AI Drafter 
TaxTMI 
TaxTMI 
2015 (9) TMI 843
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....ing that there was no justification for the appellant to reimburse the interest and finance cost to its Associated Enterprise (AE), which was in fact the liability of the AE itself. 2.1 The learned CIT (Appeals) erred in observing that the essence of the transaction of imports between the appellant and its AE was primarily of purchase of goods and not one of financing/funding arrangement. 2.2 The learned CIT (Appeals) erred in observing that such reimbursement of interest and finance cost has reduced the appellant's profits in India to that extent and it has shifted its profits to a tax haven abroad. 2.3 the ld. CIT(A) failed to understand that the AE was set up for the purpose of importing raw material from the international markets 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 form domestic banks. 2.4 The learned CIT (Appeals) erred in not appreciating that the AE had incurred interest and finance cost on behalf of the appellant and the same were recovered by the AE from the appellant at actual cost, without levying any mark-up the....
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....n to various international transactions with its Associated Enterprises(AE)and accordingly he made a reference to the Transfer Pricing Officer(TPO)u/s.92CA(1)of the Act for determi -nation of the Arm's length price(ALP) in relation to the international transactions.The TPO,vide his order dt.28.9.2011,recommended a total adjustment of 26.74 crores. 2.1.During the course of hearing before us,it was brought to our notice that the Tribunal while deciding in appeal for the AY. (ITA/3438/M.2012,dated 18.12.2013)had dealt with the similar issue with regard to TP adjustment,that the matter was sent back to the file of the AO/TPO for fresh adjudication.We find that assessee had raised following grounds: "1.On the facts and in the circumstances of the case and in the law,ld. CIT(A) erred in confirming the adjustment made by the Ld AO /Transfer Pricing Officer (TPO) in arriving at the Arms Length Price (ALP) óf international transaction relating to reimbursement of interest and other finance cost at NIL as against Rs. 17,81,06,522/- pursuant to the transfer pricing adjustment as per the order passed under section 92CA(3) of Act. 2. The ld. CIT(A) erred in observing that the es....
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....ee to MRK goes to the Deutsche Bank 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....
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....principle, we cannot appreciate that the whole gamut of transactions are done as per the set principles 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 12 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 function....
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....ffshore model‟ financing as claimed by the asssessee. The assessee‟s claim of exhausting of the domestic financing facilities is bonafide or otherwise 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 purchas....
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....comparables in accordance with the law. 17. Therefore, to sum up, we find merit in the assessee‟s contention that the MKR is not just a material seller to the assessee. Therefore, in principle, we cannot appreciate the approach of the TPO in accepting (i) the „international 15 transactions‟ involving the payment of cost for import of the raw materials and (ii) rejecting the reimbursement of the finance cost, interest cost etc amounting to Rs. 17.81 cr and (iii) not charging of the „corporate guarantee commission‟ on the MKR. The TPO must determine ALP of the purchase price of the raw material as a whole after considering all the relevant segments of the price ie purchase cost, administrative cost and the finance cost and interest cost, guarantee commission etc. In the remand proceedings, after considering all these segments of the pricing, if TPO finds that the unit price of the raw material is at ALP, in that case, there is no need for any TP additions. 18. Consequently, the legal dispute on if the impugned reimbursement falls within the ambit of section 92(1) of the Act becomes an academic exercise. Otherwise also, we do not appreciate the argu....
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....iture was hardly Rs. 0.58 crores and Rs. 0.68 crores respectively of the total book value of the assets, that whatever expenses were incurred on account of repair and maintenance were in the nature of revenue only. After considering the explanation of the assessee, the AO held that the assessee could not substantiate the contention in relation to the revenue nature of the expenditure, that the specific bills pointed out during the course of assessment proceedings revealed that the assets in question were likely to provide enduring benefit to the assessee which was in the nature of capital expenditure. Finally he made disallowance of 2.16 cr. (at the rate of 20% of 10. 84cr.) to the income of the assessee as capital expenditure.He allowed depreciation as per law. After considering the depreciation net addition of Rs. 1.89 crores was made to the total income of the assessee. 3.1.Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was contended that the details of expenses under the head repairs and maintenance alongwith vouchers/bill etc.were produced before the AO,that the expenditure was incurred for preser....
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....% 0.59% 2005-06 0.97% 0.31% - 2006-07 0.85% 0.31% 4. It was submitted that assessee has vast turnover and large assets under factory building, plant & machinery and therefore, the claim of expenditure is reasonable compared to the total turnover of assessee.The total turnover of assessee being 1799.29 crores and the profit declared is Rs. 81.66 crores under section 115JB. It was submitted that since AO has not clearly understood the repairs and maintenance of expenditure, he on adhoc basis disallowed 20% as capital expenditure without identifying the expenditure or assets created. 5. The learned DR however, relied on the orders of AO and the CIT (A) to submit that in the absence of any details, the order of AO to be sustained. 6. We have examined the issue. There is no dispute to the fact that assessee has incurred expenditure and also the fact that out of the total expenditure incurred during the year, assessee itself segregated the capital and revenue expenditure.Claim of repair and maintenance to Plant is Rs. 6,86,35,438/ - and repair and maintenance to building is Rs. 46,59,035/- totaling to 7,32,94,473/-. 7. Assessee is a large industria....
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....rned CIT (A) the total book value of plant & machinery was(525.54) crores and of building it was(94.80) crores. The expenses in question were incurred for general repairs and maintenance of both plant & machinery and factory building. The percentage of expenditure was 0.87% in respect of plant and machinery and 0.59% in respective factory building of the total book value of assets. The genuineness of the expenditure was not doubted nor did AO carry out any exercise to identify any item of such expenditure so as to classify it as that incurred in the capital field. On the contrary, AO estimated 20% of the expenditure in question as incurred in the capital field. Such adhoc allocation of expenditure towards the capital field, in our considered opinion, is utterly unwarranted.Thus,we uphold the findings of the first appellate authority and reject ground 1 of the revenue". 8. In this year, however, the CIT (A) surprisingly on the basis of some test check of vouchers affirmed the order of AO by differing from the findings in earlier two years. We are not fully convinced with the test conducted by the CIT (A) as he himself recorded that assessee out of the expenditure claim with refer....