TMI Blog2017 (6) TMI 582X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, appropriate profit indicator in this case is operating profit 7 total cost i.e. OP/TC. In case of pure distributor, only value added expenses are considered and Berry ratio can be applied. The AE made value addition, assumed various risks of business and also incurred damages and losses in the business, as discussed by me in detail earlier. As per TNMM study filed by the appellant, the margin on total cost earned by AE is 4.52% which is less when compared with 5.18% in case of other eleven comparable companies. This is within arm's length. Therefore, otherwise also no transfer pricing adjustment is called for by the safe harbor clause. Disallowance of Administrative & Selling Expenses - Held that:- Disallowance has been made by ld. AO without pointing out any specific item of disallowance which is in the nature of purely an ad-hoc disallowance. Assessee’s books are audited and the entire expenditure is properly vouched. It is a settled law that business expenditure should not be disallowed without citing specific item and giving reasons for disallowance. In our considered view, ld. CIT(A) has rightly held the disallowance to be ad-hoc and untenable which is upheld. Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, from Indian ports to various Chinese ports as also in exports of agro-products to other countries. BBPL has a 100% subsidiary company as associated enterprise (AE) in Singapore, namely Bagadiya Brothers (Singapore) Pvt. Ltd (in short BBSPL ) which regularly operates in ship chartering business. AE provides vessels to third parties as well assessee in its regular course of business at Singapore. Assessee for its iron ore exports charters the vessels from third party charterers as well as AE. 4.1 For impugned AY 2008-09, assessee filed return of income of ₹ 64,23,57,250/- computed in accordance with provisions. TP report in respect of transactions with Associated Enterprise (AE) applying TNMM method and adopting AE as Tested Party. Ld. AO forwarded the TP report to ld. TPO u/s 92CA and called for details of other items of expenditure claimed by it, which were duly filed. Ld. TPO vide report u/s 92CA dtd. 20-12-2010 recommended TP adjustments/ addition of ₹ 14,90,76,625/- (mistakenly taken by AO as ₹ 14,96,76,625/-). Ld. TPO for proposing TP adjustment: i. Rejected assessee s application of TNMM method as most appropriate method and AE as tested party. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.12.2011 wherein various issues have been raised in regard to computation of Arm's Length Price. It is observed that most of these issues have already been taken care of by the Joint Commissioner of Income Tax, Transfer Pricing Officer-1, Raipur. The other issues are beyond the purview of the jurisdiction of the undersigned and the assessee is advised to take up these issues at appropriate appellate forum. In regard to the calculation mistake pointed out by the assessee company in calculation of downward price adjustment, the assessee company may move rectification application u/s 154 before the Joint Commissioner of Income Tax, Transfer Pricing Officer-1, Raipur. 7. In view of the facts and in the circumstances of the case detailed above, the various objections raised by the assessee company against the order u/s 92CA(3) of the IT. Act are rejected. Accordingly a sum of ₹ 14,96,76,625/- is added to the income of the assessee on account of downward adjustment as per order u/s 92CA(3) dated 29.10.2011 passed by the Joint Commissioner of Income Tax, Transfer Pricing Officer-1, Raipur. (Addition: ₹ 14,96,76,625/-) 8. On going through the Audit Report submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs before the TPO, because the appellant was not knowing the mind of the TPO and the issues came to the knowledge only upon receipt of the Order of the TPO. It is submitted that in the Show Cause Notice dated 19.10.201 1, a very short time was allowed to the appellant. The Show Cause Notice dated 19.10.2011 was received on the same day at 8.25 PM requiring the appellant to file explanation by 24.10.2011. The appellant filed an application dated 24.10.2011 before the TPO. in which it was submitted that 22nd October was Saturday and 23a was Sunday and as such they were holidays in Singapore and Sunday is holiday in India and that 26th October, 2011 was Diwali, due to which there was festival celebration mood and most of the employees were on leave in India as well as at Singapore. In the above application, the appellant, for the above reasons, requested to allow further time of a week which was not allowed by the TPO. The Ld. Authorized Representatives further submitted that, barring a few evidences, all the evidences mentioned in the application were filed before the AO during the course of assessment proceedings which the AO refused to admit saying that the same be filed before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admit additional evidences saying that adequate time and opportunities were provided to the appellant at the time of hearing is contrary to the facts as discussed above and does not hold good. The AO in his letter dated 10.05.2012 objected that, as the appellant did not file objection before the Dispute Resolution Panel, the additional evidences at this stage should not be accepted. The objection is to be dismissed as not being as per the provisions of law. DRT is an alternate route. An assessee can opt to take shelter of provision contained u/s 144C relating to DRT or can file appeal before CIT (Appeals) u/s 246A. By not filing objections before DRT under sub-Section 2 of Section 144C, the assessee does not lose his right to file additional evidences before the CIT (Appeals). On the date of hearing on 8th August, 2012, the JCIT - TPO-1 opted not to appear, though he filed comments on written submission. However, the AO was present. The AO present at the time of appellate proceedings before me admitted that additional evidences can be admitted by me within the norms under Rule 46A and did not object to the admission of additional evidences filed by the appellant. 