Income Tax Appellate Tribunal - Bangalore
M/S Arrow Electronics India Ltd.,, ... vs Addl.Dit, Bangalore on 31 March, 2017
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 1
IN THE INCOME TAX APPELLATE TRIBUNAL
BENGALURU BENCH 'A', BENGALURU
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER
AND
SHRI. S. JAYARAMAN, ACCOUNTANT MEMBER
1-2. I.T (TP).A Nos.209 & 210/Bang/2011
(Assessment Years : 2000-01 & 2001-2002)
3-5. Cross Objection Nos.31 to 33/Bang/2011
(In I.T (TP).A Nos.617 to 619/Bang/2011
(Assessment Years : 2002-03, 2003-04 & 2004-05)
M/s. Arrow Electronics India Ltd,
India Liaison Office, No.26, Akshaya Commercial Complex,
4th floor, Victoria Layout,
Bengaluru 560 047 .. Appellant
PAN : AAGCA0297G
v.
Additional Director of Income Tax,
(International Transaction) -1, Bengaluru .. Respondent
6-8. I.T (TP).A Nos.617 to 619/Bang/2011
(Assessment Years : 2002-03, 2003-04 & 2004-05)
Additional Director of Income Tax,
(International Transaction) -1, Bengaluru .. Appellant
v.
M/s. Arrow Electronics India Ltd,
India Liaison Office, No.26, Akshaya Commercial Complex,
4th floor, Victoria Layout,
Bengaluru 560 047 .. Respondent
Assessee by : Shri. Gurunathan, Advocate
Revenue by : Smt. Preethi Garg, CIT-DR
Heard on : 05.01.2017
Pronounced on : 31.03.2017
ORDER
PER BENCH :
Two appeals are filed by the assessee for the a ys. 2000-01, 2001-
02 , three appeals are filed by the Revenue for the a y s. 2002-03 to 2004- IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 2 05 and three cross objections are filed by the assessee against those three appeals filed by the Revenue for the a ys. 2002-03 to 2004-05, respectively, against the respective orders of the CIT(A) -IV, Bangalore which are under consideration in this proceedings .
02. M/s. Arrow Asia Pac Ltd, Hong Kong is a group company of the US based Arrow group which is looking after the Asian operations. M/s. Arrow Asia Pac Limited has set up one of its branch offices in Singapore in the name and style of M/s. Arrow Electronics India Limited which in turn had immediately opened a liaison office (LO) in Bangalore in 1994, obtaining approval of the RBI. Later on, this company opened branches of the LO at Hyderabad, Mumbai, New Delhi & Pune. However, the main operations and control remained with Bangalore office where 59 employees were working as against 16 employees in all other branches put together. The Singapore based company was exclusively set up to service the customers in India only and they constitute the entire customer base of the company.
03. Arrow Group started a fully owned subsidiary of M/s. Arrow Asia Pac limited in the name of M/s. Arrow Electronics India Private Limited in December 2002. However, till July 2003, no effective operation was carried out by the subsidiary. The LO itself was taking care of the operations till July 2 0 0 3 . S u b s e q u e n t l y , i t b e c a m e i n - operative. The sales of the Indian subsidiary are shown from July 2003, it continues till date a n d i s reported to be filing its return from July 2003. A survey w as c o n du c t e d on IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 3 28.08.2006 on t h e l ia is o n o f f ic e p r e m is e s in Bangalore where the office of the Indian subsidiary is also located. There, the sales and expenses details and other accounts pertaining to the LO was found and impounded. Statements of former employees of LO, who were later on working for the subsidiary, were recorded. After the survey, notices u/s 148 were issued for a ys 2000-01 to 2004-05. Complying with them, the assessee f i le d t h e r e t u r n s d e c la r in g in c o m e o n t h e b a s is o f c o s t + 6 % . The A O has recorded the findings of the survey. According to the A O, the LO was not supposed to do business in India as per the approval from the RBI but, in fact, the LO was carrying on some income earning activities in India which fact has been recorded by obtaining statements of former employees of the Indian subsidiary and the employees of the erstwhile LO. The AO noticed that out of the total profits earned, a portion of the profit was attributable to the Indian operations since they had liaison offices in lndia. After concluding so, he took into consideration the total sales and deducted the cost of sales to arrive at the gross . profit. The Singapore expense was taken as claimed by the assessee and after deducting expenses of Singapore and of Indian liaison offices, net profit was determined and 40% of it was taken as profit attributable to the Indian LO. Before deciding the 40:60 ratio, the AO determined the functional analysis after fixing the relative weightage of 50:25:25 to Functions, Assets and Risks and finally determined the weighted average after taking into intra sectional IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 4 ratio between the LO and the HO and finally arrived at the profit attributable to Indian operations at 40%. Thus, the AO determined the profit attributable to the Indian LO at Rs. l,35,85,005/-, Rs.74,90,544/-, Rs. l,83,37,555/-, Rs. l,42,54,775/-& Rs.92,04,320/-, for a ys 2000-01,2001-'02,2002-'03,2003-'04& 2004-05,respectively. Simultaneously, the AO referred the matter to the TPO for ays 2002-03 to 2004-05. The TPO determined adjustments u/s 92CA at Rs.5,65,55,609/-, Rs.4,96,10,165/- & Rs.1,70,10,258/-, respectively, for ays 2002-03 to 2004-05 and the AO substituted these figures as against his working of income for these ays as stated above and concluded the assessments , inter alia, charging of interest u/s. 234B , initiated penalty proceedings u/s 271(1)(c) and u/s 271B and accordingly is s u e d demand notices. A g g r ie v e d by the finding that the Singapore branch had business connection in India and against the finding that the Singapore Company had a PE in India and determination of 40% of the total profits as attributable to the Indian operations etc, the assessee filed appeals before the CIT (A). The CIT (A) dismissed them for ays 2000-01& 2001-02. However, in the appeals related to ays 2002-03 to 2004-05, the CIT(A) gave part relief on the adjustments made by the TPO. Aggrieved, the assessee filed two appeals in I.T (TP). A Nos. 209 & 210/Bang/2011 for ays 2000-01& 2001-02 with similar grounds of appeal. One of the appeal grounds is extracted as under:
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 5
7. Without prejudice the additions are excessive, arbitrary and unreasonable and ought to be deleted in full.
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 6
04. The assessee also filed similar additional grounds of appeals for ays 2000-01& 2001-02, one of the appeal grounds is extracted as under:
Additional grounds of appeal no 2:
The CIT (A) ought to have appreciated that on the facts and in the circumstances of the case, no interest was chargeable u/s.234B of the Act and consequently he ought to have directed the AO to delete the interest charged u/s.234B of the Act.
Additional grounds no 3 :
1. The learned CIT (A) erred in confirming the assessment order u/s.143(3) r.w.s.147 of the Act dt.28.12.2007, which was based entirely on statements recorded u/s.133A of the Act, which is bad in law.
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 7 Additional grounds of appeal no 4 :
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 8
05. The AR submitted the same plea which was taken before the CIT (A) and on the lines of the above additional grounds. Let us examine, how the CIT (A) dealt those issues by extracting the relevant portion of the order as under :
"4.......................................................................................................The following were the findings of A O:
i. The LO could not make any supplies on its own but the I n d i a n subsidiary could do so. This is evident from the stat ement of Mr. Singh, Sales Manager wherein he has stated that the customers had to i m p o r t t h e i r r e q u i r e m e n t s f r o m t h e i r o v e r s e a s o f f i c e l o c a t e d a t Singapore.
ii. Salaries were earlier paid by the LO and later by the Indian company.
iii. Earlier t o in corporation of th e su b sid iary th ey were permitted t o canvass imported sales from Singapore, but after the incorporation of the company they were permitted to do Rupee sales.
iv. Revenue recognition was always there before incorporation in the hands of the LO and after the company came into existence.
V. Profits arose to the Indian company after the incorporation and it was attributable to the LO before incorporation.
vi. Th e n at u r e o f t h e b u sin e s s r em ain t h e sa m e b e f or e an d af t e r t h e incorporation since the LO was dealing with the same functions like marketing, sales, service, accounts, administration etc. The LO was also assigned the task of identifying potential customers for which technically competent personnel were appointed.
vii. The Indian LO was involved in procurement of orders and step by step execution including collection of payments.
viii. Price negotiation was also one of the functions assigned to LO. IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 9 X.The LO was taking the final decision on the pricing without even referring the issue to Singapore or Hong Kong.
xi.LO was responsible for concluding the contracts. xii. Targets were given to the Indian LO.
5. After observing the above, the AO concluded that though t h e L O was n ot d oing an y t rading bu sin ess in t h e con venti onal sen se still it was involved in income earning operations by employing technically qualified persons for marketing, sales, a d m i n i s t r at i o n , a c c o u n t s e t c . , It wa s al s o i n vol v ed i n f i n d i n g p ot en t i al cu st om e r s, p ri c e n eg ot i at i o n s, c on cl u d i n g contracts, following up of payments etc., The AO finally concluded that the LO was virtually doing the business but was carefully avoiding the outcome of the act by ensuring the goods delivery by HO and receipt of payments was in Sing ap ore. LO was su rviving on remitt an ces received from Sin gap ore office and it was taking care of its expenses out of these remittances. This was essentially done in order to adhere to the stipulation of the RBI. The LO was not permitted to do any activity pertaining to industrial, commercial or t ra d i n g i n n at u r e. Ap a rt f r om t h at , an y i n co m e ari si n g fr o m a b u si n e s s connection in India was liable to be charged to tax in India as per provisions of section 9(1)(1). The appellant wanted to avoid that also as also the provisions of 7 and Article 5 of India Singapore DTAA. The AO finally concluded that the appellant should have apportioned a portion of the profit to Singapore operation and the balance to Indian Operations since the LO could have been regarded as Indian permanent establishment. The AO did exactly that, which was not done by the appellant. AO held that there is no mathematical formula for working out the profits of Indian operations and that of Singapore operations and finally concluded that Functions, Assets and Risks analysis is the best way to arrive at the profits. AO assigned relative weightage to these functions and fixed the same at 50:25:25 for F:A:R, Considering the role of the LO and the role of the HO (head office) in 8 different functions being identifying new customers, pursuit and follow up of the customers, co-ordination with the suppliers, price IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 10 negotiations and finalization, securing orders, processing Of orders, dispatching of materials, payment for materials, the AO held that LO could be assigned 565 points and the HO 235 points on a scale of 800 and concluded that 70.30 ratio is fair and reasonable. As regards assets analysis. The AO held that LO has vi rtu ally n o asset s and in vi ew of th e sam e tu ck th e rati o of 10:90 for LO : HO. As regards risk analysis, it was held that mostly it is borne by the HO and the LO was in charge of only the manpower and not for the stock he assigned the ratio of 90:10 for HO : LO. Finally he worked out the basis of 40:60 between LO and HO as under:
........................................................................................................................... ........................................................................................................................... .........................
8. Quantification of 40% of the profits to- the LO:
The AO after detailed analysis has held that 40% of the profits a s a t t ri b u t a b l e t o In d i a n o p e r a t i o n s a n d t h e b al a n c e 6 0 % t o i t s Singapore HO. The appellant has argued that the functions performed pertaining to determination, negotiation and / or fixing of prices of goods, identifying new customers, determining sale prices for third party customers, devel oping marketing strategy, coordinating marketing strategy implementation, planning advertisement and promotional material as well as use of media and processing of sales order, the LO had very limited role and in all other spheres it has no role to play. They have listed out various functions wherein the LO had no role at all which according to the appl1ant include purchasing of finished goods, inventory control, handling import, quality control, IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 11 distribution network maintenance, warehousing, shipping, selling to end users, sub-distributors, middlemen, determining its marketing and remun eration of sales p ersonnel, undertaking warranties and ot h e r fu n ct i o n s . In su p p o rt of t h ei r a rg u m e n t s t h e y h a v e q u ot ed judgment of the Hon'ble Supreme Court in the case of DIT vs. Morgan Stanley and Company Inc. It is held that this judgment was applicable only to the facts of the relevant case and it has no application to the facts of the appellant's case and hence is not relevant. Incidentally this judgment was based on clarification issued by the CBDT in circular no.23 of 1969. Since the circular itself is now withdrawn, the facts of the case are no longer relevant to the appellant's case. The appellant has also argued that preparatory to the auxiliary activities, the Indian LO carried on certain activities and their case is covered under Article 5(7) of the tax treaty between India and Singapore. It is held that that the Indian LO was carrying on activities right from the year 1996 and it w a s n o t a preparatory activity and accordingly the appellant's argument does not survive. The restriction of the activities by the RBI is cited as one of the reasons to claim that they have-not conducted any business operations nor they had a PE. Incidentally the conduct of the appellant as found out after conducting survey u/s 133A and the appellant's own admission of existence of partial income attributable to t h e In dian op eration s d o n ot supp ort th e app ellant 's argu m en ts t h a t t h e i r c a s e i s n o t c o v e r e d u n d e r S e c t i o n 9 ( 1 ) ( i ) a s a l s o t h e i r argument about existence of PE in India. It is also further held that the AO has taken enormous pains in quantifying the percentage of profit attributable to Indian operations at 40% as depicted in page 16 and 17 o f t h e assessment order. it is held that the AO was reasonable in considering sectoral weightage at 50:25:25 for functions performed, asset s empl oyed and ri sks invol ved . Fu rt h er it is held th at AU was correct in taking only 10% towards assets and risks in the i n t r a sectoral ratio pertaining to LO and the balance 90% to the HO. IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 12 Even in the functions performed, the 8 broad parameters as discussed in page 16 of the assessment order practically cover every aspect of functions performed and relative weightage allocation is also held to be proper and the final quantification of 565 to LO and 235 to HO on a scale of 8 0 0 i s h e l d t o b e p e r f e c t l y j u s t i f i e d a n d a c c o r d i n g l y q u a n t i f i c a t i o n o f 7 0 : 3 0 b e t w e e n LO and HO is upheld. The final quantification of profits attributable to LO and HO as per the table 1 above as per para 5 at 40 : 60 is also upheld."
5.1 With regard to the issues as to whether the assessee had any business connection in India as per provisions of Section 9(i) and whether the appellant had a PE in India, the assessee has relied on the following cases before the CIT(A):
- CIT vs RD Aggarwal & Co (SC) [56 ITR 201
- CIT vs. Hindustan Shipyard Ltd (AP) [109 ITR 158]
- CIT vs Atlas Steel Company Ltd (Cal) [164 .ITR 4011
- CIT vs Gulf Oil (Great Britain) Ltd (Bom) [108 ITR 874]
-Imperial Chemical Industries Limited vs inspecting A s s i s t a n t C o m m i s s i o n e r [19 ITD 275]
- VDO Tachometer Warke, West Germany vs CIT (Kar) [117 ITR 804] and the circular no 23 of the CBDT. After considering them, the CIT (A) held as under:
" 7.1 ....................................................................................................-
i . Th e CB D T h as wi t h d r awn ci rc u l ar n o 3 d at ed 23 .0 7. 196 9 al on g wi t h ci rcu l a r n o . 1 63 d at ed 2 9. 05. 19 75 an d ci r cu l a r n o . 786 d at ed 07.02.2000 vide Circular No.712009 [F.No. 500/ 135/2007- FTD-l], dat ed 22.10.2009. Accordingly relying on the above circular has no significance as it is no longer operative. It is IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 13 worthwhile to mention that the app ellant themselves have filed retu rns in resp onse to the notices u/s 148 by declaring income on the cost +6% basis. By filing t h e r e t u r n s i n r e s p o n s e t o t h e n o t i c e s u / s 1 4 8 t h e a p p e l l a n t h a s categorically admitted that a portion of income was earned in India and was taxable in India. The only issue which remained to be decided was whether the quantification of profits of LO to HO was 40:60 or otherwise. Considering the appellant's submissions the AO was asked to su bmit th e remand rep ort and in t u rn th e AO has submitt ed t he rem and rep ort wh ere-in h e has reit erated wh at ever is stated in t h e assessm en t order. However, t h e AO h as reit erat ed t he fact t hat th e appellant's themselves admitted to the activities of the . LO are taxable i n In d i a b y sh owi n g i n c om e at c o st + 6 % b a si s. In vi ew of the appellant's own a d m i s sio n by showing i nc o m e a t t ri b u t a b l e t o t h e Indian operations, the appellant has indirectly accepted the Fact that they had business connection in India and also the Indian LO as the PE o f A r r o w S i n g a p o r e . T h e a p p e l l a n t ' s arguments deserve no consideration in view of the detailed reasons given by the AO in the assessment order as also in view of the appellant's own admission of income having arisen in India and the indirect existence of the PE. Accordingly, the case laws cited by the appellant are held to be not relevant to the facts of the case and it is held that the appellant's arguments deserve no consideration."
06. We have considered the rival submissions and gone through relevant material. It is clear from the above that a survey w a s co nd u c t e d o n 28.08.2006 on t h e lia is o n o f f ic e p r e m is e s in Bangalore where the office of the Indian subsidiary is also located. There, the sales and expenses details and other accounts pertaining to the LO was found and impounded. Statements of former employees of LO, who were later on working for the subsidiary, were recorded. On due appraisal of those facts and materials , notices u/s 148 were issued IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 14 for a ys 2000-01 to 2004-05. Complying with them, the assessee f i le d t h e r e t u r n s d e c la r in g i n c o m e o n t h e b a s is o f c o s t + 6 % . I t is s e e n t h a t the AO g a v e d u e op p o r t u n it y t o th e a s s e s se e in h is le t t e r dated 24.12.2007 d r a w in g a s s e s se e ' s a t t e n t io n t o w a r d s u s in g t h e s t a t e m e n t s r e c o r d e d at t h e t im e o f s u r v e y , it s d u e a n a ly s is etc and thereafter passed the im p u g n e d a s s e s sm e n t o r d e r s . T h e C I T ( A ) h a s a ls o g iv e n a n o p p o r t u n it y by way of a remand p r o c e e d in g s . T he AO has reiterated the fact that the appellant's themselves admitted to the activities of the LO are taxable in India by showing income at cost + 6% basis. In vie w of the assesse e' s own admission by showing income attributable to the Indian operations, it has indirectly accepted the fact that they had business connection in India and also the Indian LO as the PE o f A r r o w S i n g a p o r e . T h u s , as held by the CIT(A) that the assessee's arguments d e s e r v e n o consideration in view of the detailed reasons given by the AO in the assessment order as also in view of the appellant's own admission of income having arisen in India and the indirect existence of the PE. Accordingly, the case laws cited by the assessee and the circular are held to be not relevant to the facts of the case and it is held that the appellant's arguments deserve no consideration. The CIT (A), inter alia, held that incidentally the conduct of the appellant as found out after the survey u/s 133A and the appellant's own admission of existence of partial income attributable to the Indian operations do IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 15 not support the appellant's arguments t h a t t h e i r c a s e i s n o t c o v e r e d u n d e r S e c t i o n 9 ( 1 ) ( i ) a s a l s o t h e i r argument about existence of PE in India. It is also further held that the AO has taken enormous pains in quantifying the percentage of profit attributable to Indian operations at 40% as depicted in page 16 and 17 of the asse ssme nt orde r . It is he ld tha t th e AO was re asonab le in considering sectoral weightage at 50:25:25 for functions performed, assets employed and risks involved. Further, it is held that AO was co r r e c t in t a k in g o n l y 1 0 % t o w a r d s a s s e t s a n d r is k s i n t h e in t r a sectoral ratio pertaining to LO and the balance 90% to the HO. Even in the functions performed, the 8 broad parameters as discussed in page 16 of the assessment order practically cover every aspect of functions performed and relative weightage allocation is also held to be proper and the final quantification of 565 to LO and 235 to HO on a scale of 8 0 0 is h e l d t o b e p e r f e c t l y j u s t i f i e d a n d a c c o r d i n g l y q u a n t i f i c a t io n o f 7 0 :
3 0 b e t w e e n t h e LO and the HO is upheld. The final quantification of profits attributable to the LO and the HO as per the table 1 , above , as per para 5 at 40 : 60 is also upheld. Before us, the assessee could not lay any material to dislodge the above findings and hence we uphold the orders of the CIT(A) for ays 2000-01 & 2001-02. The assessee by way of additional ground pleaded that the CIT (A) erred in confirming the assessment orders u/s.143(3) r.w.s.147 dt.28.12.2007, which was based entirely on statements recorded u/s.133A , which is bad in law. We have IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 16 considered this plea. It is clear from the survey findings extracted , supra, in sub-para 4 under para 5 etc, that the AO has relied on various relevant materials and hence this plea of the assessee is held as untenable. The CIT (A), applying the ratio laid by the Supreme Court in the case of CIT v Anjum M H Ghaswala 252 ITR 1, has held that the levy of interest u/s.234B is mandatory with which we are in agreement. In the result , all the above grounds of the assessee are dismissed for ays 2000-01 & 2001-02.
ITA Nos.617 to 619/Bang/2011 - By the Revenue CO Nos.31 to 33/Bang/2011 - By the Assessee :
07. Now, let us examine the Revenue's three appeals I.T (TP).A Nos.617 to 619/Bang/2011for assessment years 2002-03, 2003-04 & 2004-05 & Assessee's cross -objections Nos.31 to 33/Bang/2011 on I.T (TP). A Nos.617 to 619/Bang/2011 on Revenue's above three appeals as under:
08. For a ys 2002-03, 2003-04 & 2004-05, the AO determined the profit attributable to the Indian L O at Rs. l,83,37,555/-, Rs.
l,42,54,775/-& Rs.92,04,320/-, respectively. The AO noticed that the assessee's international transactions with its A E being more than 15 crores in each year referred the matter to the TPO. The TPO after making a detailed analysis, determined arm's length margin at 4.78%, 5.18% and 5.58% as mean PLI for the three years , and determined arm's length profit at Rs.5,65,66,609/-, R s . 4 . 9 6 , 1 0 , 1 6 5 / - a n d Rs.1,70,10,258/-, respectively, for the three IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 17 assessment years. The TPO took the TNMM as the most appropriate method. The A O substituted these figures as against his working of income for these ays as stated above and concluded the assessments , inter alia, charging of interest u/s. 234B , initiated penalty proceedings u/s 271(1)(c) and u/s 271B and accordingly issued d e m an d notices. Aggrieved by the finding that the Singapore branch h a d business connection in India and against the finding that the Singapore Company had a PE in India and determination of 40% of the total profits as attributable to the Indian operations and against the determination of adjustment u/s 92CA for these years etc, the assessee filed appeals before the CIT(A). The CIT (A) gave a part relief on the adjustments made by the TPO . Aggrieved, the Revenue filed three appeals I.T (TP).A Nos.617 to 619/Bang/2011for assessment years 2002-03, 2003-04 & 2004-05 with similar grounds of appeal. One of the appeal grounds is extracted as under:
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 18
09. The assessee filed three cross -objections Nos.31 to33/Bang/2011 on I.T (TP). A Nos.617 to 619/Bang/2011 for assessment years 2002-03, 2003-04 & 2004-05 with similar grounds of appeal. One of the cross -objection's grounds is extracted as under:
percentage attributed to LO which was held by the department itself at 40% of global sales.
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 19
10. The assessee also filed similar additional grounds of appeals for ays 2002-03 to 2004-05, one of the additional grounds is extracted as under:
Additional grounds of appeal no 2:
The CIT (A) ought to have appreciated that on the facts and in the circumstances of the case, no interest was chargeable u/s.234B of the Act and consequently he ought to have directed the AO to delete the interest charged u/s.234B of the Act.
Additional ground no 3 :
1. The learned CIT (A) erred in confirming the assessment order u/s.143(3) r.w.s.147 of the Act dt.28.12.2007, which was based entirely on statements recorded u/s.133A of the Act, which is bad in law.
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 20 Additional grounds of appeal :
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 21
10. The DR submitted his plea on the lines of the Revenue's grounds of appeal. The AR submitted on the lines of cross objections and the additional grounds of appeal. Let us examine, how the CIT (A) dealt them by extracting the relevant portion of the order as under :
"8....................................................................................................................................... ............................................................................................................................................. ...............................................................................The final quantification of profits attributable to LO and HO as per para 42 of the assessment orders and table I above as per Para 5 at 40:60 is also upheld. However, for AY 04-05 there is an a ri t h m e t i cal m i st ak e c o m m i t t ed b y t h e A O i n n ot al l owi n g Singapore exp enses and accordingly for AY 04- 05 the IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 22 figures as determined under the head TP adjustments, (worked out below) of Rs.52,82,613/- is confirmed.
9. Transfer Pricing adjustment as per Section 92CA:
9.1 The AO noticing that the appellant's international taxation with its AE being more than 15 crores in each year referred the matter to the TPO after making a detailed analysis determined arm's length margin at 4.78%, 5.18% and 5.58% as mean PLI for the three years , and determined arm's length profit at Rs.5,65,66,609/-, Rs.4.96,10,165/- and Rs.1,70,10,258/- for the three assessment years. The TPO took the TNMM as the most appropriate method.
9.2 The appellant has rai sed objections on the determinati on of the ALP on its entire sales rather than applying the above percentage on the profit attributable to LO. Besides that, it is also stated that the working capital adjustment has not been given by the TPO. It was also pointed out that the AO has determined certain profit for the same year on protective basis but the TPO has determined income at much higher ratio which was 3.09 times, 3.48 times and 1.85 times higher as compared to the AO. This is b e c a u s e o f t h e f a c t , t h a t the TPO has not considered applying the d et erm i n ed p erc en t ag es at t ri b ut abl e to the LO wh i ch was h el d by the department itself at 40%. of the global sales. Besides that, it was stated that by not giving working capital adjustment of 2.75%, 2.81% and 1.92%, the TPO has arrived at a much higher figure as compared to what the AO under identical circumstances has computed. The appellant has also relied on the following judgments in support of the working capital adjustment:
(a) Philips Software Centre Pvt. Ltd Vs. ACT (119 TTJ 721)
(b) Sony India Pvt. Ltd Vs. CIT (315 ITR 150) ( C) Eg ain Com m u nicat i on s Pvt . Lt d ( Del hi Tri bu n al in ITA No.1885 /PM/2007).
(d) Mentor Graphics P. Ltd., [109 ITD 101] [2007] [Delhi] IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 23 After considering the appellant's arguments on these issues only two issues have to be determined.
(i) Whether the determined margin of ALP for three years are to b e applied on the total turnover or on the turnover of the LO which is determined to be 40% of the total turnover.
(ii) Whether the app ellant can be given working capital adjustment as claimed by them.
To be in consistent with the departmental stand for AY 00-01 & 01- 02 which is also confirmed by the CIT (A) as also in view of the AO's protective assessment wherein he has taken 40 : 60 to LO HO it is to be held that the percentage of ALP as determined by the TPO should have been applied only o n 4 0 % o f t h e t o t al s al e s a n d t h e A L P s h o u l d h a v e been determined accordingly. Coming to the working capital adjustment the appellant has given a detailed working but ultimately arrived at the figure of working capital by taking the PLR as determined by the Centre for Monitoring Indian Economy (CMIE). The appellant had adopted percentage of 10.31, 10.21 & 9.81 for th e th ree F Y's resp ectively. In cid en tally t h ere i s n o uniform a g r ee m e n t on t h e a d o p t i o n o f P L R a s a d o p t e d b y t h e C M IE . T h o u g h approximately the RBI and the CMIE determined PLR are almost the same still SBI PLR and LIBOR rates vary. Accordingly, there is no uniformity in adoption of the PLR rate as determined by the CMIE. Accordingly, it is not possible to allow working capital adjustment as requested by the appellant though the appellant is right in asking for certain percentage of working capital adjustment. Considering the fact that the AO has independently determined the p rofi t at t ri butabl e t o the LO, corresp ond i ng to this determination the working capital adjustment could be given. Accordingly working capital adjustment of 0.906% and 1.459% could be given in AY's 0 2 - 0 3 & 0 3 - 0 4 r e s p e c t i v e l y . A c c o r d i n g l y , t h e A L P margin to be re-determined for AY 02-03 & 03-04 works out as under:
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 24 AO is directed to adopt ALP adjustments of Rs.1,83137,996/- a n d Rs.1142,54,781/- for AY 02-03 & 03-04 respectively which are almost the same as Rs.1,83,37,555/- and Rs.1,42,54,775/- determined by the AO on protective basis.
However, for AY 04-05 AO has determined on protective basis income attributable to. LO at Rs.92,04,320/- but it is seen from his table in para 42 that he has not allowed Singapore expenses while arriving at this figure. For AY 04-05, the AO is directed to allow an adhoc figure of 1.25% towards Working capital adjustment. Hence the ALP margin shall be taken at 4.34% ( 5.59% - 1.25%) and on 40% of the global sales, being Indian LO sales, ALP is to be determined. This percentage is to be adopted on Rs.12,17,19,202/-
(being 40% of Rs.30,42,98,005/-) and the ALP is to be taken a t Rs.52,82,613/- for AY 04-05. Though this figure is slightly lower than the income determined by the AO, in view of the AO's non allowance of Singapore expenses the profit was determined at Rs. 92,04,320/- though in the other two years AO has allowed the same."
11. We heard the rival submissions and gone through relevant material, From the above, it is clear that the CIT (A, consistent with the departmental stand for a ys 2000-01 & 01-02 which is also confirmed by the CIT (A) as also in view of the AO's protective assessment wherein he has taken 40 : 60 to the LO :HO, held that the percentage of ALP as IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 25 determined by the TPO should have been applied only on 40% of the total sale s and the ALP should have bee n de termine d accordingly. When there is no uniformity in adoption of the PLR rate as determined by the CMIE, it is not possible to allow working capital adjustment as requested by the appellant though the appellant is right in asking for certain percentage of working capital a dj ustme nt . Conside r in g the fa ct that the AO h a s in de pe nde nt ly d e te rm ine d the profit attributable to the LO, corresponding to this determination the working capital adjustment could be given. Accordingly, the working capital adjustment of 0.906% and 1.459% could be given in ay's 0 2 - 0 3 & 0 3 - 0 4 , r e s p e c t i v e l y . T h u s , t h e C I T ( A ) re-determined t h e A L P m a r g i n for a ys 02-03 & 03-04. For a y 04- 05, the CIT (A) found that the AO has determined on protective basis income attributable to the LO at Rs.92,04,320/- but it is seen from the AO's table in para 42 that he has not allowed Singapore expenses while arriving at this figure. For ay 04-05, the CIT (A) directed the AO to allow an adhoc figure of 1.25% towards working capital adjustment. Hence, the ALP margin shall be taken at 4.34% ( 5.59% - 1.25%) and on 40% of the global sales, being Indian LO sales, and re-determine the ALP . Before us, the Revenue could not assail such findings with any material. The CIT (A) orders are consistent with the findings in ays 2000-01 & 01-02 and on the facts and circumstances appears reasonable . Hence, the orders of the CIT (A) do not require any interference and hence we dismiss the Revenue's appeal for a ys 02-03, 03-04 & 04-05, respectively.
IT(TP)A.209,210,617 to 619,COs.31 to 33/B/2011 Page - 26
12. With regard to issues in the assessee's cross-objections and the additional grounds of appeals for a ys 02-03, 03-04 & 04-05, r e s p e c t i v e l y , f o r t h e e l a b o r a t e r e a s o n s m e n t i o n e d in p a r a 6, supra, they fail and hence the corresponding grounds are dismissed.
13. In the result, the assesssee's appeals are dismissed, the appeals of the Revenue and the Cross-Objections of the assessee are also dismissed.
Order pronounced in the open court on 31 st day of March, 2017.
Sd/- Sd/-
(SUNIL KUMAR YADAV) (S. JAYARAMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
MCN*
Copy to:
1. The assessee
2. The Assessing Officer
3. The Commissioner of Income Tax
4. The Commissioner of Income Tax (A)
5. DR
6. GF, ITAT, Bangalore
By Order
Assistant Registrar.