TaxTMI 
TaxTMI 
2017 (6) TMI 582
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....n the ground as the actual deletion is of Rs. 1,19,000/-). iii. Whether in law and on facts & circumstances of the case, the CIT(A) was justified in admitting additional evidence in violation of Rule 46A of I. Tax Rules, 1962. iv. The order of the Ld. CIT(A) is erroneous both in law and on facts. v. Any other ground that may be adduced at the time of hearing. 3. Assessee's CO raises following grounds:- i. That the Learned Commissioner of Income-tax (Appeals) has rightly deleted the addition of Rs. 14,69,89,382/- made by the Ld. Assessing Officer on account of Transfer Pricing adjustment after appreciating the facts and the law and after allowing opportunity to the ld. JCIT - TPO and the Ld. ACIT ii. That the Ld. CIT(A) after considering the facts and law rightly deleted the disallowance of Rs. 1,19,000/- made out of office expenses. The relief allowed by Ld. CIT(A) is Rs. 1,19,000/- and not Rs. 11,86,296/- as mentioned by ld. AO in the grounds of appeal. iii. That the Order of the Ld. Commissioner of Income-tax (Appeals) is valid in law and on facts and be upheld. 4. Brief facts of the appeal are - Assessee, Bagadiya Brothers Private Limited ( 'BBPL' for sho....
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....y included in the TP adjustment resulting in excess adjustment of Rs. 7,32,81,066/-. Ld. AO however issued draft assessment order dated 27.12.2011, which was served on 29.12.2011 without adopting any objections filed in this behalf. Assessee again filed these objections which were summarily rejected and proposed TP additions along with other additions order were made in the final assessment order dated 28.02.12 by following observations: "5. The Joint Commissioner of Income Tax, Transfer Pricing Officer-1, Raipur vide order u/s 92CA(3) of the IT. Act, 1961 dated 29.10.2011 has determined the Arm's Length Price and suggested downward adjustment of Rs. 14,90,76,625/-. Accordingly, show cause notice dated 08.11.2011 was issued along with notice u/s 142(1) of the IT. Act, requiring the assessee company to file objections, if any to the order u/s 92CA(3) of the IT. Act dated 29.10.2011 passed by the Joint Commissioner of Income Tax, Transfer Pricing-1, Raipur in its case as it was proposed to add amount of Rs. 14,96,76,625/- to its income on account of downward adjustment as mentioned in the order under reference. 6. In response to the above show cause, the assessee company ha....
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....mount of Rs. 1,19,000/- @10% of the total claim of Rs. 11,86,296/- is disallowed and added to the total income of the assessee company. (Addition: Rs. 1,19,000/-)" 4.3 Aggrieved, assessee preferred first appeal before ld. CIT(A). At the time of hearing, it was claimed that ld. AO framed the assessment in hurry without asking any further query, additional evidence along with application for admission thereof were filed. Ld. forwarded the additional evidence to ld. AO for comments which in turn were forwarded to ld. TPO. Ld. CIT(A) after considering the AO's objections on admission of additional evidence, admitted the same u/r 46A of the ITAT Rules by following observations:- "The appellant filed an application dated 02.05.2012 under Rule 46A making prayer to additional evidences. It is submitted that these evidences pertain to AE, namely M/s. Bagadiaya Brothers (Singapore) Pvt. Ltd., whose registered office is at Singapore. These evidences were not in the possession of the appellant and it was collected from AE. There was change in premises of AE at Singapore causing dislocation of various records. Some of these evidences could not be filed during proceedings before the TPO, b....
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....his is enclosed at Page No.221 of the Paper Book. The JCIT, TPO-1 directed the appellant to file the explanation by 24.10.2011. I am convinced from the argument of the Ld. Authorized Representatives that 22nd & 23rd October, 2011 being Saturday and Sunday respectively and moreover Diwali was on 26th October, 2011 during which festive mood prevails in India as well as in Singapore when many employees are on leave. One week time requested by the appellant was not granted to the appellant and the order was passed by the TPO on 29.10.2011 which happens to be Saturday. Therefore, I hold that sufficient time was not allowed by the JCIT, TPO-1 and the appellant was prevented by sufficient cause from producing evidences which are relevant to the grounds of appeal. I also find that barring some instances of chartered party agreements and UMetal data, all the evidences were filed before the AO during the proceedings before him. The AO, in his order at Para No.6, rejected the same saying that it is beyond his jurisdiction and advised the assessee to take-up these issues at appropriate Appellate Forum. The objection of the TPO in the remand report dated 26.07.2012 to admit additional evidences....
