TMI Blog2010 (9) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... incorrect and factually inaccurate, despite the fact that under the Transfer Pricing Regulations the only reason which can be used for segregation is the FAR analysis as provided in Rule 10B(2)(b) The segregation was totally artificial and uncalled for and the authorities below were not justified in segregating them - The trading functions having the same FAR and having closely linked transactions were to be taken as a whole and not separately, thereby creating artificial loss in one segment and profit in the other The assessee had to incur huge advertisement costs because the assessee operated in a highly competitive environment against the market leaders such as SONY, SAMSUNG, LG and many local brands of Indian origin such as Videocon etc - These international transactions are pure and simple financial help by a parent A.E. in Japan to its subsidiary A.E. ailing in India to cope up with the high costs of advertisement to survive in the local Indian highly competitive market and it has no other implications except that the larger part of the cost of advertisement has been shared by the parent company without any corresponding or reciprocal benefit to the parent company - The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices Advertising Expenses Reimbursement Import of CPD SPD products by NPIPL from MEI ground entities Rendering sales agency services by NPIPL to MEI group entities in respect of industrial sales division products against receipt of commission payments. Reimbursement received by NPIPL from MEI group entities for certain advertising expenses. Reimbursement of traveling expenses by MEI group entities to NPIPL. Reimbursement of market development expenses incurred for the industrial products by MEI group entities to NPIPL. Payment of Pananet Additional income support by NPIPL to MEI. received by NPIPL for providing warranty services to Pananett machines sold to customers inIndiafrom MEI group entities. Service fee received by NPIPL for supervising authorized service centers, and reimbursement of cost of repair and replacement by MEI group entities to NPIPL. 3. During the course of scrutiny assessment, detailed information, clarification alongwith justification of allowability of various expenses was called by the AO and the same were duly file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction pertaining to SPD was held to be at arm s length. In respect of imported goods under CPD, the AO observed that the loss margin shown was below the arm s length margin. The AO therefore observed that the transfer price of the imported finished goods under the CPD has to be adjusted downwards. Accordingly, arm s length price was determined at the price declared in form 3CEB minus the adjustment amount i.e. Rs.74704584 Rs.11237019 = RS.63467565. The arm s length price in respect of remuneration received under ISD division was also enhanced by the AO by an amount equivalent to the difference of operating loss margin and the mean margin of the comparable companies chosen. This difference works out to be 6.11% -(-) 28.8% = 34.91% of the total costs. The total costs have been worked out to be Rs.33131321.34.91% of this amount comes to Rs.11566144/-. Thus, the total income of the assessee was enhanced by the AO by following amounts: For CPD imports - Rs.11237019 For ISD - Rs.11566144 Total - Rs.22803163 These additions have been dealt by CIT(A) as under: 4.1 During the assessment proceedings, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se comparables, using the most appropriate method and finally, by ascertaining whether the intra-group transactions conform to the arm s length standards prescribed by the Act or not. A. Business Profile: 4.4 Before adjudicating on the TP issues, it would be appropriate to sketch the business profile of the appellant as described in the TP report: (i) National Panasonic India Pvt. Ltd. (NPIPL or assessee or Taxpayer Company) is part of the Matsushita group of companies. The group is one of the world s leading manufacturers of consumer electronics products. These products are sold under the brand names National Panasonic , Technics and Quasar . (ii) National Panasonic India Private Limited (NPIPL) is wholly owned subsidiary of Matsushita Electric Industrial Company Limited, Japan (MEI). 99.99% of the shares of the assessee company are held by MEI, Japan and the remaining .01% are held by Matsushita Asia Private Limited, Singapore. (iii) The business of the taxpayer company is organized under three distinct segments (Table-2) : Table-2 Division Sub-Division Products Brand Name Functions performed Remarks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isk assumed (Para 3.1.2) and assets deployed by the appellant (Table-4) : Table-4 D. T.P. Report, Economic Benchmarking Analysis: Trading Functions Import of products Payment for Pananet Support Reimbursement of administrative expenses Supervision of authorized service centers (ASC) Functions Import products from MEI Group Entities. Obtaining custom clearance. Maintenance of warehouse facilities