TaxTMI 
TaxTMI 
2015 (1) TMI 922
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....e Hon'ble DRP and the learned AO erred in: 2.1 recommending a transfer pricing adjustment in respect of mark up to be earned by the Appellant on payments made to third party service providers towards custom clearance of high value packages; 2.2 erroneously computing the mark-up to be earned by the Appellant on payments made to third party service providers as per the agreement entered into between the Appellant and its AE without appreciating the intent of agreement and the implicit arrangement between the parties: 2.3 in erroneously computing a mark-up to be earned by the Appellant on payments made to third party service providers without considering the arm's length margin of comparable companies; 2.4 in erroneously computing a mark-up to be earned by the Appellant on payments made to third party service providers without considering the arm's length margin of comparable companies having similar pass through costs; 2.5 In failing to appreciate that even if the payments made to third party service providers were to be considered as part of the operating revenue and operating expense earned / incurred by the Appellant towards coordination of custom cleara....
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....hat the assessee will co-ordinate with Jeena so that global standard services can be provided to FEC in India. Thus, the assessee company by its own and with the coordination of M/s Jeena provided following services to its AE in India: i) Provision of custom clearance services for low value packages.: These services were essentially in the nature of preparing and filing the prescribed documentation and payments of duties and taxes to the customs authorities. The assessee in the agreement with FEC agreed to provide these services at costs plus a mark-up of 14%.. The relevant provisions of the agreement has been reproduced by TPO in para 3.1 of his order. ii) Coordination of custom clearance services for high value packages: These services were conducted through an independent third party, Jeena for the clearance of high value packages from the customs authorities, as the Assessee did not possess the requisite license. The Assessee was required to facilitate and coordinate with for the clearance of high value packages for AE, to ensure that the services were undertaken in accordance with FEC's global standards. For coordinating such services the assessee had charged c....
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....d the custom duties. In response to the show cause notice as to why these payments have not been routed through Profit and Loss account, the assessee submitted that for the custom clearance of high value packages, the assessee has contracted with Jeena who raised the bills in two components, one non -taxable components which comprises of custom duty and stamp duty; and two, service fee which comprises of warehousing charges, airlines charges and agency charges. The total payments on account of payment of custom duty was Rs. 14,62,68,929/- and the closing amount available with Jeena as on 31.3.2009 was Rs. 12,62,354/- Thus , the payment of service fee was also based on invoices raised by Jeena. This advance given to Jeena was also routed through balance sheet of the assessee and the balance in this account as on 31.3.2009 was Rs. 1,36,33,233/-. On this, the TPO observed that the assessee has not accounted for the payment made to Jeena in its cost base, while applying the markup. The TPO examined the OECD guidelines on intra group services, pass through expenses and cost plus mark-up used in TNMM. The relevant part of the said guidelines has been reproduced by the TPO at pages 6 to 9....
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....e, by the decision of the Hon'ble Delhi High Court in the case of 'Li and Fung India Pvt Ltd V/s CIT' in Income Tax Appeal No.306 of 2012, judgment and order dated 16.12.2013, wherein the Hon'ble High Court has held that such an adjustment by applying the mark-up on the cost of the third party for determining Arm Length margin of the assessee cannot be upheld. He submitted that FEC was conducting its business of high value customers earlier through Jeena and Co, even prior to the existence of the assessee. When the assessee company was forward in the year 2006, this arrangement was undertaken by the assessee only for administrative convenience and also to ensure global standard services. For co-ordinating such services in connection with custom clearance of high value packages with Jeena, the assessee has earned Rs. 3,11,240/- which was computed by applying mark-up 9% on the actual cost of Rs. 34,58,222/-. Under these circumstances, The AE has reimbursed the payment made by assessee to Jeena, amounting to Rs. 31,88,84,840/- out of which, Rs. 14,62,68,929/- related to custom duty paid by Jeena and balance amount of Rs. 17,26,15,911/- related to the service fee charged by Jeena towar....
