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2016 (4) TMI 1447
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....- "Grounds of appeal qua ITA No.813/Del/2014 - AY 2009-10 : 1. That on facts and in law the TPO/AO/DRP erred in making/upholding an addition to total income of '106,86,60,627 under Chapter- X of the Income Tax Act, 1961[hereinafter referred as "the Act"] in the order of assessment. 1.1 That on facts and in law, the AO/TPO/DRP jurisdictionally erred in virtually rewriting the accounts of the appellant, including therein transactions which did not belong to it and in changing its functional profile. 1.2 That on facts and in law the DPR/AO/TPO without any cogent, acceptable material on record erred in: i. Completely misunderstanding the business model, functional and risk profile of the tested party. ii. Re-characterizing the service and commission segment as equivalent to its trading segment. iii. Rejecting the use of "Berry Ratio" and using OP/TC (including cost to others) as a Profit Level Indicator (PLI) in order to Benchmark appellant's international transactions. iv. Using the data not existing at the time of preparation of Rule 100 documentation by the assessee. v. Using single year data as....
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....umstances of the case and in law, the AO/DRP erred in charging interest u/s 234B and 234C of the Act. 9. That on facts and in law the orders passed by the Assessing Officer [herein above referred as the "AO"] / Dispute Resolution Panel [herein above referred as the "DRP"] / Transfer Pricing Officer [hereinabove referred as the "TPO"] are bad in law and void ab-initio. That the appellant prays for leave to add, alter, amend and/or vary the ground(s) of appeal at or before the time of hearing." "Grounds of appeal qua ITA No.1795/Del/2015 - AY 2010-11: 1. That on facts and in law the TPO/AO/DRP erred in making/upholding an addition to total income of Rs. 98,70,26,791/-under Chapter- X of the Income Tax Act, 1961 [hereinafter referred as "the Act"] in the order of assessment. 1.1 That on facts and in law, the AO/TPO/DRP jurisdictionally erred in virtually rewriting the accounts of the appellant, including therein transactions which did not belong to it and in changing its functional profile. 1.2 That on facts and in law the DPR/AO/TPO without any cogent, acceptable material on record erred in: i. Completely misundersta....
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.... 6. That on the facts and circumstances of the case, the learned AO/DRP has erred, both on facts and in law in making/upholding a disallowance of an amount of Rs. 40,78,906/- on account of service fee paid to M/s. Wet Japan Logistics, Division of Mitsui & Co. Ltd., Japan and M/s. Mitsui & Co. (Asia) Pte Ltd., Singapore. 7. That on the facts and circumstances of the case, the learned AO/DRP has erred, both on facts and in law in making/upholding a disallowance of an amount of Rs. 1,10,01,931/- on account of expenditure on logistics and warehousing support services. 8. That on the facts and circumstances of the case, the learned AO/DRP has erred, both on facts and in law in making/upholding a disallowance of an amount of Rs. 5,93,513/- on account of non-deduction of withholding tax on purchases from Mitsui & Co. Ltd., Japan under section 40(1)(i) of the Income Tax Act. 9. That on the facts and circumstances of the case and in law, the AO/DRP erred in charging interest u/s 234A, 234B and 234C of the Act. 10. That on facts and in law the orders passed by the Assessing Officer [herein above referred as the "AO"] / Dispute Resolution Pan....
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....ny of return of income filed by the assessee declaring total income of Rs. 1,79,43,030/- qua assessment year 2010-11, the case was referred to Transfer Pricing Officer (TPO) u/s 92CA (1) of the Income-tax Act, 1961 (hereinafter 'the Act'). In pursuance to the transfer pricing order and DRP dated 20.01.2014 passed u/s 92CA (3), assessment order has been passed making adjustment of Rs. 98,70,26,791/- on account of difference in arms length price (ALP) for the combined Associated Enterprises (AEs) segment determined by the TPO. 9. During the assessment proceedings, it has come on the record that assessee has paid service fee of Rs. 40,78,906/- to its related parties, namely, M/s. West Japan Logistics Division of Mitsui & Co. Ltd., Japan amounting to Rs. 6,40,000/- and M/s. Mitsui & Co. (Asia) Pte Ltd., Singapore amounting to Rs. 34,38,906/-. Finding the explanation filed by the assessee not tenable, TPO/DRP disallowed the same u/s 37 (1) being the expenditure not incurred wholly and exclusively for the purpose of business and considered the same as related party transaction. The AO thereby made an addition of Rs. 40,78,906/- to the total income of the ....
