TMI Blog2012 (12) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B TPO should not have undertaken determining the ALP at nil whereas the jurisdiction provided to him is to determine the ALP of the transactions under the method(s) provided under the Act. Therefore, on legal principles also this adjustment made by AO cannot be upheld. - IT APPEAL NO. 7032 (MUM.) OF 2011 - - - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erators etc. On reference under section 92CA(1) of the I.T. Act 1961, vide order dated 28.10.2010 adjustments were made on the following transactions assessee had with Associated Enterprises(AEs):- Import of spares and equipments/Entity level profitability adjustment of Rs. 9,67,80,000). Royalty and project engineering and manufacturing drawings (adjustment of Rs. 11,27,16,302), Settlement for liquidity damages (adjustment of Rs. 2,70,38,000). Interest on delayed payments (adjustment of Rs. 32,359). Total adjustments came to Rs. 23,65,67,461. The objections are in this backdrop. 4. Assessee objected to various additions proposed before the DRP. (A) With reference to the adjustment on import of spares and equipments of Rs. 9,67,80,000 it was the submission that the entire amount was arrived at after bench marking, using TNMM method, at the entity level and operational profits attributable to international transactions by determining the Arm Length Price(ALP) is much less than what was proposed by TPO on entire sales turnover and if modified is within the range of +/- 5% as per second proviso to Sec 92C(2). The DRP however, did not agree on the reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay an amount of Rs. 32,359/- was made as adjustment which was confirmed by the DRP. The present appeal is with reference to the above action of the TPO and the DRP in making transfer pricing adjustments. 5. The learned Counsel referred to the sequence of events, the TP study, the selection of variables, revised selection of variables, change of data from three years to the relevant assessment year's data before the TPO to submit that assessee in the TP report has bench marked its transactions at the entity level on nine comparables which earned a mean profit margin of 4.12% as against assessee's margin of 5.19%. In view of the updated data and rejection of three comparables, the TPO has arrived at the revised mean margin at 6.29% as against assessee's margin of 5.19%. Therefore, he proposed to make adjustment of Rs. 9,67,80,000 on the entire turnover of the entity. Referring to the page No.66 of the document filed along with the appeal memo, it was the submission that assessee had total sales of Rs. 883.6 crores and operating expenses were to the tune of Rs. 837.7 crores. Assessee had an operating profit of Rs. 45.9 crores. Out of the operating expenses, payments made to AE are o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting cost (including these amounts) and further ALP cannot be determined at Nil as was done by the TPO. In view of this it was the submission that the adjustments are not required to be made. 7. The learned AR also justified the said payments on facts which were also placed before the TPO and the DRP. With reference to the interest adjustment made it was the submission that there are no loans granted to the AE and is only the credit which AO considered as loan. However, being a small amount added by AO, the learned Counsel did not press the issue seriously at the time of arguments. 8. The learned Counsel also referred to the segmental data provided to the DRP in order to support its contention that assessee's profits are more than the comparable's profit. It was submitted that segmental data was not considered by the DRP, even though audited accounts were furnished. Another argument of the learned Counsel is with reference to arriving at the operating profits by excluding the losses incurred in the local projects. He referred to the submissions made before the DRP that assessee has incurred huge losses in two local projects and if these losses in the projects were excluded, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restricted to international transactions alone and cannot be applied to the entire turnover of the company. On the facts of the case assessee's transactions with third parties constitute more than 95% and with AEs less than 5%. Therefore, adjustment made by the TPO on the entire turnover of the entity without restricting to the international transactions is not correct according to facts and law. This issue was already discussed elaborately by various Coordinate Benches in cases referred by Ld. Counsel above. The ITAT in the case of IL Jin Electronics (I) (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle-11(1), New Delhi, [2010] 36 SOT 227 (DELHI) held as under: "The assessee had also taken an alternative ground that out of the total raw materials consumed by it for manufacturing print circuit boards, only 45.51 per cent of the total raw materials was imported through the assessee's associate concerns, and, therefore, any adjustment, if any called for, could only be made to the 45.51 per cent of the total turnover, and not to its total turnover. After considering the facts of the case, there was no difficulty in accepting the contention of the assessee that at best only 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AE transactions only. As rightly pointed out, the finally comparables margin on the updated data arrived at by the TPO was 6.29% as against assessee's margin of 5.19%. Therefore, the addition on margin of 1.10% can only be determined on the AE transactions. 16. The next argument is with reference to the application of proviso to section 92C(2). This argument even though was raised before the TPO as well as DRP, they have not considered the issue in the correct perspective as they have applied the margins on the entire sales of assessee, naturally the ALP determined also was high. The correct working should be like this: Particulars Profit Loss A/c (Rs. In crs) Computation of Arm's Length Price (Rs. in crs) Sales (as per books of account) (A) 883.6 883.6 Less: Operating Expenses (B) 837.7 828.0 - Payments made to AE 35.5 35.1 - Payments made to Non AE 802.2 792.9 Operating Profit (OP) (C) = (A-B) 45.9 55.6 OP/Sales = (C)/(A) 5.19% 6.29% Arm's length price (ALP) 35.1 Application of the range - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bent upon the TPO to work out the ALP of relevant transactions by following the some authorized method and the entire cost borne by assessee cannot be disallowed by taking the ALP at Nil. This aspect was already decided by the Hon'ble Delhi High Court in the case of EKL Appliances. Therefore, there is no need to extract the ITAT order placed before us. The Hon'ble Delhi High Court in the case of DCIT v. EKL Appliances Ltd 2012 TII-1 High Court Del. TP 29-03-2012, has held as under: "19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, [1951] 20 ITR 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r than Section 57(iii) of the Act makes the position stronger. In the case of Sassoon J. David Co. Pvt. Ltd. v. CIT, [1979] 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to necessarily reimburse the payment to KF. It has reimbursed the same amount what was deducted by NLC from KF. As far as TP provisions are concerned on facts, this adjustment cannot be made as assessee has paid the same amount which was recovered by NLC as third party. Whether the liquidated damages are to be paid by assessee or not is a business consideration to be examined under section 37(1). This aspect, as considered by the Delhi High Court in the case of EKL Appliances (supra), is also outside the purview of the TP provisions as payment of liquidity damages to KF is a business decision taken by assessee and in our view it is necessary for the purpose of business, in view of the ongoing agreements with the NLC. Since assessee reimbursed the exact amount which was recovered by NLC, we are of the opinion that no adjustment can be made both on facts and on law. Therefore, AO's disallowances of the entire amount of Rs. 2,70,38,800 cannot be supported. One of the argument by the TPO is that the settlement deed does not clarify how the Euro 4,60,000 has been quantified. The entire data was placed before AO and there is no dispute with reference to the facts. In view of this, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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