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TMI Blog2020 (8) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... ginal study. Here is absolutely no complete analysis of the data. Various comparables selected by the TPO has not at all been considered by the CIT(A). Further, we are of the opinion that if RPM is approved, then, the TPO should be given opportunity for analysis of cost base of comparables, segmental details and benchmarking process. So far as service fee is concerned, the assessee has to first prove that the foreign AE is the least complex party and relevant data should be available in public domain or the assessee should give full details.Nothing is coming out of record regarding the submission of the details. Initial years of transfer pricing proceedings, we deem it proper to restore the issue to the file of the AO/TPO for deciding the issue afresh and in accordance with the law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. Ground of appeal No. 1 by the Revenue is accordingly allowed for statistical purposes. Expenditure on foreign travel - Allowable business expenditure - AO disallowed being 20% of such expenditure on the ground that the assessee did not establish that the amount in question was an expenditure laid out w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 17,40,08,078/- made by AO on account of Arm's Length Price. 3. Facts of the case, in brief, are that the assessee is a 100% subsidiary of Mobil Petroleum Company Inc., USA. The assessee is engaged in the business of manufacture and trading of a range of lubricants in India. It filed its return of income on 30th October, 2004 declaring nil income after setting off of total income of ₹ 21,94,478/- with brought forward losses. Since the assessee had entered into certain international transactions with its AEs, the AO made a reference to the TPO for determination of the ALP of the international transaction. The TPO, during the course of TP assessment proceedings, noted that the assessee has undertaken the following international transactions:- S. No. Description of transaction Method Value (In Rs. ) 1. Import of base oil CPM 44,44,13,425 2. Import of additives CPM 9,18,37,885 3. Import of lubricants CPM 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d specialties from its AEs for sale in the domestic market. In addition to this, it has global arrangement with the AEs as well as shippers for supply of lubricants at different ports. As per this arrangement, the group companies are invoiced by the assessee and these transactions are shown as sold finished goods to the AEs. The assessee also provide market support for which commission is paid to the assessee. 8. The TPO noted that the assessee in its transfer pricing report has tabulated the risk profile analysis between the assessee and its AEs, the details of which are as under:- Nature of risk Exxon India Exxon Group Market risk Yes Indirectly Product Liability risk No for trading, Yes for manufacturing No for manufacturing, Yes for trading Technology risk No Yes Credit risk Yes No Inventory risk Yes No Foreign Exchange risk Yes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 Panama Petrochem 4.98 6 Sah Petroleums 13.55 7 Savita Chemicals 7.41 8 Tide Water Oil 5.10 9 Totalfinaelf India Ltd. 6.48 6.95 12. On the basis of the comparability analysis and financial analysis of the above comparables which are engaged in similar trade and observing that these comparables are having operating profit margin over operating revenue of 6.95% on mean basis, the AO computed the ALP of the international transaction of the assessee at ₹ 17,40,08,078/-, the details of which are as under:- Operating revenue 2,12,86,63,000 (A) OP/OR of comparables 6.95% (B) Operating profit (A x B) 14,79,42,078 Operating Loss as per books 2,60,66,000 Difference 17,40,08,07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious decisions of the Tribunal were also brought to the notice of the CIT(A) to the proposition that CUP is the most appropriate method for purchase of raw materials. 16. So far as import of lubricants is concerned, it was argued that the assessee merely imports the lubricants and resells it further to unrelated parties. It does not add any value to the products imported and merely acts as a buy-sell agent. The segment constitutes only 32.21% to the total revenue of the assessee for the year under consideration. Rule 10B(1A) of the IT Rules, 1962 was also brought to the notice of the CIT(A). It was argued that gross profit margin earned by the comparable companies is 13.73% while that earned by the assessee is 32%. Thus, the transactions undertaken by the assessee with respect to its trading segment are at arm's length as defined by the Indian transfer pricing regulations. 