IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : "I-2" : NEW DELHI
BEFORE SHRI I.C. SUDHIR , JUDICIAL MEMBER
AND
SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
ITA No: 2449/Del/2014
Asstt. Year : - 2009-10
M/s. Metso Minerals (India) Pvt. Ltd. Vs. DCIT,
C-227, Ground Floor, Circle 6(1)
Western Marg, New Delhi.
Near Garden of five Senses,
Paryavaran Complex,
New Delhi 110 030
(PAN AAACS3407L)
(Appellant) (Respondent)
And
ITA No: 1205/Del/2014
Asstt. Year : - 2009-10
DCIT, Vs. M/s. Metso Minerals (India) Pvt. Ltd.
Circle 6(1) C-227, Ground Floor, Western Marg,
New Delhi Near Garden of five Senses,
Paryavaran Complex,
New Delhi 110 030
(PAN AAACS3407L)
(Appellant) (Respondent)
Assessee by : Shri Ajay Vohra, Sr. Advocate
Shri Neeraj Jain, Advocate
& Shri Puneet Chugh, CA
Department by : Shri R.K. Jha, Addl. CIT,DR
Date of Hearing : 09.06.2015
Date of pronouncement : 28.08.2015
2
ORDER
PER INTURI RAMA RAO, AM
These are cross appeals filed by assessee-company as well as by the
Revenue directed against the order of the assessment passed u/s 143(3) read
with section 144C of the Income-tax Act, 1961 for the assessment year 2009-
10. The assessee-company raised the following grounds of appeal in ITA No.
2449/Del/2014:-
1. That the assessing officer erred on facts and in law in determining the
income of the appellant at Rs.15,90,82, 198 under Section 143(3) read
with Section 144C of the Income-tax Act, 1961 ('Act') as against
returned income of Rs.10,73,56,150.
2. That the assessing officer/ DRP erred on facts and in law in making
adjustment of Rs. 4,85,04,301 to the income of the appellant on
account of the alleged difference in the arm's length price of the
international transaction of marketing support services undertaken by
the appellant with its associated enterprises.
2.1 That the assessing officer/DRP erred on facts and in law in re-
characterizing the transaction of provision of marketing support
services undertaken by the appellant as commission agent services, by
misinterpreting the following clauses of the agreement:
(i) The assessee is under no obligation to increase the turnover of its AE.
(ii) The assessee shall not be responsible for acting as mediator between its
foreign AE and its customers.
(iii) There is no responsibility towards the customer neither there is any
clause of obligation towards any after sales service.
(iv) The assessee has no obligation for recovery from the customers.
(v) The assessee does not have any authority to execute contract.
(vi) The payment mode is fixed percentage of sale value of goods.
2.2 That the assessing officer/ORP erred on facts and in law in not
appreciating that in terms of Marketing Support Services agreement
3
entered by the appellant with its associated enterprise, the scope of
services provided by the appellant were limited to:
(i) Promotion of AEs products in the India
(ii) Providing information on any business opportunities that AEs may have
in the India in relation to its products.
2.3 That the assessing officer/ORP erred on facts and in law in re-
characterizing the transaction of provision of marketing support
services as commission agent services, merely on the premise that the
appellant is receiving fixed percentage of service fee on the FOB value
of invoices raised by the AE on the customers in India.
2.4 That the assessing officer/ORP erred on facts and in law in concluding
that the reason for dip in margins of the appellant in its marketing
support service segment is due to the mutual adjustment between the
associated enterprise and the appellant.
2.5 That on the facts and circumstances of the case and in law, the
assessing officer/ORP ought to have allocated operating cost to the
marketing support service segment on a rational basis instead of
arbitrarily allocating disproportionately higher costs to this segment.
2.6 That the assessing officer/ORP erred on facts and in law in undertaking
a fresh search of comparable companies engaged in the business of
providing commission agent services and thereby rejected the
benchmarking analysis undertaken by the appellant in its transfer
pricing document considering companies engaged in providing
marketing support services.
2.7 That the assessing officer/ ORP erred on facts and in law in considering
Priya International Limited having abnormally high profit margin in the
final set of comparable companies considering segment profitability of
its commission segment, not appreciating that the said segmental
profitability of the company was arrived at gross level without
allocating indirect and un-allocable expenses.
2.8 That the assessing officer/ DRP erred on facts and in law in considering
British Metal Corpn. India Private Limited a company functionally not
comparable and showing abnormally high profit margin in the relevant
segment, in the final set of comparable companies.
4
2.9 That the assessing officer/ DRP erred on facts and in law in considering
Publicity Society of India Ltd. and P L Worldways Ltd. which are
functionally not comparable and are showing abnormally high profit
margin in the relevant segment, in the final set of comparable
companies.
2.10 That the assessing officer/ DRP erred on facts and in law in considering
British Metal Corpn. India Private Limited, Priya International Limited
and Publicity Society of India Ltd. as part of the comparable companies
for bench marking of international transaction of market support
services when these companies were not considered as comparable in
the previous years nor in the subsequent years.
2.11 Without prejudice, that the assessing officer/ DRP erred on facts and in
law in considering incorrect profit margin of certain comparable
companies:
Name of the company Margin considered by TPO Actual margin
PL Worldways Ltd. 39.60% 4.52%
Publicity Society of India 71.17% 37.14%
Ltd. (Seg.)
3. That the assessing officer/DRP erred on facts and in law in making an
ad- hoc disallowance of 50% of the professional fees of Rs. 60,29,221
paid by the appellant to Metso Minerals (Mumbai) Private Limited
('Metso Mumbai') invoking section 40A(2)(a) of the Act.
3.1 That the assessing officer/DRP erred on facts and in law in making
arbitrarily disallowance of 50 percent of the professional fees paid to
Metso Mumbai without giving any cogent basis and on the basis of
his/its conjecture and surmises.
3.2 That the assessing officer/ORP erred on facts and in law in making an
ad- hoc disallowance of professional fees paid by the appellant to
Metso Mumbai, allegedly holding that:
(i) There is no justification for the payment at the rate of Rs. 600 per hour.
