TaxTMI 
TaxTMI 
2020 (2) TMI 422
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....ese appeals are clubbed, heard together and a common order is being passed for the sake of convenience as under. 2. The grounds of appeal raised by the Department in these appeals for the Assessment Years (A.Y.) 2012-13 to 2014-15 are identical. Though ground No.5 and 6 are on transfer pricing issues, no such issues are involved for the A.Y.2012-13 and 2014-15. For the A.Y.2013-14, transfer pricing adjustments were made by the Assessing Officer(AO) which are being agitated by the Revenue in this appeal. 3 During the pendency of appeal proceedings, the department has filed the revised grounds and the Ld.DR submitted that the grounds raised originally in appeal memo in Form No.36 were lengthy and argumentative, therefore, the department has filed the revised grounds and requested to admit the same in the place of original grounds. After hearing both the parties, we take up the revised grounds for adjudication. The department has raised the common grounds in appeal Nos.510/Viz/2018, 511/Viz/2018 and 53/Viz/2018 as under: 1) The order of the Commissioner of Income Tax (Appeals) Guntur, for the AY: 2013-14, is erroneous both on facts and in law. 2) The Ld. CIT (A....
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....s are extracted from the appeal of A.Y. 2012-13. The assessee is engaged in the business of processing of tobacco, manufacturing of cigarettes and import and export of cigars and beverages. The assessee company has two divisions, namely tobacco division and SEZ division. The SEZ unit is set up in Special Economic Zone, Cochin, during the F.Y.2005-06 relevant to the A.Y.2006-07, as per letter of approval dated 14.03.2005 issued by the Development Commissioner, Chochin, SEZ. The assessee's unit in the SEZ is engaged in the business of import of cigarettes and alcoholic beverages and re-export of the same. The assessee maintained separate books of accounts for the tobacco division and the SEZ division. During the previous year relevant to the A.Y.2012-13, the assessee has computed the profits from SEZ unit at Rs. 5,48,87,579/- and claimed 50% of the same as deduction u/s 10AA of the Act, being the 7th year, which worked out to Rs. 2,74,21,882/-. The AO viewed that the assessee is not entitled for exemption u/s 10AA, since, the assessee is not engaged in the manufacturing activity and only engaged in the trading activity. Therefore, the AO issued show cause notice calling for the ex....
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.... the deduction u/s 10AA in case of trading activities carried on in SEZ units. The Ld.DR further submitted that the Assessee is neither manufacturing nor producing any article or thing nor rendering any services. Precisely this is the main reason for disallowance of claim u/s 1OAA by the Assessing Officer. It was the contention of the assessee that the expression "services" under rule 71 of the SEZ rules include trading and further that trading mean import for the purpose of re-export. It was also pointed out by the assessee that the clarification issued by the Department of Commerce, Ministry of Commerce and Industry vide instruction No. 4/2006 permits the units in SEZ in whose case letter of approval was given for carrying out trading activities of all forms of trading but the benefits of u/s 10AA will exclude the trading other than trading in the nature of reexport of imported goods. From the perusal of the said instruction it can be noticed that the said instruction, while allowing SEZ units to carry out all forms of trading had stated that the benefits of u/s 10AA will exclude trading other than trading in the nature of re-export of imported goods. At the same time it was a....
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....rcumstances of the case, the benefit of exemption u/s 10AA of the Act is available to the assessee, which is engaged in the business of trading activity in the nature of import and re-export of goods which falls within the meaning of the term 'services' as defined u/s 10AA of the Act. Admittedly, the assessee has established a unit at Cochin SEZ, which was approved by the Development Commissioner vide his letter no.9/05/2005/IL/CSEZ/1563 dated 14.3.2005. The assessee is engaged in the business of trading activity in the nature of importing Cigars, Cigarettes & Alcoholic beverages and re-exporting the same. The assessee claims that units located in SEZ, engaged in the business of import and export falls within the definition of the term 'services' as defined in clause 'Z' of section 2 of SEZ Act, 2005 and rule 76 of SEZ Rules, 2006, which defines the term 'services', which includes 'trading'. As per explanation given in SEZ Rules, 2006, the expression 'trading' for the purpose of second schedule of SEZ Act, shall mean import for the purpose of re-export and such trading is included in the list of services for the purpose of section (2) of SEZ Act. The term 'services' is not defined ....
