TaxTMI 
TaxTMI 
2018 (10) TMI 51
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.... filed by the assessee are common and identical; therefore, these appeals and cross objections have been heard together and are being disposed of by this consolidated order. For the sake of convenience, the grounds as well as the facts narrated in Revenue's appeal, in ITA No.1372/Kol/2016, for assessment Year 2009-10, have been taken into consideration for deciding the above appeals and cross objections en masse. 3. Although, these appeals filed by the Revenue for Assessment Year 2008-09 (in ITA No.1371/Kol/2017) and for A.Y. 2009-10 (in ITA No.1372/Kol/2017) and Cross-Objections filed by the Assessee in Assessment Year 2008-09 (in CO. No.71/Kol/2018) and for A.Y. 2009-10 (in CO. No.72/Kol/2018), contain multiple ground of appeals. However, at the time of hearing we have carefully perused all the grounds raised by the Revenue as well as cross objections raised by the Assessee. Most of the grounds raised by the Revenue as well as Assessee, are either academic in nature or contentious in nature. However, to meet the end of justice, we confine ourselves to the core of the controversy and main grievances of Revenue and the Assessee as well. With this background, we summarize and con....
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....ssee's cross objections. Other Grounds raised by Revenue (1). Revenue's ground No.5 relates to grievance of the Revenue that companies eligible for claiming deduction u/s 10A of the Act, should continue to remain liable to pay Minimum Alternate Tax (MAT) u/s 115JB of the Act. (2).Ground No.1 raised by the Revenue in Assessment Year 2008-09 (in ITA No.1371/Kol/2017) and Ground No.10 raised by the Revenue in Assessment Year 2009-10 (in ITA No.1372/Kol/2017) relates to disallowance u/s 14A read with Rule 8D(2)(iii). (3).Ground No.2 raised by the Revenue in Assessment Year 2008-09 in ITA No.1371/Kol/2017 relates to disallowance of depreciation to the tune of Rs. 15,392/-. (4).Ground No.3 raised by the Revenue in Assessment Year 2008-09 in ITA No.1371/Kol/2017 relates to addition of Rs. 6,43,440/- on account of unexplained investment deleted by the ld. CIT(A) admitting additional evidence. 4. We shall first take-up additions challenged on account of Transfer Pricing Adjustment. For the sake of ready reference, grounds of appeal raised by Revenue and Cross Objections raised by the assessee for A.Y 2008-09 and 2009-10, relating to transfer p....
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....ections. 5. The brief facts qua the issue of transfer pricing adjustment of Rs. 12,31,02,132/- are that the assessee company is engaged in the business of manufacturing and export of silk fabric and garments. During the year under consideration the assessee company has entered into following international transactions with its associated enterprises, the details of which are given as under: Sl No. Name of A.E Nature of services Amounts (Rs.) 1 SPIN International Inc Export of Fabrics 20,04,96,006/- 2 OOO JJ Homes Export of Fabrics 94,68,840/- 3 J.J. Creations SA Export of Fabrics 31,26,409/- During the course of the proceedings before ld TPO, the assessee filed a Transfer Pricing Study Report and such other documents as were required together with detailed submissions to justify the arm's length price computed in respect of the international transactions. The documents and information submitted during the course of the proceedings were perused by the ld TPO and he noticed that in respect of the international transactions, the conclusion arrived by the assessee, in respect of the arm's length nature of the tra....
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....r computing the operating margins. However, the incomes and expenses related to the operations of the relevant financial year alone is considered for the computation of operating margins of the comparables. The following incomes, which are non-operating in nature and nothing to do with the operations of the company, are excluded from operating revenues: i. Interest, ii. Dividends, iii. Provisions no longer written back. iv. Gain on sale of assets/investments, v. Income from investments, vi. Gain on revaluation of assets. vii. Foreign Exchange gain, and viii. Other incomes not pertaining to the operations Similarly, the following expenses which are non-operating and provisions are excluded from operating expenses: i. Provisions other than provisions for bad debts ii. Loss on sale of assets/investments iii. Loss on revaluation of assets iv. Foreign exchange loss v. Other expenses not pertaining to the operations. Similarly, extra ordinary expenses or income which do not recur every year like donations, preliminary expenses written off are not considered as operating expenses as the comparison of the profits should be at same level fo....
