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2015 (5) TMI 852 - ITAT DELHI

2015 (5) TMI 852 - ITAT DELHI - TMI - Transfer pricing adjustment - addition on Service fee received - Held that:- The assessee simply rendered agency services under this segment by co-ordinating between customers and its AEs. By no standard, the assessee can be said to have dealt with the goods of its AEs as an absolute owner. Once position is such, we fail to comprehend as to how financial results of the commission segment can be adjusted for making a comparison with trading segment. The ld. A .....

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assessee will initially propose comparable instances having undertaken activity similar to it under this segment. Then it will be for the TPO to decide on their comparability or otherwise and determine the ALP of this transaction as per law. We further add that in doing so, the TPO will consider the figures of the comparables for the current year alone and not the multiple-year data as has been held by the Hon’ble jurisdictional High Court in ChrysCapital Investment Advisors (India) P. Ltd. VS. .....

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e 9 albeit prohibits the deletion of enhancement of income due to the making of transactions at ALP, but permits the deletion of enhancement of income due to disallowance u/s 40(a)(i) of the Act. Be that as it may, we find that the TPO has not proposed any transfer pricing adjustment in respect of `Trading segment’ of the assessee under which the purchases in question were made. The addition on account of TP adjustment is in respect of `Service fee received’, which was earned by the assessee wit .....

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eign AEs, either because of non-chargeability of income under the Act from sale of such goods to the assessee or because of the application of non-discrimination clause. The natural corollary which follows is that the provision of section 195 cannot apply and, resultantly, there can be no disallowance u/s 40(a)(i) of the Act. We, therefore, order for the deletion of this disallowance - Decided in favour of assesse.

Disallowance u/s 14A - Held that:- It as an admitted position that the .....

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ctfully following the precedents, we hold that no disallowance u/s 14A can be made - Decided in favour of assessee. - ITA No.945/Del/2915 - Dated:- 26-5-2015 - SHRI R.S. SYAL & SHRI C.M. GARG, JJ. For the Appellant : Shri M.S. Syali, Sr. Advocate, Shri Tarandeep Singh, Advocate, Shri Harkunal Singh, Advocate For the Respondent : Shri Sanjay Prasad, CIT DR ORDER PER R.S. SYAL, AM : This appeal by the assessee is directed against the order passed by the Assessing Officer under Section 143 (3 .....

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and sellers of various products across the globe. The assessee reported certain international transactions in Form 3CEB. The only international transaction in dispute is Service fee received amounting to ₹ 2,66,29,622/-. In order to demonstrate that its international transactions were at Arm s Length Price (ALP), the assessee employed the Transactional Net Margin Method (TNMM) as the most appropriate method. Certain comparables were chosen. By using the multiple-year data of the comparabl .....

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05,980/- in the hands of its AE, on which it had earned the above referred Service fee. The TPO proposed to treat the Service commission segment as equivalent to the Trading segment. The assessee s cost base of Service Fee segment was accordingly worked out at ₹ 6,82,08,06,478/-, by clubbing the cost of goods amounting to ₹ 665.58 crore incurred by the AEs and expenses of ₹ 16.50 crore incurred by the assessee in India under the Service fee segment. The TPO chose some comparabl .....

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g adjustment before the Dispute Resolution Panel (DRP). Vide its Direction dated 16.12.2014, the DRP approved the action of the TPO/AO. The assessee is contesting this addition amounting to ₹ 9.62 crore made by the AO. 4. We have heard the rival submissions and perused the relevant material on record. It can be observed from the international transactions reported by the assessee that apart from earning Service fee amounting to ₹ 2.66 crore, being the commission income for co-ordinat .....

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he transactions undertaken by the assessee under the Trading segment on which operating profit was determined by reducing purchase and other operating costs from the sale value. The TPO has accepted such trading transactions at ALP. The controversy is only qua the agency segment, under which Service fee was received without making purchase or sale of goods as an owner. In such circumstances, the question arises as to whether the cost of goods, for which the assessee simply provided services by a .....

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f account. Once the position is that the assessee sold the goods as an agent of its AEs and simply earned commission, how the cost of such goods in the hands of the AE can be taken into consideration and the entire transaction be considered as that of sale and purchase, is anybody s guess. We do not subscribe to the view canvassed by the TPO in this regard. By equating commission business with the trading business, the TPO has ventured to recharacterize the commission transaction as a trading tr .....

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of a transaction differs from its form; and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. Neither the TPO has taken recourse to any of these exceptions nor there is any material on record to justify the bringing of the instant case within their sweep. Ex consequenti, it is manife .....

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d to incongruous results, thereby rendering the entire exercise of determining ALP, a futility. By combining the cost of goods incurred by the AE with the expenses incurred by the assessee, the TPO has embarked upon treating the foreign AE as well as the assessee as tested parties to one transaction. Such an approach has no sanction of law. The Hon ble Delhi High Court in Li & Fung (India) P. Ltd. Vs. CIT (2014) 361 ITR 85 (Del) has repelled an approach similar to the one adopted in the inst .....

