Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, BANGALORE BENCH “ A ”
Before: SHRI ABRAHAM P GEORGE & SHRI VIJAY PAL RAO
Per Shri Vijay Pal Rao, J.M. : This appeal by the revenue is directed against the order dt.19.12.2008 of Commissioner of Income Tax (Appeals)-IV, Bangalore for the Assessment Year 2005-06.
The revenue has raised the following grounds :
The Order of the learned CIT (A) is opposed to law and facts and circumstances of the case.
2. The learned CIT (Appeals) was not justified in directing the AO to recompute the deduction allowable u/s. 10A of I.T. Act, 1961 after reducing the concerned expenditure both from the export turnover and the total turnover. 3. The CIT(A) erred in directing the AO to exclude the concerned expenditure from the total turnover also while computing the deduction u/s 10A of the I.T. Act, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover 4. The CIT(A) erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 5. The Ld. CIT(A) erred in directing the AO to reconsider his working and rework the ALP accordingly taking into consideration the guidelines issued by the ITAT in the assessees own case for the A.Y 2006-07 in of 2010 without appreciating the fact that the ITAT in its order had remitted the issue back to the file of the Assessing Officer to recompute the ALP by adopting the TNMM method for arriving at the ALP while the CIT(A) does not have such powers consequent to the amendment of section 251(l)(a) by the Finance Act, 2001 wef 01.06.2001. 6. The CIT(A) appeals erred in, directing the TPO to reconsider his working and rework the ALP accordingly taking into consideration the guidelines issued by the ITAT in the assessees own case for the A.Ys 2006-07 & 2007-08 without appreciating the fact that the directions of the ITAT have not reached a finality as appeals u/s 260A have been preferred against the said directions contained in the orders dated 30.08.2011 in ITA No. 1410/Bangalore/2010 and 28.03.2011 in IT(TP) No 1076/Bangalore/2011 for the A.Ys 2006-07 and 2007-08. 7. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (A) be reversed in so far the above issue is concerned and that of the A.O be restored. 8. The Appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the appeal.”
IT(TP)A No.1447/Bang/2013 Page 2 of 15
Ground No.1 is general in nature and does not require any specific adjudication.
Ground Nos.2 to 4 are regarding exclusion of expenditure incurred in foreign currency from the export turnover as well as from total turnover.
4.1 We have heard the rival submission and perused the material on record. The Hon’ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others 349 ITR 98 (Kar) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon’ble jurisdictional High Court reads as follows:-
“………..Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define ‘total turnover’, the word ‘total turnover’ falls for interpretation by this Court;
IT(TP)A No.1447/Bang/2013 Page 3 of 15
……..In section 10A, not only the word ‘total turnover’ is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assxcessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is IT(TP)A No.1447/Bang/2013 Page 4 of 15 to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same”. 4.2 The Hon’ble Mumbai High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd. 330 ITR 175, in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon’ble Mumbai High Court reads as follows:-
“The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression “export turnover” in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the IT(TP)A No.1447/Bang/2013 Page 5 of 15 export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression “total turnover” has not been defined at all by Parliament for the purposes of s.10A. However, the expression “export turnover” has been defined. The definition of “export turnover” excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression “export turnover” cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. ‘export turnover’ would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from ‘export turnover’ for the purposes of the numerator would be brought in as part of the ‘export turnover’ when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary – CIT v Sudarshan Chemicals Industries Ltd. (2000) 163
IT(TP)A No.1447/Bang/2013 Page 6 of 15
CTR (Bom) 596: (2000) 245 ITR 769 (Bom) applied; CIT v Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) and CIT v Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on”
4.3 In the light of the above binding precedents, we direct the AO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while calculating deduction u/s 10A of the Act.
Ground Nos.5 & 6 are regarding the Transfer Pricing Adjustment and adoption of Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) for determining the transfer pricing.
