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TMI Blog2016 (4) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... o the order passed by TPO/DRP for benchmarking the international transaction qua AYs 200910 and 2010-11 is not sustainable in the eyes of law as (i) TPO/DRP have illegally and arbitrarily included the cost of sales incurred by the assessee company s AE, for which the assessee company has rendered support services to work out the profit for determination of the ALP; (ii) Identical and similar issue has been decided by the Tribunal in case of Mitsubishi Corporation India P Ltd. [ 2014 (10) TMI 702 - ITAT DELHI ] by following the judgment rendered in case of Li and Fung India Pvt. Ltd. [ 2014 (1) TMI 501 - DELHI HIGH COURT ] and held that the TPO was not justified in re-characterizing the transaction as trading transaction and it has also been held that cost of sales incurred by the AE cannot be included to work out the profit for determination of the ALP; (iii) Nature of services rendered by the assessee company to its AE since 2003 are the same and it has been consistently benchmarking its international transaction relating to the business support services using TNMM as the most appropriate method as OP/TC as PLI, as has been used in the instant case; (iv) As has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cceeding year, AY 2011-12, the DRP has decided this issue in favour of the assessee and deleted the entire addition of service fee paid to the same parties to whom this fee was paid. So in view of the matter, this issue is required to be restored to the AO to decide afresh in the light of the order dated 14.12.2015 passed by DRP qua AY 2011-12 in assessee s own case after providing an opportunity of being heard to the assessee. Consequently, this ground is determined in favour of the assessee. Expenditure on logistic and warehousing support service - Addition u/s 37 (1) on the ground that the same has not been incurred wholly and exclusively for the purpose of business and the assessee has failed to offer any justification for making the aforesaid payment on account of commercial expediency nor the assessee has furnished copy of agreement with M/s. Panasonic India Pvt. Ltd. and nor placed on record detailed computation of losses - HELD THAT:- AR, contention, that the amount in question has been incurred under terms of the outsourcing agreement with respective agencies, and placed on record the copy of agreement, lying at pages 7 onwards of the paper book has been overlooked by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO/TPO without any cogent, acceptable material on record erred in: i. Completely misunderstanding the business model, functional and risk profile of the tested party. ii. Re-characterizing the service and commission segment as equivalent to its trading segment. iii. Rejecting the use of Berry Ratio and using OP/TC (including cost to others) as a Profit Level Indicator (PLI) in order to Benchmark appellant's international transactions. iv. Using the data not existing at the time of preparation of Rule 100 documentation by the assessee. v. Using single year data as against multiple year data used by the assessee in order to compute the arm's length price of its international transaction. vi. Inflating the Total Cost (TC) of assessee by Rs. 4,541 crores (Approx) ignoring the fact that the said value was recorded as sales/purchase by the Associated Enterprise (AE) and as such it was not a cost to the assessee. vii. Rejecting the comparable set selected by the assessee which were engaged in the business of providing services and adopting a comparable set of general trading companies. viii. Assuming that the assessee has developed various unique intangib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X of the Income Tax Act, 1961 [hereinafter referred as the Act ] in the order of assessment. 1.1 That on facts and in law, the AO/TPO/DRP jurisdictionally erred in virtually rewriting the accounts of the appellant, including therein transactions which did not belong to it and in changing its functional profile. 1.2 That on facts and in law the DPR/AO/TPO without any cogent, acceptable material on record erred in: i. Completely misunderstanding the business model, functional and risk profile of the tested party. ii. Re-characterizing the service and commission segment as equivalent to its trading segment. iii. Rejecting the use of Berry Ratio and using OP/TC (including cost to others) as a Profit Level Indicator (PLI) in order to Benchmark appellant s international transactions. iv. Using the data not existing at the time of preparation of Rule 100 documentation by the assessee. v. Using single year data as against multiple year data used by the assessee in order to compute the arm s length price of its international transaction. vi. Inflating the Total Cost (TC) of assessee by Rs. 5924.87 crores (Approx) ignoring the fact that the said value was recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 40(1)(i) of the Income Tax Act. 9. That on the facts and circumstances of the case and in law, the AO/DRP erred in charging interest u/s 234A, 234B and 234C of the Act. 10. That on facts and in law the orders passed by the Assessing Officer [herein above referred as the AO ] / Dispute Resolution Panel [herein above referred as the DRP ] / Transfer Pricing Officer [hereinabove referred as the TPO ] are bad in law and void ab-initio. That the appellant prays for leave to add, alter, amend and/or vary the ground(s) of appeal at or before the time of hearing. ITA NO.813/Del/2014 (AY 2009-10) : 3. Briefly stated facts of this case are : the assessee company is a wholly owned subsidiary of Mitsui Company Pvt. Ltd., Japan, engaged in providing sales support Services and liasoning services to its associated enterprises ( AEs ) with regard to the exports and imports of the commodities from its AE to / from India. Services include : Providing information to AEs in respect of prospective supplier and / or customer Providing information with respect to the economic, business or market conditions for commodities in India Acts as communication c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed the same u/s 37 (1) being the expenditure not incurred wholly and exclusively for the purpose of business and considered the same as related party transaction. The AO thereby made an addition of Rs. 40,78,906/- to the total income of the assessee. 10. The AO in pursuance to the order passed by the TPO/DRP made addition of Rs. 5,93,513/- on account of making purchases of Rs. 7,19,40,901/- from M/s. Mitsui Co. Ltd., Japan during FY 2009-10 on account of non-deduction of TDS on the business profit on the aforesaid payment on the ground that M/s. Mitsui Co. Ltd., Japan has a PE in India and is regularly filing its return of income before Indian Income-tax Authorities. Consequently, the amount of Rs. 5,93,513/- has been added to the total income of the assessee. 11. The ld. AR for the assessee challenging the impugned order contended inter alia that TPO / AO / DRP have erred in making / upholding an addition to the total income of Rs. 10,686,60,627/- by completely misunderstanding the business model, functional and risk profile of the comparable companies; that DRP/AO/TPO have illegally rejected the use of Berry ratio and using OP/TC as a profit level indicator (PLIT) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial segments. Assessee company is considered to be a low risk activity and the primary source of activity is in the nature of commission earned on the traded goods. 14. The assessee company has used TNMM as the most appropriate method for bench marking its international transaction and PLI selected as GP/OC i.e. Berry ratio. Assessee company chosen 29 comparables and by using 3 years data adjusted average Berry ratio at 1.08 and assessee company has claimed its 3 years average Berry ratio at 1.17. 15. However, TPO after analysis of the assessee s transfer pricing approach and after issuing show cause notice selected 31 comparables and taken average at 4.66 %. Assessee raised objection to the comparables chosen by the TPO inter alia that in the absence of computation of correct margin certain parties are having related party transaction more than 25% and that the financial of some comparable are indicating manufacturing activity. 16. TPO disposed of the objections raised by the assessee and on the basis of final comparables chosen for TP studies recorded the findings to arrive at the difference of 1,068,660,627/- as adjustment to the value of international transaction for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gimpex Ltd 4.29 4.29 13. Golkunde Diamonds Ltd. 8.93 -2.98 14. Indo Bonito Multinational Ltd. 12.41 11.59 15. Indo Unique Trading Pvt. Ltd. 6.29 2.92 16. Jaguar Overseas Ltd. 9.32 6.63 17. Jainex Ltd. 2.18 1.59 18. KP Sanghvi Intl. Ltd. 13.18 7.13 19. Kothari Products Ltd. 13.57 2.78 20. Lahoti Overseas Ltd. 0.92 0.76 21. MD Overseas Ltd. 0.52 -7.49 22. Phulchand Export Pvt. Ltd. 3.58 -2.89 23. Riddi-Siddhi Bullion Ltd. 0.19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment order. GROUNDS NO.8 9 OF ITA NO.813/DEL/2014 AY 2009-10 AND GROUNDS NO.9 10 OF ITA NO.1795/DEL/2015 AY 2010-11 18. Since the aforesaid grounds are consequential and general in nature, no findings are required to be returned. GROUNDS NO.1 TO 4 OF ITA NO.813/DEL/2014 AY 2009-10 AND GROUNDS NO.1 TO 4 OF ITA NO.1795/DEL/2015 AY 201011 19. The ld. AR for the assessee by relying upon the order passed by ITAT, Delhi Bench in assessee s own case for AYs 2007-08 and 2008-09 in ITA Nos.6463 5082/Del/2011 dated 20.08.2015 contended that this issue is squarely covered and also brought on record the copies of grounds of appeal of the preceding years. 20. A perusal of the grounds of appeal qua the AY 2008-09 as well as 2009-10 in assessee s own case apparently go to prove that the issue raised in the present year is identical as has been determined by the coordinate Bench in the order (supra). The ld. AR reiterated his arguments challenging the impugned orders as has been addressed before the TPO as well as DRP. The ld. AR further contended that the TPO/DRP have erred in applying the trading margins by ignoring the facts of the instant case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that margins earned in trading are in identical circumstances as while providing support services. 