TaxTMI 
TaxTMI 
2020 (8) TMI 353
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.... 21,94,478/- with brought forward losses. Since the assessee had entered into certain international transactions with its AEs, the AO made a reference to the TPO for determination of the ALP of the international transaction. The TPO, during the course of TP assessment proceedings, noted that the assessee has undertaken the following international transactions:- S. No. Description of transaction Method Value (In Rs. ) 1. Import of base oil CPM 44,44,13,425 2. Import of additives CPM 9,18,37,885 3. Import of lubricants CPM 23,01,45,525 4. Sale of marine lubricants CPM 1,65,60,844 5. Commission received for marketing support services CPM 50,57,030 6. Payment of service fee TNMM 11,99,84,377 7. Cost recharges paid by assessee CUP 11,675,909 8. Cost recharges received by assessee CUP 12,769,244 Total 93,24,44,239 4. He noted that the transactions from sl. No. 1-5 have been benchmarked in aggregated format using cost plus method with gross profit/direct and indirect cost of production as profit level indicator. The financial result of the assessee is ta....
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....ee company is carrying out manufacturing activity by getting of blending of base oil and additives done by third parties and has paid an amount of Rs. 4.40 crore as blending fees. He further noted that the assessee also incurred an expenses of Rs. 14,62,74,000/- on transportation, storage and handling charges. These expenses, according to him, are nothing, but, in the nature of transportation and storage charges paid by the assessee. The details of such expenses as provided by the assessee are as under:- Transportation, storage and handling charges (in Rs. ) Raw Material Storage Cost in Tanks 12,390,740 Transportation from Tanks to Plant 17,655,769 Finished Goods Transportation to Clearing & Forwarding agents (CFAs) and Customers 84,336,317 Storage Charges at CFAs 31,890,898 Total 146,273,724 10. After analyzing the various functional profile of the assessee, the TPO observed that the profile of the assessee company is more than a simple manufacturer and trader in view of the fact that huge expenses on advertisement and publicity to the extent of Rs. 6.43 crore is incurred. The assessee, according to him is ....
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.... CPM gives the gross profit mark up available after deducting the input cost. It is a good measure of the compensation for the performance of the manufacturing and selling functions and risks assumed thereof. Adoption of TNMM by the TPO/AO was vehemently opposed on the ground that the same is not applicable in the case of the assessee. The assessee also provided supplementary method in the form of CUP analysis for purchase of raw material during the impugned financial year and Resale Price Method for import of finished goods. It was argued that the AEs of the assessee supplied similar raw material as is sold to the assessee to other unrelated parties in India. The prices charged by the AEs from unrelated third parties serves as internal CUP for the transaction related to import of raw material. It was accordingly argued that the CUP is the most appropriate method in the hands of the assesseee. The various decisions of the Tribunal were also brought to the notice of the CIT(A) to the proposition that CUP is the most appropriate method for purchase of raw materials. 16. So far as import of lubricants is concerned, it was argued that the assessee merely imports the lubricants and r....
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.... I have considered the submission of the appellant in this regard and I am of the view that Indian transfer pricing regulations requires each international transaction to be evaluated and analysed separately. Further, in this regard the Hon'ble Mumbai ITAT has in case of Tecnimount ICB (P.) Ltd. held that 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. Secondly with application of TNMM method, I agree with the submissions made by the appellant wherein, it has highlighted various business and commercial reasons for non-applicability of TNMM method. The appellant has highlighted the fact that during the phase it was recovering from cessation of joint venture between Mobil Corporation and Indian Oil Corporation Ltd. and hence, did not have a normal year of business operations as witnessed by other comparable companies" selected by the TPO. Further, I am of the view that any reliable adjustments cannot be made to account for these differences. Analysing the submission of the appellant further I am also of the....
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....e same time period. Further, I do not find any merit in the contention of the TPO that the appellant should demonstrate that it has procured the base oil from other unrelated parties at a higher price and not the other way round. The argument provided by the TPO does not find any merit, In this regard I wish to examine the specific provision contained in Rule 10B (1) of Income-tax Rules 1962: Quote: (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for 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 price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; On analysing the above information it is clearly evident that t....
