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Income Tax Appellate Tribunal, RAIPUR BENCH: RAIPUR
Before: SHRI R. K. PANDA & MS SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM
The appeal is filed by the Revenue and the Cross Objection is filed by the assessee against the order dated 30/10/2014 passed by CIT(A)-, Raipur (CG) for Assessment Year 2010-11.
2 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 2. The grounds of appeal and cross objection are as under:
I.T.A .No. 387/BIL/2014 (A.Y 2010-11)
“1. Whether in law and on facts and circumstances of the case, the Ld.CIT(A) has erred in deleting the adjustment of Rs. 81,44,959/- pertaining to arm’s length price as suggested by the Transfer Pricing Officer?”
Whether in law and on facts and circumstances of the case, the Ld.CIT(A) has erred in deleting the disallowance of rS.2,00,000/- made by the A.O on account of travelling expenses?.
Whether in law and on facts and circumstances of the case, the Ld.CIT(A) has erred in deleting the disallowance of Rs.2,00,000/- made by the A.O on a/c of Legal & Professional Charges?
The Order of the Ld.CIT (A) is erroneous both in law and on facts?
Any other ground that may be adduced at the time of hearing.”
C.O No. 90/BIL/2015 (A.Y 2010-11)
“1. That under the facts and the law, the Ld.CIT(A) has rightly deleted the addition of Rs.81,44,959/- made by the Ld. Assessing Officer on account of Transfer Pricing adjustment. 2. That the Ld.CIT(A) after considering the facts and law rightly deleted the disallowance of Rs.2,00,000/- made out of travelling expenses and Rs.2,00,000/- out of legal & professional expenses.”
The assessee is a private limited company deriving income from the business of export of Iron Ore Fines, Rice Bran Oil, De-oiled Cake, Rice etc. The Assessing Officer, made an addition of Rs. 81,44,959/- on the basis of Order passed by DCIT (TPO-II), Ahemadabad u/s 92C(3) dated 28/01/2014. The Iron Ore
3 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 Fines export is made in bulk / loose form from various Indian ports to various Chinese ports. The assessee has a wholly owned subsidiary at Singapore. It has filed Audit Report in Form 3CEB and Transfer Pricing Study (TP Study) before the AO / TPO. The turnover of the assessee company was Rs. 996 crores and the trading results were accepted by the Assessing Officer. The assessee has international transaction with the Associate Enterprise (AE) for vessel freight (chartering) of Rs. 232,72,71,145; vessel freight (trading) of Rs. 10,66,94,209/-; export of Iron Ore Fines of Rs. 204,29,90,919/-; reimbursement of expenses of Rs. 6,41,193/- and recovery of expenses of Rs. 5,43,228/-.
The Arm’s length price (ALP) of international transaction for vessel freight was benchmarked using Transaction Net Margin Method (TNMM). The results were accepted by AO/TPO as within ALP. In respect of export of Iron Ore Fines, the uncontrolled comparable transactions were identified in TP Study using internal export instances in case of assessee as well as import instances by AE. Further, the external comparable instances were identified using data from Trade Steel Index (TSI) and U-Metal database. All the comparable instances found for each export transaction were averaged and the average price was compared with the export price charged by the assessee. The average price was also adjusted on account of various elements such as grade of Fines, freight, insurance, port adjustment etc. The TPO, in those cases where the internal transactions were available, did not accept the external comparables. Accordingly the TPO found that in 14 instances internal comparables were available and in remaining 7 instances external comparables could have been used. In case of two vessels, namely “THEOSKEPASTI” and "GOA ” the TPO found that there was only one comparable of Trade Steel Index. He, therefore, rejected the claim of the assessee for allowing benefit of variation of (+/-) 5% observing that benefit U/S 92C(2), second proviso by relying on following decisions:
Haworth (India) Pvt. Ltd., A. Y. 2006-07 (ITA No. 5341/Del/2010) > ADP Private Limited (2011-TII-44-ITA T-Hyd-TP) >
4 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 Perot Systems TSI (India) Ltd. (2010-TOIL-15-Del) > > Essar Steel Ltd. (2011-TII-17-ITAT- Vizag-TP) > Vipin Enterprises [18 Taxmann.com 85 (Del)] > UE Trade Corporation (India (2011 -TIl-04-ITAT-Del-TP)
Accordingly, the TPO proposed upward adjustment of Rs. 81,44,959/- in his Order U/S 92C(3) dated 28/01/2014. This was accepted by the Assessing Officer and the above sum was included in the income of the assessee. The Assessing Officer also made disallowance of Rs. 2,00,000/- out of Legal & Professional Charges and Rs. 2,00,000/- out of Travelling Expenses.
Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
The Ld. DR submitted that as regards Ground No.1, the CIT(A) erred in deleting the adjustment of Rs.81,44,959/- pertaining to Arms Length Price as suggested by the TPO. The Ld. DR submitted that the TPO observed and gave finding that in 14 instances internal comparables were available in remaining 7 instances external comparables could have been used. The TPO further observed that in case of two vessels, namely “ THEOSKEPASTI” and “GOA”, the TPO found that there was only one comparable of Trade Steel Index. Therefore, the TPO rejected the claim of the assessee for allowing benefit of variation (+/-) 5% observing that benefit u/s 92C (2) Second proviso by relying various decisions and proposed upward adjustment of Rs.81,44,959/-. As regards Ground No. 2, the Ld. DR submitted that the CIT(A) erred in deleting the disallowance of Rs. 2 lacs made by the Assessing Officer on account of travelling expenses as the Assessing Officer has rightly disallowed the same. As regards Ground No.3, the Ld. DR submitted that the CIT(A) has erred in deleting the disallowance of Rs.2 lacs made by the Assessing Officer on account of Legal and Professional Charges.
5 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015
The Ld. AR relied upon the order of the CIT(A) and submitted that the CIT(A) has taken all the cognizance of the evidences provided before him as well as before the TPO and the Assessing Officer.
We have heard both the parties and perused the material available on record. As regards Ground No 1, the CIT(A) held as under:-
“9. I have carefully gone through the assessment order, submissions of the appellant, order of the TPO, comments of the TPO and the AO and the material available. It is seen that the TPO/AO has accepted the Transactional Net Margin Method (TNMM) with regard to freight charges paid by the appellant to the Associated Enterprise (AE) as within arm’s length price. The TPO/AO has also accepted the comparable uncontrolled price method in case of Iron Ore Fines as adopted by the appellant, barring in following two vessels out of 21 vessels:
S.No. Name of Vessel Rate Comparable Difference Weight in Amount of FOB/MT rate per MT in dry/MT adjustment FOB/MT (USD)
1 THEOSKEPASTI 64.00 65.73 (1.73) 29841.444 51106.70
2 GOA 68.00 70.97 (2.97) 40661.325 120764.13
3 TOTAL 171870.83
The TPO took average exchange rate of USD at Rs. 47.39 per USD and worked-out the adjustment of Rs. 81,44,959/-. The appellant used external CUP of Trade Steel Index in above cases. There is single comparable, benefit of (+/-) deviation as per second proviso of Sec. 92C(2) was rejected by the TPO. If the benefit of above proviso is allowed, both the above transactions are within ALP. For better understanding, provisions of Section 92C are extracted hereunder:
6 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 “Sec. 92C reads as below:
“Compulation of arm’s length price.
92C. (1) The arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method', having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant comparable uncontrolled price method; (a) resale price method; (b) cost plus method; (c) profit split method; (d) (e) transactional net margin method; (f such other method as may be prescribed by the Board.
(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed:
Provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the Provided further that if the variation between the arm’s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price find that provisos to Sec. 92C(2) have been amended as below:
First proviso was inserted by Finance Act, 2001, w.e.f. 1/04/2002 which reads as below:-
7 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 “Provided that where more than one price may be determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. ”
However, the above proviso was substituted by Finance Act 2002, w.e.f. 01/04/2002 as below:-
“Provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean. ”
Thus, the proviso inserted by Finance Act 2001, in fact, did not become operative.
Thereafter, Finance Act, 2009 enjoined that in Section 92C, for the proviso, the following provisos shall be substituted with effect from the 1st day of October, 2009, namely:-
"Provided that where more than One price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices :
Provided further that if the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed five per cent, of the latter, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price.".
8 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 11. In my considered view, the element of estimation in determination of Transfer Price cannot be ruled out owing to the reason that the two independent transactions in the practical world cannot be alike in all respect. Considering this aspect, in my opinion, the benefit of (+/-) 5% has been allowed by the Finance Act, 2009 w.e.f. 01.10.2009. For this reason, I am of the considered opinion that benefit of (+/-) 5%, as referred in second proviso to Sec. 92C(2) is available not only in those cases where more than one price is determined as ALP by the most appropriated method but also in those cases where only one price is determined as ALP. ALP in both the above cases of two vessels have been determined by having single comparable as per “The Steel Index”. The observation of the Hon’ble Members in ITAT “A” Bench, Mumbai in DCIT (International Taxation) vs. Development Bank of Singapore in ITA No. 6621/Mum/ 2006 dated 17/05/2013 is reproduced below:
“As per the first proviso where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. Per contra, if there is only one price which is determined by the most appropriate method, then as per the main sub-section (2) without the aid of proviso, that price shall constitute the ALP. The second proviso comes into play to deem the actual transacted price asthe ALP. It provides that wherethe variation betw’een the ALP‘so determined’ does not exceedthe specified percentage, the price at which the international transaction has actually been undertaken ‘shall be deemed to be the arm’s length price’. The words ‘so determined’ as employed in the second proviso assume significance. As these have been used in the second proviso distinct from the subject matter of the first proviso, naturally these will apply to the ALP
9 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 determined under sub-section (2) consisting of the main provision and also the first proviso. Resultantly, the option of ‘deemed’ ALP shall extend not only to a situation where more than one price is determined as ALP by the most appropriate method but also where only one price is determined as ALP. The net result is that the option to the assessee shall be available in both the situations, covered under main sub-section (2) and also the first proviso. ”
The issue of prices quoted by LIBOR whether average of various rates was also dealt-in by the Hon’ble Members in the aforesaid Order of Hon’ble ITAT, Mumbai Bench-K, Mumbai in case of The Development Bank of Singapore. In the said case, LIBOR was comparable uncontrolled interest rate which the assessee relied upon. In that case, the Hon’ble Members observed as below:
“Since the LIBOR is not a rate in itself at which some bank is willing to borrow or lend, but an average of rates at which various panel banks offer to borrow or lend inter-bank offers, the same cannot be characterized as one price determined under the comparable uncontrolled price method. It is required tobe considered as arithmetical mean of such prices, thereby making available the option of plus minus 5% variation to the assessee. As the present addition of Rs. 50,476 made by the AO was the outcome of not allowing plus minus 5% cushion, which in our considered opinion is richly due to the assessee, we hold that the learned CIT (A) was justified in deleting this addition. ”
Accordingly, I am of the view that the words “so determined” used in second proviso is independent and unconnected with the subject matter of first proviso and as such cannot be considered as rider to first proviso. In
10 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 my opinion, the second proviso to above section is independent one. The words “so determined” refers to word used “determined” in opening section 92C(2) which refers as many as six methods to be most appropriate method. Therefore, I am of the considered opinion that both the above transaction in two vessels, namely “THEOSKEPASTI” and “GOA ” are within deviation of (+/-) 5%, and therefore, the transaction is within ALP. Accordingly, the upward adjustment of Rs. 81,44,959/- is uncalled for and deleted.
The case of the appellant is also supported for another reason. I also find that prices quoted by Steel Index are available in public domain. The front page of above site mentions that TSI Prices are based on actual spot companies. The price discovery methodology is rigorous 21st century approach using online data gathering to provide fully verifiable prices free from subjectivity. I also find that the appellant has filed price data of relevant dates during proceedings before TPO. The header mentions “The Steel Index Price Analyzer”. It suggests “statistics for Iron Ore Fines – 62% and 58% USD / MT. There is also mention at the bottom of the page expressing that – “Platts acquired the Steel business briefing group. A leading information provider to the global steel market through its two core business, Steel Business Briefing (SBB) and These Steel Indexes (TSI) in July, 2011. The acquisition of the SBB group enables platts to provide customers and the market with the benefit of a target, highly experienced editorial team a grammatically extended brief prices assessments and far from expensive product and variance mix. ”
The TPO has accepted the TSI prices in TP Study for determining ALP. Therefore, the comment of the TPO in his report that Trade Steel Index is arithmetical mean has not been explained by the appellant cannot be accepted and appellant has sufficiently demonstrated above.
The case laws referred by the TPO in the TP Order as well as in the
11 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 comments filed by TPO pertain to earlier year i.e., prior to substitution of first proviso in Sec. 92C(2) by Finance Act, 2009. However, in case of UV Trade Corporation India - (2011) T-II04 ITAT - Del.-TP the Hon’ble Members have taken different view as taken in case of Development Bank of Singapore supra by the Hon’ble Members of Mumbai Bench. There being difference of opinion in the decision of two different Benches of ITAT, I am convinced with the decision in case of Development Bank of Singapore, Mumbai Bench and also for the reasons that in case of different view, view beneficial to the appellant be taken. The other judgement in case of General Atlantic Pte. Ltd. supra quoted by the TPO is of Mumbai ITAT which is prior to the judgement of the same bench of ITAT in Development Bank of Singapore supra. The later judgement is preferred. Therefore, the upward adjustment is deleted.
The appellant gets relief of Rs.81,44,959/-”
Thus, the CIT(A) after verifying all the aspects and also that of the evidences produced before the Transfer Pricing Officer and the Assessing Officer rightly come to the conclusion that the transaction in two vessels, namely “THEOSKEPASTI” and “GOA ” are within deviation of (+/-) 5%, and therefore, the transaction is within ALP. Accordingly, the upward adjustment of Rs. 81,44,959/- is rightly deleted by the CIT(A). The case of the assessee is also supported by another reason that prices quoted by Steel Index are available in public domain and assessee filed price data of relevant dates during proceedings before TPO. The TPO has accepted the TSI prices in TP Study for determining ALP. Therefore, the comment of the TPO in his report that Trade Steel Index is arithmetical which was not explained by the assessee was rightly rejected by the CIT(A) and held that the assessee has sufficiently demonstrated the same. Therefore, there is no need to interfere with the order of the CIT(A). Ground No. 1 of the Revenue’s appeal is dismissed
As regards Ground No. 2, we find that the CIT(A) held as under:-
12 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 “15. I have carefully gone through the assessment order and submissions of the appellant. The appellant claimed travelling expenses at Rs. 71 lakhs & odd out of which Rs.2,00,000/- has been disallowed by the AO stating that some expenses are not properly supported and complete details are not available and also that some expenses have been incurred by Credit Card by individual director. I considered the details filed for the sum of Rs. 71 lakhs & odd and find that they contain details with regard to person who incurred the expenses, place, details of ticket, details of hotel etc. The A.O has not pointed out any specific instance of unsubstantiated claim of expenditure. The disallowance is, therefore, uncalled for and is deleted.”
Thus, the CIT(A) has taken the cognizance of the details filed by the assessee during the course of the Assessment Proceedings before the Assessing Officer as well as before him. The finding of the CIT(A) in our opinion is just and proper. Therefore, there is no need to interfere with the findings of the CIT(A). Ground No. 2 of the Revenue’s appeal is dismissed.
As regards Ground No. 3, we find that the CIT(A) held as under:- 10.
“18. I have carefully gone through the assessment order and submissions of the appellant. The appellant incurred Rs. 65 lakhs & odd towards Legal and Professional Charges. Details with regard to above were filed before me, I have carefully gone through the same, the A.O has not brought on record any evidence to prove that the expenses were not incurred in relation to business nor any specific instance of unsubstantiated claim has been pointed out by the A.O. I do not find any reason to sustain the disallowance made by the AO on adhoc basis. Hence, the disallowance is deleted.”
The assessee incurred Rs. 65 lakhs approximately towards the legal and professional charges and for which the assessee submitted the details which
13 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015 was ignored by the Assessing Officer. However, we find that the CIT(A) after proper appreciation of the facts of the case deleted the disallowance. The order of the CIT(A) on this issue is a reasoned one, therefore, there is no need to interfere with the findings of the CIT(A). Ground No. 3 of the Revenue’s appeal is dismissed.
In respect of the Cross objection the same is in support of the order of the CIT(A). Since, all the grounds raised by the Revenue are dismissed, the cross objection becomes infructuous. Accordingly, the cross objection is also dismissed.
In result, the appeal of the Revenue as well as cross objection filed by the assessee are dismissed.
Order pronounced in the Open Court on 11th October, 2018. Sd/- Sd/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 11/10/2018 R.N* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT
Private Secretary ITAT, Raipur
14 ITA No. 387/BIL/2014 & C.O No. 90/BIL/2015
Date of dictation 05.10.2018
Date on which the typed draft is placed before the 05.10.2018 dictating Member
Date on which the typed draft is placed before the Other Member
Date on which the approved draft comes to the Sr. PS/PS
Date on which the fair order is placed before the Dictating Member for pronouncement
Date on which the fair order comes back to the Sr. 11.10.2018 PS/PS
Date on which the final order is uploaded on the .10.2018 website of ITAT
Date on which the file goes to the Bench Clerk .10.2018
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant Registrar for signature on the order
Date of dispatch of the Order