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....pany entered into international transactions with its AE during assessment year under consideration as under :- S. No. Nature of international transaction Value (in INR) 1. Provision of services 884,041,575/- 2. Purchase of goods 169,451,775/- 3. Sales of goods 42,263,081/- 4. Purchase of Assets 375,869,000/- 5. Reimbursement of received/receivable expenses 43,194,499/- 6. Reimbursement of paid/payable expenses 143,461,810/- 13. Assessee company is wholly owned subsidiary of MCJ, the general trading company playing an important role in linking buyers and sellers for products in a variety of industrial segments. Assessee company is considered to be a low risk activity and the primary source of activity is in the nature of commission earned on the traded goods. 14. The assessee company has used TNMM as the most appropriate method for bench marking its international transaction and PLI selected as GP/OC i.e. Berry ratio. Assessee company chosen 29 comparables and by using 3 years data adjusted average Berry ratio at 1.08 and assessee company has claimed its 3 years average Berry ratio at 1.17. 15. However, TPO aft....
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.... 13. Golkunde Diamonds & Ltd. 8.93 -2.98 14. Indo Bonito Multinational Ltd. 12.41 11.59 15. Indo Unique Trading Pvt. Ltd. 6.29 2.92 16. Jaguar Overseas Ltd. 9.32 6.63 17. Jainex Ltd. 2.18 1.59 18. KP Sanghvi Intl. Ltd. 13.18 7.13 19. Kothari Products Ltd. 13.57 2.78 20. Lahoti Overseas Ltd. 0.92 0.76 21. MD Overseas Ltd. 0.52 -7.49 22. Phulchand Export Pvt. Ltd. 3.58 -2.89 23. Riddi-Siddhi Bullion Ltd. 0.19 0 24. Sakuma Exports Ltd. 1.03 0.63 25. Shri Lal Mahal Ltd. 3.16 2.69 26. Shri Sai Jewels Pvt. Ltd. 4.02 3.51 27. Varun Industries Ltd. 5.47 5.16 28. Vigneshwara Exports Ltd. 8.58 8.58 29. Welspun trading Ltd. 0.04 0.04 4.75 2.58 8. Calculation of arm's length price Based on above, it is concluded that the assessee has not been able to substantiate its arguments with valid documentary evidences. Following the discussion in the preceding paras, the FOB value of goods sourced from India, being Rs. 4591 Crores shall be taken as par....
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....ignoring the fact that the value of the sale under no circumstances affects the activities of the assessee company which is a service provider and in case of support services, the correct method adopted by the assessee is TNMM on the basis of which OP/TC has been computed. 21. Now, the first question arises for determination is, "as to whether the assessee company has performed trading activity for its AE i.e. Mitsui & Company Pvt. Ltd., Japan or it has worked as a service provider"? 22. This issue has been squarely dealt with by the coordinate Bench in the order (supra) and relevant portion thereof is reproduced for ready reference as under :- "The Learned AR submitted that the trading activities are undertaken by Mitsui Japan not by Mitsui India. If it is import of goods for buyers in India, the Mitsui Japan has a contract with the Japanese suppliers and Mitsui Japan also enters into contract with the buyers in India. Similarly for exports from India, Mitsui Japan enters into a contract with Indian supplier directly for the purchase and sales transactions. Thus the role of Mitsui India, the assessee company is a mere facilitator, a mere service provider. Mitsui Ind....
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.... providing support services employ human resources for the same and that does not lead to creation of any intangibles. Assessee's role is limited to that of a routine coordination and support service provider. It is Mitsui Japan which has the expertise, a strong relation with a vast network of manufacturers, distributors and buyers." 23. So, we have no hesitation in following the order passed by the coordinate Bench in determining the issue in favour of the assessee that the assessee company has performed routine, preparatory and ancillary activities in nature and have not created any intangibles as its role was limited to that of a routine coordination and support service provider. So, the ld. TPO/DRP have erred in recharacterizing the service end commission activities of the assessee company as equivalent to its trading segment. 24. Now, the question arises for determination is, "as to whether TPO/DRP has inflated the total cost (TC) of assessee by Rs. 4541 crores qua AY 2009-10 and Rs. 5924.87 crores qua AY 2010-11 respectively by ignoring the fact that the said value was recorded sale/purchase by the AEs and was never a cost to the assessee"? 25. This issue h....
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....nded warehouses and maintains sufficient Inventory as per agreement with customers. It performs Inventory control and ships goods to customers. Mitsubishi India's customers sometimes arrange for their own shipping and handling. -Sales marketing and after sales activities: In principal transactions, the Group Companies coordinates in negotiating prices with Mitsubishi India's customers. Mitsubishi India's sales personnel requirements are Identified by Mitsubishi India and also remuneration of sales personnel is determined by Mitsubishi India. Mitsubishi India is responsible for billing and collection. Mitsubishi India provides market research relating to local market and develops marketing strategy. -Identifying potential customers and suppliers. -Information gathering. -Facilitating communication -Arrangement of logistics. -Accounting and administration. -Developing long term strategic policies. -Dealing with finance, accounting, IT and legal issues. -Human Resource Management: (b) risks assumed by the assessee: -bears volume risk -bears foreign exchange risk -bears manpower risk ....