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....mparable companies is provided to both TPO and myself in submission dated November 9, 2009. In view of the above the arm's length price paid for import of lubricants is ted and transfer pricing addition made by the TPO ought to be deleted. Service Fee I have carefully considered the submission and TP documentation made by the Appellant wherein, the Appellant has used TNMM taking foreign AE as the tested party, to determine the arm's length price for payment of service charges. In this regard, as mentioned above, I wish to analyse the various ITAT judgments like Development Consultants India and Ranbaxy Laboratories which allows the use of foreign associated enterprise as the tested party for justifying the arm's length nature of international transaction. In view of the above I do not find any flaw in the methodology adopted by the appellant to benchmark its international transaction related to payment of service fee. Therefore, I hold that the international transaction with respect to payment of service charges should be benchmarked by using TNMM taking foreign AE as the tested party to determine the arm's lengt....
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.... Rs. 44.44 crores. Thus, they have not provided the full data for the CUP analysis. Therefore, on these facts/evidences, decision can be taken here itself. He submitted that the TPO has rightly chosen TNMM and the ld. CIT(A) has taken cognizance of assessee's submission regarding CUP data which is glaring. He submitted that when there is insufficient data and when in the TP report itself CUP was rejected as the most appropriate method, the Tribunal should not accept the CUP method as the most appropriate method. Therefore, the TPO's action for benchmarking TNMM should be approved. 22. So far as trading segment (for import of lubricants) is concerned, the ld. CIT-DR submitted that the assessee for the first time has gone before the CIT(A) for segmental RPM for trading segment. This was not done in original TP study. Whatever comparables they have taken earlier they were for altogether different purpose. Here, there is no complete analysis. Therefore, they have to do complete analysis as to what are the filters applied, which are the comparables rejected/accepted and how many comparables finally selected. He accordingly submitted that the segmental RPM cannot be accepted u....
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....escription As at 1-4-2003 Purchases/Additions during the year Disposals /Adjustments during the year As at 31-3-2004 As at 1-4-2003 Depreciation for the year Depreciation on assets sold/assets written off As at 31-3-2004 As at 31-3-2000 As at 31-3-2003 Plant and Machnery 16,776 166 6,687 10,255 3,715 1,649 2,561 2,803 7,452 13,061 Leasehold improvements 16,488 295 - 16,783 769 3,823 - 4,592 12,191 15,719 Moulds and tools 8,296 - 289 8,007 7,458 390 277 7,571 436 838 Furniture and fixtures 4,204 376 643 3,937 415 339 219 535 3,402 3,789 Computers 19,852 1,185 45 20,992 5,592 6,922 19 12,475 8,517 14,260 Office Equipment 4,232 2,221 802 5,651 1,940 1,135 500 2,575 3,076 2,292 Motor Vehicles 1,117 - 834 283 755 214 686 283 - 362 Telecommunications 2,618 4,580 - 2,198 87 610 - 697 6,501 2,531 TOTAL 73,583 8,823 9,300 73,106 20,73 15,082 4,282 31,531 41,575 52,852 ....
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....ssee and its associated enterprise having regard to the arm's length price, in order to nullify the effect of transfer of income to a jurisdiction outside India, if any, in respect of the controlled transaction. Circular No. 14 of2001111issued by the Central Board of Direct Taxes indicates that the provisions of sections 92 to 92F of the Income-tax Act, 1961, were introduced "with a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India ". The exercise of determining the arm's length price in respect of international transactions between related enterprises is aimed at determining the price which would have been charged for products and services, as nearly as possible, if such international transactions were not controlled by virtue of their being executed between related parties. The object of the exercise is, thus, to remove the effect of any influence on the prices or costs that may have been exerted on account of the international transactions being entered into between related parties. It is, at once, clear that for the exercise of determining the arm's length price to be reliable, it ....
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....ficant turnaround during the second half of the year under review backed by a spate of relaunches in the commercial vehicle category. 28. Referring to the annual audited accounts of Chennai Petroleum Corporation Ltd., copy of which is placed at page 895-987 of the paper book, the ld. Counsel for the assessee, referring to various pages of the audit report drew the attention of the Bench to page 26 of the said report where it has been reported as under:- "Your Company has a well-defined Manual on Delegation of Authority, based on which, the authorities exercise their powers. This Manual is reviewed periodically to cope with the changes necessitated by the needs of the organization. In addition to the Manual on Delegation of Authority, the Company's key departments have Departmental Manuals prescribing a checklist of activities and systems and procedures for carrying out such activities. These manuals further strengthen the internal control systems in the Company. PERFORMANCE AT A GLANCE Physical Performance The total crude processed by the Manali Refinery and Cauvery Basin Refinery during the year was 7.04 Million Metric Tonne (MMT). This c....