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....f the ld. TPO/Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A). The ld CIT(A), having gone through the submissions of the assessee, observed that comparison of the company as a whole and that of the comparable itself is bad since Rule 10B provides comparability of "international controlled transaction", with an "uncontrolled transaction" only. Section 92F(ii) of the Act and Rule 10B(l)(e) which deals with arm's length price & transaction net margin method. On a perusal of the same, it is very clear that net margin method refers to only net profit margin realized by an enterprise from an international transaction or a cluster of such transaction and not operating margin of the enterprises as a whole. As regards the issues being selection and the rejection of the comparables, the ld CIT(A) noted that the Assessing Officer has failed to bring on record any reason for rejection of the comparables so given by the assessee i.e. M/s. Zenith Exports Ltd. & M/s. Eastern Silk Ind. Ltd. In Zenith Exports Ltd., the assessee has furnished the segmental report of the said comparable and as such the Assessing Officer's contention in such respect is not accept....
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.... the entity. That is, only the controlled international transaction has to be compared with uncontrolled transaction and adjustment has to be made only to the controlled international transaction and not otherwise. The ld. Counsel for the assessee also submitted before us in respect of the comparable selected by the assessee and the objections and comments on the Comparable selected by the ld TPO. The assessee selected two comparable companies Viz: 1) Zenith Exports Limited, and 2) Eastern Silk Ind.Limited. The relevant data and information about these companies, as submitted by the ld Counsel are given below, one by one, as follows 1). Zenith Exports Ltd. (Pb 65) Nature Amount Paper book Pg. No Volume of Paper book Segmental Results Pg. 108 Volume I Turnover 461.60 cr (16.25%) Pg 111 Volume 1 The ld TPO has rejected such comparable without making any discussion in the order and has simply applied search process on data base applying certain filters. The TPO did not examine data which was very much part of the audited accounts of the said company. Since the assessee is also engaged in sales & manufacturing of silk fabric & segment....
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....tions for such adjustments to eliminate the material differences for determination of arm's length price. Further, this comparable as selected by assessee had only 16.25% related party transactions (RPT) which is much within less than tolerance range as considered by various courts in the country which have considered such RPT (related party transaction) limit at 15 % to 25% and these judgments are as follows: a) DCIT vs. Synopsis India (P) Ltd. (2015) 64 taxmann.com 10 (Bang) b) 24/7 customer.com v. DCIT (2013) 140 ITD 344 (Bang) c) Cordys R & D India (P) Ltd. (2014) 149 ITD 587 (Hyd) d) SAP (India) Pvt. Ltd. v. Addl. CIT(2012) 87 taxmann.com 316 (Bangalore AT) Page 42 of case law paper book) [RPT tolerance unit between 15% to 25%] Hence it may be held accordingly. The ld Counsel objected the seven comparable selected by the ld TPO. The ld TPO selected the seven comparable companies to compute the PLI and arm's length price. The TPO in its order has selected following comparable and respective operating margins is as follows: 1. Grabal Alok Impex Ltd. (merged) 37.07% 2. Hanung Toys and Textiles Ltd. 20.45% 3. Jai....