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as an absolute owner. Once position is such, we fail to comprehend as to how financial results of the commission segment can be adjusted for making a comparison with trading segment. The ld. AR has drawn our attention towards the Tribunal orders passed in assessee s own case for the earlier years reversing similar stand of the Revenue authorities on the international transaction of receipt of Service fee. As such, we set aside the impugned order on this score and remit the matter to the TPO/AO f .....

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of the comparables for the current year alone and not the multiple-year data as has been held by the Hon ble jurisdictional High Court in ChrysCapital Investment Advisors (India) P. Ltd. VS. DCIT (Del) vide its judgment dated 27.4.2015. 7. The next ground of the appeal is against the disallowance of ₹ 70,37,18,502/- made under section 40(a)(i) of the Act. 8. The facts apropos this ground are that the assessee made purchases from its AEs as under : - S. No. Name and Address of the AE Descri .....

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ore 1 Temasek Avenue, #19-00 Millenia Tower, Singapore 0391921 Import of goods 6,658,981,033 5 Mitsubishi International GmbH, Germany Hamburg Brnach, Maattenwiete 5, Hamburg Import of goods 17,610,327 6 Mitsubishi Shoji Chemical Corporation, 6-1, Kyobashi, 1- Chome, Chuo-Ku, Tokyo 104-0031 Import of goods 16,669,779 7 Petro Diamond Japan Corporation 4th Floor, Mitsubishi Corp. Building, 6-3, Marunouchi 2-Chome, Chiyoda-Ku, Tokyo 100-0005 Import of goods 2,566,470 8 Thai MC Company Limited Thaila .....

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s deleted such disallowance for the assessment year 2006-07 by observing that in some cases, the group entities did not have a permanent establishment in India, while in others, the assessee was entitled to the benefit of non-discrimination clause in the Double Taxation Avoidance Agreement between India and Japan (DTAA). The facts of the instant year were claimed to be similar to the said earlier year. Reliance was also placed on certain other tribunal decisions in support of the assessee s enti .....

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ection 40(a)(i) at ₹ 70,37,18,502/- by applying gross profit rate of 6.54% (as applied for the assessment year 2009-10) on total purchase transactions of ₹ 2152.04 crore and attributing 50% of the same to the business operations of such companies in India. This resulted into an addition of ₹ 70.37 crore, against which the assessee has come up in appeal before us. 10. We have heard the rival submissions and perused the relevant material on record. The AO has made disallowance u/ .....

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eir hands. Second category comprises of items at serial nos. 3 and 4 of the above Table which are, in fact, purchases made by the assessee from MCJ including its branch office. The ld. AR contended that the AO wrongly recorded the Mitsubishi Corporation, Singapore, at serial no. 4 as a separate entity, which is only a branch of MCJ, indicated at serial no. 3. This contention was not controverted by the ld. DR with any material/evidence to the contrary. The ld. AR argued that no deduction of tax .....

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clause qua sections 30 to 38 of the Act and provides that no deduction shall be allowed in computing the income chargeable under the head Profits and gains of business or profession in respect of the items set out in the provision. Clause (a)(i) of section 40 provides that no deduction shall be allowed in case of any assessee, inter alia, on other sum chargeable under this Act which is payable outside India or in India to a non-resident, not being a company or to a foreign company on which tax i .....

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service the provisions of section 195 of the Act for treating the failure of the assessee in making deduction of tax at source from the payments made to the non-residents AEs. Sub-section (1) of section 195 states that any person responsible for paying to a non-resident, not being a company, or to a foreign company, any payments specified in the provision or any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the .....

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there can be no question of deduction of tax at source and the consequential disallowance u/s 40(a)(i) of the Act cannot follow. 13. It, therefore, becomes essential to first determine if the nonresident AE sellers were liable to tax in India for the goods sold by them to the assessee in India. As against a resident chargeable under the Act in respect of his world income, a non-resident as per section 5(2) of the Act is chargeable only in respect of income from whatever source derived, which is .....

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) to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. The effect of this provision is that all income accruing or arising to a non-resident from any business connection etc. in India, to the extent of the operations of such business carried out in India, shall be deemed to accrue or arise in India and the provisions of section 5(2) shall be magnetized. Per contra, if the business operations are not carried out in .....

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tside India. No operations, such as, procuring of material or manufacture of finished goods, took place within India. It was held that no business connection was there and, in the absence of the non-resident having any place of business in India, the case was not covered within the provision analogous to section 9(1)(i) of the Act. Similar view has been reiterated by the Hon ble Supreme Court in CIT vs. T.I & M Sales Ltd. (1987) 166 ITR 93 (SC) and more recently in GVK Industries Ltd. And An .....

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that no business operations were carried out by him in India. The existence of a PE in India may require examination as to whether such PE was involved in specific transactions between non-resident and an unrelated Indian enterprise. In case there is no PE of the foreign enterprise in India and the goods are directly sold offshore by such non-resident enterprise without performing any operations in India, then, no income can accrue or arise or deemed to accrue or arise to him in terms of sectio .....

