TaxTMI 
TaxTMI 
2011 (12) TMI 393
X X X X Extracts X X X X
X X X X Extracts X X X X
....count of transactions with the overseas AE. The AO proposed addition of Rs. 25.56 crores in the draft assessment order. The assessee filed objections before the DRP, who rejected such objections and confirmed the stand of the Department. Based on the TPO's order and the draft order approved by the DRP, the AO made addition of Rs. 25.56 crores. 4. At this stage, it would be relevant to consider the order of TPO passed on 29-10-2009. From this order it can be seen that during the year in question, the assessee entered into the following international transactions with its AEs: (Figures in Rs. '000) 1. Import of raw materials 57783 Transactional Net Margin Method ('TNMM') 2. Import of finished goods 310098 TNMM 3. Export of finished goods 97766 TNMM 4. Receipt of indenting commission 94481 TNMM 5. Recovery of expenses 27520 Recovery of actual Cost (TNMM) 6. Reimbursement of expenses 405 Reimbursement of Actual cost (TNMM) 5. The TPO noted that the activities of the assessee were largely classified into manufacturing and trading. As regards the manufacturing activity, he observed that the assessee manufact....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions during the course of proceedings before him itself showed the reliability or unreliability of the accounts being maintained and margins being shown by the assessee. He analyzed the final split-up given by the assessee (copy on page 510 of the paper book) between trading and indenting segments and noticed from it that the assessee had bifurcated all other expenses except Employee cost and Rent on the basis of trading turnover to the indenting turnover (i.e. 42:734). Employee cost was bifurcated by the assessee in the ratio of 1:1 between trading and indenting segments. In the opinion of the TPO, the entire Employee cost was required to be bifurcated on the basis of trading and indenting turnover. He, therefore, allocated a sum of Rs. 4.60 crores to the indenting segment. Similarly, as regards Rent totaling Rs. 53.90 lakhs, the assessee attributed equal amount to both the activities. Applying the same yardstick of apportioning in turnover ratio, the TPO allocated Rs. 50.94 lakhs to indenting segment and Rs. 2.96 lakhs to trading segment. In this way, he revised the segmental accounts in respect of trading and indenting activities as under : (Figures in Rs. ' 000) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nly on the making of payment by the customers. For the services rendered by the assessee, commission rates ranged between 1% to 3%. It was also observed that the assessee changed its agreement with effect from 13.1.2006 under which it was to be remunerated by way of reimbursal of total cost i.e. direct expenses and a fair allocation of indirect expenses plus 0.6% of the sale value of the AE's goods indented in India through the assessee. The TPO opined that arm's length indenting commission should be based as a percentage of sale and not as a percentage of cost inasmuch as the compensation was only for the effective sales made through the assessee. The most appropriate method for compensating such kind of indenting services, in his opinion, was not a cost plus but a percentage of sales method. He noticed that the assessee had shown to have earned margin of 23.73% under indenting segment, which was erroneously depicted as a percentage of its gross commission and hence was meaningless. The assessee was given an opportunity to give the names of the comparable companies which were indulging in such kind of indenting business in chemicals to prove that its price was at ALP. The assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee also undertook the business of trading and indenting. There is no dispute as regards arm's length price declared by the assessee in respect of manufacturing activity. The assessee consolidated its results from the other two streams of activities, namely, trading of finished polycarbon etc., purchased by it from Bayer group for resale and indenting commission earned from Bayer group on sales effected by them through the assessee's assistance. The TPO requested the assessee to segregate the results in respect of trading and indenting activities and furnish segmental accounts separately. Initially it was argued before the TPO on behalf of the assessee that it was not practicable to segregate the results in respect of trading and indenting activities. The assessee revised the calculations of such profit one after the other, for four times, sometimes voluntarily and on others at the instance of the TPO. Final calculation, a copy of which is available on page 510 of the paper book, was filed splitting trading and indenting activities, which has been considered by the TPO for further adjustments. Thus it can be seen that though the assessee was initially hesitant to give segmental ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t rate of comparable cases and then comes the final stage of determining as to whether or not the profit of the assessee represents ALP. 10. The TPO undertook the first step of finding out the correctness of profit declared by the assessee with reference to the final (fourth) calculation