(ii) There are no details of what work has been done by the engineers of
Metso Mumbai and what has been the contribution to revenue of the
appellant.
5
(iii) The appellant is also rendering such services to its related parties.
Accordingly, there is rationale to receive such services from Metso
Mumbai.
(iv) The rates agreed between the parties may not be at arms length price
as the services are rendered to group companies.
3.3 That the assessing officer/ORP erred on facts and in law in concluding
that the professional charges paid by the appellant to Metso Mumbai is
a mechanism to divert income to Metso Mumbai as it is incurring losses
for last several years.
3.4 That the assessing officer/ORP erred on facts and in law in not
appreciating the fact that the design and drawing services availed by
the appellant from Metso Minerals were availed for timely delivery of
projects and to maintain confidentiality of the projects undertaken by
the appellant.
3.5 That the assessing officer/ ORP erred in fact and in law in making an ad-
hoc disallowance of professional fees incurred by the appellant on
account of drawings and designs received from Metso Mumbai without
bringing on record the fair market value of such design and drawing
services availed by the appellant.
3.6 Without prejudice, the assessing officer/ORP erred on facts and in law
in not appearing that the profit earned by the appellant in its
manufacturing segment were considered to be at arms length price by
the TPO and accordingly, there could not be a case of shifting of profits
by the appellant to Metso Mumbai by way of payment of professional
fees.
4. That the assessing officer erred on facts and in law in making
disallowance of Rs 2,07,137 on the basis of information furnished by
AIR as transaction against credit card -bills, alleging the same as
unexplained expenditure.
4.1 That the assessing officer failed to follow the directions of DRP by not
providing the appellant the details of the information furnished by the
AIR based on which the disallowance is made.
5. That the assessing officer erred on facts and in law in levying interest
under Section 2348 and Section 234C of the Act.
6
2. Briefly stated the facts of the case are that the appellant [Mesto Minerals
(India) Pvt. Ltd.] is a company incorporated under the provisions of the Companies
Act, 1956. It is engaged in the business of manufacturing and trading of mineral
processing equipment. The return of income for the assessment year 2009-10 was
filed on 27th September, 2009, disclosing taxable income of Rs. 10,73,56,150/-. The
case was selected for scrutiny assessment. Since the appellant reported international
transaction in its report in form 3CEB, a reference under Section 92CA(3) was made
to Transfer Pricing Officer (TPO)-1(3), New Delhi.
3. It is reported that during the year under consideration, the appellant entered
into the following international transactions with its AEs:
(i) Purchase of raw materials;
(ii) Purchase of spare parts:
(iii) Purchase of machinery;
(iv) Purchase of fixed assets;
(v) Provision of market support services; and
(vi) Reimbursement of expenses
4. In support of the appellant's claim that the price charged by it for the
service rendered to its AE was at arm's length, the appellant filed a report in
Form 3CEB as required under the provisions of Section 92E of the Act. The
appellant also made a detailed analysis of international transactions. The
appellant had adopted transactional net margin method (TNMM) as the most
appropriate method for determining the arm's length price. The operating
profits to total cost was adopted as the profit level indicate ("PLI"). In the
7
transfer pricing study, the appellant had chosen 17 comparables and their
weighted average operating profit margin was worked out at 5.82% as below:
Sl. No. Name of the company Weighted
average
(OP/QC)
1. A2Z Maintenance & Engineering Services Pvt. Ltd 0.99%
2. Ambals Advertisers (India) 0.77%
3. Apollo Sindoori Hotels 0.31%
4. Bonjour Bonheur Forex Spot Pvt. Ltd. 0.96%
5. Cyber Media Events 7.87%
6. DLF Services Ltd. 9.47%
7. IDC (India) Ltd. 15.67%
8. India Tourism Development Corporation -0.92%
9. Indo Asia Leisure Services 1.43%
10. Kerala Travels Interserve 7.84%
11. Mid Day Multimedia -1.05%
12. Overseas Development & Employmen Promotion 7.21%
Consultants Limited
13. Pearl International Tours & Travels 4.06%
14. Shrayans Resources 3.33%
15. Times Innovative Media Limited 0.37%
16. Trade Wings Limited 15.61 %
17. Travel Corporation (India) -- 20.15%
Ltd. -
Arithmetic Mean 5.82%
5. The appellant claimed that since the margin for marketing
supportive services segment was at 10.23% in its case, which was more
than the comparables profit margin of 5.82%. The international
transaction for provisions for marketing support services was at arm's
length price. As against this, the Transfer Pricing Officer (TPO), made the
flowing observations:
8
"It has been observed that in earlier years the commission
being charged by the assessee from its US AE was at the
rate of 10%. For e.g. in the F. Y 2007- 08 the commission
from US on the sale of Rs.9,02,36,684 was RS.9048360
i.e.10% and this was based on written agreement between
them. The sale in the US segment increased in the year
under consideration from 9.02 crores to 23.09 crores. But
the assessee instead of showing the commission @ 10%
reported only a commission of Rs.1.15 crores i.e. @ of 5%. It
can be seen that as the parties were related to each other
therefore they opted to reduce the
commission as a mutual arrangement so that the assessee
does not have to pay taxes on the increased commission. As
a matter of convenience since the parties are associated
with each other they revised the agreement and reduced the
commission from 10% to 5%."
The TPO rejected the comparables selected by the appellant by
holding that none of comparables selected by the appellant were
functionally comparable as the appellant mere commission agent and
therefore he proceeded to select his own comparables and selected the
following comparables earning commission income:
S. No. Company Name OP/TC
1. Killick Agencies & Marketing Ltd.
29.24%
(seg)
2. ' P LWorldways Ltd. 39.60%
3. Publicity Societyof India Ltd. (seg) 71.17%
4. Cox & Kings. 69.81%
5. ICC International Agencies Limited 11.83%
6. British Metal Corporation (India)
62.96%
Pvt Ltd.
7. Priya International Limited
82.19%
(Indenting Segment)
Arithmetic mean 52.40%
Accordingly, the TPO vide his order dated 8th January, 2013 passed an
order under section 92CA(3) of the Act determining the arm's length price at
Rs. 5,87,64,787/-. Subsequently, this order was rectified under Section 154 of
9
the Act vide his order dated 26th February, 2014 determining the adjustments
at Rs. 4,85,04,301/-.