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t attracted. The AO, while finalising the assessment for the current year, has noticed on pages 52 and 54 of his order that the assessee made identical reply which was made during the course of assessment proceedings for the assessment year 2009-10. In rejecting the assessee s contention put forth for the instant year and making disallowance u/s 40(a)(i) of the Act, he relied on the view taken by him for the said assessment year 2009-10. Since the assessment order for the assessment year 2009-10 .....

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h the purchase transactions with all the six AEs in a common manner without separately adjudicating upon these three parties which were not involved in the preceding year. This shows that the facts and circumstances in respect of these AEs are similar to those of the three AEs from whom the assessee purchased goods in the preceding year as well. Apart from relying on his order for the AY 2009-10, the AO also noticed that the Tribunal order in the case of Metalone Corporation, in favour of the as .....

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be inferred in such circumstances. In view of the fact that the AO has not drawn any line of distinction between the three new AEs from which the assessee made purchases in the current year alone vis-a-vis the remaining three from which imports were made in earlier years as well, and, further, on the failure of the ld. DR to point out any difference in the factual or legal position existing in respect of these three new entities, we are inclined to follow the same conclusion as given for the thr .....

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ster his submission of non-applicability of the provisions of section 40(a)(i) of the Act. The sum and substance of his arguments is that total purchases amounting to ₹ 2141.78 crore were made by the assessee from MCJ including its overseas branch office and non-discrimination clause under Article 24 of the DTAA applies warranting nondeduction of tax at source. Au contraire, the ld. DR put forth that the case of the assessee is covered under Article 9 of the DTAA and for that reason, the a .....

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ces are or may be subjected. This provision shall, notwithstanding the provisions of article 1, also apply to persons who are not residents of one or both of the Contracting States. 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other Contracting State than the taxation levied on enterprises of that other Contracting State carrying on the same activities. This provision shall n .....

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tate shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first mentioned Contracting State......... . 17 It is equally important to consider the prescription of Article 9, the relevant part of which runs as under :- ARTICLE 9 - 1. Where : (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Cont .....

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by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly..... . 18. The case of the ld. AR is that the assessee is entitled to the benefit of Article 24 in terms of para 3. A perusal of this para transpires that except where the provisions of Article 9 etc. apply, interest, royalties and other disbursements paid by an Indian enterprise to a Japanese enterprise, shall, be deductible in determining the taxable profits of the India .....

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ovisions of the Act shall apply on a transaction with a Japanese enterprise as if it is a transaction with an Indian enterprise. If the transaction with a Japanese enterprise entails some adverse consequences in comparison with if such transaction had been made with an Indian enterprise, then such adverse consequences will be remedied under this clause by presuming, for computing the total income of an Indian enterprise, as if it was a transaction with an Indian enterprise and not a Japanese ent .....

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contrasted with purchases made from a non-resident, imposes liability on the purchaser for deducting tax at source under section 195, subject to the fulfilment of other conditions. When we compare an Indian enterprise purchasing goods from an Indian party vis-a-vis from a Japanese party, there is possibility of an obvious discrimination in terms of disallowance of purchase consideration under section 40(a)(i) in so far as the purchases from a Japanese enterprise are concerned. It is this discrim .....

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on and consequently ousting the application of section 40(a)(i), the non-discrimination clause shall operate to stop the making of disallowance in case of purchases actually made from a Japanese enterprise, which would have otherwise attracted the disallowance. Thus, it is evident that para 3 of Article 24, without considering the effect of Article 9 and other Articles referred to in the beginning of this para, rules out the making of disallowance u/s 40(a)(i) of the Act. 19. Now let us examine .....

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ds, whatever has been provided in Article 9 shall remain intact and will have superseding effect over the mandate of Article 24(3). The contention of the ld. DR that once Article 9 applies, then the application of Article 24(3) is thrown out, is not wholly correct. The writ of Article 9 does not stop the application of Article 24(3) in entirety. The overriding effect of Article 9 over para 3 of Article 24 is limited to its content alone. In other words, the mandate of Article 24 applies save and .....

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nt part of Article 9 of the DTAA as extracted above. Para 1 of this Article can be viewed in two parts, viz., clause (a) or clause (b) as one part and the portion starting with and as the second part. Such first part sets out the basic condition for the applicability of the second part. The first part provides for the one enterprise directly or indirectly controlling or contributing to the capital of the other or the existence of common persons managing or contributing to the capital of both the .....

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ue to such conditions, may be included in the profits of that enterprise and taxed accordingly. The effect of the second part is that the transactions between the two enterprises should be viewed at arm s length notwithstanding their commercial or financial relations. And if the profit accruing to an enterprise has been understated due to such commercial or financial relations, then, such understated profits should also be taxed. On circumspection of Article 9 read with Article 24, the position .....

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in respect of any transfer pricing adjustment made by bringing transactions between two AEs at arm s length price. Disallowance u/s 40(a)(i) is an independent component of the computation of total income which is distinct from any transfer pricing adjustment. Article 24 read with Article 9 albeit prohibits the deletion of enhancement of income due to the making of transactions at ALP, but permits the deletion of enhancement of income due to disallowance u/s 40(a)(i) of the Act. Be that as it ma .....

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