submitted by the assessee splitting the results showing net profit margin at 3.90% in the case of trading and 23.73% in the case of indenting activities. Here, it is pertinent to note that trading margin at 3.90% was determined by considering the figure of net sales of Rs. 42.71 crores as denominator. On the other hand, the net profit margin in the case of indenting activity at 23.73% was computed by adopting the gross figure of indenting commission along with cost recovery as denominator instead of actual turnover on which such indenting commission was earned. The figure of such indenting turnover was admitted by the assessee as Rs. 734.83 crores. The TPO substituted the figure of indenting turnover with the gross commission adopted by the assessee for the purposes of working out the Operating profit to Sales ratio in the indenting segment. In the fourth and the final financial split, the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....amount of gross commission in the denominator, the same is not capable of comparison with the net profit margin in the trading segment with the amount of turnover as denominator. Rounds cannot be compared with the squares and vice versa. It is only the turnover and not the gross commission in the indenting activity, which can be compared with the turnover in the trading activity. We, therefore, repel this contention raised on behalf of the assessee and approve the view canvassed by the TPO in adopting the figure of turnover in the indenting segment at Rs. 734.83 crores. 12. The second objection raised by the assessee is on the bifurcation of employee cost between trading and indenting segments. Whereas, the assessee divided employee cost in equal shares between the trading and indenting activities, the TPO apportioned it in the ratio of turnover. The ld. AR argued that the basis adopted by the assessee in bifurcating such cost was correct. We are again unconvinced with the submissions tendered on behalf of the assessee in this regard that the employee costs should be segregated in equal proportion between the two segments. The obvious reason is that the assessee itself admitted ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r, the same comes to around 1.5%. 13. Now we move to the second step of finding out the profit rate of comparable cases. We have approved the view of the TPO in holding that both the trading and indenting activities were required to be benchmarked separately. We have noticed above that the assessee gave comparable cases showing profit margins in trading and indenting activities taken as one consolidated unit, without there being any segregation for indenting activity. In that view of the matter the comparable cases cited by the assessee lost their significance. Left with no comparable case available for comparison from the side of the assessee, the TPO rightly requested the assessee to give names of companies indulging in such kind of indenting business in chemicals to show that its price was at arm's length. The assessee did not furnish any details of the comparable cases. In the absence of the assessee discharging its onus the TPO took upon himself the duty of finding comparable cases. He noticed that no data was available on such activity in the realm of uncontrolled transactions. He, accordingly, took note of three comparable cases entering into similar indenting business by....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he may skip the exercise of voluntarily finding the comparable cases at his end. Thus it is the aggregate of such cases being those short-listed from the assessee's list and those voluntarily included by the TPO, which are considered to find out the average profit for the purposes of comparison. v. It may also happen that all the cases chosen by the assessee turn out to be incomparable and as such the basket of comparable cases is emptied. As the exercise of determining ALP is inconceivable without any comparable case, the TPO will have to afford one more opportunity to the assessee enabling it to give certain other cases which are really comparable. On the receipt of details of such comparable cases, the steps at ii. to iv. shall be undertaken by the TPO. vi. If despite being put to notice as per step v., the assessee fails to give any list of comparable cases or the cases given are again found to be incomparable, then the power of the TPO in voluntarily selecting comparable cases as discussed in step iv. above shall get converted in to his duty. He will have to undertake the exercise of finding comparable cases so as to complete his job. 15. Adverting t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enterprise" implies two independent entities which are not associated to each other. Section 92C(1) prescribes certain methods, out of which one which is most appropriate should be chosen for computing ALP. The manner of determination of ALP as per these methods has been set out in Rule 10B of the I.T. Rules, 1962. There is reference to "uncontrolled transaction" in this rule. Rule 10A(a) defines "uncontrolled transaction" to mean "a transaction between enterprises other than associated enterprises, whether resident or non-resident". When we read sections 92C(1) and 92F(ii) in conjunction with Rules 10A and 10B, it becomes ostensible that ALP is to be determined with reference to uncontrolled transactions or, in other words, the price applied or proposed to be applied in a transaction between other than Associated Enterprises in uncontrolled conditions. 