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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’, NEW DELHI
Before: Ms. Sushma ChowlaDr. B. R. R. Kumar
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I-1’, NEW DELHI Before Ms. Sushma Chowla, Vice President Dr. B. R. R. Kumar, Accountant Member (E-Court Module) ITA No. 978/Del/2015 : Asstt. Year : 2005-06 M/s Marubeni India Pvt. Ltd., Vs Deputy Commissioner of 5th Floor, Lotus Tower, Income Tax, Circle-6(1), Community Center, New Friends New Delhi Colony, New Delhi-110065 (APPELLANT) (RESPONDENT) PAN No. AAACM6413A ITA No. 933/Del/2015 : Asstt. Year : 2005-06 Deputy Commissioner of Vs M/s Marubeni India Pvt. Ltd., 5th Floor, Lotus Tower, Community Income Tax, Circle-6(1), New Delhi Center, New Friends Colony, New Delhi-110065 (APPELLANT) (RESPONDENT) PAN No. AAACM6413A Assessee by : Sh. Nageshwar Rao, Adv. Revenue by : Sh. M. Barnwal, Sr. DR Date of Hearing: 03.06.2020 Date of Pronouncement: 24.06.2020 ORDER Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the assessee and revenue against the orders of the ld. CIT(A)-44, New Delhi dated 18.11.2014.
Following grounds have been raised by the assessee: “Ground 1: On the facts and circumstances of the case and in law, the Hon'ble Commissioner of Income Tax (Appeals) (‘CIT(A)’) erred in partially confirming the addition proposed by the Learned Assessing Officer ('AO'),
2 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd. and thereby confirming the order issued under section 92CA(3) the Income Tax Act, 1961 ('the Act') passed by the learned Transfer Pricing Officer ('TPO') rejecting the economic analysis carried on by the Appellant.
Ground 2: That the Hon'ble CIT(A)/ TPO have erred in law in re-determining the arm's length price of the impugned transaction of the Appellant without appreciating the fact that circumstances necessitating the determination of price by the Learned TPO as mentioned in sub section (3) of section 92C did not exist in case of the Appellant.
Ground 3: The Hon'ble CIT(A) have grossly erred in facts and law in confirming the action of the Learned TPO of rejecting the economic analysis (using a combined transaction approach with Transactional Net Margin Method as the most appropriate method) undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('the Rules’) for determining the Arm's Length Price ('ALP') of the impugned transaction.
Ground 4: That the Hon'ble CIT(A) has erred in law and in facts by partially confirming the addition on account of transfer pricing by placing reliance on an incorrect premise that the Assessee takes physical delivery of goods under the related party trading activities and thus applying an ad-hoc ratio of 1:38 (which represents three times gross profit of AE trading segment to commission) for allocating expenses between the related party trading segment and commission segment.
Ground 5: Without prejudice to our claim in ground no. 4 above, even if indirect expenses incurred by the Appellant are to be allocated in an ad-hoc manner using three times gross profit relating to trading activities as opposed to actual commission earned, then the allocation be made in respect of all segments (including non-AE trading activities) since the only premise followed by the Hon’ble CIT(A) - that the Appellant takes ‘physical delivery’ of goods, holds true only with respect to the non-AE trading activities.
Ground 6: That the Hon'ble CIT(A) / AO erred in facts and law in disallowing a sum of Rs. 8,90,958, being 25 percent of ‘business promotion expenditure’ which is incidental to the business and which is wholly incurred for the purpose of the business.
3 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd. 7. Ground 7: Without prejudice to our claim in ground no. 6 above, the Hon’ble CIT(A)/ AO has erred in disallowing the claim of the Appellant amounting to Rs. 8,90,958 twice. The said amount has been considered as part of operating cost considered for the purpose of computing the arm’s length price, and secondly the same amount has been added back to the income of the Appellant. Thus, such disallowance has resulted in double addition on account of an expense incurred by the Appellant and hence is unjustified.”
