TMI Blog2011 (3) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... the certain charges at cost plus 10%. In such circumstances, this type of receipts would always be considered in the operating expenses. - cost of closure is not to be excluded from computing the operating expenses. Adjustment on account of risk – Held that: - assessee failed to file the details exhibiting risk born by comparables. - In the absence of that comparability, it is difficult to make adjustment. - The assessee ought to have demonstrated this factor before the learned TPO as well as before the Learned CIT(Appeals). - it is difficult to give any benefit on that account. Adjustment on account of global recession – Held that:- It may be a corroborative factor for determination of ALP in the case of assessee, but it is difficult to work out the exact influence of the market condition in the profit making of the assessee. TPO has considered the results of the comparable cases and thereafter recommended adjustment, therefore, we do not deem it appropriate to make any ad hoc adjustment on the basis of this argument at this stage. Variation within the limit of +/- 5% - held that: - the transfer price shown by the assessee was not to be disturbed if it was within +/- 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g types of activities: Handling/Agency Business MIPL acts as a representative of MCJ and Other Related Enterprises (ORE s). MIPL helps MCJ and ORE s in marketing their products in India. Its role is limited to brokering a deal between two companies and providing pre shipment post shipment liaison services. In almost all transactions one party would be overseas. Marubeni Group Company or client of overseas Marubeni Group Company. In most cases the Indian parties are very reputed industrial houses whose main procurement needs are regularly provided by Marubeni group or their products are marketed through MIPL. For MIPL s services they are mainly paid commission by their overseas group partner/MCJ in foreign currency. Which may be fixed, by contract, or could be variable and a result of negations. MIPL earns commission from related parties. The Commission is based generally on the invoice value and in some instances based on quantity- depends on the products that are being traded(could range from 0.1% to 5-6%). Principal Business Sometimes MIPL involves itself in trading i.e. export or import in its own name. Such transactions however are very few. Project activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Expenses 63,79,405 4. Addition on account of interest paid to Incometax Authorities 9,36,037 5. Additional on account of Foreign Exchange Loss 9,36,037 6. Disallowance on account of donation 2,00,000 7. Addition on account of Legal and Professional charges. 3,93,328 6. First common issue is involved in cross appeals for assessment year 2002-03 and department s appeal for assessment year 2003-04. It pertains to determination of arms length price in respect of international transactions with the associate enterprises. The assessee has reported seven international transactions with its associates enterprises in assessment year 2002-03 d six international transactions with its associate enterprises in assessment year 2003-04. The details of the transaction and the method used for demonstrating the arms length price for the purpose of transfer pricing in respect of international transaction adopted by the assessee have duly been noticed by the Learned CIT(Appeals) in paragraph 4.1 of the order in both the assessment years. Assessing Officer has made a reference under sec. 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2002-03 which read as under: i. Whether the interest income of ₹ 1.72 crore is part of operating income or not. ii. Whether loss on sale of fixed assets, interest paid to incometax, office closure cost, amount paid to telephone adalat areabnormal costs and are required to be excluded while computing the operating expenses. iii. Whether business promotion expenses disallowed by the A.O.and admitted by the appellant should also be excluded while computing the operating expenses iv. Whether, the appellant is entitled for adjustments to the operating profit, on account of differences in the working capital position and differences in the risks profile, between the appellant and the comparable companies. v. Whether the appellant is entitled to the benefit of +/- 5% range mentioned in Proviso 92C(2) while computing the Arm s Length Price. 10. Similarly, in assessment year 2003-04, Learned CIT(Appeals) has propounded nine points which were required to be adjudicated. After going through the orders of the revenue authorities below and the grounds taken by the revenue in this year, in respect of determination of arm s length price, we are of the opinion that po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.13,15,473 c) Telephone Expenses (as per order of Telephone Adalat ) Rs.31,70,638 d) Business Promotion Expenses Rs.14,40,045 Total Rs.76,46,545 12. The revenue has accepted the order of Learned CIT(Appeals) in respect of exclusion of receipts representing loss on sale of (a) fixed assets; (b) interest on account of income-tax. 13. Let us now considered the each item considered by the TPO for making adjustments in the arm s length remuneration of the assessee relating to international transaction. The first common item involved in both the assessment years is whether interest income of ₹ 1.72 crores received by the assessee in assessment year 2002-03 and ₹ 1,93,95,460 should be formed part of operating income for working out the arm s length price. The learned counsel for the assessee at the time of hearing has placed on record a written note and advanced his arguments by referring the order of the Learned CIT(Appeals) in assessment year 2002-03. The learned counsel for the assessee while impugning the order of the Learned CIT(Appeals) contended that as per clause 21 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in assessment year 2000-01 are available. Since the interest income in the earlier years has been treated as a income from business, it should form part of operating income for the purpose of determining the arm s length price. He relied upon vendors Tech nology (P) Vs. ACIT 131 TTJ 309 (ITAT Delhi) and contended that interest from advance from A.E. would effect profit margin. 