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2015 (12) TMI 1328 - ITAT CHENNAI

2015 (12) TMI 1328 - ITAT CHENNAI - TMI - TPA - Method of determination of arm's length price (ALP) - Transfer Pricing Officer confused himself in characterization of the assessee's functions as captive, routine, full-fledged distributor at one place and routine distributor in another place. The Transfer Pricing Officer is also characterizing the assessee as an agent in one place and captive distributor and agent in another place. - Held that:- In view of the misunderstanding of the facts by the .....

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ion as in case of section 201(1A) of the Act. There is an obvious omission to include short deduction / lesser deduction in section 40(a)(ia) of the Act. Therefore, this Tribunal is of the considered opinion that in case of short / lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the assessing officer, cannot be disallowed. Accordingly, the orders of lower authorities are set side and the entire disallowance is deleted - Decided in favour of assessee. - ITA No .....

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ore, we heard these appeals and the cross-objection together and disposing of the same by this common order. 2. Let's first take the assessee's appeals in I.T.A. No.586/Mds/2014 and I.T.A. No.610/Mds/2015. 3. Shri Raghunathan Sampath, the Ld.counsel for the assessee, submitted that the assessee-company is established by Roca Sanitaria S.A. Spain and EID Parry Limited in June, 2006, as a joint venture company. In fact, Roca Sanitaria S.A. Spain and EID Parry Limited were having equal shar .....

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to the Ld. counsel, to determine the Arm's Length Price of imported finished goods, the assessee adopted Resale Price Method as most appropriate method. The Transfer Pricing Officer, however, adopted Transaction Net Margin Method using Berry Ratio as profit level indicator. According to the Ld. counsel, in the assessment year 2008-09, Resale Price Method was accepted by the Transfer Pricing Officer as most appropriate method. A copy of the order is available at pages 285 to 287 of the paper- .....

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n exclusive distributor of Roca Group products. The assessee procures finished goods on principal to principal basis, performing all sales and marketing functions on its own. The assessee negotiates and enters into contract with third party customers on its own account. The inventory risk analysis of the assessee is explained in the note filed at pages 224 to 227 of the paper-book. According to the Ld. counsel, the assessee is a full- fledged risk bearing distributor. 5. Inspite of the clear and .....

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ing Officer classified the assessee as an agent. Further, referring to para 6.2.4 of the transfer pricing order, the Ld.counsel submitted that the assessee was classified as 'captive' 'distributor' and 'agent' for the associate enterprise. 6. Referring to the observation made in the order of Dispute Resolution Panel at page 8, the Ld.counsel for the assessee submitted that the DRP observed that the assessee-company performed all the valuable functions with risks as an ind .....

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Therefore, according to the Ld. counsel, the Transaction Net Margin Method adopted by the Dispute Resolution Panel cannot be a correct method. According to the Ld. counsel, the Resale Price Method is the most appropriate method in view of the functions performed by the assessee- company. 7. The Ld.counsel for the assessee further submitted that the Assessing Officer adopted Berry Ratio as Profit Level Indicator. Under the Transaction Net Margin Method, by referring to para 2.30 of the OECD guid .....

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ginal purchase and resale. According to the Ld. counsel, the year under consideration is just second year of operation of the assessee's distribution. Therefore, the sales/stock turnover of the goods were so low. Subsequently, in future years the stock position was significantly improved. 8. Referring to page 10 of the transfer pricing order, the Ld.counsel for the assessee submitted that the Transfer Pricing Officer placed reliance at para 2.31 of the OECD Guidelines. The Assessing Officer .....

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d.counsel for the assessee further submitted that the Assessing Officer has also referred to the decision of Du Pont case. According to the Ld. counsel, Du Pont is a company in Switzerland. The Transfer Pricing Officer quoted that this Switzerland company by taking possession of inventory had acted as full-fledged distributor for its United States parent company. According to the Ld. counsel, Du Pont was the world's largest chemical company and intended to establish a market in Europe. Du Po .....

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free market forces. The Ld.counsel further clarified that Berry Ratio is an appropriate profit indicator to test the transfer pricing rate of limited risk distributor with guaranteed operational performance. In the case before us, according to the Ld. counsel, Roca India operates as a full-fledged distributor performing all functions and bears all risks relating to the distribution function. In such a scenario, the application of Berry Ratio is inappropriate in the present case. Referring to the .....

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indicator. In the case before us, the title to the goods rest with the assessee. Therefore, Berry Ratio cannot be applied in respect of functions performed by the assessee- company. 10. On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that admittedly the assessee-company is a joint venture of Roca Sanitaria S.A. Spain and EID Parry Limited. Initially, EID Parry Limited had 50% shares. However, on 16th July, 2008, Roca Investment S.L. purchased 47% of .....

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ers, the Ld. D.R. pointed out that Roca is a brand product which has its own tag price and the distributor is guided by the seller's manual provided by the manufacturer. This is evident from the agreement entered into between the assessee and Roca Sanitaria S.A. Spain. There is no credit risk associated with assessee-company. The assessee-company in fact provides an extensive market support function by utilizing the manpower resources available with the assessee. The market support service i .....

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Transaction Net Margin Method would be the most appropriate method to determine the Arm's Length Price of the goods purchased by the assessee from associate enterprise. Referring to Berry Ratio, the Ld. D.R. pointed out that the functions carried out by the assessee-company are not proportionate to the sale. According to the Ld. D.R., the most appropriate method has to be determined on the facts of the case on year to year basis. Therefore, merely because the Transfer Pricing Officer accept .....