19. The learned AR further contended that the finding given by the TPO that appellant company has over a period of time developed a supply chain intangibles, which is all about having the right product in the right place, at the right price, at the right time and in the right condition, is wrong and against the facts. In this regard reference made by the TPO in its order about the assessee company having developed knowledge of products and design, knowledge of acquisition, knowledge of quality control, knowledge of storage is wrong and against the facts. These are none of the activities of the assessee company as is evident from the description of business support service provided by it. Assessee company simply provides facilitation services to entities in supply chain without being a part of the supply chain. The assessee company has created human intangibles. In this regard the AR submitted that TPO has just made a literary reference in his order about human intangibles and held that assessee has created human capital intangible ignoring the facts and the detailed reply submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets, risks assumed by the assessee and assets employed by the assessee. He noted that, as set out in paragraph 3.4 of the transfer pricing study, the assessee has provided the services for (a) facilitating communication between buyer and seller; (b) arranging freight, insurance and custom clearance through third parties; (c) collecting market information; (d) identifying potential customers (in import transactions only) or suppliers (in export transactions only); and (e) advising an associated enterprise or third party in regulatory or financial matters. It was also noted that, as stated in the transfer pricing study, the presence of assessee in India provides AEs a medium of communication through which they can compete with their competitors eyeing similar business in India . The TPO was of the view that the assessee has performed all the critical functions, assumed significant risks and used both tangible and unique intangibles developed by it over a period of time . He then summarized the FAR analysis as follows: Functions performed by the assessee: -Purchasing activities: Mitsubishi India places orders with related party vendors after receiving orders or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion that to apply the TNMM, the assessee's net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Textually, and within the bounds of the text must the AO/TPO operate, Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee's net profit margin for application of the TNMM. Rule 10B(1)(e) recognizes that the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise ... (emphasis supplied). It thus contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear. 40. The TPO's reasoning to enhance the assessee's cost base by considering the cost of manufacture and export of finished goods, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the activity of a trader. The decisive factors as to why the question framed in (a) has been answered in the negative, are being elaborated in the following paras based on the Business Profile, FAR analysis etc. which we have deliberated on in the earlier paras. 12.20. The unrebutted facts available on record is that the assessee is a service provider to the extent of 88.67% of its total earnings. As per the contracted terms and the unrebutted stand of the assessee it is merely providing indenting services. At no point of time the title in goods or possession of the merchandise is in assessee's hands. The contract is entered into by SCJ and Indian customers directly whether for export or import. The negotiations are directly done by SCJ and the Indian customers and the assessee merely functions as a facilitator. Looking at the nature of services rendered and the arguments advanced which also remain unrebutted and as such are taken to be correct the assessee does not need to incur cost either for maintaining or storing the inventory or for the transportation as the title in goods is never held by the assessee for its indenting activity as a service provider. Consequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at no point of time the assessee was ever exposed to any of those risks as such, the two activities could not be treated at par and thus invited a similar treatment. 12.22. The Ld. CIT DR has relied upon various decisions in support of the TPO's order and the order of the DRP which we propose to discuss subsequently. However it can never be over emphasized that each decision operates on its own peculiar facts and circumstances. This holds equally good for orders and judgments rendered in the context of transfer pricing as each change or nuanced change in facts and circumstances would call for a detailed appreciation of facts and circumstances of both sets of cases. Transfer pricing litigation as we have seen is very fact drive. Consequently for appreciating the principles laid down in the judgements and orders, a detailed factual study of the business model FAR analysis and even economic conditions, if need be, have to be closely examined. Only then the applicability or relevance of the principle laid down be considered. The issues being purely factual necessarily warrant a detailed discussion. 12.23. In the facts of the present case it is seen that the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but even the risk borne is completely different. The risks being of a higher level the rewards if the venture succeeds can also move upwards in regard to the trading activity. This fact is demonstrated from assessee's own record of the two years under consideration whereas in the first year it is 1.81%, in the other it is 13.29%. 