TMI Blog2022 (5) TMI 220X X X X Extracts X X X X X X X X Extracts X X X X ..... at transactional net margin method comparing the net profit is the correct methodology in accordance with the income tax rules, we reject the contentions of the assessee that there are no expenses incurred by the assessee or even if those are incurred the may be spread in the same ratio to arrive at the net profit. Whether the learned transfer-pricing officer has taken the correct comparables or not? - Balmer Lawrie - The assessee has not shown that there are significant related party transactions in the logistics segment of this comparable company. Further, merely because a comparable company has a shareholding of government of India it does not become non-comparable only because of this factor that part of the shareholding is owned by government of India. If such logic were accepted then all the Navratna companies, who are leaders in their own business, would be excluded from the comparability analysis. Therefore, we reject the contention of the assessee for exclusion of Balmer Lawrie Co Ltd (logistics segment). Hindustan cargo Ltd - There is a difference in the accounting period of the comparable company with the assessee company. It is also not shown before us that Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. We do not find any infirmity in the order of the learned CIT A in deleting the above addition looking at the consistent accounting policy adopted by the assessee and offering the same amount as income when three years have elapsed. Accordingly, ground of the appeal are dismissed. - ITA No. 3036/Mum/2012 And ITA No. 2986/Mum/2012 - - - Dated:- 26-4-2022 - Shri Prashant Maharishi, AM And Shri Sandeep Singh Karhail, JM For the Assessee : Shri Madhur Agarwal, Advocate For the Department : Shri Ms. Vatsalaa Jha, CIT DR ORDER PER PRASHANT MAHARISHI, AM: 01. These are the cross appeals filed by both the parties against the order passed by The Learned Commissioner of Income Tax (Appeals) 15, Mumbai (The Learned CIT A) dated 29th of February 2012 for assessment year 2007 08. 02. Assessee has challenged certain additions confirmed by the learned CIT A in appeal number 2986/M/2012 and the Asst Commissioner of income tax, central circle 30, Mumbai (the Learned AO) has challenged the additions deleted by the learned CIT A in ITA number 3036/M/2012. 03. Assessee has raised following grounds of appeal in ITA number 2986/M/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t's international transactions with its AE but also on appellant's transactions with Non AEs. 5. The Ld. CIT (A) grossly erred, in facts and in law, in not appreciating that the profit margin of 7.91% earned by appellant in the subject international transactions is higher than the profit margin of 6.76% earned by AE in the subject international transactions and also erred in not appreciating that profits at Rs 6,15,40.110/- allocated to appellant after considering transfer pricing adjustment of Rs. 2,80,52,480/- upheld by Ld. CIT(A) can not exceed actual combined profit earned by the AE and appellant together of Rs. 5,98,31,781/-. B. Relating to disallowances u/s. 14A: 6. The Ld. CIT (A) grossly erred, in facts and in law, in upholding disallowance of Rs. 9,65, 162/ u/s. 14A of the Act, without regard to the fact that appellant has suo moto and voluntarily disallowed Rs. 1,92,920/- on fair and just basis towards indirect expenses. 04. The learned assessing officer in ITA number 3036/MU/2012 has raised following grounds of appeal :- 1. On the facts and circumstances and in law, the Ld CIT(A) has erred in reducing the adjustment made to inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld CIT(A) has erred in ignoring the fact that the assessee has granted a fresh guarantee during the year under consideration which was subjected to benchmarking of guarantee fee hence, has no bearing on the earlier years 8. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance u/s 14A on reasonable basis by following the decision of Bombay High Court in the case of M/s. Godrej Boyce Mfg. Co. Ltd. Vs. DCIT wherein it has held that provision of Rule 8D does not have retrospective effect when this finding of Bombay High Court has not be accepted and department is in appeal before the Supreme Court on this issue. 9. On the facts and circumstances and in law, the Ld CIT(A) has erred in holding that provisions of section 41(1) of the I.T. Act are not applicable to unproved liabilities shown in the balance sheet on the ground that the assessee has offered these liabilities to tax in the F.Y. 2010-11. 10. On the facts and circumstances and in law, the Ld CIT(A) has erred in holding that unproved liabilities cannot be brought to tax in the current year as it will amount to double taxation as the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing officer asked the assessee to provide detailed calculation of profit level indicator along with any segmental details as per the profit and loss account. Learned transfer pricing officer found that assessee has operating income of ₹ 2,058,797,018/ , operating cost of ₹ 1,906,140,922/- and thereby resulting into an operating profit of ₹ 152,656,096/ resulting into the profit level indicator of 7.41%. Therefore the learned transfer pricing officer held that the contention of the assessee are not acceptable for the reason that assessee does not maintain any segmental audited accounts and therefore the information provided by the assessee is insufficient and not acceptable. For this proposition the learned transfer pricing officer looked at the notes on accounts wherein note number 12 in segment information it was stated that company is in the business of operation of Shipping related services incidental to the shipping and looking at nature of business and risk and return profile the business of the company is considered as a single segment. The learned transfer-pricing officer further held that the additional operational and general administrative expenses a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and submitted that as assessee is exposed itself to a greater risk compared to the bank and therefore the rate of 4.75% on the value of bank guarantee is an appropriate benchmarking of the transaction. Accordingly he determined arm s-length guarantee fee of ₹ 641,250/-. As assessee has already charged ₹ 62,670 , therefore, addition of ₹ 578,580/ was made. Accordingly, the learned TPO passed an order u/s 92CA (3) of the act proposing an adjustment of the arm slength price of the international transaction by ₹ 132,859,991/-. 011. The learned AO further examined that assessee is earning both taxable as well as exempt income and therefore it was asked that why disallowance u/s 14A should not be made. The assessee submitted that it has a total investment of ₹ 13.06 crores whereas the share capital and free reserves amounted to Rs. 111.69 crores and therefore there cannot be any investment made by the assessee from any borrowings. Hence, interest expenditure cannot be disallowed u/r 8D [2][I] and [I]. On account of the administrative expenses, assessee submitted that it has disallowed a sum of ₹ 192,920/ as 1% of the dividend received which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, he accepted the contention of the assessee that adjustment should be made only on transaction with AE i.e. International Transactions only. He held that ship chartering business of appellant with AE is ₹ 47.22 crores and the adjustment thereon comes to only ₹ 28,052,418/- . He therefore granted relief to the assessee of ₹ 104,228,931/ holding that the adjustment would only be made to the extent of ₹ 28,052,480/ . The learned CIT A directed learned transfer pricing officer to give the benefit to the assessee of +_5% as per the proviso to Section 92C (2) of the act. With respect to the arm s-length price of the corporate guarantee, he following the decision of his predecessor in earlier assessment year held that corporate guarantee fees of 0.5% charged to its associated enterprise based on the past action of the learned transfer-pricing officer, it is at arm s-length. Therefore, he deleted the addition/adjustment of ₹ 5,78,580/ . 016. With respect to disallowance u/s 14 A of the income tax act, he found that disallowance worked out by the assessee is ₹ 687,883/ out of the administrative expenditure and disallowance out of the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactional net margin method shall be preferred over external transactional net margin method. d. Internal segment cannot be rejected merely because no segmental information is available in the audited financial statement or it is not audited. Learned transfer pricing officer referring to the note on account has rejected the internal segment for these reasons. e. LD transfer pricing adjustment should have restricted adjustment to the extent of transactions with the associated enterprise is only. f. Coming to the comparable selected by the learned transfer pricing officer he submitted that Messer s Balmer Lawrie Co Ltd is a company where GOI holds 61% and same has been accepted as a comparable company by the learned transfer pricing officer. He submitted that the government company could not be considered as a comparable company. g. With respect to the Inclusion of Hindustan cargo Ltd by the learned transfer-pricing officer, he submitted that the learned transfer-pricing officer has included the same despite of the reason that it is following the different Accounting year compared to the assessee. He submitted that because of this reasons the comparable comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciated enterprises. Therefore, assessee submits that this is the internal transactional net margin method should be adopted for the benchmarking of the transaction. The learned assessing officer has found fault with the above approach of the assessee stating that assessee is considering only the gross profit and therefore in ignoring the other expenditure incurred by the assessee. Therefore, TP approach of assessee of comparing only the gross profit and stating that it is an internal transactional net margin method is flawed. He further held that the segmental gross profit working of the assessee is also not backed by any reliable and accurate data