| 2018-TII-INSTANT-ALL-546 | 22 March 2018 |
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CASE LAWS CIT Vs BOSKALIS INTERNATIONAL DREDGING INTERNATIONAL CV: BOMBAY HIGH COURT (Dated: March 19, 2018) Income Tax - Sections 92C, Rule 10A. Boskalis International-Dredging International, the assessee, a Netherlands based limited partnership firm, had entered into dredging contracts with Indian companies. The assessee along with its AEs M/s Dredging International NV, Belgium, as well as M/s. Boskalis International BV, Netherlands formed a consortium for these contracts. The assessee entered into a contract with Indian Oil Corporation for undertaking dredging and reclamation work in Paradeep Refinery Project. The assessee had various international transactions with its AEs, M/s World Dredging International BV (WDI), Netherlands; Boskalis Dredging India, Mumbai; and M/s Dredging International India, New Delhi, relating to hiring the dredger and vessels on lease. The assessee had made payment of hiring charges for dredger vessels, hiring and purchase of equipment besides provision of personnel services. In its transfer pricing report, the assessee had aggregated the transactions of lease of dredgers and equipment for computation of ALP. The TPO accepted the VG Bow valuation used by the assessee in its TP study for lease rentals but rejected the assessee's claim that the lease rental could be aggregated on the basis of class of transactions rather than analyzing the lease rentals on dredger by dredger basis or on equipment by equipment basis. Relying on OECD guidelines, the TPO held that held that leasing of all equipments were separately done by the assessee and all the transactions were separate and neither the same were closely linked nor continuous, therefore, the same requires to be evaluated separately. The TPO thus worked out a transfer pricing adjustment against the assessee in respect of the lease rentals paid by the assessee. On appeal, the CIT(A) confirmed the action of the TPO/AO in considering each transaction as a separate and distinct transaction which could not be clubbed together as well as disallowance of lease rentals beyond the project period. When the matter went before the Tribunal, it was held that hiring of various equipments to be used for execution of a project could be aggregated for the purpose of determination of ALP only to the extent of the transactions or to the extent of number of transactions with each associated enterprise. Further, the Tribunal in its impugned order also held that transactions carried out with different AEs could be clubbed. Having heard the parties, the High Court directs reframing of substantial question of law as to neccesity of aggregation of international transaction in a case where the ALP of each separate transaction could be arrived at, and accordingly, the matter is listed for next hearing. Case deferred DCIT Vs EATON POWER QUALITY PVT LTD: PUNE ITAT (Dated: March 12, 2018) Income tax - ALP - gross profit margin - labour charges - non AE transactions - purchase of finished goods - resale price method The assessee company, engaged in trading in UPS and DC power systems, SMPS power supply, had filed its return declaring NIL Income. Consequent to the same, the AO referred the matter to the TPO, who noted that the assessee had undertaken international transactions of purchase of finished goods and spares and accessories from AEs, for sale in India, amounting to Rs. 9,39,21,256/-. For benchmarking the said transactions, the assessee had used Resale Price Method with gross margin to sales as PLI. The TPO noted from the details that in case of resale of goods purchased from AEs the name of product was mentioned as ‘mixed’, for which sale value had been mentioned as Rs. 57,68,917/- and cost of purchase had been mentioned as Rs. 25,35,802/- and thus, gross profit earned was mentioned at Rs. 32,31,115/-. Similarly, in the details of sale of goods purchased from non AEs, the name of product had been mentioned as ‘mixed’ and quantity had been shown as ‘I’, where the sale value has been shown at Rs. 4,56,31,242/- and the cost of purchase had been shown at Rs. 6,72,85,449/- and the resultant gross loss had been arrived at (-) Rs. 2,16,54,207/-. The TPO analyzed the cost of purchases of various items vis-à-vis sales and also noted that loss had been booked towards consumable items, against the consumption of spares, from cables consumed, against labour charges and against credit notes. The TPO was of the view that these items could not be considered while comparing gross profit margins because the expenditure under the said heads of expenses were booked after gross profit level to arrive at the net profit. The TPO was of the view that the spares and accessories which were purchased by the assessee were primarily for resale to the dealers for maintenance and services of the products sold and therefore, there was no additional cost of components which the assessee incurred after purchase of finished goods from AEs. The TPO thus, directed exclusion of said items and an adjustment of Rs. 95,73,845/- was proposed to arrive at the ALP of international transactions of goods purchased from AEs by taking difference between gross profit from purchase of goods and resale of unrelated parties at 39.89% and comparing the same with gross profit from purchase of goods from and resale from related parties. On appeal, the CIT(A) deleted TP adjustment on account of international transactions of import of finished goods, accessories, components and spares holding that the TPO’s approach of excluding the mixed items transaction altogether for computation of gross margins could not be considered as correct. On appeal, the ITAT held that, Whether it is justified on the part of TPO to exclude the items booked as mixed, while working out the gross margins of assessee on the sale of goods imported from AEs as well as from unrelated parties - NO: ITAT + the issue which arises in the present appeal is, whether the approach of assessee is correct in computing the gross profits on sales from re-sale of products imported from AEs, which include the value of components, spares, accessories, consumables, etc. which were included as part of cost of end-products. In order to adjudicate the same, the nature of business undertaken by the assessee has to be appreciated. The assessee was a solutions provider in the power management space to its customers. In order to achieve and provide solutions of power management, the assessee imports certain items like UPS and DC power systems and also imports certain other components, spares, accessories, consumables, etc. and the end-product is configured to suit the requirement of customers. The assessee provides complete solutions to its customers, which require configuration of UPS / DS power systems as per needs of customers. The assessee in this regard has explained that where customer wants longer power backup due to load shedding in his locality, the requirement of accessories i.e. batteries, racks, consumables, etc. would vary vis-à-vis the customer which need shorter backup. The assessee as a practice, was not charging separate price for components, accessories, consumables, etc. but the same were billed in total sale consideration charged from the customers. In such circumstances, the case of assessee was that while working out the margins earned on re-sale of goods imported from its AEs or bought from unrelated parties, then the cost of accessories need to be considered, as the sale price of said items were already included in the sale value charged to the customers; + there seems merit in the plea of assessee that the approach adopted by assessee to work out the margins of profits on sale of goods after including the cost of goods plus cost of other components, consumables, batteries, etc. needs to be accepted. The assessee had worked out the margins on the sale of goods imported from AEs at 34% as against 19% on sale of goods imported from AEs being higher. There is no merit in the approach of TPO in first, holding transactions undertaken by the assessee with its AEs at arm's length and then making any transfer pricing adjustment in the hands of assessee. There is no merit in the approach of TPO in excluding the items booked as mixed while working out the gross margins of assessee on the sale of goods imported from AEs as well as from unrelated parties. It has also been noted that these items like spares, accessories, batteries, etc. were also used by the assessee in discharge its obligation of warranty or replacement of damaged items in transportation, etc. The assessee in this regard claimed that though most of the products purchased by assessee were eventually re-sold but some of the items, accessories, consumables were utilized for warranty obligation and were not re-sold. The assessee had maintained complete data in this regard and had also filed the detailed information in this regard before TPO. Therefore, in the entirety of the circumstances, the order of CIT(A) in deleting transfer pricing adjustment, is upheld. Revenue's appeal dismissed |
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