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....exemption u/s 10AA of the Act on an interpretation of the provisions of the Income-tax Act as well as the SEZ Act and Rules, apart from the instructions issued by the Ministry of Commerce, we do not find any infirmity in the order passed by the Ld. CIT(A) and thus, the appeal filed by the revenue is hereby dismissed. 11. The assessee relied upon the decision of ITAT, Jaipur 'B' Bench in the case of DCIT Vs. Goenka Diamonds & Jewellers Ltd. 509/JP/2011 dated 31.1.2012, wherein the coordinate bench of this Tribunal, under similar circumstances has held as under: "We have also reproduced Section 51 of the SEZ Act. As per this Section, it is mentioned that notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act, the provision of SEZ Act will prevail. The Hon'ble Apex Court in the case of Tax Recovery Officer, Vs. Custodian Appointed under the Special Court, 293 ITR 369 had an occasion to consider the meaning of language employed in Section 13 of the Special Court Act. In Section 13 of the Special Court Act, it was stated that provision of the Act shall hav....
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....The SEZ Rules define the services and the activity of the assessee is covered under the definition of services. Therefore, the argument advanced by the Ld.DR is not tenable. Hence, respectfully following the view taken by this Tribunal in the assessee's own case, we hold that the assessee is eligible for deduction u/s 10AA on the profits derived by SEZ Unit in respect of trading activity of importing the goods for reexport. Accordingly, the ground raised by the revenue on this issue is dismissed. The cross objections of the assessee are supportive and becomes infructuous hence dismissed. The appeals of the revenue as well as cross objections of the assessee on this issue for the A.Y. 2012-13 to 2014-15 are dismissed. 14. Ground No.4 is related to the issue of addition made by the AO u/s 40(a)(ia) of the Act in respect of Ocean Freight charges paid to the agents of foreign shipping company for non deduction of tax at source. This issue is also common for all the assessment years of 2012-13 to 2014-15. Brief facts are that during the assessment proceedings, the AO found that for the A.Y.2012-13 the assessee has made the payment of Rs. 21,51,939/- towards transportation & shipping ....
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....23, hence, argued that no interference is called for in the order of the Ld.CIT(A). 18. We have heard both the parties and perused the material placed on record. The assessing officer made the additions u/s 40(a)(ia) for the A.Ys 2012-13 to 2014-15 and out of which the Ld.CIT(A) granted relief in respect of Ocean Freight Charges as under : A.Y. Disallowance u/s 40(a)(ia) (Rs.) Relief granted by CIT(A) in respect of Ocean Freight Charges (Rs.) 2012-13 Rs. 17,10,263/- Rs. 4,14,988/- 2013-14 Rs. 24,96,779/- Rs. 13,90,000/- 2014-15 30% of Rs. 65,13,221/- Rs. 77,540/- = Rs. 19,53,967/- 19. There is no dispute that the assessee has paid the Ocean Freight charges to the shipping agents. The payments made to shipping agents are covered by the Circular No. 723 of CBDT dated 19.09.1995. As per Circular No.723, in case of payments made to foreign shipping agents of nonresident ship owners or charterers for carriage of passengers etc., shipped at a port in India, the agent acts on behalf of the non-resident ship-owner and steps into the shoes of the principal. Accordingly, the provisions of section 172 shall apply and sections 19....
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....axpayer held that the transactions were at arm's length, hence, viewed that no adjustment was required. 21.3. The AO verified the financials as per the annual report for the F.Y.2012-13 which are as under : Sl.No. Particulars In Rs. 1. Operating Revenue 248,15,98,792 2. Operating Cost 241,02,48,082 3. Operating Profit 7,13,50,710 4. OP/OR*100 2.88 5. OP/OC*100 2.96 With regard to sale transactions, the assessee had adopted the internal CPM as MAM and it has given detailed analysis of AE and non AE transactions. From the perusal of information, the TPO observed that the assessee is manufacturing different types of products, i.e. unprocessed tobacco, cut tobacco and packing material, chemicals and flavours. Since the assessee has not provided the basis of allocation of expenses in internal CPM, the TPO rejected the CPM as MAM and adopted TNMM as MAM. The TPO selected the following comparables for bench marking the international transaction. Sl.No. Name of the company Operating Revenue Operating Cost Operating Income OP/OR OP/OC 1 V.S.T.Industries 668.68 510.88 157.8 23.60 30.89 2.....
