TaxTMI 
TaxTMI 
2013 (6) TMI 104
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....d goods, market research and liaison work; and (ii) trading of a broad range of industrial, agricultural and consumer goods, commodities and natural resources. 3. We may first take up the appeal filed by the assessee in ITA No.1042/2011 relating to the assessment year 2002-03. The assessee filed a return of income on 31.10.2002 declaring "nil" income. It was revised but even in the revised return the income declared was Rs. nil; however, it was explained that the interest on bank deposit earlier treated as business income was being shown as "income from other sources" in the revised return, that the brought forward unabsorbed depreciation was being claimed as depreciation of the current year and that the expenses amounting to Rs. 11,23,440/- relating to construction project was being withdrawn. The return was scrutinised and an assessment order was passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the „Act‟) determining the total income at Rs. 2,35,01,470/-. Several additions were made in the assessment order. For the purpose of the present appeal, however, the assessee has proposed the following 7 questions, stated to be substantial q....
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....#8223;s length price. While doing so, the TPO treated the interest income of Rs. 1.72 crores received by the assessee as non-operating income. Because of this treatment accorded to the interest income, the profits of the companies which were taken for comparison purposes were found to be more than the profits earned by the assessee and accordingly the addition on account of transfer pricing adjustment was made. It was the conclusion of the TPO that the income earned by way of interest by investing the surplus funds of the assessee in interest bearing instruments cannot be used to offset the assured return on costs. 5. The TPO was further of the view that in respect of the services rendered by the assessee, it should be remunerated on a cost-plus basis and the total costs should be made the basis of computing its earnings and not merely the commission and fixed fees paid to it. According to the TPO the commission rates and the fixed fees were determined by extraneous unascertainable factors which had no bearing with the corresponding costs incurred by the assessee. As the commission was paid on the basis of the value of the transactions put through because of the efforts of the ass....
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....art of operating income or not. ii. Whether loss on sale of fixed assets, interest paid to income tax, office closure cost, amount paid to telephone adalat are abnormal costs and are required to be excluded while computing the operating expenses. iii. Whether business promotion expenses disallowed by the A.O and admitted by the appellant should also be excluded while computing the operating expenses. iv. Whether, the appellant is entitled for adjustments to the operating profit, on account of differences in the working capital position and differences in the risks profile, between the appellant and the comparable companies. v. Whether the appellant is entitled to the benefit of +5% range mentioned in Proviso 92C(2) while computing the Arm's Length Price." 8. The submissions of the assessee before the CIT (Appeals) were mainly these. The parking of the surplus funds in interest bearing securities was an integral part of the assessee‟s operations, that one of the objects of the company was to invest the surplus funds in securities, deposits, units, shares, bonds, debentures, etc. and that according to its memorandum of association these activities were permitted and thus t....
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....controlled transaction of the assessee, the interest income of Rs. 1.72 crores was to be considered as non-operating income. He thus endorsed the decision of the TPO/AO. 10. The assessee carried the matter in further appeal before the Income Tax Appellate Tribunal. After considering the rival contentions and examining the facts, the Tribunal agreed with the income tax authorities, recording the following findings: - (a) The purpose of the exercise before the TPO is to determine the arm‟s length price of the transactions of the assessee with its associates by comparing the same with un-controlled, comparable transactions and in doing so he has to consider all the components of the operating income from which the costs incurred in earning such income have to be deducted; (b) It was not sufficient to decide whether the interest income fell to be assessed as business income or as income under the residual head for the purpose of making the assessment; it was further necessary to find out whether the interest income forms part of the operating income of the assessee; (c) The business profile of the assessee, which has been brought out by the income tax authorities and particul....
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....nt for the purpose of determining the operating income of an assessee for the purposes of transfer pricing regulations. Moreover, the Tribunal has also found as a fact that the interest arose out of investment of surplus funds which were not immediately required for the core business of the assessee. The Tribunal‟s view that in such circumstances the interest income cannot be considered to be its operating income is essentially a question of fact to be gathered from the nature of the assessee‟s business and its business profile. All these factors have been rightly kept in view by the Tribunal. We are, therefore, of the opinion that the first three questions are not substantial questions of law meriting scrutiny of this Court. 13. So far as the fourth question proposed by the assessee is concerned, the controversy arises this way. It was the assessee‟s contention that in determining the ALP, it was denied the benefit of the proviso to section 92C(2). The proviso as it existed at the material time, read as under: - "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mea....
