TaxTMI 
TaxTMI 
2021 (9) TMI 1463
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....earned Dispute Resolution Panel ('Ld DRP') is bad in law. 2. That the Ld. DRP erred both on facts and in law in confirming action of the Ld. AO/ Transfer Pricing Officer's (Ld. TPO) of making an adjustment of Rs. 1,14,09,377/- to the income of the appellant by holding that the international transactions undertaken by the appellant do not satisfy the arm's length principle envisaged under the Income-tax Act 1961 ('Act') 3. That the Ld. DRP erred in confirming an adjustment of Rs. 64,84,261/- in back-office support services segment and in doing so the Ld. DRP has grossly erred in agreeing with the Ld. TPO's action of: 3.1 not appreciating that none of the conditions set out in section 920(3) of the Act are satisfied in the present case; 3.2 disregarding the Arm's Length Price ('ALP') as determined by the Appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules'); and in particular modifying/ rejecting the filters applied by the Appellant; 3.3 disregarding multiple year/ prior years' data as used by the Appellant in the TP docu....
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.... during the hearing. 2.1 The grounds raised by the Revenue in its appeal are reproduced as under: 1. That on the facts and in the circumstances of the case and in law, the Hon'ble DRP has erred in deleting the disallowance made u/s 14A of the IT Act, 1961, when DRP agrees that the additions u/s 14A should be made on average investment and not on turnover. 2. That on the facts and in the circumstances of the case and in law, the Hon'ble DRP has erred in ignoring the DBDT's Circular No. 5 dated 14.02.2014. 3. That the order of the Hon'ble DRP is erroneous and is not tenable on facts and in law. 4. That the grounds of appeal are without prejudice to each other. 5. That the appellant craves leave to add, alter, amend or forego any ground(s) of the appeal raised above at the time of hearing. 3. Briefly stated facts of the case are that the assessee, 'Louis Drefus Commodities India Private Limited' ('LD India') is a subsidiary of 'Louis Dreyfus Commodities Asia Pte. Ltd.', Singapore (LD Asia). The assessee is trader in India of agriculture-based commodity products, including crude palm oil, coffee, cotton, soyabean meal, sorghum, maize e....
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....rder. For ready reference said transactions are extracted as under: 10. Nature of International Transaction Value of transaction (Rs.) Most Appropriate Method 1. Import of Agri-Commodities 1.1 Purchase of Crude Palm Oil - Raw Material 807,402,850 Comparable Uncontrolled Price Method (''CUP1') 1.2 Purchase of Soya bean Oil -Raw Material 796,658,133 1.3 Purchase of Crude Palm Oil -Traded Goods 198,004,805 1.4 Purchase of Sugar - Traded Goods 2,281,788,761 1.5 Purchase of Cotton - Traded Goods 6,255 2. Export of Agri-Commodities 2.1 Sale of Soya Bean Meal 9,461,751 CUP 2.2 Sale of Maize 99,427,923 2.3 Sale of Cotton 5,125,418,551 2.4 Sale of Coffee 83,526,864 3. Merchanting trade of Agri Commodities 3.1 Purchase of Soyabean Seed 244,909,808 3.2 Sale of Soyabean seed 246,571,182 4. Provision of Market Research and Research for Freight....
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....0 percentile. In its transfer pricing study, the assessee selected 8 comparables and computed the average arithmetic mean of the margin at 11.79%. The list of the comparables selected by the assessee and there margin is reproduced as under: SI. No. Name Of the Comparable Margin 1. Aditya Birla Minacs Worldwide Limited 2.20% 2. Datamatics Financial Services Ltd. -1.26% 3. I C R A Techno Analytics Ltd. 13.81% 4. Informed Technologies India Ltd. 16.26% 5. Infosys B P O limited 17.55% 6. Inhouse Productions Limited 8.81% 7. Nittany Outsourcing Services Pvt.Ltd. 26.25% 8. R Systems International Limited 10.70% 6.4 Accordingly, the assessee treated its international transaction of back office support service at arm's-length in view of the margin being in the range of plus minus 5% of average margins of comparables. The learned TPO rejected few comparables of the assessee and added few comparables selected by him. Finally, he retained nine comparables as under and computed their average margin at 22.76%. Final list of comparable is reproduced as under: Sr. No. Comparable name Operating Profit / To....
