Income Tax Appellate Tribunal - Delhi
M/S. Marubeni India Pvt. Ltd., New Delhi vs Dcit, New Delhi on 24 June, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-1', NEW DELHI
Before Ms. Sushma Chowla, Vice President
Dr. B. R. R. Kumar, Accountant Member
(E-Court Module)
ITA No. 978/Del/2015 : Asstt. Year : 2005-06
M/s Marubeni India Pvt. Ltd., Vs Deputy Commissioner of
5th Floor, Lotus Tower, Income Tax, Circle-6(1),
Community Center, New Friends New Delhi
Colony, New Delhi-110065
(APPELLANT) (RESPONDENT)
PAN No. AAACM6413A
ITA No. 933/Del/2015 : Asstt. Year : 2005-06
Deputy Commissioner of Vs M/s Marubeni India Pvt. Ltd.,
Income Tax, Circle-6(1), 5th Floor, Lotus Tower, Community
New Delhi Center, New Friends Colony,
New Delhi-110065
(APPELLANT) (RESPONDENT)
PAN No. AAACM6413A
Assessee by : Sh. Nageshwar Rao, Adv.
Revenue by : Sh. M. Barnwal, Sr. DR
Date of Hearing: 03.06.2020 Date of Pronouncement: 24.06.2020
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the assessee and revenue against the orders of the ld. CIT(A)-44, Ne w Delhi dated 18.11.2014.
2. Following grounds have been raised by the assessee:
"Gro und 1: On the facts and circumstan ces o f the case an d in law, the Hon'ble Commissioner of Inco me Tax (Appeals) ('CIT(A)') erred in partial ly confirming the ad dition p roposed by the Learned Assessing Officer ('AO'), 2 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd.
an d thereb y confirming the order issued under section 92 CA(3 ) the In come Tax Act, 196 1 ('the Act') passe d b y the learn ed Transfer Pricing Offi cer ('TPO') rejecting the econo mic anal ysi s carried on b y the App ellant.
Ground 2: That the Hon'ble CIT(A)/ TPO h ave erred in law in re-determining the arm's len gth price of the impugn ed transac tio n of th e Appel lant wi thout appreciating th e fact that circumstances necessitati ng th e d etermin ation of price by the Learn ed TPO as mentioned in sub section (3) of sectio n 92C did not exist in case of the Appell ant.
Ground 3 : The Hon'ble CIT(A) have grossly erred in facts an d law in confirming th e action of th e Learned TPO of rejecting the economic an alysis (using a combined transac tio n app ro ach with Transaction al Net Margin Method as the mo st appropriate method) undertaken by the Ap pellant in accordance with the p ro visions o f the Act read with the Inco me Tax Rules, 19 62 ('the Rules') for determinin g the Arm's Length Price ('ALP') of the impugn ed transactio n.
Ground 4: That the Hon 'ble CIT(A) has erred in law and in facts b y p arti ally con firming th e addition on account of transfer pricing b y p lacing reli ance on an incorrect premise that the Assessee takes physical delivery of goods under th e related party tradin g activi ties and thu s ap plying an ad-hoc ra ti o o f 1:38 (which rep resents three times gross profit o f AE trading segment to commission) for allo cating expenses between the related p arty trad ing segment and commission segment.
5. Ground 5 : Without prejud ice to our claim in ground no. 4 abo ve, even if indirect expen ses in curred by the App ellant are to be allo cated in an ad-hoc manner using three times g ro ss profit relating to trading activities as op posed to actu al co mmission earned, th en the allocati on be mad e in respect of all segments (in cluding non-AE tradin g activiti es) sin ce the onl y premise followed by the Hon'ble CIT(A) - that the Ap pellant takes 'physical delivery' of goods, holds true only with resp ect to the no n-AE trading activiti es.
6. Ground 6: Th at the Hon'bl e CIT(A) / AO erred in facts and law in disallowing a sum of Rs. 8,9 0,958, being 25 percent of 'business promotion expenditu re' which is incidental to the bu siness and which is who lly incurred for the purpose of the busin ess.3 ITA Nos. 933 & 978/Del/2015
Marubeni India Pvt. Ltd.
7. Ground 7 : Without prejudice to our claim in ground no . 6 above, the Hon 'ble CIT(A)/ AO has erred in disallo wing th e claim of the App ellant amounting to Rs. 8,90,958 twice. The said amount has b een considered as part of operating co st con sid ered for th e purpose of computing the arm's leng th p rice, and secondly th e same amoun t has b een ad ded back to the inco me of the App ellant. Thus, such di sallowance has resulted in double ad dition on accou nt of an expense in curred by the App ellant and hence is unjustified."
3. Following grounds have been raised by the revenue:
"1. Whether on the facts and circumstances of th e case, the ld . CIT (A) erred in reducing the adju stment to Arm's Length Price as th is was based on the compu tati on provided by the assessee.
2. Whether on the facts an d circumstan ces o f the case, the ld . CIT (A) erred in reducing the adju stment to Arm's Length Price without appreciating th at bo th the tradi ng an d commission segment constitute i nternation al transac tio ns and therefore ever if allocation of expenses were rewo rked th e corresp ondin g impact on the commission segment should also have been considered."
4. Brief facts of the case are that the assessee is a wholly owned subsidiary of Marubeni Co rpo ration, Japan (MCJ). It was incorporated in June, 1996 Marubeni is mainly involved in brokering internatio nal trading deals in wide area of industries like Machinery, Textiles, Petroleum, Metal & Minerals, Chemicals & Othe rs. The assessee stated that MCJ is Japanese trading company that serves as an import-expo rt gate way, with a specific emphasis on delivering goods, se rvices and technologies to and from the Japan. The principal activity of the company is general trading which includes the purchase, distribution and marketing of industrial goods and commodities. MIPL's ope rations include coordination of import and export of goo ds and services add liaison activities. It coordinates the trade in a 4 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd.
broad, range of industrial, agricultural and consumer goods, commodities and natural resources. MIPL has also undertaken a few trading transactions (buy-sell model), primarily involving unrelated parties.
5. Gro und 2 of the assessee's appeal relates to invocation of Sub-Section (3) of Se ction 92C by the Assessing Office r. This objection is being dismissed relying on the orde r of the Special Bench Bangalore of ITAT in the case of M/s Aztec Software and Technology Services Ltd. in ITA No. 584/BLR/2006 dated 12.06.2007 and judgment of Hon'ble High Court of Delhi in the case of Sony India Pvt. Ltd. 288 ITR 52.
6. During the year, the assessee had transaction value of Rs.271,81,364/- on account of sale of dumpers and Rs.27,08,067/- on account o f marine fuels. As per the TP report, the gross profit on sale of goods has been calculated at Rs.14,55,820/- which corresponds to 4.87% of the sales. The AO held that OP/TC of unrelated party segment has been calculated by the assessee at 64.49% as the margin of profit unde r uncontrolled conditions. After going through the submissions of the assessee of the transactions of related parties and unrelated parties, the AO came to a conclusion that the OP/TC of unrelated party segment is 4.22% whereas the same for related party segment is (-)39.16%. By following TNMM, the AO made adjustment of Rs.218,51,592/- to the profits of the assessee on the inte rnational transactions.
7. The segmental details furnished by the assessee on February 08, 2008 is as under:
5 ITA Nos. 933 & 978/Del/2015Marubeni India Pvt. Ltd.
P ar t icu lar s Inc om e fr om r ela t e d Inc om e fr om unr e lat e d
pa r ty t r a d ing s e gm ent pa r t y t r a d ing se gm ent
Am ou nt B a sis of Am ou nt B a sis of
A lloc at ion A lloc at ion
Inc om e
G r oss Pr of it 14 , 55 ,8 2 2 Act ua l 1,2 8 , 57 ,8 40 Act ua l
M isce lla neo us I nc om e 85, 0 98 G r oss P r of it 7 ,5 1, 5 90 G r oss
Pr o f it
G r oss In com e 15 , 40 ,9 2 0 1,3 6 , 09 ,4 30
Ex pe nd it ur e
P er so na l Ex pe ns es 4 ,5 6, 0 86 G r oss P r of it 18 , 85 ,8 6 9 Act ua l
A dm i nist r a t iv e, S ell i ng 6 ,6 2, 1 63 G r oss P r of it 63 , 41 ,5 9 7 Act ua l
a nd ot her e x p ens es
D e pr ec ia t i on 92, 3 56 G r oss P r of it 46, 0 43 Act ua l
B a nk char ge s 1,1 84 G r oss P r of it Act ua l
M isce lla neo us 1,0 97 G r oss P r of it Act ua l
Ex pe nd it ur e wr it te n
o ff
T ot a l E x p end it ur e 12 , 12 ,8 8 7 82 , 73 ,5 1 0
O p er a t in g P r o f it 3 ,2 8, 0 34 53 , 35 ,9 2 0
O p er a t in g M a r g in 27. 0 5 % 64. 4 9 %
( O P/ T C )
8. Summary of the segmental details filed by the assessee dated 28.08.2008:
P ar t icu lar s Inc om e fr o m r ela t ed Inc om e fr om unr e la t e d pa r ty t r a di ng s eg m e nt p ar t y t r a d ing se gm ent Am ou nt B as is of Am ou nt B a sis of A lloc at io n A ll oc at io n Inc om e Sa le of tr a de s 29 , 889 ,4 31 A ct ua l 2 79 ,7 7 2, 6 08 Act ua l go od s M isce lla neo us 751 ,58 0 G r o ss S a les 7,0 34 ,9 8 3 G r oss S a le s Inc om e T ot a l I n co m e 30 , 641 ,0 11 2 86 ,8 0 7, 5 91 Ex pe nd it ur e C ost o f go ods s old 28 , 433 ,6 09 A ct ua l 2 66 ,9 1 4, 7 68 Act ua l P er so na l ex pe ns es 8 ,2 47 ,72 5 G r o ss S a les 1,8 85 ,8 6 9 Act ua l A dm i nist r a t iv e, 11 , 974 ,3 77 G r o ss S a les 6,3 41 ,5 9 7 Act ua l Se llin g a nd ot her e x pe ns es D e pr ec ia t i on 1 ,6 70 ,14 8 G r o ss S a les 46, 0 43 Act ua l B a nk C ha r g es 21 , 411 G r o ss S a les - Act ua l M isce lla neo us 19 , 842 G r o ss S a les - Act ua l Ex pe nd it ur e wr it t en of f T ot a l E x p end it ur e 50 , 367 ,1 11 2 75 ,1 8 8, 2 78 T ot a l P r of it 19 , 726 ,1 00 11, 6 19 ,3 13 O p er a t in g Mar g in 27 . 05 % 64. 4 9 % ( O P/ T C ) 6 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd.
9. The TP adjustments computed by the assessee and the TPO is as under:
Pa r t icu lar s A dj us t m e nt A dj us t m e nt A dj us t m e nt r e-
pr o pos e d by pr o pos e d by c om put e d by
TP O in t he t he l d. T PO A p pel la nt in
TP or der in t h e s how s ubm is si on dt .
ca us e n ot ic e Au gus t 28 , 200 8
Sa le fr om T r a di ng 2 9, 8 89 ,4 31 2 9, 8 89 ,4 31 2 9, 8 89 ,4 31
( r ela t ed par t y)
M isce lla neo us I nc om e 85, 0 98 85, 0 98 85, 0 98
T ot a l O p er a t i ng 3 0, 6 41 ,0 11 2 9, 9 74 ,5 29 2 9, 9 74 ,5 29
Inc om e
D ir ect C ost 2 8, 4 33 ,6 09 2 8, 4 33 ,6 09 2 8, 4 33 ,6 09
Ind ir ect C ost 2 1, 9 33 ,5 03 1,2 12 ,8 8 7 1,2 12 ,8 8 7
T ot a l O p er a t i ng 5 0, 3 67 ,1 12 2 9, 6 46 ,4 96 2 9, 6 46 ,4 96
Ex pe ns es
O per a t in g Pr o f it 1 9, 7 26 ,1 01 9,8 89 ,4 3 1 3 28 ,0 3 3
Ar m ' s l engt h m ar gi n 4.2 2 % 64. 4 9 % 4.2 2 %
Tr a nsf er P r ici ng 2 1, 8 51 ,5 93 9,2 29 ,5 9 4 W it hi n 5 p er c ent
A dj us t m e nt r ang e
10. The main argument of the ld. AR is that the asse ssee has re-computed ope rating margins after including ' cost of sales' as part of the total operating co st on the reque st received from the TPO in respect of the trading transactions undertaken with related and unrelated parties. While the assessee re -computed ope rating margins in the aforesaid margin (i.e. after including cost of sale as part of operating cost), the asse ssee committed a mathematical mistake in its calculation on account of which 'miscellaneous income' and 'common costs' were allocated on the basis of 'gross sales' instead of 'gross profit', in respect of the service segment and related party trading segment, while the portion of common costs identified in relation to unrelated party trading segment remained unchanged. Thus, resulting in a (39.16) percent operating loss due to abnormally high allocation of common cost to related party trading segment. It was argued that the adjustment in ALP based o n the submission dated 28.08.2008 is 4.22% falls within 5% range and hence no 7 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd.
adjustment is required. It was argued that the rectification petition filed before the TPO has not been disposed off. It was argued that the matter was also brought before the ld. CIT (A) he has not considered the letter dated 28.08.2008.
11. The ld. DR argued that as per the chart filed by the assessee initially the gro ss profit on trading goods of unrelated parties was 4.22% whe reas the gross profit on the trading goods from the related parties was (-)39.16%. Hence , the adjustment made by the TPO is co rrect and needs to be upheld.
12. We have go ne through the issue in toto. We have gone through the tables filed by the assessee on various dates. The issue boils do wn to whether the apportionment of the expenditure incurred on personal, administrative and selling expenses be apportioned on actual basis o r in the absence of that whether o n gro ss profit basis or gross sales basis. The amo unts in dispute other than miscellaneous income are as unde r:
Particulars Income from Basis of Income Basis of RPT allocation from URPT allocation Personal 82,47,725 Gross Sales 1 8,85,869 Actual expen ses Administrative 1,19,74,377 Gross Sales 6 3,41,597 Actual & Selling expen ses Personal 4,5 6,086 Gross profit 1 8,85,869 Actual expen ses Administrative 6,6 2,163 Gross profit 6 3,41,597 Actual & Selling expen ses
13. As per the table at page no . 7 of this order and as per the show-cause notice, the operating costs has been mentioned as Rs.2,96,46,496/- and the adjustment proposed was 8 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd.
Rs.92,29,594/- whereas in the final order the adjustment made was Rs.2,18,51,592/-. T he main argument of the assessee was that allocatio n of expense s has been made on the basis of gross sales instead of gross profit while calculating the operating margin. The assessee's contention that the total cost included in the unrelated party has not be en excluded if the total cost of sales of Rs.26.69 crores has been found to be attende d to while arriving at operating margin of 4.22%. The ld. CIT (A) has also duly considered this fact while adjudicating, held that the grievance of the assessee stands redressed on this issue.
14. Regarding the lack of opportunity afforded, while making the addition as canvassed by the ld. AR. The ld. CIT (A) held that the calculation of the adjustment and dete rmination o f the ALP has been made based on the working given by the assessee. Thus, at this juncture two issues needs to be addressed,
a) Whethe r in the absence of sho w-cause notice as to the quantum proposed, the addition made by the revenue can be held to be legally valid.
b) Whethe r the allocation of expenses be on the basis of gross sales or on the basis of gross profit.
15. Having gone through the show-cause notice and the addition made, we find that the assessee has not been afforded an opportunity while making the addition, thus denying the principles of natural justice. It is very unfortunate that in many cases, Assessing Officers make additions under scrutiny assessments in gross violation of the principles of natural justice even without issuing a proper Show Cause Notice or 9 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd.
without giving the taxpayer a fair opportunity to explain his point of view. This approach not only creates ill-will for the department, but also gives rise to unjustified demands. Furthe r, it makes the appeal proceedings also complex and time consuming, because the Commissioner Appeals is required to admit additional evidence or call for Remand Reports etc. "Hearing rule" states that the person or party who is affected by the decision made judicial/quasi judicial should be given a fair opportunity to express his point of view to defend himself. The principle of natural justice is a very old concept and it originated at an early age. The people of Greek and roman were also familiar with this concept. In the days of Kautilya, Arthashastra and Adam were acknowledged the concept of natural justice. According to the Scriptures, in the case of Eve and Adam, when they ate the fruit of knowledge, they were forbidden by the god. Before giving the sentence, eve was given a fair chance to defend himself and the same process was followed in the case of Adam too. Later on, the concept of natural justice was accepted by the English jurist. The word natural justice is derived from the Roman word 'jus-naturale' and 'lex- naturale' which planned the principles of natural justice, natural law and equity. "Natural justice is a sense of what is wrong and what is right." In India, this concept was introduced at an even as earlier as of Ramayana and Mahabharata.
16. The Hon'ble Supre me Court of India in the case of Mohinder Singh Gill vs. Chief Election Commissioner 1978 SCR (3) 272, held that the concept of fairness should be in every action whether it is judicial, quasi-judicial, administrative and or quasi-administrative work. The rule s of natural justice are rooted in all legal systems, and are not any 'new theology. They are manifested in the twin principles of nemo judex in causa sua and audi alteram parte m. It has been 10 ITA Nos. 933 & 978/Del/2015 Marubeni India Pvt. Ltd.
pointed out that the aim of natural justice is to secure justice, or, to put it negatively to prevent miscarriage of justice. These rights can operate only in areas not covered by any law validly made. The rules of natural justice are not embodied rules. What particular rule of natural justice should apply to a given case must depend to a great extent on the facts and circumstances of that case, the framework of the law under which the inquiry is held and the constitution of the tribunal. Whenever, a complaint is made befo re a court that some principle o f natural justice has been contravened, the court has to decide whether the o bservation of that rule was necessary for a just decision on the facts of that case. Every Assessing Officer, TPO, CIT(A) or any othe r functionary imple menting statute o r law whether implementing judicial functions or an administrative functions is a judicial authority with regard to the role and duties he is supposed to pe rform. While exercising such judicial authority, obse rvance of principles of natural justice is a sine qua non.
17. Keeping in view the above and the well laid down principles and keeping in view that there is substantial discrepancy betwee n the show-cause issue and the addition made, we have come to a conclusion that this is an unambiguous case of violation of principles of natural justice and hence the action of the revenue which was concluded without affording an opportunity to the assessee is liable to be obliterated.
11 ITA Nos. 933 & 978/Del/2015Marubeni India Pvt. Ltd.
18. The issue o f apportionment of expenses whether on the basis of gross profit or on the basis of gross turnover is kept open.
Business Promotion Expenditure: (Ground No. 6)
19. At the outset, it was brought to o ur notice that the similar disallowance made by the AO in the case o f the assessee pertaining to disallowance of 25% of total business promotion expenditure in the earlier years stands upheld by the Co- ordinate Bench of ITAT Delhi, the fact of which has been fairly concede d by both the parties. In the absence of any material change in the factual and legal contest on this issue in this year, we hereby decline to interfere with the orde r of the ld. CIT (A).
20. In the result, the appeal of the assessee is allowed and the appeal of the revenue is dismissed.
Order Pronounced in the Open Court on 24 /06/2020.
Sd/- Sd/-
(Sushma Chowla) (Dr. B. R. R. Kumar)
Vice President Accountant Member
Dated: 24/06/2020
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR