TMI Blog2015 (9) TMI 843X X X X Extracts X X X X X X X X Extracts X X X X ..... the pricing, if TPO finds that the unit price of the raw material is at ALP, in that case, there is no need for any TP additions. - Decided in favour of assessee for statistical purposes. Adhoc disallowance of 20% of total expenditure incurred on repairs and maintenance and treating the same as capital expenditure - Held that:- While deciding the appeal for AY 06-07 the Tribunal had decided the identical issue stating that CIT (A) surprisingly on the basis of some test check of vouchers affirmed the order of AO by differing from the findings in earlier two years. We are not fully convinced with the test conducted by the CIT (A) as he himself recorded that assessee out of the expenditure claim with reference to M/ s Sunny Constructions/ S.R. Containers treated part of the expenditure as capital and part has been claimed as revenue expenditure. It indicates that assessee has consciously segregated the capital expenditure and revenue expenditure for which no fault can be found. Moreover, AO also recorded that all the necessary details and vouchers have been placed before the authorities. Therefore, we are convinced that AO very mechanically and perfunctorily disallowed 20% on adhoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed CIT (Appeals) erred in not appreciating that the AE had incurred interest and finance cost on behalf of the appellant and the same were recovered by the AE from the appellant at actual cost, without levying any mark-up thereon. Thus, the said international transactions between the appellant and AE did not result in any income or expenditure in the hands of AE. Further, the primary liability for making the payment was with the appellant and it was purely for commercial and practical reasons that the payment was made by the AE. 2.5 The learned CIT (Appeals), erred in not appreciating that the reimbursement of expenses were inherently at arm's length as provided under section 92 of the Act. Guarantee Commission. 2.6 The learned CIT (Appeals) erred in considering corporate guarantee given by the appellant to Deutsche bank is an International Transaction covered u/s 92B( 1) of the Income Tax Act 1961. 2.7 The learned CIT (Appeals) erred in considering that the appellant has not incurred any cost to provide corporate guarantee to Bank. 2.8 The learned CIT (Appeals) has not considered the fact that the beneficiary of the Guarantee was appellant only and not othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to reimbursement of interest and other finance cost at NIL as against ₹ 17,81,06,522/- pursuant to the transfer pricing adjustment as per the order passed under section 92CA(3) of Act. 2. The ld. CIT(A) erred in observing that the essence of the transaction of imports between the appellant and its AE was primarily the purchase of goods and not one of financing/funding arrangement. 3. The Ld CIT (A) failed to understand that the AE was set up for the purpose of importing raw materials from the international market by procuring finance from overseas banks at lower cost and low rates of interest, as the appellant had exhausted the credit facilities available for its working capital requirement from domestic banks. 4.The Ld CIT(A) erred in not appreciating that the reimbursement of expenses wereinherently at rms Length as provided under section 92 of the Act 5.The Ld CIT (A) further erred in not appreciating that the AE has a facilitator and functioned as a procurement agency as well as a financer to the import transaction of the appellant. Therefore, the expenses like interest and finance cost incurred by the AE to facilitate the import of raw materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ALP. 11. Per contra, the case of the Revenue is that the MRK is merely a raw material supplier to the assessee. Expenditure of ₹ 17.81 Crores is the expenditure of the MKR and not of the assessee. Therefore, whatever is reimbursed by the assessee constitutes shifting of the profits to its AE abroad, which should not be permitted under the principles of Transfer Pricing. As per the Revenue, principles of commercial expediency have no relevance to the TP provisions which are aimed at merely to plug the transfer of profits from the country to abroad. In the absence of TP studies on the comparables, the AO has no choice but to decide the ALP 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 De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed before us that the said purchase price is at arm‟s length, the same must be demonstrated using the TP studies using the sustainable comparables and appropriate methods. For this, considering the assessee‟s argument of composite functions (ie as a financier, facilitator, procurement agency, raw material supplier etc) by the MKR, the assessee must merge all the relevant cost spent by the assessee and the MKR till the raw material reached the premises of the assessee. Assessee is under obligation to demonstrate with the sustainable comparables under the appropriate method using TP studies that the purchase price of raw material after including the administrative and finance cost/interest, is at 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O that the said amount of ₹ 17.81 cr is incurred also on the raw materials supplied to parties other than the assessee. Therefore, there is definite need for examining the ALP based on the facts and figures. We look for the fact if the per unit purchase price of the raw material‟ is at arm‟s length after considering the cost of the raw material, administrative cost and the impugned finance/interest cost of ₹ 17.81 cr. it is the claim of the assessee that the said per unit price is at ALP qua the domestic comparables. 