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.... party, M/s Jeena and Co. and after 1.4.2006, when the assessee came into existence, the AE decided that the assessee will co-ordinate with Jeena for customer clearance services for high value packages. Under this segment of services the assessee use to advance money to Jeena for the purpose of payment of custom duty and payment of service fee which was adjusted against the bills raised by Jeena. This entire amount paid by the assessee was reimbursed by the AE to the assessee. In this year, total payment of Rs. 31,88,84,840/- was made to Jeena, which consisted of custom duty paid by Jeena and also service fee charged by Jeena. This entire amount was routed through balance sheet, as the assessee was not directly rendering any services but was getting such services done through Jeena. Thus it was merely a "pass through cost" and no element of service by the assessee was involved. For co-ordinating the services with Jeena, the assessee has separately earned a fee of Rs. 3,11,240/- from its AE which was computed by applying the markup 9% on the actual cost of Rs. 34,58,224/- incurred by the assessee. This amount was routed through profit and loss account. The department's case is that,....
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.... is involved and assessee has not undertaken any FAR i.e. performed any direct functions, deployed any or undertaken any assets risks. In our opinion, the payment made by the assessee to the third party for and on behalf of the AE which has been reimbursed by AE, cannot be included in the total costs of the assessee for the purpose of determining the profit margin. On this propositon, the decision of the Hon'ble Delhi High Court in the case of 'Li and Fung India Pvt Ltd' (supra) is clearly applicable on the assessee's case. The relevant argument and the decision of the Hon'ble Delhi High Court, are as under): "11. Mr. Porus Kaka, learned senior counsel, while stating that the TNMM was chosen by LFIL as the appropriate method to calculate the arms length, provided the court with an interpretation of the provision. He argued that for applying TNMM, it would be noted that the net profit margin realized from the international transactions by the appellant is to be computed only with reference to the cost incurred by LFIL itself. The provision does not consider or impute cost incurred by the third parties or unrelated enterprises, to compute net profit margin of the appellant enterpr....
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....ith 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 assessees 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 ITA 306/2012 Page 33 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 TPOs reasoning to enhance the assessees cost base by considering the cost of manufacture and export of finished goods, i.e., ready-made garments by the third party venders (which cost is certainly not the cost incurred by the assessee), is nowhere supp....
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....es not maintain separate and individual accounts for the reasons like, one time transaction or the value of transaction is below prescribed limit. The AO held that the assessee cannot write off debts as bad without it becoming bad. Even though, the assessee was acting as an agent then also, it was required to maintain detail record of names and addresses of the clients. The relevant observations and findings of the AO are as under : "Explanation furnished by assessee is considered carefully. However, the explanation filed by the assessee is not acceptable. The assessee cannot write off any debt as bad without reasonably proving it to be bad. The fact that the assessee acting as an agent of so called one time client without taking sufficient advance to recover its expense and charges is not possible. Further, assessee company has not maintained record of name and address of the party. How money can be collected from such parties in absence of individual clients account ? Thus it is also not possible to verify whether these amounts were representing receivable from parent company or some other parties. Further, assessee has failed to bring on record efforts to recover the said out....
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....ter considering the rival submissions and also on perusal of record and finding given in the impugned order, it is seen that the amount outstanding which has been written off by the assessee, is mainly towards the payment of dues and taxes in the course of providing services to the clients which is to be recovered from the parties subsequently. Admittedly, this amount could not be recovered by the assessee from the clients hence was claimed as bad debt. The department's case is that onus is on the assessee to prove that the amount of debts has become bad and secondly, the conditions laid down in section 36(1)(vii) and 36(2) has not been fulfilled. From the perusal of the details of bad debts as submitted by the assessee, from pages 19 to 33 of paper book, it is seen that the assessee has raised invoices for the period from July 2007 to March 2009 against the various parties mentioning the amount for custom clearance services. The assessee as a part of service offered to its clients was required to make certain payments on behalf of these parties at the time of custom clearance packages i.e. custom duties and tax. These amounts are subsequently recovered by the assessee from the cus....