TMI Blog2011 (12) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The TPO did not find any data of uncontrolled transactions in this activity because of its peculiar nature. It was only thereafter, that he proceeded with the three cases - the TPO, in the absence of having been pointed out any comparable uncontrolled case by the assessee or himself finding any such case, was right on the question of picking up the cases having controlled transactions for determining the ALP of the assessee's international transactions. - the TPO was justified in considering these three cases as comparable for benchmarking the profits from the assessee's indenting activity. TDS - disallowance u/s 40(a)(ia) - The contention that there was no profit element in such reimbursement of expenses was also raised before the AO, which remained uncontroverted - Once the element of income is missing, naturally, there cannot be any question of deducting tax at source from such payment made, which pre-supposes the taxability of such sum in the hands of paye. Adjustment in the value of the opening stock to the assessee u/s 145A - held that:- The right course is to allow the benefit of increase in the value of opening stock of the current year only when the issue of add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity, he observed that the assessee manufactured and sold thermo plastics, polyurethane. For manufacturing these products, the assessee imported raw material from its AEs and also exported some of its manufactured products to the other group companies. The TPO did not propose any adjustment in such international transactions. As part of trading, the assessee imported finished polycarbon etc. from Bayer Group companies for resale in India. It also received indenting commission from Bayer Group entities whenever certain Indian customers placed orders directly on Bayer Group entities through the mediation of the assessee. For the purposes of transfer pricing, the assessee combined the activities of trading and indenting into a single group. Since in the opinion of TPO the functions performed and the risks undertaken in respect of trading and indenting activities were different and varied, the assessee was asked to furnish segmental accounts for these activities distinctly. On 13-8-2009, the assessee furnished segmental accounts in respect of manufacturing and trading activities showing net profit margin in respect of manufacturing at 13.49% and trading at 6.41%. As the assessee did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under : (Figures in Rs. ' 000) Trading Indenting Total Sales 427,176,242 7,348,320,873 7,775,497,115 Other Operating Income Cost Recovery 13,627,771 13,627,771 Reimbursements 2,560,561 3,452,494 6,013,055 Total 429,736,803 7,365,401,138 7,795,137,941 Expenditure Cost of Traded Goods Sold 396,864,566 7,253,684,515 7,623,549,081 Employee Cost 2,674,547 46,007,776 48,682,323 Freight Clearing 6,470,721 1,939,505 8,410,226 Rent 296,145 5,094,307 5,390,452 Rates Taxes 21,769 374,469 396,238 Insurance 700,493 0 700,493 Others 18,162 312,421 330,583 Travelling Conveyance 969,010 16,668,993 17,638,003 Communication 119,977 2,063,854 2,183,831 Printing Stationary 20,611 354,548 375,159 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such kind of indenting services, in his opinion, was not a cost plus but a percentage of sales method. He noticed that the assessee had shown to have earned margin of 23.73% under indenting segment, which was erroneously depicted as a percentage of its gross commission and hence was meaningless. The assessee was given an opportunity to give the names of the comparable companies which were indulging in such kind of indenting business in chemicals to prove that its price was at ALP. The assessee failed to discharge this burden. Taking strength from the Special Bench order in the case of Aztec Software Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141 (Bang) (SB), the TPO came to hold that, in the absence of the assessee forthcoming with any comparable cases, he will apply a reasonable rate of commission charged in similar activity. It was noticed by him that the transactions of indenting in the products dealt with by the assessee, were usually between two AEs. As no data about the uncontrolled transactions of similar nature was readily available, he considered it appropriate to use data of controlled transactions. Proceeding on this line, he noticed that one company, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regate the results in respect of trading and indenting activities. The assessee revised the calculations of such profit one after the other, for four times, sometimes voluntarily and on others at the instance of the TPO. Final calculation, a copy of which is available on page 510 of the paper book, was filed splitting trading and indenting activities, which has been considered by the TPO for further adjustments. Thus it can be seen that though the assessee was initially hesitant to give segmental accounts in respect of trading and indenting activities separately but eventually complied with and furnished such details. 