16. MKR as the FPF (Facilitator cum procurement Agency cum financier): it is the claim of the assessee that the assessee shifted to off-shore funding model as he exhausted the same locally. As per the assessee, MKR is incorporated 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. Considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at ALP, in that case, there is no need for any TP additions. 18. Consequently, the legal dispute on if the impugned reimbursement falls within the ambit of section 92(1) of the Act becomes an academic exercise. Otherwise also, we do not appreciate the arguments of Ld Counsel on this issue and for this, we rely on the amended proviso to the said section and the decisions cited by the Ld DR. 19. Regarding other arguments relating to the principle of commercial expediency‟, it is the revenue‟s stand that the same are not relevant for the TP studies. On the contrary, the assessee relies heavily on the SC‟s judgment in the case of the SA Builders (supra). In the remand matters, AO/TPO is directed to consider the same and pass a speaking order on this issue too. 20. Thus, we set aside the order of the CIT (A) as above and remand all the grounds to the file of the AO/TPO for want of fresh assessment after considering the directions indicated above. Assessee shall be given reasonable opportunity of being heard to the assessee in accordance with the principles of the natural justice. Accordingly, the grounds raised in the appeal are allowed for statistical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 3.1. Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was contended that the details of expenses under the head repairs and maintenance alongwith vouchers/bill etc.were produced before the AO,that the expenditure was incurred for preserving and maintaining the existing assets that no new assets came into existence, that the adhoc disallowance made by the AO was not justified.After considering the submission of the assessee,he held that it had not brought any additional fact or evidence on record during the appellate proceedings. He upheld the addition made by the AO. 3.2. During the course of hearing the AR submitted that on the basis of two bills addition of ₹ 1.89 crores was made without any basis, that AO had not discussed as to how expenditure was capital in nature, he referred to the order of the Tribunal for AY 06-07 ITA 2280/Mum/2011 dt.5.10.2012. DR supported the order of the FAA. 3.3. We have heard the rival submissions and perused the material on record. We find that while deciding the appeal for AY 06-07 the Tribunal had decide the identical issue as under :- 2. The issue in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT (A) to submit that in the absence of any details, the order of AO to be sustained. 6. We have examined the issue. There is no dispute to the fact that assessee has incurred expenditure and also the fact that out of the total expenditure incurred during the year, assessee itself segregated the capital and revenue expenditure.Claim of repair and maintenance to Plant is ₹ 6,86,35,438/ - and repair and maintenance to building is ₹ 46,59,035/- totaling to 7,32,94,473/-. 7. Assessee is a large industrial unit and its turnover is to an extent of n 799.29 crores. Considering the big volume of business being undertaken by assessee, the repairs to the Plant Machinery and Building is a reasonable and is comparable to other years.In assessment year 2005-06 the Revenue did not prefer any appeal when the expenditure was allowed by the CIT (A). In assessment year 2004-05 on similar disallowance of 25% of total maintenance and repairs expenses, the ITAT has considered the deletion made by the CIT (A) and held as under: 4.1. Ground No.1 pertains to deletion of addition of ₹ 1,03,09,31. AO made this addition on the ground that the same is in the capital field. The e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Such adhoc allocation of expenditure towards the capital field, in our considered opinion, is utterly unwarranted.Thus,we uphold the findings of the first appellate authority and reject ground 1 of the revenue . 8. In this year, however, the CIT (A) surprisingly on the basis of some test check of vouchers affirmed the order of AO by differing from the findings in earlier two years. We are not fully convinced with the test conducted by the CIT (A) as he himself recorded that assessee out of the expenditure claim with reference to M/ s Sunny Constructions/ S.R. Containers treated part of the expenditure as capital and part has been claimed as revenue expenditure. It indicates that assessee has consciously segregated the capital expenditure and revenue expenditure for which no fault can be found. Moreover,AO also recorded that all the necessary details and vouchers have been placed before the authorities. Therefore, we are convinced that AO very mechanically and perfunctorily disallowed 20% on adhoc basis without establishing any expenditure as capital expenditure. There cannot be any adhoc disallowance out of the revenue expenditure as was done by AO. Therefore, we reverse the ..... 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