Appeal Details
Counselvise Citation
[2017] 123 COUNSELVISE.COM (IT) 2749 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
4 year(s) 4 day(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
01-03-2017
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I
Assessment Year
2008-2009
Appeal Filed On
25-02-2013
Judgement Text
, IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, AHMEDABAD BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ./ ITA NO. 203/BLPR/2012 & CO NO.02/BLPR/2013 / ASSESSMENT YEAR : 2008-09 ASSISTANT COMMISSIONER OF INCOME-TAX 2(1), RAIPUR VS M/S. BAGADIYA BROTHERS (P) LTD., 15/63, BAGADIYA MANSION, JAWAHAR NAGAR, RAIPUR (C.G.) PAN : AABCB 8934 G / (APPELLANT) / (RESPONDENT) & CROSS-OBJECTOR REVENUE BY : SHRI HARE GOVIND SINGH, CIT-DR ASSESSEE BY : SHRI S.N. SOPARKAR WITH SHRI G.S. AGRAWAL, ARS DATE OF HEARING : 1 2/01/2017 DATE OF PRONOUNCEMENT IN COURT : 01/03/2 017 / O R D E R PER R.P. TOLANI, JUDICIAL MEMBER :- THIS IS A REVENUE APPEAL AND CORRESPONDING CO BY AS SESSEES ARISING FROM THE ORDER OF THE LEARNED COMMISSIONER OF INCOM E-TAX (APPEALS), RAIPUR (C.G.) DATED 31.08.2012 FOR ASSESSMENT YEAR 2008-09. 2 GROUNDS RAISED BY REVENUE ARE AS UNDER:- I. WHETHER IN LAW AND ON FACTS & CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.14,69,89,382/- MADE BY THE AO ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. II. WHETHER IN LAW AND ON FACTS & CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF RS.11,86,296/ - MADE BY THE AO UNDER THE HEAD ADMINISTRATIVE & SELLING EXPENSES. (ASSESSEE CLAIMS A MISTAKE IN THE GROUND AS THE ACTUAL DELETION IS OF RS. 1,19,000/-). III. WHETHER IN LAW AND ON FACTS & CIRCUMSTANCES OF THE CASE, THE CIT(A) WAS JUSTIFIED IN ADMITTING ADDITIONAL EVIDENCE IN VIOLA TION OF RULE 46A OF I. TAX RULES, 1962. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 2 IV. THE ORDER OF THE LD. CIT(A) IS ERRONEOUS BOTH IN LA W AND ON FACTS. V. ANY OTHER GROUND THAT MAY BE ADDUCED AT THE TIME OF HEARING. 3. ASSESSEES CO RAISES FOLLOWING GROUNDS:- I. THAT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S) HAS RIGHTLY DELETED THE ADDITION OF RS. 14,69,89,382/- MADE BY THE LD. ASSESSING OFFICER ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT A FTER APPRECIATING THE FACTS AND THE LAW AND AFTER ALLOWING OPPORTUNITY TO THE LD. JCIT TPO AND THE LD. ACIT II. THAT THE LD. CIT(A) AFTER CONSIDERING THE FACTS AND LAW RIGHTLY DELETED THE DISALLOWANCE OF RS.1,19,000/- MADE OUT OF OFFIC E EXPENSES. THE RELIEF ALLOWED BY LD. CIT(A) IS RS. 1,19,000/- AND NOT RS. 11,86,296/- AS MENTIONED BY LD. AO IN THE GROUNDS OF APPEAL. III. THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME-TA X (APPEALS) IS VALID IN LAW AND ON FACTS AND BE UPHELD. 4. BRIEF FACTS OF THE APPEAL ARE - ASSESSEE, BAGADI YA BROTHERS PRIVATE LIMITED ( BBPL FOR SHORT) IS AN EXPORTER MAINLY E XPORTING IRON ORE FINES, IN BULK/LOOSE, FROM INDIAN PORTS TO VARIOUS CHINESE PORTS AS ALSO IN EXPORTS OF AGRO-PRODUCTS TO OTHER COUNTRIES. BBPL HAS A 100 % SUBSIDIARY COMPANY AS ASSOCIATED ENTERPRISE (AE) IN SINGAPORE, NAMELY BAGADIYA BROTHERS (SINGAPORE) PVT. LTD (IN SHORT BBSPL) WHICH REGUL ARLY OPERATES IN SHIP CHARTERING BUSINESS. AE PROVIDES VESSELS TO THIRD P ARTIES AS WELL ASSESSEE IN ITS REGULAR COURSE OF BUSINESS AT SINGAPORE. ASSESS EE FOR ITS IRON ORE EXPORTS CHARTERS THE VESSELS FROM THIRD PARTY CHARTERERS AS WELL AS AE. 4.1 FOR IMPUGNED AY 2008-09, ASSESSEE FILED RETURN OF INCOME OF RS.64,23,57,250/- COMPUTED IN ACCORDANCE WITH PROVI SIONS. TP REPORT IN RESPECT OF TRANSACTIONS WITH ASSOCIATED ENTERPRISE (AE) APPLYING TNMM METHOD AND ADOPTING AE AS TESTED PARTY. LD. AO FORW ARDED THE TP REPORT TO LD. TPO U/S 92CA AND CALLED FOR DETAILS OF OTHER ITEMS OF EXPENDITURE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 3 CLAIMED BY IT, WHICH WERE DULY FILED. LD. TPO VIDE REPORT U/S 92CA DTD. 20-12-2010 RECOMMENDED TP ADJUSTMENTS/ ADDITION OF RS.14,90,76,625/- (MISTAKENLY TAKEN BY AO AS RS. 14,96,76,625/-). LD. TPO FOR PROPOSING TP ADJUSTMENT: I. REJECTED ASSESSEES APPLICATION OF TNMM METHOD AS M OST APPROPRIATE METHOD AND AE AS TESTED PARTY. II. DID NOT APPRECIATE THE FUNCTION AND RISK (FAR) PROF ILE AS EXPLAINED BY ASSESSEE WHICH WAS IN ACCORDANCE WITH RULE 10B (2). III. RECLASSIFIED THE CHARACTERIZATION OF AE AS MERELY A FACILITATING OFFICE AND AGENT ONLY. IV. HOLDING THAT THE ASSESSEES BUSINESS ADVANCES TO AE FOR SECURING VOYAGE CHARTER CONTRACTS AS NON-INTEREST BEARING LA NDINGS. V. HELD THAT THE AE WAS NEW IN SHIPPING CHARTERING BUS INESS AND DISBELIEVING THAT AE OPERATED THROUGH A SINGAPORE B ASED SHIPPING CONSULTANT L. M. MARTIN AND CO. VI. APPLIED BERRY RATIO BASED ON GROSS PROFIT/ VALUE AD DED EXPENSES (GP/ VAE) VII. HOLDING THAT THE OPERATING COST INCURRED BY AE IN R ESPECT OF HIRE CHARGES AND OTHER KEY COSTS WERE MERE PASS THROUGH COSTS AND ACCORDINGLY REWORKING THE OPERATING PROFIT/ TOTAL C OST. 4.2 A SHOW CAUSE NOTICE DTD. 8-11-2011 WAS SERV ED ON THE ASSESSEE TO FILE OBJECTIONS ON PROPOSED TP ADJUSTMENTS. ASSESSEE FIL ED DETAILED OBJECTIONS DTD. 21-12-2011 THEREON ON VARIOUS ISSUES AND APPLI CATION OF BERRY RATIO WHICH WAS GROSSLY INAPPLICABLE. BESIDES, IT WAS OBJ ECTED THAT EVEN THE AES TRANSACTIONS WITH INDEPENDENT THIRD PARTIES WERE ER RONEOUSLY INCLUDED IN THE TP ADJUSTMENT RESULTING IN EXCESS ADJUSTMENT OF RS.7,32,81,066/-. LD. AO HOWEVER ISSUED DRAFT ASSESSMENT ORDER DATED 27.1 2.2011, WHICH WAS SERVED ON 29.12.2011 WITHOUT ADOPTING ANY OBJECTION S FILED IN THIS BEHALF. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 4 ASSESSEE AGAIN FILED THESE OBJECTIONS WHICH WERE SU MMARILY REJECTED AND PROPOSED TP ADDITIONS ALONG WITH OTHER ADDITIONS OR DER WERE MADE IN THE FINAL ASSESSMENT ORDER DATED 28.02.12 BY FOLLOWING OBSERVATIONS: 5. THE JOINT COMMISSIONER OF INCOME TAX, TRANSFER PRICING OFFICER-1, RAIPUR VIDE ORDER U/S 92CA(3) OF THE IT. ACT, 1961 DATED 29.10.2011 HAS DETERMINED THE ARM'S LENGTH PRICE AND SUGGESTED DOW NWARD ADJUSTMENT OF RS.14,90,76,625/-. ACCORDINGLY, SHOW CAUSE NOTICE D ATED 08.11.2011 WAS ISSUED ALONG WITH NOTICE U/S 142(1) OF THE IT. ACT, REQUIRING THE ASSESSEE COMPANY TO FILE OBJECTIONS, IF ANY TO THE ORDER U/S 92CA(3) OF THE IT. ACT DATED 29.10.2011 PASSED BY THE JOINT COMMISSIONER O F INCOME TAX, TRANSFER PRICING-1, RAIPUR IN ITS CASE AS IT WAS PROPOSED TO ADD AMOUNT OF RS.14,96,76,625/- TO ITS INCOME ON ACCOUNT OF DOWNW ARD ADJUSTMENT AS MENTIONED IN THE ORDER UNDER REFERENCE. 6. IN RESPONSE TO THE ABOVE SHOW CAUSE, THE ASSESSE E COMPANY HAS RESPONDED BY FILING REPLY DATED 21.12.2011 WHEREIN VARIOUS IS SUES HAVE BEEN RAISED IN REGARD TO COMPUTATION OF ARM'S LENGTH PRICE. IT IS OBSERVED THAT MOST OF THESE ISSUES HAVE ALREADY BEEN TAKEN CARE OF BY THE JOINT COMMISSIONER OF INCOME TAX, TRANSFER PRICING OFFICER-1, RAIPUR. THE OTHER ISSUES ARE BEYOND THE PURVIEW OF THE JURISDICTION OF THE UNDERSIGNED AND THE ASSESSEE IS ADVISED TO TAKE UP THESE ISSUES AT APPROPRIATE APPELLATE FO RUM. IN REGARD TO THE CALCULATION MISTAKE POINTED OUT BY THE ASSESSEE COM PANY IN CALCULATION OF DOWNWARD PRICE ADJUSTMENT, THE ASSESSEE COMPANY MAY MOVE RECTIFICATION APPLICATION U/S 154 BEFORE THE JOINT COMMISSIONER O F INCOME TAX, TRANSFER PRICING OFFICER-1, RAIPUR. 7. IN VIEW OF THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE DETAILED ABOVE, THE VARIOUS OBJECTIONS RAISED BY THE ASSESSEE COMPANY A GAINST THE ORDER U/S 92CA(3) OF THE IT. ACT ARE REJECTED. ACCORDINGLY A SUM OF RS. 14,96,76,625/- IS ADDED TO THE INCOME OF THE ASSESSEE ON ACCOUNT O F DOWNWARD ADJUSTMENT AS PER ORDER U/S 92CA(3) DATED 29.10.2011 PASSED BY TH E JOINT COMMISSIONER OF INCOME TAX, TRANSFER PRICING OFFICER-1, RAIPUR. (ADDITION: RS. 14,96,76,625/-) 8. ON GOING THROUGH THE AUDIT REPORT SUBMITTED BY T HE ASSESSEE COMPANY, IT WAS NOTICED THAT THE ASSESSEE HAS CLAIMED LEGAL & P ROFESSIONAL CHARGES OF RS.46,80,072/- UNDER THE HEAD 'ADMINISTRATIVE & SEL LING EXPENSES' FOR THE YEAR UNDER CONSIDERATION. OUT OF THIS EXPENSES AN A MOUNT OF RS. 1,31,500/- WAS PAID ON ACCOUNT OF ROC FILING FEE FOR INCREASE IN THE AUTHORISED CAPITAL OF THE ASSESSEE COMPANY. THE EXPENSES CLAIMED UNDER THIS HEAD IS NOT OF REVENUE IN NATURE AS THE FEE WAS PAID FOR THE BENEF IT FOR INCREASE IN THE CAPITAL OF THE ASSESSEE COMPANY. ACCORDINGLY, THE FEE OF RS . 1,31,500/- PAID TO THE ROC IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 5 (ADDITION: RS. 1,31,500/-) 9. SIMILARLY, THE ASSESSEE COMPANY HAS ALSO CLAIMED OFFICE EXPENSES OF RS.11,86,296/- UNDER THE HEAD 'ADMINISTRATIVE & SEL LING EXPENSES' FOR THE YEAR UNDER CONSIDERATION. ON VERIFICATION OF THE BI LLS AND VOUCHERS SUBMITTED BY THE ASSESSEE, IT WAS NOTICED THAT, SOME VOUCHERS ARE OF SELF MADE AND NOT PROPERLY MAINTAINED AND SOME VOUCHERS ARE RELATING TO NON BUSINESS PURPOSE. IN VIEW OF THESE REASONS, THE EXPENSES OF RS. 11,86,296/- CLAIMED UNDER OFFICE EXPENSES ARE COMPLETELY NOT ALLOWABLE. ACCORDINGLY, AN AMOUNT OF RS. 1,19,000/- @10% OF THE TOTAL CLAIM OF RS. 11 ,86,296/- IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE COMPA NY. (ADDITION: RS. 1,19,000/-) 4.3 AGGRIEVED, ASSESSEE PREFERRED FIRST APPEAL BEFO RE LD. CIT(A). AT THE TIME OF HEARING, IT WAS CLAIMED THAT LD. AO FRAMED THE ASSESSMENT IN HURRY WITHOUT ASKING ANY FURTHER QUERY, ADDITIONAL EVIDEN CE ALONG WITH APPLICATION FOR ADMISSION THEREOF WERE FILED. LD. F ORWARDED THE ADDITIONAL EVIDENCE TO LD. AO FOR COMMENTS WHICH IN TURN WERE FORWARDED TO LD. TPO. LD. CIT(A) AFTER CONSIDERING THE AOS OBJECTIONS ON ADMISSION OF ADDITIONAL EVIDENCE, ADMITTED THE SAME U/R 46A OF THE ITAT RU LES BY FOLLOWING OBSERVATIONS:- THE APPELLANT FILED AN APPLICATION DATED 02.05.201 2 UNDER RULE 46A MAKING PRAYER TO ADDITIONAL EVIDENCES. IT IS SUBMIT TED THAT THESE EVIDENCES PERTAIN TO AE, NAMELY M/S. BAGADIAYA BROTHERS (SING APORE) PVT. LTD., WHOSE REGISTERED OFFICE IS AT SINGAPORE. THESE EVIDENCES WERE NOT IN THE POSSESSION OF THE APPELLANT AND IT WAS COLLECTED FR OM AE. THERE WAS CHANGE IN PREMISES OF AE AT SINGAPORE CAUSING DISLOCATION OF VARIOUS RECORDS. SOME OF THESE EVIDENCES COULD NOT BE FILED DURING PROCEE DINGS BEFORE THE TPO, BECAUSE THE APPELLANT WAS NOT KNOWING THE MIND OF T HE TPO AND THE ISSUES CAME TO THE KNOWLEDGE ONLY UPON RECEIPT OF THE ORDE R OF THE TPO. IT IS SUBMITTED THAT IN THE SHOW CAUSE NOTICE DATED 19.10 .201 1, A VERY SHORT TIME WAS ALLOWED TO THE APPELLANT. THE SHOW CAUSE N OTICE DATED 19.10.2011 WAS RECEIVED ON THE SAME DAY AT 8.25 PM REQUIRING T HE APPELLANT TO FILE EXPLANATION BY 24.10.2011. THE APPELLANT FILED AN A PPLICATION DATED 24.10.2011 BEFORE THE TPO. IN WHICH IT WAS SUBMITTE D THAT 22 ND OCTOBER WAS SATURDAY AND 23A WAS SUNDAY AND AS SUCH THEY WERE H OLIDAYS IN SINGAPORE AND SUNDAY IS HOLIDAY IN INDIA AND THAT 26TH OCTOBE R, 2011 WAS DIWALI, DUE TO WHICH THERE WAS FESTIVAL CELEBRATION MOOD AND MO ST OF THE EMPLOYEES WERE ON LEAVE IN INDIA AS WELL AS AT SINGAPORE. IN THE A BOVE APPLICATION, THE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 6 APPELLANT, FOR THE ABOVE REASONS, REQUESTED TO ALLO W FURTHER TIME OF A WEEK WHICH WAS NOT ALLOWED BY THE TPO. THE LD. AUTHORIZE D REPRESENTATIVES FURTHER SUBMITTED THAT, BARRING A FEW EVIDENCES, AL L THE EVIDENCES MENTIONED IN THE APPLICATION WERE FILED BEFORE THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS WHICH THE AO REFUSED TO ADMIT SAYING TH AT THE SAME BE FILED BEFORE THE APPELLATE AUTHORITY. IT WAS FURTHER SUBM ITTED THAT THERE WAS REASONABLE CAUSE IN NOT FILING THE EVIDENCES AND TH AT THIS WAS THE FIRST YEAR OF THE TRANSFER PRICING ASSESSMENT AND TO BRING ALL TH E FACTS TO THE FORE AND TO TAKE JUDICIAL VIEW ON THE ISSUES RAISED IN THE GROU NDS OF APPEAL, THE ADDITIONAL EVIDENCES SHOULD BE ADMITTED AND BE CONS IDERED IN DISPOSING-OFF THE APPEAL. 6. I HAVE CONSIDERED THE APPLICATION FILED UNDER R ULE 46A, ARGUMENTS MADE BY THE LD. AUTHORIZED REPRESENTATIVES OF THE A PPELLANT, THE SUBMISSIONS OF AO/TPO AND WRITTEN SUBMISSION FILED BY AO/TPO IN THEIR REMAND REPORTS. THE APPELLATE PROCEEDINGS BEFORE TH E CIT (APPEALS) ARE EXTENSION OF ASSESSMENT PROCEEDINGS. ADDITIONAL EVI DENCES CAN BE ADMITTED BY CIT (APPEALS) FALLING UNDER ANY OF THE CIRCUMSTA NCES MENTIONED IN SUB- CLAUSE (1) OF RULE 46A. FURTHER, SUB-CLAUSE (4) OF RULE 46A ALSO EMPOWERS THE CIT(APPEALS) TO DIRECT THE PRODUCTION OF ANY DO CUMENT OR EXAMINATION OF ANY WITNESS TO ENABLE HIM TO DISPOSE-OFF THE APPEAL . IN THE LIGHT OF ABOVE, I WILL CONSIDER THE ADDITIONAL EVIDENCES FILED BEFORE ME IF THEY CAN BE ADMITTED. 7. THE SHOW CAUSE NOTICE DATED 19.10.2011 WAS SERVE D ON THE APPELLANT IN THE NIGHT OF 19.10.2011, COPY OF THIS IS ENCLOSED A T PAGE NO.221 OF THE PAPER BOOK. THE JCIT, TPO-1 DIRECTED THE APPELLANT TO FIL E THE EXPLANATION BY 24.10.2011. I AM CONVINCED FROM THE ARGUMENT OF THE LD. AUTHORIZED REPRESENTATIVES THAT 22ND & 23RD OCTOBER, 2011 BEIN G SATURDAY AND SUNDAY RESPECTIVELY AND MOREOVER DIWALI WAS ON 26 TH OCTOBER, 2011 DURING WHICH FESTIVE MOOD PREVAILS IN INDIA AS WELL AS IN SINGAPORE WHEN MANY EMPLOYEES ARE ON LEAVE. ONE WEEK TIME REQUESTED BY THE APPELLANT WAS NOT GRANTED TO THE APPELLANT AND THE ORDER WAS PASSED B Y THE TPO ON 29.10.2011 WHICH HAPPENS TO BE SATURDAY. THEREFORE, I HOLD THA T SUFFICIENT TIME WAS NOT ALLOWED BY THE JCIT, TPO-1 AND THE APPELLANT WAS PR EVENTED BY SUFFICIENT CAUSE FROM PRODUCING EVIDENCES WHICH ARE RELEVANT T O THE GROUNDS OF APPEAL. I ALSO FIND THAT BARRING SOME INSTANCES OF CHARTERE D PARTY AGREEMENTS AND U- METAL DATA, ALL THE EVIDENCES WERE FILED BEFORE THE AO DURING THE PROCEEDINGS BEFORE HIM. THE AO, IN HIS ORDER AT PARA NO.6, REJE CTED THE SAME SAYING THAT IT IS BEYOND HIS JURISDICTION AND ADVISED THE ASSES SEE TO TAKE-UP THESE ISSUES AT APPROPRIATE APPELLATE FORUM. THE OBJECTION OF TH E TPO IN THE REMAND REPORT DATED 26.07.2012 TO ADMIT ADDITIONAL EVIDENC ES SAYING THAT ADEQUATE TIME AND OPPORTUNITIES WERE PROVIDED TO THE APPELLA NT AT THE TIME OF HEARING IS CONTRARY TO THE FACTS AS DISCUSSED ABOVE AND DOE S NOT HOLD GOOD. THE AO IN HIS LETTER DATED 10.05.2012 OBJECTED THAT, AS THE A PPELLANT DID NOT FILE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 7 OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL, THE ADDITIONAL EVIDENCES AT THIS STAGE SHOULD NOT BE ACCEPTED. THE OBJECTION IS TO BE DISMISSED AS NOT BEING AS PER THE PROVISIONS OF LAW. DRT IS AN ALTER NATE ROUTE. AN ASSESSEE CAN OPT TO TAKE SHELTER OF PROVISION CONTAINED U/S 144C RELATING TO DRT OR CAN FILE APPEAL BEFORE CIT (APPEALS) U/S 246A. BY N OT FILING OBJECTIONS BEFORE DRT UNDER SUB-SECTION 2 OF SECTION 144C, THE ASSESS EE DOES NOT LOSE HIS RIGHT TO FILE ADDITIONAL EVIDENCES BEFORE THE CIT ( APPEALS). ON THE DATE OF HEARING ON 8 TH AUGUST, 2012, THE JCIT - TPO-1 OPTED NOT TO APPEAR , THOUGH HE FILED COMMENTS ON WRITTEN SUBMISSION. HOWEVER, T HE AO WAS PRESENT. THE AO PRESENT AT THE TIME OF APPELLATE PROCEEDINGS BEFORE ME ADMITTED THAT ADDITIONAL EVIDENCES CAN BE ADMITTED BY ME WITHIN T HE NORMS UNDER RULE 46A AND DID NOT OBJECT TO THE ADMISSION OF ADDITION AL EVIDENCES FILED BY THE APPELLANT. 