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....d by the assessee), is nowhere supported by the TNMM under Rule 10B(1)(e) of the Rules. Having determined that (TNMM) to be the most appropriate method, the only rules and norms prescribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded an ALP." 30. In view of the above judgment of Hon'ble jurisdictional High Court, we hold that it was not correct on the part of the TPO to include the cost of sales incurred by the AEs in respect of which the assessee company has rendered services and then to work out the profit for determination of the arm's length prices. Our view is also supported by the judgment of the Delhi Tribunal in the case of Sojitz India (P) Ltd. vs DCIT (Supra) where a similar issue has come up. In that case also the learned TPO has included the cost of sale of all the AEs while determining the arm's length price and has also considered the transactions entered into by the assessee company as transaction that of trading activity. The ITAT has examined this issue and has held as under:- "12.18 In the aforementioned background we are of the view that in order to adjudicate upon the issues it would....
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....nventory nor is the assessee exposed to price risk or the risk linked with offering credit sales. From the nature of the risk profile of the assessee and on considering the functions performed and the assets deployed it can be safely concluded to be that of a low risk business, which has also been the claim of the assessee. It is a matter of record that in these years the assessee has also shown profits on its own trading with non AEs. In the facts available on record, nothing has been brought on record by the TPO to either justify that the assessee has made a wrong claim on facts while claiming to be engaged in indenting activities or was infact performing all or some of the functions of a trader, in which eventuality the TPO would have been well within his rights to re-characterize the assessee's indenting activities as a trading activity. It is an accepted economic principle that the trader acting as an entrepreneur is exposed to price risk, cost risk, credit risk, warranty risk etc, which would necessitate the contract being entered into and negotiated by assessee. In its indenting activity these facts are not evident. Accordingly the question posed in (a) is answered in th....
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....nce may also be made to page 248 of the paper book which contains the TP study of the assessee the same is reproduced for ready reference. "Patents, License Rights, and other Intellectual Property Rights The various intangibles required to carry out the operations of the Assessee namely trademark, patents, licence, are owned by Sojitz Japan. Sojitz Japan possesses entrepreneurial knowledge with respect to the operation of the global trading network. Sojitz India has not developed and does not use any intangible assets in its business operations in India." 12.24. As such it is seen that no intangible assets are held by the assessee in terms of supply chain intangibles etc. It is further seen that the AE is trading in a diverse range of goods right from aero space, chemicals, plastics, high technology machinery, automobiles, tele-communications industry or reality etc. and no effort has been made to show that the limited trading activity belongs to which of those segments were anyway the FAR analysis shows that there is no comparison in the two activities 12.25. Accordingly on account of these facts, we are unable to agree with the TPO who....
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.... not called for and further the margin earned in one cannot be blindly applied to the other activity in the facts of the present case. 12.28. Thus in view of the above the answer posed in (b) which was to be answered only if (a) was in the affirmative, has still been decided as parties had addressed and the facts were available on record, is also necessarily answered in the negative. 12.29. The query posed in (c) calls upon us to decide whether as per Rule 10B(1)(e)(i), the TPO, in the facts of the present case, was justified in holding that net profits margins should be computed in relation to FOB value of goods/ or the operating cost to the assessee. The said query was also to be addressed only if the answer posed to us in the said question was in the affirmative. Herein also it is seen that although the answer is in the negative but, since the parties have addressed and the facts are available on record we propose to deal with the said question also. 12.30. Rule 10 B (1) (c) (i) reads as under:- Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation ....
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....gibles of SCJ networks, the risks to which the assessee is consequently exposed we are unable to concur with the conclusion of the TPO that the assessee has created human assets and supply chain intangibles. The unrebutted fact on record is that the assessee has been able to render services utilizing the network of the AE and all intangibles and patents etc. utilized internally belong to the AE and the level and degree of the qualification required of the personnel of the assessee is low and skill requirement is so low that no specific skills are required by the personnel who replace the existing personnel who may choose to move on for better options. The assessee does not need to and cannot restrain the leaving personnel from utilizing any skills which they may have acquired during employment as no specific skills for indenting are required for indenting and acting as a facilitator. It is not the case of the department that the assessee is performing critical functions which admittedly are performed by the AE or that the assessee is contributing by way of analysis, reports and opinions, being provided as such value added services are being performed wherein the analysis/opinions m....
