AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2014 (1) TMI 395
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....inancing / funding arrangement. 3. The Ld CIT (A) failed to understand that the AE was set up for the purpose of importing raw materials from the international market by procuring finance from overseas banks at lower cost and low rates of interest, as the appellant had exhausted the credit facilities available for its working capital requirement from domestic banks. 4. The Ld CIT (A) erred in not appreciating that he reimbursement of expenses were inherently at Arm's Length as provided under section 92 of the Act. 5. The Ld CIT (A) further erred in not appreciating that the AE has acted as a facilitator and functioned as a procurement agency as well as a financer to the import transaction of the appellant. Therefore, the expenses like interest and finance cost incurred by the AE to facilitate the import of raw material by the appellant, had to be charged back to the appellant; besides the small mark-up charged by the AE on imports made by the appellant, for recovering the procurement costs incurred by the AE. Considering the risk assumed and the functions carried out by the AE, the reimbursement of interest and finance cost ought to have been accepted at cost by the Ld CIT (A)."....
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.... AE (MKR), 100% subsidiary of the assessee in British Viriginia Island (BVI) for the purpose of supplying raw materials form the Europa International Limited (EIL) to the assessee at cheaper cost. As part of the scheme of inexpensive funding, the Deutsche Bank agreed to provide invoiced funding facility to MKR for USD 40 million (equivalent to Rs.17,81,06,522/-) and the assessee has furnished corporate guarantee free of charge for the above arrangements. It is mentioned that assessee imported HR Coils, CR coils, GP coils from MRK to the tune of Rs. 363.05 Crs, which amounts to 39.46% of the total imports of the year. The breakup for the said amount of USD 40 million is as under: Credit insurance premium US$ 9,44,700 Front end fee US$ 1,33,333 Trust fees US$ 33,603 Process fee US$ 28,76,689 Miscellaneous expenses US$ 10,700 US$ 40,00,000 5. Thus, Rs. 17,81,06,522/- is the funding cost raised by the bank on MRK International which in turn was claimed from the assessee. Assessee paid the same to the AE and claimed the same as expenditure of the assessee. In this regard, TPO claims that the said expenditure of Rs. 17.81 Crs does not pertain to the assessee and, in fact, relates ....
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....d over the import cost of the raw materials. Therefore, the transaction of assessee of Rs. 17.81 Crs to the MRK International is not at Arm"s Length. On the risk relating to the corporate guarantee, it is the conclusion of the TPO that at any time MRK International has the first and primary liability as a borrower and the guarantor"s role comes only if the primary MRK International fails to honour the commitment. It is the objection of the TPO that the assessee has not charged any corporate guarantee commission for providing guarantee to the above transactions. Thus, the TPO concluded by stating that "I am of the view that there is no justification for the assessee to reimburse the costs, which is the liability of the AE, MRK International. Hence, an adjustment is to be made to the total income of the assessee to the tune of Rs. 17,81,06,522/- (i.e., US$ 40,00,000) by way of determination of ALP." AO considered the same and make additions u/s 92CA3 of the Act. Aggrieved with the above addition of the AO, assessee filed an appeal before the first appellate authority. 6. Before the CIT(A): During the proceedings before the first appellate authority, assessee made various submissions....
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....ax Act, 1961 should not permit the TPO to treat the same as international transaction for the purpose of TP adjustments. Therefore, the reimbursements of this kind are outside the scope of section 92(1) of the Act. On considering the said submissions of the assessee, CIT (A) stated that in view of the provisions of the newly inserted Explanation to section 92(1), which refers to "any expense or interest arising from the international transaction", the expenses of Rs. 17.81 Crs stands covered within the meaning of section 92(1) of the Act. On the issue of commercial expediency, CIT (A) is of the opinion that the principles relating to commercial expediency are not relevant in matter of Transfer Pricing. For this, he relied on the decisions of M/s. VVF Ltd (Mum) and M/s. Perot Systems TSE (India) Ltd (Del.). Further, CIT (A) discussed the transactions between the bank and the MRK and concluded that the finance cost and interest facilities granted by the bank are to be borne by the MRK, AE of the assesseecompany. Assessee is merely a corporate guarantor and who will come into picture only if there is a default by the AE. He also mentioned that the corporate guarantee given by the asse....
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....ant and the third party. It is further stated that the rulings relied upon by the appellant are in respect of the specific case and are binding in respect of such case only and further even the ratio"s of such rulings are not found to be relevant where the appellant has made payment to the AE without having any legal or economic obligation for the same. xii. In view of the facts of the case, discussion hereinabove, it is arrived at the so called reimbursement of the net financed cost made by the appellant to the AE is without any legal or economic justification / obligation. In the comparable third party situation, no customer shall reimburse such net financing cost to the supplier who has charged mark up on the purchase cost to cover up the finance, interest and other incidental charges. Accordingly, in the similar situation the ALP of such international transaction would be NIL by the application of CUP as the most appropriate method as in a comparable situation there cannot be any such payment by the third party. Accordingly, the action of the TPO in arriving at the ALP of this international transaction to be NIL and consequent passing of the order by the AO in conformity with ....
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....sions of TP, granting requisite adjustments to which assessee is entitled. This kind of complete denial of deduction is strongly not in accordance with the TP provisions. As per the Ld Counsel, the reimbursement cost is at Arm"s Length. Thus, Dr Shivram, vehemently mentioned that the MKR is not merely a raw material supplier but he is FPF (financier cum procurement agency cum facilitator) and proceeded to justify the argumentative grounds raised in this appeal as well as propositions stated by him in the fact-sheet usually filed by him. It is the argument of the assessee"s Counsel that the purchase price of the raw material per unit is competitive in the open market. However, he fairly submitted that nobody studied these aspects of the purchase price being competitive as the revenue officers have restricted their study to the "reimbursements" related transactions only. 9. On the other hand, Ld DR submitted that the transactions involving any expenditure or allowance also falls within the scope of provisions of section 92(1) of the Act. In this regard, Ld DR relied on various decisions and the Explanation to said section. On the merits of denial of claim of reimbursement of expense....
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....account and the MRK is not the beneficiary of any income in any form. Therefore, the provisions of section 92(1) should not apply to such reimbursements of finance cost. Addition made by the AO / TPO by completely disallowing the claim of the assessee is no way of determining the Arm"s Length Price applying the principles of Transfer Pricing. The Revenue has not picked up any method or any comparables for coming to the conclusion that the said payment is at Arm"s Length. As per the assessee, if the finance cost of Rs 17.81 Cr, administrative cost @ 2 to 3% mark up over the purchase value of raw materials is added to the cost of the raw material purchase cost from the Europa International (from whom the MKR made purchases), the price in the hands of the assessee is competitive in open market. Therefore, there is no shifting of the profits abroad and hence the price constitutes ALP. 11. Per contra, the case of the Revenue is that the MRK is merely a raw material supplier to the assessee. Expenditure of Rs 17.81 Crores is the expenditure of the MKR and not of the assessee. Therefore, whatever is reimbursed by the assessee constitutes shifting of the profits to its AE abroad, which sh....
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....ciples of ALP. When the assessee submits that MKR services are required to be considered as composite in nature for ALP study purposes, but the invoices are function specific, this approach does not provide proper TP studies of the "raw material purchases price" in the hands of the assessee. Assessee should be split the services as discussed above. When the services rendered by the MKR is inseparable and composite ie FPF, the TP studies should also be done after considering all the price components of the said services. In ALP studies, the assessee needs to travel extra mail to demonstrate that the "raw material purchase price" of the assessee is at arm"s length after considering the entire cost attributable to the said purchases by the assessee. AO/TPO needs to grant appropriate adjustments too. Since the assessee argued before us that the said purchase price is at arm"s length, the same must be demonstrated using the TP studies using the sustainable comparables and appropriate methods. For this, considering the assessee"s argument of composite functions (ie as a financier, facilitator, procurement agency, raw material supplier etc) by the MKR, the assessee must merge all the rele....
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....e etc, needs thorough probe too. TPO should have determined if the international transaction is at arm"s length only after examining the above issues qua the purchase price of the raw material after considering all the factors such as the cost of the raw material, administrative cost and the relevant and relatable finance/interest cost in the hands of the MKR provided the MKR is the dedicated supplier of the raw material to the assessee. In the TP studies, the duty of the TPO is determine the ALP and not to determine the justification of the said payments claimed by the assessee. In the instant case, the TPO is gone into the justification issues ie if the said reimbursement is rightly paid or not by the assessee. More so when there is no finding of fact by the AO that the said amount of Rs 17.81 cr is incurred also on the raw materials supplied to parties other than the assessee. Therefore, there is definite need for examining the ALP based on the facts and figures. We look for the fact if the "per unit purchase price of the raw material" is at arm"s length after considering the cost of the raw material, administrative cost and the impugned finance/interest cost of Rs 17.81 cr. it ....