4.4 It emer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in terms of quantity the export quantity this year is 21,64,424 tons as compared to 9,74,252 tons in the immediately preceding year, the number of vessels in whicl, cargo was exported this year was 40 as compared to 17 in the immediately preceding year. The net profit as per audited accounts this year is ₹ 4,318 lakhs as compared to ₹ 746 lakhs in the immediately preceding year. Therefore, I do not find any force in the argument of TPO/AO above. ii. I also find that the appellant has not shifted the business from India to Singapore. It is not the case of the AO/TPO that the appellant, a merchant exporter, was engaged in the shipping business, therefore, there is no question of shifting of the business. It was chartering vessels on voyage charter basis from third parties and continued thereafter also. The AE charters the vessels on time charter basis. I am of the considered opinion that the AE s business is a very small slice of shipping activities. Neither the appellant nor the AE have their own vessels. The appellant started chartering the vessels from AE also. Therefore, it cannot be said that the appellant has shifted the business from India to Singapore on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40 to 716 and 820 to 1150 of paper book. In these agreements, terms of contract entered into by AE with the ship owner is stipulated. From the facts available on record, as per trade practices and as per the fixture note (agreement by the appellant with AE) and charter party agreement (agreement of AE with vessel owner), the presumption of the TPO/AO that large fund is required in chartering activity and that the appellant made financial support to AE is negated. From the recasted account of appellant in the books of AE, there are no major credits and on the other hand almost on all days there is debit balance. The credit balance on four days during entire period has been also explained due to passing entry on subsequent day. Therefore, I find that no financial assistance was made by appellant to the AE. Except casting doubt on agreement with M/s R. M. Martin by JCITTPO, nothing has been brought on record to support the conclusions drawn by the AO/TPO. I find that the appellant, in his various written statement referred the services taken by AE from above Co. Copy of agreement has been filed. Payment to them is reflected in audited Profit and Loss Account of AE under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s R.M. Martin since inception of company to whom ship handling charges have been paid aggregating to USD 4,85,772 out of which USD 4,00,000 pertains to vessels shipped to the appellant. I find that this fact was brought on record before TPO as well as AO during the proceedings before them. Copy of agreement with the aforesaid Singapore entity has been also filed. Neither the AO nor the TPO have brought any supporting on record to contradict the agreement and payment made to above party as colourful device except casting doubt on the transaction. The TPO/AO presumed that large number of employees is required in ship chartering activities which I do not find correct in view of business requirement of AE and its function. The vessel owners, depending on the number of vessels they own and other business activities, may require large number of employees but the requirement with regard to employees of the entity which is engaged only in vessel chartering activities is restricted. The Ld. Counsels have described the functions involved in vessel chartering business. This operation has been taken care of by M/s R. M. Martine Pvt. Ltd., a Singapore entity. There is no supporting that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered as pure distributor, hence, the Berry ratio in the present case, which restricts only value added expenses and excludes other costs as per profit and loss account to arrive at PLI is not proper and is not according to Transfer Pricing laws of this country. In Transfer Pricing study, proper understanding of business, business practice, functions performed by AE and the appellant, risks assumed by both the parties and the assets employed by both of them is necessary. Not appreciating any of the above factors will give erroneous result. I find that JCIT-TPO/AO has not properly appreciated the functions performed, risk assumed and bassets employed by the AE and appellant. 26.2 There is no force in the argument of the JCIT-TPO/AO that AE earned abnormal profit in the very first year. The appellant has successfully explained that margin of profit (OP/TC) earned by AE on transactions with the appellant was only 4.52% as compared to 5.18% earned in comparable cases, margin of profit on all the transaction entered into by AE including third parties is 6.85%. This margin cannot be said to be on higher side. TPO referred returns on share holding fund of 11 comparable case. Return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther eleven comparable companies. This is within arm's length. Therefore, no transfer pricing adjustment is needed. It may not be out of place to mention that TPO suggested the downward adjustment at ₹ 14,90,76,625/- which the AO mistakenly took at ₹ 14,96,76,625/-. The Ld. Authorized Representatives present submitted that the mistake has been rectified by the AO and the above adjustment has been reduced to ₹ 14,90,76,625/-. Therefore, the downward adjustment made by the TPO/AO applying the Berry ratio at ₹ 14,96,76,625/- is not according to facts and is deleted. 