We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that this issue of applying TNMM as MAM has been considered by this Tribunal in assessee's own case for the Assessment Years 2006-07 to 2009-10. For the Assessment Year 2009-10, the Tribunal in the case of assessee vide its order dt.14.8.2014 in IT(TP)A No.271/Bang/2014 considered and decided in paras 30 to 37 as under : “ 30. As can be seen from the aforesaid observations of the TPO, the risk adjustment was not allowed for the reason of absence of proper basis of quantification. Now that the assessee has given the basis of such quantification, the TPO is directed to consider the same.
The issue of computation of ALP is remanded to the TPO to be considered afresh in the light of directions given earlier. Thus, ground Nos.B 4 to 17 raised by the assessee are decided accordingly.
In ground Nos.B. 18 & 19, the assessee has challenged the addition made by the TPO which was confirmed by the DRP in the matter of determination of ALP in the spares replacement services transaction with the AE.
IT(TP)A No.1447/Bang/2013 Page 7 of 15
As far as these grounds are concerned, the factual aspects, as we have already seen, are that the assessee provides spares replacement services in relation to CSI products sold by affiliate in India. The assessee procures spare parts from CSI and supplies it to the channel partner/ customers in India. The product replacement services are provided through third party logistics services provider, who delivers the spare parts to customers/channel partners as and when required. The assessee is remunerated on a cost plus mark-up basis for provision of product replacement services.
In justification of the price it received, the assessee submitted as follows:- “4.2 Functions Buys spare parts from Cisco Keeps inventory Supplies to end customers at its own cost Ships back replacement to Cisco 4.3 Assets Employs own assets. The taxpayer keeps a huge inventory as shown below. Opening stock as on 01-04-2007 : Rs. 2,252,138,000/- Closing Stock as on 31-03-2008 : Rs. 1,14,89,47,000 The other assets employed include manpower costs. storage costs, logistics costs etc. 4.4 Risks The taxpayer is claimed to be a Contract service provider with assured but very low markup. In fact as discussed below in detail the taxpayer carries out all the functions of a trader/distributor. It bears the risk relating to inventory carrying. It is subjected to customs and Vat etc on the goods purchased and sold etc. the actual characterization of the taxpayer has been discussed below in detail.
4.5 Justification of Transfer Price by Taxpayer Taxpayer has furnished the following segmental accounts in its TP analysis.
IT(TP)A No.1447/Bang/2013 Page 8 of 15
Particulars Amount Income from Sale of goods and provision of 2233620846 services - OPERATING INCOME Total cost OPERATING COSTS 2413930963 OPERATING PROFIT l80310117 Cost of goods sold 170261400 Value added cost (Operating cost (-) goods sold 711316963 Operating profit / Value added costs - 25.32%
4.6 The taxpayer followed the TNMM to justify the margins. The following companies were selected by the taxpayer as comparable: Sl. Name of the comparable Weighted average No. operating profit on value added costs in percentage % 1 Arshiya International Ltd. 7% 2 Associated Road Carriers Ltd. 4% 3 Blue Dart Express Ltd. 14% 4 Chartered Logistics Ltd. 3% 5 Costal Roadways Ltd. 3% 6 Container Corporation of India Ltd. 33% 7 EITA India Ltd. -2% 8 Gait 6% 9 Gordaon Woodfoffe Logistics Ltd. 6% 10 Haytrans (India) Ltd. 2% 11 IAL Container Line (India) Ltd. 0% 12 NECC Logistics Ltd. 4% 13 North Eastern Carrying Corp Ltd. 2% 14 Overnite Express Ltd. 6% 15 P L Shipping & Logistics Ltd. 4% 16 Patel Integrated Logistics Ltd. 4% 17 Roadways India Ltd. 1% 18 S E R Industries Ltd. -1% 19 Shreyas Relay Systems Ltd. 4% 20 Sical Logistics Ltd. 4% 21 Skyline Air Logistics Ltd. 31% 22 Southern Road Carriers Ltd. 2% 23 Speedy Multimodes Ltd. 37% 24 TM International Logistics Ltd. 10% 25 Deeksha Travels Pvt Ltd. 16% 26 DTDC Couriers & Cargo Ltd. 6%
IT(TP)A No.1447/Bang/2013 Page 9 of 15
27 Hindustan Cargo Ltd. 5% 28 Indo Arya Central Transport Ltd. 4% 29 Primier Road Carriers Ltd. 0% Average margin 7% As per the above analysis, the taxpayer claimed that its margins from the replacement services are at par with the comparables and hence should be accepted at arms length.”
The TPO rejected the claim of the assessee for the reason that while doing the search process on the database, the assessee had considered itself as a logistic company and therefore comparability criterion adopted by the assessee was not proper. The TPO also rejected the TNMM as not suitable for determination of ALP insofar as it relates to the product replacement services segment of the assessee. The TPO adopted resale price method as the most appropriate method and finally determined the ALP as follows:- 4.12 Thus the following 2 companies have been considered as final comparables. Company Sales Trading Change Purchase Gross GP/ Name Income in of Profit Sales Stock finished goods Point Red 24.74 24.67 0.39 23.93 1.13 4.57% Telecom ltd. TVS 145.45 56.47 13.96% Interconnect 404.51 208.15 - 6.23 Systems Ltd. Arithmetic mean margin 9.26%
4.13 Computation of Arms Length Price: Arm’s Length Mean Margin on cost 9.26% Operating Cost 2,413,930,963 Arms Length Price (ALP) 109.26% of Operating Cost 2,637,460,970 Price Received 2,463,723,146 Shortfall being adjustment u/s. 92CA 173,737,824
IT(TP)A No.1447/Bang/2013 Page 10 of 15
The above shortfall of Rs.173,737,824/- is treated as transfer pricing adjustment u/s. 92CA in respect of Product Replacement Services segment of the taxpayer’s international transactions.
The DRP confirmed the order of the TPO. At the time of hearing, it was brought to our notice that in the case of assessee for the A.Y. 2006-07, similar issue regarding determination of ALP in respect of product replacement services segment had come up for consideration in and the Tribunal, in its order dated 30.8.2011, has held as follows:- “7.1. Having heard both the parties and having considered the rival contentions, we find that the determination of ALP of the international transaction between the assessee and the AE in USA as regards the ‘product replacement service’ is before us. It is not in dispute that the international transaction with the associated enterprises has to be scrutinized to verify, if the same is at ALP. The dispute before us is with regard to the method of computing the ALP and also the comparables selected by the TPO. We, therefore, first proceed to decide the correct method of computing the ALP. 7.2 In the case before us, two different methods are adopted TNMM by the assessee and RPM by the TPO. Which is the most appropriate method for arriving at the ALP is to be examined. Rule 10B of IT Rules provides for different methods to be followed for determination of the ALP under sub-sec.2 of sec.92C of the IT Act. The following are the methods for computing the ALP. (a) Comparable Uncontrolled Price Method (CUP) in which the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified and such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market and the adjusted price arrived at is taken to be an arm’s length price in respect of the property transferred or services provided in the international transaction; Thus, it can be seen that in this method a comparison has to be with transaction of a comparable in an uncontrolled market conditions
IT(TP)A No.1447/Bang/2013 Page 11 of 15 i.e with an unrelated third party in a free market. In the case before us, there is no such comparable uncontrolled transaction to be compared with the transactions of the assessee with its AE. Therefore, the CUP method is not applicable. 9b) Resale Price Method (RPM) by which the price at which property purchased or services obtained by the enterprise from an associated enterprise is re-sold or are provided to an un-related enterprise (emphasis provided by us) is identified and such re- sale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions. Thus, it can be seen that to adopt Resale price method, the property purchased or services obtained by the enterprises from an associated enterprise is to be resold to an unrelated party. 7.3 In the case before us, the purchase from and sale to is the same associated enterprise. The reason given by the TPO for adopting the re-sale price method is that the assessee is a trader/distributor of the spares of its associated enterprise. We are not able to agree with this finding of the TPO. A trader is a one who purchases the goods by transfer of ownership over the goods and is free to fix the re-sale price and also is free to choose the customers to whom he would sell the goods. Likewise, in the case of distribution also the re-sale price can be fixed by the distributor and seller has no influence whatsoever in fixing such a resale price. However, in the case before us, though the assessee is becoming the owner of the goods imported, but, by virtue of the product replacement services agreement, he has no right to fix the resale price or to choose the customer to whom the products are to be sold. It is clear from the agreement that the assessee purchases the spare parts to be sold to its associated enterprise only and for doing so, it earned 1% of mark up on the value of the products and the cost of importing the goods. Thus, it can be seen that the assessee is only a custodian of the goods imported till they are delivered to the client or customer of its parent company on its directions. Therefore, the assessee cannot be held to be a trader or distributor of the goods. When the assessee cannot be held to be a trader or distributor of the spare parts, it is clear that the resale price method is not applicable for arriving at the ALP of the international transactions.
