TaxTMI 
TaxTMI 
2011 (3) TMI 483
X X X X Extracts X X X X
X X X X Extracts X X X X
....) Ltd. (hereinafter referred to MIPL) is the 100% subsidiary of Marubeni Corporation, Japan ( hereinaftere referred to MCJ), who is holding 99.99% shares in the assessee company and the balance 0.01% shares are held by Mr. H.Tsuda, representative of MCJ. Its activities have been noticed extensively by the Learned CIT(Appeals) in paragraph 5 which read as under: ii. MIPL's operations primarily consist of representation service. MIPL liaises between various business divisions of Marubeni and their suppliers/customers in India. These operations include import, export, and off-shore trade, project management, and marketing of finished goods, market research and liaison work. iii. MIPL too, like MCJ trades in a broad range of industrial, agricultural land and consumer goods, commodities and natural resources. iv. The various business segments of MIPL are: IT & Telecom Utility & infrastructure Plant & machinery Transportation & Industrial Machinery Energy & Petroleum Metal & Mineral Resources Iron & Steel Chemicals General Merchandise Food & produce Textiles MIPL undertakes the following types of activities: Handling/Ag....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essment year 2002-03 whereby Assessing Officer has determined the income of assessee at Rs.2,35,01,470. Assessing Officer has made following additions/disallowances: S.No. Particulars 1. Disallowance on account of construction activities 1,26,59,700 2. Addition on account of Arm's length price 2,60,49,881 3. Addition on account of interest to Income-tax Authorities 13,15,473 4. Addition on account of Business Promotion Expenses 14,40,045 5. Disallowance on account of Communication Expenses 79,82,798 5. In assessment year 2003-04, he determined the taxable income of the assessee at Rs.4,79,36,297. Assessing Officer has made disallowances/additions to the returned income of Rs.2,91,70,266. The additions made by the Assessing Officer are as under: S. No. Particulars Amt ( in `) 1. Addition on account of Income from International Transaction 98,63,206 2. Addition on account of Business Promotion Expenses 8,93,040 3. Addition on account of Communication Expenses 63,79,405 4. Addition on account of interest paid to Incometax Authorities 9....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d with regard to the computation of arm's length price with respect to the international transaction. In his opinion, assessee has erred in including interest income as a part of operating income while working out the arm's length price. Similarly, he observed that assessee failed to exclude certain expenses from operating expenses. In assessment year 2002-03, he recomputed the arm's length price in respect of this international transaction at Rs.22,10,47,646 as against Rs.19,49,97,705 reported by the assessee. The difference comes out to Rs.2,60,49,881. An addition of this amount accordingly, has been made in assessment year 2002-03. On similar analogy , learned TPO has determined the arm's length price of this international transaction at Rs.17,36,71,139 as against Rs.16,38,07,933 reported by the assessee in form 3CEB. The difference between the two works out to be Rs.98,63,206. He recommended the addition of this amount to the Assessing Officer. 9. Learned CIT(Appeals) while considering this issue has propounded five issues to be adjudicated in assessment year 2002-03 which read as under: "i. Whether the interest income of Rs. 1.72 crore is part of operating income or not.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ratuity amounting to Rs.1,487,150, and 'loss on disposal of fixed assets (net)' amounting to Rs.12,742, should be treated as abnormal and non operating costs and are required to be excluded while computing the operating expenses. (Ground Nos. 6, 7 & 11). viii. Whether business promotion expenses amounting to Rs.8,93,040,donation expenses amounting to 2,00,000 and legal and professional charges amounting to Rs.3,93,328 disallowed by the AO and admitted by the appellant should also be excluded while computing the operating expenses. ix. Whether the appellant is entitled to the benefit of +5% range mentioned in Proviso 92C(2) while computing the Arm's Length Price.(Ground No.10)." 11. Learned First Appellate Authority has recorded findings in detail on all these issues independently. In assessment year 2002-03, he excluded following items for computing total cost for the purpose of calculating arm's length remuneration: a) Loss on Sale of Fixed Assets/written off &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the company may think fit and is authorized to do so. The learned counsel for the assessee has apprised us with regard to assessee's business profile. He submitted that one of the activities of the assessee is of treasury function. Under this activity, the management accountants main task is in cementing these treasury's strategic role i.e. to facilitate communication and understanding of strategic possibility and to aid implementation through the use of diagnostic and the development of gap and sustaining strategies. To attract and retain competitively sought after investors capital or in other words shareholders