18. In order to appreciate the rival contentions in this regard, it will be pertinent to note that sections 92 to 92F dealing with computation of income from international transactions having regard to the ALP are placed in Chapter X with the marginal note : "Special provisions relating to avoidance of tax". The very purpose of i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee. The further question will be as to whether any cognizance can be taken of such controlled transactions for benchmarking. We have observed above that a majority of assesses do not intend to play foul with the Revenue by unnecessarily attempting to reduce the tax liability. In such circumstances the declared income from such international transactions will itself represent the arm's length price. Thus, where it is an admitted position between the tax payer and the tax collector that there is no comparable uncontrolled transaction due to the nature of transaction being such that it is ordinarily between associated enterprises, in such a case, a transaction between two associated enterprises at arm's length price, though technically called 'controlled transaction', would partake of the character of 'uncontrolled transaction' for the purposes of determining the ALP in a later international transaction between two AEs. In such a situation, no fetters can be placed on the powers of the TPO to consider such comparable controlled transaction - having adorned the garb of uncontrolled transaction -for the purposes of benchmarking. If the contention of the ld. A.R. is accepted that co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rent that the purpose behind such provisions is to uncover the arrangement made by the associated enterprises in not reflecting the true profit from the international transactions. If we accept the contention raised by the ld. A.R. that the controlled transactions should be completely ignored in such a situation when there are no uncontrolled transactions at all, it would amount to defeating the object of these provisions. When the very purpose of these provisions is to determine arm's length price and there is admittedly no record of any uncontrolled transaction, in our considered opinion, it is perfectly in order to consider a controlled transaction genuinely entered in an uncontrolled manner between some other associated enterprises, for the purposes of benchmarking of such a transaction. 21. Reverting to the facts of the instant case, it is seen that the list of comparable cases initially given by the assessee was meaningless for benchmarking the transactions in the indenting business. Despite the TPO's request, the assessee failed to furnish the names of any comparable cases. The TPO did not find any data of uncontrolled transactions in this activity because of its peculiar....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the assessee, namely, Bayer Material Science Ltd., it was inquired from the bench if there was any relation between these two companies. The ld. AR was fair enough to inform that both are group concerns. On further inquiry, it transpired that M/s INEOS ABS Ltd. was earlier a group concern of the assessee itself, but it ceased to be so somewhere in the calendar year 2004. It, therefore, becomes patent that that in the previous year relevant to the assessment year under consideration M/s INEOS ABS (India) Ltd. was not an associated enterprise of M/s Bayer Material Science Ltd. Hongkong, and hence, satisfies the test of uncontrolled transaction. The third company namely M/s Rathi Brothers Madras Ltd. also did the business of indenting and received commission @ 5% to 6%. The learned A.R. while referring to pages 848 of the paper book, being the balance sheet of this company distinguished it again on the basis of its low turnover of only Rs. 10.65 crores 23. Thus it is evident that the similarity in the nature of business and other relevant facts in these cases with that of the assessee, except the volume of turnover, is not in doubt. Now the question is whether these cases, whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nted and the assessee duly dealt with such cases in its written submissions before the TPO. Further ground no. 14 challenging the lack of adequate opportunity given by the AO and TPO, set out in the memorandum of appeal, has specifically been not pressed by the ld. AR. 25. When the rate of arm's length indenting commission at 5% is applied to the turnover of Rs. 734.83 crores, the amount of arm's length commission comes to Rs. 36.74 crores. As against that, the assessee showed only a sum of Rs. 11.17 crores as indenting commission. In our considered opinion, the AO was right in making addition of Rs. 25.56 crores. 