4.4 IT EMERGES FROM THE RECORD THAT LD. TPO AND AO WERE ALSO PRESENT DURING THE COURSE OF HEARING OF APPEAL LD. CIT(A). AFTER CONSIDERING THE REMAND REPORT, REPLY THEREON; CONTENTIONS OF ASSESS EE AND AO/TPO, LD. CIT(A) BY A VERY DETAILED ORDER DELETED THE TP ADDI TION OF RS. 14,96,76,625/- AND DISALLOWANCE OF RS. 1,19,000/- OUT OF ADMINISTR ATIVE AND SELLING EXPENSES. AGGRIEVED REVENUE IS IN APPEAL QUA THE RE LIEF AND ASSESSEES CO IN SUPPORT OF LD. CIT(A) AND BUSINESS DISALLOWANCE. THE RELEVANT PARAS OF COPIOUS OBSERVATIONS OF LD. CIT(A) ARE NOT REPRODUC ED HERE FOR THE SAKE OF BREVITY, THEY ARE PART OF THE RECORD, BESIDES MOST OF THE REASONING WILL BE COVERED IN THE CONTENTIONS OF BOTH THE PARTIES. IN SUM AND SUBSTANCE, LD. CIT(A) CATEGORICALLY HELD AS UNDER:- I. I HAVE CAREFULLY GONE THROUGH THE ASSESSMENT ORDER, ORDER OF THE TPO, WRITTEN SUBMISSIONS OF THE APPELLANT AS WELL AS BY THE JCIT/TPO AND THE AO AND ALSO CONSIDERED THE ARGUMENTS OF BOTH THE SIDES , I AM OF THE CONSIDERED OPINION THAT IT IS THE PREROGATIVE OF THE APPELLANT TO DECIDE WHETHER OR NOT IT SHOULD CONTINUE SHIP CHARTERING FROM THIRD PARTIES OR THAT IT SHOULD NOT HAVE ESTABLISHED ITS SUBSIDIARY COMPANY IN SINGAPORE. TH IS WAS A BUSINESS DECISION OF THE APPELLANT AND SHOULD BE CONSIDERED IN THE BUSINESS BACKGROUND. IT IS SEEN THAT THE APPELLANT HAS OFFE RED EXPLANATION REGARDING CHARTERING VESSELS ON VOYAGE CHARTER BASIS FROM THI RD PARTIES AND DIFFICULTIES FACED BY IT IN GETTING RIGHT TYPE OF VESSEL AT A PA RTICULAR TIME AND AT THE ECONOMICAL RATE FROM THIRD PARTIES, LOSS DUE TO CON VERSION APART FROM LOSS DUE TO FLUCTUATION IN CURRENCY RATE. THE TPO PRESENT CO ULD NOT EXPLAIN HOW ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 8 SINGAPORE WAS NOT A PREFERRED COUNTRY AND SHIPPING HUB. TILL SOME COGENT MATERIAL IS NOT BROUGHT ON RECORD BY THE TPO SHOWIN G THAT THE DECISION WAS COLOURFUL DEVICE, IT CANNOT BE INTERFERED INTO. I A LSO FIND THAT THE BUSINESS DECISION OF SETTING-UP OF A SUBSIDIARY AT SINGAPORE BY THE APPELLANT ALSO PROVED FAVORABLE. THE BUSINESS ACTIVITY HAS GONE UP MANY FOLDS AS COMPARED TO EARLIER YEARS. DURING THE COURSE OF APPELLATE PR OCEEDINGS BEFORE ME, A COMPILATION OF EXPORT PERFORMANCE HAS BEEN FILED AN D WAS ALSO MADE AVAILABLE TO THE TPO. IT IS SEEN THAT THE TOTAL EXPORT TURNOV ER OF IRON ORE FINES DURING THE YEAR UNDER CONSIDERATION HAS GONE-UP TO RS.949 CRORES FROM TO RS. 274 CRORES IN THE IMMEDIATELY PRECEDING YEAR AND IN TER MS OF QUANTITY THE EXPORT QUANTITY THIS YEAR IS 21,64,424 TONS AS COMPARED TO 9,74,252 TONS IN THE IMMEDIATELY PRECEDING YEAR, THE NUMBER OF VESSELS I N WHICL, CARGO WAS EXPORTED THIS YEAR WAS 40 AS COMPARED TO 17 IN THE IMMEDIATELY PRECEDING YEAR. THE NET PROFIT AS PER AUDITED ACCOUNTS THIS Y EAR IS RS.4,318 LAKHS AS COMPARED TO RS. 746 LAKHS IN THE IMMEDIATELY PRECED ING YEAR. THEREFORE, I DO NOT FIND ANY FORCE IN THE ARGUMENT OF TPO/AO ABOVE. II. I ALSO FIND THAT THE APPELLANT HAS NOT SHIFTED THE BUSINESS FROM INDIA TO SINGAPORE. IT IS NOT THE CASE OF THE AO/TPO THAT T HE APPELLANT, A MERCHANT EXPORTER, WAS ENGAGED IN THE SHIPPING BUSINESS, THE REFORE, THERE IS NO QUESTION OF SHIFTING OF THE BUSINESS. IT WAS CHARTE RING VESSELS ON VOYAGE CHARTER BASIS FROM THIRD PARTIES AND CONTINUED THER EAFTER ALSO. THE AE CHARTERS THE VESSELS ON TIME CHARTER BASIS. I AM O F THE CONSIDERED OPINION THAT THE AES BUSINESS IS A VERY SMALL SLICE OF SHIPPING ACTIVITIES. NEITHER THE APPELLANT NOR THE AE HAVE THEIR OWN VESSELS. THE A PPELLANT STARTED CHARTERING THE VESSELS FROM AE ALSO. THEREFORE, IT CANNOT BE SAID THAT THE APPELLANT HAS SHIFTED THE BUSINESS FROM INDIA TO SI NGAPORE ON THE OTHER HAND A NEW BUSINESS OF VESSEL CHARTERING HAS BEEN STATED AT SINGAPORE. III. FROM THE FACTS OBTAINING FROM THE RECORDS, I HOLD T HAT THE AE AND THE APPELLANT ARE PERFORMING THEIR FUNCTIONS AND ASSUMI NG THEIR BUSINESS RISK INDEPENDENTLY WITHOUT INTERRUPTION OF EACH OTHER. THE RISK UNDERTAKEN BY THE AE IS DIFFERENT THAN THE RISK UNDERTAKEN BY THE APPELLANT. THE CONTRACTUAL TERMS BETWEEN THE AE AND THE APPELLANT ARE EVIDENCED FROM THE FIXTURE NOTES FILED. FROM THE CHARTER PARTY AGRE EMENT FILED, THE TERMS BETWEEN AE & THE VESSEL OWNER IS AVAILABLE. VARIOU S ARGUMENTS MADE BY JCIT TPO/AO REMAINS UNSUBSTANTIATED WITH ANY EVID ENCE AND ARE CONTRARY TO THE FACTS AVAILABLE ON RECORD. IV. FROM THE FACTS AVAILABLE ON RECORD, I FIND THAT AE HAD ITS OWN SUFFICIENT FUNDS EVEN PRIOR TO ENTERING INTO BUSINESS TRANSACT ION WITH THE APPELLANT AND THAT THE APPELLANT HAS NOT SUPPORTED FINANCIALLY TO THE AE TO DO THE CHARTERING BUSINESS. THE APPELLANT STARTED DOING BU SINESS WITH AE FROM THE MONTH OF OCTOBER, 2007. THE AE, APART FROM ITS OWN SHARE CAPITAL OF USD 7,00,066 HAD EARNED INCOME OF USD 16,74,000 FROM CH ARTERING BUSINESS ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 9 WITH THIRD PARTIES, OTHER THAN THE APPELLANT PRIOR TO OCTOBER 2007. THE VESSEL HIRE CHARGES ARE PAID BY THE AE TO THE VESSEL OWNER IN INSTALLMENTS, WHEREAS, AS PER THE TERMS AND CONDITIONS OF AGREEMENT FILED IN THE PAPER BOOK AT PAGE NO. 126 TO 137 AND 225 TO 266 WHICH ARE COPIES OF F IXTURE NOTE, THE APPELLANT IS REQUIRED TO MAKE FULL PAYMENT TO AE ON COMPLETIO N OF LOADING AT LOADING PORT. AS AGAINST THIS, THE AE PAYS FIRST INSTALLMEN T IN ADVANCE FOR 15 DAYS, NOT IMMEDIATELY BUT IN INSTALLMENTS. THIS IS PAID G ENERALLY WITHIN 3 BANKING DAYS AFTER THE SHIP IS MADE AVAILABLE TO THE AE BY THE VESSEL OWNER. THEREAFTER, SECOND INSTALLMENT IS PAID IN 7, 3 OR O NE DAY IN ADVANCE DEPENDING ON THE CONTRACTUAL AGREEMENT AND TOTAL PE RIOD OF TIME CHARTER. THUS, SUFFICIENT FUND WAS AVAILABLE WITH THE (AE). APART FROM ABOVE, THE COST OF BUNKER, I.E. FUEL, WHICH FORMS MAJOR PORTION OF THE COST, IS NOT REQUIRED TO BE PAID IMMEDIATELY BY THE AE TO THE BUNKER SUPPLIE R AND THERE IS CREDIT PERIOD OF 30 DAYS. I FIND THAT THE AE WAS HAVING SU FFICIENT FUNDS TO CARRY ON THE CHARTERING ACTIVITY AND NO FINANCIAL SUPPORT HA S BEEN ALLOWED BY THE APPELLANT. COPIES OF ALL THE AGREEMENTS ENTERED INT O BY THE AE WITH THE SHIPPING OWNER HAVE BEEN ALSO FILED AT PAGE NO.440 TO 716 AND 820 TO 1150 OF PAPER BOOK. IN THESE AGREEMENTS, TERMS OF CONTRA CT ENTERED INTO BY AE WITH THE SHIP OWNER IS STIPULATED. FROM THE FACTS AVAILABLE ON RECORD, AS PER TRADE PRACTICES AND AS PER THE FIXTURE NOTE (AGREEMENT BY THE APPELLANT WITH A E) AND CHARTER PARTY AGREEMENT (AGREEMENT OF AE WITH VESSEL OWNER), THE PRESUMPTION OF THE TPO/AO THAT LARGE FUND IS REQUIRED IN CHARTERING AC TIVITY AND THAT THE APPELLANT MADE FINANCIAL SUPPORT TO AE IS NEGATED. FROM THE RECASTED ACCOUNT OF APPELLANT IN THE BOOKS OF AE, THERE ARE NO MAJOR CREDITS AND ON THE OTHER HAND ALMOST ON ALL DAYS THERE IS DEBIT BALANC E. THE CREDIT BALANCE ON FOUR DAYS DURING ENTIRE PERIOD HAS BEEN ALSO EXPLAI NED DUE TO PASSING ENTRY ON SUBSEQUENT DAY. THEREFORE, I FIND THAT NO FINANC IAL ASSISTANCE WAS MADE BY APPELLANT TO THE AE. EXCEPT CASTING DOUBT ON AGREEMENT WITH M/S R. M. MARTIN BY JCIT- TPO, NOTHING HAS BEEN BROUGHT ON RECORD TO SUPPORT THE CONCLUSIONS DRAWN BY THE AO/TPO. I FIND THAT THE APPELLANT, IN HIS VA RIOUS WRITTEN STATEMENT REFERRED THE SERVICES TAKEN BY AE FROM ABOVE CO. CO PY OF AGREEMENT HAS BEEN FILED. PAYMENT TO THEM IS REFLECTED IN AUDITED PROF IT AND LOSS ACCOUNT OF AE UNDER THE HEAD SHIP MANAGEMENT FEES. I ALSO FIND FR OM PROFIT AND LOSS ACCOUNT AND OTHER STATEMENT THAT SERVICES OF R. M. MARTIN WAS TAKEN BY AE ALSO PRIOR TO OCTOBER 2007. THEREFORE, THERE IS NO FORCE IN THE ARGUMENT OF JCIT-TPO IN THIS REGARD. THIS ISSUE HAS BEEN ALSO D ISCUSSED AT LENGTH AT PARA NO. 21, 22. V. THE WRONG ASSUMPTION OF TPO/AO THAT M/S. BOTHRA SHI PPING AND M/S SEA TRANS ARE SHIP OWNERS AND THE ADVERSE INFERENCE DRA WN IN THIS BEHALF WAS DISPELLED BY LD. CIT(A) BY FOLLOWING OBSERVATIONS:- ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 10 I FIND THAT THE ABOVE TWO PARTIES, NAMELY M/S. BOT HRA SHIPPING AND M/S SEA TRANS ARE NOT SHIP OWNERS BUT THEY ARE PORT AGENTS. I ALSO FIND THAT PAYMENTS TO THIS PORT AGENT HAVE BEEN MAD E BY THE AE AND NOT BY THE APPELLANT AS ARGUED BY THE TPO. THIS WAS SUBSEQUENTLY ADJUSTED AS PER TERMS AND CONDITIONS OF THE CONTRAC T. MOREOVER, THE TOTAL AMOUNT OF SUCH PORT CHARGES COMES TO RUPEES F OUR CRORES APPROXIMATELY AND NOT RS. THIRTY CRORES AS OBSERVED BY THE TPO. FURTHER, FROM THE RECASTED COPY OF ACCOUNT FILED, I FIND THAT THERE IS NO CREDIT BALANCE OF THE APPELLANT IN THE BOOKS OF AE BARRING ON 4 DAYS WHICH IS DUE TO ENTERING INTO ACCOUNTS HIRE CHARGES AND DEMURRAGE PAYABLE TO AE BY APPELLANT ON LAST DATE RATHER THAN WHEN IT BECAME DUE. THE TPO/AO HAVE PROCEEDED ON THE WRONG IMPRESS ION THAT M/S SEA TRANS MARINE PRIVATE LIMITED AND M/S BOTHRA SHI PPING PRIVATE LIMITED ARE VESSEL OWNERS AND PAYMENTS WERE MADE TO THEM BY THE APPELLANT. FOR THE REASONS DISCUSSED ABOVE, I HOLD THAT THERE IS NO FORCE IN THE CONTENTION OF THE TPO/AO THAT THE APPELLANT FINANCIALLY SUPPORTED AE IN CARRYING-OUT THE CHARTERING ACTIVIT IES. 4.5 APROPOS THE OBSERVATION OF LD. TPO/AO THAT M/S. R.M. MARTIN PVT. LTD. WAS NOT PROVIDING ANY SIGNIFICANT SERVICES AND THEIR ENGAGEMENT IN THE VESSEL CHARTERING ACTIVITY WAS NOT SUBSTANTIATED, L D. CIT(A) HELD THAT THE OBSERVATIONS OF THE LD. TPO/AO WERE WITHOUT ANY COG ENT REASONS AND PRESUMPTIONS BY FOLLOWING OBSERVATIONS:- I HAVE CONSIDERED THE ARGUMENTS, WRITTEN SUBMISSIO N OF THE LD. COUNSELS AS WELL AS THE ORDER OF THE TPO / AO AND THE COMMENTS OF TPO AND AO. I FIND THAT THE BUSINESS ACTIVITY OF THE AE IS RESTRICTED TO CHARTERING OF THE VESSEL. THE AE DID NOT HAVE ITS OWN VESSEL. IT IS SEEN THAT THIS BEING FIRST YEAR OF BUSINESS, AE, HAD OUTSOURCED THE SERVICES TO M/S R. M. MARTIN. THE ENTIRE SERVICES OF CHARTERING OF THE VESSEL WAS OUTSOURCED TO M/S R.M. MARTIN SINCE INCEPTION OF COMPANY TO WHOM SHIP HANDLING CHARGES HAVE BEEN PAID AGGREGATING TO USD 4,85,772 OUT OF WHICH USD 4,00,0 00 PERTAINS TO VESSELS SHIPPED TO THE APPELLANT. I FIND THAT THIS FACT W AS BROUGHT ON RECORD BEFORE TPO AS WELL AS AO DURING THE PROCEEDINGS BEFORE THE M. COPY OF AGREEMENT WITH THE AFORESAID SINGAPORE ENTITY HAS BEEN ALSO F ILED. NEITHER THE AO NOR THE TPO HAVE BROUGHT ANY SUPPORTING ON RECORD TO CO NTRADICT THE AGREEMENT AND PAYMENT MADE TO ABOVE PARTY AS COLOURFUL DEVICE EXCEPT CASTING DOUBT ON THE TRANSACTION. THE TPO/AO PRESUMED THAT LARGE NUM BER OF EMPLOYEES IS REQUIRED IN SHIP CHARTERING ACTIVITIES WHICH I DO N OT FIND CORRECT IN VIEW OF BUSINESS REQUIREMENT OF AE AND ITS FUNCTION. THE VE SSEL OWNERS, DEPENDING ON THE NUMBER OF VESSELS THEY OWN AND OTHER BUSINES S ACTIVITIES, MAY REQUIRE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 11 LARGE NUMBER OF EMPLOYEES BUT THE REQUIREMENT WITH REGARD TO EMPLOYEES OF THE ENTITY WHICH IS ENGAGED ONLY IN VESSEL CHARTERI NG ACTIVITIES IS RESTRICTED. THE LD. COUNSELS HAVE DESCRIBED THE FUNCTIONS INVOL VED IN VESSEL CHARTERING BUSINESS. THIS OPERATION HAS BEEN TAKEN CARE OF BY M/S R. M. MARTINE PVT. LTD., A SINGAPORE ENTITY. THERE IS NO SUPPORTING TH AT THE APPELLANT HELPED AE IN DISCHARGING ITS FUNCTIONS. THEREFORE, I FIND NO REASON TO OBSERVE THAT THERE WAS LACK OF STAFF WITH AE AND THE APPELLANT HELPED THE AE IN DISCHARGING ITS FUNCTIONS. THE OBSERVATION OF THE TPO/AO DOES NOT H OLD GOOD FROM THE ABOVE FACTS ON RECORD. I HAVE ALSO HOLD THAT SERVICES OF M/S R. M. MARTIN WERE TAKEN BY AE PRIOR TO OCTOBER 2007 ALSO, THEREFORE, THE AR GUMENT OF JCIT - TPO THAT THERE WAS NO MAN POWER WITH AE FROM MAY 2007 T O SEPTEMBER 2007 DOES NOT HOLD GOOD. 4.6 APROPOS ASSESSEES ADOPTION OF TNMM METHOD AS M OST APPROPRIATE METHOD FOR COMPUTATION OF ALP UNDER TP REGULATION A ND ADOPTING AE AS A TESTED PARTY, LD. CIT(A) HELD THE TP WORKING PROVID ED BY THE ASSESSEE TO BE CORRECT. FURTHER, IT WAS HELD THAT BERRY RATIO CAN NOT BE APPLIED TO THE ASSESSEES CASE AS IT IS APPLICABLE IN SPECIFIC CIR CUMSTANCES OF A PURE DISTRIBUTOR WHERE NO VALUE ADDED SERVICES ARE RENDE RED, BY FOLLOWING OBSERVATIONS:- 26. I HAVE CONSIDERED THE ARGUMENTS, WRITTEN SUBMI SSION, VARIOUS STATEMENT IN THE PAPER BOOK, ORDER OF THE TPO AND AO, WRITTEN AND ORAL SUBMISSION OF LD. COUNSEL, JCIT - TPO / AO. THE OBSERVATION OF TH E TPO THAT AE HAD UTILIZED THE TANGIBLE AND INTANGIBLE ASSETS OF THE PARENT COMPANY IN EARNING SUCH HUGE PROFIT IN THE FIRST YEAR OF ITS ACTIVITY AND CANNOT BE TREATED AS INDEPENDENT SHIPPING SERVICE PROVIDER IS ONLY A PRE SUMPTION WITHOUT ANY SUPPORT. THE VARIOUS FUNCTIONS HAVE BEEN OUTSOURCED BY THE AE TO ONE M/S R. M. MARTINE, SINCE INCEPTION OF THE AE, DISCUSSED IN DETAIL EARLIER. THE AE HAD ITS OWN FUNDS AND THIS ISSUE HAS BEEN DISCUSSED BY ME IN EARLIER PARA. THE AE HAS THE BUSINESS RISK AND MANY INSTANCES OF SUCH RISK WHICH ACTUALLY BORNE BY AE PERTAINING TO VARIOUS VESSELS HAVE BEEN DISCUSSED BY ME IN EARLIER PARAS. THE PAYMENT OF HIRE CHARGES, BUNKER CHARGES, PORT CHARGES HAVE BEEN MADE BY THE AE FROM ITS OWN FUNDS WHICH IS APP ARENT FROM THE CASH FLOW STATEMENT FILED AT PAGE NO.465 TO 477. THE TPO /AO HAS NOT BROUGHT ON RECORD ANY SUPPORTING SHOWING THAT THE AE WAS FUNCT IONING AS FRONT OFFICE OF THE APPELLANT OR WORKING AS AGENT OF IT, WITHOUT BE ARING RISK OF BUSINESS AND WITHOUT MAKING ANY VALUE ADDITION. 26.1 ON THE BASIS OF FACTS ON RECORD, I HOLD THAT T HE AE HAS PERFORMED BUSINESS FUNCTIONS, ASSUMED BUSINESS RISKS BY EMPLO YING ITS OWN FUNDS ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 12 INDEPENDENTLY WITHOUT HELP OF APPELLANT AND, THEREF ORE, IN NO WAY AE CAN BE CONSIDERED AS PURE DISTRIBUTOR, HENCE, THE BERRY RA TIO IN THE PRESENT CASE, WHICH RESTRICTS ONLY VALUE ADDED EXPENSES AND EXCLU DES OTHER COSTS AS PER PROFIT AND LOSS ACCOUNT TO ARRIVE AT PLI IS NOT PRO PER AND IS NOT ACCORDING TO TRANSFER PRICING LAWS OF THIS COUNTRY. IN TRANSFER PRICING STUDY, PROPER UNDERSTANDING OF BUSINESS, BUSINESS PRACTICE, FUNCT IONS PERFORMED BY AE AND THE APPELLANT, RISKS ASSUMED BY BOTH THE PARTIE S AND THE ASSETS EMPLOYED BY BOTH OF THEM IS NECESSARY. NOT APPRECIATING ANY OF THE ABOVE FACTORS WILL GIVE ERRONEOUS RESULT. I FIND THAT JCIT-TPO/AO HAS NOT PROPERLY APPRECIATED THE FUNCTIONS PERFORMED, RISK ASSUMED AND BASSETS E MPLOYED BY THE AE AND APPELLANT. 26.2 THERE IS NO FORCE IN THE ARGUMENT OF THE JCIT- TPO/AO THAT AE EARNED ABNORMAL PROFIT IN THE VERY FIRST YEAR. THE APPELLA NT HAS SUCCESSFULLY EXPLAINED THAT MARGIN OF PROFIT (OP/TC) EARNED BY A E ON TRANSACTIONS WITH THE APPELLANT WAS ONLY 4.52% AS COMPARED TO 5.18% E ARNED IN COMPARABLE CASES, MARGIN OF PROFIT ON ALL THE TRANSACTION ENTE RED INTO BY AE INCLUDING THIRD PARTIES IS 6.85%. THIS MARGIN CANNOT BE SAID TO BE ON HIGHER SIDE. TPO REFERRED RETURNS ON SHARE HOLDING FUND OF 11 COMPAR ABLE CASE. RETURN ON COST/ASSETS EMPLOYED IS MORE APPROPRIATE. PROFIT EA RNED BY AE PRIOR TO ENTERING INTO TRANSACTION WITH THE APPELLANT HAS BE EN EXPLAINED IN EARLIER PARAS. PROFIT EARNED BY AE WITH THIRD PARTIES IN TR ANSACTIONS WITH THEM CANNOT BE MADE BASIS FOR SUSPICION THAT APPELLANT H ELPED AE IN EARNING SUCH PROFIT IN ABSENCE OF OTHERWISE SUPPORTING FILED BY JCIT - TPO / AO. 26.3 I AM ALSO CONVINCED THAT IN VESSEL CHARTERING BUSINESS, IN THIS YEAR, ONLY 20 VESSELS WERE CHARTERED BY AE TO THE APPELLANT, W HERE LARGE NUMBER OF EMPLOYEES ARE NOT REQUIRED. THE NUMBER OF EMPLOYEES QUOTED BY TPO IN THE COMPARABLE COMPANY AS 216 TO 5056 IS NOT RELEVANT I N THIS CASE AS THESE COMPANIES ARE HAVING THEIR OWN VESSELS AND ARE ALSO ENGAGED IN OTHER ALLIED BUSINESS ACTIVITIES WITH WIDER ASSETS BASE. THE LEA ST NUMBER OF EMPLOYEES IS 48 IN CASE OF SANYAN GROUP LIMITED. CONSIDERING THE SIZE AND THE ASSETS EMPLOYED, THE NUMBER OF EMPLOYEES IN SUCH COMPARABL E COMPANIES CASES MAY BE HIGHER AS COMPARED TO THE CASE OF AE. 26.4 CONSIDERING THE CASES WHERE BERRY RATIO CAN BE APPLIED, VARIOUS GUIDELINES PROVIDED BY OECD PRODUCED EARLIER AND NO T REPEATED HERE FOR SAKE OF CONVENIENCE, FOR THE REASONS DISCUSSED ABOVE FAC TS OF CASE, I AM OF THE CONSIDERED OPINION THAT BERRY RATIO IS NOT APPLICAB LE IN THIS CASE AND THEREFORE, APPROPRIATE PROFIT INDICATOR IN THIS CAS E IS OPERATING PROFIT 7 TOTAL COST I.E. OP/TC. IN CASE OF PURE DISTRIBUTOR, ONLY VALUE ADDED EXPENSES ARE CONSIDERED AND BERRY RATIO CAN BE APPLIED AND AS DI SCUSSED EARLIER, I HOLD THAT THE AE IS NOT A PURE DISTRIBUTOR, THEREFORE, BERRY RATIO IS NOT APPLICABLE. REWARD COMMENSURATE WITH RISK. THE AE MADE VALUE AD DITION, ASSUMED VARIOUS RISKS OF BUSINESS AND ALSO INCURRED DAMAGES AND LOSSES IN THE BUSINESS, AS DISCUSSED BY ME IN DETAIL EARLIER. UND ERSTANDING OF FUNCTIONS ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 13 PROFILE, RISK EXPOSED AND ASSUMED, ASSETS / EMPLOYE D BY AE AND APPELLANT IS NECESSARY IN STUDY OF ARM'S LENGTH PRICE UNDER THE TRANSFER/ PRICING PROVISION. IN ITS ABSENCE ANY CONCLUSION DRAWN WILL BE ERRONEOUS AND WILL NOT BE IN THE INTEREST OF JUSTICE. IN MY CONSIDERED OPINION, THE JCIT - TPO/AO FAILED TO DO SO. VARIOUS ARGUMENT RAISED BY JCIT-TPO / AO, DISCUSSED HEREIN ARE NOT SUBSTANTIATED AND REMAINS ONLY PRESUMPTION. AS PER TNMM STUDY FILED BY THE APPELLANT, THE MARGIN ON TO TAL COST EARNED BY AE IS 4.52% WHICH IS LESS WHEN COMPARED WITH 5.18% IN CASE OF OTHER ELEVEN COMPARABLE COMPANIES. THIS IS WITHIN ARM'S LENGTH. THEREFORE, NO TRANSFER PRICING ADJUSTMENT IS NEEDED. IT MAY NOT BE OUT OF PLACE TO MENTION THAT TPO SUGGESTED THE DOWNWARD ADJUSTMENT AT RS. 14,90,76,6 25/- WHICH THE AO MISTAKENLY TOOK AT RS. 14,96,76,625/-. THE LD. AUTH ORIZED REPRESENTATIVES PRESENT SUBMITTED THAT THE MISTAKE HAS BEEN RECTIFI ED BY THE AO AND THE ABOVE ADJUSTMENT HAS BEEN REDUCED TO RS.14,90,76,62 5/-. THEREFORE, THE DOWNWARD ADJUSTMENT MADE BY THE TPO/AO APPLYING THE BERRY RATIO AT RS.14,96,76,625/- IS NOT ACCORDING TO FACTS AND IS DELETED. 4.7 ASSESSEE EXPLAINED THAT LD. TPO HAS NOT EVEN CA RED TO SEGREGATE THE AES INTERNATIONAL TRANSACTIONS CARRIED OUT WITH TH IRD/INDEPENDENT PARTIES AND INCLUDED SUCH THIRD PARTY TRANSACTION AS TP TRA NSACTIONS WHICH HAS LED TO GROSS INJUSTICE. IT SHOWS THE PERFUNCTORY APPRO ACH OF THE AUTHORITIES BELOW WHILE DEALING WITH THE IMPORTANT ISSUES OF WO RKING OF TP ADJUSTMENTS. THE ASSESSEE BY FACTS AND FIGURES DEM ONSTRATED THESE ASPECTS. LD. CIT(A) FOUND THE CONTENTIONS MADE BY THE ASSESS EE AND THE WORKING TO BE CORRECT AND DELETED THE THIRD PARTY TRANSACTION FROM THE TP WORKING BY FOLLOWING OBSERVATIONS: 35. THE APPELLANT HAS SUBMITTED THAT THE TPO AS WE LL AS THE AO HAVE ERRONEOUSLY COMPUTED THE ARMS LENGTH PRICE EVEN ON THE TRANSACTIONS WHICH TOOK PLACE BETWEEN THE AE AND THE THIRD PARTIES (OT HER THAN THE APPELLANT) THEREBY RESULTING IN ERRONEOUS TP ADJUSTMENT DISPUT E TO THE TUNE OF RS.7,32,81,066/- (RS.14,90,76,629 7,57,96,563). WITHOUT PREJUDICE TO EARLIER GROUNDS AND NOT ADMITTING, IT IS SUBMITTED THAT THE TPO AS WELL AS THE AO IGNORED THE SEGMENTAL ANALYSIS IN THE TP ADJ USTMENT ON THE OVERALL TRANSACTION OF AE INCLUDING THOSE TRANSACTIONS WHIC H DID NOT TAKE PLACE BETWEEN AE AND THE APPELLANT, WHEREAS, SEC. 92 IS A PPLICABLE ON TO THE INTERNATIONAL TRANSACTIONS BETWEEN THE ASSESSEE & T HE AE. THIS HAS RESULTED IN ABSURD AND ERRONEOUS TP ADJUSTMENT. COMPILATION FILED AT PAGE NO.37 AND WRITTEN SUBMISSION IS PRODUCED BELOW:- ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 14 PARTICULARS REFERENCE AS PER TPO (ENTITY LEVEL) TRANSACTIONS WITH APPELLANT ONLY SALES/SERVICES A 60,326,752 46,831,179 COST OF SERVICES B 55,787,407 44,241,681 ACTUAL GROSS PROFIT A B 4,539,345 2,589,498 EXPENSES C 629,508 536,448 ALP GROSS PROFIT (1.301 X D) D 818,990 697,919 ADJUSTED SALES PRICE E = B + D 56,606,397 44,939,600 DOWNWARD ADJUSTMENT TO INTERNATIONAL TRANSACTIONS F = A E 3,720,355 1,891,579 DOWNWARD ADJUSTMENT TO INTERNATIONAL TRANSACTIONS (IN RS.) F X 40.07 149,074,629 75,795,563 IT IS SUBMITTED THAT TRANSFER PRICING ADJUSTMENT, I F AT ALL IS REQUIRED TO BE MADE, WILL BE REDUCED BY RS. 757 LACS. 36. AO/TPO'S COMMENTS: THE JCIT - TPO IN HIS REMAND REPORT SUBMITTED THAT THE APPELLANT HAS NOT PROVIDED SEPARATELY CONTRACTS OR AGREEMENTS AT THE TIME OF HEARING, THEREFORE, THEY ALL APPEARED IN THE NATURE OF SAME TRANSACTION . 37. I HAVE CONSIDERED THE ARGUMENTS / WRITTEN SUBMI SSIONS OF BOTH THE SIDES. THE TNM METHOD EXAMINES THE NET PROFIT MARGIN RELAT ED TO AN APPROPRIATE BASE (I.E. COST, SALES, ASSETS) THAT A TAXPAYER REA LIZES FROM A CONTROLLED TRANSACTION. THE LD. ARS ALSO REFERRED S 10B(E), WH EREIN, THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISES FROM AN INTERNAT IONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS TO BE COMPUTE D. THE AE HAD SEGREGATED HIS TRANSACTIONS INTO RELATED PARTY TRANSACTION AND THIRD PARTY TRANSACTION, WHICH WAS MADE AVAILABLE TO THE TPO / AO AND ENCLOS ED AT PAGE NO. 120 & 121 OF THE PAPER BOOK AND IS PART OF TRANSFER PRICI NG STUDY (REVISED AT PAGE NO.464). THIS IS AS PER AUDITED ACCOUNTS OF AE AND SUPPORTED BY THE AUDITED ACCOUNTS OF THE APPELLANT, FOR WHICH A COMPILATION WAS ALSO FILED, THEREFORE, CAN BE RELIED UPON. REFERENCE OF PARAS 2.78 & 2.79 OF OECD GUIDELINES AND DECISION OF HON'BLE MUMBAI BENCH OF IT AT IN CASE O F M/S TECNIMOUNT ICB PVT. LTD VS. ACIT; DEVELOPMENT CONSULTANTS PVT. LTD . VS. DCIT REPORTED IN 115 TTJ 577 (HON'BLE KOLKATA BENCH OF ITAT); DCIT V S. M/S STARLITE REPORTED IN 133 TTJ 425 (HON'BLE MUMBAI BENCH OF IT AT) ARE RELEVANT TRANSACTIONS ENTERED INTO BY APPELLANT WITH AE ONLY FALLS UNDER TRANSFER PRICING PROVISIONS AND NOT THE ENTIRE TRANSACTION O F AE WHICH INCLUDES TRANSACTIONS WITH THIRD PARTIES ALSO. THEREFORE, T HE ALTERNATE ARGUMENTS OF THE LD. AUTHORIZED REPRESENTATIVES ARE ACCEPTED. HO WEVER, I HAVE ALREADY HELD THAT NO TRANSFER PRICING ADJUSTMENT IS REQUIRE D, THEREFORE, NO RELIEF SEPARATELY IS REQUIRED TO BE GIVEN. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 15 4.8 LD. CIT (DR) DR. HARE GOVIND SINGH SUPPORTED TH E ORDER OF LD. TPO/AO AND CONTENDS THAT: I. ADMISSION OF ADDITIONAL EVIDENCE IS NOT JUSTIFIED A S THE ASSESSEE WAS GIVEN SEVERAL OPPORTUNITIES TO PROVIDE AGREEMEN TS AND THE RELEVANT DETAILS WERE NOT FILED BEFORE TPO/AO. II. AE WAS A FRONT COMPANY CREATED TO DIVERT PROFITS, T HE SAME FUNCTIONS WERE EASILY GOT DONE BY ASSESSEE FROM OTH ER AGENCIES IN EARLIER YEARS. BESIDES, AE WAS NOT DISCHARGING ANY SIGNIFICANT FUNCTIONS, IT WAS BEING FINANCED BY ASSESSEE BY WAY OF ADVANCES PAID TO THE SHIP OWNERS DIRECTLY. IT CLEARLY PROVE S THAT NECESSARY FINANCIAL SUPPORT INCLUDING FINANCIAL RISKS HAVE BE EN PROVIDED BY THE ASSESSEE. IT CAN BE SEEN FROM THE LEDGER ACCOUN T OF THE AE IN THE BOOKS OF THE BAGADIA BROTHERS PVT. LTD. THAT ON 23.01.2008, AROUND RS.30 CRS HAVE BEEN PAID IN ADVANCE TO THE A E. THE AE HAS CARRIED OUT TOTAL BUSINESS OF MORE THAN 200 CRS DUR ING THE YEAR SINCE ITS INCEPTION WHICH IS NOT POSSIBLE FOR A COM PANY IN ITS FIRST YEAR OF OPERATION IN THE SHIPPING LINE. THIS COULD BE POSSIBLE ONLY WITH THE FINANCIAL AND GOODWILL SUPPORT OF THE ASSE SSEE-COMPANY. FURTHER, SINGAPORE IS NOT A RENOWNED HUB FOR SHIPPI NG ACTIVITIES. III. APROPOS APPLICATION OF BERRY RATIO, IN THE CASE OF E.I. DUPONT DE NEMOURS AND COMPANY V. THE UNITED STATES, THE BERRY RATIO WAS APPLIED TO EXPLAIN THAT THE GROSS MARGINS EARNED BY UNRELATED DISTRIBUTORS WERE THE RESULT OF THE MARKET'S VALUAT ION OF THEIR PERFORMED FUNCTIONS. IN THIS WAY, PROFITS AND PERFO RMANCES OF SERVICES ARE TIED TO EACH OTHER MORE CLOSELY. THE B ERRY RATIO IS THE RATIO OF GROSS PROFIT TO OPERATING EXPENSES (GP/OE) . IT IS USED FOR SERVICE PROVIDERS AND FOR ROUTINE OR PURE DISTRIBUT ORS. IF ON WORKING IT IS FOUND THAT THE BERRY RATIO IS MORE TH AN ONE IT CAN BE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 16 SAID THAT ENTITY IS MAKING PROFIT AT OPERATING LEVE L. THE BERRY RATIO IS A MEASURE OF THE VALUE OF THE SERVICE PROVIDED R ATHER THAN THE COST INCURRED IN THE BUSINESS WHICH MAY INCLUDE COS T OF GOODS SOLD. THIS METHOD HAS BEEN RECOGNIZED BY U.S. TRANS FER PRICING REGULATIONS AS WELL AS BY INDIAN TRANSFER PRICING R EGULATIONS. THIS HAS BEEN PROVIDED IN RULE 10B(1)(E)(I) AS UNDE R : 'THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE F ROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE.' THIS RATIO BEING PROVIDED IN THE TP RULES AND BASED ON WELL ACCEPTED PRINCIPLE APPLIED WORLD OVER BY THE REVENU E AUTHORITIES AND COURTS WAS RIGHTLY APPLIED BY TPO IN THIS CASE. ANALYSIS OF COMPARABLE COMPANIES FROM THE FINANCIAL DATA SUBMITTED BY THE ASSESSEE C OMPANY OF THE 11 COMPARABLE COMPANIES, TPO INFERRED THAT:- A) SHIPPING SERVICES BUSINESS REQUIRES LARGE NUMBER OF EMPLOYEES TO HANDLE ALL THE OPERATIONS/FUNCTIONS OF SHIPPING SERVICES ACTIVITIES. IN ALL OF THE CASES, EMPLOYEES WERE RAN GING FROM 216 TO 5065 EXCEPT IN THE CASE OF M/S. SANYUAN GROUP LI MITED. WHEREAS, AE WAS NOT HAVING ANY EMPLOYEE TILL FEBRUA RY, 2008 AND IN MARCH 2008, THREE EMPLOYEES WERE EMPLOYED. B) SHIPPING SERVICES REQUIRES HUGE ASSET BASE AND A LL THE COMPARABLE COMPANIES ARE HAVING ASSET BASE RANGING FROM 8.75 MILLION $ TO 2.77 BILLION $, WHEREAS THE AE IS HAVI NG TOTAL ASSETS OF US$ 8332 ONLY AND EQUITY CAPITAL OF $ 2,30,066 ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 17 C) RETURN ON SHARE-HOLDERS FUNDS BY THESE COMPARABL E SHIPPING COMPANIES IS RANGING FROM LOSS TO 24%, WHEREAS THE AE HAS EARNED 1682%. THIS ANALYSIS PROVES THAT THE AE UTILIZED INTANGIBL E/TANGIBLE ASSETS AND SUPPORT OF THE PARENT COMPANY IN EARNING SUCH HUGE PROFIT IN ITS OPERATION AND THAT TOO IN ITS VERY FI RST YEAR OF THE ACTIVITY. CONSEQUENTLY THE AES FAR PROFILE SUBMITT ED BY THE ASSESSEE WAS NOT CORRECT AND IT CANNOT BE TREATED A S INDEPENDENT SHIPPING SERVICES PROVIDER. THE FAR ANALYSIS CARRIE D OUT BY THE ASSESSEE RELATED TO THIS TRANSACTION WAS RIGHTLY RE JECTED. THEREFORE, ASSESSEES TREATING AE AS TESTED PARTY AND TNM AS M OST APPROPRIATE METHOD, MARGINS OF AE WAS RIGHTLY DISCA RDED AND ALP RECOMPUTED BY LD. TPO USING BERRY RATIO AS PLI. LD. TPO AFTER GOING THROUGH ASSESSEE'S SUBMISSION IN THIS R EGARD AND NONE OF THEM SHOWS ANY ECONOMIC RATIONALE FOR SHIFTING S HIPPING BUSINESS FUNCTION TO SINGAPORE. VI. THE ASSESSEE GAVE ONLY VAGUE REASONS FOR OPENIN G SUBSIDIARY IN SINGAPORE. THE ENGAGEMENT OF SERVICES OF M/S. R M MARTIN PTE. LTD. FOR SHIP MANAGEMENT ACTIVITY BASED IN SINGAPOR E RUNS CONTRARY TO THE ARGUMENT, THAT IT COULD HAVE BEEN E NGAGED BY THE ASSESSEE COMPANY SITTING IN INDIA AS WELL AND AS SU CH DOES NOT REQUIRE INCORPORATION OF A COMPANY IN SINGAPORE. TH E ASSESSEES CONTENTIONS THAT THE AE PERFORMED LARGE NUMBER OF S HIPPING RELATED ACTIVITIES IS NOT SUBSTANTIATED AS IT WAS N OT HAVING ANY SIZEABLE NO OF EMPLOYEES DURING THE YEAR. THE ASSES SEES EMPHASIS THAT SMT. SRIPRIYA BALASUBRAMIAM WAS A QUALIFIED RE SIDENT DIRECTOR AND WAS HAVING QUALIFICATIONS AS CLAIMED W ITH SUFFICIENT ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 18 PRIOR EXPOSURE, ACCOUNTING OF SHIPPING BUSINESS HAS NOT BEEN SUBSTANTIATED. THE FREIGHT RATE DETAILS OF VESSELS TAKEN FROM OTHE RS WERE CITED BY ASSESSEE AS CUP WERE NOT APPLIED BY TPO AS THEY WERE NOT TAKEN AS COMPARABLE IN ITS TP REPORT AND THEY ARE N OT EXACTLY COMPARABLE ON FAR. THIS YEAR, FREIGHT RATE OF BULK CARGO WERE CONSTANTLY INCREASING DURING THE WHOLE YEAR AND AS AE HAS TAKEN SHIPS ON TIME CHARTER BASIS, THE PRICES OF FREIGHT WERE ALWAYS HIGHER IN SPOT RATE AS COMPARED TO TIME CHARTER RAT E. IT IS THE CASE OF THE DEPARTMENT, THAT ASSESSEE SHOULD HAVE HIMSEL F ENTERED INTO THE TIME CHARTER AGREEMENT, TO TAKE ADVANTAGE OF RA TES DUE TO THESE TIME DIFFERENTIAL. IT IS CONTENDED BY LD. DR THAT THE REJECTION OF TNM M METHOD AND APPLICATION OF BERRY RATIO BY TPO ORDER IS JUST IFIED WHICH IS RELIED ON. 4.9 LD. COUNSEL FOR THE ASSESSEE SHRI SOPARKAR, SR. ADVOCATE, REITERATED THE FACTS OF THE CASE AND CONTENDS THAT THE TP ADJU DICATIONS WERE AT NASCENT STAGE IN AS MUCH AS MANY ISSUES ABOUT FAR ANALYSIS. IN RIGHT EARNEST TNMM METHOD WAS MOST APPROPRIATE WITH AE AS TESTED PARTY FOR ALP DETERMINATION. LD. TPO WITHOUT GIVING ANY OPPORTUNI TY OF BEING HEARD REJECTED ASSESSEES METHOD AND RECOMPUTED ALP BY AP PLYING BERRY RATIO WHICH WAS JUST CONCEIVED IN TP WORKING IN SOME DEVE LOPING COUNTRIES. BY RATIO ITSELF ITS APPLICATION IS LIMITED TO SPECIFIC CIRCUMSTANCES IN CASE OF PURE DISTRIBUTORS AND NOT TO THE FACTS OF AES CASE. LD. CIT(A) HAS CATEGORICALLY ESTABLISHED THAT ASSESSEES SUBMISSIONS, EVIDENCE A ND CONTENTIONS WERE NOT DULY CONSIDERED WHICH RESULTED IN LOPSIDED ALP WORK ING BY TPO/AO. COPIOUS REASONED FINDINGS HAVE BEEN GIVEN AS TO WHY TNMM METHOD WITH AE IS TESTED PARTY IS MOST APPROPRIATE METHOD FOR A LP WORKING AND BERRY ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 19 RATIO WAS NOT APPLICABLE AT ALL. LD. DR HAS NOT DI SLODGED FACTUAL OBSERVATION SO SUCCINCTLY RECORDED BY LD. CIT(A) AN D SUPPORTED THE THEORETICAL AND PRESUMPTIVE OBSERVATION/CONCLUSION ARRIVED AT BY LD. TPO/AO IS GROSS VIOLATION OF PRINCIPLE OF NATURAL J USTICE. 4.10 APROPOS ADMISSION OF ADDITIONAL EVIDENCE, ITS TRITE LAW THAT IF ASSESSEE DEMONSTRATES THAT HE WAS NOT GIVEN SUFFICI ENT TIME OR OPPORTUNITY TO FILE RELEVANT EVIDENCE, IT HAS A STATUTORY RIGHT TO APPLY FOR ADMISSION OF ADDITIONAL EVIDENCE. LD. CIT(A) AFTER RECORDING PRO PER FINDINGS OF FACT HELD THAT THE BERRY RATIO WAS APPLIED BY TPO WITHOUT CON FRONTING TO ASSESSEE, THEREBY ADOPTED A NEW DIMENSION UNKNOWN TO ASSESSEE . THE ADDITIONAL EVIDENCE HAS BEEN ADMITTED AFTER CITING PROPER REAS ONS, RELYING ON JUDICIAL PRONOUNCEMENTS AND AFTER GIVING THE TPO/AO ADEQUATE OPPORTUNITY OF BEING HEARD AND CALLING DETAILED REMAND REPORT. IN THE REMAND REPORT LD. TPO/AO FAILED TO SUBSTANTIATE THEIR THEORETICAL PRE SUMPTIONS. THERE IS NO PREJUDICE TO REVENUE AS REMAND REPORT WAS CALLED FR OM TPO/AO ON SUCH EVIDENCE, BOTH LD. TPO/AO WERE PRESENT IN HEARING O N MERITS BEFORE LD. CIT(A). BESIDES AO DID NOT OBJECT TO ADMISSION OF A DDITIONAL EVIDENCE WHICH IS SELF-EXPLANATORY FROM RELEVANT OBSERVATION OF LD. CIT(A) THAT: THE AO PRESENT AT THE TIME OF APPELLATE PROCEEDINGS BEFORE ME ADMITTED THAT ADDITIONAL EVIDENCES CAN BE ADMITTED BY ME WIT HIN THE NORMS UNDER RULE 46A AND DID NOT OBJECT TO THE ADMISSION OF ADD ITIONAL EVIDENCES FILED BY THE APPELLANT. THERE IS NO REASONS WHY REVENUE SHOULD BE AGGRIEVE D WHEN AO DID NOT OBJECT TO ADMISSION OF ADDITIONAL EVIDENCE. THE REFORE, THE OBJECTION OF REVENUE IN THIS BEHALF HAS NO MERIT WHATSOEVER. FUR THER RELIANCE IS PLACED ON FOLLOWING JUDGMENTS IN SUPPORT OF ADMISSION OF ADDI TIONAL EVIDENCE: (I) JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF KAMLABEN SURESHCHANDRA BHATTI, 367 ITR 692; ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 20 (II) JUDGMENT OF HONBLE ANDHRA PRADESH & TELANGANA HIGH COURT IN THE CASE OF UNIQUE PLASTICS (P) LTD., 373 ITR 201; (III) JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE O F SMT. PRABHAVATI S. SHAH, 231 ITR 1 4.11 THEREAFTER LD. COUNSEL ADVERTED TO VARIOUS PRO POSITIONS MATERIAL TO THE CONTROVERSIES ON ISSUES. IT IS CONTENDED THAT P ERFUNCTORY APPROACH OF LD. TPO/AO IS EVIDENT FROM THE FACT THAT EVEN AES THIR D PARTY TRANSACTIONS NOT RELATED TO ASSESSEE HAVE BEEN INCLUDED IN TP WORKIN G. THIS INDICATES THAT THEY WERE NOT SERIOUS ABOUT THE FACTUAL AND ANALYTI CAL TP WORKING. IT IS CONTENDED THAT: 1. THE ASSESSEES EXPORTS BULK QUANTITY OF IRON ORE TO VARIOUS PORTS OF CHINA THROUGH SEA ROUTE AND MOST OF THE SALES ARE E FFECTED ON CIF BASIS I.E. COST OF GOODS INCLUDING MARINE INSURANCE AND S EA FREIGHT. THE ASSESSEE USED TO CHARTER VESSELS FROM SHIP OPERATOR S ON VOYAGE CHARTER BASIS, WHICH POSED MANY OPERATIONAL DIFFICU LTIES LIKE: A. THE SHIP OPERATORS MANY A TIMES GAVE PRIORITY TO AS SESSEES COMPETITORS, WERE GIVING PRIORITY TO THEIR VESSEL R EQUIREMENT AND THIS BY-PASS CAUSED DELAYS IN SHIPMENT AND TIMELY D ELIVERY OF COMMODITIES TO THIRD PARTY CUSTOMERS. B. MANY TIMES ASSESSEES REQUIREMENTS IN TERMS OF VESS EL SIZES, AVAILABILITY AT A SPECIFIED TIME AND PORTS, ETC. WE RE NOT MET WITH CAUSING ADDITIONAL COST, PENALTIES AND DELAYED TRAN SACTIONS WHICH WERE ADVERSE TO BUSINESS INTEREST. 4.12 ASSESSEE IN ORDER TO OVERCOME THESE OPERATIONA L DIFFICULTIES ESTABLISHED ITS OWN SUBSIDIARY BAGADIYA BROTHERS (S INGAPORE) PTE LTD, A 100% SUBSIDIARY AT SINGAPORE FROM 25TH APRIL 2007, OPERATING AS A SHIP CHARTERING COMPANY, CATERING TO APPELLANT AS WELL A S THIRD PARTIES. IT WAS A ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 21 DECISION TAKEN IN BUSINESS PRUDENCE, IT IS SETTLED LAW THAT REVENUE AUTHORITIES CANNOT STEP IN THE BUSINESS DECISIONS A ND DECIDED WHEN, HOW AND WHY SUCH COMMERCIAL DECISIONS ARE TAKEN. I. THE FAR ANALYSIS OF AE WAS FURNISHED IN DETAILS DEM ONSTRATING THAT:- A. THE AE, WHILE PERFORMING IT FUNCTIONS, ACTS AS AN E NTREPRENEUR AND ASSUMES ALL RISKS RELATED WITH SHIPPING AND HIRING ACTIVITIES. AE DOES NOT OWN ANY VESSEL WHICH ARE HIRED BY IT ON TIME C HARTER BASIS, IN SHIPPING JARGON KNOWN AS DISPONENT OWNER BASIS F ROM OTHER SHIP OWNERS WHICH IN TURN ARE PROVIDED BY AE TO ASSESSEE AND THIRD PARTIES ON VOYAGE BASIS. THE SHIP CHARTERING BUSI NESS INVOLVES SATISFACTION OF VARIOUS PARAMETERS CONFORMING TO TH E SPECIFIC NEEDS OF CUSTOMERS LIKE SUITABLE SIZE, SEA WORTHINESS AND SA FETY OF VESSEL. IT REQUIRES RISKY INDEPENDENT FUNCTIONS IN RESPECT OF VARIABLE FACTORS LIKE- RELIABLE VESSEL OWNER, REQUIRED VESSEL SIZE, REQUIRED VESSEL SPECIFICATION, RIGHT LOCATION FOR LOADING AS WELL A S DISCHARGE, RIGHT TIME OF SHIPMENT AT THE MOST COMPETITIVE HIRE TERMS , ETC. B. AE IDENTIFIED SUITABLE AGENTS AT PORTS FOR VARIOUS CHARTERING FUNCTIONS LIKE ARRANGING A BERTH FOR VESSEL, ARRANGING FOR TH E PILOT, PREPARATION OF DOCUMENTS FOR THE CUSTOMS, ETC. HOST OF FOLLOWIN G OTHER IMPORTANT FUNCTIONS ARE PERFORMED FOR ASSIGNING A VESSEL TO C HARTERERS AND THEREAFTER: 1. BUNKERING, 2. WEATHER MONITORING, 3. CONTINUOUS MOISTURE SURVEYORS APPOINTMENT, 4. ON-HIRE SURVEYORS APPOINTMENT, 5. PNI SURVEY FOLLOW-UP, 6. STOWAGE PLAN FOLLOW-UP &VERIFICATION, 7. APPOINTMENT OF AGENTS FOR BUNKERING DETAILS, 8. HIRE CALCULATIONS, ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 22 9. DAILY UPDATES FROM MASTER / OWNERS /AGENT, 10. SURVEYOR NOMINATION, 11. PREPARATION OF ESTIMATED RE-DELIVERY NOTICE, 12. REPORTING DISPUTES / DIFFERENCES TO P&I, ETC. C. SINCE AE WAS AT EARLY STAGES IN SHIPPING OPERATIONS , IT ENGAGED AN ESTABLISHED AND EXPERIENCED SINGAPORE ENTITY, M/S. R M MARTIN, BEING IN SHIPPING LINE FOR MANY YEARS ON A LUMP-SUM FEE OF USD 20,000 PER VESSEL OPERATION. THIS WAS SUBMITTED AND EXPLAINED BEFORE THE LD. TPO BY WRITTEN SUBMISSION DATED 14.09.2011 & 24.10.2011 PLACED AT PB. COPY OF THE AGREEMENT ENTERED BY AE W ITH MATIN WAS ALSO SUBMITTED BEFORE THE LD. AO/ TPO VIDE SUBMISSI ON DATED 21 ST DECEMBER, UNFORTUNATELY IT HAS BEEN GROSSLY OVERLOO KED BY THE LD. TPO & LD. AO WHILE DRAWING ADVERSE INFERENCE THEREO N. D. AE HIRES THE VESSEL FROM SHIP OWNERS ON TIME CHARTE R BASIS WHICH INCLUDES ONLY PER DAY HIRE COST OF THE VESSEL. AE C ONTRACTS WITH CHARTERERS ON VOYAGE BASIS I.E. FREIGHT IS CHARGED FROM LOAD PORT TO DISCHARGE PORT. UNDER THE VOYAGE CHARTER, AE IS REM UNERATED ON PER TON OF GOODS TRANSPORTED AFTER CONSIDERING ALL OTHE R COSTS INCLUDING BUNKERING COST (FUEL OIL AND MARINE DIESEL OIL), WH ICH IS ONE OF MAJOR COST COMPONENT IN SHIP CHARTERING OPERATIONS. SINCE, THE SHIPPING MARKET IS VERY VOLATILE AND PRICE OF BUNKE R KEEPS ON FLUCTUATING, AE BEARS THE RISKS OF INCREASE IN PRIC E SUBSEQUENT TO VOYAGE CONTRACT WITH CHARTERERS. E. TO SUBSTANTIATE THE RISKS ASSOCIATED WITH BUNKER PR ICE, THE APPELLANT SUBMITS MARKET PRICE OF BUNKERS PREVAILING DURING F Y 07-08 ALONG WITH THE RELATIVE PRICE FLUCTUATIONS, WHICH ESTABLI SHES THE FACT THAT THE PRICE OF BUNKER IS VERY VOLATILE AND HENCE, THE RIS K IS ALWAYS ASSOCIATED WITH CHANGE IN BUNKER PRICE. THE DETAILS OF BUNKER PRICES ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 23 PREVAILING DURING JANUARY 2007 TO MARCH 2008 WERE D ULY FILED WHICH DEMONSTRATES THE ENGAGEMENT OF A GREAT RISK IN HIGH LY VOLATILE BUNKER PRICES. F. AE SUFFERS THE RISKS OF HAVING A LOWER REALISATION FOR THE HIRE CHARGES ON ACCOUNT OF SEVERAL VARIABLES WHICH ARE AT PLAY I N THE MARKET AND IS THE PRIMARY RISK OF CHARTERING BUSINESS FOR THE AE. IT HAD TO PERFORM ITS CUSTOMER AS PER THE FIXTURE NOTE TO AGREEMENT, IRRESPECTIVE OF THE DISPONENT OWNER NOT HONOURING THE CHARTER PARTY AGR EEMENT. SUCH LOSSES SUFFERED BY AE ARE DETAILED BY LD. CIT(A) IN HIS ORDER WHICH ARE REFERRED AND IN SHORT ARE IN RESPECT FOLLOWING CHAR TERING OPERATIONS: I. M.V. JIN XING: DURING THE FINANCIAL YEAR (FY) 2008- 09, THIS VESSE HIRED BY AE RESULTED IN INCURRING EXTRA COSTS AND I T PAID $ 79,500 AS ADVANCE HIRE CHARGES FOR 15 DAYS AND ALSO REMITTED $ 62,275 IN RESPECT OF BUNKERS ON BOARD ON DELIVERY. OTHER EXPE NSES SUCH AS P&I (PROTECTION & INSURANCE) USD 4993 AND AWT USD 4 90WAS ALSO INCURRED. ARBITRATION AWARD WAS MADE BY LONDON MARITIME ARBITRATORS ASSOCIATION (LMAA) AT LONDON (COPY ON RECORD). TOTAL LOSS BORNE BY AE IN THIS EPISODE TILL TIME OF SUBMISSIONS WAS TO THE TUNE OF USD 1,37,431/-, IT WAS NOT PASSED O N TO OR REIMBURSED FROM THE CUSTOMERS. II. NON-PERFORMANCE OF CHARTER VESSEL MV CONSOLIDATOR LOSS USD 5,87,504 + USD 3,47,027 = USD 9,34,531 : 4.13 THE VESSEL WAS BOOKED FOR HALDIA, WHICH IS AN INDIAN RIVER PORT, HAVING LIMITATION OF ENTRY & EXIT OF 3 VESSELS DURI NG TIDE PERIOD IN A DAY. THEREFORE, THE PORT WAS GIVING PRIORITY TO VESSELS FOR LOADING CARGO WHICH WERE ALSO DISCHARGING CARGO AT THAT PORT. THE PORT ALLOWED TWO DISCHARGE VESSELS AND ONE INCOMING VESSEL TO TAKE BERTH. THE WAITING PERIOD FOR ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 24 VESSELS TO TAKE BERTH ROSE UP TO 45 DAYS. THIS WAS NEVER CALCULATED WHEN THE ABOVE VESSEL WAS BOOKED BY AE. 4.14 DISPUTES AROSE BETWEEN ABOVE REFERRED KLC & CO SBULK, DUE TO WHICH KLC WITHDREW THE VESSEL. AE BY THIS TIME HAVE INCU RRED FOLLOWING COSTS IN ABOVE VESSEL FOR HIRING THE SAME FROM COSBULK: BUNKER - USD 2,73,987 3 HIRE ADVANCE PAID TO COSBULK - USD 2,79,600 PROTECTION & INSURANCE (P&I) - USD 5,238 BROKERAGE - USD 1,582 WEATHER ROUTING EXPENSES - USD 490 LEGAL EXPENSES - USD 26,606 TOTAL - USD 5,87,504 4.15 THE AE HAS MADE A CLAIM FOR THE ADVANCES PAID AGAINST COSBULK. THE MATTER IS STILL PENDING DISPOSAL. ON THE OTHER HAND , NCS BEING A CHARTERER ALSO FILED CORRESPONDING CLAIM FOR REFUND OF ADVANC E OF USD 3,21,360 FROM BBSPL. SINCE BBSPL DID NOT HONOUR THE CLAIM OF NCS DUE TO PENDING DISPUTE OF ITS OWN LEGAL CLAIM AGAINST COSBULK, NCS ARRESTED THE BUNKER FOR RECOVERY OF HIS CLAIM, OF VESSEL HIRED BY BBSPL. TO RELEASE THE ARREST OF THE BUNKER, BBSPL HAD TO DEPOSIT USD 3,47,027/- WITH HO N. KOLKATA HIGH COURT AS SECURITY TILL THE MATTER IS DISPOSED OFF. THE AE HAD TO INCUR ADDITIONAL HIRE CHARGES PER DAY OF THE VESSEL INCLU DING BUNKER CHARGES FOR FOUR DAYS I.E. FROM THE DAY IF VESSEL ARREST (16 TH MAY 2009) TILL THE DATE OF VESSEL RELEASE (21 ST MAY 2009).THE AE INCURRED THE SAID HIRE CHARGES WI THOUT ANY CORRESPONDING RECOVERY OF THE SAME FROM THE APP ELLANT. RELEVANT ORDERS ARE PART OF THE RECORD. M.V. METEORA: DURING FY 2007-08, AE HAD HIRED VESSEL METEORA ON T IME CHARTER BASIS AND THE SAME WAS CHARTERED BY AE TO THIRD PARTY CUS TOMER (BRITISH MARINE PLC.) ON TIME CHARTER BASIS. THE AE COULD BA RGAIN A BETTER DEAL ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 25 FOR ITSELF AND EARNED SUBSTANTIAL PROFIT FROM THE S AID TRANSACTION. HOWEVER, BRITISH MARINE PLC. REDELIVERED THE VESSEL TO AE FROM 1 ST OCTOBER 2008. THE VESSEL WAS LYING AT AES DISPOSIT ION AS THE SAME WAS HIRED BY AE UNDER A LONG TERM HIRE BASIS. THE A E COULD NOT IDENTIFY ANY CUSTOMER FROM 1 ST OCTOBER 2008 TILL 4 TH OCTOBER 2008 THEREBY INCURRING PER DAY FIXED HIRE COST OF USD 32 ,500 WITHOUT ANY CORRESPONDING INCOME. THE SAME VESSEL WAS CHARTERED BY THE APPELLANT ON A VOYAGE CHARTER @ USD 15 PER MT OF THE GOODS TRANSPORTED WHICH FURTHE R RESULTED IN LOSSES TO AE AS THE CONTRACTED RATE OF USD 15 PER M T FOR THE ENTIRE VOYAGE WAS LESS THAN THE HIRE COST OF THE AE FOR TH AT RELEVANT PERIOD. I. RISK OF ADDITIONAL COST OF HIRE CHARGES (TIME LOSS) AE SUFFERS THE RISKS OF ADDITIONAL HIRE CHARGES ON ACCOUNT OF SEVERAL CONTINGENCIES EVEN AFTER SIGNING OF THE CHARTER PAR TY AGREEMENT BETWEEN AE AND THE DISPONENT OWNER AND SIGNING OF T HE FIXTURE NOTE BETWEEN AE AND THE APPELLANT: UNDERPERFORMANCE OF VESSEL DUE TO BAD WEATHER AT PO RTS THE TIME LOST (LOSS OF HIRE CHARGES) AND BUNKER CON SUMED DURING BAD WEATHER PERIOD(S) AT LOAD PORT(S) AND/OR DISCHARGE PORT IS NOT RECOVERABLE BY AE FROM APPELLANT OR THIRD PARTY CHA RTERER, IF SUCH BAD WEATHER CONDITIONS ARE MET BY THE VESSEL PRIOR TO C OMPLETION OF ALLOWED LAYTIME AT RESPECTIVE PORTS TO THE SHIPPER/ VOYAGE CHARTERER. WHEREAS, SINCE, AE HIRES THE VESSEL ON TIME CHARTER BASIS, IT HAS TO PAY HIRE AND BUNKER COST FOR ENTIRE DURATION OF THE TIM E CHARTER IRRESPECTIVE OF THE ABOVE. ON THE OTHER HAND, WHILE SUB-LETTING THE VESSEL TO THE APPELLANT, THE AE CONTRACTS ON PER METRIC TON OF GOODS SHIPPED, WI THOUT FACTORING ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 26 THE ABOVE EVENTS. HENCE, AE ASSUMES THE ABOVE RISK WHICH IS NOT BEING TRANSFERRED TO THE APPELLANT WHILE SUB-LETTIN G THE SAME VESSEL. TIME LOSS DUE TO UNDERPERFORMANCE CAUSED BY BAD WEA THER, ADVERSE A THE AE ENTERED IN CHARTER PARTY AGREEMENT ENTERED B Y AE WITH VESSEL OWNER FOR VESSEL IKAN ACAPULCO, WHICH PROVIDES F OR THE RISK ASSUMED BY AE IN THE EVENT OF VESSEL DELAY DUE TO W EATHER, SHALLOW HARBORS, ETC. AND HENCE, THE CORRESPONDING PER DAY HIRE COST OF THE VESSEL OR ANY DETENTION OF THE VESSEL, WILL ENTIREL Y BE ASSUMED BY AE. FOR THE VESSEL IKAN ACAPULCO, WHEREIN THE AE HAD IN CURRED LOSS OF AROUND USD 136,686 DUE TO POOR WEATHER WHICH WAS NO T REIMBURSED BY THE APPELLANT. VESSEL SAILING DELAY DUE TO NON-AVAILABILITY OF NIG HT PILOTAGE- M.V. MAHAKAM MANY LOAD PORT/ DISCHARGE PORT DONT HAVE THE NIGHT NAVIGATION FACILITIES THEREFORE, MANY A TIMES VESSELS HAVE TO WAIT TILL MORNING AFTER COMPLETION OF LOADING OR DISCHARGE AT RESPECT IVE PORTS FOR THEIR ONWARD JOURNEY. FOR VESSEL MAHAKAM IT HAD TO BEAR T HE COST OF DELAY FOR 11:30 HOURS AS VESSEL MAHAKAM WHICH WAS CHARTER ED TO THE APPELLANT BY AE WAS WAITING AT DISCHARGE PORT AFTER 20:00 HRS WAS WAITING AT THE PORT DUE TO NON AVAILABILITY OF NIGH T PILOTAGE FACILITY. THE TIME LOST AND CONSEQUENT CHARGES FOR NIGHT PILO TAGE WAS NOT BE CLAIMED BY THE AE FROM ASSESSEE. VESSEL BREAKDOWNS/ DEFECTS- DURING FY 0910- M.V. SE ALUCK II THIS VESSEL LOST DUE TO HEAVY RAIN RESULTED ITS CRA NE BREAK DOWN, THE AE COULD NOT CLAIM THE TIME LOSS FROM ITS DISPONENT OWNER FOR THE ITS BREAK DOWN AND HAD TO PAY HIRE CHARGES UNDER TIME C HARTER ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 27 AGREEMENTS. THUS THE RISKS OF VESSEL BREAK DOWN/ DE FECTS RESTS WITH THE AE AND WAS NOT TRANSFERRED TO OR REIMBURSED FRO M THE ASSESSEE . NOTICE OF READINESS (NOR) LAY TIME MV STOVE CAMP BELL LAYTIME IS THE TERM USED TO REFER THE TIME ALLOWED TO CHARTERERS TO LOAD/DISCHARGE CARGO. IF THE CHARTERERS ARE UNABLE TO LOAD/DISCHARGE CARGO WITHIN THIS ALLOWED LAYTIME PERIOD, THEY WILL BE OBLIGED TO PAY DEMURRAGE. IN CHARTERING OPERATION, THE GENERAL IND USTRY PRACTICE FOR COMPUTATION OF DEMURRAGE IS: ONCE ON DEMURRAGE, AL WAYS ON DEMURRAGE. THE DESPONENT OWNER HAS TO BEAR THE RIS K OF TIME LOSS AND BUNKER CONSUMED PRIOR TO EXPIRY OF FREE TIME AL LOWED TO THE CHARTERER DUE TO BAD WEATHER. AE HAD TO BEAR A COST OF US$ 70,000/- IN RESPECT OF VESSEL MV STOVE CAMPBELL. DELAY IN VESSEL DUE TO FORCE MAJEURE MV SEA LUCK FORCE MAJEURE CLAUSE COVERS NATURAL DISASTERS OR OT HER ACTS OF GOD, WAR, OR SIMILAR INSTANCES AND EXCUSES A CHARTER PAR TY FROM LIABILITY IF SOME UNFORESEEN EVENT BEYOND THE CONTROL. DURING FY 2007-08, THE AE HAD TO BEAR THE COST OF VESSEL HIRE (MV SEALUCK) DUE TO DELAY IN RELEASE OF VESSEL FROM HALDIA PORT IN KOLKATA, INDI A I.E. LOAD PORT. IN DECEMBER 2007, THE PORT OPERATION AT HALDIA DOCK CO MPLEX WERE BOUGHT TO A STANDSTILL FROM 22:00 HRS ON 5 TH DECEMBER 2007 TILL 15:00 HRS ON 11 TH DECEMBER 2007, BY PORT WORKERS AFTER THE DEATH OF THE LABOURER WORKING IN THE PORT PREMISES. THIS DELAY I N TIME WAS NOT CONSIDERED AS A DELAY UNDER THE CLAUSE OF FORCE MAJ EURE BY THE SHIP OWNERS AND HENCE, AE HAD TO PAY THE HIRE CHARGES TO THE VESSEL OWNER FOR THE ABOVE DELAY WHICH WAS NOT REIMBURSED BY THE CHARTERER. THUS AE HAD TO INCUR THE HIRE COST FOR THE SAID DELAY WH EREAS THE CUSTOMER DID NOT PAY ANY DEMURRAGE ON THE SAID DELAY TO THE AE ON THE PREMISE OF FORCE MAJEURE. AE SUFFERED SIMILAR LOSS DUE TO FORCE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 28 MAJEURE FACTORS FOR VESSEL DARYA SUR, ASSESSEE DID NOT COUNT IN LAYTIME FOR DEMURRAGE AND AE CONTINUED TO BEAR THE HIRE COS T UNDER ITS CHARTER PARTY WITH THE VESSEL OWNER. COMPENSATION IN MV KORIANA USD 687,500/-: IT WAS PAID BY AE AS COMPENSATION AS THIS VESSEL COULD NOT BE DELIVERED TO AM NOMIKOS AND HENCE USD 63,593.70 AND USD 4,77,062.50 WERE RE STRAINED BY US BANKS UNDER RULE B ORDERS AGAINST AE INITIATED BY AM NOMIKOS. ON JUNE 25 TH AND JUNE 24 TH 2008 RESPECTIVELY. AFTER LONG LITIGATION PROCEDURES, AE COULD RELEASE USD 4,53,156.20 UNDER RULE B BUT NET AMOUNT OF USD 6,87,500/- WAS NOT RELEASED AND IT WA S LOST TO AM NOMIKOS AS A RESULT OF ABOVE DISPUTE. BAD DEBTS IN M V METEORA USD 2,70,587/- : AE HAD TO WRITE OFF A SUM OF USD 2,70,587/- HAS BEE N WRITTEN OFF AS BAD DEBTS TRADE OUTSIDE PARTIES. THIS AMOUNT COUL D NOT BE RECOVERED IN CASE OF VESSEL MV METEORA FROM THIRD PARTY NAMEL Y M/S D T RESOURCES. 4.16 THESE WELL DOCUMENTED EXIGENCIES AND RISK BEARING EVENTS, PAYMENTS CLEARLY DEMONSTRATE THAT THE AE IS OPERATING AS AN ENTREPRENEUR AND ASSUMED SUBSTANTIAL ENTREPRENEURIAL RISKS WHILE UND ERTAKING MARINE CHARTERING SERVICES ON INDEPENDENT TERMS TO THIRD P ARTY CUSTOMERS INCLUDING ASSESSEE. DESPITE ALL THESE RECORDED FACTS, EVIDENC E AND CIRCUMSTANCES IT WAS NOT JUSTIFIED ON THE PART OF LD. TPO TO TAKE A VIEW THAT FAR PROFILE OF AE WAS NOT CORRECT AND THERE WAS NO NECESSITY TO FORM AN A E. 4.17 THE RELEVANT RULE 10B(2) FOR TP WORKING SETS O UT THE CRITERIA FOR COMPARABILITY OF THE TRANSACTIONS. IT IS IMPORTANT TO TAKE INTO CONSIDERATION THE SUB-RULE (A) AND (B) WHICH SETS OUT AS UNDER: ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 29 (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY T RANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT AS SETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RES PECTIVE PARTIES TO THE TRANSACTIONS; THOUGH THE TRANSFER PRICING REGULATIONS REQUIRE A T HOROUGH ANALYSIS OF THE FUNCTIONS PERFORMED BY AN ENTITY BEFORE DETERMI NING THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTIONS LD. TPO FA ILED TO CONSIDER THE GRAVITY OF ANALYTICAL APPRECIATION IN THIS BEHALF. 4.18 IN THIS REGARD, REFERENCE CAN BE MADE TO THE D ECISION OF MENTOR GRAPHICS (NOIDA) PVT. LTD VS.- DCIT, (2007) 109 I TD 101 (ITAT- DEL),WHEREIN THE HONBLE TRIBUNAL HELD THAT: THE FUNCTION THAT NEED TO BE IDENTIFIED WHILE CARR YING COMPARISON AS PER OECD GUIDELINES INCLUDE DESIGN, MANUFACTURIN G, ASSEMBLING, RESEARCH AND DEVELOPMENT, SERVICING, PU RCHASING, DISTRIBUTION, MARKETING, ADVERTISING, TRANSPORTATIO N, FINANCIAL AND MANAGEMENT ACTIVITIES. IT IS ALSO NECESSARY TO EXAM INE AS TO WHAT IS THE PRINCIPAL FUNCTION OF THE ENTITIES. THE OECD TRANSFER PRICING GUIDELINES FOR MULTINATIO NAL ENTERPRISES AND TAX ADMINISTRATIONS (OECD) IN THIS BEHALF ALSO STATE THAT, IN TRANSACTIONS BETWEEN TWO INDEPENDENT ENTERPRISE S, COMPENSATION USUALLY WILL REFLECT THE FUNCTIONS THA T EACH ENTERPRISE PERFORMS (TAKING INTO ACCOUNT ASSETS USE D AND RISKS ASSUMED). THEREFORE, IN DETERMINING WHETHER CONTROL LED AND UNCONTROLLED TRANSACTIONS OR ENTITIES ARE COMPARABL E, A FUNCTIONAL ANALYSIS IS NECESSARY. THIS FUNCTIONAL A NALYSIS SEEKS TO IDENTIFY AND COMPARE THE ECONOMICALLY SIGNIFICAN T ACTIVITIES AND RESPONSIBILITIES UNDERTAKEN, ASSETS USED AND RI SKS ASSUMED BY THE PARTIES TO THE TRANSACTIONS PARA 1.43 STATES THAT, - WHILE ONE PARTY MAY PROVID E A LARGE NUMBER OF FUNCTIONS RELATIVE TO THAT OF THE OTHER PARTY TO TH E TRANSACTION, IT IS THE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 30 ECONOMIC SIGNIFICANCE OF THOSE FUNCTIONS IN TERMS O F THEIR FREQUENCY, NATURE, AND VALUE TO THE RESPECTIVE PARTIES TO THE TRANSACTIONS THAT IS IMPORTANT PARA 1.45 STATES THAT - FUNCTIONAL ANALYSIS IS INC OMPLETE UNLESS THE MATERIAL RISKS ASSUMED BY EACH PARTY HAVE BEEN CONS IDERED SINCE THE ASSUMPTION OR ALLOCATION OF RISKS WOULD INFLUENCE T HE CONDITIONS OF TRANSACTIONS BETWEEN THE ASSOCIATED ENTERPRISES. US UALLY, IN THE OPEN MARKET, THE ASSUMPTION OF INCREASED RISK WOULD ALSO BE COMPENSATED BY AN INCREASE IN THE EXPECTED RETURN, ALTHOUGH THE ACTUAL RETURN MAY OR MAY NOT INCREASE DEPENDING ON THE DEGREE TO WHIC H THE RISKS ARE ACTUALLY REALIZED PARA 1.46 OF THE OECD GUIDELINES STATES THAT: THE T YPES OF RISKS TO CONSIDER INCLUDE MARKET RISKS, SUCH AS INPUT COST A ND OUTPUT PRICE FLUCTUATIONS; RISKS OF LOSS ASSOCIATED WITH THE INV ESTMENT IN AND USE OF PROPERTY, PLANT, AND EQUIPMENT; RISKS OF THE SUCCES S OR FAILURE OF INVESTMENT IN RESEARCH AND DEVELOPMENT; FINANCIAL R ISKS SUCH AS THOSE CAUSED BY CURRENCY EXCHANGE RATE AND INTEREST RATE VARIABILITY; CREDIT RISKS; AND SO FORTH. 4.19 THE LD. TPO, FAILED TO CORRECTLY APPRECIATE TH E AE FAR PROFILE ASSUMED IN ITS ENTREPRENEURIAL CAPACITY FOR ITS IND EPENDENT CHARTERING OPERATIONS AND HOLDING THAT: IN VIEW OF THE SAME, IT CANNOT BE SAID THAT FUNCT IONS INCLUDING RISKS INVOLVED RELATING TO SHIP HIRING ACTIVITIES W AS CARRIED OUT BY THE AE AND IT SHOULD BE PAID FOR THESE COSTS. TH E AE CAN ONLY BE TREATED AS FACILITATION OFFICE, WHICH HAS CARRIE D OUT SOME ADMINISTRATIVE WORK... 4.20 THE LD. TPO HAS FAILED TO UNDERSTAND AND APPRE CIATE THE MODUS OPERANDI OF THE BUSINESS OF AE IN THE RELEVANT VESS EL CHARTERING BUSINESS. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 31 ANY ADJUSTMENT MADE WITHOUT GIVING DUE COGNIZANCE T O THE BUSINESS PRACTICE FOLLOWED IN THE RELEVANT INDUSTRY AND CONS EQUENTLY ANY CONCLUSION DRAWN WILL BE PREJUDICIAL TO THE INTEREST OF JUSTIC E. THE LD. TPO IS NOT JUSTIFIED IN REJECTING TNMM METH OD ADOPTED AS MOST APPROPRIATE METHOD AND AE AS TESTED PARTY BY H OLDING THAT: 10. THE ASSESSEE HAS SELECTED ITS AE, M/S. BA GADIYA BROTHERS SINGAPORE PTE LTD. (BBSPL) AS TESTED PARTY FOR BENC HMARKING THE TRANSACTIONS OF SERVICES RELATED TO THE SHIPPING AC TIVITIES AS AE IS SIMPLER OF THE TWO, AND DOES NOT HAVE ANY INTANGIBL E SINCE AE WAS AT THE NASCENT STAGE IN SHIPPING OPERA TIONS, IT FELT PRUDENT TO ENGAGE AN ESTABLISHED AND EXPERIENCED RE SOURCE IN SHIPPING INDUSTRY TO CARRY OUT AES OPERATION RATHER THAN HA VING THEM IN THEIR PAYROLL AND BURDEN ITSELF WITH ADDITIONAL RECURRING COST. HENCE, AE STARTED UTILIZING THE EXPERTISE OF A SINGAPORE ENTITY, M/S. R M MARTIN PTE. LTD.(RMPL), WHICH IS IN SHIPPING LINE FOR MANY YEAR S, TO PROVIDE ASSISTANCE TO AES SHIPPING OPERATION AT A LUMP-SUM FEE OF USD 20,000 PER VESSEL. 4.21 M/S R M MARTIN WAS ENGAGED FOR HANDLING AND MA NAGING ALL CHARTERING AND OPERATIONAL ACTIVITIES OF VESSELS CH ARTERED BY AE. HENCE, ALL THE SHIP CHARTERING OPERATIONS IN THE FIRST YEAR WA S UNDERTAKEN THROUGH M/S R M MARTIN WHICH ALSO SUPPLEMENTED THE AES REQUIRE MENT FOR QUALIFIED AND EXPERIENCE RESOURCES. THIS WAS EXPLAINED IN DET AIL BEFORE THE AUTHORITIES BELOW. SOME OF THE PRIME FUNCTIONS TO BE UNDERTAKEN BY M/S R M MARTIN AS PER THE CONTRACTUAL ARRANGEMENT ARE: IDENTIFY SUITABLE VESSELS; NEGOTIATE WITH OWNERS/ BROKERS AND FIX ON CHARTER T IME; TO DECIDE ON CHARTER/ VOYAGE FOR AE AND TO PROVIDE FOR CLEAN FIXTURE RECAP; GET REQUIRED INFORMATION AND CERTIFICATES FROM VESS EL; ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 32 NOMINATE WEATHER ROUTING AGENCY; NOMINATE AGENTS, ON-HIRE SURVEYORS APPOINTMENT, DI SPORT AGENCY APPOINTMENT; OTHERS AS PER CONTRACTUAL AGREEMENT AS ABOVE. INSPITE OF EXPLAINING THE ABOVE FUNCTIONS WHICH WER E UNDERTAKEN BY M/S R M MARTIN ON BEHALF OF AE, THE LD. TPO FAILED TO C ONSIDER THE SAME WITHOUT ANY BASIS. ASSESSEE ALSO ADDUCED EVIDENCE T O SUBSTANTIATE THAT SRIPRIYA BALASUBRAMANIAN (SB), AN EXECUTIVE DIRECTO R OF THE AES COMPANY WAS BY PROFESSION A B.COM (HONS.) WITH 1 ST CLASS GRADUATE, COMPANY SECRETARY, GRADUATE IN LAW AND HAD SUBSTANTIAL EXPO SURE IN SHIPPING INDUSTRY DUE TO HER PRIOR ENGAGEMENTS WITH SHIP OPE RATORS AND SHIP OWNERS. SHE JOINED AES COMPANY ON 25 TH APRIL, 2007 I.E. ON THE DATE OF AES INCORPORATION WHICH IS ALMOST SIX MONTHS PRIOR TO A ES FIRST CHARTERING TRANSACTION WITH THE APPELLANT. THUS AE EMPLOYED THE EXPERT SERVICES OF M/S R M MAR TIN FOR SHIPPING OPERATIONS RELATED HOST OF ACTIVITIES ALONG WITH TH E PAST SHIPPING EXPERIENCE OF S B. IN SHIPPING LINE A BATTERY OF WORK FORCE IS NOT NEEDED IF U HIRE A PROFESSIONAL AGENCY WHICH HAS A COMPETENT STAFF TO RENDER REQUISITE SERVICES. THUS THE LD. TPOS ADVERSE INFERENCES ABOUT LACK OF STAFF O TECHNICALLY COMPETENT EMPLOYEES ARE MISPLACED AND DEVOID OF REA LITIES. 4.22 POST FY 2007-08, THE AE DID NOT AVAIL SERVICES OF M/S R M MARTIN AS IT WAS ABLE TO BUILD UP OWN IN-HOUSE EMPLOYEES INCLUDI NG AN EMPLOYEE HOLDING A DIPLOMA DEGREE IN SHIPPING MANAGEMENT. TH E ADVERSE INFERENCE DRAWN FOR UTILIZATION OF PROFESSIONAL HELP OF EXPER TISE OF M/S R M MARTIN IN THE FIRST YEAR OF ITS OPERATION IS UNJUST, MISPLACE D AND ARBITRARY. SINCE AE IS ONLY ENGAGED IN CHARTERING ACTIVITIES, NOT OWNING A NY VESSEL OR EMPLOYEES THERE FOR, A LARGE EMPLOYEE BASE WAS NOT NEEDED FOR ITS CHARTERING OPERATION. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 33 4.23 FURTHER, THE LD. TPO AT PARA 12 OF THE ORDER S TATED THAT: ...THE ASSESSEE COMPANY FAILED TO PRODUCE THE COPI ES OF AGREEMENTS (TIME CHARTERED AGREEMENTS) BETWEEN BBSPL AND THE V ESSEL OWNERS...IT IS ALSO NOT POSSIBLE TO ASCERTAIN HOW S HIP OWNERS HAVE AGREED TO ENTER INTO BUSINESS WITH AE ON TIME CHART ER BASIS, AS IT REQUIRES HUGE FINANCIAL EXPOSURE. THE EQUITY CAPITA L AND TOTAL FUND AVAILABLE WITH AE WERE US$ 2,30,066 AND THERE WERE NO FINANCES AVAILABLE TO THE AE OF ITS OWN. EACH SHIPPING TRANS ACTION IS WORTH MORE THAN RS. 8 CRORES FOR A VOYAGE OF A NORMAL LOA D OF 50,000 TON, WHEREAS, AE HAS ENTERED INTO LONG TERN TIME CHARTER AGREEMENT WHICH EXPOSES IT TO EVEN BIGGER FINANCIAL EXPOSURE. NO SH IP OWNER WILL LIKE TO ENTER INTO AN AGREEMENT WITH SUCH A NEW COMPANY HAVING A MINISCULE EQUITY, IT IS POSSIBLE ONLY IF PARENT COM PANY PROVIDES FINANCIAL AND PERFORMANCE GUARANTEE AND UNDERTAKES ALL RISKS RELATED TO THESE TRANSACTIONS. IT APPEARS THAT THE ASSESSEE COMPANY HAS NOT SUBMITTED TIME CHARTER AGREEMENTS BETWEEN AE AND VE SSEL OWNERS AS THEY MAY BE CARRYING INFORMATION ADVERSE TO THE ASS ESSEE. IN TIME CHARTER BUSINESS, RENTALS ARE TO BE PAID IN ADVANCE AND CONSIDERING THE EQUITY WITH THE ASSESSEE COMPANY, IT CAN HARDLY PAY ADVANCE OF 3- 4 DAYS, AS SHIPPING RENTALS WERE RULING FOR SUPRAMA X/PANAMA VESSEL AT 50,000 TO 60,000 DOLLARS PER DAY AT THAT POINT O F TIME. FURTHER, THE LD. TPO AT PARA 13 OF THE ORDER STATED THAT: ...THE ACCOUNT ALSO SHOWS THAT THE ASSESSEE COMPAN Y HAS PAID FOLLOWING AMOUNTS DIRECTLY TO THE VESSEL OWNERS AND THE SAME AMOUNT WAS CREDITED IN THE ACCOUNT OF AE:- IN PARA 14 OF THE ORDER THE LD. TPO WRONGLY CONCLUD ED THAT: IT CAN BE SEEN FROM THE BANK ACCOUNT OF THE AE THA T FOR ANY TRANSACTION ADVANCE HAS BEEN PAID BY THE ASSESSEE AND ON BASIS OF SAME, FUNDS HAVE BEEN PAID TO THE SHIP OWNERS, WHICH CLEARLY PROVES THAT ALL THE FINANCIAL ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 34 SUPPORT INCLUDING FINANCIAL RISKS HAVE BEEN PROVIDE D BY THE ASSESSEE. IT CAN BE SEEN FROM THE LEDGER ACCOUNT OF THE AE IN TH E BOOKS OF THE BAGADIA BROTHERS PVT. LTD. THAT ON 23.01.2008, AROUND RS. 3 0 CRORES HAVE BEEN PAID IN ADVANCE TO THE AE. 4.24 IT IS THUS CONTENDED THAT THE ADVERSE OBSERVAT IONS OF THE LD. TPO/ AO ARE ARBITRARY, WITHOUT ANY BASIS & COGENT ANALYSIS OF THE MATERIAL BROUGHT ON RECORD. 4.25 APROPOS AES AVAILABILITY OF FUNDS, ASSESSEE D URING THE COURSE OF TP PROCEEDINGS SUBMITTED ITS CASH FLOW STATEMENT TO ES TABLISH THE FACT THAT AE WAS HAVING SUFFICIENT FUND PRIOR TO TRANSACTING WIT H THE APPELLANT. LD. TPO NEVER SOUGHT ANY FURTHER EXPLANATION IN THIS BEHALF OR ABOUT THE AVAILABILITY AND UTILIZATION OF FUNDS IN AES OPERATIONS AND ON BASELESS PRESUMPTIONS HELD THAT AE WAS FINANCED BY THE ASSESSEE IN ITS CH ARTERING OPERATION. 4.26 IN VIEW OF THESE FACTS THERE IS NO JUSTIFICATI ON IN THE OBSERVATIONS AND CONCLUSIONS OF LD. TPO/ AO THAT: I. THERE WAS NO JUSTIFICATION FOR ASSESSEE TO HAVE GON E FOR A 100% WHOLLY OWNED SUBSIDIARY AT SINGAPORE FOR SHIP CHART ERING FUNCTIONS AND IT WAS NOT A PROPER DECISION. II. THE AE DID NOT HAVE INDEPENDENT SOURCES AND CASH FL OW. III. NO FUNCTIONS AND RISK FAR WAS INCURRED BY AE. IV. THE RELATIONSHIP BETWEEN AE AND ASSESSEE WERE THAT OF AGENT AND PRINCIPAL AND NOT INDEPENDENT FUNCTIONS. 5. LD. CIT(A) AFTER DUE CONSIDERATION OF FACTS AND CIRCUMSTANCES, MATERIAL AVAILABLE ON RECORD, REMAND REPORT, AO/ TP O AND ASSESSEES CONTENTIONS UPHELD THE VERACITY OF ASSESSEES TP ST UDY. WHILE DOING SO THE TPOS OBSERVATIONS HAVE BEEN DISLODGED WITH PROPER REASONING AND ANALYSIS. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 35 5.1 A DETAILED TP REPORT WITH FAR ANALYSIS OF THE A PPELLANT AND AE WAS FURNISHED. IT WAS DEMONSTRATED THAT BOTH THE PARTIE S BEAR SIGNIFICANT RESPECTIVE RISKS IN RELATION TO CHARTERING BUSINESS ES STREAMLINED BY TRANSACTIONS ALONG WITH AGREEMENTS. FOR ARMS LENGT H PRICE WORKING WITH AE, TRANSACTIONAL NET MARGIN METHOD (TNMM) WAS SELE CTED AS THE MOST APPROPRIATE METHOD AND OPERATING PROFIT/TOTAL COST (OP/TC) WAS CONSIDERED AS THE PROFIT LEVEL INDICATOR (PLI) TO T EST THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTION AFTER GIVING DUE C OGNIZANCE TO RULE 10B(1)(E)(I) OF THE RULES WHICH PROVIDES THAT, THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE F ROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLO YED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT B ASE. 5.2 SINCE AE WAS PERFORMING GAMUT OF SHIPPING RELAT ED ACTIVITIES IN THE CAPACITY OF AN ENTREPRENEUR, THE APPELLANT HAD SELE CTED OPERATING PROFIT/ TOTAL COST (OP/TC) AS THE PROFIT LEVEL INDICATOR (P LI) TO ESTABLISH THE ARM LENGTH NATURE OF THE INTERNATIONAL TRANSACTION. THE REASONS FOR REJECTING OTHER TRANSFER PRICING METHODS HAVE BEEN PROVIDED IN SECT ION 5 OF THE TP STUDY SUBMITTED BEFORE LD. TPO. HOWEVER, THE LD. TPO UNJ USTIFIABLY IGNORED THE PLI SELECTED BY THE APPELLANT AND WRONGLY APPLIED G ROSS PROFIT OVER VALUE ADDED EXPENSES (GP/VAE) CALLED AS BERRY RATIO AS TH E APPROPRIATE PLI RELYING UPON OR HAVING REGARD TO ANY OTHER RELEVAN T BASE AS PROVIDED IN RULE 10B(1)(E)(I) OF THE RULES WHICH IS COMPLETELY INAPPROPRIATE ON THE BACKDROP OF THE AES VESSEL CHARTERING BUSINESS. 5.3 DR. CHARLES H. BERRY FORMULATED THE SAID BERRY RATIO AND WROTE ABOUT ITS APPLICABILITY: BERRY RATIO IS IN FACT JUST A VARIANT OF THE COST PLUS METHOD. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 36 A BERRY RATIO USES THE LEVEL OF OPERATING COSTS, IN THE CASE OF A DISTRIBUTOR, AS A MEASURE OF THE EXTENT, OR THE AMOUNT, OF THE SERV ICES PROVIDED. IN OTHER WORDS, THIS RATIO CAN BE DEFINED AS THE M EASURE OF GROSS MARGIN EARNED OVER VALUE ADDED EXPENSES WHICH IS AP PLICABLE MAINLY IN CASE OF A PURE DISTRIBUTOR ENGAGED IN ONLY BUY-SALE ARRANGEMENT WITHOUT ANY VALUE ADDITION. IN THIS CONTEXT, THE GUIDELINES PROVIDED BY OECD ON THE APPLICABILITY OF BERRY RATIO AT PARA 2.101 STATES T HAT: IN ORDER FOR A BERRY RATIO TO BE APPROPRIATE TO TE ST THE REMUNERATION OF A CONTROLLED TRANSACTION (E.G. CONS ISTING IN THE DISTRIBUTION OF PRODUCTS), IT IS NECESSARY THAT: THE VALUE OF THE FUNCTIONS PERFORMED IN THE CONTROL LED TRANSACTION (TAKING ACCOUNT OF ASSETS USED AND RISKS ASSUMED) I S PROPORTIONAL TO THE OPERATING EXPENSES, THE VALUE OF THE FUNCTIONS PERFORMED IN THE CONTROL LED TRANSACTION (TAKING ACCOUNT OF ASSETS USED AND RISKS ASSUMED) I S NOT MATERIALLY AFFECTED BY THE VALUE OF THE PRODUCTS DISTRIBUTED, I.E. IT IS NOT PROPORTIONAL TO SALES, AND THE TAXPAYER DOES NOT PERFORM, IN THE CONTROLLED TR ANSACTIONS, ANY OTHER SIGNIFICANT FUNCTION (E.G. MANUFACTURING FUNC TION) THAT SHOULD BE REMUNERATED USING ANOTHER METHOD OR FINANCIAL IN DICATOR. 5.4 THE AE ACTS AS A SERVICE PROVIDER WITH A RANGE OF CHARTERING ACTIVITIES AND HENCE CANNOT BE CHARACTERIZED AS A DISTRIBUTOR FIT FOR APPLICATION OF BERRY RATIO. FURTHER, WITHOUT PREJUDICE TO THE ABOV E, EVEN IF BERRY RATIO IS APPLIED TO TEST THE ARM LENGTH NATURE, A LARGER QU ESTION ARISES AS TO THE IDENTIFICATION OF VAE FOR PROPER APPLICATION OF BER RY RATIO. AE, BASED ON THE REQUIREMENTS OF ITS CUSTOMERS, INCLUDING THE APPELL ANT, HIRES THE VESSEL ON TIME CHARTER BASIS FROM THE SHIP OWNERS/ DISPONENT OWNERS AND CHARTERS THE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 37 SAME TO THE APPELLANT AND OTHER CUSTOMERS ON VOYAGE BASIS THEREBY CHANGING THE VERY ESSENCE OF THE TRANSACTION. IN TI ME CHARTER BASIS, THE VESSEL IS HIRED ON TIME BASIS WHEREAS IN VOYAGE CHARTER, T HE VESSEL IS HIRED ON PER METRIC TON OF THE GOODS SHIPPED AFTER CONSIDERING T HE RELEVANT LOAD AND DISCHARGE PORT. IN THESE CIRCUMSTANCES, AE IS NOT A CTING AS A DISTRIBUTOR OF SERVICES/ PRODUCTS SINCE THE FORM OF SERVICE IS COM PLETELY ALTERED BY AE. IN DOING SO, AE BEARS THE RESULTANT CAPACITY UTILIZATI ON RISKS, RISK OF VESSEL HIRE CHARGES, CREDIT RISKS, MARKET RISKS, ETC. CONSEQUEN TLY, THESE COSTS CANNOT BE CONSIDERED AS A PASS-THROUGH COSTS FOR APPLICATION OF BERRY RATIO AS APPLIED BY LD. TPO. 5.5 IN CASE OF A DISTRIBUTOR OF GOODS/SERVICES, THE DISTRIBUTOR SIMPLY PASSES ON THE COST OF GOODS SOLD TO OTHER ENTERPRIS E AND DOES NOT CHANGE THE FORM OF THE GOODS/ SERVICES AND HENCE, THE COST OF GOODS SOLD IS A PASS- THROUGH COST FOR THE DISTRIBUTOR WITHOUT ANY CHANGE IN FORM AND WITHOUT ANY VALUE ADDITION. THE REMUNERATION EARNED BY SUCH DISTRIBUTOR IS LIMITED TO VALUE ADDED EXPENSES INCURRED TO MAKE THE SALE. THE CONCEPT OF PASS- THROUGH COST FROM OCED GUIDELINES PARA 2.93 STATES THAT: IN APPLYING A COST-BASED TRANSACTIONAL NET MARGIN METHOD, FULLY LOADED COSTS ARE OFTEN USED, INCLUDING ALL THE DIRE CT AND INDIRECT COSTS ATTRIBUTABLE TO THE ACTIVITY OR TRANSACTION, TOGETH ER WITH AN APPROPRIATE ALLOCATION IN RESPECT OF THE OVERHEADS OF THE BUSIN ESS. THE QUESTION CAN ARISE WHETHER AND TO WHAT EXTENT IT IS ACCEPTAB LE AT ARMS LENGTH TO TREAT A SIGNIFICANT PORTION OF THE TAXPAYERS COSTS AS PASS-THROUGH COSTS TO WHICH NO PROFIT ELEMENT IS ATTRIBUTED (I.E. AS C OSTS WHICH ARE POTENTIALLY EXCLUDABLE FROM THE DENOMINATOR OF THE NET PROFIT INDICATOR). THIS DEPENDS ON THE EXTENT TO WHICH AN INDEPENDENT PARTY IN COMPARABLE CIRCUMSTANCES WOULD AGREE NOT TO EARN A MARK-UP ON PART OF THE COSTS IT INCURS. THE RESPONSE SHOULD NO T BE BASED ON THE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 38 CLASSIFICATION OF COSTS AS INTERNAL OR EXTERNAL COSTS, BUT RATHER ON A COMPARABILITY (INCLUDING FUNCTIONAL) ANALYSIS. THE PASS-THROUGH COST AND ARMS LENGTH REMUNERATI ON ON SUCH COSTS HAS BEEN EXPLAINED IN PARA 7.36 OF THE OCED GUIDELI NES WHICH STATES THAT: WHEN AN ASSOCIATED ENTERPRISE IS ACTING ONLY AS AN AGENT OR INTERMEDIARY IN THE PROVISION OF SERVICES, IT IS IM PORTANT IN APPLYING THE COST PLUS METHOD THAT THE RETURN OR MARK-UP IS APPROPRIATE FOR THE PERFORMANCE OF AN AGENCY FUNCTION RATHER THAN FOR T HE PERFORMANCE OF THE SERVICES THEMSELVES. IN SUCH A CASE, IT MAY NOT BE APPROPRIATE TO DETERMINE ARMS LENGTH PRICING AS A MARK-UP ON THE COST OF THE SERVICES BUT RATHER ON THE COSTS OF THE AGENCY FUNC TION ITSELF, OR ALTERNATIVELY, DEPENDING ON THE TYPE OF COMPARABLE DATA BEING USED, THE MARK-UP ON THE COST OF SERVICES SHOULD BE LOWER THAN WOULD BE APPROPRIATE FOR THE PERFORMANCE OF THE SERVICES THE MSELVES. FOR EXAMPLE, AN ASSOCIATED ENTERPRISE MAY INCUR THE COS TS OF RENTING ADVERTISING SPACE ON BEHALF OF GROUP MEMBERS, COSTS THAT THE GROUP MEMBERS WOULD HAVE INCURRED DIRECTLY HAD THEY BEEN INDEPENDENT. IN SUCH A CASE, IT MAY WELL BE APPROPRIATE TO PASS ON THESE COSTS TO THE GROUP RECIPIENTS WITHOUT A MARK-UP, AND TO APPLY A MARK-UP ONLY TO THE COSTS INCURRED BY THE INTERMEDIARY IN PERFORMIN G ITS AGENCY FUNCTION. 5.6 IN VIEW OF THE PARAMETERS OF PASS-THROUGH CONCE PT AS LAID DOWN BY OECD GUIDELINES AND ALSO BY DR. CHARLES H. BERRY, I T IS TO BE APPRECIATED THAT BERRY RATIO MAY SUITABLY BE APPLIED IN CASE OF A DISTRIBUTOR OR SERVICE PROVIDER WHO ARE ENGAGED IN BUY-SALE ARRANGEMENT OF GOODS/SERVICES WITHOUT ANY VALUE ADDITION. WHEREAS IN THE INSTANT CASE THE AE IS ENGAGED IN RANGE OF CHARTERING FUNCTIONS IN THE CAPACITY OF ENTREPRENEUR PERFORMING ENTREPRENEURIAL FUNCTIONS AND ASSUMING RELATED RISK S. LD. TPO FAILED TO ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 39 APPRECIATE THE NUANCES OF SHIP CHARTERING BUSINESS AND THE AES OPERATIONS AND GROSSLY ERRED IN NOT CONSIDERING THE OTHER DIRE CT COSTS OF AE AS SUBSTANTIAL VALUE ADDED ACTIVITIES. THE LD. TPO WHI LE COMPUTING VAE FOR ESTABLISHING THE ARMS LENGTH MARK-UP, CONSIDERED T HE FOLLOWING EXPENSES: PROFESSIONAL FEE SHIP HANDLING CHARGES; SALARIES AND EMPLOYEE BENEFITS; DEPRECIATION; AND OTHER OPERATING EXPENSES. 5.7 IN GIVEN FACTS, THE OTHER COST OF SERVICES OF THE AE CANNOT BE SIMPLY TREATED AS PASS-THROUGH COST WITHOUT APPRECIATING T HE RATIONALE OF SUCH COSTS AND UNDERLYING RISKS ATTACHED THERETO. THESE COST OF SERVICES OF AE REPRESENT SUBSTANTIAL VALUE ADDED FUNCTIONS AND HEN CE, THE LD. TPO SHOULD HAVE INCLUDED THESE COSTS AS A PART OF THE COST BAS E TO COMPUTE THE ARMS LENGTH MARGIN. A CAREFUL PERUSAL OF AGREEMENT AND F UNCTIONS REVEAL THAT AE POTENTIALLY BEARS THEM AND SUCH RISKS WERE NOT PASS ED TO CUSTOMERS OR THE APPELLANT. IN SUCH A SITUATION, AE LIKE ANY THIRD P ARTY WOULD CHARGE A FAIR REMUNERATION ON THESE EXPENSES, THE COMPARABILITY T HEREOF HAS BEEN DEMONSTRATED BY ASSESSEE. 5.8 RELIANCE IN THIS REGARD IS ALSO PLACED IN THE C ASE OF DY. COMMISSIONER OF INCOME TAX VS M/S. CHEIL COMMUNICATIONS PVT. LTD. (ITA NO. 712/DEL/2010 ASSESSMENT YEAR 2005-06): IN THE SAID CASE, THE TAXPAYER WAS ENGAGED IN RENDE RING ADVERTISING SERVICES TO ITS AES, DURING THE COURSE THEREOF ASSE SSEE HAD TO MAKE THE PAYMENTS TO THIRD PARTIES LIKE ADVERTISING AGENCIES , PRINTING PRESSES, ETC. FOR BOOKING OF ADVERTISING SLOTS ON BEHALF OF ITS AES A ND RECOVERS THE SAME FROM AES. IN THIS REGARD, THE FUNCTIONAL RESPONSIBILITIE S AND RELATED RISKS WERE NOT ASSUMED BY THE TAXPAYER. THE AFTER DUE CONSIDERATIO N OF ISSUES DELHI ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 40 TRIBUNAL ANALYZED THE SCOPE OF PRINCIPLES LAID DOWN IN THE OECD GUIDELINES FOR PASS-THROUGH COST AND HELD THAT COSTS AS MER E PASS THROUGH COSTS AND ELIMINATED THE SAME FROM THE COST BASE OF THE TAXPA YER TO ESTABLISH THE ARMS LENGTH REMUNERATION. 5.9 THE DELHI HONBLE TRIBUNAL AT PAGE 41 HELD THAT : IN THE LIGHT OF THESE GUIDELINES, IT WOULD BE, THE REFORE, CLEAR THAT A MARK-UP IS TO BE APPLIED TO THE COST INCURRED BY THE ASSESSEE COMPANY IN PERFORMING ITS AGENCY FUNCTION AND NOT TO THE COST OF RENDERING AD VERTISING SPACE ON BEHALF OF ITS ASSOCIATED ENTERPRISE IT IS CONTENDED THAT AE IS NOT ACTING ON BEHALF OF THE CUSTOMERS AND THE COSTS INCURRED ARE NOT REIMBURSED BY THEM. THE APPELLANT ALSO SUBMITTED COPY OF FIXTURE NOTES ENTERED BETWEEN THE APPELLANT AND ITS AE FOR SHIP CHARTERING VIDE SUBMISSION DATED 12 TH SEPTEMBER 2011 AND 24 TH OCTOBER 2011 PLACED ON APPENDIX IV & IX- PAGES 124 TO 138 AND 28 2 TO 410 OF THE PAPER BOOK. IT CLEARLY ESTABLISHES THE FACT THAT AE WAS A CTING IN ITS INDEPENDENT CAPACITY AND WAS NOT IN ANY MANNER PERFORMING THE M ERE ROLE OF FACILITATOR/ AGENT AND THEREBY HAD BINDING CONTRACTUAL OBLIGATIO NS WITH THE APPELLANT. 5.10 THE UNDERLYING DIRECT COSTS SO ASSUMED/INCURRE D BY THE AE ALONG WITH RISKS, THE JUSTIFICATION THEREOF AND CORRESPON DING FUNCTIONS AND RISKS ASSOCIATED WITH IT CAN BE SUMMARIZED AS: A. HIRE PAYMENTS: THIS IS THE HIRE COST OF THE VESSEL INCURRED BY THE AE AND PAID TO ITS DISPONENT / VESSEL OWNER. THE HIRE COST INCURRED IS PAID ON PER DAY HIRE COST OF THE VESSEL. THE AE IDENTIFIES THE VESSEL TO MEET THE REQUIREMENTS OF ITS CUSTOMERS INCLUDING THE APPELLANT. IN THIS R EGARD, AS HIGHLIGHTED IN ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 41 ABOVE PARAS M/S R M MARTIN PLAYS A MAJOR ROLE IN ID ENTIFYING AND FINALIZING THE REQUIRED VESSEL. AS DETAILED IN THE SUBMISSION ABOVE, THE AE ASSUMES THE FOLLOWING RISK PERTAINING TO HIRING THE VESSEL: I. RISK OF INCREASE IN BUNKER PRICES; II. RISK OF APPROPRIATE REALIZATION OF HIRE CHARGES; RISK OF PERFORMANCE OBLIGATION ARISING FROM THE FIX TURE NOTE; CAPACITY UTILIZATION RISKS; PRICE RISKS; III. RISK OF ADDITIONAL COST OF HIRE CHARGES (TIME LOSS) ; UNDERPERFORMANCE OF VESSEL DUE TO BAD WEATHER AT PO RTS TIME LOSS DUE TO UNDERPERFORMANCE CAUSED BY BAD WEA THER, ADVERSE CURRENT, RIVER PASSAGE; VESSEL SAILING DELAY DUE TO NON-AVAILABILITY OF NIG HT PILOTAGE; VESSEL BREAKDOWNS/ DEFECTS; AGREEING ON THE DATE OF SERVING THE NOTICE OF READI NESS (NOR); DELAY IN VESSEL DUE TO FORCE MAJEURE B. PORT DA CHARGES AND WEATHER ROUTING CHARGES: SINCE THE VESSEL IS HIRED ON DAILY BASIS BY AE, ALL OTHER COST NECESSARY TO CONVERT THE VESSEL FROM TIME BASIS TO VOYAGE BASIS IS INCURRED BY AE. IN THIS RESPECT, THE PORT DA CHARGES I.E. CHARGES INCU RRED AT LOAD PORT AND DISCHARGE PORT LIKE PORT DUES, IN/ OUT PILOTAGE, BE RTH HIRE, LIGHT DUES, AGENCY FEE, OTHER SUNDRIES, DRAUGHT SURVEY FEE, TRA NSPORTATION CHARGES, COMMUNICATION EXPENSES WHICH VARY FROM PORT TO PORT IS INCURRED BY ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 42 AE. FURTHER, FOR ANY VOYAGE, THE VESSEL OWNER/ CHAR TERER HAS TO INCUR WEATHER ROUTING CHARGES, PAID TO WEATHER BUREAU FOR FORECASTING SEA CONDITION. THESE ARE THE ESSENTIAL COSTS INCURRED B Y AE FOR CONVERTING THE TIME CHARTER TO VOYAGE CHARTER. 5.11 IT IS CONTENDED THAT THE LD. TPO/AO FAILED TO APPRECIATE THAT THERE IS NO ACCOUNTING HARMONY ON THE DEFINITION OF GROSS P ROFIT AND AN ALTERNATIVE SELECTION OF COSTS FOR ARRIVING AT THE GROSS PROFI T FOR THE AE WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS RESULT IN AN ARMS L ENGTH OUTCOME FOR THE APPELLANT. 5.12 LD. TPO WRONGLY APPLIED BERRY RATIO BY EXCLUDI NG COST OF GOODS SOLD, WHICH IS NOT APPROPRIATE IN THIS CASE. COST O F GOODS SOLD REFLECTS AES OWN SUBSTANTIVE ACTIVITY, ENTREPRENEURIAL FUNCTIONS AND RELATED RISKS AND HENCE, SUCH EXCLUSION IS NOT APPROPRIATE. BERRY RAT IO IS THE MEASURE OF GROSS MARGIN EARNED OVER VALUE ADDED EXPENSES WHICH IS AP PLICABLE MAINLY IN CASE OF A PURE DISTRIBUTOR ENGAGED IN ONLY BUY-SALE ARRANGEMENT WITHOUT ANY VALUE ADDITION. IN SUCH A SITUATION, VALUE ADDE D EXPENSES IS COMPUTED AFTER EXCLUDING THE COST OF GOODS SOLD FROM THE COS T BASE WHICH REPRESENT ONLY THE VALUE OF GOODS SOLD AND NOT THE SERVICES R ENDERED. IT IS AMPLY DEMONSTRATED THAT AE ACTS AS A SERVICE PROVIDER REN DERING A HOST OF SHIPPING RELATED ACTIVITIES AND CANNOT BE CHARACTER IZED AS A MERE DISTRIBUTOR SO AS TO SOMEHOW APPLY BERRY RATIO. 5.13 WITHOUT PREJUDICE TO ABOVE CONTENTIONS IT IS C ONTENDED THAT - EVEN IF BERRY RATIO IS APPLIED TO TEST THE ARM LENGTH NATU RE, A LARGER QUESTION REMAINS AS TO THE IDENTIFICATION OF VALUE ADDED EXP ENSES - VAE FOR PROPER APPLICATION OF BERRY RATIO. PERTINENTLY LOOKING AT THE OTHER WAY ROUND THE QUESTION OF DOUBT ARISES ALSO ON THE IDENTIFICATION OF COST OF GOODS SOLD - ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 43 COGS). THERE IS NO HARD AND FAST ACCEPTED ACCOUNTIN G PRINCIPLES IN INDIA OR IN THE OVERSEAS JURISDICTION THAT GUIDES THE CHARAC TERIZATION OF TOTAL EXPENSES INTO COGS AND VAE AND HENCE A VERY HIGH LE VEL OF JUDGMENT HAS TO BE TAKEN FOR IDENTIFICATION OF TOTAL EXPENSES IN TO COGS AND VAE. 5.14 THE APPELLANT HAD SELECTED AE AS THE TESTED PA RTY AND TO ESTABLISH THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTIO NS, COMPARABLES WERE SELECTED FROM OSIRIS DATABASE MENTIONED IN ITS T P STUDY AT APPENDIX II PAGE 107 OF THE PB. THEY WERE SELECTED BY A SYSTEMA TIC METHOD OF QUANTITATIVE AND QUALITATIVE ANALYSIS WHICH DOES NO T PROVIDE FOR ANY SEPARATE IDENTIFICATION OF VALUE ADDED EXPENSES. TH E FOREIGN DATABASE OR THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES OF THE RES PECTIVE COMPANY DOES NOT PROVIDE FOR SUCH DISCLOSURES AND HENCE, A HIGH LEVEL OF CARE AND JUDGMENT IS TO BE TAKEN WHICH IS NOT CONCLUSIVE. BE SIDES, THE COST OF GOODS SOLD AND OTHER OPERATING EXPENSES + DEPRECIATION + AMORTIZATION FOR THE 11 COMPARABLE COMPANIES (DETAILS WAS PROVIDED T O THE LD. TPO VIDE SUBMISSION DATED 14.10.2011) MAY NOT HAVE THE SAME NATURE AND COMPONENT OF EXPENSES AS THAT OF AE SINCE, THE ACCOUNTING DIS CLOSURE NORMS FOR THE COMPANIES WILL NOT BE SAME AND HENCE, THERE WILL AL WAYS BE A DIFFERENCE IN EXPENSES ALLOCATION UNDER THE ABOVE TWO ACCOUNTING HEADS. FURTHERMORE, AN EXPENSE CONSIDERED BY THE MANAGEMENT UNDER COST OF GOODS SOLD IN ONE YEAR MAY AGAIN BE RECLASSIFIED AND CONSIDERED UNDER OTHER OPERATING EXPENSES + DEPRECIATION + AMORTIZATION IN ANOTHER YEAR BASED ON THEIR RESPECTIVE FLEXIBLE ACCOUNTING CONVENTION AND PERSO NAL JUDGMENT, WHICH IS AGAIN NOT GUIDED BY ANY ACCOUNTING NORMS. THUS, FOR A SERVICE PROVIDER PERFORMING RANGE OF FU NCTIONS AND ASSUMING RELATED ENTREPRENEURIAL RISKS, ONE CANNOT CONCLUDE WITH SURETY, ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 44 THE EXPENSES WHICH WILL BE CLASSIFIED UNDER COGS AN D VAE FOR APPLICATION OF BERRY RATIO IN ABSENCE OF ANY CONCRETE ACCOUNTIN G NORM. WITHIN ARMS LENGTH PRICE EVEN CONSIDERING HIRE CHA RGES AS PASS THROUGH: EVEN FOR SAKE OF ARGUMENTS, IF METHOD ADOPTED BY TH E LD. TPO (IS APPLIED THAN ALSO THE HIRE CHARGES AS THE COGS (AS THE WHOLE RATIONALE OF APPLYING A BERRY RATIO IS THAT THERE HAS BEEN A MER E RESALE OF A PRODUCT, THEN THE PLAUSIBLE PRODUCT WOULD BE THE HIRE CHARGES) AN D ALL OTHER EXPENSES INCURRED AS VAE, THE FOLLOWING RESULT WOULD EMERGE. THIS IS AS PER SEGMENTAL WORKING GIVEN IN TP STUDY BY THE AUDITORS . IN THE TP STUDY, THIRD PARTY TRANSACTIONS OF M/S AN URAG OVERSEAS WAS MISTAKENLY ADDED WITH TRANSACTIONS OF AE WITH T HE APPELLANT. AFTER EXCLUDING THE SAME, THE TRANSACTIONS PERTAINING TO APPELLANT IS AS BELOW. PLEASE SEE WORKING AT APPENDIX XII PAGE NO.464 OF T HE PAPER BOOK: PARTICULARS REFERENCE REVISED CALCULATION EXCLUDING OTHER THAN BBPL TRANSACTIONS SALES/ SERVICES TO THE APPELLANT (INTERNATIONAL TRANS ACTIONS) A 46,831,179 COST OF SERVICES I.E. HIRE CHARGES ONLY B 38,045,953 ACTUAL GROSS PROFIT C = A B 8,785,226 EXPENSES (VALUE ADDED EXPENSES) D 6,732,177 ARMS LENGTH PROFIT (ALP) GROSS PROFIT E = D * 1.301 8, 758,562 -5% OF THE GROSS PROFIT F = C * 95% 8,345,965 +5% OF THE GROSS PROFIT G = C * 105% 9,224,487 ADJUSTED SALES PRICE H = B + E 46,804,515 -5% OF THE INTERNATIONAL TRANSACTIONS I = A * 95% 44 ,489,620 +5% OF THE INTERNATIONAL TRANSACTIONS J = A * 105% 4 9,172,738 NOTE EXPENSES (VALUE ADDED EXPENSES) INCLUDES TOT AL EXPENSES INCURRED BY AE PERTAINING TO INTERNATIO NAL TRANSACTION SEGMENT AS REDUCED BY HIRE CHARGES ON APPLYING PROVISO TO SECTION 92C(2) OF THE ACT, T HE ADJUSTED SALES PRICE OF 46,804,515 (B+E) IS WITHIN +/-5% OF THE IN TERNATIONAL TRANSACTION (ITO J). IN THESE CIRCUMSTANCES, NO ADJUSTMENT WILL BE R EQUIRED. FURTHER, IT CAN ALSO BE SEEN THAT ALP GROSS PROFIT OF 8,758,562 ALS O FALLS IN THE RANGE OF +/- ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 45 5% OF THE ACTUAL GROSS PROFIT (E TO F). HENCE, NO A DJUSTMENT WILL BE REQUIRED. IN THE ABOVE COMPUTATION CHART, HIRE CHAR GES OF THE VESSEL INCURRED BY AE HAVE NOT BEEN CONSIDERED UNDER THE V AE EXPRESSION SINCE, HIRE CHARGES FOR AE (DISPONENT OWNER) WHO WOULD AGA IN CHARTER THE VESSEL (TO APPELLANT AND THIRD PARTIES) COULD INDICATE THE VALUE OF COST OF SERVICE DISTRIBUTED AND NOT THE SERVICES RENDERED (PLEASE N OTE THAT LD. TPO ALSO COMPUTED THE ARM'S LENGTH MARGIN AFTER CONSIDERING ONLY OTHER OPERATING EXPENSES + DEPRECIATION + AMORTIZATION). HOWEVER, THE OTHER COSTS IN THE TOTAL COST BASE OF AE WOULD FALL UNDER THE CATEGORY OF VAE AS THESE ARE THE ESSENTIAL ACTIVITIES UNDERTAKEN BY AE FOR LETTING T HE VESSEL TO THE APPELLANT AND OTHER THIRD PARTIES AND HENCE, WILL ALWAYS CLAI M REMUNERATION FOR ALL SUCH ACTIVITIES AND PEOPLES FUNCTION. EVEN IF THE APPELLANT FOLLOWS THE LD. TPOS APPROAC H FOR COMPUTING ARMS LENGTH MARGIN (WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS), THE ABOVE COMPUTATION BRINGS OUT THE REVERSE FACT AND SUGGEST S THAT AE HAVE ARMS LENGTH MARGIN COMPARED TO THE COMPARABLE COMPANIES AND HENCE THE TRANSACTION OF AE WITH THE APPELLANT IS AT ARMS LE NGTH. IN THIS REGARD, IT IS WORTHWHILE TO NOTE THAT THE E LEMENT OF ARBITRARINESS WHICH ARISES IN CASES OF APPLICATION OF GROSS MARGINS VIS-A-VIS NET MARGINS HAS ALSO BEEN HIGHLIGHTED IN OECD TP GU IDELINES AND THE SAME PERFECTLY FITS IN THE SAID CASE. PARA 2.35 OF THE O ECD TP GUIDELINES, JULY 2010 STATES THAT: 'WHERE THE ACCOUNTING PRACTICES DIFFER FROM THE CON TROLLED TRANSACTION TO THE UNCONTROLLED TRANSACTION, APPROPRIATE ADJUSTMEN TS SHOULD BE MADE TO THE DATA USED IN CALCULATING THE RESALE PRICE MARGI N IN ORDER TO ENSURE THAT THE SAME TYPES OF COSTS ARE USED IN EACH CASE TO AR RIVE AT THE GROSS MARGIN. FOR EXAMPLE, COSTS OF R&D MAY BE REFLECTED IN OPERA TING EXPENSES OR IN COSTS OF SALES. THE RESPECTIVE GROSS MARGINS WOULD NOT BE COMPARABLE WITHOUT APPROPRIATE ADJUSTMENTS.' ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 46 FURTHER, PARA 2.62 OF THE OECD TP GUIDELINES, JULY 2010 PROVIDES THAT: 'ONE STRENGTH OF THE TRANSACTIONAL NET MARGIN METHO D IS THAT NET PROFIT INDICATORS (E.G. RETURN ON ASSETS, OPERATING INCOME TO SALES, AND POSSIBLY OTHER MEASURES OF NET PROFIT) ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES THAN IS THE CASE WITH PRICE, AS USED IN THE CUP MET HOD. NET PROFIT INDICATORS ALSO MAY BE MORE TOLERANT TO SOME FUNCTI ONAL DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTION S THAN GROSS PROFIT MARGINS. DIFFERENCES IN THE FUNCTIONS PERFORMED BET WEEN ENTERPRISES ARE OFTEN REFLECTED IN VARIATIONS IN OPERATING EXPENSES . CONSEQUENTLY, THIS MAY LEAD TO A WIDE RANGE OF GROSS PROFIT MARGINS BU T STILL BROADLY SIMILAR LEVELS OF NET OPERATING PROFIT INDICATORS. IN ADDIT ION, IN SOME COUNTRIES THE LACK OF CLARITY IN THE PUBLIC DATA WITH RESPECT TO THE CLASSIFICATION OF EXPENSES IN THE GROSS OR OPERATING PROFITS MAY MAKE IT DIFFICULT TO EVALUATE THE COMPARABILITY OF GROSS MARGINS, WHILE THE USE OF NET PROFIT INDICATORS MAY AVOID THE PROBLEM.' PARA 2.105 OF THE OECD TP GUIDELINES, JULY 2010 FUR THER STATES THAT: 'BY WAY OF ILLUSTRATION, THE EXAMPLE OF COST PLUS A T PARAGRAPH 2.53 DEMONSTRATES THE NEED TO ADJUST THE GROSS MARK UP A RISING FROM TRANSACTIONS IN ORDER TO ACHIEVE CONSISTENT AND REL IABLE COMPARISON. SUCH ADJUSTMENTS MAY BE MADE WITHOUT DIFFICULTY WHERE TH E RELEVANT COSTS CAN BE READILY ANALYZED. WHERE, HOWEVER, IT IS KNOWN TH AT AN ADJUSTMENT IS REQUIRED, BUT IT IS NOT POSSIBLE TO IDENTIFY THE PA RTICULAR COSTS FOR WHICH AN ADJUSTMENT IS REQUIRED, IT MAY, NEVERTHELESS, BE POSSIBLE TO IDENTIFY THE NET PROFIT ARISING ON THE TRANSACTION AND THEREBY E NSURE THAT A CONSISTENT MEASURE IS USED. FOR EXAMPLE, IF THE SUPERVISORY, G ENERAL, AND ADMINISTRATIVE COSTS THAT ARE TREATED AS PART OF CO STS OF GOODS SOLD FOR THE INDEPENDENT ENTERPRISES X, Y AND Z CANNOT BE IDENTI FIED SO AS TO ADJUST THE MARK UP IN A RELIABLE APPLICATION OF COST PLUS, IT MAY BE NECESSARY TO EXAMINE NET PROFIT INDICATORS IN THE ABSENCE OF MOR E RELIABLE COMPARISONS.' PARA 2.106 OF THE OECD TP GUIDELINES, JULY 2010 STA TES: 'A SIMILAR APPROACH MAY BE REQUIRED WHEN THERE ARE DIFFERENCES IN FUNCTIONS PERFORMED BY THE PARTIES BEING COMPARED. ASSUME THAT THE FACTS ARE THE SAME AS IN THE EXAMPLE AT PARAGRAPH 2 .38 EXCEPT THAT IT IS THE COMPARABLE INDEPENDENT ENTERPRISES THAT PERFORM THE ADDITIONAL FUNCTION OF TECHNICAL SUPPORT AND NOT THE ASSOCIATE D ENTERPRISE, AND THAT THESE COSTS ARE REPORTED IN THE COST OF GOODS SOLD BUT CANNOT BE SEPARATELY IDENTIFIED. BECAUSE OF PRODUCT AND MARKET DIFFERENC ES IT MAY NOT BE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 47 POSSIBLE TO FIND A CUP, AND A RESALE PRICE METHOD W OULD BE UNRELIABLE SINCE THE GROSS MARGIN OF THE INDEPENDENT ENTERPRIS ES WOULD NEED TO BE HIGHER THAN THAT OF THE ASSOCIATED ENTERPRISE IN OR DER TO REFLECT THE ADDITIONAL FUNCTION AND TO COVER THE UNKNOWN ADDITI ONAL COSTS. IN THIS EXAMPLE, IT MAY BE MORE RELIABLE TO EXAMINE NET MAR GINS IN ORDER TO ASSESS THE DIFFERENCE IN THE TRANSFER PRICE THAT WO ULD REFLECT THE DIFFERENCE IN FUNCTION. THE USE OF NET MARGINS IN SUCH A CASE NEEDS TO TAKE ACCOUNT OF COMPARABILITY AND MAY NOT BE RELIABLE IF THERE W OULD BE A MATERIAL EFFECT ON NET MARGIN AS A RESULT OF THE ADDITIONAL FUNCTION OR AS A RESULT OF MARKET DIFFERENCES.' 5.15 IT IS VEHEMENTLY CONTENDED THAT IN THE INSTANT CASE BERRY RATIO WILL NOT BE APPLICABLE DUE TO THE ABOVE STATED REASON, A ND IF WILY NILLY APPLIED WILL ALWAYS POSE UNANSWERED SET OF HYPOTHETICAL ASS UMPTIONS WHILE DECIDING THE CLASSIFICATION OF RESPECTIVE EXPENSES FOR COGS AND VAE COMPUTATION. IN THE AES CASE, THE BERRY RATIO IS N OT A MEASURE THAT HAS A MEANING WHEN APPLIED TO A SERVICE ENTITY PERFORMING HOST OF SERVICES AND INCURS SIGNIFICANT COSTS IN DOING SO RATHER THIS RA TIO RENDERS ITSELF INTO A QUESTIONABLE AND UNREALISTIC NUMBER GAME WITH A SET OF HYPOTHETICAL ASSUMPTIONS AND ARBITRARY PRESUMPTIONS. RELIANCE IS PLACED ON HONBLE DELHI HIGH COURT JUDG MENT IN THE CASE OF SUMITOMO CORPORATION INDIA (PVT.) LTD. 387 ITR 6 11. IT ANALYZED THE CONCEPT AND APPLICABILITY OF BERRY RATIO AND HELD T HAT: 46. IT CAN BE SEEN FROM THE ABOVE THAT THE BERRY R ATIO CAN BE USED ONLY IN VERY LIMITED CIRCUMSTANCES AND THE LIMITATIONS THAT WE HAVE LISTED ABOVE ARE BY NO MEANS EXHAUSTIVE. THERE IS ALSO A VIEW EXPRES SED THAT USE OF BERRY RATIO AS A PLI RESULTS IN INDICATING LESS THAN FAIR ALPS IN TAX JURISDICTION WHERE THE ASSESSEES HAVE A LOWER BARGAINING POWER. IN THE AFORESAID CONTEXT, IN OUR VIEW, THE TPO HAD CORRECTLY REASONED THAT BE RRY RATIO COULD NOT BE USED AS A PLI IN CASES OF ASSESSEES WHICH WERE USIN G INTANGIBLES. HOWEVER, WE FIND THAT THERE WAS NO COGENT MATERIAL FOR THE T PO TO HOLD THAT THE ASSESSEE HAD DEVELOPED SUPPLY CHAIN AND HUMAN RESOU RCES INTANGIBLES. IN ANY EVENT, THERE WAS NO MATERIAL TO CONCLUDE THAT C OSTS OF SUCH INTANGIBLES WERE NOT CAPTURED IN THE OPERATING EXPENSES. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 48 47. IN OUR PRIMA FACIE VIEW, THE THIRD REASON STATE D BY THE TPO, THAT IS, THE RATE OF COMMISSION PAID TO THE ASSESSEE IS BASED ON THE VALUE OF THE GOODS, WOULD BE A VALID REASON TO REJECT THE USE OF BERRY RATIO BECAUSE BERRY RATIO CAN ONLY BE APPLIED WHERE THE VALUE OF THE GOODS AR E NOT DIRECTLY LINKED TO THE QUANTUM OF PROFITS AND THE PROFITS ARE MAINLY DEPEN DENT ON EXPENSES INCURRED. THE FUNDAMENTAL PREMISE BEING THAT THE OP ERATING EXPENSES ADEQUATELY REPRESENT ALL FUNCTIONS PERFORMED AND RI SKS UNDERTAKEN. FOR THIS REASON BERRY RATIO IS EFFECTIVELY APPLIED ONLY IN C ASES OF STRIPPED DOWN DISTRIBUTORS; THAT IS, DISTRIBUTORS THAT HAVE NO FI NANCIAL EXPOSURE AND RISK IN RESPECT OF THE GOODS DISTRIBUTED BY THEM. 48. IN THE PRESENT CASE, THE ASSESSEE ASSERTS THAT ITS BUSINESS COMPRISES OF TWO SEGMENTS, TRADING SEGMENT AND INDENTING SEGMENT AND THE FUNCTIONAL RISK AND THE REWARD IN THE TWO SEGMENTS ARE DIFFERE NT. IN THE TRADING SEGMENT, THE ASSESSEE EARNS A HIGHER PROFIT MARGINS (CALCULATED ON THE VALUE OF THE GOODS TRADED) WHILE IN THE INDENTING SEGMENT ITS PROFIT MARGINS ARE LOWER. PLAINLY, THE USE BERRY RATIO WOULD GIVE UNRE LIABLE RESULTS IF THE PRODUCT MIX OF THE COMPARABLES IS DIFFERENT FROM TH E PRODUCT MIX OF THE ASSESSEE. THIS WOULD MAKE THE TASK OF FINDING A SET OF COMPARABLES FAIRLY DIFFICULT. 5.16 LD. COUNSEL THUS CONTENDS THAT BERRY RATIO IS APPLICABLE IN SPECIFIC CIRCUMSTANCES IN THE CASE OF DISTRIBUTORS WHERE THE RE IS NO VALUE ADDITION TO THE SERVICES AND NO TAKING OF RISKS. IN CONTRADIST INCTION IN THE PRESENT CASE PROVIDES ASSUMPTION OF RISK OF VARIED NATURE AND IS NOT A CASE OF MERE DISTRIBUTOR. THE RISK DEPENDS ON INNUMERABLE FACTO RS ACCEPTED BY INTERNATIONAL CONVENTION ON SHIPPING, TRADE PRACTIC ES PREVAILING IN SHIPPING BUSINESS AND INCUR ENFORCEABLE CONTRACTUAL AND STAT UTORY OBLIGATIONS. THEREFORE, THERE IS NO CASE WHATSOEVER TO SUMMARILY APPLY BERRY RATIO REJECTING THE ASSESSEES TNMM METHOD AS MOST APPROP RIATE METHOD WITHOUT CITING ANY COGENT REASON ON THE PART OF TPO /AO. 5.17 LD. COUNSEL FOR THE ASSESSEE ADVERTS TO THE PERFUNCTORY APPROACH OF TPO. IN TP REPORT SEGMENTAL ANALYSIS WAS SUBMITTED AS AN INTEGRAL PART OF THE TP STUDY REPORT. IT CONTAINED THE TRANSACTIONS WITH AE, THIRD INDEPENDENT PARTIES UNRELATED TO AE AND OVERALL FIG URES. IT WAS CONTENDED ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 49 THAT TP ADJUSTMENTS IN TERMS OF SECTION WERE APPLIC ABLE IN RELATION TO TRANSACTIONS BETWEEN ASSESSEE AND AE, THIRD PARTY T RANSACTIONS CANNOT BE INCLUDED FOR TP ADJUSTMENTS. IN A PERFUNCTORY MANNE R LD. TPO ERRONEOUSLY COMPUTED TP ADJUSTMENT ON OVERALL TRANSACTIONS OF I NCLUDING TRANSACTIONS OF AE WITH THIRD PARTIES APART FROM THE APPELLANT. THIS FACT WAS BROUGHT TO THE KNOWLEDGE OF LD. AO AFTER SERVICE OF DRAFT ASSE SSMENT ORDER, DUE TO HURRIED ASSESSMENT PROCESS AES THIRD PARTY TRANSAC TIONS WERE NOT INCLUDED AND THE TP ADJUSTMENT WAS APPLIED ON ALL TRANSACTIO N. LD. CIT(A) ACCEPTING THE OBJECTION IN TP WORKING ARE AS UNDER: 35. THE APPELLANT HAS SUBMITTED THAT THE TPO AS WE LL AS THE AO HAVE ERRONEOUSLY COMPUTED THE ARMS LENGTH PRICE EVEN ON THE TRANSACTIONS WHICH TOOK PLACE BETWEEN THE AE AND THE THIRD PARTIES (OT HER THAN THE APPELLANT) THEREBY RESULTING IN ERRONEOUS TP ADJUSTMENT DISPUT E TO THE TUNE OF RS.7,32,81,066/- (RS.14,90,76,629 7,57,96,563). WITHOUT PREJUDICE TO EARLIER GROUNDS AND NOT ADMITTING, IT IS SUBMITTED THAT THE TPO AS WELL AS THE AO IGNORED THE SEGMENTAL ANALYSIS IN THE TP ADJ USTMENT ON THE OVERALL TRANSACTION OF AE INCLUDING THOSE TRANSACTIONS WHIC H DID NOT TAKE PLACE BETWEEN AE AND THE APPELLANT, WHEREAS, SEC. 92 IS A PPLICABLE ON TO THE INTERNATIONAL TRANSACTIONS BETWEEN THE ASSESSEE & T HE AE. THIS HAS RESULTED IN ABSURD AND ERRONEOUS TP ADJUSTMENT. COMPILATION FILED AT PAGE NO.37 AND WRITTEN SUBMISSION IS PRODUCED BELOW:- PARTICULARS REFERENCE AS PER TPO (ENTITY LEVEL) TRANSACTIONS WITH APPELLANT ONLY SALES/SERVICES A 60,326,752 46,831,179 COST OF SERVICES B 55,787,407 44,241,681 ACTUAL GROSS PROFIT A B 4,539,345 2,589,498 EXPENSES C 629,508 536,448 ALP GROSS PROFIT (1.301 X D) D 818,990 697,919 ADJUSTED SALES PRICE E = B + D 56,606,397 44,939,600 DOWNWARD ADJUSTMENT TO INTERNATIONAL TRANSACTIONS F = A E 3,720,355 1,891,579 DOWNWARD ADJUSTMENT TO INTERNATIONAL TRANSACTIONS (IN RS.) F X 40.07 149,074,629 75,795,563 IT IS SUBMITTED THAT TRANSFER PRICING ADJUSTMENT, I F AT ALL IS REQUIRED TO BE MADE, WILL BE REDUCED BY RS. 757 LACS. 36. AO/TPO'S COMMENTS: ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 50 THE JCIT - TPO IN HIS REMAND REPORT SUBMITTED THAT THE APPELLANT HAS NOT PROVIDED SEPARATELY CONTRACTS OR AGREEMENTS AT THE TIME OF HEARING, THEREFORE, THEY ALL APPEARED IN THE NATURE OF SAME TRANSACTION . 37. I HAVE CONSIDERED THE ARGUMENTS / WRITTEN SUBMI SSIONS OF BOTH THE SIDES. THE TNM METHOD EXAMINES THE NET PROFIT MARGIN RELAT ED TO AN APPROPRIATE BASE (I.E. COST, SALES, ASSETS) THAT A TAXPAYER REA LIZES FROM A CONTROLLED TRANSACTION. THE LD. ARS ALSO REFERRED S 10B(E), WH EREIN, THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISES FROM AN INTERNAT IONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS TO BE COMPUTE D. THE AE HAD SEGREGATED HIS TRANSACTIONS INTO RELATED PARTY TRANSACTION AND THIRD PARTY TRANSACTION, WHICH WAS MADE AVAILABLE TO THE TPO / AO AND ENCLOS ED AT PAGE NO. 120 & 121 OF THE PAPER BOOK AND IS PART OF TRANSFER PRICI NG STUDY (REVISED AT PAGE NO.464). THIS IS AS PER AUDITED ACCOUNTS OF AE AND SUPPORTED BY THE AUDITED ACCOUNTS OF THE APPELLANT, FOR WHICH A COMPILATION WAS ALSO FILED, THEREFORE, CAN BE RELIED UPON. REFERENCE OF PARAS 2.78 & 2.79 OF OECD GUIDELINES AND DECISION OF HON'BLE MUMBAI BENCH OF IT AT IN CASE O F M/S TECNIMOUNT ICB PVT. LTD VS. ACIT; DEVELOPMENT CONSULTANTS PVT. LTD . VS. DCIT REPORTED IN 115 TTJ 577 (HON'BLE KOLKATA BENCH OF ITAT); DCIT V S. M/S STARLITE REPORTED IN 133 TTJ 425 (HON'BLE MUMBAI BENCH OF IT AT) ARE RELEVANT TRANSACTIONS ENTERED INTO BY APPELLANT WITH AE ONLY FALLS UNDER TRANSFER PRICING PROVISIONS AND NOT THE ENTIRE TRANSACTION O F AE WHICH INCLUDES TRANSACTIONS WITH THIRD PARTIES ALSO. THEREFORE, T HE ALTERNATE ARGUMENTS OF THE LD. AUTHORIZED REPRESENTATIVES ARE ACCEPTED. HO WEVER, I HAVE ALREADY HELD THAT NO TRANSFER PRICING ADJUSTMENT IS REQUIRE D, THEREFORE, NO RELIEF SEPARATELY IS REQUIRED TO BE GIVEN. 5.18 WITHOUT PREJUDICE TO THE SUBMISSION OF THE APP ELLANT THAT NO ADJUSTMENT IS REQUIRED, THE APPELLANT SUBMITS BELOW THE REVISED COMPUTATION OF TRANSFER PRICING ADJUSTMENT BASED ON THE ERRONEOUS APPROACH SELECTED BY THE LD. TPO AFTER CONSIDERING INTERNATIONAL TRANSACTIONS OF THE AE WITH THE APPELLANT ONLY. PARTICULARS REFERENCE AS PER TPO (ENTITY LEVEL) TRANSACTIONS WITH APPELLANT ONLY SALES/SERVICES A 60,326,752 46,831,179 COST OF SERVICES B 55,787,407 44,241,681 ACTUAL GROSS PROFIT A B 4,539,345 2,589,498 EXPENSES C 629,508 536,448 ALP GROSS PROFIT (1.301 X D) D 818,990 697,919 ADJUSTED SALES PRICE E = B + D 56,606,397 44,939,600 ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 51 PARTICULARS REFERENCE AS PER TPO (ENTITY LEVEL) TRANSACTIONS WITH APPELLANT ONLY DOWNWARD ADJUSTMENT TO INTERNATIONAL TRANSACTIONS F = A E 3,720,355 1,891,579 DOWNWARD ADJUSTMENT TO INTERNATIONAL TRANSACTIONS (IN RS.) F X 40.07 149,074,629 75,795,563 BASED ON THE ABOVE COMPUTATION, THE IMPUGNED TRANSF ER PRICING ADJUSTMENT WOULD COME DOWN TO RS. 7.57 CRS INSTEAD OF RS. 14.90 CRS AS ERRONEOUSLY COMPUTED BY THE LD. TPO 5.19 LD. CIT(A) WAS PLEASED TO DETECT THIS OBVIOUS AND WANTON MISTAKE AND ALTERNATIVELY ORDER TO EXCLUDE THE WRONG TP AD JUSTMENT IN THIS BEHALF. SINCE IT WAS HELD THAT NO TP ADJUSTMENT WHATSOEVER WAS REQUIRED THIS ALTERNATE GROUND BECAME ACADEMIC AS ENTIRE ADDITION S WERE DELETED ON OTHER GROUNDS. 5.20 THE APPELLANT WHILE ESTABLISHING THE ARMS LEN GTH MARGIN OF THE INTERNATIONAL TRANSACTIONS HAD SELECTED TRANSACTION AL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD. TNMM ASSESSE S THE ARMS LENGTH CHARACTER OF TRANSFER PRICES IN A CONTROLLED TRANSA CTION BY TESTING THE PROFIT RESULTS OF ONE PARTICIPANT IN THE TRANSACTION. THE TNMM EXAMINES THE NET PROFIT MARGIN RELATIVE TO AN APPROPRIATE BASE (E.G. COSTS, SALES, ASSETS) THAT A TAXPAYER REALIZES FROM A CONTROLLED TRANSACTION (OR TRANSACTIONS THAT ARE APPROPRIATE TO AGGREGATE.). UNDER THE TNMM, COMPAR ABLE TRANSACTIONS NEED TO BE ONLY BROADLY SIMILAR. SIGNIFICANT PRODUC T DIVERSITY AND SOME FUNCTIONAL DIVERSITY BETWEEN THE CONTROLLED AND UNC ONTROLLED PARTIES ARE ACCEPTABLE. FURTHER RULE 10B(E) OF THE RULE STATES THAT: TRANSACTIONAL NET MARGIN METHOD, BY WHICH, THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FR OM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 52 TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLO YED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT B ASE 5.21 THE APPELLANT FURTHER SUBMITS THAT WHILE DETER MINING AN ARMS LENGTH PRICE FOR THE INTERNATIONAL TRANSACTIONS, THE AE HA D SEGREGATED ITS TRANSACTIONS INTO RELATED PARTY SEGMENTS AND THIRD PARTY SEGMENTS. THE SEGMENTAL BREAK-UP WAS SUBMITTED TO THE LD. TPO, VI DE SUBMISSION DATED 20 TH JULY, 2011AND REVISED WORKINGS TO THE LD. AO THESE ARE PLACED ON PB. HOWEVER, THE LD. TPO RELIED ONLY ON THE OVERALL FI NANCIAL RESULTS OF THE AE, CONSIDERING ITS ENTIRE BUSINESS OPERATION AND CONSI DERED THE MARGIN EARNED IN CASE OF INTERNATIONAL TRANSACTIONS OF AE WITH TH E APPELLANT ALONG WITH THE MARGIN EARNED BY AE FROM TRANSACTIONS WITH THIRD PA RTIES, WHILE UNDERTAKING ANALYSIS FOR DETERMINING THE ARMS LENG TH PRICE OF THE INTERNATIONAL TRANSACTIONS. IT IS A WELL ACCEPTED P ROPOSITION THAT WHERE THE SEGMENT IN RELATION TO THE INTERNATIONAL TRANSACTIO NS COULD BE OBTAINED, USE OF SEGMENTED PROFITABILITY WOULD PROVIDE A BETTER A ND MORE SCIENTIFIC METHOD FOR DETERMINING THE ARMS LENGTH OPERATIONS OF THE TAXPAYER RATHER THAN ADOPTING AN OVERALL/ENTITY LEVEL APPROACH. AS PER PARA 2.78 OF THE OECD GUIDELINES: COSTS AND REVENUES THAT ARE NOT RELATED TO THE CON TROLLED TRANSACTION UNDER REVIEW SHOULD BE EXCLUDED WHERE THEY MATERIALLY AFF ECT COMPARABILITY WITH UNCONTROLLED TRANSACTIONS. AN APPROPRIATE LEVEL OF SEGMENTATION OF THE TAXPAYERS FINANCIAL DATA IS NEEDED WHEN DETERMININ G OR TESTING THE NET PROFIT IT EARNS FROM A CONTROLLED TRANSACTION (OR FROM TRA NSACTIONS THAT ARE APPROPRIATELY AGGREGATED ACCORDING TO THE GUIDANCE AT PARAGRAPHS 3.9-3.12). THEREFORE, IT WOULD BE INAPPROPRIATE TO APPLY THE T RANSACTIONAL NET MARGIN METHOD ON A COMPANY-WIDE BASIS IF THE COMPANY ENGAG ES IN A VARIETY OF DIFFERENT CONTROLLED TRANSACTIONS THAT CANNOT BE AP PROPRIATELY COMPARED ON AN AGGREGATE BASIS WITH THOSE OF AN INDEPENDENT ENTERP RISE. SINCE AE WAS ABLE TO APPROPRIATELY SEGREGATE ITS B USINESS OPERATIONS WITH THE APPELLANT FROM OTHER THIRD PARTIES AND PRO VIDE RELEVANT BUSINESS ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 53 SEGMENTS, THE ARMS LENGTH NATURE OF THE INTERNATIO NAL TRANSACTIONS SHOULD BE DETERMINED BASED ON THE RELEVANT SEGMENTED PROFI TABILITY. FOLLOWING JUDICIAL PRONOUNCEMENTS HAVE LAID DOWN F OR THE DETERMINATION OF ALP AT A TRANSACTIONAL LEVEL AND N OT AT AN ENTITY LEVEL: IN THE CASE OF M/S. TECNIMOUNT ICB PVT LTD VS ACIT (MUMBAI BENCH), HELD THAT: NOW, COMING TO THE MAIN ISSUE WHETHER THE SEGMEN TAL RESULTS ARE TO BE TAKEN INTO CONSIDERATION OR PROFIT MARGIN AT ENTITY LEVEL IS TO BE CONSIDERED, WE FIND THAT CHAPTER-X INCORPORATES SPECIAL PROVISI ONS RELATING TO AVOIDING OF TAX IN REGARD TO INTERNATIONAL TRANSACTIONS AND INC OME FROM INTERNATIONAL TRANSACTIONS HAS TO BE DETERMINED AT ARMS LENGTH P RICE. THEREFORE, AS PER THE PROVISIONS CONTAINED UNDER SECTIONS 92 TO 94, INTER NATIONAL TRANSACTIONS ARE TO BE TAKEN INTO CONSIDERATION. THEREFORE, SEGMENTA L RESULTS ARE TO BE CONSIDERED AND NOT THE PROFIT AT ENTITY LEVEL. DEVELOPMENT CONSULTANTS PVT LTD. VS DCIT 115 TTJ 57 7 - ITAT, KOLKATA HELD THAT: .IDEALLY IN ORDER TO ARRIVE AT THE MOST PRECISE A PPROXIMATION OF FAIR MARKET VALUE, THE ALP SHOULD BE DETERMINED ON A TRANSACTIO N BY-TRANSACTION BASIS. ONLY IN CASE WHEN THE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED OR CONTINUOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE BASIS, THAT SUCH TRANSACTIONS MAY BE EVALUATED TOGETHER. IN THI S CASE, THE ASSESSEE HAD ENTERED INTO THE FOLLOWING TYPES OF TRANSACTIONS (A ) ENGINEERING DRAWING AND DESIGN SERVICES, (B) DEPUTATION OF EMPLOYEES, (C) R EIMBURSEMENT OF TRAVELING COSTS AND (D) RENDERING DATA ENTRY SERVICES THROUGH ITS GROUP ENTITY DATACORE INDIA. HENCE, THE ALP OF EACH OF THE INTER NATIONAL TRANSACTIONS SHOULD BE DETERMINED SEPARATELY AS THE NATURE OF TR ANSACTIONS ENTERED BY THE ASSESSEE WITH ITS AES WAS DIFFERENT. HENCE, THE ALP WOULD BE DETERMINED BASED ON THE NATURE OF SERVICES PROVIDED BY THE ASS ESSEE FOR EACH CLASS OF TRANSACTION TAKING INTO CONSIDERATION THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE P ARTIES TO THE TRANSACTIONS. THE LD. DR COULD NOT CONTROVERT THE ABOVE ARGUMENTS PLACED BY THE ASSESSEE REGARDING DETERMINING THE ALP OF EACH INTERNATIONAL TRANSACTION SEPARATELY BY GIVING ANY STRONG ARGUMENT. WE ARE ALSO OF THE S AME VIEW THAT THE ALP SHOULD BE DETERMINED ON A TRANSACTION-BY TRANSACTIO N BASIS AND NOT ON AN ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 54 AGGREGATE BASIS AS DONE BY THE TPO AND SUSTAINED BY THE COMMISSIONER (APPEALS). DCIT VS. M/S STARLITE [133 TTJ 425] (MUMBAI BENCH) HELD THAT: 8. A PLAIN READING OF THE ABOVE SHOWS THAT TNMM RE QUIRES COMPARISON OF NET PROFIT MARGINS REALISED BY AN ENTERPRISE FROM A N INTERNATIONAL TRANSACTION OR AN AGGREGATE OF INTERNATIONAL TRANSACTIONS AND N OT COMPARISONS OF OPERATING MARGINS OF ENTERPRISES. FOR ARRIVING AT T HIS CONCLUSION, WE DREW STRENGTH FROM THE DECISION OF MUMBAI L BENCH OF T HE TRIBUNAL IN THE CASE OF UCB INDIA (P) LTD. VS. ASSTT. CIT (2009) 124 TTJ (M UMBAI) 289 : (2009) 26 DTR (MUMBAI) (TRIB) 458 : (2009) 121 ITD 131 (MUMBA I) WHERE IT IS HELD THAT S. 92C R/W R. 10B(L)(E) DEALS WITH TNMM AND IT REFERS TO ONLY NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM AN INTERNATIO NAL TRANSACTION OR A CLASS OF SUCH TRANSACTION, BUT NOT OPERATIONAL MARGINS OF ENTERPRISES AS A WHOLE.; 5.22 FURTHER, IT IS CONTENDED THAT SEGMENTAL ANALYS IS FORMING PART OF THE TP STUDY HAD SOME CLERICAL MISTAKE WHEREIN THIRD PA RTY TRANSACTIONS OF AE WAS ALSO INCLUDED WITH RELATED PARTY TRANSACTIONS O F AE WITH THE APPELLANT. A REVISED SEGMENTAL ANALYSIS WAS SUBMITTED BEFORE T HE LD. AO VIDE SUBMISSION DATED 21 ST DECEMBER, 2011. HOWEVER, THE SAME WAS NOT CONSIDERED BY THE LD. AO WHILE CONFIRMING THE ORDER OF THE LD. TPO. 5.23 IT IS VEHEMENTLY CONTENDED THAT THE FUNCTIONS UNDERTAKEN AND RISKS ASSUMED BY AE UNDER BOTH THE RELATED PARTY TRANSACT IONS AND THIRD PARTY TRANSACTIONS ARE SAME. LD. TPO/ AO ERRED IN NOT EVE N CONSIDERING THESE GLARING FACTS THAT AES PROFITABILITY FROM SIMILAR THIRD PARTY TRANSACTION WAS HIGHER THAN THE ONE TRANSACTIONS WITH THE APPELLANT , WHICH ITSELF IS A CONVINCING EVIDENCE THAT THE TRANSACTIONS OF THE AP PELLANT WITH ITS AE WERE PERFECTLY AT ARMS LENGTH. 5.24 THE FOLLOWING COMPARATIVE WORKING OF THE INTER NAL SEGMENT SHALL MAKE IT CLEAR THAT AE EARNED MORE PROFITS WHILE TRA NSACTING WITH THIRD PARTY AS COMPARED TO THE MARGIN EARNED WHILE TRANSACTING WITH THE APPELLANT. THIS ANALYSIS SUPPORTS THE APPELLANTS CONTENTION T HAT THE MARGIN EARNED BY ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 55 AE FROM TRANSACTING WITH THE APPELLANT IS AT ARMS LENGTH AND NO ADJUSTMENT IS WARRANTED. ( IN USD ) PARTICULARS TRANSACTION WITH BBPL TRANSACTION WITH ANURAG OVERSEAS TRANSACTION WITH B2B TRANSACTION WITH OTHERS TOTAL INCOME FROM SHIPS 46,831,179 3,507,615 2,256,061 7,731,303 60,326,159 EXPENSES: DIRECT 44,653,629 3,374,416 2,188,642 5,393,064 556 ,097,52 INDIRECT 124,500 9,325 5,653 707,682 847,160 TOTAL COST (TC) 44,778,129 3,383,741 2,194,295 6,100,747 56,456,912 PROFIT BEFORE TAX (OP) 2,053,050 123,874 61,765 1,630,553 3,869,244 OP/TC 4.58% 3.66% 2.81% 26.73% IT CAN BE SEEN FROM THE ABOVE ANALYSIS THAT AE HAS EARNED OPERATING PROFIT OVER TOTAL COST (OP/TC) OF 26.73% WHILE TRAN SACTING WITH THIRD PARTIES WHEREAS, IN CASE OF TRANSACTIONS MADE WITH THE APPE LLANT, THE AE HAS EARNED OP/TC OF 4.58% (REFER APPENDIX PAGE OF THE P APER BOOK). HENCE, IT CAN BE CONCLUDED THAT THE INTERNATIONAL TRANSACTION OF THE APPELLANT WITH ITS AE IS AT ARMS LENGTH. THE APPELLANTS CONTENTION ALSO FINDS SUPPORT FROM FOLLOWING PARAS OF THE OECD GUIDELINES WHICH STATES THAT: PARA 2.141 WHERE COMPARABLE UNCONTROLLED TRANSACTIO NS OF SUFFICIENT RELIABILITY ARE LACKING TO SUPPORT THE DIVISION OF THE COMBINED PROFITS, CONSIDERATION SHOULD BE GIVEN TO INTERNAL DATA, WHI CH MAY PROVIDE A RELIABLE MEANS OF ESTABLISHING OR TESTING THE ARMS LENGTH N ATURE OF THE DIVISION OF PROFITS. PARA 3.27 OF THE OECD GUIDELINES STATES THAT: INTERNAL COMPARABLES MAY HAVE A MORE DIRECT AND CL OSER RELATIONSHIP TO THE TRANSACTION UNDER REVIEW THAN EXTERNAL COMPARABLES. THE FINANCIAL ANALYSIS MAY BE EASIER AND MORE RELIABLE AS IT WILL PRESUMAB LY RELY ON IDENTICAL ACCOUNTING STANDARDS AND PRACTICES FOR THE INTERNAL COMPARABLE AND FOR THE CONTROLLED TRANSACTION. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 56 5.25 IT IS FURTHER CONTENDED THAT LD. TPO / AO ERRE D IN COMPUTING THE ADJUSTMENT BY ADOPTING EXPENSE AT USD 6,29,508 IN P LACE OF USD 6,69,508 IN PAGE 15 OF LD. TPOS ORDER, THEREBY INCREASING THE TRANSFER PRICING ADJUSTMENT TO THE TUNE OF USD 52,040. THE CORRECT W ORKING IS ACCEPTED BY LD. CIT (A) WHICH AS UNDER: PARTICULARS AMOUNT($) OPERATING EXPENSES AS PER PROFIT & LOSS A/C 6,69,50 8 GROSS PROFIT (A) X 130.1% 8,71,030 GROSS PROFIT AS CALCULATED BY TPO 8,18,990 DIFFERENCE* 52,040 * THE LD. TPO CONSIDERED $ 3,394 FOR SALARIES AND E MPLOYEES BENEFITS INSTEAD OF $ 43,394. 5.26 APROPOS APPLICATION OF CUP METHOD, LD. COUNSEL EXPLAINED THAT THE AVAILABLE INTERNAL CUPS, WHICH WAS REASONABLY COMPA RABLE EXCEPT SOME DIFFERENCE IN TRANSACTIONS DATE, TO FACILITATE THE COMPARISON WITH INTERNATIONAL TRANSACTIONS OF THE APPELLANT WITH AE S AND TO ESTABLISH THE TREND THAT VESSEL HIRE TRANSACTIONS OF THE APPELLAN T WITH ITS AES WERE UNDERTAKEN AT MARKET PRICES. BY DETAILED SUBMISSION S DATED 14.09.2011 BEFORE LD. TPO, ASSESSEE EXPLAINED THAT THE EXTERNA L CUP IN THE FORM OF FREIGHT RATES AVAILABLE IN INDEPENDENT MARKET PUBLI CATIONS AND COMPARED THE SAME WITH THE FREIGHT TRANSACTION OF THE APPELL ANT WITH ITS AE. AS, SOME INTERNAL CUPS WERE NOT COMPARABLE TO THE RELATED PA RTY TRANSACTIONS DUE TO VARIOUS DIFFERENTIAL PARAMETERS LIKE VESSEL SIZE; D IFFERENCE IN LOADABLE QUANTITY, DIFFERENT TIME PERIOD, ETC., THE APPELLAN T IDENTIFIED THE EXTERNAL CUP IN THE FORM OF FREIGHT RATES AVAILABLE IN INDEP ENDENT MARKET PUBLICATIONS AND COMPARED THE SAME WITH THE FREIGHT TRANSACTION OF THE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 57 APPELLANT WITH ITS AE. ON COMPARISON, IT CAN BE CON CLUDED THAT TRANSACTIONS WERE UNDERTAKEN AT MARKET PRICES. 5.27 AS THE APPELLANT WAS UNAWARE OF THE LD. TPOS METHODOLOGY FOR ALP WORKING AND NO FURTHER QUESTIONS WERE ASKED THE REC ORD COULD NOT BE ENRICHED WITH FURTHER EVIDENCE TO SUPPORT WITH OTHE R EXTERNAL CUP DATA I.E. FREIGHT DATA AVAILABLE IN THE INDEPENDENT MARKET PU BLICATIONS. BEFORE LD. CIT(A) THEY WERE PRODUCED BY WAY OF ADDITIONAL EVID ENCE WHICH WERE SENT FOR REMAND. LD. CIT(A) AFTER DUE CONSIDERATION HELD THE INTERNAL CUP WORKING PROVIDED BY ASSESSEE WAS JUSTIFIED FOR TNMM WORKING. 5.28 IT IS CONTENDED THAT LD. TPO/AO AND UNJUSTIFIA BLY STEPPED INTO THE SHOES OF THE APPELLANT TO DICTATE AND CHALLENGE ITS DECISION TAKEN UNDER THE REALM OF CONTEMPORARY COMMERCIAL EXPEDIENCY AND BUS INESS REALITIES OF HAVING SUBSIDIARY OPERATIONS IN SINGAPORE. SUCH AN ACT OF THE LD. TPO AND LD. AO IS BEYOND THE AUTHORITY OF TP REGULATIONS IN INDIA. IT HAS BEEN WRONGLY ALLEGED THAT THERE WAS SHIFTING OF FUNCTION S FROM APPELLANT TO AE IGNORING THAT INDEPENDENT WORKING AND PROFITS TRANS ACTED BY AE WITH OTHER THIRD PARTIES HAS BEEN DEMONSTRATED. SINGAPORE IS A SHIPPING HUB OF REPUTE OFFERING INNUMERABLE ADVANTAGES OF LOCATION SAVING. BESIDES, THE MARKET INFORMATION SUPPLIED BY ASSESSEE ON SIMILAR TRANSAC TIONS ESTABLISH THE CHARTERING TRANSACTIONS BETWEEN APPELLANT AND AE WE RE UNDERTAKEN AT COMPARABLE PRICES AND ON JUSTIFIABLE ALP. LD. TPO, WHILE DRAWING CONCLUSION IN THIS BEHALF INSTEAD OF PROJECTING ANY OBJECTIVE COMPARISON OF DATA MERELY QUESTION THE ECONOMIC RATIONALE. AT PAR A 17.2 OF THE ORDER LD. TPO/AO TRANSGRESSED TO BUSINESS DECISION AREA BY OB SERVING THAT: I HAVE GONE THROUGH ASSESSEES SUBMISSION IN THIS REGARD AND NONE OF THEM SHOWS ANY ECONOMIC RATIONALE FOR SHIFTING SHIPPING BUSINESS FUNCTION TO SINGAPORE. ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 58 5.29 IT IS UNDISPUTED THAT EARLIER, ASSESSEE WAS NE VER ENGAGED IN THE SHIP CHARTERING OPERATIONS AND WAS ONLY INVOLVED IN EXPO RTING IRON ORE FINES AND OTHER AGRO-COMMODITIES TO THIRD PARTY CUSTOMERS FOR WHICH CARGO VESSEL AS PER CUSTOMERS REQUIREMENTS WERE HIRED FROM OTHER S HIPPING AGENTS. LD. TPO HAS WRONGLY ALLEGED THAT THE APPELLANT SHIFTED ITS SHIPPING BUSINESS FUNCTION TO SINGAPORE WITHOUT APPRECIATING THE RELE VANT RECORD AND FACTS. FROM RECORD IT IS CLEAR THAT ASSESSEE WAS NEVER IN SHIPPING BUSINESS EARLIER, THEREFORE, NO QUESTION OF SHIFTING OF ALLEGED BUSIN ESS TO SINGAPORE ARISES. SINCE THIS FINDING IS FACTUALLY INCORRECT ANY ADVER SE INFERENCES THEREON BY LD. AO/TPO HAVE NO RELEVANCY AND PERSUASIVE VALUE 5.30 IT IS CONTENDED THAT ADDITIONAL PROFIT HAS BEE N EARNED BY AE DUE TO LOCATION SAVING BY ITS PHYSICAL PRESENCE IN SINGAPO RE, WHICH IS A SHIPPING HUB. WITH LOCATIONAL ADVANTAGES THE AE WAS EQUIPPED TO BARGAIN BETTER CHARTERING DEALS FOR ITS BUSINESS OPERATIONS. AS EV IDENCED BY EXTERNAL CUP DATA, ASSESSEE PAID FREIGHT CHARGES TO AE ON COMPAR ABLE MARKET PRICE, AE EARNED PROFITS FROM IT AND THIRD PARTIES BEING AT S INGAPORE AND EXPLOITING LOCATION SAVINGS. 5.31 WITHOUT PREJUDICE TO THE ABOVE SUBMISSION LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT IF ALL THESE MISTAKES AND WR ONG PARAMETER ARE CORRECTED (AS PER CHART BELOW), EVEN THE TPOS CORR ECTED WORKING WILL FALL WITHIN THE +/- 5% RANGE OF THE INTERNATIONAL TRANSA CTIONS, AS PER PROVISO TO SECTION 92C(2) OF THE ACT WHICH STATES THAT:. THE MOST APPROPRIATE METHOD REFERRED TO IN SUB-SE CTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MAN NER AS MAY BE PRESCRIBED: [PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRA NSACTION HAS ACTUALLY BEEN ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 59 UNDERTAKEN DOES NOT EXCEED FIVE PER CENT OF THE LAT TER, THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. THUS THE LEGISLATIVE MANDATE PROVIDES THAT IF THE A RMS LENGTH DOES NOT EXCEED FIVE PERCENT OF THE INTERNATIONAL PRICE THEN THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. 5.32 THE CORRECT ARMS LENGTH COMPUTATION OF LD. TP OS IF ACCORDINGLY CORRECTED AND RECOMPUTED, EVEN GOING BY THEIR APPRO ACH THE ALP WORKING WILL COME TO: PARTICULARS REFERENCE TRANSACTIONS WITH THE APPELLANT ONLY SALES/SERVICES A 46,831,179 COST OF SERVICES B 44,241,681 ACTUAL GROSS PROFIT A B 2,589,498 EXPENSES (VALUE ADDED EXPENSES) C 536,448 ALP GROSS PROFIT (1.301 X D) D 697,919 ADJUSTED SALES PRICE E = B + D 44,939,600 - 5% OF THE INTERNATIONAL TRANSACTIONS A * 95% 44,489,620 + 5% OF THE INTERNATIONAL TRANSACTIONS A * 105% 49,172,738 IT CAN BE OBSERVED THAT THE ADJUSTED SALES PRICE IS FALLING WITHIN THE +/-5% RANGE OF THE INTERNATIONAL TRANSACTIONS HENCE , NO ADJUSTMENT IS WARRANTED AS PER THE PROVISO TO SECTION 92C(2) OF T HE ACT, EVEN IF THE ERRONEOUS APPROACH OF THE LD. TPO IS FOLLOWED. 5.33 APROPOS REMAINING GROUND AND ASSESSEE CO, IT I S CONTENDED THAT LD. AO DISALLOWED RS.1,19,000/- OUT OF OFFICE EXPENSES OF RS.11,86,296/- ON AD HOC @ 10%, UNDER PRESUMPTION AND SURMISE AND BE DEL ETED. IT HAS NOT BEEN DISPUTED THAT ASSESSEES BOOKS ARE DULY AUDITED AND THERE IS NO ADVERSE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 60 REMARK BY AUDITORS. ALL THE EXPENSES ARE VOUCHED AN D VERIFIABLE, WITHOUT SPECIFICALLY POINTING OUT ANY DISALLOWABLE ITEM AD HOC DISALLOWANCE OF 10% PURELY ON ESTIMATE BASIS WHICH WAS DELETED BY LD. C IT(A) IN RIGHT MANNER. 6. WE HAVE HEARD THE RIVAL CONTENTIONS ANDPERUSED THE MATERIAL AVAILABLE ON RECORD. APROPOS THE ADMISSION OF ADDI TIONAL EVIDENCE UNDER RULE 46A, WE FIND NO INFIRMITY IN THE ORDER OF LD. CIT(A) WHICH IS BASED ON JUST AND PROPER CONSIDERATION. I. FROM THE RECORD, IT EMERGES THAT THE BERRY RATI O WAS APPLIED FOR ALP WORKING BY LD. TPO/AO WITHOUT EFFECTIVELY CONFRONTI NG IT TO THE ASSESSEE, DENYING ADEQUATE OPPORTUNITY OF BEING HEA RD WHICH JUSTIFIES ASSESSEES REQUEST FOR ADMISSION OF ADDITIONAL EVID ENCE. II. LD. CIT(A) HAS CITED ADEQUATE JUSTIFICATIONS F OR ADMISSION WHICH IS SUPPORTED BY THE GUJARAT HIGH COURT JUDGMENT IN THE CASE OF KAMLABEN SURESHCHANDRA BHATTI; AP HIGH COURT IN THE CASE OF UNIQUE PLASTICS (P) LTD; BOMBAY HIGH COURTS SMT PRABHAVAT I S. SHAH (ALL SUPRA). III. REVENUE SHOULD NOT BE AGGRIEVED INASMUCH AS L D. AO BEFORE LD. CIT(A) ULTIMATELY AGREED FOR ADMISSION OF ADDITIONA L EVIDENCE. VI. IN ANY CASE, THERE IS NO PREJUDICE CAUSED TO REVENUE INASMUCH AS A PROPER REMAND REPORT WAS CALLED FOR FROM TPO/AO IN RESPECT OF ADDITIONAL EVIDENCE WHICH IS SUBMITTED AND CONSIDER ED. FURTHER, TPO/AO WERE PRESENT DURING THE COURSE OF HEARING BE FORE LD. CIT(A). IN VIEW OF THE FOREGOING, WE SEE NO INFIRMITY IN T HE ORDER OF LD. CIT(A) WHICH IS UPHELD. 6.1 APROPOS THE MAIN GROUND ON MERIT, THE REVENUE HAS TAKEN AN OMNIBUS AND SUMMARY GROUND THAT WHETHER IN LAW AND ON FACTS & ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 61 CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.14,69,89,382/- MADE BY THE AO ON ACCOUNT OF TRAN SFER PRICING ADJUSTMENT. THE FACT OF THE MATTER IS THERE ARE MA NY PARTS TO THIS GROUND. THE FIRST AND FOREMOST BEING TREATMENT OF AES THIR D PARTY TRANSACTIONS AS RELATED PARTY TRANSACTION. LD. CIT(A) HAS UPHELD T HAT TP ADJUSTMENT TO EXTENT OF RS.7,32,81,066/- BEING THIRD PARTY TRANSA CTIONS HAVE BEEN WRONGLY AND ERRONEOUSLY CONSIDERED BY LD. TPO AS RELATED PA RTY INTERNATIONAL TRANSACTIONS LIABLE FOR ALP DETERMINATION. LD. DR C OULD NOT DISLODGE THE FINDINGS OF THE LD. CIT(A) IN THIS BEHALF. CONSEQU ENTLY LD. CIT(A)S CONCLUSION IN THIS BEHALF HAS TO BE UPHELD. 6.2 NOW ADVERTING TO THE ASSESSEES CONTENTION THA T THE AE IS AN INDEPENDENT ENTITY, A SUBSIDIARY INCORPORATED IN SI NGAPORE IN THE INTEREST OF BUSINESS TO FACILITATE THE SMOOTH CARGO SHIPMENTS O F ITS ORE EXPORT CONSIGNMENTS. THIS WAS A PRUDENT COMMERCIAL DECISIO N IN THE BEST INTEREST OF GROUPS BUSINESS. IT CANNOT BE REVIEWED BY TPO TO HOLD THAT ASSESSEE NEED NOT HAVE TAKEN THIS DECISION BY CALLING IT QUESTION ABLE BUSINESS DECISION. IN OUR CONSIDERED VIEW, THIS AMOUNTS TO INTERFERING IN THE COMMERCIAL WISDOM DOMAIN VESTED IN THE ASSESSEE. CONSEQUENTLY, WE ARE UNABLE TO AGREE WITH LD. TPO ON THIS PROPOSITION AND UPHOLD THE VIEW OF LD. CIT(A) IN THIS BEHALF. 6.3 ADVERTING TO THE RISK ASSUMED BY THE AE WHILE CONDUCTING CHARTER SHIPPING BUSINESS WITH ASSESSEE AND THIRD PARTIES, IT HAS BEEN PROPERLY DEMONSTRATED THAT SUBSTANTIAL RISKS WERE ASSUMED IN THIS BEHALF BY AE. THE DETAILED AND VARIED NATURE OF RISKS, DAMAGES, ARBIT RATION, LOSSES, LITIGATION AND VAGARIES OF SUCH RISKS HAVE BEEN MENTIONED IN D ETAILS BY LD. COUNSEL; AND INCORPORATED BY LD. CIT(A) IN HIS ORDER. AFTER GOING THROUGH THE PLEADINGS, MATERIAL AVAILABLE ON RECORD, FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT: ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 62 I. THE ASSESSEES BUSINESS DECISION OF SETTING-UP OF A SUBSIDIARY AS AN INDEPENDENT ENTITY AT SINGAPORE FOR SHIP CHARTERING OPERATIONS FOR ITSELF AND THIRD PARTIES PROVED PROFITABLE. ASSESSE ES TOTAL EXPORT OF IRON ORE HAS GONE-UP TO RS.949 CRORES FROM TO RS. 2 74 CRORES IN THE IMMEDIATELY PRECEDING YEAR. IN TERMS OF QUANTITY TH E EXPORT THIS YEAR ROSE TO 21,64,424 TONS AS COMPARED TO 9,74,252 TONS IN IMMEDIATELY PRECEDING YEAR. THE NUMBER OF VESSELS FOR CARGO WAS EXPORTED THIS YEAR INCREASED TO 40 AS COMPARED TO 17 IN THE IMMED IATELY PRECEDING YEAR. THE NET PROFIT AS PER AUDITED ACCOUNTS THIS Y EAR IS RS.4,318 LAKHS AS COMPARED TO RS. 746 LAKHS IN THE IMMEDIATELY PRE CEDING YEAR. THEREFORE, THERE IS NO FORCE IN THE PROPOSITIONS OF TPO/AO TO ALLEGE THAT THE AE IS A FRONT COMPANY, CREATED FOR NON BUS INESS CONSIDERATION ETC AND THUS REJECTING THE ASSESSEES TNMM METHOD AS MOST APPROPRIATE METHOD AND AE AT TESTED PARTY. OUR VIEWS ARE SUPPORTED BY THE DETAILS PROVIDED BY LD COUNSEL AND AS APPRECIATED BY LD. CIT(A). WE UPHOLD THE OBSERVATIONS AND CONCL USIONS OF LD. CIT(A) ION THIS BEHALF. II. THERE IS NO MERIT IN THE TPOS ALLEGATION THAT APPE LLANT HAS SHIFTED THE BUSINESS FROM INDIA TO SINGAPORE; IT WAS A MERC HANT EXPORTER AND NOT ENGAGED IN THE SHIPPING BUSINESS IN INDIA; THER EFORE, THERE IS NO MERIT IN SUCH UNFOUNDED ALLEGATION. IT WAS CHARTERI NG VESSELS ON VOYAGE CHARTER BASIS FROM THIRD PARTIES AND CONTINU ED THEREAFTER ALSO. THE AE AS A DISTINCT BUSINESS MODICUM CHARTERS THE VESSELS ON TIME CHARTER BASIS AND OFFERED ON PROFITABLE VOYAGE BASI S. NEITHER THE APPELLANT NOR THE AE HAVE THEIR OWN VESSELS, IN VIE W OF THESE FACTS AES BUSINESS IS A VERY SMALL SLICE OF HUGE SHIPPIN G. THEREFORE, IT CANNOT BE SAID THAT THE APPELLANT HAS SHIFTED THE B USINESS FROM INDIA ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 63 TO SINGAPORE ON THE OTHER HAND A NEW BUSINESS OF VE SSEL CHARTERING HAS BEEN STATED AT SINGAPORE. III. FROM THE FACTS EMERGING FROM THE RECORD, IT IS DEMO NSTRATED THAT THE AE AND THE APPELLANT WERE PERFORMING THEIR RESPECTI VE FUNCTIONS AND ASSUMING THEIR BUSINESS RISK INDEPENDENTLY WITHOUT INTERRUPTION OF EACH OTHER. THE RISK UNDERTAKEN BY THE AE IS DIFFE RENT THAN THE RISK UNDERTAKEN BY THE APPELLANT. THE CONTRACTUAL TERMS BETWEEN THE AE AND THE APPELLANT ARE EVIDENCED FROM THE FIXTURE N OTES, CHARTER PARTY AGREEMENT FILED, BESIDES THE TERMS BETWEEN AE & THE VESSEL OWNER ARE ON RECORD. CONSEQUENTLY VARIOUS ADVERSE OBSERVATIONS MADE BY JCIT TPO/AO REMAIN UNSUBSTANTIATED WITHOU T ANY CONTROVERTING EVIDENCE, ARE CONTRARY TO THE FACTS A VAILABLE ON RECORD AND MOSTLY PRESUMPTIVE COUCHED IN TECHNICAL JARGON. IV. IT IS DEMONSTRATED THAT AE HAD ITS OWN SUFFICIENT F UNDS EVEN PRIOR TO ENTERING INTO SHIPPING, THERE IS NO CONVINCING EVID ENCE THAT THE APPELLANT HAS FINANCIALLY SUPPORTED AE IN AN UNDUE MANNER FOR CHARTERING BUSINESS. THE APPELLANT STARTED DOING BU SINESS WITH AE FROM THE MONTH OF OCTOBER, 2007. THE AE, APART FROM ITS OWN SHARE CAPITAL OF USD 7,00,066 EARNED INCOME OF USD 16,74, 000 FROM CHARTERING BUSINESS WITH THIRD PARTIES, OTHER THAN THE APPELLANT PRIOR TO OCTOBER 2007. THE VESSEL HIRE CHARGES ARE PAID B Y THE AE TO THE VESSEL OWNER IN INSTALLMENTS, WHEREAS, AS PER THE T ERMS AND CONDITIONS OF AGREEMENT FILED IN THE PAPER BOOK I.E . FIXTURE NOTES, THE APPELLANT WAS REQUIRED TO MAKE FULL PAYMENT TO AE O N COMPLETION OF LOADING AT LOADING PORT. AS AGAINST THIS, THE AE PA YS FIRST INSTALLMENT IN ADVANCE FOR 15 DAYS, NOT IMMEDIATELY BUT IN INST ALLMENTS. THIS IS PAID GENERALLY WITHIN 3 BANKING DAYS AFTER THE SHIP IS MADE AVAILABLE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 64 TO THE AE BY THE VESSEL OWNER. THEREAFTER, SECOND I NSTALLMENT IS PAID IN 7, 3 OR ONE DAY IN ADVANCE DEPENDING ON THE CONT RACTUAL AGREEMENT AND TOTAL PERIOD OF TIME CHARTER. THUS, S UFFICIENT FUND WAS AVAILABLE WITH THE (AE), BESIDES THE COST OF BUNKER , I.E. FUEL, WHICH FORMS MAJOR PORTION OF THE COST, IS NOT REQUIRED TO BE PAID IMMEDIATELY BY THE AE TO THE BUNKER SUPPLIER AND TH ERE IS CREDIT PERIOD OF 30 DAYS. THUS AE WAS HAVING SUFFICIENT FU NDS TO CARRY ON THE CHARTERING ACTIVITY AND NO POTENTIAL FINANCIAL SUPPORT HAS BEEN PROVIDED BY THE APPELLANT. V. FROM THE FACTS AVAILABLE ON RECORD, AS PER TRADE PR ACTICES AND AS PER INTER SE AGREEMENT WITH AE, AND CHARTER PARTY AGREE MENT (AGREEMENT OF AE WITH VESSEL OWNER), THE PRESUMPTION OF THE TP O/AO THAT LARGE FUND WAS REQUIRED IN CHARTERING ACTIVITY IS WITHOUT BASIS. FURTHER FROM ASSESSEES RECASTED ACCOUNTS, THERE ARE NO MAJ OR CREDITS IN FAVOR OF AE, ON THE OTHER HAND ALMOST ON ALL DAYS THERE I S DEBIT BALANCE. VI. EXCEPT CASTING UNFOUNDED DOUBTS ON AGREEMENT WITH M /S R. M. MARTIN BY JCIT-TPO, NOTHING HAS BEEN BROUGHT ON REC ORD TO SUPPORT THE ADVERSE CONCLUSIONS DRAWN IN THIS BEHALF BY THE LD. AO/TPO. FROM MUTUAL PROFIT AND LOSS ACCOUNT AND OTHER STATE MENTS ESTABLISH THAT THE SERVICES OF R. M. MARTIN WARE AVAILED BY A E ALSO PRIOR TO OCTOBER 2007 ALSO. THEREFORE, THERE IS NO FORCE IN THE OBSERVATIONS OF JCIT-TPO IN THIS REGARD. VII. APROPOS ASSUMPTIONS OF TPO/AO THAT M/S. BOTHRA SHIP PING AND M/S SEA TRANS ARE SHIP OWNERS AND THE ADVERSE INFER ENCE DRAWN IN THIS BEHALF ARE NOT SUBSTANTIATED. M/S. BOTHRA SHIP PING AND M/S SEA TRANS ARE NOT SHIP OWNERS BUT ONLY PORT AGENTS TO W HOM PAYMENTS WERE MADE BY THE AE AND NOT BY THE APPELLANT AS INF ERRED BY THE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 65 TPO. THIS WAS SUBSEQUENTLY ADJUSTED AS PER TERMS AN D CONDITIONS OF THE CONTRACT, BESIDES THE TOTAL AMOUNT OF SUCH PORT CHARGES COMES TO RUPEES FOUR CRORES APPROXIMATELY AND NOT RS. THIRTY CRORES AS WRONGLY OBSERVED BY THE TPO. SIMILARLY LD TPO/AO PR OCEEDED ON THE WRONG IMPRESSION THAT M/S SEA TRANS MARINE PRIV ATE LIMITED AND M/S BOTHRA SHIPPING PRIVATE LIMITED ARE VESSEL OWNERS AND PAYMENTS WERE MADE TO THEM BY THE APPELLANT. 6.4 APROPOS THE OBSERVATION OF LD. TPO/AO THAT M/S. R.M. MARTIN PVT. LTD. WAS NOT PROVIDING ANY SIGNIFICANT SERVICES AND THEIR ENGAGEMENT IN THE VESSEL CHARTERING ACTIVITY WAS NOT SUBSTANTIATED, L D. CIT(A) HELD THAT THE OBSERVATIONS OF THE LD. TPO/AO WERE WITHOUT ANY COG ENT REASONS AND PRESUMPTIONS BY FOLLOWING OBSERVATIONS:- I HAVE CONSIDERED THE ARGUMENTS, WRITTEN SUBMISSIO N OF THE LD. COUNSELS AS WELL AS THE ORDER OF THE TPO / AO AND THE COMMENTS OF TPO AND AO. I FIND THAT THE BUSINESS ACTIVITY OF THE AE IS RESTRICTED TO CHARTERING OF THE VESSEL. THE AE DID NOT HAVE ITS OWN VESSEL. IT IS SEEN THAT THIS BEING FIRST YEAR OF BUSINESS, AE, HAD OUTSOURCED THE SERVICES TO M/S R. M. MARTIN. THE ENTIRE SERVICES OF CHARTERING OF THE VESSEL WAS OUTSOURCED TO M/S R.M. MARTIN SINCE INCEPTION OF COMPANY TO WHOM SHIP HANDLING CHARGES HAVE BEEN PAID AGGREGATING TO USD 4,85,772 OUT OF WHICH USD 4,00,0 00 PERTAINS TO VESSELS SHIPPED TO THE APPELLANT. I FIND THAT THIS FACT W AS BROUGHT ON RECORD BEFORE TPO AS WELL AS AO DURING THE PROCEEDINGS BEFORE THE M. COPY OF AGREEMENT WITH THE AFORESAID SINGAPORE ENTITY HAS BEEN ALSO F ILED. NEITHER THE AO NOR THE TPO HAVE BROUGHT ANY SUPPORTING ON RECORD TO CO NTRADICT THE AGREEMENT AND PAYMENT MADE TO ABOVE PARTY AS COLOURFUL DEVICE EXCEPT CASTING DOUBT ON THE TRANSACTION. THE TPO/AO PRESUMED THAT LARGE NUM BER OF EMPLOYEES IS REQUIRED IN SHIP CHARTERING ACTIVITIES WHICH I DO N OT FIND CORRECT IN VIEW OF BUSINESS REQUIREMENT OF AE AND ITS FUNCTION. THE VE SSEL OWNERS, DEPENDING ON THE NUMBER OF VESSELS THEY OWN AND OTHER BUSINES S ACTIVITIES, MAY REQUIRE LARGE NUMBER OF EMPLOYEES BUT THE REQUIREMENT WITH REGARD TO EMPLOYEES OF THE ENTITY WHICH IS ENGAGED ONLY IN VESSEL CHARTERI NG ACTIVITIES IS RESTRICTED. THE LD. COUNSELS HAVE DESCRIBED THE FUNCTIONS INVOL VED IN VESSEL CHARTERING BUSINESS. THIS OPERATION HAS BEEN TAKEN CARE OF BY M/S R. M. MARTINE PVT. LTD., A SINGAPORE ENTITY. THERE IS NO SUPPORTING TH AT THE APPELLANT HELPED AE IN DISCHARGING ITS FUNCTIONS. THEREFORE, I FIND NO REASON TO OBSERVE THAT THERE WAS LACK OF STAFF WITH AE AND THE APPELLANT HELPED THE AE IN DISCHARGING ITS ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 66 FUNCTIONS. THE OBSERVATION OF THE TPO/AO DOES NOT H OLD GOOD FROM THE ABOVE FACTS ON RECORD. I HAVE ALSO HOLD THAT SERVICES OF M/S R. M. MARTIN WERE TAKEN BY AE PRIOR TO OCTOBER 2007 ALSO, THEREFORE, THE AR GUMENT OF JCIT - TPO THAT THERE WAS NO MAN POWER WITH AE FROM MAY 2007 T O SEPTEMBER 2007 DOES NOT HOLD GOOD. 6.5 ADVERTING TO ASSESSEES ADOPTION OF TNMM METHOD AS MOST APPROPRIATE METHOD FOR COMPUTATION OF ALP UNDER TP REGULATION AND ADOPTING AE AS A TESTED PARTY, WE FIND THE TP WORKI NG PROVIDED BY THE ASSESSEE TO BE CORRECT. SIMILARLY BERRY RATIO CANN OT BE APPLIED TO THE ASSESSEES CASE AS IT IS APPLICABLE IN SPECIFIC CIR CUMSTANCES OF A PURE DISTRIBUTOR WHERE NO VALUE ADDED SERVICES ARE RENDE RED. THE OBSERVATION OF THE TPO THAT AE HAD UTILIZED THE TANGIBLE AND INTAN GIBLE ASSETS OF THE PARENT COMPANY IN EARNING SUCH HUGE PROFIT IN THE FIRST YE AR OF ITS ACTIVITY AND CANNOT BE TREATED AS INDEPENDENT SHIPPING SERVICE P ROVIDER IS ONLY A PRESUMPTION WITHOUT ANY SUPPORT. WE ARE OF THE VIEW THAT VARIOUS FUNCTIONS FOR SHIP CHARTERING HAVE BEEN OUTSOURCED BY THE AE TO ONE M/S R. M. MARTINE, SINCE INCEPTION OF THE AE. THE AE HAD I TS OWN FUNDS, UNDERTOOK BUSINESS RISK AND MANY INSTANCES OF SUCH RISK WHICH ACTUALLY BORNE BY AE PERTAINING TO VARIOUS VESSELS HAVE BEEN PROVED WITH EVIDENCE. THE PAYMENT OF HIRE CHARGES, BUNKER CHARGES, PORT CHARGES HAVE BEEN MADE BY THE AE FROM ITS OWN FUNDS EVIDENCED BY CASH FLOW STATEMENT COULD NOT BE CONTROVERTED BY REVENUE. IN OUR STUDIED AND CONSIDE RED VIEW THE AE HAS PERFORMED PROPER BUSINESS FUNCTIONS, ASSUMED BUSINE SS RISKS BY EMPLOYING ITS OWN FUNDS INDEPENDENTLY WITHOUT HELP OF APPELLA NT AND, THEREFORE, IN NO WAY AE CAN BE CONSIDERED AS PURE DISTRIBUTOR. IN VI EW OF THESE FACTS AND CIRCUMSTANCES, THE BERRY RATIO IS NOT AT ALL APPLIC ABLE IN THE PRESENT CASE. OUR VIEW IS FORTIFIED BY HONBLE DELHI HIGH COURT JUDGM ENT IN THE CASE OF SUMITOMO CORPN. (SUPRA) 6.6 IN TRANSFER PRICING STUDY, IT IS IMPERATIVE TO EMPLOY PROPER UNDERSTANDING OF BUSINESS, BUSINESS PRACTICE, FUNCT IONS PERFORMED BY AE ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 67 AND THE APPELLANT, RISKS ASSUMED BY BOTH THE PARTIE S AND THE ASSETS EMPLOYED BY BOTH OF THEM IS VERY RELEVANT. IN OUR V IEW LD. TPO/AO DID NOT PROPERLY APPRECIATED THE FUNCTIONS PERFORMED, RISK ASSUMED AND BASSETS EMPLOYED BY THE AE AND APPELLANT. 6.7 IN THIS YEAR, ONLY 20 VESSELS WERE CHARTERED BY AE TO THE APPELLANT, WHERE LARGE NUMBER OF EMPLOYEES ARE NOT REQUIRED. T HE NUMBER OF EMPLOYEES QUOTED BY TPO IN THE COMPARABLE COMPANY A S 216 TO 5056 IS NOT RELEVANT AS THESE COMPANIES WERE HAVING THEIR OWN V ESSELS AND ARE ALSO ENGAGED IN OTHER ALLIED BUSINESS ACTIVITIES WITH WI DER ASSETS BASE. THE LEAST NUMBER OF EMPLOYEES IS 48 IN CASE OF SANYAN GROUP L IMITED. CONSIDERING THE SIZE AND THE ASSETS EMPLOYED, THE NUMBER OF EMP LOYEES IN SUCH COMPARABLE CASES MAY BE HIGHER AS COMPARED TO THE C ASE OF AE. 6.8 WE ARE OF THE CONSIDERED OPINION THAT BERRY RAT IO IS NOT APPLICABLE IN THIS CASE AND THEREFORE, APPROPRIATE PROFIT INDICAT OR IN THIS CASE IS OPERATING PROFIT 7 TOTAL COST I.E. OP/TC. IN CASE OF PURE DIS TRIBUTOR, ONLY VALUE ADDED EXPENSES ARE CONSIDERED AND BERRY RATIO CAN BE APPL IED. THE AE MADE VALUE ADDITION, ASSUMED VARIOUS RISKS OF BUSINESS AND ALS O INCURRED DAMAGES AND LOSSES IN THE BUSINESS, AS DISCUSSED BY ME IN DETAI L EARLIER. AS PER TNMM STUDY FILED BY THE APPELLANT, THE MARGIN ON TOTAL C OST EARNED BY AE IS 4.52% WHICH IS LESS WHEN COMPARED WITH 5.18% IN CASE OF O THER ELEVEN COMPARABLE COMPANIES. THIS IS WITHIN ARM'S LENGTH. THEREFORE, OTHERWISE ALSO NO TRANSFER PRICING ADJUSTMENT IS CALLED FOR BY THE SAFE HARBOR CLAUSE. 6.9 IN VIEW OF THE FACTS, CIRCUMSTANCES, MATERIAL A VAILABLE ON RECORD AND AFTER HEARING THE RIVAL CONTENTIONS WE UPHOLD THE O RDER OF LD. CIT(A) ON ALL COUNTS WHICH ARE UPHELD. REVENUE GROUNDS IN THIS BE HALF ARE DISMISSED. 6.10 APROPOS THE REMAINING GROUND RAISED BY REVENUE FOR DISALLOWANCE OF RS.1,19,000/- OUT OF ADMINISTRATIVE & SELLING EXPEN SES (CORRECTED BY ITA NO.203/BLPR/2012 & CO 02/BLPR/2013 ACIT VS. BAGADIYA BROTHERS PVT LTD AY : 2008-09 68 ASSESSEE IN ITS CO BY WAY OF A GROUND), WE FIND THA T THE DISALLOWANCE HAS BEEN MADE BY LD. AO WITHOUT POINTING OUT ANY SPECIF IC ITEM OF DISALLOWANCE WHICH IS IN THE NATURE OF PURELY AN AD-HOC DISALLOW ANCE. ASSESSEES BOOKS ARE AUDITED AND THE ENTIRE EXPENDITURE IS PROPERLY VOUCHED. IT IS A SETTLED LAW THAT BUSINESS EXPENDITURE SHOULD NOT BE DISALLO WED WITHOUT CITING SPECIFIC ITEM AND GIVING REASONS FOR DISALLOWANCE. IN OUR CONSIDERED VIEW, LD. CIT(A) HAS RIGHTLY HELD THE DISALLOWANCE TO BE AD-HOC AND UNTENABLE WHICH IS UPHELD. REVENUE GROUND IN THIS BEHALF IS DISMISSED AND ASSESSEES CLARIFICATORY CO GROUND IS ALLOWED. THE REMAINING GROUND OF CO BEING ONLY IN SUPPORT OF LD. CIT(A)S ORDER IS ACADEMIC A ND INFRUCTUOUS. 6.11 IN THE RESULT, REVENUES APPEAL IS DISMISSED A ND ASSESSEES CO IS PARTLY ALLOWED. SD/- SD/- (AMARJIT SINGH) ACCOUNTANT MEMBER (R.P. TOLANI) JUDICIAL MEMBER AHMEDABAD; DATED 01/03/2017 *BIJU T., SR PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A) 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE . / BY ORDER, TRUE COPY / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD
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