4.7 Assessee explained that ld. TPO has not even cared to segregate the AE s international transactions carried out with third/independent parties and included such third party transaction as TP transactions which has led to gross injustice. It shows the perfunctory approach of the authorities below while dealing with the important issues of working of TP adjustments. The assessee by facts and figures demonstrated these aspects. Ld. CIT(A) found the contentions made by the assessee and the working to be correct and deleted the third party transaction from the TP working by following observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the time of hearing, therefore, they all appeared in the nature of same transaction. 37. I have considered the arguments / written submissions of both the sides. The TNM method examines the net profit margin related to an appropriate base (i.e. cost, sales, assets) that a taxpayer realizes from a controlled transaction. The Ld. ARs also referred S 10B(e), wherein, the net profit margin realized by the enterprises from an international transaction entered into with an associated enterprise is to be computed. The AE had segregated his transactions into related party transaction and third party transaction, which was made available to the TPO / AO and enclosed at Page No. 120 121 of the Paper Book and is part of Transfer Pricing study (revised at Page No.464). This is as per audited accounts of AE and supported by the audited accounts of the appellant, for which a compilation was also filed, therefore, can be relied upon. Reference of paras 2.78 2.79 of OECD Guidelines and decision of Hon'ble Mumbai Bench of IT AT in case of M/s Tecnimount ICB Pvt. Ltd vs. ACIT; Development Consultants Pvt. Ltd. vs. DCIT reported in 115 TTJ 577 (Hon'ble Kolkata Bench of ITAT); DCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce provided rather than the cost incurred in the business which may include cost of goods sold. This method has been recognized by U.S. Transfer Pricing Regulations as well as by Indian Transfer Pricing Regulations. This has been provided in Rule 10B(1)(e)(i) as under : the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. This ratio being provided in the TP Rules and based on well accepted principle applied world over by the revenue authorities and courts was rightly applied by TPO in this case. ANALYSIS OF COMPARABLE COMPANIES From the financial data submitted by the assessee company of the 11 comparable companies, TPO inferred that:- a) Shipping services business requires large number of employees to handle all the operations/functions of shipping services activities. In all of the cases, employees were ranging from 216 to 5065 except in the case of M/s. Sanyuan Group Limited. Whereas, AE was not having any employee till Februar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpared to time charter rate. It is the case of the Department, that assessee should have himself entered into the time charter agreement, to take advantage of rates due to these time differential. It is contended by ld. DR that the rejection of TNMM method and application of Berry Ratio by TPO order is justified which is relied on. 4.9 Ld. Counsel for the assessee Shri Soparkar, Sr. Advocate, reiterated the facts of the case and contends that the TP adjudications were at nascent stage in as much as many issues about FAR analysis. In right earnest TNMM method was most appropriate with AE as tested party for ALP determination. Ld. TPO without giving any opportunity of being heard rejected assessee s method and recomputed ALP by applying Berry Ratio which was just conceived in TP working in some developing countries. By ratio itself its application is limited to specific circumstances in case of pure distributors and not to the facts of AE s case. Ld. CIT(A) has categorically established that assessee s submissions, evidence and contentions were not duly considered which resulted in lopsided ALP working by TPO/AO. Copious reasoned findings have been given as to why TNMM method w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven AE s third party transactions not related to assessee have been included in TP working. This indicates that they were not serious about the factual and analytical TP working. It is contended that: 1. The assessee s exports bulk quantity of iron ore to various ports of china through sea route and most of the sales are effected on CIF basis i.e. cost of goods including marine insurance and sea freight. The assessee used to charter vessels from ship operators on voyage charter basis, which posed many operational difficulties like: a. The ship operators many a times gave priority to assessee s competitors, were giving priority to their vessel requirement and this by-pass caused delays in shipment and timely delivery of commodities to third party customers. b. Many times assessee s requirements in terms of vessel sizes, availability at a specified time and ports, etc. were not met with causing additional cost, penalties and delayed transactions which were adverse to business interest. 