TMI Blog2013 (8) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... n the revised return for which the assessee has also paid the due taxes - Decided in favour of assessee. Rejection of three comparables out of five comparables selected by the assessee - Non availability of the current year's financial data - Held that:- only current year financial data is relevant for determination of the arm's length price - sub-rule (4) of rule 10B clearly states that the data to be used in analysing 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. The proviso carves out an exception that the data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of the transfer price in relation to the transactions being compared - Following decision of Mentor Graphics (Noida) (P.) Limited. Versus Deputy Commissioner Of Income-tax, Circle 6(1), New Delhi [2007 (11) TMI 339 - ITAT DELHI-H] - Decided against assessee. Determination of arm's length price - Only one comparable taken as basis - Held that:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... negotiations, if any, which have critically affected the determination of the arm's length price. The Transfer Pricing Officer in its report has observed that the assessee did not submit any evidence for assuming the capacity utilisation of the comparables and whatever data relied upon by the assessee for seeking capacity utilisation adjustment was either unreliable or incorrect. When fixed cost itself is incurred only for a part of the year the same cannot be adjusted for differential capacity utilisation - Therefore, decided against assessee. Arm's length price determined on application of the most appropriate method is only an approximation and is not a scientific evaluation. Therefore, the Legislature thought it proper to allow marginal benefit to cases who opt for such benefit. In the case of a taxpayer who exercises the option and accepts the arm's length price as per the second limb of the proviso or in other words, he accepts the arm's length price even exceeding 5 percent of arithmetic mean determined by the tax authority as correct and is ready to pay tax on the difference between price disclosed by him and the above arm's length price. We do not see any valid objectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of the order of the Transfer Pricing of the Officer (TPO) under section 92C(iii) of the Act. The other disallowances made are ₹ 40,94,915 in respect of the provisions made for certain expenses. Initially the provision was found to be made in respect of various expenses at an aggregated sum of ₹ 1,01,91,619 and on query raised by the Assessing Officer a sum of ₹ 60,96,704 was suo motu disallowed by the assessee, hence, net addition of ₹ 40,94,915 was made. The other disallowance is a sum of ₹ 13,73,781 which is with respect to disallowance of excess depreciation on computer peripherals, UPS and printers. The assessee had claimed depreciation at 60% As against that the Assessing Officer has allowed the claim at 15% and in the circumstances a net addition of ₹ 13,73,781 is made on that account. All these additions are agitated by the assessee in the present appeal. The grounds of appeal read as under : Transfer pricing matters : On the facts and circumstances of the case, and in law ; 1. The learned Assessing Officer pursuant to the directions of the learned Dispute Resolution Panel ('learned DRP') erred in rejecting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up stage, and also disregarding the authentic information submitted by the appellant to enable the computation of such an adjustment. 7. Without prejudice to the other grounds, the learned Dispute Resolution Panel/Assessing Officer erred in computing the quantum of adjustment to be made to the profit of the manufacturing segment of the assessee by applying the profit level indicator of operating profit/sales to the value of international transaction pertaining to import of raw material instead of sales figure of the manufacturing segment which resulted in an increase in the adjustment by ₹ 26,91,806. General grounds : 8. The learned Dispute Resolution Panel/Assessing Officer erred in not granting the benefit of +/5% range as envisaged by the proviso to section 92C(2) of the Act. 9. On the facts and in the circumstances of the case, the learned Assessing Officer erred in not appreciating the fact that additions made to the total income of the appellant are merely due to difference of opinion and not due to any mala fide intent on the part of the appellant, thereby initiating penalty proceedings under section 271(1)(c) of the Act on the premise that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15%., as against the block of 'computers' eligible for depreciation at 60% The above grounds are without prejudice to each other. Your appellant craves leave to add, amend, alter, withdraw, modify and/or substitute, and to withdraw the above grounds of appeal. 2. The draft order came to be passed by the Assessing Officer on December 2, 2009 which was forwarded to the assessee. Against the draft order, the assessee opted to refer the matter to the Dispute Resolution Panel (DRP), who vide its order dated September 30, 2010 has passed the order under section 144C(5) of the Act. 3. The transfer pricing study has been conducted by pricewaterhouse Coopers and copy of such study has been placed by the assessee in the paper book at pages 101 to 170. 