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2015 (9) TMI 609 - AT - Income TaxTransfer pricing adjustment - deletion of adjustment pertaining to agency services function carried on by the appellant by CIT(A) - whether TPO/CIT(A) were incorrect in not bench-marking the functioning of import of products from M/s Corning SA France and receipt of agency commission from M/s Corning SA France - Held that:- The conclusion however of the authorities below is that the distribution function and agency service function are not comparable. It has been found that distribution function involves import of furnished goods, its warehousing, advertisement marketing and distribution/sale of productions; whereas agency function involves coordination between customers and the head office and undertaking certain marketing and logistic services. Furthermore the risks assumed in distribution function are contract risk, marketing risk, credit risk, inventory risk etc.; whereas an agency functions assessee does not undertake contract risk, inventory risk, credit risk, etc. There is no dispute to the above findings arrived at by the authorities below. Having regard to the above factual matrix we are thus inclined to uphold the conclusion of the CIT(A) to benchmark the two independent functions separately. We do not find any merit in the contention raised by the learned counsel that these are closely linked transactions undertaken by the appellant. On the contrary the nature of transactions are functionally different and even the risk assumed are different. We thus negate the stand of the assessee and uphold the findings of CIT(A) in benchmarking the distribution/agency function separately. Allocation of expenses - No infirmity in the approach adopted by the CIT(A). The CIT(A) has correctly held that allocation of expenses in proportion to sales would amount to give equal weightage in terms of functions performed, assets utilized and risks assumed to both distribution function as well as agency service activity, which otherwise involves much lesser functions and utilization of assets and risk. - Decided against revenue. Excluding the custom duties on the import of ROB for benchmarking the arm’s price - CIT(A) deleted the addition excluding the increased custom duties out of the cost of import of ROBs for benchmarking the arm’s length price of distribution segment - Held that:- . It may be taken note that in TNMM, basically a single line item of an expenditure of customs duty should not be excluded from the total cost for computing the operating profit. It is seen that the distributor / respondent has made a operating loss for the distribution business. It is noted that the assessee, TPO in spite of the loss suffered by the distributor, have applied TNMM to bench mark the distribution results. In our view the Revenue authorities and assessee should have looked into the characterization and accordingly pricing policy for the distribution business need to have been made after ascertaining as to whether the remuneration or pricing policy was at gross margin or net margin level in order to examine the reason for the loss. It is only after doing the said exercise the functional profile of the assessee as a normal risk taking distributor, which is capable of suffering a loss or limited risk distributor which generally operates with a steady but routine operating margin, can be ascertained. Thereafter, based upon such exercise, the applicability of the proper transfer pricing methodology namely re-sale price or TNMM may be applied with proper comparables. In the light of the aforesaid opinion of ours, we set aside this issue back to the file of the TPO/AO for fresh adjudication as stated above. - Decided partly in favour of revenue for statistical purpose.
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