TMI Blog2014 (1) TMI 395X X X X Extracts X X X X X X X X Extracts X X X X ..... ments. His aim should be to determine after making requisite and appropriate adjustments - The MKR is not just a material seller to the assessee - The approach of the TPO cannot be appreciated in accepting - The “international transactions” involving the payment of cost for import of the raw materials and rejecting the reimbursement of the finance cost, interest cost etc amounting to Rs 17.81 cr and not charging of the “corporate guarantee commission” on the MKR - The TPO must determine ALP of the purchase price of the raw material as a whole after considering all the relevant segments of the price ie purchase cost, administrative cost and the finance cost and interest cost, guarantee commission etc. Regarding the principle of “commercial expediency” – Following SA Builders [2006 (12) TMI 82 - SUPREME COURT] – The issue was restored for fresh adjudication - AO/TPO is directed to consider the said judgement and pass a speaking order on this issue. - I.T.A. No. 3438/M/2012 - - - Dated:- 18-12-2013 - Shri D. Karunakara Rao And Shri Vivek Varma,JJ. For the Appellant : Shri K. Sivaram For the Respondent : Shri Ajeet Kumar Jain ORDER Per D. Karunakara Rao, AM: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materials by arranging the finance abroad using the foreign banks. Assessee, being a parent company, stood as a corporate guarantee to the said financing arrangement from the bank. Assessee filed the return of income declaring the total income at NIL. There were international transactions with the Associated Enterprise (AE) reported by the assessee. They are: (i) payment for the purchase of said raw materials; and (ii) reimbursement of finance/funding cost. AO referred the transactions to the TPO for determination of the ALP. The TPO passed an order u/s 92CA3 of the Act dated 11.8.2010 and recommended adjustments to the tune of Rs. 17.81 Crs (rounded off to the nearest lakhs) on account of the said reimbursements and did not disturb the international transaction of payment for the purchase of raw materials. AO considered the same and granted an opportunity to the assessee before making additions, while passing assessment u/s 144C r.w.s. 143(3) of the Act. Assessed income was determined at Rs. 42,67,08,943/- under normal provisions and the book profits u/s 115JB is at Rs. 1,13,48,08,943/-. 4. Before the TPO: During the proceedings before the TPO, assessee submitted that the raw m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, the expenses incurred by the MRK International by way of finance cost and interest are to be borne by the assessee only as it relates to the raw materials supplied to the assessee entirely. It is the argument of the assessee that in any case, if MRK fails to comply with the terms and conditions of the Deutsche Bank, it is the assessee, being a guarantee, who has to borne the losses, if any, in accordance with the guarantee conditions given to the Deutsche Bank. Thus, the assessee summed up its arguments which read as under: (i) The transaction was essentially a offshore model of funding resorted by the assessee (ii) The funding cost was essentially towards the interest cost for availing credit of 180 days. (iii) If the funding cost was not borne by the Indian company, MRK would have incurred loss, and thence the guarantee would have been invoked by the bank and as a result, the liability to bear the cost would be on the Indian company. 5.1. The TPO considered the above submissions of the assessee and concluded that the AE is primarily for purchase of goods and not the financing or funding arrangement for the assessee and therefore, it is a trading transaction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursements of all the finance cost to the AEs. Explaining the justification for reimbursements of the finance cost, assessee submitted that finance cost was not charged to the suppliers at the end of the MRK (AE) and instead, assessee was to pay the same to the AE. Mentioning that the finance cost is related to the Letter of Credit (LC) facilities, assessee prayed to the incorporation of MRK and assessee was incurring the cost of the LCs levied by the local banks. After MRK was incorporated, the MKR had a Deutsche bank facility to withdraw the cash and make the cash payments for purchases, which are supplied to the assessee in India. This facility of financing the cash purchases coming to Rs. 17.81 Crs and the break-up of which is already provided in the above paras. As per the assessee, the role of the MRK is to procure the finance for the purpose of importing the raw materials from the international sources at lower cost. Assessee s other arguments include that assessee has a primary responsibility as it is a corporate guarantor to the Deutsche Bank and the MRK (AE) is only a facilitator. The principles of commercial expediency demands that assessee must make the reimbursement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or indirect cost related to the purchases. The mark-up charged by the MRK should have deemed to have included the finance cost as well in addition to the administrative cost and there is no need for reimbursement of finance cost and the interest separately by the assessee to the MRK. At the end of the order, CIT (A) summed up his conclusions in item no. xi and xii of para 5 of his order which reads as under: xi. Quoting the section 92(1) of the Act, it has been contended that the provision of section 92(1) is a machinery provision and as per the same, any international transaction which given rise to income shall be governed by the transfer pricing regulations and if nay international transaction which does not given rise to any income, then such transaction shall not be governed by the TPO. The appellant in the support of the same has relied upon the Advance ruling rendered in the case of Dana Corporation (321 ITR 178) and in the case of Vanenburg Group B.V. In Re (289 ITR 464). It has been further contended that as epr the explanation to section 92(1), the reimbursement of expenses to AE did not result in any expense per se, which are debited in the books of account as the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f facts sheet and mentioned that Revenue Authorities have not understood the offshore model of the financing and they are impractical in denying the deduction of payments of the reimbursement made by the assessee to its AE abroad towards the reimbursement of finance/funding cost to the MKR. Dr Shivram, Ld Counsel mentioned that the MRK is a procurement agency, facilitator and financier and certainly not merely a raw material supplier. The AE- MRK played a vital role for the phenomenal growth of the assesseecompany over the years and in that sense assessee could not be accused of shifting profits abroad. The decision of incorporating MRK abroad for managing the raw materials import at cheaper cost is a commercial decision and it is a part of the commercial expediency and the said amount of Rs 17.81 Crs was reimbursed. Further, Ld Counsel mentioned that the said reimbursement does not contain the element of profit/any income to the AE-MRK and therefore, in principle, the provisions of section 92(1) should not be invoked, when there is no income angle in the international transaction. Therefore, impugned transaction does not constitute an international transaction within the meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee in India, the MRK has recovered the said cost. He mentioned that the MKR charged the mark-up of 2% to 3% on the purchase cost of raw materials when the purchase invoices are raised on the assessee. Under these circumstances, where the corporate guarantee was not invoked by the Deutsche Bank, the reimbursement made by the assessee is outside the business principles as well as the commercial expediency . It is only to enrich the MKR abroad and the same is rightly considered as shifting of the profits of the assessee to the credit of MRK abroad. He further pointed out that the assessee has not furnished requisite details to satisfy the TPO that the finance cost paid by the assessee is at Arm s Length. During the time of rebuttal, Ld Counsel brought our attention to the details of the rates of the raw materials per ton and mentioned that the price paid by the assessee for raw material as well as for the finance cost is at Arm s Length. 10. Decision of the Tribunal: We have heard both the parties and perused the orders of the Revenue Authorities as well as the decisions placed before us. We have consulted, wherever required, the paper book, the correspondence between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the international transactions in the manner decided by the AO / TPO. In this case, nothing is reimbursed to MRK and therefore, the NIL value is taken as ALP which should be sustained. 12. We have considered the above divergent positions of the parties in the dispute. Undisputedly, the assessee imported large percentage of the requisite raw material from abroad using the MKR-AE. In turn, MKR-AE purchased the said material from M/s Europa International abroad and in the process, MKR used the Bank financing facilities from the Deutsche Bank. While raising the invoice on the assessee, the MKR added in the invoice the mark up of 2 to 3% presumably towards administrative cost only and not towards the impugned finance /interest cost. MKR-AE recovered the finance cost separately and therefore, the present litigation. For assessee, it is the case of reimbursement. But AO/TPO rejected the same and held that assessee is not required to make any payment on this account as liability to make the impugned reimbursement is on the MKR-AE and not on the assessee. For resolving the issue, we have examined the role of the MKR qua the assessee. 13. Composite Functions of MKR: Ground no.5 refers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm s length. Under the said peculiar kind of submissions of the assessee, TPO cannot restrict his TP studies to only to the international transaction of reimbursements. In the fresh TP studies, the assessee, if he persists on the above submissions, needs to consider the composite transactions ie purchase cost incurred by the MKR, finance cost incurred by the MKR, administrative cost incurred by MKR, corporate guarantee commission etc. 14. The following questions are relevant in the process and they are: 1. Whether the MKR is captive supplier of the raw material to the assessee and it does not supply to any other personal? 2. Whether the MKR incurred the said sum of Rs 17.81 crores exclusively for the raw material supplied to the assessee? 3. Whether the mark up of 2-3% charged on the assessee includes an element of finance/funding cost of US$40 millions? 4. Whether the final price of raw material per unit (raw material purchased from the MKR and after including the reimbursed sum of Rs 17.81 cr)) is competitive in the open market and necessitates no adjustments? 5. Whether the MKR s is incorporated solely for the purpose of the assessee and has rendered services to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted with the sole purpose of procuring the raw material with cheaper price using the cheaper funding channels abroad. Admittedly, the Associate Enterprise- MKR is subsidiary of the assessee and said to be rendering captive services to the assessee. If that is the fact, for the purpose of the TP studies, TPO must travel beyond what is accounted in the books of the assessee and the MKR and determine the ALP. Considering the special facts of the present case, where the MKR, the assessee- AE, is captive supplier with dedicated importer ie assessee, the TPO is not justified in segregating all the three segments of the price ie raw material price + administrative cost + finance cost. We do not approve the observation of the TPO that the MKR is mere raw material supplier to the assessee. Prima facie, we are of the opinion, MKR seems to be the body and soul of the assessee abroad functionally and financially. TPO must consider the same in his TP studies. Therefore, in TP studies of this case, TPO must determine the ALP after merging all the relevant cost segments. His aim should be to determine after making requisite and appropriate adjustments, if the import price of the raw material in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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