TMI Blog2009 (2) TMI 736X X X X Extracts X X X X X X X X Extracts X X X X ..... to the revenue authorities that figures so arrived at were correct and reliable for comparison. During the course of hearing of the appeal, we had also asked the ld. counsel to give working of results of the concern for the relevant period on some sound basis, but the ld. Counsel showed his inability to do so. He conceded that results of the concern are not available in the public domain. If that is the position, we see no force in the objection of the taxpayer to non inclusion of Wellwin Industry Ltd. in the list comparables for working mean margin of operating profit under TNM Method. Admittedly, Wellwin Industry Ltd. in the period prior to the financial year under consideration, had shown profit and same was taken into consideration for determining arm s length price for the AY 2003-04. However, its accounts for the period ended 31.3.2004 are not available and, therefore, could not be taken for working mean margin of profit. On these facts, we do not find any error in the approach of revenue authorities in excluding Wellwin Industry Ltd. for a comparative analysis. Deduction of provision for future loss debited in the profit and loss account - We are of view that for fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensure safety security of home and business premises. The taxpayer company was incorporated as a joint venture between Tata Group and the Honeywell Group in 1988 and currently enjoys a good position in Indian automation and control industry. Subsequent to the year ended March 31, 2004, Tata Group sold its entire equity stake to the Honeywell Group resulting in the Honeywell Group acquiring a controlling stake in the taxpayer company. 3. During the year under consideration, the taxpayer, as per its audit report on Form 3CEB, disclosed six international transactions with its associated enterprises. Out of six, in case of five transactions arm s length principles have been accepted to be satisfied and accordingly no adjustments made under the transfer pricing regulations. The detail of such transactions is available at page 2 of the order of Transfer Pricing Officer (TPO). The only International Transaction (IT) in which taxpayer s audit has not been accepted, is shown in TPO s order as under: Sr. No. Particulars A.E. Amount Method adopted 1. Import of raw materials and goods to be used for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alance systems business and, therefore, their comparison with each other and clubbing was not right. The balance system was much more mature and established as against IS-Infra business which was newly set up in which assessee had suffered loss. Aggregation of two businesses for benchmarking purposes was not in accordance with provision of Rule 10A(d) of Income-tax Rules. 2. IS-Infra projects comprised of projects involving related as well as unrelated party transactions. 3. Losses in IS-Infra project were primarily attributable to inappropriate project cost estimation and lack of expertise in handling similar projects. The losses were on account of genuine business reasons. The taxpayer claimed to have carried international transactions in system integration business at arm s length. 4. Selection of comparable companies were also challenged as under: The taxpayer pointed out that Nelco Ltd. has also suffered losses during the year ending March 31,2004, although the said enterprise (segment) had made profit in earlier year. Reference was also made to the following concerns: Eurotherm Del Ltd. The taxpayer also objected to the inclusion of Eurotherm Del Ltd. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identified business unit and, therefore, operating profit of the said unit has to be taken into account for benchmarking. Similar results of comparables were taken into account for analysis after considering functions carried by them. It was not possible to bifurcate and take profit of sub-segments since what was comparable in each case, was systems integration activity for applying Transactional Net Margin Method. The TPO accordingly rejected the objections of the taxpayer. He further observed that trading results of Wellwin Industry Ltd. for the year ending 31.3.2004 were not available and this was admitted by the taxpayer before him. 4.1 After rejecting contentions of the taxpayer, the TPO made adjustment of Rs 282 lakhs as per the following calculations: The profit of the system integration segment is being computed as follows: Gross Sales: 22050 lakhs Operating Profit: -186 lakhs Arm s length operating profit margin: 0.42% Arm s length operating profit = 22050 lakhs * 0.42% = 93 lakhs Profit to be added to total income 189 lakhs 93 lakhs = 282 lakhs. On receipt of order of the TPO, the Assessing Officer (A.O) made assessment in conformity with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss suffered by that enterprise is also taken into account, there is no scope to make any adjustment while computing arm's length profit. The learned counsel for the taxpayer accordingly objected to the adjustment made in this case. 7. Without prejudice to the above submissions, Shri Bapat, the learned counsel for the taxpayer, drew our attention to the profit and loss a/c of the taxpayer for the relevant period and submitted that sum of Rs 201 lakhs was debited in that account as provision for future losses. The detail is as under: Financial Break up of System Integration Business Year Ended March 31, 2004. Rs. In Lacs Particulrs Is-infra Balance systems Total Gross Sales 2,140 19,910 22,050 Add: Other operating income 39 362 401 Total operating income 2,179 20,272 22,450 Less: Cost of goods sold 2,954 14,978 17,932 Gross profit (GP) (775) 5,294 4,518 Less: Business unit expenses 201 1,875 2,076 Factory allocation 20 185 205 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat other comparable cases did not make such provisions. He relied upon accounting standards to contend that provision of future losses was justified and rightly taken by the revenue authorities as part of operating profit. The learned Departmental Representative accordingly supported the impugned order. 9. We have given serious consideration to rival contentions of the parties. In this complicated field of transfer pricing, the taxpayer has raised only a limited issue relating to exclusion of Wellwin Industry Ltd. as a comparable. All other objections raised before revenue authorities have been given up. Neither the selection of most appropriate method (TNMM), nor any parameters of selection have been challenged before us by the learned counsel for the taxpayer. As regards the question of not considering profit / losses of Wellwin Industry Ltd., for the period ending March 31, 2004, it is an admitted position that results of that enterprise for the relevant period are not available. The party after September, 2003 maintained accounts for 18 months and closed its account only on March 31, 2005. The company did not maintain separate accounts for the period March 31, 2004. The taxp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h price for the assessment year 2003-04. However, its accounts for the period ended 31.3.2004 are not available and, therefore, could not be taken for working mean margin of profit. On these facts, we do not find any error in the approach of revenue authorities in excluding Wellwin Industry Ltd. for a comparative analysis. 10. As regards the alternative contention of the taxpayer, we are of view that for finding operative profit margin of the taxpayer or other similar enterprises, under TNM Method, all receipts and disbursements shown in accounts for the relevant period are required to be scrutinised. Only items of receipt or expenditure having nexus with the operating profit/loss of the enterprises are to be taken into consideration. An item of receipt or expenditure, which has no direct connection with operating profit, is to be ignored. Further, relevant receipts and expenditure for the year ending 31.3.2004 are relevant and not future profit or loss of the subsequent year as discussed earlier. It appears that to settle accounts with Tata Group, which withdrew from the enterprise after 31.3.2004, future losses were also provided in the accounts. Otherwise such provision of fut ..... X X X X Extracts X X X X X X X X Extracts X X X X
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