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....se on exchange on daily basis, accept trades entered into by the AEs and verify those trades from exchange with the trade sheet provided by the AE, preparing of position report of the physical and futures trades of AEs (iv) providing travel support desk to employees of AEs including online search of availability of the airline ticket and comparing quotes for available carriers between a specified destinations (v) providing internal audit services to associated enterprises (vi) providing quality control/ inspection services for quality and grade of Coffee to associated enterprises. 6.8 In background of above functional analysis of the assessee, the comparability of comparable companies challenged by the assessee is adjudicated as under: 1. Aptico Limited: 1.1 Before the learned TPO, this company was challenged for inclusion on the ground that it is engaged in providing high-end technical consultancy services. The learned TPO rejected this objection observing that majority of the income of the company is from skill development, tourism and research studies, project related services, which are in the nature of business and support servic....
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....rejected the contention of the assessee as the comparable company is fulfilling all the quantitative criteria set forth by the Ld. Transfer Pricing Officer. The argument of the selection of the above comparable company vis-a-vis is the functions performed by the comparable company which shows that only 12% of the total revenue of the comparable company is pertaining to the research studies deserves consideration. This is a glaring factor which shows that the comparable company is not functionally comparable wherein it performs only one functions which is constituting only 12% of its revenue which is comparable with the functions performed by the assessee. We have also perused the annual accounts of the above comparable company placed at page No. 681/706 of the paper book furnished by the assessee. A careful perusal of the operations carried out by Apitco Ltd. deciphers that this company is providing services in the nature of Project report preparation, Technical and economic studies, feasibility studies, Micro enterprise development, Skill development, Project management consulting, Industrial cluster development, Environmental management consulting, Energy management consulting, M....
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....erused relevant material on record. The dispute is regarding whether the services rendered by the company are in the nature of the consultancy or in the nature of support services. On perusal of annual report of the company, we find that on page 42 of the Annual Report Compendium, the critical activity of the company has been mentioned as monitoring of all procurement activities including project management from concept to commissioning so as to ensure timely supply and delivery, quality control, through inspection and evidence of cost overruns to the client. Further on perusal of the Annual Report Compendium pages 44 to 61, we find that the company has provided procurement related advisory and auditing services for multilaterally funded project across a range of developing countries including India. The company has also provided procurement management services in India. The company has also provided bid support services. The relevant part of the annual report is reproduced as under: "Bid Support Services GPCL's expertise in conducting audits and providing services in multilaterally funded projects was put to use in offering Bid Support Services to an Indian Contr....
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....al to the services of back-office support rendered by the assessee. 3.4 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. As far as argument that services are payroll processing are similar to services of preparing and maintaining accounts by the assessee for its associated enterprises, we agree with the Learned DR. On perusal of function performed by the assessee under back-office support services ( page 394 of the paper-book), we find that the assessee utilized two softwares for maintenance of accounts of AEs. The first software is 'EKA', i.e., trading/logistics application, which captures trades both in the physical and the futures side. Another software is 'Dream' which is an accounting application and captures accounting aspects of trades entered into 'EKA', both on the physical and futures side. The accounts support service team of the assessee generates debtors ageing report and trial balance, after posting of invoice and bank reconciliation etc. Thus, the activities of the assessee are also in the nature of processing of accounting data for AEs, which is akin to payroll processing support services, wh....
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....de scheduling and documentation of shipments, liaison with counter parties, inventory management for insurance, management of warehouse accounts including sending instruction to warehouse for storage. These services are also akin to services of valuation and auction of the assets of third parties and primarily business support services and therefore, company is a good comparable. 4.4 We have heard rival submission of the parties and perused the relevant material on record. The assessee has objected inclusion of the company on the ground of functional dissimilarity only. However we find that services of valuation of the assets of the third parties and assisting in their disposal by way of auction is in the nature of business support to third parties. Therefore, in our opinion, the company is a valid comparable being functionally similar. The Learned AO/TPO is accordingly directed to retain the company in the set of comparables. 5. TSR Darashaw Ltd. 5.1 Before the learned TPO, the assessee objected inclusion of the company on the ground of functional dissimilarity being engaged in rendering services, namely, registrar and transfer agent activity, records ma....
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....ny that transfer agent activity functions include transfer for equity and preference shares, debentures instruments and bonds, commercial paper and private placements. The transfer processing include customer/query handling and correspondence, split/consolidation/renewal of certificates, processing and distribution of the interest. These observations have not been disputed by the lower authorities. If we take into account these activities, then we find that these activities are in the nature of independent activities of a share broking house and cannot be treated as back-office support services. Accordingly, we hold the company is functionally dissimilar to the assessee and, therefore, direct the Learned AO/TPO to exclude the company from the set of the comparables. 6.9 The ground Nos. 3 to 3.8 of the appeal are accordingly allowed partly. 7. In ground No. 4, the assessee has challenged action of the Learned DRP in upholding the action of the learned TPO of classifying the international transaction of merchandising trade as a finance arrangement. In ground No. 4.1, the assessee has alternatively requested to take interest rate of 2.74%, which the assessee had used to pay inte....