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ower and managerial power and had human resources. These are all economic factors which need to be taken into consideration. According to the Ld. D.R., an independent entrepreneur would do everything in a limit so that gross profit is enough to take care of these expenditures and also leave some residual amount as profit. According to the Ld. D.R., the gross profit is not enough to take care of even the expenditure incurred by the assessee in respect of sale of Roca products. 12. Referring to th .....

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assessee is fairly dependent on associate enterprise to carry out its business. Therefore, the Dispute Resolution Panel has rightly upheld the Transaction Net Margin Method as most appropriate method. 13. We have considered the rival submissions on either side and perused the relevant material available on record. For the purpose of determining the most appropriate method, one of the factors to be taken into consideration is the function performed by the parties. Other than the function perform .....

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by the assessee. As rightly submitted by the Ld.counsel for the assessee, the Transfer Pricing Officer confused himself in characterization of the assessee's functions as captive, routine, full-fledged distributor at one place and routine distributor in another place. The Transfer Pricing Officer is also characterizing the assessee as an agent in one place and captive distributor and agent in another place. For the purpose of determining most appropriate method for determining Arm's Leng .....

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sunderstanding of the facts by the Transfer Pricing Officer and Dispute Resolution Panel, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Dispute Resolution Panel once again on the basis of the agreement entered into between the assessee and Roca Sanitaria S.A. Spain. In other words, the Dispute Resolution Panel shall re-examine the issue afresh on the basis of the agreement entered into between the parties and determine the actual function performed by .....

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. The Dispute Resolution Panel shall examine the agreement between the parties and other transactions between the assessee and Roca Sanitaria S.A. Spain and thereafter determine the actual function performed by the assessee apart from the assets employed in the transaction, including the risks assumed by the assessee, and thereafter decide the matter in accordance with law. The Dispute Resolution Panel shall give sufficient opportunity to the assessee before giving direction to the Assessing Off .....

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aid to BSNL and Tulip Telecom Ltd. The assessee deducted tax under Section 194C of the Act. However, the Assessing Officer found that the payment made by the assessee is for the use of commercial equipment, therefore, tax has to be deducted under Section 194J of the Act and not under Section 194C of the Act. The Dispute Resolution Panel directed the Assessing Officer on the basis of the judgment of Calcutta High Court in S.K. Tekriwal v. ITO (48 SOT 515). Referring to the judgment of Madras High .....

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e of the commercial equipment, therefore, tax has to be deducted under Section 194J of the Act. It is an admitted fact that the assessee has deducted tax under Section 194C of the Act. Therefore, it is not a case of non-deduction of tax but, it is a case of short deduction. We have carefully gone through the provisions of Section 40(a)(ia) of the Act. Section 40(a)(ia) of the Act clearly says that disallowance has to be made on the failure of the assessee to deduct tax in respect of the payment .....

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entical issue was considered by the Cochin Bench of this Tribunal in Apollo Tyres Ltd. v. DCIT in I.T.A. No.31 & 74/Coch/2010 dated 29th May, 2013. The Cochin Bench found that for short deduction of tax, there cannot be any disallowance under Section 40(a)(ia) of the Act. In fact, the Cochin Bench further observed as follows:- "8. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the provisions .....

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ore the due date specified in sub-section (1) of section 139: Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.- For the purposes of this sub-clause.- (i) "commission or brokerage" shall have the .....

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on to section 194-I; (vi) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;" Therefore, section 40(a)(ia) enables the assessing officer to disallow any payment towards interest, commission or brokerage, fee for professional service, fees for technical service etc. on which tax is deductible at source under Chapter XVIIB and if such tax has not been deducted or after deduction has not been paid. 9. We have also carefully gone .....

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h tax was deductible to the date on which such tax is deducted; and (ii) At one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid, and such interest shall be paid before furnishing the statement in accordance with the provisions of subsection (3) of section 200.)" Section 201(1A) enables the assessing officer to levy interest in case the tax was not deducted either wh .....

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be deducted was found to be not deducted then interest u/s 201(1A) can be levied in respect of that part of the amount which was not deducted. Whereas the language of section 40(a)(ia) does not say that even for short deduction disallowance has to be made proportionately. Therefore, the legislature has clearly envisaged in section 201(1A) for levy of interest on the amount on which tax was not deducted whereas the legislature has omitted to do so in section 40(a)(ia) of the Act. In other words, .....

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is a shortfall in the deduction of tax at source. For the purpose of convenience, we are reproducing below paragraphs 34 and 35 of the judgment of the Andhra Pradesh High Court: "34. ................. We may now read the provisions of section 201. "Consequences of failure to deduct or pay.- (1) If any such person and in the cases referred to in section 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the ta .....

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to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax was deductible to the date on which such tax is actually paid. (2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the amount .....

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the deduction is not as required by or under this Act, there is a default. But the fact is that this expression 'as required by or under this Act' grammatically refers only to the duty to pay the tax that is deducted and cannot refer to the duty to deduct the tax. Since this is a penal section, it has to be strictly construed and it cannot be assumed that there is a duty to deduct the tax strictly in accordance with the computation under the Act and if there is any shortfall due to any .....

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words "the whole or any part of tax" by Finance Act, 2001. The Division Bench of the Mumbai Bench of this Tribunal in the case of Chandabhoy and Jassobhoy (supra) had an occasion to consider an identical issue. The Mumbai Bench found that short deduction of TDS, if any, could have been considered as liability under the Income-tax Act as due from the assessee. Therefore, the disallowance of the entire expenditure, whose genuineness was not doubted by the assessing officer is not justifi .....

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