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....ppellant and should be considered in the business background. It is seen that the appellant has offered explanation regarding chartering vessels on voyage charter basis from third parties and difficulties faced by it in getting right type of vessel at a particular time and at the economical rate from third parties, loss due to conversion apart from loss due to fluctuation in currency rate. The TPO present could not explain how Singapore was not a preferred country and shipping hub. Till some cogent material is not brought on record by the TPO showing that the decision was colourful device, it cannot be interfered into. I also find that the business decision of setting-up of a subsidiary at Singapore by the appellant also proved favorable. The business activity has gone up many folds as compared to earlier years. During the course of appellate proceedings before me, a compilation of export performance has been filed and was also made available to the TPO. It is seen that the total export turnover of iron ore fines during the year under consideration has gone-up to Rs. 949 crores from to Rs. 274 crores in the immediately preceding year and in terms of quantity the export quantity thi....
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.... vessel owner in installments, whereas, as per the terms and conditions of agreement filed in the paper book at Page No. 126 to 137 and 225 to 266 which are copies of fixture note, the appellant is required to make full payment to AE on completion of loading at loading port. As against this, the AE pays first installment in advance for 15 days, not immediately but in installments. This is paid generally within 3 banking days after the ship is made available to the AE by the vessel owner. Thereafter, second installment is paid in 7, 3 or one day in advance depending on the contractual agreement and total period of time charter. Thus, sufficient fund was available with the (AE). Apart from above, the cost of bunker, i.e. fuel, which forms major portion of the cost, is not required to be paid immediately by the AE to the bunker supplier and there is credit period of 30 days. I find that the AE was having sufficient funds to carry on the chartering activity and no financial support has been allowed by the appellant. Copies of all the agreements entered into by the AE with the shipping owner have been also filed at Page No.440 to 716 and 820 to 1150 of paper book. In these agreements, t....
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.... on the wrong impression that M/s Sea Trans Marine Private Limited and M/s Bothra Shipping Private Limited are vessel owners and payments were made to them by the appellant. For the reasons discussed above, I hold that there is no force in the contention of the TPO/AO that the appellant financially supported AE in carrying-out the chartering activities." 4.5 Apropos the observation of ld. TPO/AO that M/s. R.M. Martin Pvt. Ltd. was not providing any significant services and their engagement in the vessel chartering activity was not substantiated, ld. CIT(A) held that the observations of the ld. TPO/AO were without any cogent reasons and presumptions by following observations:- "I have considered the arguments, written submission of the Ld. Counsels as well as the Order of the TPO / AO and the comments of TPO and AO. I find that the business activity of the AE is restricted to chartering of the vessel. The AE did not have its own vessel. It is seen that this being first year of business, AE, had outsourced the services to M/s R. M. Martin. The entire services of chartering of the vessel was outsourced to M/s R.M. Martin since inception of company to whom ship handling charges h....
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....ts activity and cannot be treated as independent shipping service provider is only a presumption without any support. The various functions have been outsourced by the AE to one M/s R. M. Martine, since inception of the AE, discussed in detail earlier. The AE had its own funds and this issue has been discussed by me in earlier para. The AE has the business risk and many instances of such risk which actually borne by AE pertaining to various vessels have been discussed by me in earlier paras. The payment of hire charges, bunker charges, port charges have been made by the AE from its own funds which is apparent from the cash flow statement filed at page No.465 to 477. The TPO/AO has not brought on record any supporting showing that the AE was functioning as front office of the appellant or working as agent of it, without bearing risk of business and without making any value addition. 26.1 On the basis of facts on record, I hold that the AE has performed business functions, assumed business risks by employing its own funds independently without help of appellant and, therefore, in no way AE can be considered as pure distributor, hence, the Berry ratio in the present case, which res....
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.... this case and therefore, appropriate profit indicator in this case is operating profit 7 total cost i.e. OP/TC. In case of pure distributor, only value added expenses are considered and Berry ratio can be applied and as discussed earlier, I hold that the AE is not a pure distributor, therefore, Berry ratio is not applicable. Reward commensurate with risk. The AE made value addition, assumed various risks of business and also incurred damages and losses in the business, as discussed by me in detail earlier. Understanding of functions profile, risk exposed and assumed, assets / employed by AE and appellant is necessary in study of arm's length price under the Transfer/ pricing provision. In its absence any conclusion drawn will be erroneous and will not be in the interest of justice. In my considered opinion, the JCIT - TPO/AO failed to do so. Various argument raised by JCIT-TPO / AO, discussed herein are not substantiated and remains only presumption. As per TNMM study filed by the appellant, the margin on total cost earned by AE is 4.52% which is less when compared with 5.18% in case of other eleven comparable companies. This is within arm's length. Therefore, no transfer ....