14. On the other hand, Learned DR submitted that assessment of interest income as a business income is altogether a different aspect. For the purpose of determining the value of international transaction as arm s length price, one has to see whether interest income has played any role in either generating receipts for international transaction or had any influence over those transactions. He relied upon the order of the Learned CIT(Appeals). 15. We have duly considered the rival contentions and gone through the record carefully. There is no dispute that in assessment year 2000-01, interest income earned on the deposits made out of surplus fund was held to be a business income. There may not be any dispute with regard to the objects available in the MOU that assessee shall invest surplus fund in fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arning of any other revenue stream. For rendering of services, the TPO was to determine the arm s length price, which has to be computed by keeping in mind the return on cost. If interest is included as a part of the operating revenue, then it would mean to compute the return on investment which is an inappropriate profit level indicator for a service provider. Thus, for computing operating margin on cost, neither the interest income nor interest expenses is a relevant factor. The essential element for consideration is the cost incurred for the operating activity which has to be taken into account. We find that Learned CIT(Appeals) has examined the issue with different angles also. The assessee has incurred expenses for earning interest income at ₹ 1.22 crores in assessment year 2002-03. It has shown interest income at ₹ 1.72 crores. Both these factors have to be taken into consideration before inclusion of any interest income in the operating income for the purpose of ALP. On due consideration of the order of the Learned CIT(Appeals), we are of the opinion that Learned First Appellate Authority as well as learned TPO has examined this aspect elaborately and has rightly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s head on the ground that element of personal nature is involved. The assessee did not dispute this disallowance before the Learned CIT(Appeals). It only prayed that it be excluded from the operating expense. On due consideration of the Learned CIT(Appeals) s order, we are of the view that once it is considered that this amount represents expenses of personal nature then it may not have any bearing on the international transaction. Learned CIT(Appeals) has rightly excluded this amount from the operating cost. In the result, the solitary grievance raised by the revenue in assessment year 2002-03 is de void of any merit. It is rejected. The other grounds raised by the revenue are general in nature and do not require any specific adjudication. 18. In the assessee s appeal, the next item relates to inclusion of following amounts in the operating cost: *Compensation for disclosure of business ₹ 12,19,764 units in Delhi Office * Compensation for closure of business unit ₹ 6,24,221 * Compensation for closure of Chennai office ₹ 50,54,007 Total ₹ 68,97,992 19. The learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he international transaction. But if the business was closed by the influence exercised at the end of AE then this issue would be a relevant issue for the purpose of ALP. Learned CIT(Appeals) directed the assessee to produce documentary evidence where it has been decided to close down these branches. The assessee failed to submit those details. Learned DR has demonstrated that closure of these branches would automatically reduce the cost of A.E. In such situation, it is a relevant item for consideration for the transfer pricing issue. The argument of the assessee that by inclusion of these receipts, revenue is drawing to tax the A.E., in our understanding this submission is not on a sound footing. The learned counsel for the assessee contended that if this stand of the revenue is accepted then there will never b a loss to an entity in India rather in other words higher the loss the revenue will expect higher income-tax on those losses by treating it as an operating expenses and expecting higher margin on that which would be against the principle of natural justice. It is not the case. The ITAT in the case of Mentorgraphic reported in 109 ITD 101 has observed that transfer pricing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this case an adjustment of 20% to the comparable margin to adjust for difference in risk and ownership on intangible has been accepted. In the case of assessee, same ratio is to be applied. On the other hand, Learned DR relied upon the order of the Learned CIT(Appeals). 