for stocks. Selling and distribution functions. Price determination. Undertaking publicity and advertisement campaigns with full description Payment for use of Pananet software on the basis of number of hours used. Receipt of reimbursement for administrative and traveling expenses incurred by NPIPL for its dealers inIndia. Appointment of ASCs. Distributin of service manual to ASCs. Providing technical support to ASCs. Administering supply of spare parts and tools to ASCs. To collect records of service claims from ASCs. Reporting of service activities of ASCs Replying to complaints, questions inquiries from customers. Risk Contract risk w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding services to unrelated parties in respect of advertising campaign. Any benefit on account of the campaign accruing to the MEI group was purely incidental. Hence, the reimbursement cost on account of advertising expenses would not warrant any mark up. Accordingly, no separate benchmarking analysis is required to be done for this transaction. E. Multi-Year Data: 4.8 For carrying out the comparability analysis, the appellant had focused on the operating results of comparables over the three financial years 1999-2000, 2000-01, 2001-02. This was stated to have been done to minimize the impact of abnormal factors on the outcomes of the comparable data. F. Selection of Comparables : Trading Function: 4.9 The appellant identified a set of nine uncontrolled comparable companies from Prowess Database by way of three different searches. In the first search, companies classified under the broad head of electronics were considered as per the selection process detailed in Table-5 of this order, by adopting a formula based search strategy by applying various quantitative and qualitative filters to the set of potential comparables within this segment: Table 5 : SELECTION PROC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to include companies engaged in the trade of electrical machinery. Table No.7 of this order summarizes the selection process. Table-7 Criteria No. of Companies passing the criterion Explanation Starting Point 730 Companies in the electronics, electrical non-electrical goods segment having the requisite financial information. Manufacturing sales to total sales ratio of 294 To exclude companies those are primarily into manufacturing. Trading sales to total sales ratio of 75% to be retained 167 To exclude companies those are not primarily engaged in distribution/trading activities. Research development expenses to sales ratio 166 To eliminate companies undertaking significant research and development activities. Qualitative analysis 6 To eliminate companies Companies having related party sales. Companies not dealing in similar product or having similar business and functional profile. Companies having more than 10% of average loss. Insufficient information such as absence of director s report. The final set of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage Income from operation 9,25,934 7,13,907 4,25,271 Other income 1,150 0 0 Total Operating Income 9,27,084 7.13.907 4,25,271 20,66,262 Expenditure Cost of sales 6,84,856 5,42,125 3,05,761 Direct selling expenses 1,04,984 76,006 59,604 General administrative expenses 69,925 56,381 39,553 Total Operating Cost 8,59,765 6,74,512 4,04,918 19,39,195 Total Operating Profits 67,319 39,395 20,353 1,27,067 NPM 7.26% 5.52% 4.79% 6.15% It was concluded in the TP report that the assessee had earned net profit margin of 6.15% which exceeded the arm s length profit margin of 2.48%, the outcome of NPIPL s internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not closely linked. ii. Trading of consumer goods like TV sets, washing machines and cameras cannot be said to be closely interlinked or integrated with the trading of office automation and telecom products. iii. The marketing strategy and the target consumer group differ widely for the two segments. The dynamics of the two segments are vastly dissimilar. iv. The difference in gross margins between the SPD (26%) and CPD (19%) segments reflects the distinctions. v. The ratio of selling expenses to net sales for CPD is 18.63% as against 14% for SPD. vi. vii. It is inappropriate to say that import of consumer goods is closely interlinked with import of office products. The very purpose of transfer pricing analysis is to segregate controlled transactions from uncontrolled transactions and then to evaluate the control led transactions separately. Thus, aggregation of unrelated and related party transactions would distort the evaluation process. CPD with very insignificant proportion of related party transactions cannot be aggregated with SPD. viii. If aggregation of results is done for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant as the TP adjustment of Rs. 1,12,37,019/-was more than +5% variations from the ALP allowed under the law for a purchase transaction. 