6. Against the above said adjustment proposed by the Transfer Pricing
Officer the Assessing Officer vide its draft order dated 5th March, 2013 passed
under section 144C of the Act incorporated the above adjustments. The draft
assessment was duly served on the appellant. Being aggrieved by the draft
assessment order, the appellant filed objections before the Dispute Resolution
Panel. The Dispute Resolution Panel (`DRP') vide order dated 26.12.2013
directed the TPO to exclude Killick Agencies & Marketing Ltd. And Cox & Kings
as these companies had substantially high related party transactions.
Accordingly, the Assessing Officer passed final assessment order dated 28th
February, 2014 making upward adjustment of on account of Transfer Pricing
of Rs. 4,85,04,301/-; for profession fees paid to Metso Minerals (Mumbai) Pvt.
Ltd. of Rs. 30,14,610/- and for unexplained expenditure reflecting in ITS
Report of Rs. 2,07,137/-. Being aggrieved, the appellant as well the Revenue
had come up with the present appeals before us.
7. During the course of hearing, the learned Counsel for the appellant had
submitted that the level of value addition in a distribution activity can be
compared with an agency/marketing support function only at gross margin
level. All functions related to trading such as procurement, storage,
distribution and other related activities are not undertaken for agency/
marketing support function. Further, in the market support segment the
10
appellant neither performs any function related to inventory management nor
assume inventory risk. Hence, selling and administration costs should ideally
be split in gross margin ratio and not in the ratio of sales. It would be
appreciated that the allocation of expenses at gross margin level provides a
level playing field for the two activities, viz., distribution and commission/
marketing support service activities for the reason that the effect of the
turnover / cost of goods sold which is not relevant in the agency/ marketing
support service activities, is not taken into account for allocating common
expenses.
Reliance in this regard is placed on the following decisions:
· Varian India Private Limited vs. ADIT (ITA 160/Mum/2013)
· DSM Anti-Infective India Ltd vs ACIT (ITA/Chd/2011)
· Mitsubishi Corporation India Pvt Ltd vs. DCIT (ITA No 5042/Del/2011
7.2. It was submitted that if the allocation of expenses in proportion of the gross
margin is done, it results in allocation of only Rs.2,71,47,935 towards
agency/marketing support service activity and OP/OC ratio of the
commission/marketing support segment at 354.58%.
Without prejudice, it was submitted that if the expenses are allocated in the
proportion of gross margins, the transfer pricing adjustment in respect of agency
service functions and marketing service functions taking OPITC of comparable
companies adopted by TPO, would be nil.
11
Income from Market Support Services 12,34,09,807
Total income from market support 12,34,09,807
Cost for market support (on basis of allocation 2,71,47,935
done on the basis of GP Ratio)
Total aggregate cost 2,71,47,935
Arm's length agency/ marketing support servi 4,16,85,654
(considering a mark-up of 53.55% as taken by the -
TPO
after DRP Order) (A) (153.55% of171,271,47,935)
Marketing support and Agency service income 12,34,09,807
the appellant
(B)
It is clear from the above working, after making the correct allocation of
expenses, the value of international transaction from marketing support services at
Rs. 12,34,09,807 is more than the arm's length price at Rs. 4,16,85,654 (after taking
into consideration the OP/OC of the comparables at 53.55%) as determined by TPO.
In view of the above, it was submitted that if the segmental profitability
computed after allocation of expenses in the proportion of Gross Profit then the
international transaction of rendering market support services is at arm's length
price. Hence, no transfer pricing adjustment is warranted.
7.2 Without prejudice to the above argument, the learned counsel had assailed
the rejection of transfer pricing study undertaken by the appellant and the
comparables identified therein without assigning any reason. He contended that the
TPO has summarily rejected the transfer pricing study undertaken by the appellant
and the comparables identified therein without ascribing any reason. In this
connection, he placed reliance on the decision of Hon'ble Jurisdictional High Court in
12
the case of Li & Fund India (P) Ltd.: 361 ITR 85, before this Hon'ble Court, the
assessee adopted TNMM and computed PLI at operating profit margin/total cost.
The Hon'ble Delhi High Court, held that where all elements of a proper TNMM were
detailed and disclosed in the assessee's study reports, care ought to be taken by the
tax administrators and authorities to analyze the same in detail and then proceed to
record reasons why some or all of them were unacceptable. The Hon'ble Court also
referred to Circular Nos. 12 and 14 of 2001, wherein it was clarified that where the
onus as to determination of ALP stood discharged by the assessee, the assessing
officer could intervene only if the AO/TPO had, on the basis of material or
information or document in his possession, all the information that price charged in
an international transaction had not been determined in accordance with the Act.
Further, he submitted that the comparables selected by the TPO are functionally not
comparable with the appellant and the TPO has erroneously selected the companies
earning commission income. According to the learned counsel, the following
companies selected by the TPO should be rejected:
S.No Company Name Reasons for rejections
1. British Metal Corpn India The company provides agency
services for non-ferrous metals,'
Private Limited precious. metals, fertilizers and
cooking coal. These products
are- completely different from
the products for which assessee
provides marketing- support
services.
2 Priya International The company is engaged in
provision of commission agency
and trading of chemicals. As per the
animal report of the company, . the
company is engaged In providing' .
agency services for sale of chemicals
which forms part of the indenting
13
services. The chemical business is
completely different market business
which cannot be compared with the
provision of marketing . support
services in'the heavy
machinery business. Further, in the
annual report of the company- there
is an unallocated segment for which
complete details are not available.
3. PL Worldways Limited The company provides a wide
gamut of travel related services viz.
Corporate travel solutions, holiday
travel, event management,
conferences, cruises and air
charters, which are entirely
different from the marketing
support services rendered by the
appellant.
As per the annual report of the
company, the company not only
earns commission from air tickets
sold but also earns transaction fees
from its customer for sale of holiday
packages and other travel solutions.
4. Publicity Society of India The company is a newspaper
Limited publication company engaged in
publication of wide variety of
newspaper and publications. The
company derives majority of its
income from sale of newspapers
and advertisement revenue.
Further, the company also has a
website `freepressjournal.in' which
is a major source of revenue
through its e-advertisement
initiatives. As the majority of income
comprises of advertisement revenue
and sale from newspaper, the
company is not functionally
comparable to the marketing
support services rendered by the
appellant.
After removing the above companies, average operating profit
14
margin of the final list of comparable companies with an 11.83% as
under:
Sl. No. Company Name OP/TC
1. ICC International 11.83%
Agencies Ltd.
Arithmetic mean 11.83%
Therefore, it is submitted that since the OP/OC ratio of the
appellant in marketing support services segment at 10.23% falls within
the +/-5% range of the mean operating margin of 11.83% of the above
comparable companies, it was submitted that the international
transaction of provision of marketing support services undertaken by the
appellant satisfies the arm's length test and the adjustment made by the
TPO is liable to be deleted.
7.3 . In consistent Approach followed by the TPO :
It is submitted that the Transfer Pricing Officer in the assessee's
own case for the all the preceding assessment years and successive
years has accepted the benchmarking analysis of international
transaction of provision of marketing support services applying TNMM
method.
The comparable selected by the appellant in its transfer pricing
study for the FY 2008-09 (AY2009-10) have either been accepted by
that TPO in the financial year 2009-10 (AY 2010-11) or FY 2007-08 (AY
15
2008-09). The list of the comparables is tabulated as under:-
Sl. No. Name of the OP/OC(%)
company
F.Y. 2010 FY 2009 FY 2008
1. Asian Business 18.22
Exhibition &
Conference Ltd.
2. BVG Indian Ltd. 25.60
3. Balmer Lawrie & Co. 3.80
Ltd.
4. Balurghat Technologies 1.93
Ltd.
5. Bonjour Bonheur Forex 0.84 0.96 Not in base
Spot Pvt. Ltd. set
6. Cyber Media Events 6.07 7.87 8.43
Limited
7. DLF Services Limited 8.47 9.47 9.47
8. IDC (India) Limited 12.83 15.67 15.34
9. Indo Asia Leisure 3.50 1.43 Not in base
Services Ltd. set
10. Kerala Travels 8.54 7.84 Not in base
Interserve Ltd. set
11. Mid Day Multimedia -5.08 -1.05 Not in base
Ltd. set
12. Officer Care Services 4.72
Ltd.
13. Overseas Development 9.88 7.21 Persistent
& Employment losses during
Promotion Consultants FY 2006 and
Ltd. 2007
16
14. Pearl International -3.28 4.06 2.91
Tours and Travels Ltd.
15. Sharyans Resourses 3.21 3.33 Different
Ltd. business
profile
Financial
Service prove
16. Trade Wings Ltd. 17.36 15.61 8.52
17. Travel 22.58 20.15 18.01
Corporation(India) Ltd.
18. A2Z Maintenance & Not in base 0.99 0.99
Engineering Service set
Pvt. Ltd.
19 Ambal's Advertisers Turnover less 0.77 Insufficinet
(India) Ltd. than 1 Crores information
Director's
report and
company
profile not
available
20. Appolo Sindoori Hotels RPT to Sales 0.31 0.27
Ltd. Ratio 85%
21. India Tourism Persistent -0.92 0.64
Development Losses
Corporation Ltd.
22. Times Innovative Persistent 0.37 2.15
Media Ltd. Losses
23. Balmer Lawrie & Co.
Ltd.
Average 8.19 5.82 6.21
From the above table it would be· appreciated that the
comparables selected in the transfer pricing documentation in FY
2008-09 are accepted by the TPO in the previous and successive
years. Hence the rejection of the benchmarking done by the appellant
17
is arbitrary and without any cogent reasons.
It is submitted that the appellant is in the same business for a
number of years and the methodology used for benchrnarking the
international transaction has been consistently followed from year to
year. There has absolutely no deviation from this practice for all the
years. The department was also pleased to not make any variation to
the determination of arms length price for the said international
transactions keeping in view consistency and uniformity of approach
while determining the ALP for all the earlier years. Accordingly,
following the rule of consistency also, the same should be accepted by
the TPO in the year under consideration.
In this connection, it is respectfully submitted that the Hon'ble
Supreme ourt has clearly laid down that where a fundamental aspect
permeating through the different assessment years have been found
as a fact one way or the ther, and the parties have allowed the
position to be sustained by not challenging the order, it is not allowed
to change the position in any subsequent year. The Supreme Court in
Radhasoami Satsang vs. CIT (193 ITR 321) has clearly laid down the
above rule of law by making the following observation:
"One of the contentions which learned senior counsel for the Assessee raised
at the hearing was that, in the absence of any change in the circumstances,
18
the Revenue should have felt bound by the previous decisions and no attempt
should have been made to reopen the question. He relied upon some
authorities in support of his stand. A Full Bench of the Madras High Court
considered this question in T.M.M. Sankaralinga Nadar and Bros. Vs. CIT
[1929] 4 ITC 226. After dealing with the contention, the Full Bench expressed
the following opinion (p.242).
The principle to be deduced from these two cases is that where the question
relating to assessment does not vary with the income every year but depends
on the nature of the property or any other question on which the rights of the
parties to be taxed are based, e.g., whether a certain property is trust property
or not, it has nothing to do with the fluctuations in the income; such questions,
if decided by a court on a reference made to it would be res judicata in that
the same question cannot be subsequently agitated."
The Supreme Court in the recent decision in the case of Excel Industries
Limited 358 ITR295, following its earlier decision supra reiterated the law in
this regard.
Reliance is" also' placed on' the forgoing decisions, wherein the
aforesaid settled principles as to consistency were applied in respect of the
issues relating to transfer pricing:
(i) Giesecke & Devrient India Private Limited vs. DCIT (ITA
No.5400/De1/2010)
72. The Assessee in its submission has stated that TPO has accepted the
bench marking analysis of the Assessee in immediately preceding year
(i.e. AY 2006-07) and immediately succeeding year (AY 2008-09) and
has not drawn any adverse inference with regard to the international
transaction pertaining to CVPS distribution business ... xxx ...
73. We have considered the submission of both the parties and find
considerable force in arguments of Ld. Counsel for the Assessee that
there being no change in business profile of the Assessee, the
comparables accepted in AY 2006-07 and AY 2008-09 could not be
ignored ... xxx ... "
19
(ii) The Hon'ble Delhi Tribunal in the case of McCann Erickson .India Pvt.
Ltd. vs. Addl. CIT (ITA No. 5871/DeI/2011), too held that "although the
principle of res-judicata is not applicable to the income-tax
proceedings, however, something material or adverse in nature, which
is having direct bearing on the peculiar facts and circumstances of the
Name of the Margin considered by TPO Actual margin case,
Company has to
P L Worldways Ltd. 39.60% 4.52%
be
Publicity Society of 71.17% 37.14%
India Ltd. (seg)
brought
on
record to draw the adverse inference".
Reliance is also placed on the following judgements in which principle of
consistency was affirmed by the various courts:
- Lloyds TSB Global Services Private Limited (ITA No. 5928/Mum/2012)
- Brintons Carpets Asia P Ltd. (ITA No. 296/PN/10)
- ARJ Security Printers (264 ITR 276)
- Deutsche Asset Management (India) Private (ITA No. 7717/Muml2010)
- Hosley India Private Limited (ITA No. 5904/De1/2010)
- Nokia India Pvt. Ltd. [ITA No.551/DeI/2011]
- M/s Lenovo (India) Pvt. Ltd. vs. ACIT [ITA No. 1457/Bang/2010]
- L'Oreal India P. Ltd. (ITA No. 5423/Mum/2009)
- NDS Services Pay-TV Technology Private Limited, ITA No. 10891Bang/2011
In view of the above the benchmarking analysis undertaken by the appellant
in the transfer pricing study calls for being restored.
7.4 Without prejudice Correct Margin (OP/OC) of the comparables companies:
The TPO vide its order has considered incorrect margin of the following
companies in the comparable set:
Name of the comparables companies Incorrect margin Correct margin
PL Worldways Limited 39.60% 4.52%
Publicity Society of India Limited 71.17% 37.14%
20
The appellant pointed out the above computational error before the
TPO and DRP and the same was not accepted or considered by them without giving
any reason.
After considering the correct margins the revised arithmetic mean of the
comparable companies is as follows :
No. Company Name OP/TC
1. P L World ways Ltd. 4.52%
2. `Publicity Society of India Limited' 37.14%
3. ICC International Agencies Limited 11.83%
4. British Metal Corporation (India) Pvt. Ltd. 62.96%
5. Priya International Limited 82.19%
(Indenting Segment)
Arithmetic mean 39.73%
Alternatively without prejudice, the revised TP adjustment after considering
the correct arithmetic mean would be as follows:
Particulars Incorrect adjustment in Adjustment after correct
the AO order margin as per appellant
Operating cost of the 111,959,693 111,959,693
assessee (as per TP Order)
Arm's length margin- 53.55% 39.73%
OP/OC
Arm's length price (A) 171,914,109 171,914,109
Price shown in 123,409,807 123,409,807
international transaction
(B)
Transfer Pricing 48,504,302 33,029,233
adjustment
Without prejudice, Transfer Pricing adjustment, to be sustained, if any, should
be restricted to Rs.3,30,29,233.
21
On the other hand, learned Sr. DR relied on the orders of the lower
authorities.
8. We have heard the rival submissions and perused the material on
record. At the first instance, we shall now deal with the comparables chosen by
the Transfer Pricing Officer:
(i) British Metal Corpn. Indian Pvt. Ltd.
This company was selected as comparable by the Transfer Pricing
Officer. Before us, the appellant objected to inclusion of this company as
comparable on the ground that this company provides agency services for non-
ferrous metals, precious metals, fertilizers, and cooking coal and whereas the
appellant provides market supporting services for which it earns commission in
respect of equipment for minerals and rock processing. The appellant also
brought on record the details to demonstrate the nature of business carried on
by this company. It is clear from the page nos. 695 & 696 of the paper book
that this company is engaged in providing agency services in non-ferrous
metals, fertilizers and cooking coal etc. In our considered opinion, the nature
of services rendered by this company is entirely different and cannot be
considered as a comparable. Moreover, the appellant received fixed fee from
its AE. Therefore, we direct that this company be omitted from the list of
22
comparables for the period under consideration for the purpose of
determining arm's length price of the international transaction in question.
(ii) Priya International
This company was selected as comparable by the Transfer Pricing
Officer. It is seen from the record that the Transfer Pricing Officer included this
company in the final set of comparables selected by him. The appellant
brought on record substantial factual evidence to establish that this company
is functionally dissimilar and different from the appellant and therefore is not
comparable. It is evident from page no. 740 to 743 of the paper book that this
company is engaged in the provision of commissioning agency and trading of
chemicals. This function is totally different from marketing services for the
equipment of minerals and therefore, this company should be excluded for the
purposes of comparison while determine the arm's length price of the
international transaction in question.
(iii) PL Worldways Ltd.
This company was selected as comparable by the Transfer Pricing Officer. It
earns commission from air ticket sold and also transactional fees from its
customer for sale of holiday packages. This function is totally different from
the functions carried out by the appellant and therefore, this company should
23
be excluded for the purposes of comparison while determine the arm's length
price of the international transaction in question.
(iv) Publicity Society of India Ltd.
This company was selected as comparable by the Transfer Pricing Officer. It is
contended that this company cannot be included in the list of comparables as
it is engaged in the business of publication of news papers and publications. To
demonstrate this fact, the appellant had filed the annual financial statement of
this company. We find substance in the submissions made by the learned
Counsel for the appellant and therefore, this company should be excluded for
the purposes of comparison while determine the arm's length price of the
international transaction in question.
8.1 Learned Counsel for the appellant submitted before us that if the above
aforesaid comparables are excluded from the list of the comparables chosen by the
transfer pricing officer then the profit margin of the appellant would well within + 5
per cent range of the arithmetic mean of the remaining comparables companies
and therefore the price received by the appellant would be considered as at arm's
length. He prayed for a limited direction to the Transfer Pricing Officer on the lines
set out above and determine the arm's length price. It also submitted that the other
issues raised by the appellant in the grounds of appeal need not be gone into.
8.2 We are of the view that the prayer sought for by learned counsel for the
appellant is acceptable and accordingly, the Transfer Pricing Officer is directed to
24
compute the arm's length price after excluding the comparable companies dealt with
in this order. Accordingly, the ground nos. 2 to 2.11 are disposed of.
9. Ground nos. 3 to 3.6 relate to challenge of addition on account of
disallowance of 50% of profession paid to M/s Metso Minerals (Mumbai) Pvt. Ltd.
The brief facts leading to this addition of Rs. 30,14,610/- under Section 40A(2)(a) of
the Act are as follows:
During the previous year relevant to the AY 2009-10, the appellant made
payment to its subsidiary M/s Metso Minerals (Mumbai) Private Limited
("Metso Mumbai") amounting to Rs. 60,29,221 towards drawings, design &
engineering services. The appellant, during the year has also received payment
of Rs 9,67,387 for similar services rendered to Metso Mumbai.
The assessing officer, in the impugned order, disallowed 50% of the aforesaid
payment made by the appellant to Metso Mumbai under section 40A(2)(a) of the
Act, allegedly holding that:
(i) There is no justification for the payment at the rate of Rs. 600 per hour;
(ii) There are no details of what work has been done by the engineers of
Met so Mumbai and what has been the contribution to revenue of the
appellant;
(iii) The appellant is also rendering such services to its related parties.
Accordingly, there is rationale to receive such services from Metso
Mumbai;
(iv) The appellant has not furnished any comparable case which would
show that the rates are as per prevailing market rates;
25
(v) Professional services have been rendered to Metso Mumbai and other
third parties in spite of tight delivery schedules.
It is submitted before us that the aforesaid disallowance made by the
assessing officer is without appreciating the following underlying facts of the case of
the appellant and the need for receiving services from Metso India:
(i) The appellant, under its project engineering segment, is engaged in diversified
activities, including, (a) Bulk Material Handling (b) activities such as stock re-
claimer, Wagon Tippler & designing for engineering services (c) supply of
equipments / materials and (d) erection and commissioning of the plant!
projects.
(ii) Since the appellant is engaged in diversified activities, in order to facilitate and
manage delivery of goods and services on time, while handling multiple
projects simultaneously, it is necessary for the appellant to delegate some
part of the" design and drawing work to outside agency, on requirement basis.
This is also required to avoid penalties/damages claimed by the customers on
delay in delivery of goods and services.
(iii) Since Metso Mumbai has requisite expertise to render such services on time
to time basis with fundamental quality of goods and services, it is incumbent
upon the appellant to engage Metso Mumbai for rendering such services.
(iv) Further, since Metso Mumbai is group entity of the appellant, confidentiality
and secrecy of the products for which the drawings are made are kept secret.
In order to substantiate its claim and corroborate the aforesaid, the appellant,
during the course of assessment proceedings vide submission dated 25.02.2013
submitted the following documents:
1) The details of projects for which services were availed from Metso Minerals.
The number of hours spent by Metso Mumbai on each was also submitted;
2) Copy of invoices issued by Metso Mumbai;
26
3) Name projects for which the appellant company has rendered services to
Metso Mumbai;
4) Copy of invoices raise by the appellant for rendition of services to Metso
Mumbai;
5) Details of the qualified engineers of the both companies who have rendered
the professional work of engineering and designing services.
The DRP vide its order dated 26.12.2013 rejected the objection of the
appellant against the addition made by the assessing officer allegedly holding that
the rate of payment made by appellant against such professional services are higher
and susceptible as Metso Mumbai was in losses.
The learned Sr. Counsel submitted before us that it is a settled position as laid
down in the following decisions is that whether any expenditure is required to be
incurred for the purpose of business and the reasonableness of the quantum thereof
has to be judged from the point of view of the businessman and not of the Revenue:
- CIT v. Malayalam Plantations Limited: 53 ITR 140 (SC)
- CIT v. Wa1chand & Co. etc. (1967) 65 ITR 381
- J K Woollen Manufacturers v. CIT: 72 ITR 612(SC)
- CIT v. Birla Cotton Spg. And Wvg. Mills: 82 ITR 166 (SC)
- Madhav Prasad Jatia v. CIT UP, 118 ITR 200 (SC)
- S.A. Builders Ltd. vs. CIT : 288 ITR 1 (SC)
- CIT v. Rockman Cycle Industries Ltd.: 331 ITR 401 (P&H) (FB)
- CIT v. Bharti Televentures Ltd: 331 ITR 502 (Del)
- CIT vs. EKL Appliances Ltd. : ITA No. 1068/2011 & 1070/2011 (Del HC)
It was further submitted that for invoking the provisions of section 40A(2) of
the Act, the onus lies upon the assessing officer to prove that the payment is
excessive or unreasonable having regard to the fair market value of goods or
legitimate needs of the business, as has been held in the following decisions:
27
- CIT vs. Modi Revlon (P.) Ltd.:210 Taxman 161 (Del)
- CIT vs. Nestle India Ltd: 337 ITR 103 (Del.)
- CIT vs. Forbes Tea Brokers: 315 ITR 405 (Mad.)
- CIT v. Modi Xerox Ltd.: ITA No.31120011 Lex Doc Id 405888 (All.)
- Voltamp Transformers (P) Limited v. CIT: 129 ITR 105 (Guj.)
- CIT v. Aditya Medisales Ltd.: ITA No. 559/2009 (Guj.)
- CIT v. Gopala Polyp last Ltd. : ITA NO. 26512009 (Guj.)
- JCIT v. ITC Ltd.: 112 ITD 57 (Kol.)(SB)
- Jagdamba Rollers Flour Mill Ltd. vs ACIT: 117 ITD 260(TM) (Nag.)
- Aradhana Beverages & Foods Co. (P.) Ltd vs. DCIT:51 SOT 426 (Del)
- S.K. Engg vs. JCIT: 103 ITD 97 (Bang.)
- Rangoon Chemical Works (P) Limited: 100 Taxman163 (Ahd.) (Mag)
- Kinetic Honda Motor Ltd V. JCIT 77 ITD 393
- Shyam Oil Cake Ltd V. ACIT: 83 TTJ 414 (Jd.)
- Vikshara Trading & Investment (P) Limited: 61 TTJ 6 (Ahd.)
- Beta Naphthol (P) Limited: 50 TTJ 375 (Ind.)
In the instant case, the assessing officer has failed to bring on record any
corroborative evidence to establish that the price paid to Metso Minerals for receipt
of professional services was unreasonable and excessive. The AO/DRP have merely
made bald allegations without any supporting evidence with respect to
excessiveness of the payments made as compared to the 'market value'.
Reliance in this regard is also placed on the decision of the Hon'ble Tribunal in
the appellant's own case for assessment year 2007-08 (ITA No 4414/Del/2012)
wherein the Hon'ble Tribunal while deleting similar addition made by the assessing
officer held as under:
"12. In view of the foregoing reasons, we are of the considered opinion that
the case of the assessee does not fall in any of the three situations
contemplated by section 40A(2)(a) of the Act. Once a payment is held to be not
excessive or unreasonable having regard to the fair market value of the
services or the legitimate needs of the business or the benefit derived by or
28
accruing to the assessee, there can be no question of making or sustaining any
disallowance u/s 40A(2) of the Act. We, therefore, order for the deletion of the
addition sustained in the first appeal. "
In view of the above, it was submitted that the disallowance of Rs. 30,14,610
being professional charges paid to Metso Mumbai made by the assessing officer may
be directed to be deleted.
10. On the other hand, the ld. Senior DR has relied on the orders of the lower
authorities.
11. We heard the rival submissions and perused the material on record. It appears
from the assessment order that the Assessing Officer had disallowed the impugned
payment to its sister concern merely guided by the fact that the appellant had been
incurring losses and also placed reliance on the decision of Hon'ble Gujarat High
Court in the case of Coronation Flour Mills Vs. ACIT, [2009] 314 ITR 1 (Guj.). This, in
our view, would not meet the requirement of the provisions of Section 40A(2). A
plain reading of the provisions of Section 40A(2) reveals that where an assessee
incurs any expenditure in respect of which payment is required to be made or has
been made to any person referred to in clause (b) of section 40A(2) of the Act and
the Assessing Officer is of the opinion that such expenditure is excessive or
unreasonable having regard to (a) fair market value of the goods, services or facilities
for which the payment is made; or (b) the legitimate needs of the business of the
assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such
goods, services or facilities, then the Assessing Officer shall not allow as a deduction
so much of the expenditure as is so considered by the Assessing Officer to be
29
excessive or unreasonable. Therefore, it becomes apparent that the Assessing Officer
is required to record a finding as to whether the expenditure is excessive or
unreasonable in relation to any one of the three requirements prescribed. This
opinion has to be formed by the Assessing Officer based on the material evidence
available on the record. The Assessing Officer is duty bound to bring on record the
comparable fair market value of the services rendered to say that the value paid by
the assessee is excessive or unreasonable. We find no evidence on record to notice
that the Assessing Officer made efforts in this direction. He simply made
disallowance based on the surmises and conjectures.
12. We may also refer to the scope of Section 40A(2) as explained by the CBDT in
Circular No. 6P, dated 06.07.1968. The CBDT clarified that while examining the
reasonableness of expenditure the Assessing Officer is expected to exercise his
judgment in a reasonable and fair manner. It should be borne in mind that the
provision is meant to check evasion of tax through excessive or unreasonable
payments to relatives and associate concerns and should not be applied in a manner
which will cause hardship in bona fide cases.
13. In CIT Vs. Edward Keventer (P.) Ltd. [1972] 86 ITR 370, the Calcutta High Court
considering identical provision in 1922 Act, it was held that the section places two
limitations in the matter of exercise of the power. The section enjoins the Assessing
Officer in forming any opinion as to the reasonableness or otherwise of the
expenditure incurred must take into consideration (i) the legitimate business needs
of the company and (ii) the benefit derived by or accruing to the company. The
30
legitimate business needs of the company must be judged from the view point of the
company itself and must be viewed from the point of view of a prudent
businessman. It is not for the Assessing Officer to dictate what the business needs of
the company should be and he is only to judge the legitimacy of the business needs
of the company from the point of view of a prudent businessman. The benefit
derived or accruing to the company must also be considered from the angle of a
prudent businessman. The term "benefit" to a company in relation to its business, it
must be remembered, has a very wide connotation and may not necessarily be
capable of being accurately measured in terms of pound, shillings and pence in all
cases. Both these aspects have to be considered judiciously, dispassionately without
any bias of any kind from the view-point of a reasonable and honest person in
business.
14. The aforesaid judgement of Calcutta High Court was affirmed by the Apex
Court in CIT Vs. Edward Keventer (P.) Ltd. [1978] 115 ITR 149. In the same line is the
judgment of Bombay High Court in the case of CIT Vs. Shtrunjay Diamonds [2003]
261 ITR 258/128, Taxmann, 759.
15. In the light of aforesaid legal position, we hold that 50% of professional
charges paid to M/s Metso Minerals (Mumbai) Private Limited cannot be
disallowed and accordingly these grounds of appeal are allowed.
16. Ground no. 4 to 4. 1 relates to challenge of disallowance of Rs
2,07,137/- on account of unexplained expenditure made against credit card bills.
31
16.1. During the assessment proceedings, the assessing officer required the
appellant to explain the transaction amounting to Rs 207,137/- against the credit
card bills as per individual transaction statement (' ITS ') furnished by Citi Bank. Since
no such transaction was entered into by the appellant during the year and no
transaction was recorded in the books of accounts of the appellant, the appellant
sought information from Citi Bank. However, Citi Bank directed the appellant to
sought information from the assessing officer.
16.2 Further, the AIR furnished by Citi Bank was also in the name of Vijay Dhar
whose address is stated to be that of the appellant. The appellant requested Citi
Bank as well as assessing officer to furnish the relevant details, however, both did
not accepted the request and did not furnish any detail to the appellant. In these
circumstances, the apprehension of AD that the said transaction is unexplained-is
incorrect .
16.3 The DRP vide its order dated 26.12.2013 has however directed the AO to
furnish the detail of entries regarding the credit card transaction to the appellant and
then decided upon "the" tax liability u/s. 69C of the Act for unexplained credit. The
DRP held as follows:
"The assessee has submitted that detail of transactions was not supplied to
him and the A 0 has not established that entries are not recorded in books of
accounts. In the view of this, DRP directs the AO to furnish detail of entries
regarding credit card transaction to the assessee and then decide upon its
taxability U/S 69C of the Act. The objection is disposed of accordingly. "
32
The assessing officer while passing the final order dated 28.02.2014 did not
followed the direction of the DRP and did not re-verified the AIR of the Citi Bank and
upheld the adjustment of Rs 207,137 /- by holding that there was paucity of time so
as to verify the AIR of Citi Bank.
Reliance is placed on the recent decision of the Mumbai Tribunal in case of
Threadneedle Investment Fund ICVC Asia Fund Mumbai (ITA 8016/Mum/2011)
where in it has been held that onus does not shifts on assessee if a transaction is
reported in AIR. The Tribunal held as follows:
" .......just because an AIR report was generated indicating the PAN No. of
assessee, the onus does not shift completely to assessee. It is the responsibility
of A O to examine complete details before asking for reconciliation and
whether the transactions were indeed undertaken or not. The AIR report also
does not contain any authentication but since it is generated by the
Department, credit was given by AO and DRP 'about its authenticity. Assessee
after obtaining the details and making efforts to reconcile filed the documents
on record duly certified as 'true copy' before the DRP. What further
authentication was required could not be understood. In our view, the DRP
should have examined the transactions, which could not be done before AO
due to lack of time and details. "
Reliance is placed on decision of Bangalore Tribunal in case of DCIT vs. Shri G.
Selva Kumar (ITA No. 868/ Bang/2009) where in it has been held that onus would be
on the revenue if the adjustment is made on the basis of AIR. The Tribunal held as
follows:
" 10 .....Assessment order based only on the AIR report will not stand in the
eye of law. The assessee is also directed to co-operate with the proceedings by
promptly producing the relevant documents and books of account required by the
Id. AO .. Since the grounds raised by the Revenue and CO by the assessee pertains to
the same issue, the delay in filing the CO is condoned and admitted for hearing. "
33
In the light of the above arguments, it is submitted that adjustment made by
the assessing officer on account of credit card transaction may be deleted.
16.4 Having heard the rival submissions, we are of the considered opinion that the
interest of justice would be met, if the matter is restored to the file of the Assessing
Officer for fresh adjudication in accordance with law. Accordingly, this ground of
appeal is restored to the file of the Assessing Officer.
ITA No. 1205/Del/2014
17. This appeal filed by the Revenue against the direction of the Hon'ble Dispute
Resolution Panel for deletion of two comparables chosen by the Transfer Pricing
Officer , namely Killick Agencies Marketing Ltd. and Cox and Kings (India) Ltd. The
Hon'ble DRP rejected these two comparables applying the filter of related party
transactions. Indisputably, Killick Agencies Marketing Ltd. had 64.12% and M/s Cox
and Kings (India) Ltd. had 109.9% of related party transactions. In view of the fact
that these comparables had high percentage of related party transactions, the
Hon'ble DRP had rejected the same as comparables.
18. Section 92 provides that the income arising from international transactions is
to be computed, having regard to arm's length price. Section 92F(ii) defines "arm's
length price" to mean a price which is applied or proposed to be applied in a
transaction between persons other than associated enterprises, in uncontrolled
34
conditions. To compute ALP the results of the international transaction are bench
marked against comparable uncontrolled transaction. The mandate of s. 92F(ii) is
that ALP shall be computed considering price applied or proposed to be applied in
transactions between non-AE's. When selecting external comparables, one needs to
ensure that such external comparables are uncontrolled. The companies having
controlled transactions therefore need to be eliminated. Following this rationality,
the courts have evolved test of related party transactions. The Hon'ble Coordinate
Benches of Tribunal in the following decisions, held that companies having related
party transactions of 15% cannot be considered as comparables:
(i) Customer.Com Pvt. Ltd. Vs. DCIT, [2012] 28 taxmann.com 258 (Bang.)
(ii) ITO vs CRM Services India (P.) Ltd., [2011] 14 taxmann.com 96 (Del.)
(iii) CSR India (P.) Ltd. Vs. ITO, [2013] 31 taxmann.com 265 (Bang.)
(iv) Logica Private Ltd. Vs. ACIT IT(TP) A No. 1129/Bang./2011 : TS-131-ITAT-
2013-BANG-TP
(v) Avaya India (P.) Ltd. Vs. ACIT, [2013] taxmann.com 569 (Del-Trib.):
[2012] 15 ITR(T) 237 (Del-Trib.)
(vi) ACIT Vs. Sakata Inx (India) Ltd., [2012] 21 taxmann.com 37 (JP) : [2012]
53 SOT 165 (JP.)
(vii) Huawei Technologies India Pvt. Ltd. Vs. ITO IT(TP) No. 1338/Bang/2010.
(viii) Will Processing Services (India) (P.) Ltd. Vs. DCIT, TS-49-ITAT-2013
(Mum)-TP
27. Respectfully following the ratio laid down in the above cases, since the
comparables in the question are having more than 15% related party transactions,
we hold that the Hon'ble DRP is justified in rejecting these two comparables. Hence
the grounds of appeals filed by the Revenue are dismissed.
35
28. In the result, the appeal filed by the assessee company is partly allowed for
statistical purposes and the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 28th August, 2015
Sd/- Sd/-
(I.C. SUDHIR) (INTURI RAMA RAO)
JUDICIAL MEMBER ACCOUNTANT MEMBE
Dated: the 28th August, 2015
`veena'
`RK'
Copy of the Order forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
6. Guard File By order
Dy. Registrar, ITAT, New Delhi
|