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.... 44,939,600 Downward adjustment to international transactions F = A - E 3,720,355 1,891,579 Downward adjustment to international transactions (in Rs.) F x 40.07 149,074,629 75,795,563 It is submitted that Transfer Pricing adjustment, if at all is required to be made, will be reduced by Rs. 757 lacs. 36. AO/TPO's comments: The JCIT - TPO in his remand report submitted that the appellant has not provided separately contracts or agreements at the time of hearing, therefore, they all appeared in the nature of same transaction. 37. I have considered the arguments / written submissions of both the sides. The TNM method examines the net profit margin related to an appropriate base (i.e. cost, sales, assets) that a taxpayer realizes from a controlled transaction. The Ld. ARs also referred S 10B(e), wherein, the net profit margin realized by the enterprises from an international transaction entered into with an associated enterprise is to be computed. The AE had segregated his transactions into related party transaction and third party transaction, which was made available to the TPO / AO and enclosed at Page No. 120 & 121 of the Paper Book and is pa....
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....e market's valuation of their performed functions. In this way, profits and performances of services are tied to each other more closely. The Berry Ratio is the ratio of gross profit to operating expenses (GP/OE). It is used for service providers and for routine or pure distributors. If on working it is found that the Berry Ratio is more than one it can be said that entity is making profit at operating level. The Berry Ratio is a measure of the value of the service provided rather than the cost incurred in the business which may include cost of goods sold. This method has been recognized by U.S. Transfer Pricing Regulations as well as by Indian Transfer Pricing Regulations. This has been provided in Rule 10B(1)(e)(i) as under : "the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base." This ratio being provided in the TP Rules and based on well accepted principle applied world over by the revenue authorities and courts was rightly applied by TP....
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....re, accounting of shipping business has not been substantiated. The freight rate details of vessels taken from others were cited by assessee as CUP were not applied by TPO as they were not taken as comparable in its TP report and they are not exactly comparable on FAR. This year, freight rate of bulk cargo were constantly increasing during the whole year and as AE has taken ships on time charter basis, the prices of freight were always higher in spot rate as compared to time charter rate. It is the case of the Department, that assessee should have himself entered into the time charter agreement, to take advantage of rates due to these time differential. It is contended by ld. DR that the rejection of TNMM method and application of Berry Ratio by TPO order is justified which is relied on. 4.9 Ld. Counsel for the assessee Shri Soparkar, Sr. Advocate, reiterated the facts of the case and contends that the TP adjudications were at nascent stage in as much as many issues about FAR analysis. In right earnest TNMM method was most appropriate with AE as tested party for ALP determination. Ld. TPO without giving any opportunity of being heard rejected assessee's method and recomput....
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....the case of Kamlaben Sureshchandra Bhatti, 367 ITR 692; (ii) Judgment of Hon'ble Andhra Pradesh & Telangana High Court in the case of Unique Plastics (P) Ltd., 373 ITR 201; (iii) Judgment of Hon'ble Bombay High Court in the case of Smt. Prabhavati S. Shah, 231 ITR 1 4.11 Thereafter ld. Counsel adverted to various propositions material to the controversies on issues. It is contended that perfunctory approach of ld. TPO/AO is evident from the fact that even AE's third party transactions not related to assessee have been included in TP working. This indicates that they were not serious about the factual and analytical TP working. It is contended that: 1. The assessee's exports bulk quantity of iron ore to various ports of china through sea route and most of the sales are effected on CIF basis i.e. cost of goods including marine insurance and sea freight. The assessee used to charter vessels from ship operators on voyage charter basis, which posed many operational difficulties like: a. The ship operators many a times gave priority to assessee's competitors, were giving priority to their vessel requirement and this by-pass caused delays in shipment and timely delive....
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....ery notice, 12. Reporting disputes / differences to P&I, etc. c. Since AE was at early stages in shipping operations, it engaged an established and experienced Singapore entity, M/s. R M Martin, being in shipping line for many years on a lump-sum fee of USD 20,000 per vessel operation. This was submitted and explained before the Ld. TPO by written submission dated 14.09.2011 & 24.10.2011 placed at PB. Copy of the agreement entered by AE with Matin was also submitted before the Ld. AO/ TPO vide submission dated 21st December, unfortunately it has been grossly overlooked by the Ld. TPO & Ld. AO while drawing adverse inference thereon. d. AE hires the vessel from ship owners on time charter basis which includes only per day hire cost of the vessel. AE contracts with charterers on voyage basis i.e. freight is charged from load port to discharge port. Under the voyage charter, AE is remunerated on per ton of goods transported after considering all other costs including bunkering cost (Fuel Oil and Marine Diesel Oil), which is one of major cost component in ship chartering operations. Since, the shipping market is very volatile and price of bunker keeps on fluctuating, AE ....