IT(TP)A No.1447/Bang/2013 Page 12 of 15 7.4 The other methods provided are cost plus method which is applicable to the transactions relating to manufacture and sale of goods and Profit Split Method which is applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so inter-related that they cannot be evaluated separately for the purpose of determining the ALP of any one transaction. These two methods cannot be made applicable to the facts before us. The only remaining method is the Transactional net margin method (TNMM)by which the net profit margin realized by an enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise and is compared to net profit margin realized by an unrelated enterprise from an uncontrolled transaction or a number of such transactions and the adjustments for the difference is made. The assessee has adopted the transactional net margin method, as the most appropriate method as seen above. We have already found that the other methods prescribed by Rules are not applicable to the facts of the case before and therefore, the TNMM method is the most appropriate method for computing the ALP relating to the international transactions of the assessee with its associated enterprise.
Coming to the next issue i.e selection of comparables, we find that the Rule-10B of sub-rule-2 & 3 clearly provides the criteria to be considered in selection of comparables. One of the important criteria is the FAR analysis i.e functions performed, assets employed and risks undertaken by the assessee as well as the comparable companies. In the submissions made by the assessee, it is clear that the assessee is performing the function of storing the spare parts imported and supply them to the customers while billing the US company for the sale of the products. The services provided by the assessee are akin to that of the C & F agents who are responsible for the safe keeping and transport of the goods to the clients on the direction of the principal. The comparables adopted by the assessee are also performing similar functions. 8.1 As already brought out by the counsel for the assessee the assets employed and the risk undertaken by the assessee are nil. All these factors are to be considered while selecting the comparables, but the TPO has not considered these aspects before rejecting the comparables selected by the assessee. As regards the comparables selected by the TPO, as rightly pointed out by the counsel for the IT(TP)A No.1447/Bang/2013 Page 13 of 15
assessee, three of these comparables except Iris Computers are involved in trading and manufacturing activities and the segmental break up is not given. Further, the assets employed and the risk undertaken by these companies are also higher than the assessee. Therefore, we are in agreement with the learned counsel for the assessee that these companies have to be rejected as the comparables. The only comparable which can be accepted is Iris Computers and is to be accepted and the gross profit as pointed out by the learned counsel for the assessee should also reconsidered by the TPO. Holding thus, we remit the issue back to the TPO/AO with a direction to recompute the ALP by adopting the proper comparables and also by using the TNMM method for arriving at the ALP. He shall also consider the issue of allowing the benefit of 5% range as provided under the erstwhile proviso to sec.92C(2) of the Act in the light of the judicial precedents thereon.”
We are of the view that the facts and circumstances of the present assessment year being identical, the issue of determining the ALP should be remanded to the TPO/AO for fresh consideration in the light of the directions given by the Tribunal in A.Y. 2006-07. We hold and direct accordingly. Thus, grounds Nos.18 & 19 are decided accordingly.”
Thus in the identical facts and circumstances, the Tribunal has set aside the issue of determination of Arm’s Length Price (ALP) to the record of the TPO/A.O for fresh consideration by using the TNMM as MAM. Respectfully following the earlier orders of the Tribunal, we set aside this issue to the record of the TPO/A.O in the same terms as directed by the Tribunal in the order.
In the result, the appeal of the revenue is partly allowed. Order pronounced in the open court on this 15th day of July, 2016.