4. Assessee s submissions before the CIT(A) were summarized by the CIT(A) in his order as under: 7. During the appellate proceedings, the following submissions were made in support of the Grounds of Appeal No. 9 to 9.2: i. The appellant had raised objections and pointed out serious lapses and shortcomings in the order passed by the TPO u/s 92CA(3) of the I.T. Act. It was inter alia highlighted that the comparisons of profits made by the TPO by splitting the activities of the appellant were unrealistic and non-comparable. However, he had completely ignored all such submissions and made additions as per order of TPO u/s 92CA(3) of the I.T. Act. ii. In the TP report filed by the appellant, comparables were chosen after an extensive exercise and many attempts were made to find the comparables. After all these efforts, a net profit of 2.48% was adopted as the arm s length margin for benchmarking the trading activity of the appellant. iii. The TPO on the contrary had bifurcating the trading activity of the assessee into two separat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee on advertisement selling expenses have got to be reduced for the similar amount. Either way such receipt being of revenue nature, as has been held by the tax authorities in earlier years, has to be accounted for. This receipt cannot be left out of computation. (x) The TPO has concluded and recommended an addition of Rs.1,12,37,019/-in the trading activity of the assessee as according to him the assessee has overpaid on the imported goods in the CPD division @ 8.45% of the sales. In absence of any evidence, such an allegation that assessee has overpaid is highly unreasonable based on surmises which do not hold well on the facts of the assessee s case. (xi) The TPO had called for exhaustive information, including the price paid by the assessee towards the local purchases. A complete list of purchases of the same/identical items which were imported was furnished along with the purchase cost. It was also explained that the price paid for the imported goods were very competitive and in no case higher than that paid to the local sellers including the unrelated parties. (xii) The assessee had submitted before the TPO that custom duty was paid on all the imports. In fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der as under: (xiii) The following additional risk factors identified by the TPO to justify the bifurcation of assessee s trading activity into CPD SPD in para 7 of his order but had chosen not to made any adjustment to the profit level indicators of the comparables. a) The marketing strategy and target consumer group differ widely for the two segments. b) The dynamics of the two segments are vastly dissimilar. c) The difference in gross margins between SPD (26%) and CPD (19%) segment shows the differentiation in this respect. d) The ratio of selling expenses to net sales for CPD is 18.63% as against 14% for SPD. (xiv) If the adjustments are made to the profit level indicator of 2.48% of the comparables only for (c) (d) above, the profit of CPD will work out to be as under: -Profit level indicator -2.48% -unrelated comparable. -Adjustment for G.P. (-) 7.00% -Adjustment for selling expenses (-) 4.63% Comparable Profit level (-) 9.15% Indicator of CPD ======= (xv) The profit determined by the TPO of (-) 5.97% is well above the adjusted PLI of CPD for the comparables at (-) 9.15% and therefore, the transactions of the assessee could only be concluded to be at ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ote 15 to the Notes to the Accounts. The bifurcation of the two divisions CPD SPD within the trading function was made on the basis of customers and product lines by following the ICAI Guidelines. (ii) The CPD section had both local and imported sub-segments. Since related party transactions of CPD division constituted only 5% of total transaction of the CPD division, further bifurcation of CPD into CPD (local) CPD (Imported) lent more credibility to the benchmarking analysis (iii) The dynamics of the two divisions CPD SPD are vastly dissimilar as the drivers of consumer products and office automation products are very different. The consumer durables like the products handled by the SPD have different target customers, growth potential and follow different strategies. (iv) Two or more operating segments can be aggregated only if the segments have the same characteristics in each of the following areas: The nature of the products and services provided The nature of the production process The type or class of customer The methods of product or service distribution If applicable, the nature of the regulatory environment CPD and SP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act. 3. That the CIT(A) has grossly erred in holding that segregation of CPD and SPD division of the assessee, which are two trading divisions was proper, merely on the ground that /the target customers of these two divisions were different. 4. The CIT(A) ought to have held that under the TNMM method it is the broad functions which are required to be compared and if most of the functions performed by the assessee and the comparable cases are identical, the same cannot be rejected on an isolated reason that the target customers and product lines of CPD and SPD are different. 