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.... costs in above vessel for hiring the same from Cosbulk: Bunker - USD 2,73,987 3 hire advance paid to Cosbulk - USD 2,79,600 Protection & Insurance (P&I) - USD 5,238 Brokerage - USD 1,582 Weather routing expenses - USD 490 Legal expenses - USD 26,606 Total - USD 5,87,504 4.15 The AE has made a claim for the advances paid against Cosbulk. The matter is still pending disposal. On the other hand, NCS being a charterer also filed corresponding claim for refund of advance of USD 3,21,360 from BBSPL. Since BBSPL did not honour the claim of NCS due to pending dispute of its own legal claim against Cosbulk, NCS arrested the bunker for recovery of his claim, of vessel hired by BBSPL. To release the arrest of the bunker, BBSPL had to deposit USD 3,47,027/- with Hon. Kolkata High Court as security till the matter is disposed off. The AE had to incur additional hire charges per day of the vessel including bunker charges for four days i.e. from the day if vessel arrest (16th May 2009) till the date of vessel release (21st May 2009).The AE incurred the said hire charges without any corresponding recovery of the s....
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....he corresponding per day hire cost of the vessel or any detention of the vessel, will entirely be assumed by AE. For the Vessel Ikan Acapulco, wherein the AE had incurred loss of around USD 136,686 due to poor weather which was not reimbursed by the appellant. Vessel sailing delay due to non-availability of night pilotage- M.V. Mahakam - Many load port/ discharge port don't have the night navigation facilities therefore, many a times vessels have to wait till morning after completion of loading or discharge at respective ports for their onward journey. For vessel Mahakam it had to bear the cost of delay for 11:30 Hours as vessel Mahakam which was chartered to the appellant by AE was waiting at discharge port after 20:00 hrs was waiting at the port due to non availability of night pilotage facility. The time lost and consequent charges for night pilotage was not be claimed by the AE from assessee. * Vessel Breakdowns/ defects- During FY 0910- M.V. Sealuck II This vessel lost due to heavy rain resulted its crane break down, the AE could not claim the time loss from its Disponent Owner for the its break down and had to pay hire charges under time charter agreements. Thus the ....
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....,500/- was not released and it was lost to AM Nomikos as a result of above dispute. *Bad debts in M V Meteora - USD 2,70,587/- : AE had to write off a sum of USD 2,70,587/- has been written off as bad debts - trade outside parties. This amount could not be recovered in case of vessel MV Meteora from third party namely M/s D T Resources. 4.16 These well documented exigencies and Risk Bearing events, payments clearly demonstrate that the AE is operating as an entrepreneur and assumed substantial Entrepreneurial Risks while undertaking marine chartering services on independent terms to third party customers including assessee. Despite all these recorded facts, evidence and circumstances it was not justified on the part of ld. TPO to take a view that FAR profile of AE was not correct and there was no necessity to form an AE. 4.17 The relevant Rule 10B(2) for TP working sets out the criteria for comparability of the transactions. It is important to take into consideration the sub-rule (a) and (b) which sets out as under: '(a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into acc....
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....he OECD guidelines states that: The types of risks to consider include market risks, such as input cost and output price fluctuations; risks of loss associated with the investment in and use of property, plant, and equipment; risks of the success or failure of investment in research and development; financial risks such as those caused by currency exchange rate and interest rate variability; credit risks; and so forth." 4.19 The Ld. TPO, failed to correctly appreciate the AE FAR profile assumed in its entrepreneurial capacity for its independent chartering operations and holding that: "In view of the same, it cannot be said that functions including risks involved relating to ship hiring activities was carried out by the AE and it should be paid for these costs. The AE can only be treated as facilitation office, which has carried out some administrative work..." 4.20 The Ld. TPO has failed to understand and appreciate the modus operandi of the business of AE in the relevant vessel chartering business. Any adjustment made without giving due cognizance to the business practice followed in the relevant industry and consequently any conclusion drawn will be prejudicial to the i....
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....rst chartering transaction with the appellant. Thus AE employed the expert services of M/s R M Martin for shipping operations related host of activities along with the past shipping experience of S B. In shipping line a battery of work force is not needed if u hire a professional agency which has a competent staff to render requisite services. Thus the Ld. TPO's adverse inferences about lack of staff o technically competent employees are misplaced and devoid of realities. 4.22 Post FY 2007-08, the AE did not avail services of M/s R M Martin as it was able to build up own in-house employees including an employee holding a Diploma degree in Shipping Management. The adverse inference drawn for utilization of professional help of expertise of M/s R M Martin in the first year of its operation is unjust, misplaced and arbitrary. Since AE is only engaged in chartering activities, not owning any vessel or employees there for, a large employee base was not needed for its chartering operation. 4.23 Further, the Ld. TPO at Para 12 of the order stated that: "...the assessee company failed to produce the copies of agreements (time chartered agreements) between BBSPL and the vessel o....
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.... or about the availability and utilization of funds in AE's operations and on baseless presumptions held that AE was financed by the assessee in its chartering operation. 4.26 In view of these facts there is no justification in the observations and conclusions of ld. TPO/ AO that: i. There was no justification for assessee to have gone for a 100% wholly owned subsidiary at Singapore for ship chartering functions and it was not a proper decision. ii. The AE did not have independent sources and cash flow. iii. No functions and risk FAR was incurred by AE. iv. The relationship between AE and assessee were that of Agent and Principal and not independent functions. 5. Ld. CIT(A) after due consideration of facts and circumstances, material available on record, remand report, AO/ TPO and assessee's contentions upheld the veracity of assessee's TP study. While doing so the TPO's observations have been dislodged with proper reasoning and analysis. 5.1 A detailed TP report with FAR analysis of the appellant and AE was furnished. It was demonstrated that both the parties bear significant respective risks in relation to chartering businesses streamlined by transactions alo....
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....nd risks assumed) is proportional to the operating expenses, *The value of the functions performed in the controlled transaction (taking account of assets used and risks assumed) is not materially affected by the value of the products distributed, i.e. it is not proportional to sales, and *The taxpayer does not perform, in the controlled transactions, any other significant function (e.g. manufacturing function) that should be remunerated using another method or financial indicator. 5.4 The AE acts as a service provider with a range of chartering activities and hence cannot be characterized as a distributor fit for application of Berry Ratio. Further, without prejudice to the above, even if Berry Ratio is applied to test the arm' length nature, a larger question arises as to the identification of VAE for proper application of Berry Ratio. AE, based on the requirements of its customers, including the appellant, hires the vessel on time charter basis from the ship owners/ disponent owners and charters the same to the appellant and other customers on voyage basis thereby changing the very essence of the transaction. In time charter basis, the vessel is hired on time basis wher....
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....ermine arm's length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of renting advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function." 5.6 In view of the parameters of pass-through concept as laid down by OECD Guidelines and also by Dr. Charles H. Berry, it is to be appreciated that Berry Ratio may suitably be applied in case of a distributor or service provider who are engaged in buy-sale arrangement of goods/services without any value addition. Whereas in the instant case the AE is engaged in range of chartering functions in the capacity of entrepreneur performing entrepreneurial functio....
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....is not acting on behalf of the customers and the costs incurred are not reimbursed by them. The appellant also submitted copy of fixture notes entered between the appellant and its AE for ship chartering vide submission dated 12th September 2011 and 24th October 2011 placed on Appendix IV & IX- pages 124 to 138 and 282 to 410 of the Paper Book. It clearly establishes the fact that AE was acting in its independent capacity and was not in any manner performing the mere role of facilitator/ agent and thereby had binding contractual obligations with the appellant. 5.10 The underlying direct costs so assumed/incurred by the AE along with risks, the justification thereof and corresponding functions and risks associated with it can be summarized as: A. Hire Payments: This is the hire cost of the vessel incurred by the AE and paid to its Disponent / Vessel Owner. The hire cost incurred is paid on per day hire cost of the vessel. The AE identifies the vessel to meet the requirements of its customers including the appellant. In this regard, as highlighted in above paras M/s R M Martin plays a major role in identifying and finalizing the required vessel. As detailed in the submiss....
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....es rendered. It is amply demonstrated that AE acts as a Service Provider rendering a host of shipping related activities and cannot be characterized as a mere distributor so as to somehow apply Berry Ratio. 5.13 Without prejudice to above contentions it is contended that - even if Berry Ratio is applied to test the arm' length nature, a larger question remains as to the identification of value added expenses - VAE for proper application of Berry Ratio. Pertinently looking at the other way round the question of doubt arises also on the identification of Cost of Goods Sold - COGS). There is no hard and fast accepted accounting principles in India or in the overseas jurisdiction that guides the characterization of Total expenses into COGS and VAE and hence a very high level of judgment has to be taken for identification of Total expenses into COGS and VAE. 5.14 The appellant had selected AE as the tested party and to establish the arm's length nature of the international transactions, comparables were selected from OSIRIS database mentioned in its T P Study at Appendix II page 107 of the PB. They were selected by a systematic method of quantitative and qualitative analysis which....