26. We have duly considered the rival contentions and gone through the record carefully. Learned CIT(Appeals) has rejected this argument of the assessee on the ground that assessee failed to bring any evidence on the record to show that their exists any difference in the risk profile of the comparable companies vis- -vis the assessee. According to the Learned CIT(Appeals), in order to take benefit of this adjustment, information should be submitted along with details under Rule 10D maintained by the assessee. We find that Learned CIT(Appeals) has discussed in detail and observed that under section 92D(i) of the Act provide that every person entering into an international transaction, is required to keep and maintain such information and document in respect of thereof as is being prescribed under rule. Rule 10D(1) of the IT Rules. This rule requires maintenance of a record of the analysis performed to evaluate co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue appears not to have been raised before the TPO but in the written submissions before the Learned CIT(Appeals) assessee has raised this issue. In our opinion, it is an issue raised on general conditions of the market. But the adjustment recommended by the TPO is based on the result shown by the comparable in uncontrolled transactions. That comparison has taken into consideration the general factor available to the assessee vis- -vis to the comparable in the market. Therefore, no separate adjustment deserves to be made because of the general conditions of the market at that relevant point of time. It may be a corroborative factor for determination of ALP in the case of assessee, but it is difficult to work out the exact influence of the market condition in the profit making of the assessee. TPO has considered the results of the comparable cases and thereafter recommended adjustment, therefore, we do not deem it appropriate to make any ad hoc adjustment on the basis of this argument at this stage. This ground of appeal is rejected. 29. In ground No.12, grievance of the assessee is that benefit of proviso appended to section 92C of the Income-tax Act, 1961 has been denied to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when Assessing Officer, will give effect to his order or of the higher authority. In our understanding, Learned First Appellate Authority has not committed any error because as and when Assessing Officer will determine the income of the assessee he will see the brought forward business losses and unabsorbed depreciation. He will treat both these items in accordance with law. Thus, this ground is pre-matured one at this stage. It is rejected. 32. The learned counsel for the assessee at the time of hearing raised an alternative argument. He submitted that if interest income is excluded from operating income for the purpose of computing ALP then estimated expenses on account of administrative, salary etc. be computed and excluded from the operating cost. He made a reference to the decision of Hon'ble Kerala High Court in the case of CIT vs. Wandoor Jupitor Chittry. He pointed out that in this case, 10% of expenses have been estimated for earning interest income. He claimed that at least 10% of interest income be considered towards interest cost. This issue was not raised before the learned revenue authorities below. To some extent, arguments of the learned counsel for the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to it s A.E. Therefore, these expenses are not to be considered while determining the ALP of the assessee. Learned CIT(Appeals) after taking note of assessee s submissions and also considering the details of project expenses on page 31 has excluded this amount from commission segments. The findings apart from the details of expenses read as under: 9.2 I have gone through the above submissions, the appellant s case is that they have incurred an expenditure of ₹ 2,82,92,590 on TISCO and Purulia projects which relates to the trading segments of the appellant s business. As part of the Trading activities the appellant has incurred direct site expenses to the tune of ₹ 1,61,16,786 and the balance ₹ 12,175,804 (₹ 2,82,92,590 - ₹ 1,61,16,786) is towards of allocation of indirect expenses/overheads. The TPO did not allow the allocation of indirect expenses towards the trading segment and instead treated these expenses as part of the Commission segment only. 9.3 During the appellate proceedings the appellant submitted that they are maintainiang segmental accounts of the Trading and Commission business, especially the projects which are part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as erred in upholding the charging of interest under section 234B and 234D. The learned counsel for the assessee submitted that charging of interest under sec. 234B is consequential in nature, however, interest under section 234D is not chargeable upon the assessee in view of the Special Bench s decision of the ITAT rendered in the case of ITO Vs. Ekta Promoters reported in 113 ITD 719. 38. On due consideration of the facts and circumstances, we are of the opinion that section 234D has been brought on statute book from 1.6.2003. The Special Bench of the ITAT has held that it is applicable from assessment year 2004-05. Thus, interest under section 234D is not chargeable in this year. We allow the ground of appeal raised by the assessee partly and direct the Assessing Officer not to charge interest under sec. 234D of the Act. 39. In ground No.3, assessee has pleaded that learned revenue authorities have erred in withdrawing the interest granted under sec. 244A of the Act. At the time of hearing, learned counsel for the assessee did not press this ground of appeal, hence it is rejected. 40. The assessee has moved an application under Rule 11 of the IT Rules for admission of ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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