17. So far as the services transaction is concerned, it was argued that the assessee has used TNMM taking foreign AE as the tested party for determination of the arm's length price for payment of service charges. Relying on various decisions, it was argued that use of foreign associated enterprise a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar of business operations as witnessed by other comparable companies selected by the TPO. Further, I am of the view that any reliable adjustments cannot be made to account for these differences. Analysing the submission of the appellant further I am also of the view that in light of other alternatives available in form of other more direct methods an attempt should be made to analyse the same and understand their applicability to the case under consideration! In this regard I also wish to examine Ld. Tribunal judgment in case of MSS India (P.) Ltd. which lays out that traditional transactional methods such as CUP, CPM etc should be preferred over transactional profit methods i.e. TNMM. Similarly as mentioned above, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines) have exhibited a distinct preference towards CUP over all other traditional and transactional methods. The OECD TP Guidelines provides: Thus, even the Hon'ble Tribunal is of view that CUP being the most direct method should be considered as the method of choice and all efforts should be made to apply the said method wherever possible. In backdr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s length price in respect of the property transferred or services provided in the international transaction; On analysing the above information it is clearly evident that the only requirement of law for application of CUP method is comparison of controlled transactions with uncontrolled transactions, irrespective of the end which is analysed. Thus, in my opinion the appellant has met all the condition for application of CUP method. Therefore, I hold that the international transaction with respect to import of base oil should be benchmark by using comparable uncontrolled price which clearly demonstrates the arm's length nature of the transaction. Trading segment - Import of Lubricants After considering the submission made by the Appellant in this respect I am of the view that the Appellant for benchmarking the international transaction of imports the lubricants has segmented the same under trading segment and used RPM to determine the arm's length price. I have gone through the functional profile of the Appellant. The appellant in its trading segment merely imports the lubricants and resells it further to unrelated parties. Thus, it does not add any value t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nchmarked by using TNMM taking foreign AE as the tested party to determine the arm's length price. Thus, in view of the above I am accepting the benchmarking study conducted by the Appellant to identify companies engaged in providing general management consulting and administrative services. Wherein, OP/TC achieved by the comparable companies is 11.21% as against 5% charged by the associated enterprise. Based on the above I hold that international transactions related to payment of service fees was in accordance with the arm's length principle and transfer pricing addition made by the TPO ought to be deleted. In view of the above the arm's length price charged by the appellant for its international transaction related is accepted and transfer pricing addition made by the TPO ought to be deleted. 19. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal. 20. The ld. DR strongly challenged the order of the CIT(A) in deleting the addition made by the TPO/AO. Referring to the last para of page 27 of the order of the CIT(A), he submitted that no finding has been given by the ld. CIT(A) as to how TNMM is not applicable. He submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nally selected. He accordingly submitted that the segmental RPM cannot be accepted unless fresh analysis has been done. Referring to objection of the TPO at para 3(i) of the remand report copy of which is placed at pages 501-509 of the paper book and copy of annual report placed at paper book pages 1-29, he submitted hat there is absolutely no comment by the assessee on the search process or segmental for comparables and non-disclosure on filters. He submitted that the cost base has not been verified as mentioned in the report of the TPO. He submitted that if TNMM is accepted in the manufacturing process, the same method can be applied for trading segment also. Further, there is no comment by the CIT(A) on common expenditure for segmental approach when there is specific remark by the TPO that cost base of comparables selected by the assessee is not given. He submitted that if RPM is approved, the TPO should be given opportunity for analysis of cost base of comparables, segmental data and benchmarking process. 