TaxTMI 
TaxTMI 
TaxTMI 
2017 (6) TMI 582
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....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 short) is an exporter mainly exporting Iron Ore Fines, in ....
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....2,81,066/-. 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 has responded by filing reply dated 21.12.2011 wherein various issues have bee....
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....d 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, because the appellant was not knowing the mind of the TPO and the issues came to th....
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....lant 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 saying that adequate time and opportunities were provided to the appellant at the t....
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....lant 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 this year is 21,64,424 tons as compared to 9,74,252 tons in the immediately preceding year....
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.... 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, terms of contract entered into by AE with the ship owner is stipulated. From the facts av....
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....ivate 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 have been paid aggregating to USD 4,85,772 out of which USD 4,00,000 pertains to vessels shipped ....
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....thout 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 restricts only value added expenses and excludes other costs as per profit and loss account to arrive a....
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....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 pricing adjustment is needed. It may not be out of place to mention that TPO suggested the downward adj....
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....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 part of Transfer Pricing study (revised at Page No.464). This is as per audited accounts of AE and supported by the audited accounts of the appellant, for which a compilation was also f....
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....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 TPO in this case. ANALYSIS OF COMPARABLE COMPANIES From the financial data submitted by the assessee company of the 11 comparable companies, TPO inferred that:- a) Shipping services business req....
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.... 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 recomputed ALP by applying Berry Ratio which was just conceived in TP working in some developing countries. By ratio itself its application is limited to specific circumstances in case of pure distributors and not to the fa....
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....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 delivery of commodities to third party customers. b. Many times assessee's requirements in terms of vessel sizes, availability at a specified time and ports, etc. were not met with causing additional cost, penalties and delayed transactions ....
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.... 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 bears the risks of increase in price subsequent to voyage contract with charterers. e. To substantiate the risks associated with bunker price, the appellant submits market price of bunkers prevailing during FY 07-08 along with the relative price fluctuations, which establishes the fact that the price of bunker is very volatile and hence,....
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....ances 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 same from the appellant. Relevant orders are part of the record. M.V. Meteora: During FY 2007-08, AE had hired vessel Meteora on time charter basis and the same was chartered by AE to third party customer (British Marine Plc.) on time charter basis. The AE could bargain a better deal for itself and earned substantial profit from the said transaction. However, British Marine Plc. redelivered t....
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....ilities 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 risks of vessel break down/ defects rests with the AE and was not transferred to or reimbursed from the assessee. *Notice Of Readiness (NOR)- Lay time - MV Stove Campbell- Laytime is the term used to refer the time allowed to charterers to load/discharge cargo. If the charterers are unable to load/discharge cargo within this allowed laytime period, they will be obliged to pay demurrage. In chartering operation....
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....y 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 account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;' Though the transfer pricing regulations require a thorough analysis of the functions performed by an entity before determining the arm's length nature of the international transactions ld. TPO failed to consider the gravity of analytical appreciation in this behalf. 4.18 In this regard, reference can be made to the dec....
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....d 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 interest of justice. The Ld. TPO is not justified in rejecting TNMM method adopted as most appropriate method and AE as tested party by holding that: "10. The assessee has selected its AE, M/s. Bagadiya Brothers Singapore Pte Ltd. (BBSPL) as tested party for benchmarking the transactions of services related to the shipping activities as AE is simpler of the two, and does not have any intangible" Since AE was at the nascent stage in shipping opera....
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..... 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 owners...It is also not possible to ascertain how ship owners have agreed to enter into business with AE on time charter basis, as it requires huge financial exposure. The equity capital and total fund available with AE were US$ 2,30,066 and there were no finances available to the AE of its own. Each shipping transaction is worth more than Rs. 8 crores for a voyage of a normal load of 50,000 ton, whereas, AE has entered into long tern time charter agreement which exposes it to eve....
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....ces 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 along with agreements. For arm's length price working with AE, Transactional Net Margin Method (TNMM) was selected as the most appropriate method and Operating Profit/Total Cost (OP/TC) was considered as the Profit Level Indicator (PLI) to test the arm's length nature of the international transaction after giving due cognizance to Rule 10B(1)(e)(i) of the Rules which provides that, "the net profit margin realised by the enterprise from an international transaction entered into with an associated enterpri....
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....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 whereas in voyage charter, the vessel is hired on per metric ton of the goods shipped after considering the relevant load and discharge port. In these circumstances, AE is not acting as a distributor of services/ products since the form of service is completely altered by AE. In doing so, AE bears the resultant capacity utilization risks, risk of vessel hire charges, credit risks, market risks, etc. Consequently, these costs cannot be considered as a pass-through costs for application of Berry Ratio as applied by ld. TPO. ....
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....se, 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 functions and assuming related risks. Ld. TPO failed to appreciate the nuances of ship chartering business and the AE's operations and grossly erred in not considering the other direct costs of AE as substantial value added activities. The Ld. TPO while computing VAE for establishing the arm's length mark-up, considered the following expenses: *Professional Fee - ship handling charges; *Salaries and employee benefits; *Depreciation; and *Other Operating Expenses. 5.7 In given facts, the other "cost of services" of the AE cannot be ....
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....e 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 submission above, the AE assumes the following risk pertaining to hiring the vessel: I. Risk of increase in bunker prices; II. Risk of appropriate realization of hire charges; *Risk of performance obligation arising from the fixture note; *Capacity Utilization risks; *Price risks; III. Risk of additional cost of hire charges (time loss); *Underperformance of vessel due to bad weather at ports *Time loss due to underperformance caused by bad weather, adverse current, river passage; *Vessel sailing delay due to non-availability of night pilotage; *Vessel ....
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....e 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 does not provide for any separate identification of value added expenses. The foreign database or the generally accepted accounting principles of the respective company does not provide for such disclosures and hence, a high level of care and judgment is to be taken which is not conclusive. Besides, the "Cost of goods sold" and "Other Operating expenses + Depreciation + Amortization" for the 11 comparable companies (details was provided to the Ld. TPO vide submission dated 14.10.2011) may not have the same nature and component of expenses as that of AE since, the accounting disclosure nor....
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.... 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 the services rendered (please note that Ld. TPO also computed the arm's length margin after considering only "Other Operating expenses + Depreciation + Amortization"). However, the other costs in the Total Cost base of AE would fall under the category of VAE as these are the essential activities undertaken by AE for letting the vessel to the appellant and other third parties and hence, will always claim remuneration for all such activities and people's function. Even if the appellant follows the Ld. TPO's approach for computing arm's length margin (without prejudice to the above arguments), the above computation brings out the reverse fact and suggests that AE hav....
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....ot 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 profit indicators in the absence of more reliable comparisons." Para 2.106 of the OECD TP Guidelines, July 2010 states: "A similar approach may be required when there are differences in functions performed by the parties being compared. Assume that the facts are the same as in the example at paragraph 2.38 except that it is the comparable independent enterprises that perform the additional function of technical support and not the associated enterprise, and that these costs are reported in the cost of goods sold but cannot be separately identified. Because of product and market differences it may not be possible to find a CUP, and a resale price method would be unreliable since the ....
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....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 distributed by them. 48. In the present case, the Assessee asserts that its business comprises of two segments, trading segment and indenting segment and the functional risk and the reward in the two segments are different. In the trading segment, the Assessee earns a higher profit margins (calculated on the value of the goods traded) while in the indenting segment its profit margins are lower. Plainly, the use Berry ratio would give unreliable results if the product mix of the comparables is different from the product mix of the Assessee. This would make the task of finding a set of comparables fairly difficult." 5.16 Ld. Counsel thus contends that Berry Ratio is applicable in specific ci....
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....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 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 f....
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....s 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 appellant while establishing the arm's length margin of the international transactions had selected Transactional Net Margin Method (TNMM) as the most appropriate method. TNMM assesses the arm's length character of transfer prices in a controlled transaction by testing the profit results of one participant in the transaction. The TNMM examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate....). Under the TNMM, comparable transactions need to be only broadly similar. Significant product diversity and some functional diversity between the controlled and uncontrolled parties are acceptable. Further Rule 10B(e) of the Rule states that: "transactional net margin method, by whi....
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....itability. 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 considered, we find that Chapter-X incorporates special provisions relating to avoiding of tax in regard to international transactions and income from international transactions has to be determined at arm's length price. Therefore, as per the provisions contained under Sections 92 to 94, international transactions are to be taken into consideration. Therefore, segmental results are to be considered and not the profit at entity level." Development Consultants Pvt Ltd. vs DCIT 115 TTJ 577 - ITAT, Kolkata held that: "....ideally in order to arrive at the most precise approximation of fair market value, the ALP should be determined on a transaction by-transaction basis. Only in case when the separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis, that such trans....
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....ions 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 transactions of the appellant with its AE were perfectly at arm's length. 5.24 The following comparative working of the internal segment shall make it clear that AE earned more profits while transacting with third party as compared to the margin earned while transacting with the appellant. This analysis supports the appellant's contention that the margin earned by AE from transacting with the appellant is at arm's length and no adjustment is warranted. Particulars Transaction wit Particulars TraTransaction with BBPL TraTransaction with Anurag Overseas TraTransaction with B2B TraTransaction with others TotalTotal Income From Ships 46,831,179 3,507,615 2,256,061 7,731,303 60,326,159 Expenses: 44,653,629 3,374,416 2,188,642 5,393,064 556,097,52 Indirect 124,500 9,325 5,653 707,682 847,160 Total Cost (TC) 44,778,129 ....
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....ices. 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 the appellant with its AE. As, some internal CUPs were not comparable to the related party transactions due to various differential parameters like vessel size; difference in loadable quantity, different time period, etc., the appellant identified the external CUP in the form of freight rates available in independent market publications and compared the same with the freight transaction of the appellant with its AE. On comparison, it can be concluded that transactions were undertaken at market prices. 5.27 As the appellant was unaware of the Ld. TPO's methodology for ALP working and no further questions were asked the record could not be enriched with further evidence to support with other external CUP data i.e. freight data available in the independent market publications. Before ld. CIT(A) they were produced by way of additional evidence which were sent for remand. Ld. CIT(A) after due consideration held the internal CUP working provided by assessee w....
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....ies 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), even the TPO's corrected working will fall within the +/- 5% range of the international transactions, as per proviso to Section 92C(2) of the Act which states that:. "The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: [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 mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price." Thus the legislative mandate provides that if the arm's length does not exceed five percent of the international price then the price at which the....
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....e. 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 which is submitted and considered. Further, TPO/AO were present during the course of hearing before ld. CIT(A). In view of the foregoing, we see no infirmity in the order of ld. CIT(A) which is upheld. 6.1 Apropos the main ground on merit, the revenue has taken an omnibus and summary ground that "whether in law and on facts & circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 14,69,89,382/- made by the AO on account of transfer pricing adjustment". The fact of the matter is there are many parts to this ground. The first and foremost being treatment of AE's third party transactions as related party transaction. Ld. CIT(A) has upheld that TP adjustment to extent of Rs. 7,32,81,066/- being third party transactions have been wrongly and erroneously considered by ld. TPO as related party international transactions liable for ALP determination. Ld. DR could not dislodge the findings of the ld. CIT(A) in this behalf. Consequently ld. CIT(A)'s conclusion in this behalf has to be upheld. 6.2 Now adverting....
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....Singapore; it was a merchant exporter and not engaged in the shipping business in India; therefore, there is no merit in such unfounded allegation. It was chartering vessels on voyage charter basis from third parties and continued thereafter also. The AE as a distinct business modicum charters the vessels on time charter basis and offered on profitable voyage basis. Neither the appellant nor the AE have their own vessels, in view of these facts AE's business is a very small slice of huge shipping. Therefore, it cannot be said that the appellant has shifted the business from India to Singapore on the other hand a new business of vessel chartering has been stated at Singapore. iii. From the facts emerging from the record, it is demonstrated that the AE and the appellant were performing their respective functions and assuming their business risk independently without interruption of each other. The risk undertaken by the AE is different than the risk undertaken by the appellant. The contractual terms between the AE and the appellant are evidenced from the 'Fixture Notes', Charter Party Agreement filed, besides the terms between AE & the vessel owner are on record. Consequently variou....
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....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. vii. Apropos assumptions of TPO/AO that M/s. Bothra Shipping and M/s Sea Trans are ship owners and the adverse inference drawn in this behalf are not substantiated. M/s. Bothra Shipping and M/s Sea Trans are not ship owners but only port agents to whom payments were made by the AE and not by the appellant as inferred by the TPO. This was subsequently adjusted as per terms and conditions of the contract, besides the total amount of such port charges comes to rupees four crores approximately and not Rs. thirty crores as wrongly observed by the TPO. Similarly ld TPO/AO proceeded 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. 6.4 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 ....
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....ot be applied to the assessee's case as it is applicable in specific circumstances of a pure distributor where no value added services are rendered. The observation of the TPO that AE had utilized the tangible and intangible assets of the parent company in earning such huge profit in the first year of its activity and cannot be treated as independent shipping service provider is only a presumption without any support. We are of the view that various functions for ship chartering have been outsourced by the AE to one M/s R. M. Martine, since inception of the AE. The AE had its own funds, undertook business risk and many instances of such risk which actually borne by AE pertaining to various vessels have been proved with evidence. The payment of hire charges, bunker charges, port charges have been made by the AE from its own funds evidenced by cash flow statement could not be controverted by revenue. In our studied and considered view the AE has performed proper 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. In view of these facts and circumstances, the B....