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.....16% Total Operating Cost (OC) 241,02,48,062 Proportionate operating cost (Total OC x 98.35/100) 43,77,01,052 Adjusted Arm's Length Margin (%) (AALM) 19.69% Arm's Length Price (100+AALM)*OC 52,38,84,389 Price Received (OR) 45,06,66,714 Adjustment u/s 92CA 7,32,17,675 22. Accordingly, the AO made adjustment of Rs. 7,32,17,675/- to the returned income. 23. Against the order of the AO, the assessee went on appeal before the CIT(A) and raised the objections stating that the TPO erred in rejecting the method adopted by the assessee and rejecting the economic analysis of the assessee without making any FAR analysis and without making any valid observations. Further, the taxpayer has objected before the CIT(A) stating that there were internal uncontrolled transactions of the company for determining the ALP adopting TNMM as MAM. Rejecting the request of the assessee to adopt internal TNMM is not correct. The assessee further submitted before the CIT(A) that the AO has cherry picked the comparables which are functionally different without following the internationally accepted transfer pricing principles. The AO also did not provide search analysis ....
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....s incorrect. The Ld.CIT(A) considered the OECD guidelines and the decision of ITAT, Hyderabad in the case of Palred Technologies Ltd (supra) and held that determining the ALP adopting the internal TNMM is most appropriate for benchmarking the ALP when segmental data is available. Accordingly, held that the order of the TPO is incorrect and accordingly deleted the addition made by the TPO/AO. 24. Against which the department has filed appeal before this Tribunal. During the appeal hearing, Ld.DR argued that the AO has rightly taken the comparables using various filters in the similar types of products manufactured by the assessee and selected the comparables which are more or less comparable to the assessee company. The assessee did not bring any differences to eliminate the comparables selected by the TPO. The method adopted by the assessee i.e. CPM was not accepted since the direct costs and indirect costs cannot be ascertained accurately. There is a possibility of making the adjustment of costs in internal comparables. For considering the internal TNMM as MAM, the assessee himself had stated in the transfer pricing document that the blend and mix of each order is unique ....
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.... details were furnished as part of documentation and subsequently certified by cost accountant, the AO has rejected the internal TNMM method which is incorrect. The Ld.AR further submitted that the comparables selected by the TPO are dissimilar and functionally different. All the companies are dealing with branded products in the business to consumers as against the assessee company is in the business with branded customers. The comparable companies are selling the goods to consumers directly as against assessee's case, to the branded owners. The assessee submitted the dissimilarities of the comparables selected by the TPO with regard to manufacturing, FAR analysis of each company which was reproduced in the order of the Ld.CIT(A) in page No.14 and 15 and argued that none of the comparables selected by the TPO are comparable, therefore, requested to delete the comparables selected by TPO which are dissimilar functionally, size, nature of business etc.. The Ld.AR further submitted that the assessee has made search process using various filters of the assessee's business as mentioned in page no.28 of the paper book to find out the external comparables on capitaline transfer pricei....
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....rofit margins of the internal comparables cannot be ascertained accurately due to non availability of segmental data and adopted the TNMM as MAM. When the assessee has requested the TPO to adopt the internal TNMM as MAM, the same was also rejected by the TPO stating that there is possibility of allocation of costs to the benefit of the taxpayer and adopted TNMM as MAM. The TPO selected seven comparables and rejected the objections raised by the assessee with regard to dissimilarities in functions, foreign exchange earnings, related party transactions, deployment of fixed assets, size of the company etc and proceeded to bench mark the ALP at Rs. 7,32,17,675/- adopting the PLI at 19.69%. During the appeal hearing, the Ld.AR brought to our notice the dissimilarities in comparables selected by the TPO as under : S.No. Name of the company Our Submission / arguments on comparability 1. VST Industries Ltd. (30.98%) • Deals in manufacturing of cigarettes and in unmanufactured tobacco (but no segmental details available) whereas BEPL is engaged in liasoning and trading of tobacco products. FAR Analysis • Functionally different conside....