23. So far as service fee is concerned, he submitted that the assessee has to prove that the foreign AE is least complex and reliable data should be available in public dom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 7,458 390 277 7,571 436 838 Furniture and fixtures 4,204 376 643 3,937 415 339 219 535 3,402 3,789 Computers 19,852 1,185 45 20,992 5,592 6,922 19 12,475 8,517 14,260 Office Equipment 4,232 2,221 802 5,651 1,940 1,135 500 2,575 3,076 2,292 Motor Vehicles 1,117 - 834 283 755 214 686 283 - 362 Telecommunications 2,618 4,580 - 2,198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.48 (a)+(b)+(c) 17.73 54.33 0.61 3.48 C. i) Percentage of (a+b+c) to Total cost 8.28% 5.51% 0.14% 1.90% 2.51% (ii) Percentage of (a+b+c) to Total Sales 7.55% 4.64% 0.13% 1.80% 2.18% 25. He submitted that the business model of the assessee is completely different from that of the comparables. All those comparables have huge plant machinery, land and building, etc., whereas the assessee does not have such huge assets. 26. Referring to the decision of the Hon'ble Bombay High Court in the case of PCIT v. Aptara Technology (P.) Ltd., 410 ITR 100 (Bom.), he submitted that the Hon'ble High Court in the said decision has held that where a company which outsources its work to sub-vendors as against the assessee carrying out its activity in-house should not be selected as a comparable. Referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and Tax Administrations published in 2010 indicates the comparability factors which are important while considering the comparability of uncontrolled transactions or entities with controlled transactions or entities. Rule JOB (2) also mandates that the comparability of international transactions with uncontrolled transactions would be judged with reference to the factors indicated under clauses (a) to (d) of that sub-rule, which are similar to the comparability factors as indicated under the OECD Guidelines. These include characteristics of property or services transferred and functions performed. 27. The ld. Counsel for the assessee in his second alternate argument submitted that these are gestation years, the plant is yet to be erected and there is no capital work in progress. He submitted that the assessee is a small capital based company. He submitted that every company incurs expenditure on account of transportation and storage. Referring to the annual accounts of Castrol India Ltd., copy of which is placed at pages 829-894, Paper Book Volume V, he submitted that Castrol India owns freehold land valued at ₹ 6.79 crores, leasehold land valued at ₹ 0.64 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c names of three principal products/services of the company are: high speed diesel; low aromatic naphtha; and superior kerosene oil. 30. So far as Savita Chemicals Ltd. is concerned, the ld. Counsel for the assessee drew the attention of the Bench to page 1016 of the paper book and submitted that the said company derives income from sales at ₹ 45,24,566/- lakhs and processing income at ₹ 100.38 lakhs. Referring to page 32 of the audited accounts of Savita Chemicals Ltd., copy of which at page 1021 of the paper book, he submitted that no segmental details are given and at page 35 of the annual accounts, it is simply mentioned 'petroleum products.' Therefore, in absence of segmental details, Savita Chemicals Ltd. cannot be considered as a good comparable. 30.1 So far as Totalfina C F is concerned, the ld. Counsel for the assessee submitted that the assessee has originally selected this company under CPM on the basis of limited information available on Prowess. However, not it is seen from the website that it belongs to Total Group which is a French Giant Company. It has a wide spread marketing network in South India since early nineties. Its annual report fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd., vide ITA No. 1412/PM/2011, for A.Y. 2007-08, he submitted that the Tribunal, in the said decision has held that where the assessee had incurred certain expenditure which are start up costs and cannot be fully recovered in the instant year itself and such an expenditure has abnormally affected the profit margins, then economic adjustment such as capacity utilization and expenditure relating to start up cost should be made. 35. The ld. counsel for the assessee in his third alternate arguments submitted that the functions undertaken, assets employed and risks assumed in case of Castrol India, Savita Chemicals, Tide Water Oil Company (India) Ltd. are not available and, therefore, these companies should be excluded from the list of comparables. Similarly, in case of Totalfina C F India Ltd., and in case of Saha Petroleum, complete data is not available and, therefore, these companies are also to be excluded. The ld. Counsel for the assessee further submitted that in the subsequent assessment year 2005-06, the asssessee furnished similar evidences to the TPO during the course of the TP proceedings copy of which is placed at page 224-238 of the Volume II of the paper book which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification for non-application of TNMM. He submitted that the comparables adopted by the TPO were not examined by the CIT(A) nor any decision has been given regarding inclusion/exclusion of certain comparables. He submitted that the ld. CIT(A) has further given a finding that internal CUP is not appropriate and the assessee has neither filed any cross objection nor any cross appeal against the finding of the CIT(A). He submitted that CUP is not applicable since sufficient data is not available. The available data of AE is also not given nor full data of the assessee was given. He submitted that CUP has to be rejected as such in absence of complete data and in absence of any substantive argument of the ld. Counsel. So far as RPM is concerned, he submitted that the ld. CIT(A) has not discussed this issue. So far as Resale Price Method is concerned, he submitted that the same is not acceptable since in manufacturing there is no resale and profit split method is not before us. Further, the assessee in its TP study itself has taken itself as a manufacturer. So far as comparables are concerned, the ld. DR submitted that he has no objection if the matter is restored to the file of the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontainers as no value addition is made to the assessee. He further held that application of TNMM at entity level is inappropriate. 40. It is the submission of the ld. CIT-DR that cost plus mark up has to be examined and cost base cannot be taken as sacrosanct. According to the ld. CIT-DR, the assessee has not furnished sufficient data for additive. So far as base oil is concerned, total data given is for ₹ 21 crore when the total input is for ₹ 44.41 crore and, thus, they have not provided the full data for the CUP analysis for purchase of base oil. Similarly, for additives absolutely no data was given. It is also his submission that in absence of sufficient data and when the assessee in its TP report itself has mentioned that CUP was rejected as the most appropriate method, therefore, CUP method cannot be applied. So far as trading segment is concerned, it is his submission that here also there is no complete analysis of data regarding the nature of filters to be applied and list of final comparables. It is his submission that segmental RPM cannot be accepted unless fresh analysis has been done. It is also the submission of the ld. CIT-DR that if TNMM is accepted fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of transfer pricing proceedings, we deem it proper to restore the issue to the file of the AO/TPO for deciding the issue afresh and in accordance with the law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. Ground of appeal No. 1 by the Revenue is accordingly allowed for statistical purposes. 42. Ground of appeal No. 2 raised by the Revenue reads as under:- 2. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of ₹ 4,28,878/- on account of expenditure on foreign travel. 43. Facts of the case, in brief, are that the assessee company incurred expenditure of ₹ 21,44,386/- on foreign travel. The AO subsequently asked the assessee to give proof of business purposes for the said foreign travel, the list of persons who visited the countries abroad and the purpose of travel. Although the assessee filed details of foreign travel, however, no proof of business purpose of the aforesaid travel was furnished. In view of the above, the AO, relying on various decisions, disallowed an amount of ₹ 4,28,878/- being 20% of such expenditure on the ground that the assessee did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, in principle upheld the disallowance of 20% made by the AO by observing as under:- 8. We have heard the parties and considered the rival contentions. It is true that some of the emails were not furnished by the assessee but in view of the details furnished by the assessee, it cannot be said that the expenditure is not incurred or not allowable at all. On the facts and circumstances of the case, in our opinion, the Assessing Officer was justified in disallowing only a sum of ₹ 3,99,120/- in absence of full details and the CIT (Appeals) is not justified in enhancing the assessment by substituting the disallowance to ₹ 16,05,837/-as against ₹ 3,99,120/- disallowed by the Assessing Officer. The order of the CIT (Appeals) is accordingly reversed and that of the Assessing Officer is restored. 47. Respectfully following the decision of the Tribunal in assessee's own case for the immediately preceding assessment year, we set aside the order of the CIT(A) on this issue and restore the order of the AO. This ground of appeal of the Revenue is accordingly allowed. 