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....Supra) where the coordinate bench has held as under:- "35. In the cases in which no economic risk for inventories is assumed, in which these inventories do not even find their way to the current assets, and in which no functions are performed in respect of these inventories, except to facilitate trading in respect of the same, the very raison d'être for the cost of inventories being included in the cost base ceases to exist. The FAR analysis set out in the TPO's order, which is summarized in paragraph 7 earlier in this order, does not support the inclusion of inventory costs in the cost base either. 57. In our considered view, to sum up, in a situation in which a business entity does not assume any significant inventory risk or perform any functions on the goods traded or add any value to the same, by use of unique intangibles or otherwise, the right profit level indicator should be operating profit to operating expenses i.e. berry ratio. In such a situation, no other costs are relevant since (a) the cost of goods sold, in effect, is loses its practical significance, (ii) there is no value addition, and, accordingly, there are processing costs involv....
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....er entity, either third party vendors or the AE. Textually, and within the bounds of the text must the AO/TPO operate, Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee's net profit margin for application of the TNMM. Rule 10B(1)(e) recognizes that "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 ..." (emphasis supplied). It thus contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear. 40. The TPO's reasoning to enhance the assessee's cost base by considering the cost of manufacture and export of finished goods, i.e., ready-made garments by the third party venders (which cost is certainly not the cost incurred by the assessee), is nowhere supported by the TNMM under Rule 10B(1)(e) of the Rules. Hav....
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.... same while applying proviso to section 92C of the Act. The language of the proviso to Section 92C as it was applicable for the assessment year under consideration is very clear and unambiguous. According to provision of section 92C first arm's length price has to be determined. Thereafter the same has to be compared with the price charged by the assessee and if the difference between the price determined by TPO and the price charged by the assessee is within +/-5% then no adjustment is required to be made. 33. Further the contention of the learned CIT(DR) that the proviso to section 92C is applicable only when two different methods are adopted is also not correct. The language of the proviso in this regard is quite clear. First the most appropriate method has to be determined. Based on that arm's length price is to be found out by using various comparables. When more than one comparable is applied then arithmetical mean is to be worked out and no adjustment is to be made when arm's length price is determined on the basis of such arithmetical mean is within 5% of the cost paid or charged by the assessee. 34. In the present case the most appropriate method applied ....
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....t appropriate method as OP/TC as PLI, as has been used in the instant case; (iv) that as has been discussed in the preceding paras and as has been held by the coordinate Bench of the Tribunal in assessee's own case qua the AYs 2007-08 and 2008-09 that when the FOB value of the goods on which commission/ service income is earned amounting to Rs. 4005.37 crores for AY 2009-10 and Rs. 5057 crores for AY 2010-11 is not to be added to the cost base of the assessee's international transaction, the assessee's international transactions computed by using TNMM as the most appropriate method and PLI selected is GP/OC i.e. berry ratio, the international transaction in question are at arm's length; (v) that the comparables chosen by the TPO to determine the arm's length price of the international transaction entered into by the assessee company are not correct one because all the comparables are of trading company and not of support services provider as in the case of assessee company. Consequently, grounds no.1 to 4 in both the appeals qua AYs 2009-10 and 2010-11 are hereby determined in favour of the assessee. GROUND NO.5 OF ITA NO.813/DEL/2014 - AY 2009-10 ....
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.... investment has been made by the assessee during the years under consideration and the outstanding balance in investment i.e. in shares as on 31.03.2008 & 31.03.2009 and 31.03.2009 & 31.03.2010 was Rs. 13,00,80,400/- and Rs. 12,68,83,373/- as on March 2010 respectively. Assessee also brought on record the fact that its own funds/paid-up share capitals and reserves exceed the investment made and has not raised any long term borrowing. The assessee has only working capital from the bank which has been used for business purposes. 31. Hon'ble jurisdictional High Court in the judgment (supra) overruled the decision rendered by the Special Bench of the Tribunal by returning the following findings :- "23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression „does not form part of the total income‟ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if n....
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....by the assessee company as expenditure on account of payment of service fee paid to M/s. West Japan Logistics Division of Mitsui & Co. Ltd., Japan and M/s. Mitsui & Co. (Asia) Pte Ltd., Singapore on the ground that the aforesaid expenditure has not been incurred wholly and exclusively for the purpose of business and on the ground that the assessee has merely submitted copies of the agreement of the assessee with the aforesaid companies and no evidence is available on the file. The AO has rejected the submissions made by the assessee company to justify the aforesaid expenditure. Keeping in view the fact that in the succeeding year, AY 2011-12, the DRP vide order dated 14.12.2015 has decided this issue in favour of the assessee and deleted the entire addition of service fee paid to the same parties to whom this fee was paid. So in view of the matter, this issue is required to be restored to the AO to decide afresh in the light of the order dated 14.12.2015 passed by DRP qua AY 2011-12 in assessee's own case after providing an opportunity of being heard to the assessee. Consequently, this ground is determined in favour of the assessee. GROUND NO.7 OF ITA NO.1795/DEL/2015 - AY 2010-....