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.... case of the assessee it is 63.44%. • Earning is foreign currency account constitute 12.64% of total earnings compared to 82.6 for the assessee • Fixed assets constitute 42.46% of sales, while the assessee's fixed asset constitute 4.83% 27. We have carefully considered the arguments of the Ld.AR and DR and find that the assessee company is in the business of export of cut and uncut tobacco, whereas, the comparables selected by the TPO are either in manufacture of cigarettes, betel nut powder, gutka and manufacturing tobacco, diversified multiple product business etc. Therefore, we observe the dissimilarities in manufacture of products in comparables selected by the TPO. The comparables selected by the TPO are in the business to consumers, whereas, the assessee is supplying the tobacco to the branded customers for manufacture of the cigarettes. Therefore, we agree that the comparables selected by the TPO are functionally different. The nature and size of the business of comparables also was not brought on record by the TPO. With regard to employment of assets, earning of foreign currency also, the comparables selected by the TPO appears to be different. ....
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....on AE. For all the years the documents prepared by the assessee were accepted considering the cost audit certificate which the assessee has regularly furnished. As observed from the order of the Ld.CIT(A) for the year under consideration also, the assessee had furnished the cost audit certificate before the CIT(A) placed in page No.107 of the paper book, wherein the cost accountant has given detailed analysis of allocation of cost and revenue with the basis for each segment. The AO rejected the internal CPM on the reason that the direct costs and indirect cost cannot be readily ascertained. Similarly, internal TNMM was also brushed aside with a presumption that there is always a chance of allocation of costs to the benefit of taxpayer without any documentation. The assessee submitted that the margins in the associated enterprises were 0.43% to 3.7% as per the data collected from four associate companies carrying on the same business in the area and whose average works out to 2.5% as against 2.96% of the assessee. The assessee also submitted the data of associate enterprises in respect of whom the exports were made and in the case of International continental tobacco company FZE, th....
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....epted. Thus, we restore this matter to the file of the AO to verify the segmental results of the AE as well as non-AE and carry out comparability analysis for arriving at the margin of both parties and accordingly, determine the arm 's length price. It is only when the internal comparable and its segmental details are not found to stand the test of comparability analysis, then external comparables should he looked into...." OECD Guidelines also support the internal comparables when AE and non AE transactions are involved. As per para 3.27 of OECD guidelines, internal comparables are most reliable for bench marking purpose. "3.27. Internal comparables may have a more direct and closer relationship to the transaction under review than external comparables. The financial analysis may be easier and MOM reliable as it will presumably rely on identical accounting standards and practices for the internal comparable and for the controlled transaction. In addition, access to information on internal comparables maybe both more complete and less costly." 28.1. Therefore, following the judicial precedents and also in view of the fact that there are no external comparables availa....
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....are in fixing the sales price of the different parties. Thus the imputation of interest as proposed by the TPO is unjust and not as per the intentions of the Sec 92B. Hence, the addition made by the AO on the suggestion of the TPO is hereby deleted and the ground is allowed. -Reliance is placed on the decision of the Hon'ble ITAT, Hyderabad in the case of MIs. Hexagon Capability Center India Private Limited (ITA No. 251/HYD/2016) dated 0806-2018, wherein, it was held that notional interest on outstanding receivable is not chargeable and no TP adjustment can be made. In view of this also, the appellant succeeds on this ground. Ground No. 14 is without prejudice ground and there is no need to discuss and decide this ground, as the issue has been decided on merit, vide ground no. 13 as above." 31. We have heard both the parties and perused the material placed on record. In the instant case, the AO made TP adjustment in respect of interest on outstanding receivables that were received beyond the period of 180 days. The receivables are closely linked to the principal transaction of sale of goods. The AO did not consider the circumstances surrounding the receivables and d....
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.... make the advance to the AE. Therefore, we are unable to accept the contention of the assessee that the payment is for business purpose. We have gone through the Form 3CEB Report which is enclosed in the paper book at page No.105 to 113. The transfer pricing document also does not show any such requirement of payment of advance to the AE. During the appeal hearing also the assessee did not establish with any evidence to show that the assessee is required to make payment to the AE for executing the project or for trade advance etc. Since the advance given to PPK is not established as trade advance, the case law relied upon by the assessee in the case of Cura Technologies of ITAT Hyderabad is not applicable in the assessee's case. The Ld.DRP relied on the decision of the Coordinate Bench, ITAT Bengaluru in the case of Logix Micro System Ltd. (supra), and held that the financial impact of international transaction is applicable in the assessee's case. Parking huge funds for a longer period with AE without interest is not acceptable. If the funds are repatriated to India as observed by the Ld.DRP there would be substantive reduction in the interest cost and potential increase ....