any valid observations. Further, the taxpayer has objected before the CIT(A) stating that there were internal uncontrolled transactions of the company for determining the ALP adopting TNMM as MAM. Rejecting the request of the assessee to adopt internal TNMM is not correct. The assessee further submitted before the CIT(A) that the AO has cherry picked the comparables which are functionally different without following the internationally accepted transfer pricing principles. The AO also did not provide search analysis for selecting the companies on adhoc basis for bench marking the profit margins. The AO also failed to provide risk adjustments for functional risks and working capital differences of the comparable companies vis-àvis the assessee. The assessee has submitted detailed note before the CIT(A) highlighting differences of comparable companies selected by the TPO and submitted that none of the comparables selected by the TPO are functionally similar to that of the assessee company. The assessee submitted before the CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghtly taken the comparables using various filters in the similar types of products manufactured by the assessee and selected the comparables which are more or less comparable to the assessee company. The assessee did not bring any differences to eliminate the comparables selected by the TPO. The method adopted by the assessee i.e. CPM was not accepted since the direct costs and indirect costs cannot be ascertained accurately. There is a possibility of making the adjustment of costs in internal comparables. For considering the internal TNMM as MAM, the assessee himself had stated in the transfer pricing document that the blend and mix of each order is unique and propriety to the customer and except for the basic tobacco, it is meaningless to compare the price with one blend of tobacco with another blend of tobacco. Therefore, the TPO has rightly rejected the contention of the assessee to adopt internal TNMM as MAM. The Ld.DR further submitted that though the assessee has submitted the operating profit margins segment wise in transfer pricing documentation, the assessee has not furnished the basis of cost allocated to AEs and non AEs. Therefore, argued that there is no case for adop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... randed owners. The assessee submitted the dissimilarities of the comparables selected by the TPO with regard to manufacturing, FAR analysis of each company which was reproduced in the order of the Ld.CIT(A) in page No.14 and 15 and argued that none of the comparables selected by the TPO are comparable, therefore, requested to delete the comparables selected by TPO which are dissimilar functionally, size, nature of business etc.. The Ld.AR further submitted that the assessee has made search process using various filters of the assessee's business as mentioned in page no.28 of the paper book to find out the external comparables on capitaline transfer priceing data base but could not find any external comparables. Therefore, argued that in the absence of external comparables, since, the assessee is dealing in AE as well as non AE companies and segmental data is available, which is supported by cost analysis of cost accountant it is most appropriate and reasonable to adopt internal TNMM/ CPM as MAM rightly observed by the Ld.CIT(A). If the internal TNMM/internal CPM is adopted, the international transaction are at ALP and no adjustment are required. Accordingly requested to uphold the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted party transactions, deployment of fixed assets, size of the company etc and proceeded to bench mark the ALP at ₹ 7,32,17,675/- adopting the PLI at 19.69%. During the appeal hearing, the Ld.AR brought to our notice the dissimilarities in comparables selected by the TPO as under : S.No. Name of the company Our Submission / arguments on comparability 1. VST Industries Ltd. (30.98%) * Deals in manufacturing of cigarettes and in unmanufactured tobacco (but no segmental details available) whereas BEPL is engaged in liasoning and trading of tobacco products. FAR Analysis * Functionally different considering the nature, size and business activity of the company * Earning is foreign currency account constitute 7.46 of total earnings compared to 82.6% for the assessee * Fixed assets constitute 10.77% of sales, while the assessee's fixed asset constitute 4.83% 2. Godfrey Phillips India Ltd. (12.52%) * Deals in manufacturing of tobacco products cigarettes and cut tobacco (but no segmental details available) whereas BEPL is engaged in liasoning and trading of tobacco products. FAR Analysis * Earning is foreign currency account constitute 17.20% of total ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is supplying the tobacco to the branded customers for manufacture of the cigarettes. Therefore, we agree that the comparables selected by the TPO are functionally different. The nature and size of the business of comparables also was not brought on record by the TPO. With regard to employment of assets, earning of foreign currency also, the comparables selected by the TPO appears to be different. In respect of Dharmpal Satya company the company was manufacturing gutka and in the case of Ethnic Tobacco, the company was manufacturing unmanufactured tobacco which are functional different. In both the cases, the annual reports also not available in the public domain. With regard to Virat Crane Industries