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2015 (9) TMI 843 - ITAT MUMBAI

2015 (9) TMI 843 - ITAT MUMBAI - TMI - Transfer pricing adjustment - international transaction relating to reimbursement of interest and other finance cost - whether whatever is reimbursed by the assessee to MRK goes to the Deutsche Bank account and the MRK is not the beneficiary of any income in any form? - Held that:- As decided in assessee's earlier AY we find merit in the assessee's contention that the MKR is not just a material seller to the assessee. Therefore, in principle, we cannot appr .....

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t and the finance cost and interest cost, guarantee commission etc. In the remand proceedings, after considering all these segments of 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 appea .....

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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. .....

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of Appeal: On the facts and circumstances of the case the learned CIT (Appeals) erred in confirming adjustment made by the learned AO / Transfer Pricing Officer ('TPO') in arriving at the arm's length price of international transaction relating following a. Reimbursement of interest and other finance cost and at NlL as against ₹ 22,11,05,000 pursuant to the transfer pricing adjustment as per the order passed under section 92CA(3) of the Act. b. Guarantee commission of ₹ 4 .....

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pellant and its AE was primarily of purchase of goods and not one of financing/funding arrangement. 2.2 The learned CIT (Appeals) erred in observing that such reimbursement of interest and finance cost has reduced the appellant's profits in India to that extent and it has shifted its profits to a tax haven abroad. 2.3 the ld. CIT(A) failed to understand that the AE was set up for the purpose of importing raw material from the international markets by procuring finance from overseas banks at .....

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e 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 Deutsc .....

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the appellant from the AE and hence, the transaction would have been revenue neutral for the appellant. Grounds on other disallowances 3.The learned CIT (Appeals) erred in making confirming ad-hoc disallowance of 20% of total expenditure incurred on repairs and maintenance as the same are in the nature of capital expenditure. 4.The learned CIT (Appeals) erred in confirming for initiating penalty proceedings under section 271(1)(c) of the Act by the AO . 5.Each one of the above grounds of appeal .....

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l income at Rs.NIL.The Assessing Officer(AO) completed the assessment on 13.01.2012,u/s.143(3) r.w.s.144(3)of the Act, determining the income of the assessee at ₹ 28.36 crores. 2.During the assessment proceedings,the AO found that the assessee had entered in to various international transactions with its Associated Enterprises(AE)and accordingly he made a reference to the Transfer Pricing Officer(TPO)u/s.92CA(1)of the Act for determi -nation of the Arm s length price(ALP) in relation to th .....

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ircumstances of the case and in the law,ld. CIT(A) erred in confirming the adjustment made by the Ld AO /Transfer Pricing Officer (TPO) in arriving at the Arms Length Price (ALP) óf international transaction relating 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 b .....

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e reimbursement of expenses wereinherently at Árms 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 material by the appellant had to be charged back to the appellant, besides the small mark-up charged by .....

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espondence between the assessee and the Revenue at various stages of the proceedings as well as the facts sheet with propositions mentioned by Ld Counsel. On perusal, we find that the case of the assessee is that the payment of ₹ 17.81 Crs, equivalent to 40 million US$ is the finance cost and the interest charged by the Deutsche Bank to the MRK- AE of the assessee. It is the case of the assessee AEMRK has not collected said sum of ₹ 17.81 Crs either from Europa International Ltd or f .....

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(1) should not apply to such reimbursements of finance cost.Addition made by the AO / TPO by completely disallowing the claim of the assessee is no way of determining the Arm‟s Length Price applying the principles of Transfer Pricing. The Revenue has not picked up any method or any comparables for coming to the conclusion that the said payment is at Arm‟s Length. As per the assessee, if the finance cost of ₹ 17.81 Cr, administrative cost @ 2 to 3% mark up over the purchase valu .....

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herefore, 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 deci .....

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le 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 .....

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es to suit the assessee. This is evident from the fact the MKR raised invoices (i) when he supplied raw material to the assessee with mark up of 2% to 3% and (ii) when MKR had to recover the impugned 17.81 Cr. Further, it is a fact that the assessee has not raised any invoice towards corporate guarantee commission‟ on MKR when he gave corporate guarantee‟ to the Deutsche Bank who granted financing facility to MKR. In principle, we cannot appreciate that the whole gamut of transaction .....