4.12 Assessee in order to overcome these operational difficulties established its own subsidiary Bagadiya Brothers (Singapore) Pte Ltd, a 100% subsidiary at Singapore from 25th April 2007, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unately it has been grossly overlooked by the Ld. TPO Ld. AO while drawing adverse inference thereon. d. AE hires the vessel from ship owners on time charter basis which includes only per day hire cost of the vessel. AE contracts with charterers on voyage basis i.e. freight is charged from load port to discharge port. Under the voyage charter, AE is remunerated on per ton of goods transported after considering all other costs including bunkering cost (Fuel Oil and Marine Diesel Oil), which is one of major cost component in ship chartering operations. Since, the shipping market is very volatile and price of bunker keeps on fluctuating, AE bears the risks of increase in price subsequent to voyage contract with charterers. e. To substantiate the risks associated with bunker price, the appellant submits market price of bunkers prevailing during FY 07-08 along with the relative price fluctuations, which establishes the fact that the price of bunker is very volatile and hence, the risk is always associated with change in bunker price. The details of bunker prices prevailing during January 2007 to March 2008 were duly filed which demonstrates the engagement of a great risk in high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... USD 26,606 Total - USD 5,87,504 4.15 The AE has made a claim for the advances paid against Cosbulk. The matter is still pending disposal. On the other hand, NCS being a charterer also filed corresponding claim for refund of advance of USD 3,21,360 from BBSPL. Since BBSPL did not honour the claim of NCS due to pending dispute of its own legal claim against Cosbulk, NCS arrested the bunker for recovery of his claim, of vessel hired by BBSPL. To release the arrest of the bunker, BBSPL had to deposit USD 3,47,027/- with Hon. Kolkata High Court as security till the matter is disposed off. The AE had to incur additional hire charges per day of the vessel including bunker charges for four days i.e. from the day if vessel arrest (16th May 2009) till the date of vessel release (21st May 2009).The AE incurred the said hire charges without any corresponding recovery of the same from the appellant. Relevant orders are part of the record. M.V. Meteora: During FY 2007-08, AE had hired vessel Meteora on time charter basis and the same was chartered by AE to third party customer (British Marine Plc.) on time chart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant. Vessel sailing delay due to non-availability of night pilotage- M.V. Mahakam Many load port/ discharge port don t have the night navigation facilities therefore, many a times vessels have to wait till morning after completion of loading or discharge at respective ports for their onward journey. For vessel Mahakam it had to bear the cost of delay for 11:30 Hours as vessel Mahakam which was chartered to the appellant by AE was waiting at discharge port after 20:00 hrs was waiting at the port due to non availability of night pilotage facility. The time lost and consequent charges for night pilotage was not be claimed by the AE from assessee. * Vessel Breakdowns/ defects- During FY 0910- M.V. Sealuck II This vessel lost due to heavy rain resulted its crane break down, the AE could not claim the time loss from its Disponent Owner for the its break down and had to pay hire charges under time charter agreements. Thus the risks of vessel break down/ defects rests with the AE and was not transferred to or reimbursed from the assessee. *Notice Of Readiness (NOR) Lay time MV Stove Campbell Laytime is the term used to refer the time allowed to charterers to lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount could not be recovered in case of vessel MV Meteora from third party namely M/s D T Resources. 4.16 These well documented exigencies and Risk Bearing events, payments clearly demonstrate that the AE is operating as an entrepreneur and assumed substantial Entrepreneurial Risks while undertaking marine chartering services on independent terms to third party customers including assessee. Despite all these recorded facts, evidence and circumstances it was not justified on the part of ld. TPO to take a view that FAR profile of AE was not correct and there was no necessity to form an AE. 4.17 The relevant Rule 10B(2) for TP working sets out the criteria for comparability of the transactions. It is important to take into consideration the sub-rule (a) and (b) which sets out as under: (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; Though the transfer pricing regulations require a thorough analysis of the functions performed by an entity before determining the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or failure of investment in research and development; financial risks such as those caused by currency exchange rate and interest rate variability; credit risks; and so forth. 4.19 The Ld. TPO, failed to correctly appreciate the AE FAR profile assumed in its entrepreneurial capacity for its independent chartering operations and holding that: In view of the same, it cannot be said that functions including risks involved relating to ship hiring activities was carried out by the AE and it should be paid for these costs. The AE can only be treated as facilitation office, which has carried out some administrative work... 4.20 The Ld. TPO has failed to understand and appreciate the modus operandi of the business of AE in the relevant vessel chartering business. Any adjustment made without giving due cognizance to the business practice followed in the relevant industry and consequently any conclusion drawn will be prejudicial to the interest of justice. The Ld. TPO is not justified in rejecting TNMM method adopted as most appropriate method and AE as tested party by holding that: 10. The assessee has selected its AE, M/s. Bagadiya Brothers Singapore Pte Ltd. (BBSP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... force is not needed if u hire a professional agency which has a competent staff to render requisite services. Thus the Ld. TPO s adverse inferences about lack of staff o technically competent employees are misplaced and devoid of realities. 