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....hod and it refers to only net profit margin realized by an enterprise from international transaction or a class of such transactions but not operating margins of enterprises as whole. This view was reiterated by the Hon'ble Mumbai ITAT, 'L' Bench in the case of Addl. CIT v. Tej Diam as reported in (2008) 37 SOT 341 (Mum.) and wherein Tribunal held that the margin of the international transaction can only be compared with uncontrolled transaction and not otherwise." 13. Mr. S. Jhajharia, the ld Counsel for the assessee, further submitted that Ld.TPO selected seven comparable companies and out of these seven companies (so selected by the ld TPO), the ld CIT(A) rejected the six comparable companies. The ld Counsel defended the order passed by the ld CIT(A), so far six comparable companies rejected by the ld CIT(A) are concerned. However, ld CIT(A) accepted one comparable company, by name, M/s Silktex Ltd. The assessee does not agree with this comparable, so accepted by the ld CIT(A) because this company is not functionally comparable and there are a lot of dissimilarity. The ld Counsel submitted the details of M/s Silktex Ltd as follows: 2) Silktex Ltd Nature A....
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....exhibition expenses are for the purposes of benefitting the entire business of the company and the AE as a whole and cannot be said to be attributable solely to the sales to unrelated entities. It has also been pointed out that an entity level, the margin cost is at 5.92% (OP margin) whereas assessee determined the margin on sales at 22.96% based on arbitrary allocation of expenses to unrelated entities. Therefore, the ld. CIT(A) was wrong in considering the PLI as OP/Sales without considering the fact that such sales includes sales to the AE and is accordingly vitiated. The ld. DR therefore pointed out that if these expenses, like fair exhibition expenses etc are eliminated, similar expenses as is incurred by the comparable companies should also needs to be added back to determine the arm's length operating profit so as to ensure functional comparability on a like to like basis. However, after considering the submissions of the counsel for the assessee, the ld DR for the revenue, so far assessment year 2008-09 is concerned, accepted the two comparable companies, viz: Zenith exports and Eastern Silk Ind Ltd. as selected by the assessee. However, for A.Y. 2009-10, ld DR objected ....
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....rovided other terms and conditions of the provision of services are similar. Presently, we are dealing with the determination of ALP of the international transaction undertaken by the assessee and not its foreign AE. The assessee can resort to the CUP method only by showing that the price charged by it from its AE was favourably comparable to the price charged by some other comparable company(ies) in uncontrolled transaction(s). The ld. AR has brought no material on record to show the price charged in a comparable uncontrolled situation. We, therefore, hold that the view canvassed before the DRP for the first time in resorting to the CUP method is devoid of merits and as such, the most appropriate method in the facts and circumstances of the instant case is TNMM, which was originally adopted by the assessee and also approved by the TPO. 9. To sum up the above discussion, we hold that the assessee was not right in working out its PLI by also considering projected profits for the three subsequent years; no deduction on account of foreign exchange fluctuations can be allowed in the facts and circumstances of the instant case; and the revenue sharing formula as put forth by th....
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.... Act is concerned, we find that no exception has been carved out by the statute for nondetermination of the ALP of an international transaction of an assessee who is eligible for the benefit of deduction section 10A/10B or any other section of Chapter-VIA of the Act. Section 92(1) clearly provides that any income arising from an international transaction is required to be computed having regard to its arm's length price. There is no provision exempting the computation of total income arising from an international transaction having regard to its ALP, in the case of an assessee entitled to deduction u/s 80IC or any other such relevant provision. Section 92C dealing with computation of ALP clearly provides that the ALP in relation to an international transaction shall be determined by one of the methods given in this provision. This section also does not immune an international transaction from the computation of its ALP when income is otherwise eligible for deduction. On the contrary, we find that sub-section (4) of section 92C plainly stipulates that where an ALP is determined, the AO may compute the total income of the assessee having regard to the ALP so determined. This show....
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.... if taken to a logical conclusion, would amount to obliterating the proviso itself, which is patently incorrect. 9.4. Our view is fortified by the Special Bench order in the case of Aztech Software and Technology Services Ltd. vs. ACIT (2007) 107 ITD 141 (SB) (Bangalore) in which similar issue has been decided by the Special Bench by holding that availability of exemption u/s 10A to the assessee is no bar to applicability of sections 92C and 92CA. Similar view has been taken by Pune Bench of the Tribunal in the case of ACIT vs. MSS India (P) Ltd. (2009) 123 TTJ 657 (Pune) and several other orders. The reliance of the ld. AR on the order of the Mumbai Bench of the Tribunal in the case of DCIT vs. Tata Consultants Services Ltd. (ITA No. 7513/M/2010) dated 4.11.2015, in our considered opinion is misconceived, because, in that case, the Tribunal primarily found that the AO erred in not himself examining the issue of TP and failed to apply his mind to the TP report filed by the assessee. The last sentence in para 54 of the order upholding the assessee's contention that no TP adjustment can be made where the assessee enjoys benefit of deduction u/s 10A or 80HHE, etc., is onl....