48. Ground No. 3 raised by the Revenue reads as under:- 3. On the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant, only the amount of ₹ 321,164 was accrued during the year under reference and debited to the profit and loss account for that year. The professional fees of ₹ 321,164 include ₹ 254,468 pertaining to the services rendered in Mauritius by Key Finance Services Ltd. (a Mauritius entity) towards branch operations of the appellant in Mauritius and ₹ 49,662 pertaining to testing services rendered by ASTM International (a USA entity) in USA. Since the professional fees of ₹ 321,164 is paid by the appellant for the services which were utilized in the business of the appellant carried on outside India, the same is covered under section 9(l)(vii)(b) of the Income- tax Act and the same will not be regarded as income deemed to accrue or arise in India in the hands of non-resident recipient. Therefore, no withholding tax is required to be deducted on such payments. Therefore, the addition of ₹ 336,243 made by the assessing officer is deleted. Royalty The payment of ₹ 1,814,531 (net of withholding taxes) as reported in Note 11(h) of Notes to Account (Schedule 17) consist of royalty amount of ₹ 2,268,164 (gross a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the paper book (i.e. Annexure-3 of the letter dated 1 July 2010). The appellant also have submitted the copy of invoices raised by ExxonMobil Asia Pacific Pte. Ltd. with explanation about the services availed by it. All such details are enclosed in the paper book (i.e. Annexure-4 of the letter dated 1 July 2010). I have gone through such nature of services availed by the appellant as explained to me. It is evident that the services received by the appellant are in the nature of controllers, treasurers, public affairs, tax, human resources, law, safety health and environmental services, medical, security, global procurement, business line, etc. which are in the nature of administrative services. It is the contention of the appellant that various services as mentioned aforesaid provided by ExxonMobil Asia Pacific Pte. Ltd., Singapore to the appellant are managerial in nature and cannot be considered to be technical or consultancy services. Those services, therefore, fall outside the ambit of article 12 of Indo-Singapore tax treaty. It is also argued by the appellant that even assuming that the above-mentioned services involve technical and consultancy services bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40(a) (i) of the Income-tax Act. It is also observed that the appellant has taken CA Certificate towards remittance of external allocation expenses of ₹ 153,557,470 from Suni Nutan Co., Chartered Accountants (page 182-187 of the paper book filed on 5 May 2010) wherein such chartered accountant has certified that such payment of ₹ 153,557,470 is not subject to tax in India by virtue of Indo-Singapore tax treaty and hence not subject to the incidence of TDS in India. In view of the above, the ground of the appellant is accepted and hence the addition of ₹ 153,557,470 made by the assessing officer is deleted. Salary The salary of ₹ 15,210,574 were paid to non-resident employees for the services rendered in India for the financial years 2002-03 and 2003-04 on which withholding taxes were properly withheld and deposited. The challans of TDS of ₹ 5,129,781 were also submitted by the appellant at page no. 189-203 of the paper book filed on 05 May 2010. Therefore, the addition of ₹ 15,210,574 made by the assessing officer on the basis of Note 11(h) of Notes to Account (Schedule 17) ) for non-deduction of TDS under section 40(a)(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that the disallowance of foreign exchange expenditure of ₹ 172,571,749 made by the assessing officer is tantamount to double disallowance to the extent of ₹ 23,554,483 which is also disallowed by the Transfer Pricing Officer. Therefore, this ground is allowed in favor of the appellant. 52. Aggrieved with such order, the Revenue is in appeal before the Tribunal. 53. We have heard the rival arguments made by both the sides and perused the record. We find, in the instant case, the AO disallowed the entire expenditure made in foreign currency amounting to ₹ 17,25,71,749/- on the ground that the assessee could not substantiate regarding non-deduction of tax u/s 195 of the IT Act, the payment of which has been made in foreign currency. We find, the ld. CIT(A) deleted the addition on the ground that substantial amount of expenditure pertained to the year prior to the financial year 2003-04 and, therefore, the AO is not justified in disallowing the entire foreign exchange payment without identifying the payment pertaining to the actual accrual made during the year. Even otherwise, the ld. CIT(A) has threadbare analysed each and every item and given justifica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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