TMI Blog2020 (2) TMI 422X X X X Extracts X X X X X X X X Extracts X X X X ..... Ocean Freight charges paid to the agents of foreign shipping company for non deduction of tax at source - HELD THAT:- In the instant case section 172 is applicable, since the payment is made to Shipping Agents. The department has not called for the return of income of the non resident shipping owners at the time of assessment. Therefore, we are of the considered opinion that the payment is squarely covered by Circular No. 723 of CBDT and there is no case for deduction of tax u/s 194C or 195 and consequent disallowance u/s 40(a)(ia) of the Act. Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. Transfer pricing adjustment - Arms Length Price on sales and the interest charged on outstanding receivables treating the outstanding receivables as International transactions - Assessee has objected for adopting TNMM as MAM instead of CPM adopted by the assessee - HELD THAT:- In view of the fact that there are no external comparables available in the public domain, we hold that the assessee has rightly bench marked the ALP adopting the internal comparables and hold that the international transaction is at ALP and no interference is called for in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal raised by the Department in these appeals for the Assessment Years (A.Y.) 2012-13 to 2014-15 are identical. Though ground No.5 and 6 are on transfer pricing issues, no such issues are involved for the A.Y.2012-13 and 2014-15. For the A.Y.2013-14, transfer pricing adjustments were made by the Assessing Officer(AO) which are being agitated by the Revenue in this appeal. 3 During the pendency of appeal proceedings, the department has filed the revised grounds and the Ld.DR submitted that the grounds raised originally in appeal memo in Form No.36 were lengthy and argumentative, therefore, the department has filed the revised grounds and requested to admit the same in the place of original grounds. After hearing both the parties, we take up the revised grounds for adjudication. The department has raised the common grounds in appeal Nos.510/Viz/2018, 511/Viz/2018 and 53/Viz/2018 as under: 1) The order of the Commissioner of Income Tax (Appeals) Guntur, for the AY: 2013-14, is erroneous both on facts and in law. 2) The Ld. CIT (Appeals), Guntur, erred in deleting thee addition made by AO in respect of disallowance of claim u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of convenience the facts are extracted from the appeal of A.Y. 2012-13. The assessee is engaged in the business of processing of tobacco, manufacturing of cigarettes and import and export of cigars and beverages. The assessee company has two divisions, namely tobacco division and SEZ division. The SEZ unit is set up in Special Economic Zone, Cochin, during the F.Y.2005-06 relevant to the A.Y.2006-07, as per letter of approval dated 14.03.2005 issued by the Development Commissioner, Chochin, SEZ. The assessee s unit in the SEZ is engaged in the business of import of cigarettes and alcoholic beverages and re-export of the same. The assessee maintained separate books of accounts for the tobacco division and the SEZ division. During the previous year relevant to the A.Y.2012-13, the assessee has computed the profits from SEZ unit at ₹ 5,48,87,579/- and claimed 50% of the same as deduction u/s 10AA of the Act, being the 7th year, which worked out to ₹ 2,74,21,882/-. The AO viewed that the assessee is not entitled for exemption u/s 10AA, since, the assessee is not engaged in the manufacturing activity and only engaged in the trading activity. Therefore, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .DR argued that the CBDT has not issued any parallel circular authorizing the field officers to allow the deduction u/s 10AA in case of trading activities carried on in SEZ units. The Ld.DR further submitted that the Assessee is neither manufacturing nor producing any article or thing nor rendering any services. Precisely this is the main reason for disallowance of claim u/s 1OAA by the Assessing Officer. It was the contention of the assessee that the expression services under rule 71 of the SEZ rules include trading and further that trading mean import for the purpose of re-export. It was also pointed out by the assessee that the clarification issued by the Department of Commerce, Ministry of Commerce and Industry vide instruction No. 4/2006 permits the units in SEZ in whose case letter of approval was given for carrying out trading activities of all forms of trading but the benefits of u/s 10AA will exclude the trading other than trading in the nature of reexport of imported goods. From the perusal of the said instruction it can be noticed that the said instruction, while allowing SEZ units to carry out all forms of trading had stated that the benefits of u/s 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties, perused the materials available on record and gone through the orders of the authorities below. The only question arises for our consideration is whether on the facts and in the circumstances of the case, the benefit of exemption u/s 10AA of the Act is available to the assessee, which is engaged in the business of trading activity in the nature of import and re-export of goods which falls within the meaning of the term services as defined u/s 10AA of the Act. Admittedly, the assessee has established a unit at Cochin SEZ, which was approved by the Development Commissioner vide his letter no.9/05/2005/IL/CSEZ/1563 dated 14.3.2005. The assessee is engaged in the business of