TMI Blog2013 (7) TMI 441X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's AE/QCS have no direct nexus with the manufacturing activity of the assessee. Against assessee. Transfer Pricing adjustment made by the TPO/AO - CIT(A) included 3 new comparables and thereafter arithmetic means worked out at 5.42% - Held that:- The third comparable included by the CIT(A) is Alpha Transformers Ltd which itself shows that the said company is functionally different from the assessee as in the business of transformers which cannot be said to be in the same business as of the assessee, M/s BCC Fuba India Ltd which is showing persisting loss from year after year and M/s ECE Industries Ltd as evident from the P&L account that an extra ordinary item of income has been shown on account of sale of business, thus all the three cannot be considered as a good comparables of the assessee. Accordingly, these comparables are excluded and therefore, the arithmetic means computed by the TPO is restored. Against assessee. CIT(A) allowed (-)5% deduction to arrive a Arm's Length Price by invoking the 2nd proviso to section 92C - Held that:- On principle, assessee has not disputed the legal proposition that the benefit of +/- 5% as provided under the proviso to sec. 92C(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the terms and conditions of the said agreement. 3.2 During the course of assessment proceedings, the Assessing Officer noticed from the P L account of the assessee that the assessee has claimed Rs 85,90,907/- under the head 'export promotion expenses'. It was further seen that this payment was on account of foreign travelling expenses incurred for the family members of the director. The Assessing Officer of the opinion that the assessee company has claimed the personal expenses of the relative of the director as its business expenses. The Assessing Officer asked the assessee to explain the business purpose of export promotion expenses along with the bills of the expenses and ledger extracts. 3.3 In response, the assessee filed letters dated 19.7.2005 and 24.1.2006 and submitted that the expenses are actually marketing and sales expenses. It was submitted that the foreign travelling is made by the President and the Directors of the company for the purpose of the business. The assessee furnished before the Assessing Officer the copies of the bills of the travelling expenditure incurred for the said visits along with the details of foreign travel. 3.4 After considering the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, public listed on New York Stock Exchange. To secure their business, extensive direct contracts on regular basis are necessary. The total turnover during the year involved manufacturing 23 models of different manufacturing complexity and sale quantity. Each model has a unique design to meet customer specifications. The manufacturing operations of the assessee are in Mumbai and its customer QCS has marketing, sales, design, material procurement and customer sales support activities located in USA and Singapore. The assessee requires more than 3000 components in its manufacturing operations which are produced by more than 100 suppliers located outside India. The assessee assists QCS in technical and advisory capacity to help identify the sources for these components. To complete the design of every model it requires multiple face-to-face meeting. The assessee and its customer i.e. QCS work together to secure the design and manufacturing contracts. 4.1 The ld Sr counsel has submitted that the assessee has to satisfy the ultimate buyer of the product and therefore it is necessary to discuss with the buyers for the purpose of finalisation of design, model and other issues as per th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement are as under:- WHEREAS APDS is engaged in the Manufacture-Assembling of electronic product Switch Mode Power Supply (SMPS). WHEREAS QCS is engaged in the design, marketing and sales of electronic product SMPS, APDS and QCS desire to enter in to a Manufacture- Assembling contract agreement whereby APDS shall manufacture- assemble SMPS for QCS. The Manufacture shall be conducted according to the Assembly Drawings, Bill of Material etc provided by QCS for each model to be manufactured by APOS.QCS shall place purchase orders with APDS for each specified model of SMPS be manufactured by APDS. This Manufacture-Assembling contract agreement shall apply to all manufacture and assembling projects set forth in the current and future signed individual orders. 1. Object of the Agreement:- (1) For and in consideration to the mutual covenants and agreements contained herein, the parties hereto agree to manufacture and assembling work of electronic products, Switch Mode Power Supplies (SMPS) and sub-assemblies as set forth in detailed individual orders to be agreed between the parties. (2) Procurement of electronic components from worldwide market with joint quality inspection f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assembled by the assessee at a price ranging between 1.30 to 1.40 times of its CBOM depending on the volume of SMPS produced, complexity of assembling the SMPS, fluctuation in material cost and foreign currency rates. 