TMI Blog2011 (9) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... he given case assessee is becoming the owner of the goods imported, but, by virtue of the product replacement services agreement, he has no right to fix the resale price or to choose the customer to whom the products are to be sold. Assessee is only a custodian of the goods imported till they are delivered to the client or customer of its parent company on its directions. When assesee is not a trader RPM cannot be adopted. The assessee has adopted the transactional net margin method, as the most appropriate method as seen above. - The other methods prescribed by Rules are not applicable to the facts of the case before and therefore, the TNMM method is the most appropriate method for computing the ALP relating to the international transactions of the assessee with its associated enterprise. Selection of Comparables - As already brought out by the counsel for the assessee the assets employed and the risk undertaken by the assessee are nil. All these factors are to be considered while selecting the comparables, but the TPO has not considered these aspects before rejecting the comparables selected by the assessee. As regards the comparables selected by the TPO, as rightly pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact by disregarding the economic analysis undertaken by the appellant and conducting a fresh economic analysis for the determination of the arm s length price in relation to the spares replacement services segment transaction. 7. The learned AO/TPO has erred in law and in fact by rejecting the transfer pricing approach, the transfer pricing method adopted and the comparables identified by the appellant in its transfer pricing documentation report in relation to the spares replacement services segment. Further, the learned AO/TPO has erred by not properly analyzing the functional, asset and risk profile of the appellant and treating the appellant as a trader/distributor of spare parts. 8. The learned AO/TPO has erred in law and in fact by not appropriately determining the arm s length price for the international transaction in relation to the spare replacement services segment by using an incorrect transfer pricing method, incorrect profit level indicator and inappropriate comparables which do not satisfy the comparability criteria as specified under the Income-tax Rules, 1962. 9. The learned AO/TPO erred in determining the adjustment in respect of the arm s leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical services outside India and therefore, the foreign currency expenditure incurred by the assessee should not be reduced from the export turnover for the purpose of computing the deduction u/s 10A of the IT Act. In support of his contention, learned counsel for the assesse placed reliance upon the following decisions; 1. Zylog Systems Ltd.,Vs ITO(ITA No.1138(Mds.)/2007 Chennai ITAT, SB 2. Infosys Technologies Vs JCIT (109 TTJ 631)-Bangalore ITAT 3. Patni Telecom (P)Ltd., Vs ITO (120 TTJ (Hyd.) 967) Hyderabad ITAT 4. Changepond Technologies Pvt.Ltd., Vs ACIT(119 TTJ 18) Chennai ITAT 3.2 In the alternative learned counsel for the assesse submitted that if these expenses and the lease line charges are reduced from the export turnover than the same will have to be reduced from the total turnover for computing deduction u/s 10A of the Act. 3.3 In support of his contention, learned counsel for the assessee placed reliance upon the following decision; 1. ITO Vs Sak Soft Ltd., (313 ITR 353) SB Chennai. 4. The learned DR on the other hand, placed reliance upon the orders of the authorities below. 4.1 Having heard both the parties and havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irect sales to customers in India, along with the warranties or AMCs. In relation to the direct sales made by Cisco-US to customers in India, it has entered into an agreement with the assessee for product replacement services. According to this agreement, Cisco-India purchases spare parts from its parent company and facilitates delivery of the same to Cisco US s customers(at the time of requisition for product replacements in India and bills Cisco-US for the product. In relation to the provision of product replacement services to Cisco US, Cisco-India acts in its independent capacity and not as an agent of Cisco-US. The product replacement agreement provides for compensation to the assessee for the product replacement services i.e. 1% mark up on the price of the product replacements and duties incurred on imports and at 10 percent mark up on the logistics, warehousing and other expenses incurred by Cisco-India in providing these services. 5.2 For arriving at the Arm s Length Price the (ALP) of the international transaction between the assessee and the Cisco-US, the assessee adopted TNMM method as the most appropriate method and has selected companies which are mainly logistic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreement, it is clear that the assessee is holding spare parts only as a custodian of its AE and is delivering the spare parts to the customer free of charge at the direction of the AE. Thus, the assessee is not incurring any expenses for doing the job, but is only earning revenue for its services. He submitted that the TPO has not looked at the functional asset and the risk profile of the assesse to determine the nature of its activity. He submitted that as per the contractual terms of the agreement, the assessee is only responsible for ensuring prompt delivery of the spares to customers of Cisco-US in India and therefore, it merely functions as a product replacement service provider and cannot be regarded as a trader of spare parts and that the assesse assumes responsibility for storing and delivering spare parts without assuming any risk with regard to the quality of spare parts delivered. He also submitted that all the expenses such as Customs, Vat, if any, paid by the assessee on the product replacement services are recovered from Cisco-US. Thus, it is clear that the assessee is not employing any assets nor assuming any risks for providing the product replacement servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes of determining whether they are at arm s length, the updated margins of the comparable s companies considered in the TP report with the financial information pertaining to FY: 2005-06 only, the comparable margin is 1.02% as against 10% markup earned by the assessee. 5.5 He further submitted that based on functional analysis performed by the assessee, it is clear that the functions performed by the assessee are similar to the functions performed by a logistic service provider or more in the nature of clearing and forwarding agent (C F). He submitted that the companies performing C F activities are the following; a) Receiving the goods after completing the customs formalities; b) Warehousing these goods; c) Receiving dispatch orders from the principal; d) Arranging dispatch of goods as per the directions of the principal by engaging transport on his own or through third party transport service providers; e) Maintaining records of the receipt and despatch of goods and the stock available at the warehouse; f) Earning of remuneration from the principal for the aforesaid activities. 5.6 He submitted that the provisions of the agreement be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that this company also has significant related party transactions during the year which include sale of traded and finished goods, customer services expenses, loans availed from holding company, loans given to fellow subsidiaries, interest expenses etc. and due to these factors this company cannot be treated as comparables. 6.3 As regards Bajaj Electricals also he submitted that this company is engaged in manufacturing as well as trading activity and it does not contain a segmental breakup of the revenues and costs pertaining to the manufacturing and trading activity separately. He submitted that the said company also bears significant risks in comparison to assessee company by incurring expenses on advertisement and publicity and product promotion and service charges, commission on sales etc. and significant investments in fixed assets are also made. Thus, according to him, this company is also be rejected. 6.4 As regards Iris Computers is concerned, he submitted that the TPO has determined the gross margins earned by comparable companies using RPM and using gross profits/sales as PLI. Therefore, the gross margin was computed at 2.36%. He submitted that a review ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the open market and the adjusted price arrived at is taken to be an arm s length price in respect of the property transferred or services provided in the international transaction; Thus, it can be seen that in this method a comparison has to be with transaction of a comparable in an uncontrolled market conditions i.e with a unrelated third party in a free market. In the case before us, there is no such comparable uncontrolled transaction to be compared with the transactions of the assesse with its AE. Therefore, the CUP method is not applicable. (b) Resale Price Method (RPM) by which the price at which property purchased or services obtained by the enterprise from an associated enterprise is re-sold or are provided to an unrelated enterprise (emphasis provided by us) is identified and such re-sale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions. Thus, it can be seen that to adopt Resale price method, the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise and is compared to net profit margin realized by an unrelated enterprise from an uncontrolled transaction or a number of such transactions and the adjustments for the difference is made. The assessee has adopted the transactional net margin method, as the most appropriate method as seen above. We have already found that the other methods prescribed by Rules are not applicable to the facts of the case before and therefore, the TNMM method is the most appropriate method for computing the ALP relating to the international transactions of the assessee with its associated enterprise. 8. Coming to the next issue i.e selection of comparables, we find that the Rule-10B of sub-rule-2 3 clearly provides the criteria to be considered in selection of comparables. One of the important criteria is the FAR analysis i.e functions performed, assets employed and risks undertaken by the assessee as well as the comparable companies. In the submissions made by the assessee, it is clear that the assessee is performing the function of storing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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