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....siderations taken a backseat, and therefore arm's length determination of such transaction of financing need to be done. The learned TPO taking average lending rate of SBI at 11.8% during financial year 2009-10 and after adding 300 points, he computed interest rate for 65 days at the rate of 14.80% per annum, which was worked out Rs. 65,86,490/-. And, accordingly, he made adjustment of Rs. 49,25,116/- after reducing the amount of Rs. 16,61,734/- shown by the assessee as profit in the trade of 'soyabeen'. Before the learned DRP, the assessee submitted that in the export leg of transaction between the 'LD India' and 'LD Asia', a credit term of payment of 90 days was provided in the contract, though the assessee was paid within 65 days. According to the assessee, the cost of credit was built in by the assessee in the sale price at which 'Soyabeen' was exported to the AE and, therefore, contention of the learned TPO to treat such transaction as a financing arrangement was completely incorrect. The Learned DRP, however, rejected the contention of the assessee in absence of details of allowance of credit of 90 days and upheld the disallowance made by the learned TPO. 7.2 Before us, th....
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....export leg of LD India with LD Asia wherein a credit term of payment of qo days was provided in the contract, though the Appellant was paid within 65 days. In this regard, the Hon'ble Bench would appreciate that the cost of credit was built in by the Appellant in the sale price at which soya bean oil was exported to the AE. (kindly refer to page no 254 of the Paper Book for the copy of contract) 18. Therefore, the contention of Ld. TPO to treat such transaction as a financing arrangement between the Appellant and its AE is with any legal basis baseless. It is thus, the humble submission of the Applicant that the addition made by the Ld. TPO be kindly deleted. Disregarding the claim of the Appellant to use the same interest rate of LIBOR plus 100 basis points which the Appellant had used to pay interest on advances received from its AEs. 19. During the subject assessment year, the Appellant had also received advances against sale of grains and crude oil from the same AE to which the credit was allowed in respect of subject transaction of merchanting trade (i.e. LD Asia). In this respect, the Appellant paid interest to LD Asia on repayment of advance received from L....
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.... 'LD Asia' has happened in US dollar and, therefore, assessee was to receive US dollar from LD Asia. In view of the facts of purchase of soybean from one AE and sale at same moment to another AE and incurring of interest burden of payment for 65 days by the assessee is not justified as a prudent businessmen and therefore the Learned TPO is justified in holding the transaction as financing transaction. The transaction of purchase of 'Soyabean' by the assessee has happened when goods were already there on Singapore Port, which is the port for 'LD Asia'. The assessee has sold the goods also at the same port immediately within minutes of purchase transaction. In such circumstances, question arises, why 'LD Wilton' has transferred goods at Singapore Port, without any purchase order. Obviously, this 'Soyabean' must have been shipped in advance from the assessee to Singapore Port on the request of 'LD Asia', and due to non-availability of funds with 'LD Asia, the assessee must have been roped in for financing the transaction. In the facts of the case, the transaction can be assumed in two ways. The first, the 'LD Wilton' must have been in need of funds and assessee must be having availabl....
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.... of mutual fund as on 31/03/2010 and, therefore, on application of the Rule 8D(2)(iii) of Rules, there could be no disallowance, and deleted the disallowance observing as under: "8.2 We have carefully considered the submission made by the Id. AR and gone through the draft assessment order. We have noted that during the relevant period the assessee has purchased and sold the mutual funds namely Deutsche Insta cash Plus Fund and the income has been shown in the computation of income as short term capital gain. There was no opening balance of mutual funds as on 01.04.2009 or the closing balance of mutual funds as on 31.03.2010 and all the mutual fund purchases during the year were sold by the assessee. However, there was a dividend income of Rs. 94,929/- which was earned by the assessee during the period of holding of mutual funds which was claimed to be exempt u/s 10(35) of the Income Tax Act. It is an undisputed fact that there were no direct expenses or any financial expenses incurred by the assesses for earning the exempt income. However, the AO has disallowed 0.5% of the total turnover for the sale of mutual funds by the assessee during the relevant period under Rule 8D(....