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....s Profit C = A - B 8,785,226 Expenses (Value Added Expenses) D 6,732,177 Arm's Length Profit (ALP) Gross Profit E = D * 1.301 8,758,562 Adjusted Sales Price E = B + D 44,939,600 -5% of the Gross Profit F = C * 95% 8,345,965 +5% of the Gross Profit G = C * 105% 9,224,487 Adjusted Sales Price H = B + E 46,804,515 -5% of the international transactions I = A * 95% 44,489,620 +5% of the international transactions J = A * 105% 49,172,738 On applying proviso to Section 92C(2) of the Act, the adjusted sales price of 46,804,515 (B+E) is within +/-5% of the international transaction (Ito J). In these circumstances, no adjustment will be required. Further, it can also be seen that ALP Gross Profit of 8,758,562 also falls in the range of +/- 5% of the Actual Gross Profit (E to F). Hence, no adjustment will be required. In the above computation chart, Hire charges of the vessel incurred by AE have not been considered under the VAE expression since, Hire charges for AE (Disponent Owner) who would again charter the vessel (to appellant and third parties) could indicate the value of cost of service distributed and not....
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.... of clarity in the public data with respect to the classification of expenses in the gross or operating profits may make it difficult to evaluate the comparability of gross margins, while the use of net profit indicators may avoid the problem." Para 2.105 of the OECD TP Guidelines, July 2010 further states that: "By way of illustration, the example of cost plus at paragraph 2.53 demonstrates the need to adjust the gross mark up arising from transactions in order to achieve consistent and reliable comparison. Such adjustments may be made without difficulty where the relevant costs can be readily analyzed. Where, however, it is known that an adjustment is required, but it is not possible to identify the particular costs for which an adjustment is required, it may, nevertheless, be possible to identify the net profit arising on the transaction and thereby ensure that a consistent measure is used. For example, if the supervisory, general, and administrative costs that are treated as part of costs of goods sold for the independent enterprises X, Y and Z cannot be identified so as to adjust the mark up in a reliable application of cost plus, it may be necessary to examine net profi....
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....ction where the Assessees have a lower bargaining power. In the aforesaid context, in our view, the TPO had correctly reasoned that Berry ratio could not be used as a PLI in cases of Assessees which were using intangibles. However, we find that there was no cogent material for the TPO to hold that the Assessee had developed supply chain and human resources intangibles. In any event, there was no material to conclude that costs of such intangibles were not captured in the operating expenses. 47. In our prima facie view, the third reason stated by the TPO, that is, the rate of commission paid to the Assessee is based on the value of the goods, would be a valid reason to reject the use of Berry ratio because Berry ratio can only be applied where the value of the goods are not directly linked to the quantum of profits and the profits are mainly dependent on expenses incurred. The fundamental premise being that the operating expenses adequately represent all functions performed and risks undertaken. For this reason Berry ratio is effectively applied only in cases of stripped down distributors; that is, distributors that have no financial exposure and risk in respect of the goods dist....
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....place between the AE and the third parties (other than the appellant) thereby resulting in erroneous TP adjustment dispute to the tune of Rs. 7,32,81,066/- (Rs.14,90,76,629 - 7,57,96,563). Without prejudice to earlier grounds and not admitting, it is submitted that the TPO as well as the AO ignored the segmental analysis in the TP adjustment on the overall transaction of AE including those transactions which did not take place between AE and the appellant, whereas, Sec. 92 is applicable on to the international transactions between the assessee & the AE. This has resulted in absurd and erroneous TP adjustment. Compilation filed at Page No.37 and written submission is produced below:- Particulars Reference As PO (Entity Level)sactions with Appellant only Perticulars Refeerence As per TPO (Entity Level) Transactions with appellant only Sales/Services A 60,326,752 46,831,179 Cost of Services B 55,787,407 44, 241,681 Actual Gross Profit A - B 4,539,345 2,589,498 Expenses C 629,508 536,448 ALP Gross Profit (1.301 x D) D 818,990 697,919 Adjusted Sales Price E = B + D 56,606,397 44,939,600 D....
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....ring international transactions of the AE with the appellant only. Particulars Reference Perticulars Refeerence As per TPO (Entity Level) Transactions with appellant only Sales/Services A 60,326,752 46,831,179 Cost of Services B 55,787,407 44,241,681 Actual Gross Profit A - B 4,539,345 2,589,498 Expenses C 629,508 536,448 ALP Gross Profit (1.301 x D) D 818,990 697,919 Adjusted Sales Price E = B + D 56,606,397 44,939,600 Downward adjustment to international transactions F = A - E 3,720,355 1,891,579 Downward adjustment to international transactions (in Rs.) F x 40.07 149,074,629 75,795,563 Based on the above computation, the impugned transfer pricing adjustment would come down to Rs. 7.57 Crs instead of Rs. 14.90 Crs as erroneously computed by the Ld. TPO 5.19 Ld. CIT(A) was pleased to detect this obvious and wanton mistake and alternatively order to exclude the wrong TP adjustment in this behalf. Since it was held that no TP adjustment whatsoever was required this alternate ground became academic as entire additions were deleted on other grounds. 5.20 The appel....
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....ctions. An appropriate level of segmentation of the taxpayer's financial data is needed when determining or testing the net profit it earns from a controlled transaction (or from transactions that are appropriately aggregated according to the guidance at paragraphs 3.9-3.12). Therefore, it would be inappropriate to apply the transactional net margin method on a company-wide basis if the company engages in a variety of different controlled transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise." Since AE was able to appropriately segregate its business operations with the appellant from other third parties and provide relevant business segments, the arm's length nature of the international transactions should be determined based on the relevant segmented profitability. Following judicial pronouncements have laid down for the determination of ALP at a transactional level and not at an entity level: In the case of M/s. Tecnimount ICB Pvt Ltd vs ACIT (Mumbai Bench), held that: "...Now, coming to the main issue whether the segmental results are to be taken into consideration or profit margin at entity level is to be c....
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.... (P) Ltd. vs. Asstt. CIT (2009) 124 TTJ (Mumbai) 289 : (2009) 26 DTR (Mumbai) (Trib) 458 : (2009) 121 ITD 131 (Mumbai) where it is held that s. 92C r/w r. 10B(l)(e) deals with TNMM and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole".; 5.22 Further, it is contended that segmental analysis forming part of the TP Study had some clerical mistake wherein third party transactions of AE was also included with related party transactions of AE with the appellant. A revised segmental analysis was submitted before the Ld. AO vide submission dated 21st December, 2011. However, the same was not considered by the Ld. AO while confirming the order of the Ld. TPO. 5.23 It is vehemently contended that the functions undertaken and risks assumed by AE under both the related party transactions and third party transactions are same. Ld. TPO/ AO erred in not even considering these glaring facts that AE's profitability from similar third party transaction was higher than the one transactions with the appellant, which itself is a convincing evidence that the transact....
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....ld. TPO / AO erred in computing the adjustment by adopting expense at USD 6,29,508 in place of USD 6,69,508 in Page 15 of Ld. TPO's Order, thereby increasing the transfer pricing adjustment to the tune of USD 52,040. The correct working is accepted by ld. CIT (A) which as under: Pa ParticularParticulars Amount ($) Operating expenses as per Profit & loss A/c 6,69,508 Gross Profit (A) x 130.1% 8,71,030 Gross Profit as calculated by TPO 8,18,990 Difference 52,040 * The Ld. TPO considered $ 3,394 for Salaries and employees benefits instead of $ 43,394. 5.26 Apropos application of CUP method, ld. Counsel explained that the available internal CUPs, which was reasonably comparable except some difference in transactions date, to facilitate the comparison with international transactions of the appellant with AEs and to establish the trend that vessel hire transactions of the appellant with its AEs were undertaken at market prices. By detailed submissions dated 14.09.2011 before ld. TPO, assessee explained that the external CUP in the form of freight rates available in independent market publications and compared the same with the freight transaction of th....
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....er agro-commodities to third party customers for which cargo vessel as per customers' requirements were hired from other shipping agents. Ld. TPO has wrongly alleged that the appellant shifted its shipping business function to Singapore without appreciating the relevant record and facts. From record it is clear that assessee was never in shipping business earlier, therefore, no question of shifting of alleged business to Singapore arises. Since this finding is factually incorrect any adverse inferences thereon by ld. AO/TPO have no relevancy and persuasive value 5.30 It is contended that additional profit has been earned by AE due to location saving by its physical presence in Singapore, which is a shipping hub. With locational advantages the AE was equipped to bargain better chartering deals for its business operations. As evidenced by external CUP data, assessee paid freight charges to AE on comparable market price, AE earned profits from it and third parties being at Singapore and exploiting location savings. 5.31 Without prejudice to the above submission ld. Counsel for the assessee contends that if all these mistakes and wrong parameter are corrected (as per chart below)....
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....any disallowable item ad hoc disallowance of 10% purely on estimate basis which was deleted by ld. CIT(A) in right manner. 6. We have heard the rival contentions andperused the material available on record. Apropos the admission of additional evidence under Rule 46A, we find no infirmity in the order of ld. CIT(A) which is based on just and proper consideration. i. From the record, it emerges that the Berry Ratio was applied for ALP working by ld. TPO/AO without effectively confronting it to the assessee, denying adequate opportunity of being heard which justifies assessee's request for admission of additional evidence. ii. Ld. CIT(A) has cited adequate justifications for admission which is supported by the Gujarat High Court judgment in the case of Kamlaben Sureshchandra Bhatti; AP High Court in the case of Unique Plastics (P) Ltd; Bombay High Court's Smt Prabhavati S. Shah (all supra). iii. Revenue should not be aggrieved inasmuch as ld. AO before ld. CIT(A) ultimately agreed for admission of additional evidence. vi. In any case, there is no prejudice caused to Revenue inasmuch as a proper remand report was called for from TPO/AO in respect of additional evidence w....
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....d third parties proved profitable. Assessee's total export of iron ore has gone-up to Rs. 949 crores from to Rs. 274 crores in the immediately preceding year. In terms of quantity the export this year rose to 21,64,424 tons as compared to 9,74,252 tons in immediately preceding year. The number of vessels for cargo was exported this year increased to 40 as compared to 17 in the immediately preceding year. The net profit as per audited accounts this year is Rs. 4,318 lakhs as compared to Rs. 746 lakhs in the immediately preceding year. Therefore, there is no force in the propositions of TPO/AO to allege that the AE is a front company, created for non business consideration etc and thus rejecting the assessee's TNMM method as most appropriate method and AE at tested party. Our views are supported by the details provided by ld counsel and as appreciated by ld. CIT(A). We uphold the observations and conclusions of ld. CIT(A) ion this behalf. ii. There is no merit in the TPO's allegation that appellant has shifted the business from India to Singapore; it was a merchant exporter and not engaged in the shipping business in India; therefore, there is no merit in such unfounded allegation....
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.... available with the (AE), besides the cost of bunker, i.e. fuel, which forms major portion of the cost, is not required to be paid immediately by the AE to the bunker supplier and there is credit period of 30 days. Thus AE was having sufficient funds to carry on the chartering activity and no potential financial support has been provided by the appellant. v. From the facts available on record, as per trade practices and as per inter se agreement with AE, and charter party agreement (agreement of AE with vessel owner), the presumption of the TPO/AO that large fund was required in chartering activity is without basis. Further from assessee's recasted accounts, there are no major credits in favor of AE, on the other hand almost on all days there is debit balance. vi. Except casting unfounded doubts on agreement with M/s R. M. Martin by JCIT-TPO, nothing has been brought on record to support the adverse conclusions drawn in this behalf by the ld. AO/TPO. From mutual Profit and Loss Account and other statements establish that the services of R. M. Martin ware availed by AE also prior to October 2007 also. Therefore, there is no force in the observations of JCIT-TPO in this regard.....
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....requirement with regard to employees of the entity which is engaged only in vessel chartering activities is restricted. The Ld. Counsels have described the functions involved in vessel chartering business. This operation has been taken care of by M/s R. M. Martine Pvt. Ltd., a Singapore entity. There is no supporting that the appellant helped AE in discharging its functions. Therefore, I find no reason to observe that there was lack of staff with AE and the appellant helped the AE in discharging its functions. The observation of the TPO/AO does not hold good from the above facts on record. I have also hold that services of M/s R. M. Martin were taken by AE prior to October 2007 also, therefore, the argument of JCIT - TPO that there was no man power with AE from May 2007 to September 2007 does not hold good." 6.5 Adverting to assessee's adoption of TNMM method as most appropriate method for computation of ALP under TP regulation and adopting AE as a tested party, we find the TP working provided by the assessee to be correct. Similarly Berry Ratio cannot be applied to the assessee's case as it is applicable in specific circumstances of a pure distributor where no value added servi....
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.... added expenses are considered and Berry ratio can be applied. The AE made value addition, assumed various risks of business and also incurred damages and losses in the business, as discussed by me in detail earlier. As per TNMM study filed by the appellant, the margin on total cost earned by AE is 4.52% which is less when compared with 5.18% in case of other eleven comparable companies. This is within arm's length. Therefore, otherwise also no transfer pricing adjustment is called for by the safe harbor clause. 6.9 In view of the facts, circumstances, material available on record and after hearing the rival contentions we uphold the order of ld. CIT(A) on all counts which are upheld. Revenue grounds in this behalf are dismissed. 6.10 Apropos the remaining ground raised by revenue for disallowance of Rs. 1,19,000/- out of Administrative & Selling Expenses (Corrected by assessee in its CO by way of a ground), we find that the disallowance has been made by ld. AO without pointing out any specific item of disallowance which is in the nature of purely an ad-hoc disallowance. Assessee's books are audited and the entire expenditure is properly vouched. It is a settled law that ....