TMI Blog2017 (3) TMI 1670X X X X Extracts X X X X X X X X Extracts X X X X ..... ntification of profits attributable to the LO and the HO as per the table 1 , above , as per para 5 at 40 : 60 is also upheld Levy of interest u/s.234B - Applying the ratio laid by the Supreme Court in the case of COMMISSIONER OF INCOME TAX VERSUS ANJUM MH GHASWALA AND OTHERS [2001 (10) TMI 4 - SUPREME COURT], has held that the levy of interest u/s.234B is mandatory - all the appeals of assessee is dismissed. Transfer Pricing adjustment u/s 92CA - protective assessment - working capital adjustment - Held that:- CIT(A) confirmed AO's protective assessment wherein he has taken 40:60 to the LO:HO, held that the percentage of ALP as determined by the TPO should have been applied only on 40% of the total sales and the ALP should have been determined accordingly - also the working capital adjustment of 0.906% and 1.459% could be given in AY's 02-03 & 03-04, respectively - hence the orders of the CIT (A) do not require any interference and appeal of revenue is dismissed. - I.T (TP).A Nos.209 & 210/Bang/2011, Cross Objection Nos.31 to 33/Bang/2011 (In I.T (TP).A Nos.617 to 619/Bang/2011 - - - Dated:- 31-3-2017 - SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. S. JAYARAMAN, AC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording to the A O, the LO was not supposed to do business in India as per the approval from the RBI but, in fact, the LO was carrying on some income earning activities in India which fact has been recorded by obtaining statements of former employees of the Indian subsidiary and the employees of the erstwhile LO. The AO noticed that out of the total profits earned, a portion of the profit was attributable to the Indian operations since they had liaison offices in lndia. After concluding so, he took into consideration the total sales and deducted the cost of sales to arrive at the gross. profit. The Singapore expense was taken as claimed by the assessee and after deducting expenses of Singapore and of Indian liaison offices, net profit was determined and 40% of it was taken as profit attributable to the Indian LO. Before deciding the 40:60 ratio, the AO determined the functional analysis after fixing the relative weightage of 50:25:25 to Functions, Assets and Risks and finally determined the weighted average after taking into intra sectional ratio between the LO and the HO and finally arrived at the profit attributable to Indian operations at 40%. Thus, the AO determined the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The LO could not make any supplies on its own but the Indian subsidiary could do so. This is evident from the statement of Mr. Singh, Sales Manager wherein he has stated that the customers had to import their requirements from their overseas office located at Singapore. ii. Salaries were earlier paid by the LO and later by the Indian company. iii. Earlier to incorporation of the subsidiary they were permitted to canvass imported sales from Singapore, but after the incorporation of the company they were permitted to do Rupee sales. iv. Revenue recognition was always there before incorporation in the hands of the LO and after the company came into existence. V. Profits arose to the Indian company after the incorporation and it was attributable to the LO before incorporation. vi. The nature of the business remain the same before and after the incorporation since the LO was dealing with the same functions like marketing, sales, service, accounts, administration etc. The LO was also assigned the task of identifying potential customers for which technically competent personnel were appointed. vii. The Indian LO was involved in procurement of orders and step by step ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of materials, payment for materials, the AO held that LO could be assigned 565 points and the HO 235 points on a scale of 800 and concluded that 70.30 ratio is fair and reasonable. As regards assets analysis. The AO held that LO has virtually no assets and in view of the same tuck the ratio of 10:90 for LO : HO. As regards risk analysis, it was held that mostly it is borne by the HO and the LO was in charge of only the manpower and not for the stock he assigned the ratio of 90:10 for HO : LO. Finally he worked out the basis of 40:60 between LO and HO as under: . 8. Quantification of 40% of the profits to- the LO: The AO after detailed analysis has held that 40% of the profits as attributable to Indian operations and the balance 60% to its Singapore HO. The appellant has argued that the functions performed pertaining to determination, negotiation and / or fixing of prices of goods, identifying new customers, determining sale prices for third party customers, developing marketing strategy, coordinating marketing strategy implementation, planning advertisement and promotional ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owards assets and risks in the intra sectoral ratio pertaining to LO and the balance 90% to the HO. Even in the functions performed, the 8 broad parameters as discussed in page 16 of the assessment order practically cover every aspect of functions performed and relative weightage allocation is also held to be proper and the final quantification of 565 to LO and 235 to HO on a scale of 800 is held to be perfectly justified and accordingly quantification of 70 : 30 between LO and HO is upheld. The final quantification of profits attributable to LO and HO as per the table 1 above as per para 5 at 40 : 60 is also upheld. 