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.... are available. Further, the extent of related party transactions are also not available. Therefore, Totalfina C&F India Ltd. cannot be considered as a comparable. 31. Referring to the annual accounts of Tide Water Oil Company (India) Ltd., copy of which is placed at pages 1032 to 1079 of the paper book, the ld. Counsel for the assessee drew the attention of the Bench to page 1031 and submitted that this is the 75th year of the company. Further, five state-of-the-art plants have come up as per the annual report. He submitted that the company's products primarily marketed under the 'VEEDOL' brand name are well accepted and acknowledged in the industry for their quality and range. 32. So far as Saha Petroleum is concerned, the ld. Counsel submitted that its annual report is not available in public domain. It was a partnership firm earlier which subsequently became a company in May, 2004. Till that time its accounts were opaque. The TPO went ahead with the said information which the assessee did not have nor the same was furnished to the assessee. He submitted that even if we apply TNMM, none of the companies selected by the TPO can be considered as comparable. He su....
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....of the ALP, however, it has not objected to the application of CUP and RPM method applied by the CIT(A) to import of base oil and packaged ready-to-sell special lubricants, respectively. He submitted that RPM is the most appropriate method. The objection of the TPO in the remand report is that RPM is not a proper method for finding ALP of purchase and sale of lubricant containers. He submitted that the CIT(A) has held that since transactions under these segments consists of distribution and resale of imported finished goods without value addition, RPM is the most appropriate method. He submitted that the TPO in the second remand report dated 15th March, 2010 does not object to the use of RPM for the trading segment. He submitted that the decision of the CIT(A) is fully supported by various decisions of the Tribunal. 36. So far as payment of service fee segment is concerned, the ld. CIT(A) has held that 5% mark up of cost is reasonable. The TPO, in his remand report is silent on this issue. He submitted that the ld. CIT(A) has not decided the assessee's objections against inclusion/exclusion of certain comparables by TPO as this question had become infructuous. In any case, a....
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....ments made by both the sides, perused the orders of the AO/TPO/CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the TPO in the instant case made TP adjustment at entity level and, thereafter, allocated the addition to various segments in proportion of revenue the details of which are given at para 13 of this order. We find the TPO made adjustment of Rs. 10.52 crores in the manufacturing segment, Rs. 4.51 crores in the trading segment and Rs. 2.35 crores in the service segment. We find, the ld. CIT(A), after considering the additional evidences filed before him and on the basis of two remand reports, held that the set of transactions involving base oil from AE are independent of the transactions involving import of additives from unrelated MNC. He held that voluminous transactions of sale involving substantial value of same grade of base oil were contemporaneously made by the Singapore AE to unrelated parties in India. According to him, the price paid by the assessee during the relevant period for same grades of base oil compares well with the price paid by the independent parties. Further, the Singapo....
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....inding by CIT(A) that TNMM is not applicable. It is also his submission that the ld. CIT(A) has not at all discussed regarding various comparables taken by the AO/TPO. 41. We find some force in the arguments of the ld. DR. We find the ld. CIT(A) has not given any categorical finding that TNMM is not applicable. We find the ld. CIT(A) at page 27 and 28 of his order has simply mentioned that he agrees with the submissions made by the appellant wherein it has highlighted various business and commercial reasons for non-applicability of TNMM method. He has not given any categorical finding that TNMM is not the most appropriate method under the facts and circumstances of the case. Further, the assessee has not given full data for applicability of CUP as the most appropriate method. From the various details furnished by the assessee in the paper book, we find the assessee has not given full data for additives for application of CUP as the most appropriate method. So far as base oil is concerned, the assessee has given data for Rs. 21 crore whereas the total input is of Rs. 44.44 crores and, therefore, in absence of full details, CUP analysis could not have been done for the base oil. S....
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....t. Also, the appellant vide its letter dated 21 March 2011 filed details of the foreign travel of some of the employees wherein it is evident that the employees of the appellant provides an undertaking that the foreign travel expenditure is towards the business purpose only and the same had also been approved by the senior to whom the relevant employee reports to. Therefore, after analyzing the facts and the supporting documents submitted by the appellant I found that the foreign travel expenditure of Rs. 2,144,386 incurred by the appellant is towards its business purpose and should be allowed as normal business expenditure under section 37 of the Income-tax Act. This ground is decided in favour of the appellant." 45. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal. 46. We have heard the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We find the AO, in the instant case, disallowed an amount of Rs. 4,28,878/- being 20% of the foreign travel expenses on the ground that the assessee could not file any proof of business purpose of the persons who visited ....
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....rom Schedule-17, i.e., Notes to Accounts filed with the Profit & Loss Account that the assesseee has debited an expenditure of Rs. 17,25,71,749/- incurred in foreign currency, the details of which are as under:- 1. Professional Fee Rs. 3,36,243/- 2. Royalty Rs. 18,14,531/- 3. External Allocations Rs. 15,35,57,470/- 4. Salary Rs. 1,52,10,574/- 5. Other exp. Rs. 16,52,931/- Total Rs. 17,25,71,749 50. Applying the provisions of section 40(a)(ia) and in absence of details as to why no TDS has been made as per the provisions of section 195, the AO disallowed the entire expenditure of Rs. 17,25,71,749/- and added the same to the total income of the assessee. 51. In appeal, the ld. CIT(A) deleted the addition so made by the AO by observing as under:- "FINDING I have carefully considered the submission/information filed by the appellant. My observations are as follows: The assessing officer disallowed the entire payment of foreign currency amounting to Rs. 172,571,749 (relating to Professional Fee, Royalty, External allocations, Salary and Other expenses) as highlighted in Note 11(h) of the F notes to a....
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...., it is wrong on assessing officer's part to again disallow the same under section 40(a)(i) of the Income-tax Act. Therefore, the addition of Rs. 1,814,531 made by the assessing officer is deleted. External Allocation * The assessing officer disallowed the 'External Allocation expenses' of Rs. 153,557,470 based upon the reporting as per Note 11(h) of Notes to Account (Schedule 17 of the financial statements of the appellant). The amount of 'External Allocation expenses' of Rs. 153,557,470 disallowed by the assessing officer do not pertain to the financial year 2003-04 and the amount of 'External Allocation Expenses' actually debited to the profit and loss account do not include the amount of Rs. 153,557,470 . * Further, the appellant actually accrued the 'External allocation expenses' of Rs. 119,984,377 during the previous year 2003-04 and the invoices were raised by ExxonMobil Asia Pacific Pte. Ltd. which is a Singapore group entity. * ExxonMobil Asia Pacific Pte. Ltd., Singapore has provided the services to the appellant such as controllers, treasurers, public affairs, tax, human resources, law, safety health....
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.... enable to apply the technology. The fact that the provision of service may require technical inputs by the person providing the services does not per se means that the technical knowledge, skill etc. are made available to the person purchasing the services. Similarly, the use of the product which embodied technology shall not per se be considered to make the technology available. * In the instant case, ExxonMobil Asia Pacific Pte Ltd., Singapore provided the services in the nature of controllers, treasurers, public affairs, tax, human resources, law, safety health and environmental services, medical, security, global procurement, business line, etc. which would be regarded as administrative in nature and therefore, will not qualify as fees for technical services as prescribed under article 12 of Indo-Singapore tax treaty and therefore will not be taxable in India as tax treaty provisions override the provisions of domestic tax laws. Here the reliance may be placed on the judgments of Invensys Systems Inc. (AAR 796 of 2009), Cushman 8s Wakefield(s) Pte Ltd. (AAR 757 of 2007) and Raymonds Ltd. (ITAT Mumbai, 80 TTJ 120). * Further, in the absence of permanent establ....
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....rises of the appellant. * Further, no withholding is required to be deducted on the foreign exchange gain/losses of Rs. 371,928. * Therefore, the addition of Rs. 1,660,545 made by the assessing officer on the basis of Note 11(h) of Notes to Account (Schedule 17) for non-deduction of TDS under section 40(a)(i) of the Income-tax Act is deleted. Therefore, the above grounds are decided in favor of the appellant. ISSUE 11; Whether the AO has gravely erred in disallowing the expenditure in foreign currency as reported in the Notes to Accounts on a payment basis, aggregating Rs. 172,571,749, to the extent that this amount includes expenditure that has been adjusted by the TPO in arriving at an arm's length profit of Rs. 174,008,078 in his order dated December 6, 2006. While on the one hand, the AO has disallowed the expenditure, on the other hand he has also considered the same expenditure while determining the arm's length profit. As a result, there is a double effect in the additions made to the taxable income. The detail submissions and arguments raised by the Appellant in respect of the above are as under: It is argued by ....