26. The learned A.R. has raised one more objection by contending that the TPO was not correct in rejecting the Transactional Net Marginal Method (TNMM) applied by the assessee and choosing the Comparable Uncontrolled Price Method (CUP) for determining the ALP. Again we are unable to accept this contention advanced on behalf of the assessee. The TNMM compares net profit margin realized by an enterprise from an international transaction in relation to cost incurred or sales effected or assets employed or having regard to any other relevant base. Here the comparison is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gh this ground is no more res integra in view of the judgment of the Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) in which it has been held that disallowance is called for u/s 14A in such circumstances. However, the manner of computation of such disallowance has been restored to the file of AO for making on some 'reasonable basis'. It has further been held in this case the provisions of Rule 8D are prospective. Respectfully following the precedent, we set aside the impugned order and direct the AO to compute disallowance u/s 14A in accordance with the ratio laid down by the Hon'ble jurisdictional High Court in the aforenoted case of Godrej & Boyce Mfg Co. Ltd. (supra). 31. Ground no. 10 is against the confirmation of disallowance amounting to Rs. 2,96,26,000/- made by the AO u/s 40(a)(ia) of the Act. 32. On the perusal of the Profit and loss account of the assessee, it was observed by the AO that the assessee had claimed deduction for a sum of Rs. 2.96 crores under the head "Cost sharing expenses". On being called upon to explain as to why the deduction of tax at source was not made before making the paym....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s provides : "The basis of cost sharing shall be an exact reimbursal of the proportional time, cost of the identified personnel, without any mark up, margin or addition". Similarly, clause 3.4 of the second Agreement providing facilities to each other states that : "The basis of cost sharing shall be an exact reimbursal of the proportional cost of the identified facilities, without any mark up, margin or addition". From the Profit and loss account of the assessee, it is seen under Schedule 18 that the assessee independently incurred various expenses such as Stores and spares consumed, Power and fuel, Freight, Rent, Repairs and Travelling, etc., apart from paying Cost sharing expenses of Rs. 2.96 crores. The P & L account of BCS is also available on record. It can be seen from it that the amount recovered by BCS from the assessee and other group companies towards cost sharing has been excluded from the expenditure incurred by it. The net effect of these transactions is that BCS provided its personnel and services to the assessee on cost to cost basis which the assessee included in its expenditure, whereas the BCS reduced the amount recovered from the assessee and other group concern....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the opening stock amounting to Rs. 33,23,889/-. The assessee argued before the DRP that in the immediately preceding year, the AO made addition to the value of closing stock on account of CENVAT credit to this extent and hence the value of the current year's opening stock be correspondingly increased. The DRP directed the AO to allow the corresponding adjustment in the value of the opening stock to the assessee u/s 145A of the Act to the extent such addition in the value of the closing stock of last year was finally sustained. Before the AO, it was stated on behalf of the assessee that the appellate proceedings for the immediately preceding assessment year i.e. 2005-06 were still pending. The AO, therefore, refused to allow any adjustment on this score. 35. After considering the rival submissions and perusing the relevant material on record we find that there cannot be any doubt on the proposition that if the value of closing stock of the immediately preceding year has been increased u/s 145A by CENVAT credit in the shape of addition in the assessment u/s 143(3), the corresponding increase is also required to be allowed in the value of opening stock for the current year. The log....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see who is liable to pay advance tax, has failed to pay it and such advance tax paid is less than 90% of the assessed tax, the assessee shall liable to pay simple interest at the prescribed rate from 1st April next following such financial year to the date of determination of total income under section 143(1) and where the regular assessment is made to the date of such regular assessment on an amount equal to assessed tax or as the case may be on the amount by which the advance tax paid falls short of the assessed tax. Explanation 1 to section 234B(1) defines 'assessed tax' to mean 'the tax on the total income determined under sub-section (1) of section 143 and where regular a assessment is made, the tax on the total income determined under such regular assessment as reduced by the amount of' tax deducted or collected at source or any relief u/s 90 or 90A etc. From the above prescription of section 234B(1) read with Explanation (1) it becomes apparent that the interest under this section is charged with reference to the 'assessed tax' or the amount of assessed tax as reduced by the advance tax paid, if any, as the case may be. The assessed tax has been defined to mean tax on total ....