8. The first question in this regard is whether the TPO was justified in proceeding with the exercise of determining the ALP distinctly in respect of trading and indenting activities ? There cannot be any dispute on the proposition that if functions, assets and risks are same in more than one activity, then these can be clubbed for determining the ALP. If however the FAR analysis indicates diversion in two activities then bench-marking should be done on separate basis. It is relevant to note that there is vast difference in indenting and trading activities. In a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by adopting the gross figure of indenting commission along with cost recovery as denominator instead of actual turnover on which such indenting commission was earned. The figure of such indenting turnover was admitted by the assessee as Rs. 734.83 crores. The TPO substituted the figure of indenting turnover with the gross commission adopted by the assessee for the purposes of working out the Operating profit to Sales ratio in the indenting segment. In the fourth and the final financial split, the assessee bifurcated all expenses, except Employee costs and Rent in the ratio of trading to indenting turnover, that is, 42 : 734. However, these two expenses were apportioned equally in the ratio of 1:1. The TPO accepted all other figures given by the assessee except the bifurcation of these expenses. He apportioned these two expenses also in the ratio of trading and indenting turnover. On making this alteration, the TPO determined the ratio of operating profit to sales at 9.63% in the case of trading activity and 0.04% in the case of indenting activity as per the table extracted above. The resulting ratio of Operating profit to Sales in the trading activity was accepted by the TPO as rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... denting segments. Whereas, the assessee divided employee cost in equal shares between the trading and indenting activities, the TPO apportioned it in the ratio of turnover. The ld. AR argued that the basis adopted by the assessee in bifurcating such cost was correct. We are again unconvinced with the submissions tendered on behalf of the assessee in this regard that the employee costs should be segregated in equal proportion between the two segments. The obvious reason is that the assessee itself admitted before the TPO that "trading and indenting are being undertaken by the company as an integrated trading business with common employees, common facilities and common strategies and common management". If one of the two activities consumes a small fraction of the total time, it cannot be said that expenditure in both is similar. When the employees were common in both the segments, how the assessee could have bifurcated such expenditure in an ad hoc manner in the ratio of 1:1. It should have come out with the evidence of time spent by employees in the respective activities. It will be seen infra while dealing with ground No.10 of the appeal that the assessee furnished hour-wise utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to give names of companies indulging in such kind of indenting business in chemicals to show that its price was at arm's length. The assessee did not furnish any details of the comparable cases. In the absence of the assessee discharging its onus the TPO took upon himself the duty of finding comparable cases. He noticed that no data was available on such activity in the realm of uncontrolled transactions. He, accordingly, took note of three comparable cases entering into similar indenting business by way of controlled transactions, viz., M/s Huntsman International Pvt. Ltd., M/s INEOS ABS (India) Ltd. and M/s Rathi Properties Madras Ltd. showing the percentage of indenting commission to sales at five percent. Now the question arises as to whether the TPO was justified in considering these three cases as comparable. 14. The ld. counsel argued that the TPO erred in rejecting the comparable cases given by the assessee and choosing comparable cases at his own. From the facts recorded above, we find that the assessee did not give any comparable case in the indenting activity alone. Since the benchmarking was to be done in respect of such activity alone, it was for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases, the steps at ii. to iv. shall be undertaken by the TPO. vi. If despite being put to notice as per step v., the assessee fails to give any list of comparable cases or the cases given are again found to be incomparable, then the power of the TPO in voluntarily selecting comparable cases as discussed in step iv. above shall get converted in to his duty. He will have to undertake the exercise of finding comparable cases so as to complete his job. 15. Adverting to the facts of the instant case, it is noted that the assessee initially gave list of comparable cases. All such cases were found to be incomparable as having been given for combined trading and indenting activities. Since the TPO was to benchmark only indenting activity and none of the cases given by the assessee satisfied this functional test of comparability, the TPO requested the assessee to give a list of comparable cases indulging into the indenting of the related product. The assessee failed to cite any such case. In order to undertake the exercise of determining the ALP, the TPO was left with no option but to find out comparable cases at his own. In our considered opinion, the TPO was fully justified in se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in other words, the price applied or proposed to be applied in a transaction between other than Associated Enterprises in uncontrolled conditions. 