Following grounds have been raised by the revenue:
“1. Whether on the facts and circumstances of the case, the ld. CIT (A) erred in reducing the adjustment to Arm’s Length Price as this was based on the computation provided by the assessee.
Whether on the facts and circumstances of the case, the ld. CIT (A) erred in reducing the adjustment to Arm’s Length Price without appreciating that both the trading and commission segment constitute international transactions and therefore ever if allocation of expenses were reworked the corresponding impact on the commission segment should also have been considered.”
Brief facts of the case are that the assessee is a wholly owned subsidiary of Marubeni Corporation, Japan (MCJ). It was incorporated in June, 1996 Marubeni is mainly involved in brokering international trading deals in wide area of industries like Machinery, Textiles, Petroleum, Metal & Minerals, Chemicals & Others. The assessee stated that MCJ is Japanese trading company that serves as an import-export gateway, with a specific emphasis on delivering goods, services and technologies to and from the Japan. The principal activity of the company is general trading which includes the purchase, distribution and marketing of industrial goods and commodities. MIPL’s operations include coordination of import and export of goods and services add liaison activities. It coordinates the trade in a
4 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd. broad, range of industrial, agricultural and consumer goods, commodities and natural resources. MIPL has also undertaken a few trading transactions (buy-sell model), primarily involving unrelated parties.
Ground 2 of the assessee’s appeal relates to invocation of Sub-Section (3) of Section 92C by the Assessing Officer. This objection is being dismissed relying on the order of the Special Bench Bangalore of ITAT in the case of M/s Aztec Software and Technology Services Ltd. in ITA No. 584/BLR/2006 dated 12.06.2007 and judgment of Hon’ble High Court of Delhi in the case of Sony India Pvt. Ltd. 288 ITR 52.
During the year, the assessee had transaction value of Rs.271,81,364/- on account of sale of dumpers and Rs.27,08,067/- on account of marine fuels. As per the TP report, the gross profit on sale of goods has been calculated at Rs.14,55,820/- which corresponds to 4.87% of the sales. The AO held that OP/TC of unrelated party segment has been calculated by the assessee at 64.49% as the margin of profit under uncontrolled conditions. After going through the submissions of the assessee of the transactions of related parties and unrelated parties, the AO came to a conclusion that the OP/TC of unrelated party segment is 4.22% whereas the same for related party segment is (-)39.16%. By following TNMM, the AO made adjustment of Rs.218,51,592/- to the profits of the assessee on the international transactions.
The segmental details furnished by the assessee on February 08, 2008 is as under:
5 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd. Particulars Income from related Income from unrelated party trading segment party trading segment Amount Basis of Amount Basis of Allocation Allocation Income Gross Profit 14,55,822 Actual 1,28,57,840 Actual Miscellaneous Income 85,098 Gross Profit 7,51,590 Gross Profit Gross Income 15,40,920 1,36,09,430 Expenditure Personal Expenses 4,56,086 Gross Profit 18,85,869 Actual Administrative, Selling 6,62,163 Gross Profit 63,41,597 Actual and other expenses Depreciation 92,356 Gross Profit 46,043 Actual Bank charges 1,184 Gross Profit Actual Miscellaneous 1,097 Gross Profit Actual Expenditure written off Total Expenditure 12,12,887 82,73,510 Operating Profit 3,28,034 53,35,920 Operating Margin 27.05% 64.49% (OP/TC)
Summary of the segmental details filed by the assessee dated 28.08.2008: Particulars Income from related Income from unrelated party trading segment party trading segment Amount Basis of Amount Basis of Allocation Allocation Income Sale of trades 29,889,431 Actual 279,772,608 Actual goods Miscellaneous 751,580 Gross Sales 7,034,983 Gross Sales Income Total Income 30,641,011 286,807,591 Expenditure Cost of goods sold 28,433,609 Actual 266,914,768 Actual Personal expenses 8,247,725 Gross Sales 1,885,869 Actual Administrative, 11,974,377 Gross Sales 6,341,597 Actual Selling and other expenses Depreciation 1,670,148 Gross Sales 46,043 Actual Bank Charges 21,411 Gross Sales - Actual Miscellaneous 19,842 Gross Sales - Actual Expenditure written off Total Expenditure 50,367,111 275,188,278 Total Profit 19,726,100 11,619,313 Operating Margin 27.05% 64.49% (OP/TC)