4.22 Post FY 2007-08, the AE did not avail services of M/s R M Martin as it was able to build up own in-house employees including an employee holding a Diploma degree in Shipping Management. The adverse inference drawn for utilization of professional help of expertise of M/s R M Martin in the first year of its operation is unjust, misplaced and arbitrary. Since AE is only engaged in chartering activities, not owning any vessel or employees there for, a large employee base was not needed for its chartering operation. 4.23 Further, the Ld. TPO at Para 12 of the order stated that: ...the assessee company failed to produce the copies of agreements (time chartered agreements) between BBSPL and the vessel owners...It is also not possible to ascertain how ship owners have agreed to enter into business with AE on time charter basis, as it requires huge financial exposure. The equity capital and total fund available with AE were US$ 2,30,066 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justification in the observations and conclusions of ld. TPO/ AO that: i. There was no justification for assessee to have gone for a 100% wholly owned subsidiary at Singapore for ship chartering functions and it was not a proper decision. ii. The AE did not have independent sources and cash flow. iii. No functions and risk FAR was incurred by AE. iv. The relationship between AE and assessee were that of Agent and Principal and not independent functions. 5. Ld. CIT(A) after due consideration of facts and circumstances, material available on record, remand report, AO/ TPO and assessee s contentions upheld the veracity of assessee s TP study. While doing so the TPO s observations have been dislodged with proper reasoning and analysis. 5.1 A detailed TP report with FAR analysis of the appellant and AE was furnished. It was demonstrated that both the parties bear significant respective risks in relation to chartering businesses streamlined by transactions along with agreements. For arm s length price working with AE, Transactional Net Margin Method (TNMM) was selected as the most appropriate method and Operating Profit/Total Cost (OP/TC) was considered as the Profit L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of the products distributed, i.e. it is not proportional to sales, and *The taxpayer does not perform, in the controlled transactions, any other significant function (e.g. manufacturing function) that should be remunerated using another method or financial indicator. 5.4 The AE acts as a service provider with a range of chartering activities and hence cannot be characterized as a distributor fit for application of Berry Ratio. Further, without prejudice to the above, even if Berry Ratio is applied to test the arm length nature, a larger question arises as to the identification of VAE for proper application of Berry Ratio. AE, based on the requirements of its customers, including the appellant, hires the vessel on time charter basis from the ship owners/ disponent owners and charters the same to the appellant and other customers on voyage basis thereby changing the very essence of the transaction. In time charter basis, the vessel is hired on time basis whereas in voyage charter, the vessel is hired on per metric ton of the goods shipped after considering the relevant load and discharge port. In these circumstances, AE is not acting as a distributor of services/ pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of renting advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function. 5.6 In view of the parameters of pass-through concept as laid down by OECD Guidelines and also by Dr. Charles H. Berry, it is to be appreciated that Berry Ratio may suitably be applied in case of a distributor or service provider who are engaged in buy-sale arrangement of goods/services without any value addition. Whereas in the instant case the AE is engaged in range of chartering functions in the capacity of entrepreneur performing entrepreneurial functions and assuming related risks. Ld. TPO failed to appreciate the nuances of ship chartering business and the AE s operations and grossly erred in not considering the other direct costs of AE as substantial value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission dated 12th September 2011 and 24th October 2011 placed on Appendix IV IX- pages 124 to 138 and 282 to 410 of the Paper Book. It clearly establishes the fact that AE was acting in its independent capacity and was not in any manner performing the mere role of facilitator/ agent and thereby had binding contractual obligations with the appellant. 5.10 The underlying direct costs so assumed/incurred by the AE along with risks, the justification thereof and corresponding functions and risks associated with it can be summarized as: A. Hire Payments: This is the hire cost of the vessel incurred by the AE and paid to its Disponent / Vessel Owner. The hire cost incurred is paid on per day hire cost of the vessel. The AE identifies the vessel to meet the requirements of its customers including the appellant. In this regard, as highlighted in above paras M/s R M Martin plays a major role in identifying and finalizing the required vessel. As detailed in the submission above, the AE assumes the following risk pertaining to hiring the vessel: I. Risk of increase in bunker prices; II. Risk of appropriate realization of hire charges; *Risk of performance obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 5.13 Without prejudice to above contentions it is contended that - even if Berry Ratio is applied to test the arm length nature, a larger question remains as to the identification of value added expenses - VAE for proper application of Berry Ratio. Pertinently looking at the other way round the question of doubt arises also on the identification of Cost of Goods Sold - COGS). There is no hard and fast accepted accounting principles in India or in the overseas jurisdiction that guides the characterization of Total expenses into COGS and VAE and hence a very high level of judgment has to be taken for identification of Total expenses into COGS and VAE. 5.14 The appellant had selected AE as the tested party and to establish the arm s length nature of the international transactions, comparables were selected from OSIRIS database mentioned in its T P Study at Appendix II page 107 of the PB. They were selected by a systematic method of quantitative and qualitative analysis which does not provide for any separate identification of value added expenses. The foreign database or the generally accepted accounting principles of the respective company does not provide for such disclosu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,785,226 Expenses (Value Added Expenses) D 6,732,177 Arm s Length Profit (ALP) Gross Profit E = D * 1.301 8,758,562 Adjusted Sales Price E = B + D 44,939,600 -5% of the Gross Profit F = C * 95% 8,345,965 +5% of the Gross Profit G = C * 105% 9,224,487 Adjusted Sales Price H = B + E 46,804,515 -5% of the international transactions I = A * 95% 44,489,620 +5% of the international transactions J = A * 105% 49,172,738 On applying proviso to Section 92C(2) of the Act, the adjusted sales price of 46,804,515 (B+E) is within +/-5% of the international transaction (Ito J). In these circumstances, no adjustment will be required. Further, it can also be seen that ALP Gross Profit of 8,758,562 also falls in the range of +/- 5% of the Actual Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e controlled and uncontrolled transactions than gross profit margins. Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently, this may lead to a wide range of gross profit margins but still broadly similar levels of net operating profit indicators. In addition, in some countries the lack of clarity in the public data with respect to the classification of expenses in the gross or operating profits may make it difficult to evaluate the comparability of gross margins, while the use of net profit indicators may avoid the problem. Para 2.105 of the OECD TP Guidelines, July 2010 further states that: By way of illustration, the example of cost plus at paragraph 2.53 demonstrates the need to adjust the gross mark up arising from transactions in order to achieve consistent and reliable comparison. Such adjustments may be made without difficulty where the relevant costs can be readily analyzed. Where, however, it is known that an adjustment is required, but it is not possible to identify the particular costs for which an adjustment is required, it may, nevertheless, be possible to identify the net profit ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analyzed the concept and applicability of Berry Ratio and held that: 46. It can be seen from the above that the Berry ratio can be used only in very limited circumstances and the limitations that we have listed above are by no means exhaustive. There is also a view expressed that use of Berry ratio as a PLI results in indicating less than fair ALPs in tax jurisdiction where the Assessees have a lower bargaining power. In the aforesaid context, in our view, the TPO had correctly reasoned that Berry ratio could not be used as a PLI in cases of Assessees which were using intangibles. However, we find that there was no cogent material for the TPO to hold that the Assessee had developed supply chain and human resources intangibles. In any event, there was no material to conclude that costs of such intangibles were not captured in the operating expenses. 47. In our prima facie view, the third reason stated by the TPO, that is, the rate of commission paid to the Assessee is based on the value of the goods, would be a valid reason to reject the use of Berry ratio because Berry ratio can only be applied where the value of the goods are not directly linked to the quantum of profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of draft assessment order, due to hurried assessment process AE s third party transactions were not included and the TP adjustment was applied on all transaction. Ld. CIT(A) accepting the objection in TP working are as under: 35. The appellant has submitted that the TPO as well as the AO have erroneously computed the arm s length price even on the transactions which took place between the AE and the third parties (other than the appellant) thereby resulting in erroneous TP adjustment dispute to the tune of ₹ 7,32,81,066/- (Rs.14,90,76,629 7,57,96,563). Without prejudice to earlier grounds and not admitting, it is submitted that the TPO as well as the AO ignored the segmental analysis in the TP adjustment on the overall transaction of AE including those transactions which did not take place between AE and the appellant, whereas, Sec. 92 is applicable on to the international transactions between the assessee the AE. This has resulted in absurd and erroneous TP adjustment. Compilation filed at Page No.37 and written submission is produced below:- Particulars Reference As PO (Entity Level)sactions with Appellant only Perticulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Reference of paras 2.78 2.79 of OECD Guidelines and decision of Hon'ble Mumbai Bench of IT AT in case of M/s Tecnimount ICB Pvt. Ltd vs. ACIT; Development Consultants Pvt. Ltd. vs. DCIT reported in 115 TTJ 577 (Hon'ble Kolkata Bench of ITAT); DCIT vs. M/s Starlite Reported in 133 TTJ 425 (Hon'ble Mumbai Bench of ITAT) are relevant Transactions entered into by appellant with AE only falls under Transfer Pricing provisions and not the entire transaction of AE which includes transactions with third parties also. Therefore, the alternate arguments of the Ld. Authorized Representatives are accepted. However, I have already held that no transfer pricing adjustment is required, therefore, no relief separately is required to be given. 5.18 Without prejudice to the submission of the appellant that no adjustment is required, the appellant submits below the revised computation of transfer pricing adjustment based on the erroneous approach selected by the Ld. TPO after considering international transactions of the AE with the appellant only. Particulars Reference Perticulars Refeerence As per TPO (Entity Level) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactional net margin method, by which,- the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base 5.21 The appellant further submits that while determining an arm s length price for the international transactions, the AE had segregated its transactions into related party segments and third party segments. The segmental break-up was submitted to the Ld. TPO, vide submission dated 20th July, 2011and revised workings to the Ld. AO these are placed on PB. However, the Ld. TPO relied only on the overall financial results of the AE, considering its entire business operation and considered the margin earned in case of international transactions of AE with the appellant along with the margin earned by AE from transactions with third parties, while undertaking analysis for determining the arm s length price of the international transactions. It is a well accepted proposition that where the segment in relation to the international transactions could be obtaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evaluated adequately on a separate basis, that such transactions may be evaluated together. In this case, the assessee had entered into the following types of transactions (a) Engineering drawing and design services, (b) Deputation of employees, (c) Reimbursement of traveling costs and (d) Rendering data entry services through its Group entity Datacore India. Hence, the ALP of each of the international transactions should be determined separately as the nature of transactions entered by the assessee with its AEs was different. Hence, the ALP would be determined based on the nature of services provided by the assessee for each class of transaction taking into consideration the functions performed, assets employed and the risks assumed, by the respective parties to the transactions. The Ld. DR could not controvert the above arguments placed by the assessee regarding determining the ALP of each international transaction separately by giving any strong argument. We are also of the same view that the ALP should be determined on a transaction-by transaction basis and not on an aggregate basis as done by the TPO and sustained by the Commissioner (Appeals). DCIT vs. M/s Starlite [133 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,507,615 2,256,061 7,731,303 60,326,159 Expenses: 44,653,629 3,374,416 2,188,642 5,393,064 556,097,52 Indirect 124,500 9,325 5,653 707,682 847,160 Total Cost (TC) 44,778,129 3,383,741 2,194,295 6,100,747 56,456,912 Profit Before Tax (OP) 2,053,050 123,874 61,765 1,630,553 3,869,244 OP/TC 4.58% 3.66% 2.81% 26.73% h BBPL Transactionh Anurag Overseas Transaction with B2B(in USD) Transaction with It can be seen from the above analysis that AE has earned operating profit over total cost (OP/TC) of 26.73% while transacting with third parties whereas, in case of transactions made with the appellant, the AE has earned OP/TC of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... internal CUPs were not comparable to the related party transactions due to various differential parameters like vessel size; difference in loadable quantity, different time period, etc., the appellant identified the external CUP in the form of freight rates available in independent market publications and compared the same with the freight transaction of the appellant with its AE. On comparison, it can be concluded that transactions were undertaken at market prices. 5.27 As the appellant was unaware of the Ld. TPO s methodology for ALP working and no further questions were asked the record could not be enriched with further evidence to support with other external CUP data i.e. freight data available in the independent market publications. Before ld. CIT(A) they were produced by way of additional evidence which were sent for remand. Ld. CIT(A) after due consideration held the internal CUP working provided by assessee was justified for TNMM working. 5.28 It is contended that ld. TPO/AO and unjustifiably stepped into the shoes of the appellant to dictate and challenge its decision taken under the realm of contemporary commercial expediency and business realities of having subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king will fall within the +/- 5% range of the international transactions, as per proviso to Section 92C(2) of the Act which states that:. The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm s length price, in the manner as may be prescribed: [Provided that where more than one price is determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm s length price. Thus the legislative mandate provides that if the arm s length does not exceed five percent of the international price then the price at which the international transaction has actually been undertaken shall be deemed to be the arm s length price. 5.32 The correct arm s length computation of Ld. TPO s if accordingly corrected and recomputed, even going by their approach the ALP w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Kamlaben Sureshchandra Bhatti; AP High Court in the case of Unique Plastics (P) Ltd; Bombay High Court s Smt Prabhavati S. Shah (all supra). iii. Revenue should not be aggrieved inasmuch as ld. AO before ld. CIT(A) ultimately agreed for admission of additional evidence. vi. In any case, there is no prejudice caused to Revenue inasmuch as a proper remand report was called for from TPO/AO in respect of additional evidence which is submitted and considered. Further, TPO/AO were present during the course of hearing before ld. CIT(A). In view of the foregoing, we see no infirmity in the order of ld. CIT(A) which is upheld. 6.1 Apropos the main ground on merit, the revenue has taken an omnibus and summary ground that whether in law and on facts circumstances of the case, the CIT(A) has erred in deleting the addition of ₹ 14,69,89,382/- made by the AO on account of transfer pricing adjustment . The fact of the matter is there are many parts to this ground. The first and foremost being treatment of AE s third party transactions as related party transaction. Ld. CIT(A) has upheld that TP adjustment to extent of ₹ 7,32,81,066/- being third party transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most appropriate method and AE at tested party. Our views are supported by the details provided by ld counsel and as appreciated by ld. CIT(A). We uphold the observations and conclusions of ld. CIT(A) ion this behalf. ii. There is no merit in the TPO s allegation that appellant has shifted the business from India to Singapore; it was a merchant exporter and not engaged in the shipping business in India; therefore, there is no merit in such unfounded allegation. It was chartering vessels on voyage charter basis from third parties and continued thereafter also. The AE as a distinct business modicum charters the vessels on time charter basis and offered on profitable voyage basis. Neither the appellant nor the AE have their own vessels, in view of these facts AE s business is a very small slice of huge shipping. Therefore, it cannot be said that the appellant has shifted the business from India to Singapore on the other hand a new business of vessel chartering has been stated at Singapore. iii. From the facts emerging from the record, it is demonstrated that the AE and the appellant were performing their respective functions and assuming their business risk independently withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lmost on all days there is debit balance. vi. Except casting unfounded doubts on agreement with M/s R. M. Martin by JCIT-TPO, nothing has been brought on record to support the adverse conclusions drawn in this behalf by the ld. AO/TPO. From mutual Profit and Loss Account and other statements establish that the services of R. M. Martin ware availed by AE also prior to October 2007 also. Therefore, there is no force in the observations of JCIT-TPO in this regard. vii. Apropos assumptions of TPO/AO that M/s. Bothra Shipping and M/s Sea Trans are ship owners and the adverse inference drawn in this behalf are not substantiated. M/s. Bothra Shipping and M/s Sea Trans are not ship owners but only port agents to whom payments were made by the AE and not by the appellant as inferred by the TPO. This was subsequently adjusted as per terms and conditions of the contract, besides the total amount of such port charges comes to rupees four crores approximately and not Rs. thirty crores as wrongly observed by the TPO. Similarly ld TPO/AO proceeded on the wrong impression that M/s Sea Trans Marine Private Limited and M/s Bothra Shipping Private Limited are vessel owners and payments were mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was no man power with AE from May 2007 to September 2007 does not hold good. 6.5 Adverting to assessee s adoption of TNMM method as most appropriate method for computation of ALP under TP regulation and adopting AE as a tested party, we find the TP working provided by the assessee to be correct. Similarly Berry Ratio cannot be applied to the assessee s case as it is applicable in specific circumstances of a pure distributor where no value added services are rendered. The observation of the TPO that AE had utilized the tangible and intangible assets of the parent company in earning such huge profit in the first year of its activity and cannot be treated as independent shipping service provider is only a presumption without any support. We are of the view that various functions for ship chartering have been outsourced by the AE to one M/s R. M. Martine, since inception of the AE. The AE had its own funds, undertook business risk and many instances of such risk which actually borne by AE pertaining to various vessels have been proved with evidence. The payment of hire charges, bunker charges, port charges have been made by the AE from its own funds evidenced by cash f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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