18. In order to appreciate the rival contentions in this regard, it will be pertinent to note that sections 92 to 92F dealing with computation of income from international transactions having regard to the ALP are placed in Chapter X with the marginal note : "Special provisions relating to avoidance of tax". The very purpose of introducing these provisions under Chapter X is to curb the tendency of avoiding the payment of lawful tax in certain circumstances. When two Associated Enterprises enter into transactions with each other, the possibility of arranging the affairs in such a manner that due tax is not paid in India cannot be ruled out. Albeit such a tendency is not omnipresent, yet it is not difficult to find out the instances where the affairs are cooked up between the Associated Enterprises in such a way that due tax does not come into the coffers of the exchequer in India. In order to curb such evil practice and protect the interest of our country, these sections have been inserted to ensure that income in respect of intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price, though technically called 'controlled transaction', would partake of the character of 'uncontrolled transaction' for the purposes of determining the ALP in a later international transaction between two AEs. In such a situation, no fetters can be placed on the powers of the TPO to consider such comparable controlled transaction - having adorned the garb of uncontrolled transaction -for the purposes of benchmarking. If the contention of the ld. A.R. is accepted that controlled transaction should be altogether shunted out for the purpose of transfer pricing provision, even in rare circumstances as are presently prevailing, then the very rationale and purpose of sections 92 to 92F, being the determination of ALP, which is otherwise achieved from the controlled transaction, will be defeated. It is in such exceptional circumstances that the principle of purposive interpretation will come into play to set free the hands of the TPO tied with determining ALP only on the basis of uncontrolled transactions. 20. We have noticed above that the purpose behind these provisions is to prevent the avoidance of tax in the international transactions by ascertaining the arm's length p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me other associated enterprises, for the purposes of benchmarking of such a transaction. 21. Reverting to the facts of the instant case, it is seen that the list of comparable cases initially given by the assessee was meaningless for benchmarking the transactions in the indenting business. Despite the TPO's request, the assessee failed to furnish the names of any comparable cases. The TPO did not find any data of uncontrolled transactions in this activity because of its peculiar nature. It was only thereafter, that he proceeded with the three cases, namely, M/s Huntsman International Pvt. Ltd., M/s INEOS ABS (India) Ltd. and M/s Rathi Brothers Madras Ltd. In our considered opinion the TPO, in the absence of having been pointed out any comparable uncontrolled case by the assessee or himself finding any such case, was right on the question of picking up the cases having controlled transactions for determining the ALP of the assessee's international transactions. 22. Now we will examine the comparability of these cases with that of the assessee. The first case is M/s Huntsman International Pvt. Ltd. which is engaged in trading, indenting and manufacturing Polyurethane products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso did the business of indenting and received commission @ 5% to 6%. The learned A.R. while referring to pages 848 of the paper book, being the balance sheet of this company distinguished it again on the basis of its low turnover of only Rs. 10.65 crores 23. Thus it is evident that the similarity in the nature of business and other relevant facts in these cases with that of the assessee, except the volume of turnover, is not in doubt. Now the question is whether these cases, which are otherwise comparable, should be disregarded simply on the ground of smallness of turnover when compared with that of the assessee. Considering the fact that the assessee did not come out with any comparable case to justify its price at arm's length and further the TPO found out these cases having functionally identical activities duly confronted to the assessee, it is not possible to disregard such cases merely on the ground that the volume of turnover is lower in comparison to that handled by the assessee. One more important factor which cannot be lost sight of is that in the case of M/s Rathi Brothers Madras Ltd. indenting commission is 5% to 6% with turnover of Rs. 10.65 crores. The same rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not correct in rejecting the Transactional Net Marginal Method (TNMM) applied by the assessee and choosing the Comparable Uncontrolled Price Method (CUP) for determining the ALP. Again we are unable to accept this contention advanced on behalf of the assessee. The TNMM compares net profit margin realized by an enterprise from an international transaction in relation to cost incurred or sales effected or assets employed or having regard to any other relevant base. Here the comparison is that of net profit margin and not the gross income with the sales effected etc. As we are dealing with a case of commission income which is normally allowed as a percentage of turnover effected, the ratio of net profit to sales cannot be held as appropriate. On the other hand, the CUP method is useful where the A.Es buy or sell similar goods or services. In the present case, we are concerned with the rendering of services by one A.E. to another. In that view of the matter, CUP method appears to be the most appropriate method in the given circumstances. It is further relevant to note that the question of applying one method or the other can arise if the data of the comparable cases concerning such m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enoted case of Godrej Boyce Mfg Co. Ltd. ( supra ). 31. Ground no. 10 is against the confirmation of disallowance amounting to Rs. 2,96,26,000/- made by the AO u/s 40(a)(ia) of the Act. 32. On the perusal of the Profit and loss account of the assessee, it was observed by the AO that the assessee had claimed deduction for a sum of Rs. 2.96 crores under the head "Cost sharing expenses". On being called upon to explain as to why the deduction of tax at source was not made before making the payment, the assessee stated that it was only reimbursement of costs to its group concern, namely, Bayer Corp Science Ltd. (BCS) and no profit element was involved in such payment. Not convinced, the AO held that the payment made by the assessee was liable to suffer deduction of tax at source u/s 194C. As the assessee had not deducted tax at source from such payment, the AO disallowed the amount of Rs. 2.96 crores u/s 40(a)(ia) of the Act. 33. We have heard the rival submissions and perused the relevant material on record. It is noticed that the assessee is a manufacturer of high performance material such as polyurethane etc. apart from engaged in trading of polycarbonate. BCS is sis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Rs. 2.96 crores. The P L account of BCS is also available on record. It can be seen from it that the amount recovered by BCS from the assessee and other group companies towards cost sharing has been excluded from the expenditure incurred by it. The net effect of these transactions is that BCS provided its personnel and services to the assessee on cost to cost basis which the assessee included in its expenditure, whereas the BCS reduced the amount recovered from the assessee and other group concerns from its expenses. The contention that there was no profit element in such reimbursement of expenses was also raised before the AO, which remained uncontroverted. Now, the position which emerges is that BCS incurred certain costs on employees and facilities which were utilized by the assessee and the other group concerns for which there was reimbursement of actual expenditure incurred to BCS without any profit element. The ld. DR also failed to lead any material to show that there was any profit element in such payment. The Hon'ble jurisdictional High Court in CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320/177 Taxman 81 (Bom.) has held that payment by way of reimbursemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re still pending. The AO, therefore, refused to allow any adjustment on this score. 35. After considering the rival submissions and perusing the relevant material on record we find that there cannot be any doubt on the proposition that if the value of closing stock of the immediately preceding year has been increased u/s 145A by CENVAT credit in the shape of addition in the assessment u/s 143(3), the corresponding increase is also required to be allowed in the value of opening stock for the current year. The logic is simple that the value of the closing stock of one year becomes opening stock for the next year. The ld. A.R. has admitted that the addition made in the immediately preceding year on this issue has been challenged by it before the ld. CIT(A) and the matter is still pending. The effect of allowing this adjustment in the value of the opening stock at this stage will be lead to the presumption that the value of closing stock has been finally determined at this figure. But as the issue of addition u/s 145A in the immediately preceding year has not attained finality, in our considered opinion, the assessee cannot be allowed to have the benefit of the increased value of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here regular a assessment is made, the tax on the total income determined under such regular assessment as reduced by the amount of' tax deducted or collected at source or any relief u/s 90 or 90A etc. From the above prescription of section 234B(1) read with Explanation (1) it becomes apparent that the interest under this section is charged with reference to the 'assessed tax' or the amount of assessed tax as reduced by the advance tax paid, if any, as the case may be. The assessed tax has been defined to mean tax on total income determined under regular assessment in case such assessment is made. We are concerned with a case in which a regular assessment has been made under section 143(3). In such a case, assessed tax can only mean the tax on the total income determined by the A.O. under section 143(3) as reduced by the advance tax etc. There is no reference whatsoever to the proposition that the additions which could not have been foreseen by the assessee at the time of filing return, should not be considered as part of assessed income for the purposes of charging interest u/s 234B. If the contention of the ld. AR is brought to logical conclusion, then probably the interest pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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