trading activity in the nature of importing Cigars, Cigarettes Alcoholic beverages and re-exporting the same. The assessee claims that units located in SEZ, engaged in the business of import and export falls within the definition of the term services as defined in clause Z of section 2 of SEZ Act, 2005 and rule 76 of SEZ Rules, 2006, which defines the term services , which includes trading . As per explanation given in SEZ Rules, 2006, the expression trading for the purpose of second sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law assessee cannot, by any stretch of imagination, be entitled to claim deduction u/s 10AA of the Act. Since the Ld. CIT(A) has given cogent reasons in arriving at a conclusion that the assessee is entitled to exemption u/s 10AA of the Act on an interpretation of the provisions of the Income-tax Act as well as the SEZ Act and Rules, apart from the instructions issued by the Ministry of Commerce, we do not find any infirmity in the order passed by the Ld. CIT(A) and thus, the appeal filed by the revenue is hereby dismissed. 11. The assessee relied upon the decision of ITAT, Jaipur B Bench in the case of DCIT Vs. Goenka Diamonds Jewellers Ltd. 509/JP/2011 dated 31.1.2012, wherein the coordinate bench of this Tribunal, under similar circumstances has held as under: We have also reproduced Section 51 of the SEZ Act. As per this Section, it is mentioned that notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act, the provision of SEZ Act will prevail. The Hon ble Apex Court in the case of Tax Recovery Officer, Vs. Custodian Appointed und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of Commerce and argued that in the absence of instructions and directions to implement the circular of Ministry of Commerce (supra), no deduction is permissible as per the Act. However the Act does not define the term services in section 10AA. The SEZ Rules define the services and the activity of the assessee is covered under the definition of services. Therefore, the argument advanced by the Ld.DR is not tenable. Hence, respectfully following the view taken by this Tribunal in the assessee s own case, we hold that the assessee is eligible for deduction u/s 10AA on the profits derived by SEZ Unit in respect of trading activity of importing the goods for reexport. Accordingly, the ground raised by the revenue on this issue is dismissed. The cross objections of the assessee are supportive and becomes infructuous hence dismissed. The appeals of the revenue as well as cross objections of the assessee on this issue for the A.Y. 2012-13 to 2014-15 are dismissed. 14. Ground No.4 is related to the issue of addition made by the AO u/s 40(a)(ia) of the Act in respect of Ocean Freight charges paid to the agents of foreign shipping company for non deduction of tax at sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) partly allowed the appeal of the assessee. The Ld.CIT(A) examined the issued and found from the copies of invoices filed before him that the invoices contain the details of various charges separately and observed that the payment of ₹ 21,51,939/- include the Ocean Freight and transportation charges of ₹ 10,10,348/- in the A.Y.2012-13. The Ld.CIT(A) found that as per Circular No.723 dated 19.09.1995, Ocean Freight paid to agent of foreign shipping company does not attract TDS provisions. Accordingly deleted the addition made by the AO in respect of Ocean Freight charges. 16. Against which the department filed appeal challenging the order of the Ld.CIT(A). During the appeal hearing, the Ld.DR strongly supported the order of the AO and also argued that Circular No.723 dated 19.09.1995 has no application in the assessee s case. 17. On the other hand, the Ld.AR submitted that the assessee had incurred Ocean Freight of ₹ 4,14,988/- for the A.Y.2012-13, ₹ 13,90,000/- for the A.Y.2013-14 and ₹ 77,450/- for the A.Y.2014-15, which was disallowed by the AO and the Ld.CIT(A) granted the relief. The Ld.AR argued that the Ld.CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shipping Agents. The department has not called for the return of income of the non resident shipping owners at the time of assessment. Therefore, we are of the considered opinion that the payment is squarely covered by Circular No. 723 of CBDT and there is no case for deduction of tax u/s 194C or 195 and consequent disallowance u/s 40(a)(ia) of the Act. Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. I.T.A.511/Viz/2018, A.Y.2013-14 21. The additional issues involved for the A.Y.2013-14 are related to the transfer pricing issues. Ground No.5 and 6 are related to the transfer pricing adjustment made by the AO in the assessment order in respect of Arms Length Price on sales and the interest charged on outstanding receivables treating the outstanding receivables as International transactions. 