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r considering all the 12 price components of the said services. In ALP studies, the assessee needs to travel extra mail to demonstrate that the raw material purchase price of the assessee is at arm‟s length after considering the entire cost attributable to the said purchases by the assessee. AO/TPO needs to grant appropriate adjustments too. Since the assessee argued before us that the said purchase price is at arm‟s length, the same must be demonstrated using the TP studies using th .....

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rice 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, c .....

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w material per unit (raw material purchased from the MKR and after including the reimbursed sum of ₹ 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 other parties? The above questions needs specific answers if the issues raised are to be adjudicated meaningfully. 15. TPO failed to address to these Issues: The perusal of the orders of the revenue a .....

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avings in the present offshore model‟ financing as claimed by the asssessee. The assessee‟s claim of exhausting of the domestic financing facilities is bonafide or otherwise etc, needs thorough probe too. TPO should have determined if the international transaction is at arm‟s length only after examining the above issues qua the purchase price of the raw material after considering all the factors such as the cost of the raw material, administrative cost and the relevant and rela .....

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1 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 comp .....

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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 materia .....

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all the allowable adjustments in accordance with the provisions of the law and rules. As such, the MKR supplies constitute only 36% of the total raw material of the assessee. This indicates that the assessee had purchases from other sources as well. This fact should also help TPO in his comparative studies of the raw material price. Subjected to the facts of the case, in the ALP studies, TPO may also consider the fact that the assessee is entitled to commission for granting the corporate guarant .....

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ting the reimbursement of the finance cost, interest cost etc amounting to ₹ 17.81 cr and (iii) 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. In the remand proceedings, after considering all these segments of the pricing, if TPO .....

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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 direc .....

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of the assessee in part. 3.Ground no.3 deals with adhoc disallowance of 20% of total expenditure incurred on repairs and maintenance and treating the same as capital expenditure.During the assessment proceedings the AO found that the assessee had claimed an expenditure of ₹ 10.84 crores under the head repair and maintenance(plant and machinery ₹ 7.99 crores+building ₹ 1.90 crores + others ₹ 94.67 lacs).He observed that some of the payments towards repair and maintenance w .....

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e total book value of plant and machinery and building was ₹ 1375.71 and ₹ 301.74 crores respectively, against the said assets the assessee had incurred ₹ 7. 99 crores and ₹ 1.90 crores, that the expenditure was hardly ₹ 0.58 crores and ₹ 0.68 crores respectively of the total book value of the assets, that whatever expenses were incurred on account of repair and maintenance were in the nature of revenue only. After considering the explanation of the assessee, .....

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r law. After considering the depreciation net addition of ₹ 1.89 crores was made to the total income of the assessee. 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 int .....

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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 the appeal is with reference to disallowance of 20% of the expenditure incurred on repairs and maintenance of plant and building claimed by asse ssee. Assessee has furnished all the necessary detai .....

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tested some of the vouchers and after recording that assessee treated some of the expenditure as capital expenditure in the books of account, however, confirmed the order of AO on the reason that there is no clear cut difference in claiming the expenditure as capital or revenue expenditure. 3. At the outset the learned Counsel submitted that this issue is a recurring issue and referred to the orders of the ITAT in assessee's own case in assessment year 2004-05. It was submitted that similar .....

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im of expenditure is reasonable compared to the total turnover of assessee.The total turnover of assessee being 1799.29 crores and the profit declared is ₹ 81.66 crores under section 115JB. It was submitted that since AO has not clearly understood the repairs and maintenance of expenditure, he on adhoc basis disallowed 20% as capital expenditure without identifying the expenditure or assets created. 5. The learned DR however, relied on the orders of AO and the CIT (A) to submit that in the .....

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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 hel .....

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authority deleted the disallowance with the following observations: "10. I have very carefully considered the arguments. I am convinced that AO had very mechanically and perfunctorily disallowed 20%. On the one hand, she has mentioned that all the relevant details, bills and vouchers had been produced before her, on the other hand, she had merely doubted that 'many' of the same were not of revenue nature. Thus, the allegation was vague.She has not singled out a single bill or vouch .....

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ar incentive for the appellant company to debit any higher amount when it had an unabsorbed depreciation of more than (175 crore). Thus, I am convinced that without a single detection of expenditure allegedly of capital nature, AO was not entitled to an arbitrarily disallowance of 20% of the debited amount I delete the addition made". 4.2 We are fully convinced with the above findings of the learned CIT (A) the total book value of plant & machinery was(525.54) crores and of building it .....

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