5. The CIT(A) has grossly erred in law in mis-interpreting the OECD guidelines pertaining to aggregation Vs. Segregation of the functions. 6. The CIT(A) has grossly erred on the facts of the appellant s case in holding that there exist a distinct difference between the dynamics of the two divisions of the assessee i.e. CPD and SPD. 7. The CIT(A) ought to have held that once having accepted the TNMM method, having accepted the comparables and the PLI of the comparable, the CIT(A) should not have rejected assessee s trading functions on merely conjectures, surmises, and erroneous consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the ISD division was performing commission agency functions. The assessee company had also undertaken transfer pricing analysis for these functions. For this purpose, the results of CPD and SPD were aggregated and the results of ISD were considered separately. However, the TPO while scrutinizing the assessee s accounts on segmental basis, re-written the accounts of three segments CPD, SPD and ISD. On the basis of rewritten accounts, the TPO recommended transfer pricing adjustment of Rs.1.12 crores in respect of imported finished goods for the CPD segment. An adjustment to the tune of Rs.1.15 crores was also recommended in respect of remuneration earned from parent company pertaining to ISD division. In the economic analysis carried out by the assessee, the activities of the supervision of authorized service centers were aggregated with the main activity of trading function for the purpose of benchmarking analysis. TNMM as adopted by assessee was found to be most appropriate method by the TPO and CIT(A) to test the profitability of commission and marketing agency services of ISD division. In respect of margin shown on SPD, the AO found that same was more than arm s length margin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchase of spares TNMM 56,39,260/ Commission Service income TNMM 2,04,93,071/ Payment for Pananet Services TNMM 1,56,936/ Reimbursements received TNMM 15,97,82,249/ 9. A reference was made by the AO u/s 92CA(1) of the Act to the TPO for computation of ALP in respect of these international transactions. The TPO observed that the business of the company was organized under three distinct segments (i) Consumer Product Division (CPD) (ii) System Products Division (SPD) and (iii) Industrial Sales Division (ISD). The first two divisions performed trading functions whereas the third one performed commission agency functions. The assessee had conducted transfer pricing analysis for these two functions separately. For this purpose, the results of CPD SPD were aggregated and the results of ISD were considered separately. The TPO, however, analyzed the accounts of the assessee on segmental basis and redrew the accounts of the three segments CPD, SPD ISD separately. Further, CPD was bifurcated into CPD (Local) CPD (Imported Goods). On the basis of the redrawn segmental accounts, the TPO recomme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was very competitive and in no case higher than the price paid to the local sellers. However, with regard to allocation of unallocated expenses, the CIT(A) has already allowed allocation of Rs.87,48,348/-in the proportion of net sales of various segments viz. CPD(Local), CPD (Imported), SPD and ISD, the CIT(A) has directed the AO to take the same into account while finalizing the segmental accounts of these divisions. Against the adjustment proposed in the cost of CPD imports and ISD division, the assessee is in appeal before us. From the record, we found that advertisement reimbursement was part of the package deal wherein assessee company was being compensated for marketing of all products as well as establishing as well as new, the gain of which will accrue to the Indian counterpart in the form of additional sales. There is no dispute to the well-settled legal proposition that marketing and advertising expenses play a vital role in facing the competition from foreign brands and driving the sales. The sales of CPD and SPD divisions both are dependent on the advertising expenses incurred by the assessee, we therefore do not find any justification in not allowing setting off such r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th price and while recognizing the income of ISD division. Even in double entry system of book keeping, the income and expenses have to be balanced out either through netting of from operating expenses or through including in the operating income of the profit loss account, the treatment given by the assessee which was duly approved by the auditors was correct and has to be considered while making adjustment on account of transfer pricing. Only because the comparable selected by the TPO was not in receipt of such reimbursement, the assessee s case cannot be said to be at par with those, when fact was on record that assessee has got huge reimbursement of such expenses. We found that comparables were not incurring the same levels of advertisement expenses, therefore they were not in receipt of such reimbursement, the same cannot be made basis for ignoring the actual reimbursement received