6 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd. 9. The TP adjustments computed by the assessee and the TPO is as under: Particulars Adjustment Adjustment Adjustment re- proposed by proposed by computed by TPO in the the ld. TPO Appellant in TP order in the show submission dt. cause notice August 28, 2008 Sale from Trading 29,889,431 29,889,431 29,889,431 (related party) Miscellaneous Income 85,098 85,098 85,098 Total Operating 30,641,011 29,974,529 29,974,529 Income Direct Cost 28,433,609 28,433,609 28,433,609 Indirect Cost 21,933,503 1,212,887 1,212,887 Total Operating 50,367,112 29,646,496 29,646,496 Expenses Operating Profit 19,726,101 9,889,431 328,033 Arm’s length margin 4.22% 64.49% 4.22% Transfer Pricing 21,851,593 9,229,594 Within 5 percent Adjustment range
The main argument of the ld. AR is that the assessee has re-computed operating margins after including ‘cost of sales’ as part of the total operating cost on the request received from the TPO in respect of the trading transactions undertaken with related and unrelated parties. While the assessee re-computed operating margins in the aforesaid margin (i.e. after including cost of sale as part of operating cost), the assessee committed a mathematical mistake in its calculation on account of which ‘miscellaneous income’ and ‘common costs’ were allocated on the basis of ‘gross sales’ instead of ‘gross profit’, in respect of the service segment and related party trading segment, while the portion of common costs identified in relation to unrelated party trading segment remained unchanged. Thus, resulting in a (39.16) percent operating loss due to abnormally high allocation of common cost to related party trading segment. It was argued that the adjustment in ALP based on the submission dated 28.08.2008 is 4.22% falls within 5% range and hence no
7 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd. adjustment is required. It was argued that the rectification petition filed before the TPO has not been disposed off. It was argued that the matter was also brought before the ld. CIT (A) he has not considered the letter dated 28.08.2008.
The ld. DR argued that as per the chart filed by the assessee initially the gross profit on trading goods of unrelated parties was 4.22% whereas the gross profit on the trading goods from the related parties was (-)39.16%. Hence, the adjustment made by the TPO is correct and needs to be upheld.
We have gone through the issue in toto. We have gone through the tables filed by the assessee on various dates. The issue boils down to whether the apportionment of the expenditure incurred on personal, administrative and selling expenses be apportioned on actual basis or in the absence of that whether on gross profit basis or gross sales basis. The amounts in dispute other than miscellaneous income are as under:
Particulars Income from Basis of Income Basis of RPT allocation from URPT allocation Personal 82,47,725 Gross Sales 18,85,869 Actual expenses Administrative 1,19,74,377 Gross Sales 63,41,597 Actual & Selling expenses Personal 4,56,086 Gross profit 18,85,869 Actual expenses Administrative 6,62,163 Gross profit 63,41,597 Actual & Selling expenses
As per the table at page no. 7 of this order and as per the show-cause notice, the operating costs has been mentioned as Rs.2,96,46,496/- and the adjustment proposed was
8 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd. Rs.92,29,594/- whereas in the final order the adjustment made was Rs.2,18,51,592/-. The main argument of the assessee was that allocation of expenses has been made on the basis of gross sales instead of gross profit while calculating the operating margin. The assessee’s contention that the total cost included in the unrelated party has not been excluded if the total cost of sales of Rs.26.69 crores has been found to be attended to while arriving at operating margin of 4.22%. The ld. CIT (A) has also duly considered this fact while adjudicating, held that the grievance of the assessee stands redressed on this issue.
Regarding the lack of opportunity afforded, while making the addition as canvassed by the ld. AR. The ld. CIT (A) held that the calculation of the adjustment and determination of the ALP has been made based on the working given by the assessee. Thus, at this juncture two issues needs to be addressed, a) Whether in the absence of show-cause notice as to the quantum proposed, the addition made by the revenue can be held to be legally valid. b) Whether the allocation of expenses be on the basis of gross sales or on the basis of gross profit.
