TMI Blog2010 (2) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... he matter afresh in entirety as per the guidelines issued in the cases (supra) by the Tribunal was, in fact, not opposed by the learned Departmental Representative for the Revenue; the learned Departmental Representative for the Revenue preferred not to advance any arguments on merit in support of the orders of tax authorities below – Held that:- matter is restored to the file of the AO for compliance. Consequently, the grounds of appeal taken by the assessee before us stand allowed for statistical purposes. - ITA No. 4015/Del/2007; - - - Dated:- 3-2-2010 - G.E. Veerabhadrappa, D.R. Singh, JJ. S.D. Kapila and R.R. Maurya, for the Appellant A.K. Pandey, for the Respondent ORDER-D.R. Singh, J.M.: The assessee has filed this appeal against the order of the learned CIT(A)-XX, New Delhi, dt. 30th July, 2007 passed in Appeal No.104 of 2006-07/CIT(A)-XX pertaining to asst. yr. 2003-04 on the following nine grounds: "1. The learned CIT(A)-XX, New Delhi [hereinafter referred to as learned CIT(A)], erred in confirming the transfer pricing adjustment (TP adjustment) of Rs.5,92,30,475 made by the learned Assessing Officer (hereinafter referred to as learned AO). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by it from uncontrolled comparable companies and hence the purchase price by Axalto was the ALP as per principles of comparable uncontrolled price method (CUP). The learned CIT(A) failed to provide any opportunity to Axalto prior to holding that reliable adjustments could not have been made in absence of information on contractual terms relating to comparable uncontrolled transaction. 8. The Hon'ble CIT(A) has erred in confirming rejection of one cited comparable company i.e., Usha (India) Ltd. on the basis that the said company was not operating under normal business conditions and appears to be on the verge of major restructuring since Axalto is also operating under similar business conditions with its net worth eroded and its operations restructured. 9. The Hon'ble CIT(A) failed to appreciate that under TNMM, the learned AO ought to have made adjustments on account of material differences identified by AO on account of products/services/functions/supply-chain/efficiency etc. to make the incomparable controlled transactions comparable to the international transaction of resale of finished goods by Axalto." 2. Briefly stated, the facts relevant to the disposal of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Usha (India) Ltd. as a comparable case. The AO found that the TPO in his order had considered all the objections of the assessee raised before him and thereafter passed the order. So, following report of the TPO, the AO made addition of Rs.5,92,30,475 to the total income of the assessee. 4. Aggrieved with the order of the AO, the assessee filed appeal before the learned CIT(A) and contended before him that the action of the AO in making the addition on account of TP adjustment was not correct because the AO has not provided opportunity to the assessee to file objections and explain its case to the proposed TP adjustment of Rs.5,92,30,475. 5. On considering the submissions of Authorised Representative for the assessee, the order of AO, the report of TPO, the CIT(A) upheld the order passed by the AO by making following relevant observations. 5.1 First he decided that since the AO has not decided the assessment order ex parte and had allowed full opportunity to assessee to present his case through written submissions as well as by means of oral arguments. So in view thereof it cannot be said that the assessee was denied of proper opportunity to present its case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the CIT(A) further observed that as per the provisions of s. 92C(1) of the Act, the ALP in relation to an international transaction is to be determined by, the MAM to be selected out of various methods specified in the section. Sec. 92C(2) of the Act provides that the MAM for determination of ALP, shall be applied in the manner prescribed in r. 10B of the IT Rules, 1962 (the Rules). The first issue arising out of this appeal involves comparison of RPM [r. 10B(1)(b)] with TNMM [r. 10B(1)(e)] and the suitability of one method over the other, under the given circumstances. The assessee had chosen RPM, whereas, the TPO applied TNMM. 5.6 As per the (1995) Transfer Pricing Guidelines for Multinational Enterprise and Tax Administrations (OECD guidelines), RPM entails a comparison of gross margin of functionally similar uncontrolled transactions with the gross margin of the controlled transaction. An analysis at the gross profit level, demands more emphasis on comparability of functions performed, assets utilized and risk assumed rather than similarity of the product themselves. In a market economy, it is expected that compensation by way of gross margins for performing similar funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee maintains a processing centre at Noida where imported goods are stored and final dispatch to the end consumer are made after repackaging, labelling, etc. From the TP report, it is not clear as to whether the comparables discharged similar functions or not. 6. The difference in the level of managerial efficiency in terms of inventory management between the assessee and the comparables has also not been brought out clearly in the TP report. However, from the TPO's order it is clear that the assessee had made provision for obsolescence of inventory of Rs.1.31 crores, leading to a conclusion that the assessee had not managed its inventory efficiency. Similar information is not brought out in the TP report regarding the comparables. Assuming that there exists different levels of management efficiency in dealing with inventory management between the assessee and the comparables, it will distort the value of cost of sales, rendering comparability at the gross margin level unreliable. 6.1 The assessee, as the exclusive distributor of Schlumberger, a world leader in this segment, had an important role to protect the well-known brand. However, the comparable situation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO's order dt. 19th Jan., 2006 filed before the TPO and reproduced in TPO's order at para 7.4. The TPO after analyzing the additional functions performed by the assessee in conjunction with more risks undertaken by the assessee held that RPM was not the MAM for determination of ALP. 6.5 When there are functional differences between the assessee and the comparables, and varied levels of risks assumption by them, TNMM provides the practical solution to the problem of determination of transfer prices. Therefore, after taking into account the relevant factors for deciding the MAM as contained in r. 10C(2) of the Rules, I am of the view for the aforesaid reasons that TNMM is the MAM under the given circumstances. Accordingly, I concur with the findings recorded by the TPO in para 7.5 of the order dt. 9th March, 2006. 7. We have considered the rival submissions of both the parties, perused the case law referred to by the learned Authorised Representative for the assessee and carefully gone through the orders of the tax authorities below as well as the relevant record. 7.1 From the order of the AO it is clear that he has neither mentioned the objections raised by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntiate that RPM has been correctly applied and that no adjustments were required to be made as well as to rebut the findings recorded in the report of TPO while adopting TNMM against RPM adopted by the assessee. Whereas, fully agreeing with the report of TPO, the tax authorities below accepted the TNMM and the adjustments as made in the report by the TPO. 7.5 The learned Authorised Representative for the assessee, besides the above-mentioned submissions, contended that the instant case of the assessee requires to be set aside to the file of the AO for allowing an opportunity to the assessee for substantiating its claim by producing sufficient evidence to explain and justify the correctness of RPM using the comparables mentioned by the assessee and for rebutting the report of the TPO in adopting the TNMM and making the adjustments while making the impugned additions to the income of the assessee in view of the recent guidelines laid down in the following two significant decisions of the Tribunal: (i) UCB India (P) Ltd. vs. Asstt. CIT (2009) 124 TTJ (Mumbai) 289 : (2009) 26 DTR (Mumbai)(Trib) 458 : (2009) 317 ITR 292 (Mumbai)(AT); (ii) Mentor Graphics (Noida) (P) Ltd. vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta on comparables." 7.7 Further, the Tribunal while laying the guidelines for adopting the comparable uncontrolled price method, made the following observations: "The comparable uncontrolled price method may be applicable in the following situations: (a) where the taxpayer or any other member of the group sells similar goods, in similar quantities and under similar terms to an independent enterprise in a similar market (an internal comparable); (b) where an independent enterprise sells the particular product in similar quantities and under similar terms of any other independent enterprise in a similar market (an external comparable); (c) where the taxpayer or another member of the group buys similar goods, in similar quantities and under similar terms from an independent enterprise in a similar market (an internal comparable); (d) where an independent enterprise buys similar goods in similar quantities and under similar terms from other independent enterprise in a similar market (an external comparable). Under this method the properties of a product and accompanying circumstances and conditions have to be evaluated for comparison. Even a minor change in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onestly and in a bona fide manner as required by statutory regulations-held, yes. Whether ALP is determined by taking result of a comparable transaction in comparable circumstances and by making suitable adjustments for difference-held, yes. Whether first step in determination of ALP is to analyse specific characteristics of controlled transaction whether it relates to transfer of goods, services or intangible and without proper study of specific characteristics of controlled transaction, no meaningful comparison or location of comparable is possible-held, yes. Whether if there are material and significant differences in risk involved, then comparables identified are not correct as appropriate adjustments for differences in such cases are not possible and, therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions performed and risk profile are also to be considered-held, yes. Whether even when TNMM is applied to determine ALP as per OECD guidelines, functional profile, assets employed, risk assumed of controlled and uncontrolled transactions are to be seen while screening comparable companies-held, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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