available. Thereafter he applies the transactional net margin method in the case of the assessee at entity level, selects eight comparable companies, derives the arithmetic mean of their profit level indicator, and determines the arm s-length price of the transaction. On appeal before the learned CIT A, he upheld the action of the learned transfer pricing officer; however, he applied that the profit ratio should be applied only to the transactions entered into with the associated enterprise. He corrects an error that the learned assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... freight forwarding, NVOCCC operator et cetera. Logistics segment selected 2 Haytrans India Ltd 21.87 The company provides the following services cargo movement, shipping agency services, International frightful, logistics and supply chain management, a road transportation 3 Sical logistics Ltd (segment logistics) 8.44 The company is engaged in providing integrated solutions for offshore logistics and multimodal logistics for bulk and containerized cargo. It is also engaged important logistics, container freight station, and offshore supplies. Logistics segment selected 4 Sindhu cargo services Ltd 4.81 The company provides cargo logistic services like packing and documentation and freight forwarding services 5 TL sipping and logistics Ltd 4.44 The company is engaged in business of custom clearance, shipping agency and port -related agency services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly the logistics segment of that company. Further, it is not a government-owned company, which is evident at page number 20 of the annual report where 61.80% of the shareholding is held by holding company Balmer Lawrie investment Ltd. Further, the other 40% of shares of this company are held by various mutual funds banking, financial institutions, and foreign institutional investors. It is also a listed company at Bombay stock exchange and National stock exchange. The assessee has not shown that there are significant related party transactions in the logistics segment of this comparable company. Further, merely because a comparable company has a shareholding of government of India it does not become non-comparable only because of this factor that part of the shareholding is owned by government of India. If such logic were accepted then all the Navratna companies, who are leaders in their own business, would be excluded from the comparability analysis. Therefore, we reject the contention of the assessee for exclusion of Balmer Lawrie Co Ltd (logistics segment). 028. The assessee has also challenged that Hindustan cargo Ltd is a company, which is following a different financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment of ₹ 28,052,480 cannot exceed the actual combined profit on by the AE and the appellant together of ₹ 59,831,781/ . We do not find any force in the argument of the learned authorised representative as we are dealing with a transactional net margin method and not profit split method. 032. In the result ground number 2 5 of the appeal are allowed partly. 033. Coming to ground number 6, The learned authorised representative with respect to the disallowance sustained by the learned CIT A u/s 14 A stated that rule 8D does not apply to these assessment year. The assessee has earned exempt income of ₹ 77 lakhs as a dividend and assessee has already offered the disallowance of ₹ 192,920. He submitted that in the earlier years the learned CIT A has restricted disallowance to ₹ 75,000, however, for this year he has confirmed the higher disallowance adopting the rule 8D of the income tax rules. He submitted that when rule 8D does not apply for this year, there is no reason to sustain the disallowance confirmed by the learned CIT A 034. Learned departmental representative supported the orders of the lower authorities. 035. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate and facts of the each assessment year should be looked into for benchmarking the international transactions. He further submitted that the learned transfer-pricing officer has correctly benchmarked the guarantee commission. 040. The learned authorised representative supported the order of the learned CIT A. Assessee also placed before us the order of the Commissioner of income tax appeals for assessment year 2008 09 dated 3/9/2014 wherein identical adjustment because of corporate guarantee was deleted. 041. The fact shows that assessee has provided corporate guarantee of US$ 0.3 million equivalent to ₹ 131 lakhs in favour of habib Bank zurich AG for working capital limits sanctioned to USL shipping Fze , UAE being 100% subsidiary of assessee. For this guarantee assessee has charged a commission at the rate of 0.5% being ₹ 62,670/ . The transfer pricing officer held that 4.75% is considered as appropriate to benchmark the about transaction accordingly he made an adjustment of ₹ 578,580/ on and above the guarantee fee charged by the assessee. The learned CIT A based on his order for assessment year 2005 06 and 2006 07 as well as for asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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