21.1. During the assessment proceedings, the AO found that the assessee had international transactions exceeding ₹ 30 crores, therefore, referred the issues to the Transfer Pricing Officer(TPO) for determining the ALP. As per Form 3CEB and TP document, the international transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sl.No. Name of the company Operating Revenue Operating Cost Operating Income OP/OR OP/OC 1 V.S.T.Industries 668.68 510.88 157.8 23.60 30.89 2. Godfrey Philips 2096.48 1863.25 233.23 11.12 12.52 3. Sinnar Bidi Udyog 10.6 9.8 0.8 7.55 8.16 4. Dharampal Satya 2094.96 1699.47 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iewed that minor operational differences in the accounting and minor functional differences would not be reasons for elimination of comparables under TNMM and rejected the objections raised by the TPO. The TPO worked out the margins adopting the PLI of 19.69% on total turnover of the assessee and worked out the margin on the turnover of AE and arrived at the adjustments of ₹ 7,32,17,675/- u/s 92CA (3) Act as under: Description Amount Arm s Length Margin 19.69% % of AE transactions on revenue (₹ 45,06,66,714 x 100/₹ 248,15,98,792) 18.16% Total Operating Cost (OC) 241,02,48,062 Proportionate operating cost (Total OC x 98.35/100) 43,77,01,052 Adjusted Arm s Length Margin (%) (AALM) 19.69% Arm s Length Price (100+AALM)*OC 52,38,84,389 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumentation for the A.Y.2012-13 2014-15 was accepted considering the cost audit certificate regularly furnished by the assessee allocating the various costs. The Ld.CIT(A) further observed that the assessee is consistent in its method and the profit ratios for AE and non AEs given by the assessee suggest that the profit margin is more with regard to AE and do not require any interference. The Ld.CIT(A) further observed that though the TPO has stated that the assessee has not raised any objections with regard to comparables selected by the TPO, the reply submitted by the assessee before the TPO vide letter dated 06.10.2016, shows that the assessee has raised the objections for taking the external comparables having different nature and volume of business etc. The external comparables taken by the TPO are in multiple products and branded ones. The volume of business and nature of business do vary with the activities and viewed that at any stage they cannot be treated as comparables. The Ld.CIT(A) found that the TPO has not addressed the issues raised by the assessee, hence, held that the order of the TPO is incorrect. The Ld.CIT(A) considered the OECD guidelines and the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he segment wise allocation of costs and certified the same. Therefore, there is no case for rejecting the method adopted by the AO. The AO unilaterally rejected the method adopted by the assessee stating that in CPM method direct and indirect cost cannot be ascertained reliably without calling for the information which is readily available with the assessee.. Alternatively, the assessee has asked the AO to adopt internal TNM and the TPO has rejected alternate plea also with a presumption that there is a chance of allocation of cost to AE and Non AE to the benefit of the assessee without any material. The other objection of the TPO for rejecting the adoption of internal TNMM was that the same was not used in TP documentation and the segmental financials were not available in the Financial statements which is not the correct reason for rejection of internal TNMM. Since the assessee has adopted the CPM Method the data was made available with regard to the CPM method. However, during the course of assessment proceedings and before the CIT(A), the assessee furnished segmental financials certified by the cost accountant. Therefore, submitted that though the segmental details were furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l at net profit. TNMM is extension of CPM . For the A.Y.2012-13 and 2014-15, the products involved in international transaction with AEs and non AEs are the identical and there were no adjustments suggested by the TPO. The Ld.AR further submitted that when internal TNMM is available and the segmental data is available, the approach should be to benchmark the profit PLI adopting internal comparables since it provides the best possible FAR and it would be easier to compare the profit margins. The assessee relied on the decision of Hon ble ITAT in the case of Palred Technologies Ltd (supra) and argued that the Ld.CIT(A) has considered all the issues and deleted the addition, hence, submitted that no interference is called for in the order of the Ld.CIT(A). 26. We have heard both the parties and perused the material placed on record. The assessee had international transaction of ₹ 45,06,66,714/- in respect of sales. The operative profit of the company was 2.96%. The assessee adopted the internal CPM as MAM and arrived at the margin of 2.79% in case of AE as against the margin of non AE segment at 2.09%. The AO rejected the method adopted by the assessee stating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The company deals in manufacturing bidis, in which bidi leaves is the main ingredient and tobacco dust. Bidi manufacturing is functionally different activity without high cost of plant and machinery when compared to cut tobacco and cigarettes, unmanufactured tobacco. FAR Analysis Activity significantly different Does not have any export operations, it does not export goods hence there are no earning in foreign currency while the same account for 82.6% in the case of the assessee. 4. Dharmpal Satya (23.27%) Deals in manufacturing of Gutka which is different from the product dealt. Annual report is not available in the public domain. 5. Ethnic Tobacco (6.08%) Manufacture of unmanufactured tobacco Annual report is not available in the public domain. 