by the assessee. Thus, we found that all the variation of the PLI with the tested party with the PLI of comparables have occurred on this sole account which needed adjustment while arriving at price paid by the assessee to its associated enterprises or the income earned by the assessee from the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Statute on a particular subject, then they would hold the field over all other treaties, commentaries, like the OECD, other Acts, Companies Act etc. Chapter X and Rules made thereunder are a self contained code and answers to all questions must be found in the written law contained in the Act and Statute. The Apex Court in the Azadi Bachao Andolan case reported as 263 ITR 706 (SC) has reiterated this well known and accepted concept of interpretation of tax laws in India. Ld. AR has rightly pointed out during the course of hearing that if the TPO and the CIT(A) were of the opinion that these two Divisions viz., CPD and SPD were separate Divisions and required a different criteria for determining the arm s length price, then they could not have compared both the Division s results as has been done by them with the same set of comparables; there is obviously a contradiction between the two. If the TPO and the CIT(A) were serious in segregating the two, then they should have applied different set of comparables for both. Therefore, the first point made on merits which deserve to be accepted is that if for the sake of argument it is accepted that the two Divisions have separate ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rical components for Siemens India Ltd., GEC, Aisthom Finolex cables, supplying switchboards, switches and distribution boards for industrial application etc., (4) Khaitan India Ltd., trading in fans, monobloc pumps etc., (5) Rington India Ltd., trading in computers and peripherals, office and home segments, (6) Remi Salws Engg., Ltd trading in fans, electric motors and scientific instruments; and (7) ACI Infocm Ltd., trading in floppy disk drives, hard disk drives and other computer equipments. All these comparables which have been held to be correct by all the authorities below, as well as, not objected to by CIT-DR would show that the customer is not relevant to compare the results of the assessee i.e. the tested party with that of the comparables. If this is not an important criteria for rejecting comparables, then it cannot be an important criteria for segregation of results of the assessee. We are the view that the reasons given by both TPO and CIT(A) with regard to the difference between the two Divisions for purposes of segregation are legally and factually incorrect and cannot be accepted. Rule 10B(2) very clearly lays down as under: R.10B(2) For the purposes of sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided in the Rules themselves and as is borne out from the facts of the case, Rule 10B(2(b) clearly is in favour of the proposition that segregation should not be done. In addition, the comparables used are also the same for both the Divisions. It also lends weight to returning the finding that segregation was not called for. We have given our careful consideration to the issue and the order of the authorities below and the submissions of both the parties before us. The above expression is also found in the Rules itself. Therefore, there is no possibility of de-linking the closely linked transactions for transfer pricing analysis. As already stated above, the test for the proposition whether the transaction is closely linked or not is given in Rule 10B(2)(b). Therefore, the grounds raised on the issue of segregations vs. desegregation, as per the provisions of law, segregation was not called for. The Senior DR in his defence of the order of CIT(A) has reiterated the reasons given by TPO and the CIT(A). He also reiterated para 1.42 of OECD guidelines on transfer pricing as reproduced by CIT(A) in para 9.3.2 of his order. The Senior DR also raised doubt about the transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisement expenses by assessee s A.E. as a non-operating revenue receipt. 16. The issues with regard to these grounds deal with the concept of how operating profit should be calculated for working out the profit in a TNMM method. The Transfer Pricing Officer on page 5 para 7.1.1 states that reimbursement of advertisement expenditure is not operating income. He further goes on to say in para 7.1.3 that the comparable companies chosen have not received similar re-imbursement but all of them have spent on advertising and marketing. In para 7.1.4 the TPO further states that as advertisement income has been received from sources extraneous to the business of the appellant, therefore, this income cannot be treated as operating income. The CIT (A) in his order deals with these issues in para 5.2 page 12, para 7.3 on pages 26, 27 and 28. On page 28 para 8(v), the CIT(A) raised the question which needed to be answered in the appellate proceedings before him which is reproduced as under: (iv) Under the given circumstances, whether the TPO was right in excluding the reimbursement of advertisement and sales promotion expenses as non-operating revenue? 17. He then went on to give his findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent expenses incurred. (vii) These international transactions are pure and simple financial help by a parent A.E. in Japan to its subsidiary A.E. ailing in India to cope up with the high costs of advertisement to survive in the local Indian highly competitive market and it has no other implications except that the larger part of the cost of advertisement has been shared by the parent company without any corresponding or reciprocal benefit to the parent company. (viii) The advertisement expenses that have been incurred by the assessee are in the course of its business operations and thus form part of the operating expenses of the assessee. However, when the same expenses are reimbursed by way of financial support from the A.E. which reimbursements as per the accounting policy of the assessee have been shown under the separate head of operating revenue instead of netting off the operating expenses, the TPO has treated the same as non-operating receipt. (ix) The Accounting Standards as applicable to the assessee under the ICAI Guidelines, which have been certified by the financial auditors have treated such reimbursements as operating revenue and have found no mistake in the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. During the course of appellate proceedings, copies of the jurisdictional ITAT s orders in the appellant s own case for the A.Y.s 1999-2000, 2000-01 2001-02 were also furnished where relying on the order for the A.Y. 1998-99, all the disallowances were allowed. 12.4 I have carefully considered all the submissions made by the appellant and also perused the orders of the Delhi Tribunal in the appellant s own case for the A.Y.s 1998-99, 1999-2000, 2000-01 2001-02. It was abundantly clear from the orders of the Tribunal that there was no basis for the AO to make the disallowances relating to trade discount, cash discount, sales promotion and advertisement. The relevant extract from the order for the A.Y 1999-2000 is reproduced below: 6. We are in agreement with the above observations. We find that the transactions relating to advertisement, sales promotion, commission trade discount etc. are not between the resident and the non-resident. There is no arrangement with the non-resident to hold that the arrangement produces to the resident less profit than the ordinary profit is settled law that if due to certain expenditure incurred by an assessee a benefit flows to the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is what is the substance of the transaction. A local expenditure incurred for benefit of local sale which does not enure any benefit to AE but is still reimbursed by the AE can have either of the two effects one it may reduce the expenditure to the extent of reimbursement and this concept of reduction of expenditure to the extent of reimbursement is a well known concept under various provisions of Income Tax Act including for purposes of calculating WDV of a depreciable asset wherein a reimbursement is made or subsidy received it will go to reduce the cost of the asset or it may have the effect of increasing the income. Reimbursement of expenditure implicitly or explicitly linked to the incurring of revenue expenditure can have no other character than of revenue receipt and as the receipt is directly linked with the business of the assessee, it cannot be disregarded while calculating its income either for the purpose of Income Tax Act or for the purpose of calculating his operating income. It may be looked at from any angle whatsoever either it will go to reduce the expenditure thereby increasing the income or it may become a part of operating income. Therefore, in our opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO and CIT(A) would not hold ground and the conduct of the assessee is based on facts and figures from the AY 1998-99 on record, the order of the Tribunal on record accepted by the Revenue, it can be concluded that the receipt of advertisement reimbursement would form a part of operating profit either by way of by adding to income or by way of reduction of advertising expenditure to the extent of reimbursement. Both have the same effect of increasing operating profits to this extent. We therefore hold that the TPO and the CIT(A) wrong in excluding reimbursement of advertisement expenses while calculating the PLI of the appellant. 