12.27. While holding that the margins of one activity cannot be applied to other activity we consider it necessary to address another aspect of the issue as Ld. CIT DR has specifically relied upon orders of the ITAT for the proposition that the TPO can recharacterize the transaction under the Act. We hold that no doubt that the TPO under the Income Tax Act and the rules there under has the powers to re-characterize the transaction if so warranted on facts, in the facts of the present case, this power has been erroneously exercised. On a detailed consideration of the functions performed by the assessee in the two separate class of activities and, considering the assets utilized by the assessee in the two ventures and on a consideration of the risks to which the assessee is exposed to in the two activities as discussed above we are of the considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tc., whose funds are not locked in the cost of goods, title in goods never vests with the assessee contracts are entered in the name of SCJ and its affiliates at one end and the customers in India also in their own names. In these unrebutted facts on record, the TPO was not correct in holding that the 'costs' as per the Rule were FOB value of goods. As such (c) is also decided accordingly. 12.32. Arguments on the creation of and contributing to the human intangibles and supply chain intangibles have been addressed as such we propose to addresses these also at this stage. Since we are of the view that issues in transfer pricing are very fact specific and conclusion necessarily are fact driven as such it may be pertinent to add that while deliberating on facts we have also taken into consideration the orders relied upon by the parties, specifically the department, while deciding the issue in assessee's favour. However in order to maintain coherence and lucidity in our findings which are fact driven, we propose to discuss the judgements subsequently. For the present purposes on consideration of the functions performed by the assessee, the assets deployed using the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification to apply the margins of trading activity to indenting activity in the facts of the present case. 12.34. We further support the view taken, by referring to 2006-07 assessment year wherein the Revenue has accepted the method applied and only on comparables there have been a dispute. Similarly in 2008-09 assessment year, that is the immediately subsequent assessment after the two years under consideration, same method has been followed by the assessee. According to the Ld. CIT DR the method has not been accepted though adjustments have not been made as the margins in the trading activity vis- -vis the indenting activity, declined. The Ld. CIT D.R has been at pains to emphasize that no doubt no adjustment was made in the TP proceedings for 2009-10 assessment year but no deviation has been made from the stand taken by the department in the TP proceedings. 12.35. Accordingly on facts for the detailed reasoning given hereinabove on the issues addressed before us we are of the view that the TPO's action upheld by the DRP cannot be upheld by us. The issue is also covered by the judgment of the Mitsubishi Corporation India (P) Ltd. vs. DCIT (Supra) where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g costs or value added expenses - particularly when, as we have noted above, no resources are used in the inventories. 80. Coming to the service fee/commission segment, we have noted that as regards the service fee/commission segment, the TPO has re-characterized the same as trading activities as he was of the view that the right course of action will be to treat the same as equivalent to trading segment, because what the assessee has disclosed as service/commission income is infact trading income. Accordingly, the cost of goods sold by the AEs, which was ₹ 2927,92,05,406, was also to be included in cost base of the service/commission segment and then ALP was recomputed. So far as this aspect of the matter is concerned, the issue is now covered in favour of the assessee by Hon'ble jurisdictional High Court's decision in the case of Li Fung wherein Their Lordships have, inter alia, observed as follows: ..This Court is of opinion that to apply the TNMM, the assessee's net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the coordinate benches we are of the view that the adjustment made to arm s length price as upheld by the DRP cannot be sustained. 