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.... differences between the transactions materially affect the factor being examined in a given methodology, whether determination of prices or for profit margin and for such determination a reasonable accurate adjustment can be made to eliminate the material effects of any such differences. Rule 10B(2) of Income Tax Rules, provides the comparability of the transaction with uncontrolled transaction which has to be judged with reference to specific characteristics of the property transferred or services provided; FAR analysis; contractual terms; conditions prevailing in the markets, that is, economic conditions in which respective parties transact or operate including geographical locations, size etc. Thus, comparison of attributes of the transaction is carried which would affect conditions in Arm's length dealing. Rule 10B (3) specifically provides as under:- "An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction ifnone of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, ....
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....rily incur higher costs (e.g. due to start-up costs or increased marketing efforts) and hence achieve lower profit levels than other taxpayers operating in the same market. 1.116 Timing issues can pose particular problems for tax administrations when evaluating whether a taxpayer is following a business strategy that distinguishes it from potential comparables. Some business strategies, such as those involving market penetration or expansion of market share, involve reductions in the taxpayer's current profits in anticipation of increased future profits. If in the future those increased profits fail to materialize because the purported business strategy was not actually followed by the taxpayer, the appropriate transfer pricing outcome would likely require a transfer pricing adjustment. However legal constraints may prevent re-examination of earlier tax years by the tax administrations. At least in part for this reason, tax administrations may wish to subject the issue of business strategies to particular scrutiny. 1.117 When evaluating whether a taxpayer was following a business strategy that temporarily decreased profits in return for higher long-run profits....
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....g what period of time an independent enterprise would accept, tax administrations may wish to consider evidence of the commercial strategies evident in the country in which the business strategy is being pursued. In the end, however, the most important consideration is whether the strategy in question could plausibly be expected to prove profitable within the foreseeable future (while recognising that the strategy might fail), and that a party operating at arm's length would have been prepared to sacrifice profitability for a similar period under such economic circumstances and competitive conditions." Thus, business strategies, market penetration, increase or save its market share are relevant and material factors determining prices and profit and PLI. All these factors have to be taken into consideration while eliminating the material effects which warrants some kind of reasonable accurate adjustments. 19. We note that the assessee has agitated the impugned addition of Rs. 12,31,02,132/- to the transaction made by the assessee with it's Associate Enterprise (AE) under section 92A of the Act, across territorial border of India. The assessee has not disputed the fact ....
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....ara No. 8 of this order) and thus added the sum of Rs. 12,31,02,132/- being the derived adjustment of Arm's Length Price (ALP) on transaction with Associate Enterprises (AEs). We note that the assessee had selected 2(two) companies as comparables and such comparables dealing in the same product line as that of the assessee, were considered and the result of such comparables were compared with that of the assessee. The comparables and their financial data as was mentioned in the transfer pricing document (TPR), which is as follows: Particular Zenith Exports Eastern Silk Ind. Ltd. Sales turnover 239.53 510.03 Total income 239.53 510.03 Purchase 44.65 346.73 Stock adjustment (0.96) (89.92) Raw materials 116.71 104.73 MFG. Expenses 29.23 50.71 Other manufacturing expenses 18.63 33.76 Cost of goods sold 208.26 446.01 Gross profit 31.26 94.02 Operating profit 13.05% 12.5% Operating cost 15.01% 14.35% Average margin on cost = 14.68% Average margin on sales - 12.78% As such the margin earned by assessee from AE at 22.96% is much better than that of c....
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....aced on judgment of the coordinate Bench in the case of DCIT v. Landis + Gyr Ld. (2017) 86 taxmann.com 109. Based on this rationale, we accept this comparable company. ii). Eastern Silk Ind. Ltd. Nature Amount Paper book Pg. No Volume of Paper book Turnover 510.03 cr Pg 127 Volume I RPT 82.90 cr (16.25%) Pg 138 Volume I Exports 413.24 cr Pg 140 Volume I The TPO/ AO rejected such comparable without analyzing the FAR analysis of this comparable and merely applied search process and filters thereon to derive comparable without even considering this Company. Since the function of the comparable is similar to that of the assessee, only reasonable accurate adjustment should have been done in case of turnover of such entity varied from that of the assessee and in this connection we have already submitted that Rule 10B(2), (3) & (4) read with Rule 10B(e) duly mentions for such adjustments to eliminate the material differences for determination of arm's length price. Further, this comparable as selected by assessee had only 16.25% related party transactions (RPT) which is much within less than tolerance range as considered by....
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....1.2014, has considered, the Eastern Silk Ind Ltd. and has accepted as a comparable, taking into account same facts and circumstances, which were prevailing in A.Y.2008-09 &2009-10. In such a scenario, even though the assessee has got a higher RPT and, however, since the TPO has accepted the comparable Eastern Silk Ltd. for AY 2010-11, we agree with the Ld. CIT(A) that this company should not be excluded as a comparable. Further, we note that this comparable as selected by assessee had only 16.25% related party transactions (RPT) which is much within less than tolerance range as considered by various courts in the country which have considered such RPT (related party transaction) limit at 15% to 25% and these judgments are as follows: a) DCIT vs. Synopsis India (P) Ltd. (2015) 64 taxmann.com 10 (Bang) b) 24/7 customer.com v. DCIT (2013) 140 ITD 344 (Bang) c) Cordys R & D India (P) Ltd. (2014) 149 ITD 587 (Hyd) d) SAP (India) Pvt. Ltd. v. Addl. CIT(2012) 87 taxmann.com 316 (Bangalore AT) Page 42 of case law paper book) [RPT tolerance unit between 15% to 25%] We also note this fact that the TPO has not mentioned any RPT filter for AY 2009-10, in his or....
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....egmental transaction of such company has not been given whereas the AE of tested party is mainly in USA and a smaller party in Russia & Belgium. Hence, also this company does not qualify as comparable. We also note that ld CIT(A) did not make adjustments on account of the factors governing the price or profit in a transaction which may depend upon business strategies, market conditions, competitions, market penetration schemes, geographical locations, climatic conditions, etc. Guidelines issued by OECD ( 2017-OECD Transfer Pricing Guidelines) also recognized the business strategies adopted by the companies which have a bearing on profitability levels and profit level indicators (PLI). Para D.1.5 of OECD guidelines are given in para 18 of this order. Therefore, since the ld CIT(A) has failed to do adjustment on account of business strategies, market conditions, competitions, market penetration schemes, geographical locations, climatic conditions, etc, as noted above. Moreover, since the Function Asset & risk is not similar and hence it cannot be considered as comparable, therefore, we reject this comparable. Therefore, we direct the ld. TPO/Assessing Officer not to consider th....
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....tional 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; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-clause( 1) is established to be the same as the net profit margin referred to in sub-clause (ii); (v) the net profit margin established is then token into account to arrive at an arm's length price in relation to the international transaction." 19. It is cl....
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.... transactions are to be taken into consideration while calculating the arm's length price." (c) DCIT, Ward 16(3) v. Twinkle Diamond in ITA No. 5033/ Mum/ 07 for A.Y 2004- 05 order dt. 30.04.2010. (d)ACIT v. T. Two International P. Ltd. & DCIT v. Tarajewels Exports P. Ltd. & ACIT v. Tara Ultimo P. Ltd. in ITA No. 5644, 5645 & 5646/ Mum/ 08 order dt. 29.2.2010. (e) IIjin Electronics Pvt. Ltd. v. ACIT (10) 36 SOT 227 20. It is not disputed by the TPO that the net profit margin earned by the Assessee from the controlled international transaction was 39.25% in comparison to the average net profit margin earned by the comparables chosen by the Assessee at 27.072%. If one were to proceed on the basis of the comparable selected by the TPO and apply its profit margin of 20.91%, the Assessee's profit margin of 39.25% is higher. Hence the comparison of the net profit margin of the international transaction of the Assessee in comparison to the net profit margin of the comparables is much better and the addition so made by the TPO & AO is wholly wrong and incorrect and was rightly deleted by the CIT(A). 21. For the reasons given above ground nos.....
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....ort from 10A & 10B Unit, and relate to grievance that transfer pricing provision did not apply to transaction between the 10A and 10B unit, and to reduce the turnover pertaining to sections 10A & 10B in computation of arm's length price. We note that these are miscellaneous grounds raised by the Revenue and assessee relating to transfer pricing. Fair Exhibition & Travelling expenses in OC of AE (contended by Revenue in Ground 6). The Revenue has contended that the expenses like travelling expenses, fair and exhibition expenses should be as part of the operating cost of the AE. We note that as per the FAR analysis the sales and marketing function in respect of the transaction with AE is to be performed by AE only and hence the expenses are incurred by such AE only. It has also to be appreciated that had such expenses incurred by assessee then the same would form part of the Transfer Pricing Study as well as the Form 3CEB as well would have also been part of the Transfer Pricing assessment and adjustment by the TPO. Since no such expenditure has been incurred, mere contention that the AE would have been benefited by such expenses, has no relevance nor can lead to apportionment ....
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....e first mentioned enterprise." Our view is fortified by the Special Bench order in the case of Aztech Software and Technology Services Ltd. vs. ACIT (2007) 107 ITD 141 (SB) (Bangalore) in which similar issue has been decided by the Special Bench by holding that availability of exemption u/s 10A to the assessee is no bar to applicability of sections 92C and 92CA. Similar view has been taken by Pune Bench of the Tribunal in the case of ACIT vs. MSS India (P) Ltd. (2009) 123 TTJ 657 (Pune). Apart from this the judgment of the Special Bench, Kolkata in the case of Instrumentarium Corporation in ITA No.1548&1549/Kol/2009 wherein it was held that arm's length price has to be computed as per section 92 of the Act. Therefore, if the 10A and 10B unit sales goods/services to its AE, the arm's length price should be computed. However, we note that in assessee's case under consideration, the ld TPO has already included the sale of 10A & 10B units to compute the arm's length price, therefore, this ground does not have any further impact and it is only an academic discussion and does not have any impact on our decision in para 22 of this order in deleting both the upward transfer pricing a....
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....]] or [* * * *] section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or" In this caluse, the words "section 10A or section 10B or" omitted by the finance Act 2007, w.e.f.01.04.2008" The purport of this omission was that up to assessment year 2007-08, the 10A, & 10B units were not supposed to pay minimum alternate tax (MAT) under section 115JB of the Act. However, on or after assessment year 2008-09 these 10A & 10B companies should pay minimum alternate tax (MAT) under section 115JB of the Act. Therefore, we note that the companies eligible for claiming deduction u/s 10A are continued to remain liable to Minimum Alternate Tax (MAT) made u/s 115JB of the Act. The issue before us is relating to A.Y. 2008-09 and A.Y. 2009-10, therefore, we are of the view that assessee company is liable to pay MAT. Therefore, we allow this ground raised by the Revenue. 30. Ground No.1 raised by the Revenue in Assessment Year 2008-09 (in ITA No.1371/Kol/2017) and Ground No.10 raised by the Revenue in Assessment Year 2009-10 (in ITA No.1372/Kol/2017) relates to disallowance u/s 14A read with Rule 8D(2)(iii). After giving our thoughtful consideration to t....