5.1 With regard to the issues as to whether the assessee had any business connection in India as per provisions of Section 9(i) and whether the appellant had a PE in India, the assessee has relied on the following cases before the CIT(A): - CIT vs RD Aggarwal Co (SC) [56 ITR 201 - CIT vs. Hindustan Shipyard Ltd (AP) [109 ITR 158] - CIT vs Atlas Steel Company Ltd (Cal) [164 .ITR 4011 - CIT vs Gulf Oil (Great Britain) Ltd (Bom) [108 ITR 874] -Imperial Chemical Industries Limited vs inspecting Assistant Commissioner [19 ITD 275] - VDO Tachome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were later on working for the subsidiary, were recorded. On due appraisal of those facts and materials , notices u/s 148 were issued for a ys 2000-01 to 2004-05. Complying with them, the assessee filed the returns declaring income on the basis of cost + 6%. It is seen that the AO gave due opportunity to the assessee in his letter dated 24.12.2007 drawing assessee s attention towards using the statements recorded at the time of survey, its due analysis etc and thereafter passed the impugned assessment orders. The CIT (A) has also given an opportunity by way of a remand proceedings. The AO has reiterated the fact that the appellant's themselves admitted to the activities of the LO are taxable in India by showing income at cost + 6% basis. In view of the assessee's own admission by showing income attributable to the Indian operations, it has indirectly accepted the fact that they had business connection in India and also the Indian LO as the PE of Arrow Singapore. Thus, as held by the CIT(A) that the assessee's arguments deserve no consideration in view of the detailed reasons given by the AO in the assessment order as also in view of the appellant's own admission of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held that the levy of interest u/s.234B is mandatory with which we are in agreement. In the result , all the above grounds of the assessee are dismissed for ays 2000-01 2001-02. ITA Nos.617 to 619/Bang/2011 - By the Revenue CO Nos.31 to 33/Bang/2011 - By the Assessee : 07. Now, let us examine the Revenue s three appeals I.T (TP).A Nos.617 to 619/Bang/2011for assessment years 2002-03, 2003-04 2004-05 Assessee s cross -objections Nos.31 to 33/Bang/2011 on I.T (TP). A Nos.617 to 619/Bang/2011 on Revenue s above three appeals as under: 08. For a ys 2002-03, 2003-04 2004-05, the AO determined the profit attributable to the Indian L O at Rs. l,83,37,555/-, Rs. l,42,54,775/- ₹ 92,04,320/-, respectively. The AO noticed that the assessee's international transactions with its A E being more than 15 crores in each year referred the matter to the TPO. The TPO after making a detailed analysis, determined arm's length margin at 4.78%, 5.18% and 5.58% as mean PLI for the three years, and determined ar m's length profit at ₹ 5,65, 66,60 9/-, ₹ 4.96,10,165/- and ₹ 1,70,10,258/-, respectively, for the three assessment years. The TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 42 of the assessment orders and table I above as per Para 5 at 40:60 is also upheld. However, for AY 04-05 there is an arithmetical mistake committed by the AO in not allowing Singapore expenses and accordingly for AY 04-05 the figures as determined under the head TP adjustments, (worked out below) of ₹ 52,82,613/- is confirmed. 9. Transfer Pricing adjustment as per Section 92CA: 9.1 The AO noticing that the appellant's international taxation with its AE being more than 15 crores in each year referred the matter to the TPO after making a detailed analysis determined arm's length margin at 4.78%, 5.18% and 5.58% as mean PLI for the three years, and determined arm ' s length profit at R s . 5, 65 , 66 , 609 / - , ₹ 4.96,10,165/- and ₹ 1,70,10,258/- for the three assessment years. The TPO took the TNMM as the most appropriate method. 9.2 The appellant has raised objections on the determination of the ALP on its entire sales rather than applying the above percentage on the profit attributable to LO. Besides that, it is also stated that the working capital adjustment has not been given by the TPO. It was also pointed out that the AO has determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted by the appellant though the appellant is right in asking for certain percentage of working capital adjustment. Considering the fact that the AO has independently determined the profit attributable to the LO, corresponding to this determination the working capital adjustment could be given. Accordingly working capital adjustment of 0.906% and 1.459% could be given in AY's 02-03 03-04 respectively. Accordingly, the ALP margin to be re-determined for AY 02-03 03-04 works out as under: AO is directed to adopt ALP adjustments of ₹ 1,83137,996/- and ₹ 1142,54,781/- for AY 02-03 03-04 respectively which are almost the same as ₹ 1,83,37,555/- and ₹ 1,42,54,775/- determined by the AO on protective basis. However, for AY 04-05 AO has determined on protective basis income attributable to. LO at ₹ 92,04,320/- but it is seen from his table in para 42 that he has not allowed Singapore expenses while arriving at this figure. For AY 04-05, the AO is directed to allow an adhoc figure of 1.25% towards Working capital adjustment. Hence the ALP margin shall be taken at 4.34% ( 5.59% - 1.25%) and on 40% of the global sales, being Indian LO sales, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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