5.2 It is the case of the assessee that the director of the assessee visited foreign country to have meeting and discussion with the buyers of the finished products. Therefore, the purpose of the visit to the buyer is to discuss the specific requirement and design of the product. Thus, the assessee has claimed that the foreign visit undertook by the directors is to satisfy the buyers that the product would be as per the requirement and therefore, the entire expenditure has been incurred for the purpose of the business of the assessee. 5.3 It is to be noted that as per the agreement, the assessee is under no obligation to discuss the products design with the buyer when the entire manufacturing/assembling of the SMPS was to be done as per the specific design provided by the AE/QCS. Thus, providing the design is the sole responsibility of the AE/QCS. Therefore, when the assessee has to manufacture the product as per the specification provided by the QCS, then the onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d mainly procures the required raw materials from the AEs namely QCS Singapore, and QCS Systems Inc, USA. The assessee is not selling the products other than to the AE; therefore, the entire sales of the assessee are to the AE. 7.1 During the year under consideration, the assessee has various international transactions, the details of which are given by the TPO in para 5 as under:- Sl.No Nature of International transactions Name of the AE Amount in Rs 1 Sale of power supplies QCS Singapore 53,335,76,244 2 Sale of power supplies QCS System Inc USA 16,931 3 Purchase of raw material QCS Singapore 41,08,15,579 4 Purchase of Raw material QCS System Inc. USA 1,12,68,130 5 Purchase of fixed assets QCS Singapore 1,14,36,809 6 Purchase of fixed assets QCS Systems Inc USA 92,32,058 7 Purchase return of fixed assets QCS Singapore 6,75,188 7.2 The assessee stated to have used cost plus method to benchmark its international transactions and claimed that the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.45 16.66 0.79 4.74 4 TVS Electronics Ltd 24.53 23.42 1.11 4.74 Average 9.22% Advance Power Display Systems Ltd 53.36 53.17 0.19 0.36% 7.6 Accordingly, the TPO made an adjustment of Rs 4.90 crores towards ALP. 7.7 On appeal the Commissioner of Income Tax (Appeals), though held that the TNMM is the most appropriate method in this case; however, three more comparables as suggested by the assessee were also included and accordingly computed the arithmetic means of the operating profit of the 7 comparables at 5.42%. The ground for inclusion of the three more comparables, as suggested by the assessee is that in the subsequent Assessment Year 2006-07 and 2007-08, the TPO has considered these comparables for benchmarking the international transactions. Thus, the Commissioner of Income Tax (Appeals) has worked out the arithmetic means of 7 comparables at 5.42% against the arithmetic means determined by the TPO by considering four comparables at 9.22%. 8. The revenue has challenged the order of the Commissioner of Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of ALP. Therefore, when these companies were accepted as comparables in the subsequent year, then the rejection on the ground of residential status is not justified for the year under consideration. 9.5 He further pointed out that the Commissioner of Income Tax(Appeals) issued a remand order and in the remand report, the TPO has accepted three comparables as suggested by the assessee Thus, the ld Sr counsel for the assessee has submitted that once the TPO has accepted the comparables, then the department cannot take a different stand in the appeal and it is not open to the department to go against the order of the TPO in the remand report. He has further submitted that in the case of M/s BCC Fuba India Ltd, the brought forward loss cannot be said to be pertaining to the immediately preceding year to presume the said company is persisting loss making company. Further, only abnormally operating loss making company may be excluded and not the business loss in the ordinary course of business. In the absence of abnormal evident or circumstances causing persisting loss, an entity cannot be excluded from the comparables when loss is normal business loss. 10 We have considered the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the comparability, no case can be accepted as a comparable, solely on the basis that it has been accepted as comparable in the subsequent year. From the annual report of the company M/s BCC Fuba India Ltd., it is clear that this company is showing persisting loss from year after year and therefore, in view of the series of decisions of this Tribunal on the point that persisting loss making company cannot be considered as a good comparable for the purpose of determination of the ALP. 10.3 Further, in the case of ECE Industries Ltd, it is evident from the P L account that an extra ordinary item of income has been shown on account of sale of business; therefore, in this case, there is an extra ordinary event during the year under consideration which makes this company as not a good comparable for the year under consideration. 11. The issue before us is limited in respect to the inclusion of three more comparables by the Commissioner of Income Tax(Appeals) as the assessee has not challenged the four comparables on the basis of which the TPO determined the ALP. The grievance of the department before us is only in respect of inclusion of three more comparables by Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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