wealth. In today's world, investors capital has more choice and mobility then ever before, the key to co-operate survival and growth lies in organizational change initiatives that will contribute directly to the economic value of the firm and its ability to satisfy the financial return requirements of its investors. The main object of treasury function which cash management, management of bank account and debt management, financial planning and forecasting of cash flow financial assets management. He pointed out that parleying of surplus fund is an integral part of assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nts which are part of the operating income and from which one has to reduce the cost incurred in earning operating income. The issue before us is not to decide whether a particular receipt is an income from business or an income from other sources for the purpose of the Income-tax Act, 1961. From the record, we find that Learned CIT(Appeals) has discussed the business profile of the assessee which we have also noticed in foregoing paragraphs. He recorded a finding that earning of the interest income has never been the primary operating income generating activity, in fact, interest income is prima facie earned as a result of finance activity by investing the surplus funds and it is not the result of an operating activity. The basic object of the Chapter X of the Income-tax Act, 1961 is to determine and arrive at the arm's length price by comparing the operating profits of the controlled transaction with the uncontrolled transaction. According to the Learned CIT(Appeals), it is a universal practice under TP Regulation that interest income is to be excluded from the operating revenue for computing the net profit from the operating activity. However, situation would be different if the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arm's length remuneration are Rs. 31,70,638 and Rs. 14,40,045. The first item represent a payment made to telephone department against the demand raised by it. The second item relates to business promotion expenses. The Telephone Department has raised a demand upon the assessee which was disputed by it in a telephone adalat but ultimately it has to pay the amount. According to the Learned CIT(Appeals), the payment made to telephone department is in the nature ofabnormal item which is not regularly incurred in the ordinary course of business. The learned counsel for the assessee on the strength of ITAT's decision in the case of SAB Laboratory India Pvt. Ltd. Vs. ACIT reported in 6 ITR (Trib.) page 88 contended that the Learned First Appellate Authority has rightly given the credit of this expenditure and has rightly excluded this expenditure for calculating the operating cost. Learned DR on the other hand relied upon the order of the TPO. 17. On due consideration of the facts and circumstances, we are of the view that in computing the ALP, the expenses in the nature of abnormal items are not to be looked into. This expenditure is not of a routine nature. It is not ascertainable f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee is primarily engaged in contract service provider to its AE which means that continuity of business is ensured to the MIPL. If the associate enterprises intends to break the relation of which it has enjoyed concessional fruit over the year then on closure of certain branches, the A.E. ought to have adequately compensate the assessee for such severance of relation. The assessee has closed these three offices in order to reduce the surplus staff, to reduce the different profile i.e. consolidation of business unit. The assessee has to see economic environment available in the market and to reduce the losses, it thought, it fit to close certain branches. 20. The learned counsel for the assessee submitted that Learned First Appellate Authority has failed to appreciate the facts and circumstances in right perspective. The assessee is an independent juridical entity. It is not guided by it's A.E. for taking all such administrative decisions. It has been running its business in India as an independent unit. The decision to close certain offices was taken by the executive management in India. He pointed out that effort of the TPO as well as of the Learned CIT(Appeals) i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... always be there. The analysis carried out by the adjudicating authority should be judicious one and that should be carried out after taking into consideration all the relevant facts and circumstances of the case. In the present case, the compensation received by closure of certain units may not be a regular phenomena. But by virtue of closing down certain branches, assessee has reduced the cost of A.E. It means that closure has a direct link with the international transaction. Assessee has been receiving the certain charges at cost plus 10%. In such circumstances, this type of receipts would always be considered in the operating expenses. Learned First Appellate Authority has right held that cost of closure is not to be excluded from computing the operating expenses. The ground Nos. 6 & 7 raised by the assessee in this regard are rejected. 23. The next item disputed by the assessee in ground No.8 is that Learned CIT(Appeals) has erred in using the current year data for comparable purposes and not relying on the date of preceding two years. The learned counsel for the assessee did not press this ground of appeal on the ground that Special Bench's decision of the ITAT in the case....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion and documentation to be maintained under Rule 10D(1) should be contemporaneous as far as possible and should exist latest by the due date of filing of the return. With regard to adjustment on account of risk, according to the Learned CIT(Appeals), assessee failed to file the details exhibiting risk born by comparables. In the absence of that comparability, it is difficult to make adjustment. As far as the decision of the ITAT is concerned, that relates to facts situation of that case. In a given circumstance, some estimated mark upon may be applied for risk adjustment. The assessee ought to have demonstrated this factor before the learned TPO as well as before the Learned CIT(Appeals). Thus, in the absence of exact details, exhibiting the risk born by the comparable vis-à-vis the risk in running the business taken by the assessee, it is difficult to give any benefit on that account. Ground No.9 raised by the assessee is, therefore, rejected. 27. In ground No.11, assessee has submitted that there is a general recession in the international market, because of general recession, assessee could not achieve the desired business target. The learned counsel for the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....range under the proviso is given to the assessee on the PLIs determined by the Learned CIT(Appeals) then arithmetic mean of the PLI would be 3.8%. Similarly, if plus five is added then it would be 14.8%. According to the learned counsel, benefit of this proviso ought to have been extended to the assessee. Learned DR on the other hand pointed out that benefit of minus 5% provided in the proviso is not a standard deduction. He relied upon the order of the ITAT in the case of Global Ventage (P) Ltd. vs. CIT reported in 2010 Tax India Online page 24. He placed on record copy of the ITAT's order. He also relied upon the order of the ITAT Mumbai in the case of DCIT vs. Basf India Ltd. reported in 41 SOT 10. 30. We have duly considered the rival contentions and gone through the record carefully. Learned First Appellate Authority rejected the claim of the assessee on the ground that the benefit cannot be considered to be a standard universal deduction allowed in each and every case which the assessee exceeds the permissible limit and falls outside the arm's length range. The proviso provides a relief to the taxpayer at the time of determining ALP. In effect, the transfer price shown by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efit to the assessee. In view of the above discussion, the appeal of the assessee in assessment year 2002-03 is partly allowed whereas appeal of the revenue is dismissed. 33. In assessment year 2003-04, as observed earlier, only revenue is disputing the determination of the ALP. We have extracted the relevant points expounded by the Learned CIT(Appeals) for determination of ALP in paragraph 10 page 11 of this order. The first item is exclusion of interest income from operating income. This issue we have already adjudicated while adjudicating this issue in assessment year 2002-03. Learned CIT(Appeals) has held that interest income cannot be considered as forming part of operating income. This finding is against the assessee and assessee is not challenging this issue in its appeal. The next item relates to exclusion of interest paid to income-tax, value of fixed assets written off, provisions for gratuity etc. These items were included by the assessee in the operating cost. Learned CIT(Appeals) has held that these are to be excluded. The assessee is not disputing this factor and revenue could have not any grievance. The only grievance of the revenue is that Learned CIT(Appeals) ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....supervision of these projects, the cost of which cannot be directly identified and allocated, therefore, it is reasonable to conclude that some portion of these indirect costs also known as corporate overheads need to be allocated to the trading segment as well as particular project department. Hence, I agree with the appellant's contention that in the absence of any allocation of such expenses it is prudent to use income as the appropriate "allocation key" to allocate such overheads/indirect expenses to the Trading segment". 34. On due consideration of the findings of the Learned CIT(Appeals), we are of the view that these expenses have no relation with the international transactions of the assessee, therefore, they cannot be considered while computing the ALP of the assessee. Learned CIT(Appeals) has examined the other aspects in detail. We have considered those issues also i.e. whether last year data has to be taken into consideration or multiple years data. We have considered this issue while dealing with the determination of the ALP in assessment year 2002-03. Similarly, we have considered the issue in respect of business promotion expenses etc. discussed by the Lear....