6. Virat Crane Industries Ltd. (7.79%) De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and it is also functionally different. In the case of ITC Ltd., it is engaged in multiple products and multiple verticals and segmental details and FAR analysis is not available, hence, the same cannot be taken as comparable. With regard to VST Industries which deals in manufacturing of cigarettes and un manufactured tobacco is functionally different in size and nature of business and no segmental details are available. The case of Godfrey Philiph is also is same as the case with VST Industries. Therefore, in view of the submissions made by the assessee as discussed against each company, the comparables selected by the TPO are uncomparable, hence they required to be deleted. During the appeal hearing, the Ld.DR did not controvert the submissions made by the Ld.AR in respect of dissimilarities of the comparables selected by the TPO, therefore, we hold that all these seven companies are uncomparable in respect of functions, business, foreign exchange earnings, deployment of assets etc and in couple of cases, annual reports are not available in the public domain. Therefore, we direct the TPO to delete the comparables selected by the TPO. 28. As per the transfer pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and non AE worked out to 2.09% in page No.210 of the paper book. Thus, in the instant case, the internal TNMM comparables are available along with segmental data. External comparables are not available as admitted by both the parties during the appeal hearing. Therefore, it is unjustified to reject the economic analysis made by the assessee. The TPO has not brought any material to show that the internal segmental details furnished by the assessee are incorrect and PLI admitted in respect of AE and non AE are not based on facts. As rightly observed by the Ld.CIT(A), once there is availability of segmental financials and internal comparables, the right approach is to bench mark internally, as the internal comparables provide the best possible FAR and also easier to compare the profit margins where non AE transaction is more than that of AE volume. This view is supported by the decision of Hon ble ITAT in the case of Palred Technologies Ltd. (supra) relied up on by the Ld.CIT(A) wherein, it was held that when segmental details have been furnished by the assessee with regard to AEs and non AEs, the same should be considered for the purpose of assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. Cross objections filed by the assessee on this issue are only supportive and becomes infructuous, hence dismissed. 29. The next issue in TP adjustment is with regard to adjustment made by the TPO in respect of interest on receivables. The TPO found that a sum of ₹ 28,42,54,759/- was outstanding receivables which was not reported in Form 3CEB or in the TP document. The TPO also found that some receivables have been received beyond credit period of 180 days. Therefore, the AO/TPO issued a show cause notice directing the assessee to explain as to why the interest should not be charged @14.45. on the outstanding receivables. Since the assessee has not filed any objections, the TPO charged the interest @14.45% on outstanding receivables and worked out the TP adjustment @ ₹ 7,09,433/- u/s 92CA(3) of the Act which the AO made adjustment. 30. Against which the assessee went on appeal before the CIT(A) and the Ld.CIT(A) deleted the addition made by the AO observing that the differences in credit periods would be taken care in fixing the sale pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vables as international transactions, since, the same are to be received in foreign exchange the interest if any required to be applied following LIBOR or LIBRO plus method. However in the instant case, receivables represent the trade receipts but not the unsecured/ secured loans. In the case of trade receipts, the sale price is fixed including the realizable time period and hence, once the transactions are at ALP in respect of sales, no separate adjustment is required to be made in of sales receivables. Identical issue has come before this Tribunal in the case of Mahati Software Pvt. Ltd. in I.T.A No. 67/Viz/2016 68/Viz/2017 dated 07.09.2018. The Tribunal held that the no interest is chargeable on trade advance once the sale price is at ALP. For the sake of clarity and convenience, we extract para No.11 of the order of this Tribunal in the cited case which reads as under : 11. We have heard both the parties and perused the material placed on record. In this case, the AO charged the interest of ₹ 1,38,12,847/- and made the ALP adjustment confirmed by the Ld.DRP. The assessee contended that the assessee had the interest free funds in the business and out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... System Ltd. is squarely applicable in the assessee s case. Even in the case law relied upon by the assessee in the case of Cura Logistics (supra) also, the Coordinate Bench held that if the purpose of advance is trade advance, the interest is not chargeable but in case of loan the interest is chargeable. Having observed that the advance is not a trade advance, we hold that the interest is chargeable on the advances given to the AE. Since the facts are identical, we find no reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The appeal of the revenue on this issue is dismissed. ITA No.233/viz/2019 A.Y.2014-15 32. The department has filed separate appeal for the A.Y.2014-15 agitating the issue of non deduction of TDS on ocean freight. The grounds raised by the department reads as under: 1. The order of the Commissioner of Income Tax (Appeals) Guntur is erroneous both in law and on the facts of the case. 2. The Ld.CIT(A) has deleted the addition made by the AO for non deduction of TDS on payments made to an agent of foreign shipping company towards oceanic freight, Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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