24. The last point raised by the CIT(A) and TPO is that comparables do not have reimbursement. As submitted by the learned AR, the comparables do not have advertisement expenses of this magnitude at all. Therefore, even on the first principles of FAR analysis as contained in Rule 10B(2), either the entire advertisement expenditure the comparables operating profits would have to be adjusted to bring it at par with the tested party to the extent of reimbursement, if not to the extent of entire advertisement expenditure of the appellant would have to be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,299 Operating Exp. - - 37,736,859 17,098,649 162,017,256 Adv. Exp. 7,054,248 21,975,346 29,029,594 - 504,886,414 Selling Exp. 20,395,201 93,538,482 113,933,683 406,022 114,339,705 Other operating expenses 7,005,786 30,731,073 Admn Exp. 2,172,687 12,874,141 15,046,828 - 15,046,828 Personnel Exp. Depreciation - - -- 12,499,107 1,067,873 99,592,440 16,294,218 Finance Charges - - - - - Allocation of unallocated exps. in proportion to sales 76,759 448,573 525,332 - 2,059,669 Operating Expenditure 141,179,330 734,961,045 876,140,375 31,071,651 3,738,006,829 Operating Profit/Loss (1,988,007) 78,708,629 76,720,622 (7,489,134 ) 21,138,270 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these centres, it deals with all complaints, questions and answers from customers, i.e. ISD Division is the service part of the assessee. For the ISD Division, the CIT(A) has discussed this issue on page 15 of his order. As there was a loss in these operations, the question raised was why a loss in a service industry. In the previous year, there was expansion of business and therefore in expectation of other business it incurred extra costs, but due to lack of adequate sales made by the AEs in India, costs could not be recovered. The assessee s submissions in this regard are contained in para 7.2 (xix) and (xx) on page 26 of CIT(A) s order which is reproduced below: (xix) The TPO misdirected himself in concluding that the risks of running the establishment for earnings in the ISD division was on assessee s account. After having created an infrastructure in the earlier years, wherein the ISD division had made profits, it could not have closed it down overnight. The earnings from commission income were lower because of the lower business done by the Principals in the Indian Territory on which the assessee was entitled to commission. It is submitted that there was no increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is anything to the contrary pointed out by the TPO or the CIT(A) or the Sr. DR that there was any arrangement between the assessee and the AEs to take over the risk of loss in this business by the AEs. Therefore, the basic premises on which this adjustment has been made is factually incorrect. On page 111 of PB-I, the transfer pricing stated in para 4.6 in which the weighted average profit of three years has been taken as at 14.03% of total operating income. The learned AR has submitted before the Tribunal that this was the only year in which it made a loss and in subsequent year also it has made profits. This year the loss was unique in the sense that the business of the ISD Division was low. The entire business of the ISD Division is to non-AEs, i.e. to Indian customers. Therefore, the AE had no control over the volume of business of the appellant s ISD Division. It was further submitted that as per Proviso to Rule 10B(4) the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into: Provided that data relating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale nor any purchases from the AEs. It is purely a local service allocated to servicing goods sold by AEs to its customers in India plus commission on the goods sold by the AEs directly in India. It is, therefore, clear that no adjustment on the ISD Division is called for as the PLI for the three years average of assessee is higher than that of the comparables. The chart at page 111 is reworked as under in line with our findings given here in above. Table 18 Commission and marketing agency services (ISD) (Rupees in '000) Particulars 31-Mar-02 31-Mar-01 31-Mar-00 Weighted Average [As per CIT(A) order page 41 -Table 17] Income Income from operations 1,229 231 - Other Income 22,769 30,367 30,629 Total operating Income 23,998 30,598 30,629 85,225 Expenditure Cost of sales 415 - - Direct selling expenses 406 603 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received allegedly without any linkages with the business of the assessee from the AE is Rs.15,30,40,478/-, which is many times more than the benefit alleged to have been taken by the AEs from the assessee. In our view transfer pricing analysis and addition cannot be made in such circumstances even on the overall view of the case. We also found that even after all the adjustments as proposed were made by the TPO and the CIT(A) as per the appeal effect, the assessee is still left with a carry forward business loss and this loss for the current year amounts to Rs.2,87,06,096/-.,therefore, the question of transferring any profits from high tax jurisdiction to low tax jurisdiction which is the fundamental principle of transfer pricing also does not appeal to any logic in this case. 35. In the appeal of the Revenue the only ground raised is that Ld. CIT(A) has erred in law and in facts and circumstances of the case in holding that only current year data for 2003-04 is to be used for computation of the Arm s Length Price. The ground raised by the revenue has already been discussed by us while disposing of the assessee s appeal in which we have reproduced Rule 10B(4) and Proviso there ..... X X X X Extracts X X X X X X X X Extracts X X X X
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