4. The return of income has been filed by the assessee on November 27, 2006 declaring a loss of ₹ 52,33,133/-. Subsequently, a revised return was filed on March 31, 2008 in which an income of ₹ 79,75,972/- was declared and the assessment has finally come to be passed at an assessed income of ₹ 6,79,99,031/- after making the aforementioned three additions. 5. The assessee is engaged in the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted net profit margin of 13.50% (by making certain adjustment on account of capacity utilisation etc.) in its transfer pricing study as against mean margin of five comparables at 9.17% (as per Table 3 given in order of the Transfer Pricing Officer and reproduced below at the end of this paragraph) and in this manner as per transfer pricing study, the transaction has been considered as transaction at an arm's length price. TABLE 3 Manufacturing Segment Company Name OP/Sales BP Ergo Ltd. 9.46% Gunnebo India Ltd. (Steelage Industries Ltd.) -13.86% Shakti Met-Dor Ltd. 28.62% Supreme Industries Ltd. 4.28% APW President Systems Ltd. 13.73% Count 5 Average 8.45% 7. With regard to the other segment relating to market and installation support services, the benchmark used by the assessee is also the transactional net margin method bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pacity utilisation in the cases of comparable at 70% The cost pertaining to abnormal under utilisation of capacity amounting to ₹ 44,38,709/was ignored for the purpose of computing operating profits from the manufacturing operations during the year under consideration. Further it was noticed that excessive overhead cost amounting to ₹ 1,28,04,653/was incurred during pre-commencement period, i.e., up to December, 2005 and the same was not considered for the purpose of computing operating profits from the manufacturing operations. Such position has been described in the order of the Transfer Pricing Officer in tables 5 and 6 which for the sake of convenience are being reproduced below: TABLE 5 Particulars Manufacturing segment After Capacity Adjustment Before Capacity Adjustment A D E Income Sales of Goods (Gross) 5,01,43,814 5,01,43,814 Less: Excise duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1126042 * 60.58%) i.e., ₹ 6,821,333 The details of pre-operative expenses are described in table 7 as below : TABLE 7 Particulars Amount (Rs.) Salaries Wages 31,44,719 Fringe Benefits 19,93,198 Consulting 21,06,241 Maintenance 1,86,049 Supplies 1,64,571 Travelling costs 26,63,272 Telephone 5,46,689 Postage 81,438 Lease Rents 3,32,655 Training/Education 2,56,264 Legal Accounting 10,63,150 Advertising Fairs 91,060 Insurance 1,64,226 Other selling and general administration expenses 11,120 Total 1,28,04,653 11. Thus, it was found by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,42,445 Administration Other expenses 1,43,57,069 Total expenditure 6,06,18,850 Operating cost Operating Profit -1,04,75,036 Operating Profit/Sales -20.88% 13. The learned Transfer Pricing Officer has thus, worked out difference in the arm's length price of manufacturing segment at ₹ 1,74,03,994 as per table 10:- TABLE 10 Details Amount Value of International Transactions 5,93,36,409 Arm's Length OP/Sale at the rate of 8.45% 39,521,183 Arm's Length Margin 50,13,926 Margin shown by the assessee @ (-) 20.88% 1,23,90,068 Difference 1,74,03,994 % of difference with the value at which the international transaction has taken place 29.33% 14. Since the var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Details Reference Amount Adjustment in Manufacturing Segment Para 4.17 1,74,03,994 Adjustment in Market Support Service Segment Para 5.9 3,71,50,369 Total Adjustment 5,45,54,363 17. The findings of the Dispute Resolution Panel on the objections raised by the assessee are as under : Findings on legal issues : 1. Data of only the relevant financial year of the comparable entities is to be used as the assessee did not establish that the data of the preceding two years demonstrated settled facts which have influenced the result of the financial year under consideration. 2. Adjustment of 5% as provided under the second proviso to section 92C(2) of the Act cannot be granted as the difference computed by the Transfer Pricing Officer in the arm's length price (ALP) is more than 5% of the arm's length price determined by the Transfer Pricing Officer. 3. The Assessing Officer is not under an obligation to demonstrate the existence of tax avoidance for invoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no benefit can be given to the assessee in the transfer pricing analyses. The expenditure are in the nature of procurement, legal and accounting, consultancy and professional fees and on the face of it these expenditure are non-operational expenses. 2. The rejection of comparable M/s. Alfred Herbert India Ltd. is correct for the reasons discussed by the Transfer Pricing Officer in his order as the functions of that company were not similar to the functions of the assessee. The directors annual report of that company indicated that the company was carrying on business activity of the reality and business service division which has contributed to the increased profitability of the said company and that the efforts continue by the company to improve the sale of market division and thus, it can be seen that the said company was having difference kind of business. There was no segmental report in the annual report of the company. Therefore, the results of the said company cannot be compared with the assessee. 3. The Transfer Pricing Officer was correct in rejecting three out of five comparables selected by the assessee as the financial data of the relevant financial year for thos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Dispute Resolution Panel was wrong in not granting the relief to that extent on the ground that the assessee had given up its claim regarding those expenditures. To substantiate the argument that such disallowance has to be taken out of operating cost, the learned authorised representative has placed reliance upon the decision of the Tribunal in the case of SAP Labs India P. Ltd. v. Asst. CIT [2010] 6 ITR (Trib) 81 (Bang), copy of which is placed at page 43 of the compendium. It was submitted that in any case if the said expenditure is not allowed for the purpose of transfer pricing analysis then the same should be allowed as deduction under section 37 for corporate tax assessment and reduce the assessed income to that extent to avoid double taxation. 21. Touching to ground No. 4 the objection of learned counsel is that according to search process conducted for transfer pricing study to identify a set of broadly functional comparable the assessee had arrived at a set of five broadly comparable companies/entities with a mean margin of 3.15% As per table 13 below : TABLE 13: Arm's Length Results Sl. No. Name of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application of the transactional net margin method and in that circumstances fresh search was submitted to the Dispute Resolution Panel with a larger set of six comparables and reference in this regard was made to pages 234 to 236 of the paper book, whereby the fresh search was submitted. He submitted that such objections have wrongly been rejected by the Dispute Resolution Panel. At first, it was submitted that if the old search is taken into consideration then the Transfer Pricing Officer could have considered multi-year data of the three rejected comparables which was available at the time of preparing the transfer pricing study. So far as it relates to exclusion of Alfred Herbert India P. Ltd. the submission of learned authorised representative as under : 6.52 Alfred Herbert India Ltd. : As per AS 17, 'A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subjects to risks and returns that are different from those of other business segments.' The fact that the consolidated annual report of Alfred India Ltd. has shown the sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity purposes. Referring to rule 10B(1)(e)(i) it was submitted by the learned authorised representative that for the purpose of computing net operating margin the cost which can be considered are pertaining to such transactions, therefore, the cost incurred prior to the commencement of commercial operations have no nexus with the international transactions and thus, required to be excluded while computing the operating margins. The assessee has identified these expenses totalling to ₹ 1.28 crores the details of which are filed at page 263 of the paper book. He submitted that if the matter is considered from the view point of law as described in rule 10B(1)(e)(i) the assessee has computed the profit margin as follows : (a) The revenue earned from the raw material during the accounting period (i.e., sales effected using the imported raw material) to be considered ₹ 50,143,814. (b) The value of imported raw material to be reduced from the sales. (c) The change in stock (both raw material and finished goods) during the period be added to (in case of increase in stock) or reduced from (in case of decrease in stock) from the sales are the case may be. (d) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on account of capacity utilisation, it was submitted that all the details were submitted by the assessee regarding the startup stage of operations and capacity utilisation details viz-a-viz the details with regard to comparables and also the legal pronouncement in favour of the assessee and reference in this regard was made to pages 264 to 298 and pages 245 to 247 of the paper book. He submitted that neither the Transfer Pricing Officer nor the Dispute Resolution Panel has contested difference between the stage of operations of the assessee and the comparable. They have rejected the entire adjustment based only on account of the presumed inconsistency which has been observed only in one out of five comparables which is also proved to be incorrect as the licensed capacity does not have any relevance in the computation of capacity utilisation as at the prevailing time there was no statutory restrictions to exceed the production from licensed capacity. Reference in this regard was made to pages 200 and 201 of the paper book. He submitted that licensed capacity is disclosed in the annual accounts merely to comply with the disclosure requirements which are more relevant to licensing e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the international transaction (which is import of raw material) rather than to sales of the manufacturing segment of the assessee and, thus, the learned Transfer Pricing Officer has computed the operating margin of the comparables on sales and applied the operating margin on the assessee's purchases. Thus, it was submitted that there is a fundamental difference in the calculation of mean margin. He submitted that the correct computation in this respect, if the same criteria is adopted, will be as under : Sl. No. Particulars Amount (Rs.) 1. Sales 50,143,814 2. OP/Sales as calculated by the Ld. TPO 8.45% 3. OP considering the above OP/Sales 4,237,152 4. OP as calculated by the Ld. TPO (10,475,036) 5. Difference being the adjustment required 14,712,188 31. Thus, it was pleaded that an adjustment of ₹ 1,47,12,188/- is required to be made in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we conclude DCIL should retain the gross margins as determined through the benchmarking exercise by the assessee discussed earlier in this order. (c) Sony India P. Ltd. v. Deputy CIT [2009] 315 ITR (AT) 150 (Delhi) (I. T. A. Nos. 1181/Del/2005, 1257/Del/2007 and 1656/Del/ 2007) : Para 163 Option is given to the taxpayer as in some cases, variation not exceeding 5% of arithmetic mean might not suit the taxpayer, and, therefore, taxpayer in such cases should not be put to a prejudice. Otherwise, there is no difference between the first and the second limb of the provision as far as right of the taxpayer to challenge the determined price is concerned. The second limb only allows marginal relief to the taxpayer at his option to take the arm's length price not exceeding 5% of the arithmetic mean. Therefore, in line with the view taken by the Kolkata Bench of the Tribunal, we are of the view that benefit of the second limb is available to all taxpayers irrespective of the fact that price of international transaction disclosed by them exceeds the margin provided in the provision. (d) Skoda Auto India P. Ltd. v. Asst. CIT [2009] 122 TTJ (Pune) 699 : Para 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent year financial data as against multiple year data prescribed under rule 10B(4) of the Income-tax Rules, 1962. He submitted that at appropriate places the discussion on these issues have already been made, hence, these grounds may be decided accordingly. 35. Coming to ground No. 12, it was submitted by learned authorised representative that the assessee made provisions of ₹ 40,94,915/-. The assessee had booked the actual expenditure of ₹ 33,24,274/- in the next financial year, i.e., the financial year 2006-07. Such provision to the extent not booked against the actual expenditure in the financial year 2006-07 was reversed in the next year and, in this manner, excess provision was offered to tax in the next year. He submitted that the provision as on March 31, 2006 was actually a sum of ₹ 47,40,969/-and, on the basis of actual expenditure, an amount of ₹ 14,16,695/- was reversed in the financial year 2006-07 and he described the following table : Provision as on March 31, 2006 (disallowed amount 4,740,969 Less : Booked against actual expenses in financial year 2006-07 3,324,274 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would result in double taxation, but in the present case the assessee has not demonstrated that commission expenditure disallowed in the return of income was considered as part of operating expenses in the transfer pricing analysis. Therefore, he pleaded that to verify such fact, the matter may be sent back to the file of the Assessing Officer/Transfer Pricing Officer. 41. In respect of ground No. 3, he submitted that this ground is interrelated to ground No. 2 and the said amount has already been surrendered for taxation and, therefore, it does not call for adjudication. 42. In respect of ground No. 4, he submitted that this issue has been discussed by the Transfer Pricing Officer in paragraph 5. He submitted that the assessee has considered five companies as comparables in the transfer pricing study report considering multiple year data. The Transfer Pricing Officer adopted current year data on the basis of which he rejected three out of five comparables. He submitted that the current year data for the said three comparables was not even available before the Dispute Resolution Panel and the said data is not available even as on date. He submitted that the Transfer Pricing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order about admission of such fresh search, the said fresh search cannot be considered. He submitted that following case law support the case of the Revenue that even one comparable is good enough to compute the arm's length price : (i) In the case of Vedaris Technology P. Ltd. v. Asst. CIT (I. T. A. No. 4372 (Del)/2009) reported as [2009] 131 TTJ (Delhi) 309 the arm's length price had been determined considering only one comparable. This case is on transactional net margin method. The para relied upon by the authorised representative is of no help to the assessee as the decision is taken by the Tribunal on merits and not on concession. (ii) In the case of Perot Systems TSI (India) Ltd. v. Deputy CIT (I.T.A. Nos. 2320, 2321 and 2322/Del/2008) reported as [2010] 5 ITR (Trib) 106 (Delhi) ; 2010-TIOL-51-ITAT-DEL-TP wherein the arm's length price had been determined considering only one comparable. This decision was further relied upon by the Income-tax Appellate Tribunal in the case of UE Trade Corporation (India) P. Ltd. [2011] 9 ITR (Trib) 400 (Delhi) available in the case law compilation submitted by the authorised representative for the assessee at pages 302-317 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's compilation case law). He submitted that the assessee has relied upon paragraph 14 of the Income-tax Appellate Tribunal's order. He submitted that whole of the paragraph should be read and it will show that adjustments are to be made to the comparables and not to the tested party and such position was upheld by the Income-tax Appellate Tribunal. Distinguishing the decisions in the case of Asst. CIT v. Fiat India P. Ltd. and Skoda Auto India P. Ltd., he submitted that they were given in the context of capital intensive industries, hence, could not be applied to the case of the assessee. 48. It was further submitted that one can visit to OECD guidelines only when the provisions of the Income-tax Act or Rules are not clear and, in the present case, the law being clear and the adjustment being not in accordance with the law, the claim of the assessee should be rejected. He submitted that as pointed out by the Dispute Resolution Panel and the Transfer Pricing Officer, the data considered for capacity utilisation of one of the comparables, namely, M/s. Steel Age Industries Ltd. was not reliable, hence, adjustment on that account was rightly rejected. He submitted that sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Thus, it was submitted that the Transfer Pricing Officer has rightly computed the adjustment in the manufacturing segment taking the value of international transactions reported in Form 3CEB and it is for the assessee to argue that this could possibly lead to anomaly in the subsequent year when the unused inventory enters the profit and loss statement and transactional net margin method is used for determining the arm's length price. This may require suitable adjustment when the arm's length price is determined in the next year. This would be a matter of details and can be left to be decided in the next year if such a situation arises. 51. Apropos ground No. 8, it was submitted by the learned Departmental representative that in the case of Global Vantedge P. Ltd. v. Deputy CIT [2010] 1 ITR (Trib) 326 (Delhi) ; 37 SOT 1, it has been held that it is not a standard deduction. He submitted that for marketing support segment only one comparable was selected, therefore, since only one the arm's length price was selected, there is no question of analysing the variation from the transfer price of the international transaction as the proviso clearly mentions where more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iso to section 92C(2) is available only if the variation between the arm's length price and transfer price does not exceed 5% of the transfer price. He submitted that for the reason aforesaid, the claim of the assessee regarding +/- 5% as standard deduction has rightly been denied by the Transfer Pricing Officer. 56. Apropos ground No. 11, it was submitted that current year data is only the relevant data as per rule 10B(4) and such issue has been set at rest by the decision of the Appellate Tribunal in the case of Customer Services India P. Ltd. v. Asst. CIT [2009] 30 SOT 486 (Delhi) wherein it has been held as under : It was mandatory on the part of the Transfer Pricing Officer to use the assessee data relating to the financial year 2002-03 in which the international transactions were admittedly entered into by the assessee company with its associated enterprises. 57. He submitted that as per well settled law, single year data has to be considered unless the assessee demonstrates that prior years' data has had an influence on the setting of transfer price of international transaction either at the time of setting them or by way of adjusting them subsequent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies in the public domain is not available up to the date of filing the returns and such fact is established by the statistics placed as annexure A. He submitted that as per annexure B, the set of comparables selected by the Transfer Pricing Officer for the financial year 2006-07 during the assessments, current year data was not available for any of the comparable companies in the public domain at the time of statutory time line to file the returns and such fact prove that it is impossible for the tax payer to use current year data while preparing the contemporaneous documents. He submitted that while deciding the issue regarding user of multiple year data the submissions of the assessee made before the Dispute Resolution Panel vide pages 211-215 of the paper book should be considered. 60. So far as it relates to the contention of the learned Departmental representative that one comparable is sufficient to determine the arm's length price, he submitted that it has never been the case of the assessee that any of the comparables selected by it should be rejected. In fact, the assessee has selected and all throughout distinguished the set of comparables selected in its transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies had concluded their arguments on the present appeal. 