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.... applicability of the arm‟s length price was being considered by the TPO and therefore, he ought to have considered that date also in arriving at the ALP. Our attention was drawn to sub-rule (4) of Rule 10B of the Income Tax Rules, 1962 and the proviso thereto. The sub-rule and the proviso are as below :- "(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." The argument is that considering the nature of the powers of the transfer pricing officer under Section 92C of the Act, particularly, Clause (c) of sub-section (3), the TPO ought to have considered the data relating to the earlier two years. It would perhaps have been appropriate for us to consider the submission of the assessee in normal circumstances, but from paragraph 23 of th....
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....he rate of cost plus 10% that if the Indian units are closed then the operating costs would correspondingly be reduced and therefore, the compensation paid would form part of the operating costs and would thus be relevant for arriving at the ALP. 18. The aforesaid issues were considered by the Tribunal. It noted that despite a specific direction issued by the CIT(Appeals), the assessee was unable to adduce any documentary evidence to show that the decision to close the Indian units was taken by the assessee independently and without being influenced by the associated enterprise. The Tribunal thus appears to have doubted the assessee‟s claim that it was an independent decision, taken without consulting the associated enterprise, to close down the Indian offices. The Tribunal further agreed that the stand taken by the revenue authorities that the closure of the Indian branches would correspondingly reduce the costs of the associated enterprise and therefore, it would be relevant item for consideration in the matter of arriving at the appropriate ALP. The Tribunal opined that transfer pricing is not an exact science and it is difficult to arrive at the ALP with any amount of ce....
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.... kinds of remuneration : a. handling commission - which varies from transaction to transaction and depends on the product, volume etc.; (during the proceedings the assessee was asked to give transaction wise break up of commission received but inability in this regard was expressed as it was stated that the transactions were numerous and could not collated); b. Services fees - fixed fees for rendering marketing support in form of market survey etc." The CIT (Appeals) proceeded to decide the issue on the basis that the assessee was unable to produce any document to show the circumstances under which the decision to close the offices was taken. He also assumed that the relevance of the closure of the Indian units and the payment of compensation both would hinge upon as to whose decision it was to close down the Indian units. He held that the decision was taken at the behest of the associated enterprises and therefore, for transfer-pricing purposes the assessee must be compensated by them and accordingly the costs of closure are not to be excluded for computing the operating expenses. The decision of the CIT(Appeals) was endorsed by the Tribunal which noted that since MCJ was payin....
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....ing profit margin has considered the total operating expenditure at only Rs. 15,72,33,860/-, as against the total operating expenditure of Rs. 18,52,26,882/- shown in the audited profit and loss account. This difference was sought to be reconciled by the assessee and from the reconciliation it was noticed by the TPO that the difference of Rs. 2,82,50,502/- was claimed by the assessee against the revenues from the trading segment. When the TPO called for the details of the trading segment the assessee filed the same from which it was noticed that direct cost of Rs. 1,61,16,786/- and indirect costs of Rs. 1,21,75,804/- were claimed in the trading segment against the revenue by way of sales. It may be noted that the aggregate of these two figures accounts for the difference between the operating expenditure as shown in the audited profit and loss account and as considered by the assessee for the purpose of the transfer pricing study. 24. On a perusal of the figures relating to the trading segment, the TPO was of opinion that the direct costs of Rs. 1,61,16,786/- were nothing but indirect expenses pertaining to the trading transactions such as salary, travelling, communication, entert....
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.... 336,580 4,444,462 New Delhi 1,300,363 600,652 Total costs ------(D) 15,219,905 15,274,932 Total Direct expenses/ site expenses -----(E) 7,601,935 8,514,581 Grand Total (direct expenses) 16,116,516 Computation of indirect expenses Total cost 15,219,905 15,274,932 Direct costs 7,601,935 8,514,581 Total indirect costs -----(F) 7,617,970 6,760,351 Total allocable expenses Commission segment ----A/C * F) 1,394,176 808,341 Trading Segment -----(B/C * F) 6,223,794 5,952,010 26. The CIT (Appeals) accepted the above statement and directed the assessing officer to exclude the amount of Rs. 1,21,75,804/- from the commission segment. He thus allowed the appeal of the assessee on this point. 27. The revenue carried the matter in appeal before the Income Tax Appellate Tribunal. The Tribunal noted that after excluding the aforesaid amount, the arm‟s length remuneration came to Rs. 16,31,25,719/- which is less than the actual revenue of Rs. 16,38,07,933/- and, therefore, no adjustment was required to be made. As to the correctness of the decision of the CIT (Appeals), the Tribunal adverted to the assessee‟s conten....