Having gone through the show-cause notice and the addition made, we find that the assessee has not been afforded an opportunity while making the addition, thus denying the principles of natural justice. It is very unfortunate that in many cases, Assessing Officers make additions under scrutiny assessments in gross violation of the principles of natural justice even without issuing a proper Show Cause Notice or
9 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd. without giving the taxpayer a fair opportunity to explain his point of view. This approach not only creates ill-will for the department, but also gives rise to unjustified demands. Further, it makes the appeal proceedings also complex and time consuming, because the Commissioner Appeals is required to admit additional evidence or call for Remand Reports etc. “Hearing rule” states that the person or party who is affected by the decision made judicial/quasi judicial should be given a fair opportunity to express his point of view to defend himself. The principle of natural justice is a very old concept and it originated at an early age. The people of Greek and roman were also familiar with this concept. In the days of Kautilya, Arthashastra and Adam were acknowledged the concept of natural justice. According to the Scriptures, in the case of Eve and Adam, when they ate the fruit of knowledge, they were forbidden by the god. Before giving the sentence, eve was given a fair chance to defend himself and the same process was followed in the case of Adam too. Later on, the concept of natural justice was accepted by the English jurist. The word natural justice is derived from the Roman word ‘jus-naturale’ and ‘lex- naturale’ which planned the principles of natural justice, natural law and equity. “Natural justice is a sense of what is wrong and what is right.” In India, this concept was introduced at an even as earlier as of Ramayana and Mahabharata.
The Hon’ble Supreme Court of India in the case of Mohinder Singh Gill vs. Chief Election Commissioner 1978 SCR (3) 272, held that the concept of fairness should be in every action whether it is judicial, quasi-judicial, administrative and or quasi-administrative work. The rules of natural justice are rooted in all legal systems, and are not any 'new theology. They are manifested in the twin principles of nemo judex in causa sua and audi alteram partem. It has been
10 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd. pointed out that the aim of natural justice is to secure justice, or, to put it negatively to prevent miscarriage of justice. These rights can operate only in areas not covered by any law validly made. The rules of natural justice are not embodied rules. What particular rule of natural justice should apply to a given case must depend to a great extent on the facts and circumstances of that case, the framework of the law under which the inquiry is held and the constitution of the tribunal. Whenever, a complaint is made before a court that some principle of natural justice has been contravened, the court has to decide whether the observation of that rule was necessary for a just decision on the facts of that case. Every Assessing Officer, TPO, CIT(A) or any other functionary implementing statute or law whether implementing judicial functions or an administrative functions is a judicial authority with regard to the role and duties he is supposed to perform. While exercising such judicial authority, observance of principles of natural justice is a sine qua non.
Keeping in view the above and the well laid down principles and keeping in view that there is substantial discrepancy between the show-cause issue and the addition made, we have come to a conclusion that this is an unambiguous case of violation of principles of natural justice and hence the action of the revenue which was concluded without affording an opportunity to the assessee is liable to be obliterated.
11 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd. 18. The issue of apportionment of expenses whether on the basis of gross profit or on the basis of gross turnover is kept open.
Business Promotion Expenditure: (Ground No. 6)
At the outset, it was brought to our notice that the similar disallowance made by the AO in the case of the assessee pertaining to disallowance of 25% of total business promotion expenditure in the earlier years stands upheld by the Co- ordinate Bench of ITAT Delhi, the fact of which has been fairly conceded by both the parties. In the absence of any material change in the factual and legal contest on this issue in this year, we hereby decline to interfere with the order of the ld. CIT (A).
In the result, the appeal of the assessee is allowed and the appeal of the revenue is dismissed. Order Pronounced in the Open Court on 24/06/2020.
Sd/- Sd/- (Sushma Chowla) (Dr. B. R. R. Kumar) Vice President Accountant Member Dated: 24/06/2020 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR