Sami – Sabinsa Group Ltd. Vs DCIT (ITAT Bangalore)
Facts- The assessee is an Indian multinational company engaged in the export of standardized herbal extracts, fine chemicals, specialty chemicals, cosmeceuticals, phytonutrients and probiotics. The assessee has modern state-of -the art manufacturing facilities in and around Bengaluru and Hyderabad. In this appeal, the first issue that has to be adjudicated is with regard to the determination of Arm’s Length Price in respect of international transaction of sale of herbal products by the assessee to its Associated Enterprise (AE), as required under section 92 of the Act.
The assessee filed TP analysis justifying the price it received for sale of its products to its AE as at arm’s length. The assessee chose Cost Plus Method (CPM) as the most appropriate method (MAM) for determining the ALP. The assessee had chosen 3 comparable companies The gross margins after adjustment towards depreciation was compared with the gross margins after depreication of the comparable companies and it was claimed by the assessee that the international transaction has been carried out at ALP.
The AO made a reference to the Transfer Pricing Officer (TPO) under section 92CA of the Act for determination of ALP. The TPO rejected the RPM as the most appropriate method and chose Transaction Net Margin Method (TNMM) as the most appropriate method.
The assessee filed objections before the DRP in respect of the determination of ALP by the TPO which was incorporated in the Draft Order of Assessment by the AO. The DRP gave certain directions which resulted in the addition made to the total income on account of determination of ALP at much lesser sum than what was determined by the TPO. Still aggrieved, the assessee is in appeal before the Tribunal.
Conclusion- The ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B and 0.5% corporate guarantee is held to be appropriate.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal by the assessee against the final Order of Assessment dated 31.03.2016 passed by the DCIT, Circle – 6(1)(1), Bengaluru, under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called the ‘the Act’), in relation to Assessment Year 2011-14.
2. The grounds of appeal raised by the assessee are as follows:
1. The Learned AO has grievously erred in not understanding the business of your appellant and has instead stated in the Assessment order that your appellant had undertaken international transactions with AEs in windmill parts like electrical panel and generators and therefore took approval from the Pr. CIT-6 for referring the case to the TPO. It is prayed that since the very basis for reference to the TPO itself is wrong, the TP proceedings should be quashed.
2. The Hon’ble DRP has erred in law and on facts in upholding the order of the TPO wherein Transaction Net Margin Method was selected as the most appropriate method for determining arm’s length price for transactions relating to export of goods to associated enterprises and rejecting Cost Plus Method adopted by the appellant.
3. The learned DRP has erred in law and on facts in holding that the transfer pricing adjustment is applicable to sales made to Non-AE’s also and not excluding the same while computing the quantum of TP adjustment.
4. The learned Dispute Resolution Panel [the `DRP’] and Transfer Pricing Officer [the ‘TPO’J erred in law and on facts in rejecting all three comparable companies selected by your appellant i.e., Synthite Industries Limited, Infrag Limited and Surya Herbal Limited.
5. The Hon’ble DRP has erred in law and on facts in upholding the order of TPO in selecting Amrutanjan Healthcare Limited as a comparable company to your appellant’s business though it is functionally dissimilar.
6. The learned DRP has erred in law and on facts in upholding the order of the TPO in selecting AVT Natural Products Limited and Shilpa Medicare Limited as comparable companies to your appellant’s business functions though they fail TPO’s filter of Rs.200 crores for Upper turnover and are functionally dissimilar to your appellant.
7. The learned DRP has erred in upholding the order of the TPO that no risk adjustment was to be given effect while computing the TP adjustment although your appellant does not carry out the function of marketing and consequently, does not earn profits attributable to that function and the consequent risk.
a) The learned DRP has erred in upholding the order of the TPO in law and on facts, holding that corporate guarantee given to third party for raising fund by Associated Enterprises in the normal course of business is an international transaction within the meaning of Section 92B of the Income Tax Act, 1961.
8. b)Without prejudice to above, the learned DRP has erred in upholding the order of the TPO in law and on facts in making an addition of Rs.88,89,439/- to the total income on account of commission on corporate guarantee given to Associated Enterprises at 3.00%, despite the fact that the matter has been settled by Hon’ble ITAT, Bangalore Bench in the assessee’s own case for AY 2009-10 at 0.5% of corporate guarantee amount.
9. For these and other grounds that may be adduced during the course of the proceedings, the order of the TPO to the extent upheld by the DRP be ordered to be modified to the extent appealed against.
3. The assessee is an Indian multinational company engaged in the export of standardized herbal extracts, fine chemicals, specialty chemicals, cosmeceuticals, phytonutrients and probiotics. The assessee has modern state-of -the art manufacturing facilities in and around Bengaluru (Kunigal, Nelamangala and Dobaspet) and Hyderabad. In this appeal, the first issue that has to be adjudicated is with regard to the determination of Arm’s Length Price (ALP) in respect of international transaction of sale of herbal products by the assessee to its Associated Enterprise (AE), as required under section 92 of the Act.
4. The profit margin of the assessee was as follows:
Profit and loss Re-conciliation of the Taxpayer for the Asst Year 2012-13
