DCIT, New Delhi V. M/s. Metso Minerals (India) Pvt. Ltd., New Delhi

ITA 1205/DEL/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97081 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 09-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 03-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRIA
• Assessee Lawyers: PUNEET CHUGH; AJAY VOHRA SR SHRI NEERAJ JAIN
• Keywords: Unexplained cash credit; Related party transaction; Unexplained expenditure; Transfer pricing; International transaction; Rule of consistency; Fair market value; Corroborative evidences
• Section: 69C; 143(3); 92E; 154; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I - 2 : NEW DELHI BEFORE SHRI I.C. SUDHIR , JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA NO: 2449/DEL/2014 ASSTT. YEAR : - 2009 - 10 M/S. METSO MINERALS (INDIA) PVT. LTD. VS. DCIT, C - 227, GROUND FLOOR, CIRCLE 6(1) WESTERN MARG, NEW DELHI. NEAR GARDEN OF FIVE SENSES, PARYAVARAN COMPLEX, NEW DELHI 110 030 ( PAN AAACS3407L ) (APPELLANT) (RESPONDENT) AND ITA NO: 1205/DEL/2014 ASSTT. YEAR : - 2009 - 10 DCIT, VS. M/S. METSO MINERALS (INDIA) PVT. LTD. CIRCLE 6(1) C - 227, GROUND FLOOR, WESTERN MARG, NEW DELHI NEAR GARDEN OF FIV E SENSES, PARYAVARAN COMPLEX, NEW DELHI 110 030 (PAN AAACS3407L) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SR. ADVOCATE SHRI NEERAJ JAIN, ADVO CATE & SHRI PUNEET CHUGH, CA DEPARTMENT BY : SHRI R.K. JHA, ADDL. CIT,DR DATE OF HEARING : 0 9. 0 6.2015 DATE OF PRONOUNCEMENT : 28 .08. 2015 2 O R D E R PER INTURI RAMA RAO, AM THESE ARE CROSS APPEAL S FILED BY ASSESSEE - COMPANY AS WELL AS BY THE REVENUE DIRECTED AGAINST THE ORDER OF THE ASSESSMENT PASSED U/S 143(3) READ WITH SECTION 144C OF THE INCOME - TAX ACT, 1961 FOR THE ASSESSMENT YEAR 2009 - 10. THE ASSESSEE - COMPANY RAISED THE FOLLOWING GROUNDS OF APPEAL IN ITA NO. 2449/DEL/2014 : - 1. THAT THE ASSESSI NG OFFICER ERRED ON FACTS AND IN LAW IN DETERMINING THE INCOME OF THE APPELLANT AT RS.15,90,82, 198 UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME - TAX ACT, 1961 ('ACT') AS AGAINST RETURNED INCOME OF RS.10,73,56,150. 2. THAT THE ASSESSING OFFICE R/ DRP ERRED ON FACTS AND IN LAW IN MAKING ADJUSTMENT OF RS. 4,85,04,301 TO THE INCOME OF THE APPELLANT ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF MARKETING SUPPORT SERVICES UNDERTAKEN BY THE APPELLAN T WITH ITS ASSOCIATED ENTERPRISES. 2.1 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN RE - CHARACTERIZING THE TRANSACTION OF PROVISION OF MARKETING SUPPORT SERVICES UNDERTAKEN BY THE APPELLANT AS COMMISSION AGENT SERVICES, BY MISINTERPRETING T HE FOLLOWING CLAUSES OF THE AGREEMENT: (I) THE ASSESSEE IS UNDER NO OBLIGATION TO INCREASE THE TURNOVER OF ITS AE. (II) THE ASSESSEE SHALL NOT BE RESPONSIBLE FOR ACTING AS MEDIATOR BETWEEN ITS F OREIGN AE AND ITS CUSTOMERS. (III) THERE IS NO RESPONSIBILITY TOWARDS THE CUSTOMER NEITHER THERE IS ANY CLAUSE OF OBLIGATION TOWARDS ANY AFTER SALES SERVICE. (IV) THE ASSESSEE HAS NO OBLIGATION FOR RECOVERY FROM THE CUSTOMERS. (V) THE ASSESSEE DOES NOT HAVE ANY AUTHORITY TO EXECUTE CONTRACT. (VI) THE PAYMENT MODE IS FIXED PERCENTAGE OF SALE VALUE OF GOODS. 2.2 THAT THE ASSESSING OFFICER/ORP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN TERMS OF MARKETING SUPPORT SERVIC ES AGREEMENT 3 ENTERED BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE, THE SCOPE OF SERVICES PROVIDED BY THE APPELLANT WERE LIMITED TO: (I) PROMOTION OF AES PRODUCTS IN THE INDIA (II) PROVIDING INFORMATION ON ANY BUSINESS OPPORTUNITIES THAT AES MAY HA VE IN THE INDIA IN RELATION TO ITS PRODUCTS. 2.3 THAT THE ASSESSING OFFICER/ORP ERRED ON FACTS AND IN LAW IN RE - CHARACTERIZING THE TRANSACTION OF PROVISION OF MARKETING SUPPORT SERVICES AS COMMISSION AGENT SERVICES, MERELY ON TH E PREMISE THAT THE APPELLANT IS RECEIVING FIXED PERCENTAGE OF SERVICE FEE ON THE FOB VALUE OF INVOICES RAISED BY THE AE ON THE CUSTOMERS IN INDIA. 2.4 THAT THE ASSESSING OFFICER/ORP ERRED ON FACTS AND IN LAW IN CONCLUDING THAT THE REASON FOR DIP IN MARGINS OF THE APPELLANT IN ITS MARKETING SUPPORT SERVICE SEGMENT IS DUE TO THE MUTUAL ADJUSTMENT BETWEEN THE ASSOCIATED ENTERPRISE AND THE APPELLANT. 2.5 T HAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSING OFFICER/ORP OUGHT TO HAVE ALLOCATED OPERATING COST TO THE MARKETING SUPPORT SERVICE SEGMENT ON A RATIONAL BASIS INSTEAD OF ARBITRARILY ALLOCATING DISPROPORTIONATELY HIGHER COSTS TO TH IS SEGMENT. 2.6 THAT THE ASSESSING OFFICER/ORP ERRED ON FACTS AND IN LAW IN UNDERTAKING A FRESH SEARCH OF COMPARABLE COMPANIES ENGAGED IN THE BUSINESS OF PROVIDING COMMISSION AGENT SERVICES AND THEREBY REJECTED THE BENCHMARKING ANALYSIS UNDERTAKEN BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENT CONSIDERING COMPANIES ENGAGED IN PROVIDING MARKETING SUPPORT SERVICES. 2.7 THAT THE ASSESSING OFFICER/ ORP ERRED ON FACTS AND IN LAW IN CONSIDERING PRIYA INTERNATIONAL LIMITED HAVING ABNORMALLY HIGH PROFIT MARG IN IN THE FINAL SET OF COMPARABLE COMPANIES CONSIDERING SEGMENT PROFITABILITY OF ITS COMMISSION SEGMENT, NOT APPRECIATING THAT THE SAID SEGMENTAL PROFITABILITY OF THE COMPANY WAS ARRIVED AT GROSS LEVEL WITHOUT ALLOCATING INDIRECT AND UN - ALLOCABLE EXPENSES. 2.8 THAT THE ASSESSING OFFICER/ DRP ERRED ON FACTS AND IN LAW IN CONSIDERING BRITISH METAL CORPN. INDIA PRIVATE LIMITED A COMPANY FUNCTIONALLY NOT COMPARABLE AND SHOWING ABNORMALLY HIGH PROFIT MARGIN IN THE RELEVANT SEGMENT, IN THE FINAL SET OF COMPARAB LE COMPANIES. 4 2.9 THAT THE ASSESSING OFFICER/ DRP ERRED ON FACTS AND IN LAW IN CONSIDERING PUBLICITY SOCIETY OF INDIA LTD. AND P L WORLDWAYS LTD. WHICH ARE FUNCTIONALLY NOT COMPARABLE AND ARE SHOWING ABNORMALLY HIGH PROFIT MARGIN IN THE RELEVANT SEGMENT, IN THE FINAL SET OF COMPARABLE COMPANIES. 2.10 THAT THE ASSESSING OFFICER/ DRP ERRED ON FACTS AND IN LAW IN CONSIDERING BRITISH METAL CORPN. INDIA PRIVATE LIMITED, PRIYA INTERNATIONAL LIMITED AND PUBLICITY SOCIETY OF INDIA LTD. AS PART OF THE COMPARABLE COMPANIES FOR BENCH MARKING OF INTERNATIONAL TRANSACTION OF MARKET SUPPORT SERVICES WHEN THESE COMPANIES WERE NOT CONSIDERED AS COMPARABLE IN THE PREVIOUS YEARS NOR IN THE SUBSEQUENT YEARS. 2.11 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER/ DRP ERRED ON FACTS AND IN LAW IN CONSIDERING INCORRECT PROFIT MARGIN OF CERTAIN COMPARABLE COMPANIES: NAME OF THE COMPANY MARGIN CONSIDERED BY TPO ACTUAL MARGIN PL WORLDWAYS LTD. 39.60% 4.52% PUBLICITY SOCIETY OF INDIA LTD. (SEG.) 71.17% 37.14% 3. THAT THE ASS ESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN MAKING AN AD - HOC DISALLOWANCE OF 50% OF THE PROFESSIONAL FEES OF RS. 60,29,221 PAID BY THE APPELLANT TO METSO MINERALS (MUMBAI) PRIVATE LIMITED ('METSO MUMBAI') INVOKING SECTION 40A(2)(A) OF THE ACT. 3.1 T HAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN MAKING ARBITRARILY DISALLOWANCE OF 50 PERCENT OF THE PROFESSIONAL FEES PAID TO METSO MUMBAI WITHOUT GIVING ANY COGENT BASIS AND ON THE BASIS OF HIS/ITS CONJECTURE AND SURMISES. 3.2 THAT THE ASSESSING OFFICER/ORP ERRED ON FACTS AND IN LAW IN MAKING AN AD - HOC DISALLOWANCE OF PROFESSIONAL FEES PAID BY THE APPELLANT TO METSO MUMBAI, ALLEGEDLY HOLDING THAT: (I) THERE IS NO JUSTIFICATION FOR THE PAYMENT AT THE RATE OF RS. 600 PER HOUR. (II) THERE ARE NO DETAILS OF WHAT WORK HAS BEEN DONE BY THE ENGINEERS OF METSO MUMBAI AND WHAT HAS BEEN THE CONTRIBUTION TO REVENUE OF THE APPELLANT. 5 (III) THE APPELLANT IS ALSO RENDERING SUCH SERVICES TO ITS RELATED PARTIES. ACCORDINGLY, THERE IS RATIONALE TO RECEIVE SUCH SERVICES FROM METSO MUMBAI. (IV) THE RATES AGREED BETWEEN THE PARTIES MAY NOT BE AT ARMS LENGTH PRICE AS THE SERVICES ARE RENDERED TO GROUP COMPANIES. 3.3 THAT THE ASSESSING OFFICER/ORP ERRED ON FACTS AND IN LAW IN CONCLUDING THAT THE PROFESSIONAL CHARGES PAID BY THE APPELLANT TO METSO MUMBAI IS A MECHANISM TO DIVERT INCOME TO METSO MUMBAI AS IT IS INCURRING LOSSES FOR LAST SEVERAL YEARS. 3.4 THAT THE ASSESSING OFFICER/ORP ERRED ON FACTS AND IN LAW IN NOT APPRECIA TING THE FACT THAT THE DESIGN AND DRAWING SERVICES AVAILED BY THE APPELLANT FROM METSO MINERALS WERE AVAILED FOR TIMELY DELIVERY OF PROJECTS AND TO MAINTAIN CONFIDENTIALITY OF THE PROJECTS UNDERTAKEN BY THE APPELLANT. 3.5 THAT THE ASSESSING OFFICER/ ORP ERRED IN FACT AND IN LAW IN MAKING AN AD - HOC DISALLOWANCE OF PROFESSIONAL FEES INCURRED BY THE APPELLANT ON ACCOUNT OF DRAWINGS AND DESIGNS RECEIVED FROM METSO MUMBAI WITHOUT BRINGING ON RECORD THE FAIR MARKET VALUE OF SUCH DESIGN AND DRAWING SERVICES AVA ILED BY THE APPELLANT. 3.6 WITHOUT PREJUDICE, THE ASSESSING OFFICER/ORP ERRED ON FACTS AND IN LAW IN NOT APPEARING THAT THE PROFIT EARNED BY THE APPELLANT IN ITS MANUFACTURING SEGMENT WERE CONSIDERED TO BE AT ARMS LENGTH PRICE BY THE TPO AND ACCORDINGLY, THERE COULD NOT BE A CASE OF SHIFTING OF PROFITS BY THE APPELLANT TO METSO MUMBAI BY WAY OF PAYMENT OF PROFESSIONAL FEES. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING DISALLOWANCE OF RS 2,07,137 ON THE BASIS OF INFORMATION FURNISHED BY AIR AS TRANSACTION AGAINST CREDIT CARD - BILLS, ALLEGING THE SAME AS UNEXPLAINED EXPENDITURE. 4.1 THAT THE ASSESSING OFFICER FAILED TO FOLLOW THE DIRECTIONS OF DRP BY NOT PROVIDING THE APPELLANT THE DETAILS OF THE INFORMATION FURNISHED BY THE AIR BASE D ON WHICH THE DISALLOWANCE IS MADE. 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 2348 AND SECTION 234C OF THE ACT. 6 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE APPELLANT [MESTO MINERALS (INDIA) PVT. LTD.] IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF MINERAL PROCESSING EQUIPMENT. THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009 - 10 WAS FILED ON 27 TH SEPTEMBER, 2 009, DISCLOSING TAXABLE INCOME OF RS. 10,73,56,150/ - . THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT. SINCE THE APPELLANT REPORTED INTERNATIONAL TRANSACTION IN ITS REPORT IN FORM 3CEB , A REFERENCE UNDER SECTION 92CA(3) WAS MADE TO TRANSFER PRICING OFFICE R ( TPO) - 1(3), NEW DELHI. 3. IT IS REPORTED THAT DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES: (I) PURCHASE OF RAW MATERIALS; (II) PURCHASE OF SPARE PARTS: (III) PURCHASE OF MACHINERY; (IV) PURCHASE OF FIXED ASSETS; (V) PROVISION OF MARKET SUPPORT SERVICES; AND (VI) REIMBURSEMENT OF EXPENSES 4. IN SUPPORT OF THE APPELLANT S CLAIM THAT THE PRICE CHARGED BY IT FOR THE SERVICE RENDERED TO ITS AE WAS AT ARM S LENGTH, THE APPELLANT FILED A REPORT IN FORM 3CEB AS REQUIRED UNDER THE PROVISIONS OF SECTION 92E OF THE ACT. THE APPELLANT ALSO MADE A DETAILED ANALYSIS OF INTERNATIONAL TRANSACTIONS . THE APPELLANT HAD ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM S LENGTH PRICE. THE OPERATING PROFITS TO TOTAL COST WAS ADOPTED AS THE PROFIT LEVEL INDICATE ( PLI ). IN THE 7 TRANSFER PRICING STUDY , T HE APPELLANT HAD CHOSEN 17 COMPARABLES AND THEIR WEIGHTED AVERAGE OPERATING PROFIT MARGIN WAS WORKED OUT AT 5.82% AS BELOW: 5. THE APPELLANT CLAIMED THAT SINCE THE MARGIN FOR MARKETING SUPPORTIVE SERVICES SEGMENT WAS AT 10.23% IN ITS CASE, WHICH WAS MORE THAN THE COMPARABLES PROFIT MARGIN OF 5.82%. THE INTERNATIONAL TRANSACTION FOR PROVISIONS FOR MARKETING SUPPORT SERVICES WAS AT ARM S LENGTH PRICE. AS AGAINST THIS, THE TRANSFER PRICING OFFICER (TPO), MADE THE FLOWING OBSERVATIONS: SL. NO. NAME OF THE COMPAN Y WEIGHTED AVERAGE (OP/QC) 1 . A2Z MAINTENANCE & ENGINEERING SERVICES PVT . LTD 0.99 % 2. AMBALS ADVERTISERS (INDIA) 0.77 % 3. APOLLO SINDOORI HOTELS 0.31 % 4 . BONJOUR BONHEUR FOREX SPOT PVT. LTD. 0.96% 5 . CYBER MEDIA EVENTS 7.87% 6. DLF SERVICES LTD. 9 . 47% 7. IDC (INDIA) LTD. 15.67 % 8. INDIA TOURISM DEVELOPMENT CORPORATION - 0.92 % 9. INDO ASIA LEISURE SERVICES 1 . 43% 10. KERALA TRAVELS INTERSERVE 7.84% 11 . MID DAY MULTIMEDIA - 1 . 05% 12. OVERSEAS DEVELOPMENT & EMPLOYMEN PROMOTION 7 . 21 % CONSULTANTS LIMITED 13. PEARL INTERNATIONAL TOURS & TRAVELS 4.06% 14. SHRAYANS RESOURCES 3 . 33% 15. TIMES INNOVATIVE MEDIA LIMITED 0 . 37% 16 . TRADE WINGS LIMITED 15.61 % 17 . TRAVEL CORPORATION (INDIA) LTD . - - 20.15 % - ARITHMETIC MEAN 5.82% 8 ' IT HAS BEEN OBS E RVED THAT IN EARLIER Y EAR S TH E COMMISSION B E ING C HARG E D B Y THE ASSESSEE FROM ITS US AE WAS AT THE RATE OF 10 % . FOR E.G . IN THE F. Y 200 7 - 08 THE COMMISSION FROM US ON THE SALE OF RS . 9 , 02,36, 684 WAS RS.904 8 360 I . E.10% AND THIS WAS BASED ON WRITTEN AGREEMENT BET W EEN THEM . THE SALE IN THE US SEGMENT INCREASED IN THE YEAR UNDER CONSIDERATION FROM 9.02 CRORES TO 23.09 CRORES . BUT THE ASS E S S EE INSTEAD OF SHOWING THE COMMISSION @ 10 % REPORTED ONLY A COMMISSION OF RS.1.15 CRORES I. E . @ OF 5% . IT CAN BE SEEN THAT AS THE PARTIES WERE RELATED TO EACH OTHER THEREFORE THEY OPTED TO REDUCE THE COMMISSION AS A MUTUAL ARRANGEMENT SO THAT TH E ASSESSEE DOES NOT HAVE TO PAY TAXES ON THE INCREASED COMMISSION . AS A MATTER OF CONVENIENCE SINCE THE PARTIES ARE ASSOCIATED WITH EACH OTHER THEY REVISED THE AGREEMENT AND REDUCED THE COMMISSION FROM 10% TO 5%. THE TPO REJECTED THE COMPARABLES SELECTED BY THE AP PELLANT BY HOLDING THAT NONE OF COMPARABLES SELECTED BY THE APPELLANT WERE FUNCTIONALLY COMPARABLE AS THE APPELLANT MERE COMMISSION AGENT AND THEREFORE HE PROCEEDED TO SELECT HIS OWN COMPARABLES AND SELECTED THE FOLLOWING COMPARABLES EARNING COMMISSION INC OME: ACCORDINGLY, THE TPO VIDE HIS ORDER DATED 8 TH JANUARY, 2013 PASSED AN ORDER UNDER SECTION 92CA(3) OF THE ACT DETERMINING THE ARM S LENGTH PRICE AT RS. 5,87,64,787/ - . SUBSEQUENTLY, THIS ORDER WAS RECTIFIED UNDER SECTION 154 OF S. NO. COMPANY NAME OP/TC 1. KILLICK AGENCIES & MARKETING LTD. (SEG) 29.24% 2. ' P L WORLDWAYS LTD. 39.60% 3. PUBLICITY SOCIETYOF INDIA LTD . (SEG) 71 . 17% 4. COX & KINGS . 69.81% 5. ICC INTERNATIONAL AGENCIES LIMITED 11 . 83 % 6. BRITISH METAL CORPORATION (INDIA) PVT LTD. 62 . 96% 7. PRIYA INTERNATIONAL LIMITED ( INDEN T ING SEGMENT ) 8 2. 1 9% ARITHMETIC MEAN 52.40% 9 THE ACT VIDE HIS ORDER DATED 26 TH FEBRUARY, 2014 DETERMINING THE ADJUSTMENTS AT RS. 4,85,04,301/ - . 6. AGAINST THE ABOVE SAID ADJUSTMENT PROPOSED BY THE TRANSFER PRICING OFFICER THE ASSESSING OFFICER VIDE ITS DRAFT ORDER DATED 5 TH MARCH, 2013 PASSED UNDER SECTION 144C OF THE ACT INCORPORA TED THE ABOVE ADJUSTMENTS. THE DRAFT ASSESSMENT WAS DULY SERVED ON THE APPELLANT. BEING AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, THE APPELLANT FILED OBJECTIONS BEFO RE THE DISPUTE RESOLUTION PANEL . THE DISPUTE RESOLUTION PANEL ( DRP ) VIDE ORDER DATED 26.12 .2 013 DIRECTED THE TPO TO EXCLUDE KILLICK AGENCIES & MARKETING LTD. AND COX & KINGS AS THESE COMPANIES HAD SUBSTANTIALLY HIGH RELATED PARTY TRANSACTIONS. ACCORDINGLY, THE ASSESSING OFFICER PASSED FINAL ASSESSMENT ORDER DATED 28 TH FEBRUARY, 2014 MAKING UPWA RD ADJUSTMENT OF ON ACCOUNT OF TRANSFER PRICING OF RS. 4,85,04,301/ - ; FOR PROFESSION FEES PAID TO METSO MINERALS (MUMBAI) PVT. LTD. O F RS. 30,14,610/ - AND FOR UNEXPLAINED EXPENDITURE REFLECTING IN ITS REPORT OF RS. 2,07,137/ - . BEING AGGRIEVED, THE APPELLANT AS WELL THE REVENUE HAD COME UP WITH THE PRESENT APPEAL S BEFORE US. 7. DURING THE COURSE OF HEARING, THE LEARNED COUNSEL FOR THE APPELLANT HAD SUBMITTED THAT THE LEVEL OF VALUE ADDITION IN A DISTRIBUTION ACTIVITY CAN BE COMPARED WITH AN AGENCY/ MARKETING SUPPORT FUNCTION ONLY AT GROSS MARGIN LEVEL . ALL FUNCTIONS RELATED TO TRADING SUCH AS PROCUREMENT, STORAGE, DISTRIBUTION AND OTHER RELATED ACTIVITIES ARE NOT UNDERTAKEN FOR AGENCY/ MARKETING SUPPORT FUNCTION. FURTHER, IN THE MARKET SUPPORT SEGMEN T THE 10 APPELLANT NEITHER PERFORMS ANY FUNCTION RELATED T O INVENTORY MANAGEMENT NOR ASSUME INVENTORY RISK. HENCE, SELLING AND ADMINISTRATION COSTS SHOULD IDEALLY BE SPLIT IN GROSS MARGIN RATIO AND NOT IN THE RATIO OF SALES. IT WOULD BE APPRECIATED THAT THE A LLOCATION OF EXPENSES AT GROSS MARGIN LEVEL PROVIDES A LEVEL PLAYING FIELD FOR THE TWO ACTIVITIES, VIZ., DISTRIBUTION AND COMMISSIO N/ MARKETING SUPPORT SERVICE ACTIVITIES FOR THE REASON THAT THE EFFECT OF THE TURNOVER / COST OF GOODS SOLD WHICH IS NOT RELE VANT IN THE AGENCY/ MARKETING SUPPORT SERVICE ACTIVITIES, IS NOT TAKEN INTO ACCOUNT FOR ALLOCATING COMMON EXPENSES. RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING DECISIONS: VARIAN INDIA PRIVATE LIMITED VS. ADIT (ITA 160/MUM/2013) DSM ANTI - INFECTIVE INDIA LTD VS ACIT (ITA/CHD/2011) MITSUBISHI CORPORATION INDIA PVT LTD VS . DCIT (ITA NO 5042/DEL/2011 7.2 . IT WAS SUBMITTED THAT IF THE ALLOCATION OF EXPENSES IN PROPORTION OF THE GROSS MARGIN IS DONE, IT RESULTS IN ALLOCATION OF ONLY RS.2,71,47,935 TOWARDS AGENCY/MARKETING SUPPORT SERVICE ACTIVITY AND OP/OC RATIO OF THE COMMISSION/MARKETING SUPPORT SEGMENT AT 354.58%. WITHOUT PREJUDICE, IT WAS SUBMITTED THAT IF THE EXPENSES ARE ALLOCATED IN THE PROPORTION OF GROSS MARGINS, THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF AGENCY SERVICE FUNCTIONS AND MARKETING SERVICE FUNCTIONS TAKING OPITC OF COMPARABLE COMPANIES ADOPTED BY TPO, WOULD BE NIL. 11 IT IS CLEAR FROM THE ABOVE WORKING, AFTER MAKING THE CORRECT ALLOCATION OF EXPENSES, THE V ALUE OF INTERNATIONAL TRANSACTION FROM MARKETING SUPPORT SERVICES AT RS. 12,34,09,807 IS MORE THAN THE ARM'S LENGTH PRICE AT RS. 4,16,85,654 ( AFTER TAKING INTO CONSIDERATION THE OP/OC OF THE COMPAR ABLES AT 53.55%) AS DETERMINED BY TPO. IN VIEW OF THE ABOVE, IT WAS SUBMITTED THAT IF THE SEGMENTAL PROFITABILITY COMPUTED AFTER ALLOCATION OF EXPENSES IN THE PROPORTION OF GROSS PROFIT THEN THE INTERNATIONAL TRANSACTION OF RENDERING MARKET SUPPORT SERVIC ES IS AT ARM'S LENGTH PRICE. HENCE, NO TRANSFER PRICING ADJUSTMENT IS WARRANTED. 7.2 WITHOUT PREJUDICE TO THE ABOVE ARGUMENT, THE LEARNED COUNSEL HAD ASSAILED THE REJECTION OF TRANSFER PRICING STUDY UNDERTAKEN BY THE APPELLANT AND THE COMPARABLES IDENTIFI ED THEREIN WITHOUT ASSIGNING ANY REASON. HE CONTENDED THAT THE TPO HAS SUMMARILY REJECTED THE TRANSFER PRICING STUDY UNDERTAKEN BY THE APPELLANT AND THE C OM PARABLES IDENTIFIED THEREIN WITHOUT ASCRIBING ANY REASON. IN THIS CONNECTION, HE PLACED RELIANCE ON THE DECISION OF HON BLE JURISDICTIONAL HIGH COURT I N INCOME FROM MARKET SUPPORT SERVICES 12,34,09,807 TOTAL INCOME FROM MARKET SUPPORT 12 , 34,09,807 COST FOR MARKET SUPPORT (ON BASIS OF ALLOCATION DONE ON THE BASIS OF GP RATIO ) 2,71,47,935 TOTAL AGGREGATE COST 2,71,47,935 ARM'S LENGTH AGENCY/ MARKETING SUPPORT SERVI 4,16,85,654 (CONSIDERING A MARK - UP OF 53 . 55% AS TAKEN BY THE - TPO AFTER DRP ORDER) (A) ( 153.55% OF171, 271,47,935) MARKETING SUPPORT AND AGENCY SERVICE INCOME 12,34,09,807 THE APPELLANT (B) 12 THE CASE OF LI & FUND INDIA (P) LTD.: 36 1 ITR 85, BEFORE THIS HON'BLE COURT, THE ASSESSEE ADOPTED TNMM AND COMPUTED PLI AT OPERATING PROFIT MARGIN/TOTAL COST. THE HON'BLE DELHI H IGH COURT, HELD THAT WHERE ALL ELEMENTS OF A PROPER TNMM WERE DETAILED AND DISCLOSED IN THE ASSESSEE S STUDY REPORTS, CARE OUGHT TO BE TAKEN BY THE TAX ADMINISTRATORS AND AUTHORITIES TO ANALYZE THE SAME IN DETAIL AND THEN PROCEED TO RECORD REASONS WHY SOME OR ALL OF THEM WERE UNACCEPTABLE. THE HON BLE COURT ALSO REFERRED TO CIRCULAR NOS. 12 AND 14 OF 2001, WHEREIN IT WAS CLARIFIED THAT WHERE THE ONUS AS TO DETERMINATION OF ALP STOOD DISCHARGED BY THE ASSESSEE, THE ASSESSING OFFICER COULD INTERVENE ONLY IF THE AO/TPO HAD, ON TH E BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, ALL THE INFORMATION THAT PRICE CHARGED IN AN INTERNATIONAL TRANSACTION HAD NOT BEEN DETERMINED IN ACCORDANCE WITH THE ACT. FURTHER, HE SUBMITTED THAT THE COMPARABLES SELECTED BY THE TPO ARE FUNCTIONALLY NOT COMPARABLE WITH THE APPELLANT AND THE TPO HAS ERRONEOUSLY SELECTED THE COMPANIES EARNING COMMISSION INCOME. ACCORDING TO THE LEARNED COUNSEL, T HE FOLLOWING COMPANIES SELECTED BY THE TPO SHOULD BE RE JECTED: S.NO COMPANY NAME REASONS FOR REJECTIONS 1. BRITISH METAL CORPN INDIA PRIVATE LIMITED THE COMPANY PROVIDES AG ENCY SERVICES FOR NON - FERROUS METALS, ' PREC I OUS . METALS , FE R T I LI Z ERS AND COOKING COAL . THESE PRODUCTS ARE - COMPLETELY DIFFERENT FR O M THE PRODUCTS FOR WHICH ASSESSEE PROVIDES MARKETING - SUPPORT SERVICES . 2 PRIYA INTERNATIONAL THE COMPANY IS ENGAGED IN PROVISION OF COMMISSION AGENCY AND TRADING OF C H EMIC AL S . A S PER THE ANIMAL REPORT OF THE COMPANY, . THE COMPANY IS ENGAGED IN PROVIDING . AGENCY SERVICES FOR SALE OF CHEMICALS WHICH FORMS PART OF THE INDENTING 13 SERVICES. THE CHEMICAL BUSINESS IS COMPLETELY DIFFERENT MARKET BUSINESS WHICH CANNOT BE COMPARED WITH THE PROVISION OF MARKETING . SUPPORT SERVICES IN THE HEAVY MACHINERY BUSINESS. FURTHER, IN THE ANNUAL RE P ORT OF THE COMPANY - THERE IS AN UNALLOCATED SE G MENT FOR WHICH COMPLETE DETAILS ARE NOT AV A ILABLE. 3. PL WORLDWAYS LIMITED THE COMPANY PROVIDES A WIDE GAMUT OF TRAVEL RELATED SERVICES VIZ. CORPORATE TRAVEL S OLUTIONS, HOLIDAY TRAVEL, EVENT MANAGEMENT, CONFERENCES, CRUISES AND AIR CHARTERS, WHICH ARE ENTIRELY DIFFERENT FROM THE MARKETING SUPPORT SERVICES RENDERED BY THE APPELLANT. AS PER THE ANNUAL REPORT OF THE COMPANY, THE COMPANY NOT ONLY EARNS COMMISSION FROM AIR TICKETS SOLD BUT ALSO EARNS TRANSACTION FEES FROM ITS CUSTOMER FOR SALE OF HOLIDAY PACKAGES AND OTHER TRAVEL SOLUTIONS. 4. PUBLICITY SOCIETY OF INDIA LIMITED THE COMPANY IS A NEWSPAPER PUBLICATION COMPANY ENGAGED IN PUBLICATION OF WIDE VARIETY O F NEWSPAPER AND PUBLICATIONS. THE COMPANY DERIVES MAJORITY OF ITS INCOME FROM SALE OF NEWSPAPERS AND ADVERTISEMENT REVENUE. FURTHER, THE COMPANY ALSO HAS A WEBSITE FREEPRESSJOURNAL.IN WHICH IS A MAJOR SOURCE OF REVENUE THROUGH ITS E - ADVERTISEMENT INITIATIVES. AS THE MAJORITY OF INCOME COMPRISES OF ADVERTISEMENT REVENUE AND SALE FROM NEWSPAPER, THE COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE MARKETING SUPPORT SERVICES RENDERED BY THE APPELLANT. AFTER REMOVING THE ABOVE COMPANIES, AVERAGE OPERATING PROFIT 14 MARGIN OF THE FINAL LIST OF COMPARABLE COMPANIES WITH AN 11.83% AS UNDER: SL. NO. COMPANY NAME OP/TC 1. ICC INTERNATIONAL AGENCIES LTD. 11.83% ARITHMETIC MEAN 11.83% THEREFORE, IT IS SUBMITTED THAT S INCE THE OP/OC RATIO OF THE APPELLANT IN MARKETING SUPPORT SERVICES SEGMENT AT 10.23% FALLS WITHIN THE +/ - 5% RANGE OF THE MEAN OPERATING MARGIN OF 11.83% OF THE ABOVE COMPARABLE COMPANIES, IT WAS SUBMITTED THAT THE INTERNATIONAL TRANSACTION OF PROVI SION OF MARKETING SUPPORT SERVICES UNDERTAKEN BY THE APPELLANT SATISFIES THE ARM'S LENGTH TEST AND THE ADJUSTMENT MADE BY THE TPO IS LIABLE TO BE DELETED. 7.3 . IN CONSISTENT APPROACH FOLLOWED BY THE TPO : IT IS SUBMITTED THAT THE TRANSFER PRICING OFFICER IN THE ASSESSEE S OWN CASE FOR THE ALL THE PRECEDING ASSESSMENT YEARS AND SUCCESSIVE YEARS HAS ACCEPTED THE BENCHMARKING ANALYSIS OF INTERNATIONAL TRANSACTION OF PROVISION OF MARKETING SUPPORT SERVICES APPLYING TNMM METHOD. THE COMPARABLE SELECTED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY FOR THE FY 2008 - 09 (AY2009 - 10) HAVE EITHER BEEN ACCEPTED BY THAT TPO IN THE FINANCIAL YEAR 2009 - 10 (AY 2010 - 11) OR FY 2007 - 08 (AY 15 2008 - 09). THE LIST OF THE CO MPARABLES IS TABULATED AS UNDER : - SL. NO. NAME OF THE COMPANY OP/OC(%) F.Y. 2010 FY 2009 FY 2008 1. ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. 18.22 2. BVG INDIAN LTD. 25.60 3. BALMER LAWRIE & CO. LTD. 3.80 4. BALURGHAT TECHNOLOGIES LTD. 1.93 5. BONJOUR BONHEUR FOREX SPOT PVT. LTD. 0.84 0.96 NOT IN BASE SET 6. CYBER MEDIA EVENTS LIMITED 6.07 7.87 8.43 7. DLF SERVICES LIMITED 8.47 9.47 9.47 8. IDC (INDIA) LIMITED 12.83 15.67 15.34 9. INDO ASIA LEISURE SERVICES LTD. 3.50 1.43 NOT IN BASE SET 10. KERALA TRAVELS INTERSERVE LTD. 8.54 7.84 NOT IN BASE SET 11. MID DAY MULTIMEDIA LTD. - 5.08 - 1.05 NOT IN BASE SET 12. OFFICER CARE SERVICES LTD. 4.72 13. OVERSEAS DEVELOPMENT & EMPLOYMENT PROMOTION CONSULTANTS LTD. 9.88 7.21 PERSISTENT LOSSES DURING FY 2006 AND 2007 16 14. PEARL INTERNATIONAL TOURS AND TRAVELS LTD. - 3.28 4.06 2.91 15. SHARYANS RESOURSES LTD. 3.21 3.33 DIFFERENT BUSINESS PROFILE FINANCIAL SERVICE PROVE 16. TRADE WINGS LTD. 17.36 15.61 8.52 17. TRAVEL CORPORATION(INDIA) LTD. 22.58 20.15 18.01 18. A2Z MAINTENANCE & ENGINEERING SERVICE PVT. LTD. NOT IN BASE SET 0.99 0.99 19 AMBAL S ADVERTISERS (INDIA) LTD. TURNOVER LESS THAN 1 CRORES 0.77 INSUFFICINET INFORMATION DIRECTOR S REPORT AND COMPANY PROFILE NOT AVAILABLE 20. APPOLO SINDOORI HOTELS LTD. RPT TO SALES RATIO 85% 0.31 0.27 21. INDIA TOURISM DEVELOPMENT CORPORATION LTD. PERSISTENT LOSSES - 0.92 0.64 22. TIMES INNOVATIVE MEDIA LTD. PERSISTENT LOSSES 0.37 2.15 23. BALMER LAWRIE & CO. LTD. AVERAGE 8.19 5.82 6.21 FROM THE ABOVE TABLE IT WOULD BE APPRECIATED THAT THE COMPARABLES SELECTED IN THE TRANSFER PRICING DOCUMENTATION IN FY 2008 - 09 ARE ACCEPTED BY THE TPO IN THE PREVIOUS AND SUCCESSIVE YEARS. HENCE THE REJECTION OF THE BENCHMARKING DONE BY THE APPELLANT 17 IS ARBITRARY AND WITHOUT ANY COGENT REASONS. IT IS SUBMITTED THAT THE APPELLANT IS IN THE SAME BUSINESS FOR A NUMBER OF YEARS AND THE METHODOLOGY USED FOR BENCHRNARKING THE INTERNATIONAL TRANSACTION HAS BEEN CONSISTENTLY FOLLOWED FROM YEAR TO YEAR. THERE HAS ABS OLUTELY NO DEVIATION FROM THIS PRACTICE FOR ALL THE YEARS. THE DEPARTMENT WAS ALSO PLEASED TO NOT MAKE ANY VARIATION TO THE DETERMINATION OF ARMS LENGTH PRICE FOR THE SAID INTERNATIONAL TRANSACTIONS KEEPING IN VIEW CONSISTENCY AND UNIFORMITY OF APPR OACH WH ILE DETERMINING THE ALP FOR ALL THE EARLIER YEARS. ACCORDINGLY, FOLLOWING THE RULE OF CONSISTENCY ALSO , THE SAME SHOULD BE ACCEPTED BY THE TPO IN THE YEAR UNDER CONSIDERATION . IN THIS CONNECTION, IT IS RESPECTFULLY SUBMITTED THAT THE HON'BLE SUPREME OURT HAS CLEARLY LAID DOWN THAT WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS HAVE BEEN FOUND AS A FACT ONE WAY OR THE THER , AND THE PARTIES HAVE ALLOWED THE POSITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT I S NOT ALLOW E D TO CHANGE THE POSITION IN ANY SUBSEQUENT YEAR. THE SUPREME COURT IN RADHASOAMI SATSANG VS. CIT (193 ITR 321) HAS CLEARLY LAID DOWN THE ABOVE RULE OF LAW BY MAKING THE FOLLOWING OBSERVATION: 'ONE OF THE CONTENTIONS WHICH LEARNED SENIOR COUNSE L FOR THE ASSESSEE RAISED AT THE HEARING WAS THAT, IN THE ABSENCE OF ANY CHANGE IN THE CIRCUMSTANCES, 18 THE REVENUE SHOULD HAVE FELT BOUND BY THE PREVIOUS DECISIONS AND NO ATTEMPT SHOULD HAVE BEEN MADE TO REOPEN THE QUESTION. HE RELIED UPON SOME AUTHORITIES IN SUPPORT OF HIS STAND. A FULL BENCH OF THE MADRAS HIGH COURT CONSIDERED THIS QUESTION IN T.M.M. SANKARALINGA NADAR AND BROS. VS. CIT [1929] 4 ITC 226. AFTER DEALING WITH THE CONTENTION, THE FULL BENCH EXPRESSED THE FOLLOWING OPINION (P.242). THE PRINCIPLE TO BE DEDUCED FROM THESE TWO CASES IS THAT WHERE THE QUESTION RELATING TO ASSESSMENT DOES NOT VARY WITH THE INCOME EVERY YEAR BUT DEPENDS ON THE NATURE OF THE PROPERTY OR ANY OTHER QUESTION ON WHICH THE RIGHTS OF THE PARTIES TO BE TAXED ARE BASED, E.G., WHETHER A CERTAIN PROPERTY IS TRUST PROPERTY OR NOT, IT HAS NOTHING TO DO WITH THE FLUCTUATIONS IN THE INCOME; SUCH QUESTIONS, IF DECIDED BY A COURT ON A REFERENCE MADE TO IT WOULD BE RES JUDICATA IN THAT THE SAME QU ESTION CANN OT BE SUBSEQUENTLY AGITATED. THE SUPREME COURT IN THE RECENT DECISION IN THE CASE OF EXCEL INDUSTRIES LIMITED 358 ITR295, FOLLOWING ITS EARLIER DECISION SUPRA REITERATED THE LAW IN THIS REGARD. RELIANCE IS' ALSO' PLACED ON' THE FORGOING DEC ISIONS, WHEREIN THE AFORESAID SETTLED PRINCIPLES AS TO CONSISTENCY WERE APPLIED IN RESPECT OF THE ISSUES RELATING TO TRANSFER PRICING: (I) GIESECKE & DEVRIENT INDIA PRIVATE LIMITED VS. DCIT (ITA NO.5400/DE1/2010) 72. THE ASSESSEE IN ITS SUBMISSION HAS S TATED THAT TPO HAS ACCEPTED THE BENCH MARKING ANALYSIS OF THE ASSESSEE IN IMMEDIATELY PRECEDING YEAR (I.E. AY 2006 - 07) AND IMMEDIATELY SUCCEEDING YEAR (AY 2008 - 09) AND HAS NOT DRAWN ANY ADVERSE INFERENCE WITH REGARD TO THE INTERNATIONAL TRANSACTION PERTAIN ING TO CVPS DISTRIBUTION BUSINESS ... XXX ... 73. WE HAVE CONSIDERED THE SUBMISSION OF BOTH THE PARTIES AND FIND CONSIDERABLE FORCE IN ARGUMENTS OF LD. COUNSEL FOR THE ASSESSEE THAT THERE BEING NO CHANGE IN BUSINESS PROFILE OF THE ASSESSEE, THE COMPARABLE S ACCEPTED IN AY 2006 - 07 AND AY 2008 - 09 COULD NOT BE IGNORED ... XXX ... ' 19 (II) THE HON'BLE DELHI TRIBUNAL IN THE CASE OF MCCANN ERICKSON .INDIA PVT. LTD. VS. ADDL. CIT (ITA NO. 5871 / DEI/2011), TOO HELD THAT 'ALTHOUGH THE PRINCIPLE OF RES - JUDICATA IS NOT APPLICABLE TO THE INCOME - TAX PROCEEDINGS, HOWEVER, SOMETHING MATERIAL OR ADVERSE IN NATURE, WHICH IS HAVING DIRECT BEARING ON THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE, HAS TO BE BROUGHT ON RECORD TO DRAW THE ADVERSE INFERENCE . RELIANCE IS ALSO PLACED ON THE FOLLOWING JUDGEMENTS IN WHICH PRINCIPLE OF CONSISTENCY WAS AFFIRMED BY THE VARIOUS COURTS: - LLOYDS TSB GLOBAL SERVICES PR IVATE LIMITED (ITA NO. 5928/MUM/ 2012) - BRINTO NS CARPETS ASIA P LTD. (ITA NO. 296/PN/10 ) - ARJ SECURITY PRINTERS (264 ITR 276) - DEUTSCHE ASSET MANAGEMENT (INDIA) PRIVATE (ITA NO. 7717/MUML2010) - HOSLEY INDI A PRIVATE LIMITED (ITA NO. 5904/ DE1/2010) - NO KIA INDIA PVT. LTD. [ITA NO.551/ DEI/2011] - M/S LENOVO (INDIA) PVT. LTD. VS . ACIT [ITA NO. 1457/ BANG/20 10 ] - L'OREAL INDIA P. LTD. (ITA NO. 5423/MUM/ 2009) - NDS SERVICES PAY - TV TECHNOLOGY PRIVATE LIMITED, ITA NO. 10891BANG/2011 IN VIEW OF THE ABOVE THE BENCHMARKING ANALYSIS UNDERTAKEN BY THE APPELLANT IN THE TRANSFER PRICING STUDY CALLS FOR BEING RESTORED. 7.4 WITHOUT PREJUDICE CORRECT MARGIN (OP/OC) OF THE COMPARABLES COMPANIES: THE TPO VIDE ITS ORDER HAS CONSIDERED INCORRECT MARGIN OF THE FOLLOWING COMPANIES IN THE COMPARABLE SET: NAME OF THE COMPARABLES COMPANIES INCORRECT MARGIN CORRECT MARGIN PL WORLDWAYS LIMITED 39.60% 4.52% PUBLICITY SOCIETY OF INDIA LIMITED 71.17% 37.14% NAME OF THE COMPANY MARGIN CONSIDERED BY TPO ACTUAL MARGIN P L WORLDWAYS LTD. 39.60% 4.52% PUBLICITY SOCIETY OF INDIA LTD. (SEG) 71.17% 37.14% 20 THE APPELLANT POINTED OUT THE ABOVE COMPUTATIONAL ERROR BEFORE THE TPO AND DRP AND T HE SAME WAS NOT ACCEPTED OR CONSIDERED BY THEM WITHOUT GIVING ANY REASON . AFTER CONSIDERING THE CORRECT MARGINS THE REVISED ARITHMETIC MEAN OF THE COMPARABLE COMPANIES IS AS FOLLOWS : ALTERNATIVELY WITHOUT PREJUDICE, THE REVISED TP ADJUSTMENT AFTER CONSIDERING THE CORRECT ARITHMETIC MEAN WOULD BE AS FOLLOWS: PARTICULARS INCORRECT ADJUSTMENT IN THE AO ORDER ADJUSTMENT AFTER CORRECT MARGIN AS PER APPELLANT OPERATING COST OF THE ASSESSEE (AS PER TP ORDER) 111,959,693 111,959,693 ARM S LENGTH MARGIN - OP/OC 53.55% 39.73% ARM S LENGTH PRICE (A) 171,914,109 171,914,109 PRICE SHOWN IN INTERNATIONAL TRANSACTION (B) 123,409,807 123,409,807 TRANSFER PRICING ADJUSTMENT 48,504,302 33,029,233 WITHOUT PREJUDICE, TRANSFER PRICING ADJUSTMENT, TO BE SUSTAINED, IF ANY, SHOULD BE R ESTRICTED TO RS.3,30,29,233. NO. COMPANY NAME OP/TC 1. P L WORLD WAYS LTD. 4.52% 2. PUBLICITY SOCIETY OF INDIA LIMITED 37.14% 3. ICC INTERNATIONAL AGENCIES LIMITED 11.83% 4. BRITISH METAL CORPORATION (INDIA) PVT. LTD. 62.96% 5. PRIYA INTERNATIONAL LIMITED (INDENTING SEGMENT) 82.19% ARITHMETIC MEAN 39.73% 21 ON THE OTHER HAND, LEARNED SR. DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. AT THE FIRST INSTANCE, WE SHALL NOW DEAL WITH THE COMPARABLES CHOSEN BY THE T RANSFER PRICING OFFICER : (I) BRITISH METAL CORPN. INDIAN PVT. LTD. THIS COMPANY WAS SELECTED AS COMPARABLE BY THE TRANSFER PRICING OFFICER. BEFORE US, THE APPELLANT OBJECTED TO INCLUSION OF THIS COMPANY AS COMPARABLE ON THE GROUND THAT THIS COMPANY PROVIDES AGENCY SERVICES FOR NON - FE RROUS METALS, PRECIOUS METALS, FERTILIZERS, AND COOKING COAL AND WHEREAS THE APPELLANT PROVIDES MARKET SUPPORTING SERVICES FOR WHICH IT EARNS COMMISSION IN RESPECT OF EQUIPMENT FOR MINERALS AND ROCK PROCESSING. THE APPELLANT ALSO BROUGHT ON RECORD THE DETA ILS TO DEMONSTRATE THE NATURE OF BUSINESS CARRIED ON BY THIS COMPANY. IT IS CLEAR FROM THE PAGE NOS. 695 & 696 OF THE PAPER BOOK THAT THIS COMPANY IS ENGAGED IN PROVIDING AGENCY SERVICES IN NON - FERROUS METALS, FERTILIZERS AND COOKING COAL ETC. IN OUR CONSI DERED OPINION, THE NATURE OF SERVICES RENDERED BY THIS COMPANY IS ENTIRELY DIFFERENT AND CANNOT BE CONSIDERED AS A COMPARABLE. MOREOVER, THE APPELLANT RECEIVED FIXED FEE FROM ITS AE. THEREFORE, WE DIRECT THAT THIS COMPANY BE OMITTED FROM THE LIST OF 22 COMPAR ABLES FOR THE PERIOD UNDER CONSIDERATION FOR THE PURPOSE OF DETERMINING ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION IN QUESTION. (II) PRIYA INTERNATIONAL THIS COMPANY WAS SELECTED AS COMPARABLE BY THE TRANSFER PRICING OFFICER. IT IS SEEN FROM THE RECORD THAT THE TRANSFER PRICING OFFICER INCLUDED THIS COMPANY IN THE FINAL SET OF COMPARABLE S SELECTED BY HIM. THE APPELLANT BROUGHT ON RECORD SUBSTANTIAL FACTUAL EVIDENCE TO ESTABLISH THAT THIS COMPANY IS FUNCTIONALLY DISSIMILAR AND DIFFERENT FROM THE APPELLANT AND THEREFORE IS NOT COMPARABLE. IT IS EVIDENT FROM PAGE NO. 740 TO 743 OF THE PAPER BOOK THAT THIS COMPANY IS ENGAGED IN THE PROVISION OF COMMISSIONING AGENCY AND TRADING OF CHEMICALS. THIS FUNCTION IS TOTALLY DIFFERENT FROM M ARKETING SERVICES FOR THE EQUIPMENT OF MINERALS AND THEREFORE, THIS COMPANY SHOULD BE EXCLUDED FOR THE PURPOSES OF COMPARISON WHILE DETERMINE THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION IN QUESTION. (III) PL WORLDWAYS LTD. THIS COMPANY WAS SE LECTED AS COMPARABLE BY THE TRANSFER PRICING OFFICER. IT EARNS COMMISSION FROM AIR TICKET SOLD AND ALSO TRANSACTIONAL FEES FROM ITS CUSTOMER FOR SALE OF HOLIDAY PACKAGES. THIS FUNCTION IS TOTALLY DIFFERENT FROM THE FUNCTIONS CARRIED OUT BY THE APPELLANT AN D THEREFORE, THIS COMPANY SHOULD 23 BE EXCLUDED FOR THE PURPOSES OF COMPARISON WHILE DETERMINE THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION IN QUESTION. (IV) PUBLICITY SOCIETY OF INDIA LTD. THIS COMPANY WAS SELECTED AS COMPARABLE BY THE TRANSFER P RICING OFFICER . IT IS CONTENDED THAT THIS COMPANY CANNOT BE INCLUDED IN THE LIST OF COMPARABLES AS IT IS ENGAGED IN THE BUSINESS OF PUBLICATION OF NEWS PAPERS AND PUBLICATIONS. TO DEMONSTRATE THIS FACT, THE APPELLANT HAD FILED THE ANNUAL FINANCIAL STATEMEN T OF THIS COMPANY. WE FIND SUBSTANCE IN THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE APPELLANT AND THEREFORE, THIS COMPANY SHOULD BE EXCLUDED FOR THE PURPOSES OF COMPARISON WHILE DETERMINE THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION IN Q UESTION. 8.1 LEARNED COUNSEL FOR THE APPELLANT SUBMITTED BEFORE US THAT IF THE ABOVE AFORESAID COMPARABLES ARE EXCLUDED FROM THE LIST OF THE COMPARABLES CHOSEN BY THE TRANSFER PRICING OFFICER THEN THE PROFIT MARGIN OF THE APPELLANT WOULD WELL WITHIN + 5 PER CENT RANGE OF THE ARITHMETIC MEAN OF THE REMAINING COMPARABLES COMPANIES AND THEREFORE THE PRICE RECEIVED BY THE APPELLANT WOULD BE CONSIDERED AS AT ARM S LENGTH. HE PRAYED FOR A LIMITED DIRECTION TO THE TRANSFER PRICING OFFICER ON THE LINES SET OUT ABOVE AND DETERMINE THE ARM S LENGTH PRICE. IT ALSO SUBMITTED THAT THE OTHER ISSUES RAISED BY THE APPELLANT IN THE GROUNDS OF APPEAL NEED NOT BE GONE INTO. 8.2 WE ARE OF THE VIEW THAT THE PRAYER SOUGHT FOR BY LEARNED COUNSEL FOR THE APPELLANT IS ACCEPTAB LE AND ACCORDINGLY, THE TRANSFER PRICING OFFICER IS DIRECTED TO 24 COMPUTE THE ARM S LENGTH PRICE AFTER EXCLUDING THE COMPARABLE COMPANIES DEALT WITH IN THIS ORDER. ACCORDINGLY, THE GROUND NOS. 2 TO 2.11 ARE DISPOSED OF. 9 . GROUND NOS. 3 TO 3.6 RELATE TO CHAL LENGE OF ADDITION ON ACCOUNT OF DISALLOWANCE OF 50% OF PROFESSION PAID TO M/S METSO MINERALS (MUMBAI) PVT. LTD. THE BRIEF FACTS LEADING TO THIS ADDITION OF RS. 30,14,610/ - UNDER SECTION 40A(2)(A) OF THE ACT ARE AS FOLLOWS: DURING THE PREVIOUS YEAR RELEVANT TO THE AY 2009 - 10, THE APPELLANT M ADE PAYMENT TO ITS SUBSIDIARY M/ S METSO MINERALS (MUMBAI) PRIVATE LIMITED ('METSO MUMBAI') AMOUNTING TO RS. 60,29,221 TOWARDS DRAWINGS, DESIGN & ENGINEERING SERVICES. THE APPELLANT , DURING THE YEAR HAS ALSO RECEIVED PAYMENT OF RS 9,67,387 FOR SIMILAR SERVICES RENDERED TO METSO MUMBAI. THE ASSESSING OFFICER, IN THE IMPUGNED ORDER, DISALLOWED 50% OF THE AFORESAID PAYMENT MADE BY THE APPELLANT TO METSO MUMBAI UNDER SECTION 40A(2)(A) OF THE ACT, ALLEGED LY HOLDING THAT: (I) THERE IS NO JUSTIFICATION FOR THE PAYMENT AT THE RATE OF RS. 600 PER HOUR; (II) THERE ARE NO DETAILS OF WHAT WORK HAS BEEN DONE BY THE ENGINEERS OF MET SO MUMBAI AND WHAT HAS BEEN THE CONTRIBUTION TO REVENUE OF THE APPELLANT; (III) THE APPELLANT IS ALSO RENDERING SUCH SERVICES TO ITS RELATED PARTIES. ACCORDINGLY, THERE IS RATIONALE TO RECEIVE SUCH SERVICES FROM METSO MUMBAI; (IV) THE APPELLANT HAS NOT FURNISHED ANY COMPARABLE CASE WHICH WOULD SHOW THAT THE RATES ARE AS PER P REVAILING MARKET RATES; 25 (V) PROFESSIONAL SERVICES HAVE BEEN RENDERED TO METSO MUMBAI AND OTHER THIRD PARTIES IN SPITE OF TIGHT DELIVERY SCHEDULES. IT IS SUBMITTED BEFORE US THAT THE AFORESAID DISALLOWANCE MADE BY THE ASSESSING OFFICER IS WITHOUT APPRECI ATING THE FOLLOWING UNDERLYING FACTS OF THE CASE OF THE APPELLANT AND THE NEED FOR RECEIVING SERVICES FROM METSO INDIA: (I) THE APPELLANT, UNDER ITS PROJECT ENGINEERING SEGMENT, IS ENGAGED IN DIVERSIFIED ACTIVITIES, INCLUDING, (A) BULK MATERIAL HANDLING (B) ACTIVITIES SUCH AS STOCK RE - CLAIMER, WAGON TIPPLER & DESIGNING FOR ENGINEERING SERVICES (C) SUPPLY OF EQUIPMENTS / MATERIALS AND (D) ERECTION AND COMMISSIONING OF THE PLANT! PROJECTS. (II) SINCE THE APPELLANT IS ENGAGED IN DIVERSIFIED ACTIVITIES, IN ORDER TO FACILITATE AND MANAGE DELIVERY OF GOODS AND SERVICES ON TIME, WHILE HANDLING MULTIPLE PROJECTS SIMULTANEOUSLY, IT IS NECESSARY FOR THE APPELLANT TO DELEGATE SOME PART OF THE' DESIGN AND DRAWING WORK TO OUTSIDE AGENCY, ON REQUIREMENT BASIS. THIS I S ALSO REQUIRED TO AVOID PENALTIES/DAMAGES CLAIMED BY THE CUSTOMERS ON DELAY IN DELIVERY OF GOODS AND SERVICES. (III) SINCE METSO MUMBAI HAS REQUISITE EXPERTISE TO RENDER SUCH SERVICES ON TIME TO TIME BASIS WITH FUNDAMENTAL QUALITY OF GOODS AND SERVICES, IT IS INCUMBENT UPON THE APPELLANT TO ENGAGE METSO MUMBAI FOR RENDERING SUCH SERVICES. (IV) FURTHER, SINCE METSO MUMBAI IS GROUP ENTITY OF THE APPELLANT, CONFIDENTIALITY AND SECRECY OF THE PRODUCTS FOR WHICH THE DRAWINGS ARE MADE ARE KEPT SECRET. IN O RDER TO SUBSTANTIATE ITS CLAIM AND CORROBORATE THE AFORESAID, THE APPELLANT, DURING THE COURSE OF ASSESSMENT PROCEEDINGS VIDE SUBMISSION DATED 25.02.2013 SUBMITTED THE FOLLOWING DOCUMENTS: 1) THE DETAILS OF PROJECTS FOR WHICH SERVICES WERE AVAILED FROM MET SO MINERALS. THE NUMBER OF HOURS SPENT BY METSO MUMBAI ON EACH WAS ALSO SUBMITTED; 2) COPY OF INVOICES ISSUED BY METSO MUMBAI; 26 3) NAME PROJECTS FOR WHICH THE APPELLANT COMPANY HAS RENDERED SERVICES TO METSO MUMBAI; 4) COPY OF INVOICES RAISE BY THE APPELLANT FOR RENDITION OF SERVICES TO METSO MUMBA I; 5) DETAILS OF THE QUALIFIED ENGINEERS OF THE BOTH COMPANIES WHO HAVE RENDERED THE PROFESSIONAL WORK OF ENGINEERING AND DESIGNING SERVICES. THE DRP VIDE ITS ORDER DATED 26.12.2013 REJECTED THE OB JECTION OF THE APPELLANT AGAINST THE ADDITION MADE BY THE ASSESSING OFFICER ALLEGEDLY HOLDING THAT THE RATE OF PAYMENT MADE BY APPELLANT AGAINST SUCH PROFESSIONAL SERVICES ARE HIGHER AND SUSCEPTIBLE AS METSO MUMBAI WAS IN LOSSES. THE LEARNED SR. COUNSEL SUBMITTED BEFORE US THAT I T IS A SETTLED POSITION AS LAID DOWN IN THE FOLLOWING DECISIONS IS THAT WHETHER ANY EXPENDITURE IS REQUIRED TO BE INCURRED FOR THE PURPOSE OF BUSINESS AND THE REASONABLENESS OF THE QUANTUM THEREOF HAS TO BE JUDGED FROM THE POINT O F VIEW OF THE BUSINESSMAN AND NOT OF THE REVENUE: - CIT V. MALAYALAM PLANTATIONS LIMITED: 53 ITR 140 (SC) - CIT V. WA1CHAND & CO. ETC. (1967) 65 ITR 381 - J K WOOLLEN MANUFACTURERS V. CIT: 72 ITR 612(SC) - CIT V. BIRLA COTTON SPG. AND WVG. MILLS: 82 ITR 166 (S C) - MADHAV PRASAD JATIA V. CIT UP, 118 ITR 200 (SC) - S.A. BUILDERS LTD. VS. CIT : 288 ITR 1 (SC) - CIT V. ROCKMAN CYCLE INDUSTRIES LTD.: 331 ITR 401 (P&H) (FB) - CIT V. BHARTI TELEVENTURES LTD: 331 ITR 502 (DEL) - CIT VS. EKL APPLIANCES LTD. : ITA NO. 1068/2011 & 1070/ 2011 (DEL HC) IT WAS FURTHER SUBMITTED THAT FOR INVOKING THE PROVISIONS OF SECTION 40A(2) OF THE ACT, THE ONUS LIES UPON THE ASSESSING OFFICER TO PROVE THAT THE PAYMENT IS EXCESSIVE OR UNREASONABLE HAVING REGAR D TO THE FAIR MARKET VALUE OF GOODS OR LEGITIMATE NEEDS OF THE BUSINESS, AS HAS BEEN HELD IN THE FOLLOWING DECISIONS: 27 - CIT VS. MODI REVLON (P.) LTD.:210 TAXMAN 161 (DEL) - CIT VS. NESTLE INDIA LTD: 337 ITR 103 (DEL.) - CIT VS. FORBES TEA BROKERS: 315 ITR 405 (MAD.) - CIT V. MODI XEROX LTD.: ITA NO.31120011 LEX DOC ID 405888 (ALL.) - VOLTAMP TRANSFORMERS (P) LIMITED V. CIT: 129 ITR 105 (GUJ.) - CIT V. ADITYA MEDISALES LTD.: ITA NO. 559/2009 (GUJ.) - CIT V. GOPALA POLYP LAST LTD. : ITA NO. 26512009 (GUJ.) - JCIT V. ITC LTD.: 112 ITD 57 (KOL.)(SB) - JAGDAMBA ROLLERS FLOUR MILL LTD. VS ACIT: 117 ITD 260(TM) (NAG.) - ARADHANA BEVERAGES & FOODS CO. (P.) LTD VS. DCIT:51 SOT 426 (DEL) - S.K. ENGG VS. J CIT: 103 ITD 97 (BANG.) - RANGOON CHEMICAL WORKS (P) LIMITED: 100 TAXMAN163 (AHD.) (MAG) - KINETIC HONDA MOTOR LTD V. JCIT 77 ITD 393 - SHYAM OIL CAKE LTD V. ACIT: 83 TTJ 414 (JD.) - VIKSHARA TRADING & INVESTMENT (P) LIMITED: 61 TTJ 6 (AHD.) - BETA NAPHTHOL (P) LIMITED: 50 TTJ 375 (IND.) IN THE INSTANT CASE, THE ASSESSING OFFICER HAS FAILED TO BRING ON RECORD ANY CORROBORATIVE EVIDENCE TO ESTABLISH THAT THE PRICE PAID TO METSO MINERALS FOR RECEIPT OF PROFESSIONAL SERVICES WAS UNRE ASONABLE AN D EXCESSIVE. THE AO/ DRP HAVE MERELY MADE BALD ALLEGATIONS WITHOUT ANY SUPPORTING EVIDENCE WITH RESPECT TO EXCESSIVENESS OF THE PAYMENTS MADE AS COMPARED TO THE 'MARKET VALUE'. RELIANCE IN THIS REGARD IS ALSO PLACED ON THE DECISION OF THE HON'BLE TRIBUNAL IN THE APPELLANT'S OWN CASE FOR ASSESSMENT YEAR 2007 - 08 (ITA NO 4414/DEL/2012) WHE REIN THE HON'BLE TRIBUNAL WHILE DELETING SIMILAR ADDITION MADE BY THE ASSESSING OFFICER HELD AS UNDER: '12. IN VIEW OF THE FOREGOING REASONS, WE ARE OF THE CONSIDERED OPI NION THAT THE CASE OF THE ASSESSEE DOES NOT FALL IN ANY OF THE THREE SITUATIONS CONTEMPLATED BY SECTION 40A(2)(A) OF THE ACT. ONCE A PAYMENT IS HELD TO BE NOT EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES OR THE LEGITIMAT E NEEDS OF THE BUSINESS OR THE BENEFIT DERIVED BY OR 28 ACCRUING TO THE ASSESSEE, THERE CAN BE NO QUESTION OF MAKING OR SUSTAINING ANY DISALLOWANCE U/S 40A(2) OF THE ACT. WE, THEREFORE, ORDER FOR THE DELETION OF THE ADDITION SUSTAINED IN THE FIRST APPEAL. ' IN VIEW OF THE ABOVE, IT WAS SUBMITTED THAT THE DISALLOWANCE OF RS. 30,14,610 BEING PROFESSIONAL CHARGES PAID TO METSO MUMBAI MADE BY THE ASSESSING OFFICER MAY BE DIRECTED TO BE DELETED. 10 . ON THE OTHER HAND, THE LD. SENIOR DR HAS RELIED ON THE ORDERS O F THE LOWER AUTHORITIES. 1 1 . WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT APPEARS FROM THE ASSESSMENT ORDER THAT THE ASSESSING OFFICER HAD DISALLOWED THE IMPUGNED PAYMENT TO ITS SISTER CONCERN MERELY GUIDED BY THE FACT THAT THE APPELLANT HAD BEEN INCURRING LOSSES AND ALSO PLACED RELIANCE ON THE DECISION OF HON BLE GUJARAT HIGH COURT IN THE CASE OF CORONATION FLOUR MILLS VS. ACIT, [2009] 314 ITR 1 (GUJ.) . THIS, IN OUR VIEW, WOULD NOT MEET THE REQUIREMENT OF THE PROVISIONS OF SECTI ON 40A(2) . A PLAIN READING OF THE PROVISIONS OF SECTION 40A(2) REVEALS THAT WHERE AN ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT IS REQUIRED TO BE MADE OR HAS BEEN MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF SECTION 40A(2) OF THE ACT A ND THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO (A) FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE; OR (B) THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASS ESSEE; OR (C) THE BENEFITS DERIVED BY OR ACCRUING TO THE ASSESSEE ON RECEIPT OF SUCH GOODS, SERVICES OR FACILITIES, THEN THE ASSESSING OFFICER SHALL NOT ALLOW AS A DEDUCTION SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY THE ASSESSING OFFICER TO BE 29 EXCE SSIVE OR UNREASONABLE. THEREFORE, IT BECOMES APPARENT THAT THE ASSESSING OFFICER IS REQUIRED TO RECORD A FINDING AS TO WHETHER THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE IN RELATION TO ANY ONE OF THE THREE REQUIREMENTS PRESCRIBED. THIS OPINION HAS TO BE FORMED BY THE ASSESSING OFFICER BASED ON THE MATERIAL EVIDENCE AVAILABLE ON THE RECORD. THE ASSESSING OFFICER IS DUTY BOUND TO BRING ON RECORD THE COMPARABLE FAIR MARKET VALUE OF THE SERVICES RENDERED TO SAY THAT THE VALUE PAID BY THE ASSESSEE IS EXCESSIV E OR UNREASONABLE. WE FIND NO EVIDENCE ON RECORD TO NOTICE THAT THE ASSESSING OFFICER MADE EFFORTS IN THIS DIRECTION. HE SIMPLY MADE DISALLOWANCE BASED ON THE SURMISES AND CONJECTURES. 1 2 . WE MAY ALSO REFER TO THE SCOPE OF SECTION 40A(2) AS EXPLAIN ED BY THE CBDT IN CIRCULAR NO. 6P, DATED 06.07.1968. THE CBDT CLARIFIED THAT WHILE EXAMINING THE REASONABLENESS OF EXPENDITURE THE ASSESSING OFFICER IS EXPECTED TO EXERCISE HIS JUDGMENT IN A REASONABLE AND FAIR MANNER. IT SHOULD BE BORNE IN MIND THAT THE PROVISI ON IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS TO RELATIVES AND ASSOCIATE CONCERNS AND SHOULD NOT BE APPLIED IN A MANNER WHICH WILL CAUSE HARDSHIP IN BONA FIDE CASES. 1 3 . IN CIT VS. EDWARD KEVENTER (P.) LTD. [1972] 86 ITR 370, THE CALCUTTA HIGH COURT CONSIDERING IDENTICAL PROVISION IN 1922 ACT, IT WAS HELD THAT THE SECTION PLACES TWO LIMITATIONS IN THE MATTER OF EXERCISE OF THE POWER. THE SECTION ENJOINS THE ASSESSING OFFICER IN FORMING ANY OPINION AS TO THE REASONABLENESS OR OTHERWISE OF THE EXPENDITURE INCURRED MUST TAKE INTO CONSIDERATION (I) THE LEGITIMATE BUSINESS NEEDS OF THE COMPANY AND (II) THE BENEFIT DERIVED BY OR ACCRUING TO THE COMPANY. THE 30 LEGITIMATE BUSINESS NEEDS OF THE COMPANY MUST BE JUDGED FROM THE VIEW POI NT OF THE COMPANY ITSELF AND MUST BE VIEWED FROM THE POINT OF VIEW OF A PRUDENT BUSINESSMAN. IT IS NOT FOR THE ASSESSING OFFICER TO DICTATE WHAT THE BUSINESS NEEDS OF THE COMPANY SHOULD BE AND HE IS ONLY TO JUDGE THE LEGITIMACY OF THE BUSINESS NEEDS OF THE COMPANY FROM THE POINT OF VIEW OF A PRUDENT BUSINESSMAN. THE BENEFIT DERIVED OR ACCRUING TO THE COMPANY MUST ALSO BE CONSIDERED FROM THE ANGLE OF A PRUDENT BUSINESSMAN. THE TERM BENEFIT TO A COMPANY IN RELATION TO ITS BUSINESS, IT MUST BE REMEMBERED, HA S A VE R Y WIDE CONNOTATION AND MAY NOT NECESSARILY BE CAPABLE OF BEING ACCURATELY MEASURED IN TERMS OF POUND , SHILLINGS AND PENCE IN ALL CASES. BOTH THESE ASPECTS HAVE TO BE CONSIDERED JUDICIOUSLY, DISPASSIONATELY WITHOUT ANY BIAS OF ANY KIND FROM THE VIEW - POINT OF A REASONABLE AND HONEST PERSON IN BUSINESS. 14 . THE AFORESAID JUDGEMENT OF CALCUTTA HIGH COURT WAS AFFIRMED BY THE APEX COURT IN CIT VS. EDWARD KEVENTER (P.) LTD. [1978] 115 ITR 149. IN THE SAME LINE IS THE JUDGMENT OF BOMBAY HIGH COURT IN THE CASE OF CIT VS. SHTRUNJAY DIAMONDS [2003] 261 ITR 258/128 , TAXMANN, 759. 15 . IN THE LIGHT OF AFORESAID LEGAL POSITION, WE HOLD THAT 50% OF PROFESSIONAL CHARGES PAID TO M/ S METSO MINERALS (MUMBAI) PRIVATE LIMITED C ANNOT BE DISALLOWED AND ACCORDINGLY THESE GROUNDS OF APPEAL ARE ALLOWED. 16 . GROUND NO. 4 TO 4. 1 RELATES TO CHALLENGE OF DISALLOWANCE OF RS 2,07,137/ - ON ACCOUNT OF UNEXPLAINED EXPENDITURE MADE AGAINST CREDIT CARD BILLS . 31 16.1 . DURING THE ASSESSMENT PRO CEEDINGS, THE ASSESSING OFFICER REQUIRED THE APPELLANT TO EXPLAIN THE TRANSACTION AMOUNTING TO RS 207,137 / - AGAINST THE CREDIT CARD BILLS AS PER INDIVIDUAL TRANSACTION STATEMENT (' ITS ') FURNISHED BY CITI BANK. SINCE NO SUCH TRANSACTION WAS ENTERED INTO B Y THE APPELLANT DURING THE YEAR AND NO TRANSACTION WAS RECORDED IN THE BOOKS OF ACCOUNTS OF THE APPELLANT, THE APPELLANT SOUGHT INFORMATION FROM CITI BANK. HOWEVER, CITI BANK DIRECTED THE APPELLANT TO SOUGHT INFORMATION FROM THE ASSESSING OFFICER. 16.2 F URTHER, THE AIR FURNISHED BY CITI BANK WAS ALSO IN THE NAME OF VIJAY DHAR WHOSE ADDRESS IS STATED TO BE THAT OF THE APPELLANT. THE APPELLANT REQUESTED CITI BANK AS WELL AS ASSESSING OFFICER TO FURNISH THE RELEVANT DETAILS, HOWEVER, BOTH DID NOT ACCEPTED TH E REQUEST AND DID NOT FURNISH ANY DETAIL TO THE APPELLANT. IN THESE CIRCUMSTANCES, THE APPREHENSION OF AD THAT THE SAID TRANSACTION IS UNEXPLAINED - IS INCORRECT . 16.3 THE DRP VIDE ITS ORDER DATED 26.12.2013 HAS HOWEVER DIRECTED THE AO TO FURNISH THE DETA IL OF ENTRIES REGARDING THE CREDIT CARD TRANSACTION TO THE APPELLANT AND THEN DECIDED UPON 'THE' TAX LIABILITY U/ S. 69C OF THE ACT FOR UNEXPLAINED CREDIT. THE DRP HELD AS FOLLOWS: 'THE ASSESSEE HAS SUBMITTED THAT DETAIL OF TRANSACTIONS WAS NOT SUPPLIED T O HIM AND THE A 0 HAS NOT ESTABLISHED THAT ENTRIES ARE NOT RECORDED IN BOOKS OF ACCOUNTS. IN THE VIEW OF THIS, DRP DIRECTS THE AO TO FURNISH DETAIL OF ENTRIES REGARDING CREDIT CARD TRANSACTION TO THE ASSESSEE AND THEN DECIDE UPON ITS TAXABILITY U/S 69C OF THE ACT. THE OBJECTION IS DISPOSED OF ACCORDINGLY. ' 32 THE ASSESSING OFFICER WHILE PASSING THE FINAL ORDER DATED 28.02.2014 DID NOT FOLLOWED THE DIRECTION OF THE DRP AND DID NOT RE - VERIFIED THE AIR OF THE CITI BANK AND UPH ELD THE ADJUSTMENT OF RS 207,137 / - BY HOLDING THAT THERE WAS PAUCITY OF TIME SO AS TO VERIFY THE AIR OF CITI BANK. RELIANCE IS PLACED ON THE RECENT DECISION OF THE MUMBAI TRIBUNAL IN CASE OF THREADNEEDLE I NVESTMENT FUND I CVC ASIA FUND MUMBAI (ITA 8016/MUM/ 2011) WHERE IN IT HAS BEEN HELD T HAT ONUS DOES NOT SHIFTS ON ASSESSEE IF A TRANSACTION IS REPORTED IN AIR. THE TRIBUNAL HELD AS FOLLOWS: ' .......JUST BECAUSE AN AIR REPORT WAS GENERATED INDICATING THE PAN NO. OF ASSESSEE, THE ONUS DOES NOT SHIFT COMPLETELY TO ASSESSEE. IT IS THE RESPONS IBILITY OF A O TO EXAMINE COMPLETE DETAILS BEFORE ASKING FOR RECONCILIATION AND WHETHER THE TRANSACTIONS WERE INDEED UNDERTAKEN OR NOT. THE AIR REPORT ALSO DOES NOT CONTAIN ANY AUTHENTICATION BUT SINCE IT IS GENERATED BY THE DEPARTMENT, CREDIT WAS GIVEN BY AO AND DRP 'ABOUT ITS AUTHENTICITY. ASSESSEE AFTER OBTAINING THE DETAILS AND MAKING EFFORTS TO RECONCILE FILED THE DOCUMENTS ON RECORD DULY CERTIFIED AS 'TRUE COPY' BEFORE THE DRP. WHAT FURTHER AUTHENTICATION WAS REQUIRED COULD NOT BE UNDERSTOOD. IN OUR V IEW, THE DRP SHOULD HAVE EXAMINED THE TRANSACTIONS, WHICH COULD NOT BE DONE BEFORE AO DUE TO LACK OF TIME AND DETAILS. ' RELIANCE IS PLACED ON DECISION OF BANGALORE TRIBUNAL IN CASE OF DCIT VS. SHRI G. SELVA KUMAR (ITA NO. 868/ BANG/2009) WHERE IN IT HAS BEEN HELD THAT ONUS WOULD BE ON THE REVENUE IF THE ADJUSTMENT IS MADE ON THE BASIS OF AIR. THE TRIBUNAL HELD AS FOLLOWS: ' 10 .....ASSESSMENT ORDER BASED ONLY ON THE AIR REPORT WILL NOT STAND IN THE EYE OF LAW. THE ASSESSEE IS ALSO DIRECTED TO CO - OPERATE WITH THE PROCEEDINGS BY PROMPTLY PRODUCING THE RELEVANT DOCUMENTS AND BOOKS OF ACCOUNT REQUIRED BY THE ID. AO .. SINCE THE GROUNDS RAISED BY THE REVENUE AND CO BY THE ASSESSEE PERTAINS TO THE SAME ISSUE, THE DELAY IN FILING THE CO IS CONDONED AND ADMITTED FOR HEARING. ' 33 I N THE LIGHT OF THE ABOVE ARGUMENTS, IT IS SUBMITTED THAT ADJUSTMENT MADE BY THE ASSESSING OFFICER ON ACCOUNT O F CREDIT CARD TRANSACTION MAY BE DELETED. 16.4 HAVING HEARD THE RIVAL SUBMISSIONS, WE ARE OF THE CONSIDERED OPINION THAT THE INTEREST OF JUSTICE WOULD BE MET, IF THE MATTER IS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. ACCORDINGLY, THIS GROUND OF APPEAL IS RESTORED TO THE FILE OF THE ASSESSING OFFICER. ITA NO. 1205/DEL/2014 17 . THIS APPEAL FILED BY THE REVENUE AGAINST THE DIRECTION OF THE HON BLE DISPUTE RESOLUTION PANEL FOR DELETION OF TWO COMPARABLES CHOSEN BY THE TRANSFER PRICING OFFICER , NAMELY KI LLICK AGENCIES MARKETING LTD. AND COX AND KINGS (INDIA) LTD. THE HON BLE DRP REJECTED THESE TWO COMPARABLES APPLYING THE FILTER OF RELATED PARTY TRANSACTION S . INDISPUTABLY, KILLICK AGENCIES MARKETING LTD. HAD 64.12% AND M/S COX AND KINGS (INDIA) LTD. HAD 109.9% OF RELATED PARTY TRANSACTIONS . IN VIEW OF THE FACT THAT THESE COMPARABLES HAD HIGH PERCENTAGE OF RELATED PARTY TRANSACTIONS , T HE HON BLE DRP HAD REJECTED THE SAME AS COMPARABLES. 18 . SECTION 92 PROVIDES THAT THE INCOME ARISING FROM INTERNATIONAL TRANSACTIONS IS TO BE COMPUTED, HAVING REGARD TO ARM S LENGTH PRICE. SECTION 92F(II) DEFINES ARM S LENGTH PRICE TO MEAN A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BET WEEN PERSONS OTHER THAN ASSOCIATED ENTERPRISES, IN UNCONTROLLED 34 CONDITIONS. TO COMPUTE ALP THE RESULTS OF THE INTERNATIONAL TRANSACTION ARE BENCH MARKED AGAINST COMPARABLE UNCONTROLLED TRANSACTION. THE MANDATE OF S. 92F(II) IS THAT ALP SHALL BE COMPUTED CO NSIDERING PRICE APPLIED OR PROPOSED TO BE APPLIED IN TRANSACTIONS BETWEEN NON - AE S. WHEN SELECTING EXTERNAL COMPARABLES, ONE NEEDS TO ENSURE THAT SUCH EXTERNAL COMPARABLES ARE UNCONTROLLED. THE COMPANIES HAVING CONTROLLED TRANSACTIONS THEREFORE NEED TO BE ELIMINATED. FOLLOWING THIS RA TIONALITY, THE COURTS HAVE EVOLVED TE S T OF RELATED PARTY TRANSACTIONS . THE HON BLE COORDINATE BENCH ES OF TRIBUNAL IN THE FOLLOWING DECISIONS , HELD THAT COMPANIES HAVING RELATED PARTY TRANSACTIONS OF 15% CANNOT BE CONSIDERED AS COMPARABLES : (I) CUSTOMER.COM PVT. LTD. VS. DCIT, [2012] 28 TAXMANN.COM 258 (BANG.) (II) ITO VS CRM SERVICES INDIA (P.) LTD., [2011] 14 TAXMANN.COM 96 (DEL.) (III) CSR INDIA (P.) LTD. VS. ITO, [2013] 31 TAXMANN.COM 265 (BANG.) (IV) LOGICA PRIVATE LTD. VS. ACIT IT(TP) A NO. 1129/BANG./2011 : TS - 131 - ITAT - 2013 - BANG - TP (V) AVAYA INDIA (P.) LTD. VS. ACIT , [2013] TAXMANN.COM 569 (DEL - TRIB.) : [2012] 15 ITR(T) 237 (DEL - TRIB.) (VI) ACIT VS. SAKATA INX (INDIA) LTD., [2012] 21 TAXMANN.COM 37 (JP) : [2012] 53 SOT 165 (JP.) (VII) HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. ITO IT(TP) NO. 1338/BANG/2010. (VIII) WILL PROCESSING SERVICES (INDIA) (P.) LTD. VS. DCIT, TS - 49 - ITAT - 2013 (MUM) - TP 27 . RESPECTFULLY FOLLOWING THE RATIO LAID DOWN IN THE ABOVE CASE S, SINCE THE COMPARABLES IN THE QUESTION ARE HAVING MORE THAN 15% RELATED PARTY TRANSACTIONS, WE HOLD THAT THE HON BLE DRP IS JUSTIFIED IN REJECTING THESE TWO COMPARABLES. HENCE THE GROUNDS OF APPEALS FILED BY THE REVENUE ARE DISMISSED. 35 28 . IN THE RESULT , THE APPEAL FILED BY THE ASSESSEE COMPANY IS PARTLY AL LOWED FOR STATISTICAL PURPOSES AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH AUGUST , 2015 SD/ - SD/ - ( I.C. SUDHIR ) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBE DATED: THE 28 TH AUGUST , 2015 VEENA RK COPY OF THE ORDER FORWARDED T O: 1 . APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR 6. GUARD FILE BY ORDER DY. REGISTRAR , ITAT, NEW DELHI