it is in the business of betel nut powder and the mouth fresheners and it is also functionally different. In the case of ITC Ltd., it is engaged in multiple products and multiple verticals and segmental details and FAR analysis is not available, hence, the same cannot be taken as comparable. With regard to VST Industries which deals in manufacturing of cigarettes and un manufactured tobacco is functionally different in size and nature of business and no segmental details are ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the margins in the associated enterprises were 0.43% to 3.7% as per the data collected from four associate companies carrying on the same business in the area and whose average works out to 2.5% as against 2.96% of the assessee. The assessee also submitted the data of associate enterprises in respect of whom the exports were made and in the case of International continental tobacco company FZE, the operating profit was 3.85% and in the case of Aberdeen International FZE the OP/OC works out to 3.05% against the assessee's margin of 2.96%, thus, submitted that the company is not shifting any profits to its AEs. The assessee has furnished the computation of ALP with segmental accounts, where the OP of the AE works out to 2.79% and non AE worked out to 2.09% in page No.210 of the paper book. Thus, in the instant case, the internal TNMM comparables are available along with segmental data. External comparables are not available as admitted by both the parties during the appeal hearing. Therefore, it is unjustified to reject the economic analysis made by the assessee. The TPO has not brought any material to show that the internal segmental details furnished by the assessee are incorrect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asier and MOM reliable as it will presumably rely on identical accounting standards and practices for the internal comparable and for the controlled transaction. In addition, access to information on internal comparables maybe both more complete and less costly." 28.1. Therefore, following the judicial precedents and also in view of the fact that there are no external comparables available in the public domain, we hold that the assessee has rightly bench marked the ALP adopting the internal comparables and hold that the international transaction is at ALP and no interference is called for in the order of the Ld.CIT(A). Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. Cross objections filed by the assessee on this issue are only supportive and becomes infructuous, hence dismissed. 29. The next issue in TP adjustment is with regard to adjustment made by the TPO in respect of interest on receivables. The TPO found that a sum of ₹ 28,42,54,759/- was outstanding receivables which was not reported in Form 3CEB or in the TP document. The TPO also found that some receivables have been received beyond credit period of 180 days. Therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the parties and perused the material placed on record. In the instant case, the AO made TP adjustment in respect of interest on outstanding receivables that were received beyond the period of 180 days. The receivables are closely linked to the principal transaction of sale of goods. The AO did not consider the circumstances surrounding the receivables and did not consider that the outstanding receivables are not unsecured loans / advances given to AEs. Even if it is considered that the receivables as international transactions, since, the same are to be received in foreign exchange the interest if any required to be applied following LIBOR or LIBRO plus method. However in the instant case, receivables represent the trade receipts but not the unsecured/ secured loans. In the case of trade receipts, the sale price is fixed including the realizable time period and hence, once the transactions are at ALP in respect of sales, no separate adjustment is required to be made in of sales receivables. Identical issue has come before this Tribunal in the case of Mahati Software Pvt. Ltd. in I.T.A No. 67/Viz/2016& 68/Viz/2017 dated 07.09.2018. The Tribunal held that the no interest is charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... System Ltd. (supra), and held that the financial impact of international transaction is applicable in the assessee's case. Parking huge funds for a longer period with AE without interest is not acceptable. If the funds are repatriated to India as observed by the Ld.DRP there would be substantive reduction in the interest cost and potential increase in the profit of the company. Therefore, the case law relied upon by the ITAT Bangalore in the case of Logix Micro System Ltd. is squarely applicable in the assessee's case. Even in the case law relied upon by the assessee in the case of Cura Logistics (supra) also, the Coordinate Bench held that if the purpose of advance is trade advance, the interest is not chargeable but in case of loan the interest is chargeable. Having observed that the advance is not a trade advance, we hold that the interest is chargeable on the advances given to the AE." Since the facts are identical, we find no reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The appeal of the revenue on this issue is dismissed. ITA No.233/viz/2019 A.Y.2014-15 32. The department has filed separate appeal for the A.Y.2014-15 agitating the issue of n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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