32. We are of the further view that the adjustment as confirmed by the DRP is otherwise untenable in view of the proviso to section 92C of the Act. The TPO has included the cost of sales of the AEs while making adjustment to the arm s length price. The cost base as determined by the learned TPO in the assessment year 2007-08 is Rs. 4558,90,44,859. The adjustment proposed after order from the DRP is Rs. 116,70,79,548. This amount is within 5% of the cost base of Rs. 5589044859/- determined by the learned TPO himself. The cost base as determined by the TPO in the assessment year 2008-09 is Rs. 4071,95,89,546. The adjustment proposed after order from the DRP is Rs. 114,82,92,425. This amount is also within 5% of the cost base determined by the TPO himself. Accordingly, no adjustment could have been made in view of the proviso to section 92C of the Act. The TPO is not right in including the cost of sales while determining arm s length price and not considering the same while applying proviso to section 92C of the Act. The language of the proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stainable in the eyes of law for the following reasons :- (i) that the TPO/DRP have illegally and arbitrarily included the cost of sales incurred by the assessee company s AE, for which the assessee company has rendered support services to work out the profit for determination of the ALP; (ii) that identical and similar issue has been decided by the Tribunal in case of Mitsubishi Corporation India (P_ Ltd. vs. DCIT ITA No.5042/Del/2011 dated 21.10.2014 by following the judgment rendered by Hon ble jurisdictional High Court in case of Li and Fung India Pvt. Ltd. vs. CIT 361 ITR 85 (Del.) and held that the TPO was not justified in re-characterizing the transaction as trading transaction and it has also been held that cost of sales incurred by the AE cannot be included to work out the profit for determination of the ALP; (iii) that the nature of services rendered by the assessee company to its AE since 2003 are the same and it has been consistently benchmarking its international transaction relating to the business support services using TNMM as the most appropriate method as OP/TC as PLI, as has been used in the instant case; (iv) that as has been discussed in the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the availability of interest free funds far exceeds the investments made as in the present case. 16.2 DRP has duly considered the issue. It is seen that in the case of Cheminvest Ltd. Vs ITO 317 ITR (AT) 86 (Delhi S. Bench), the ITAT has held that irrespective of the fact that whether during a year there is any exempt income or not, Sec. 14A disallowance would still be attracted. It is to be noted that once the A.O. is satisfied that the assessee had incurred expenses in earning exempt income, he has to follow the procedure laid down in Rule 8D. For purposes of disallowance u/s 14A, it is not necessary that there should be fresh 'investment during the year under consideration. Further, the assessee has not established with evidence that its share capital and reserves were actually invested in equity from where exempt dividend income is to be earned. Therefore, the objection is rejected. 30. Undisputedly, the assessee has not earned any exempt income during the years under consideration and no investment has been made by the assessee during the years under consideration and the outstanding balance in investment i.e. in shares as on 31.03.2008 31.03.2009 and 31.03.2009 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss account, lying at page 7 of the paper book. A perusal of the audited profit loss account statement apparently shows that assessee has never claimed prior period expenses to the tune of Rs. 11,11,510/- during the year under consideration in Income-tax return and as such, the question of disallowing the same does not arise. So, we hereby decide this ground in favour of the assessee. GROUND NO.7 OF ITA NO.813/DEL/2014 AY 2009-10 34. The AO has made disallowance of Rs. 2,29,831/- on account of service tax payable and made the addition under section 43B of the Act. However, during the course of argument, the ld. AR for the assessee has fairly conceded that this ground goes against the assessee company and as such, he does not want to press it. Consequently, ground no.7 is determined against the assessee. GROUND NO.6 OF ITA NO.1795/DEL/2015 AY 2010-11 35. The AO made an addition of Rs. 40,78,906/- by disallowing the same u/s 37 (1) claimed by the assessee company as expenditure on account of payment of service fee paid to M/s. West Japan Logistics Division of Mitsui Co. Ltd., Japan and M/s. Mitsui Co. (Asia) Pte Ltd., Singapore on the ground that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee had made purchase of Rs. 7,19,40,901/- from M/s. Mitsui Co. Ltd., Japan during FY 2009-10, which has a PE in India and it regularly files its income before the Income-tax authorities. The assessee company was required to deduct the tax at source on the business profit on the above said payment, which has not been deducted by the assessee company and consequently, AO made an addition of Rs. 5,93,513/-. Undisputedly, this issue is covered by the order passed by the DRP in assessee s own case qua AY 2011-12 vide order dated 14.12.2015 wherein DRP has held that no TDS is applicable u/s 195 on offshore supplies. When the assessee company has no PE in India it is not liable to deduct tax at source. So in the light of the facts and circumstances of the case and the fact that this issue has been decided by the ld. DRP qua the subsequent AY 2011-12 in favour of the assessee, this issue is also restored to the AO to determine afresh in view of the stand taken by the revenue in the subsequent year. So, consequently this ground is also determined in favour of the assessee. 38. In view of what has been discussed above, the aforesaid appeals so far as TP issues are concerned are a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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