63. We have carefully considered the rival submissions in the light of material placed before us. Firstly we take the grievance of the assessee as represented in ground Nos. 2 to 4 relating to adjustment made with regard to marketing support services segment. The first and foremost objection of the assessee is regarding non-reduction of suo motu disallowance of commission expenses of ₹ 1,32,09,105 from operating expenses for the purpose of transfer pricing analysis. It has been the case of the assessee that on March 31, 2008 it has electronically filed the revise return vide which a sum of ₹ 1,32,09,105 was added to the earlier returned income on account of commission paid to DSF added back . Copy of such revised return is placed at pages 1 to 5 of the paper book according to which taxable income of the assessee has been computed at ₹ 79,75,972 as against earlier returned loss of ₹ 52,33,133. Copy of original return file is placed at pages 6 to 30 of the paper book. It has also been the submission of the assessee before the Dispute Resolution Panel that the Transfer Pricing Officer has erroneously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it can be granted to the assessee in the transfer pricing analysis. Here it will be pertinent to mention that the Dispute Resolution Panel while considering this issue has mistakenly written the amount as ₹ 60,96,704 and this position has been clarified by the learned authorised representative in his written submissions in paragraph 5.3.2 as the said sum of ₹ 60,96,704 relates to ground No. 12 in connection with a corporate tax ground. So the sum as stated in the Dispute Resolution Panel's order at page 2 in paragraph 1(b) is relating to the claim of the assessee of ₹ 1,32,09,105 instead of ₹ 60,96,704. 65. Thus, it can be seen that the contention of the assessee has been rejected by the Dispute Resolution Panel without properly appreciating the case of the assessee. It is the case of the assessee that the Transfer Pricing Officer has wrongly computed the margin of the assessee at 1.35% and if the said sum of ₹ 1,32,09,105 is taken into consideration then the profit margin will be 9.63% and such computation has been shown in the following table 1 annexed with the written arguments : Table 1 : Computation of operating margins for marketing su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t its profit margin should have been taken according to the income computed in the revised return for which the assessee has also paid the due taxes. In this manner, finding force in the contentions of the learned authorised representative, we are of the opinion that ground No. 2 of the assessee is to be allowed and accordingly allowed. Ground No. 3 is the alternative argument and as the main argument of the assessee is accepted we need not required to go in the alternative claim made by the assessee. 67. The second objection of the assessee relating to marketing support service business is covered in ground No. 4. The first issue relates to rejection of three comparables out of five comparables selected by the assessee. Three comparables have been rejected on the ground of non-availability of the current year's financial data. The current year financial data of those three comparables has not been available even before the Tribunal. According to the well settled law, as explained in various decisions of the Tribunal, only current year financial data is relevant for determination of the arm's length price and this position of law is well settled by the following decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le considering Alfred Haworth India Ltd. as comparable, only the segmental data relating to sales and marketing operation was considered as comparable and not entire business of that concern, therefore, the said comparable could not be rejected. The relevant submission of the assessee before the Dispute Resolution Panel are placed at pages 208 to 210 of the paper book. In paragraph 6.5.6 the assessee has admitted that the said comparable and its subsidiaries were also engaged in businesses not comparable to the marketing support service segment of the assessee but the assessee has considered the data only on a segment level and not on a company wide level. This issue has been discussed by the Transfer Pricing Officer in paragraph 5.6 and after going through the report of the directors with regard to financial performance of the said concern, it is observed by the Transfer Pricing Officer that the said concern was having a different kind of businesses. The financial report of the said concern is filed by the assessee in the paper book at pages 345 to 397 and at page 375 the following functions of the said concern are described as primary segment : 1. Manufacturing operations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Deputy CIT [2009] 315 ITR (AT) 150 (Delhi) (I. T. A. Nos. 1181/Del/2005, 1257/Del/2007 and 1656/Del/2007). 71. On the other hand, it is the case of the learned Departmental representative that the arm's length price can be computed even on the basis of one comparable and to support such contention he has relied upon : 1. Vedaris Technology P. Ltd. v. Asst. CIT [2009] 131 TTJ (Delhi) 309 2. Perot Systems TSI (India) Ltd. v. Deputy CIT [2010] 5 ITR (Trib) 106 (Delhi) 72. In none of the cases relied upon by the learned authorised representative, it has been categorically held that if only one comparable is left, the entire exercise should be carried out freshly. In the case of SAP Labs India P. Ltd. v. Asst. CIT [2010] 6 ITR (Trib) 81 (Bang), 22 comparables were selected by the assessee in its transfer pricing report. As against that the Transfer Pricing Officer had selected 8 comparables and out of all these parties the Tribunal has selected 12 comparables for computing the arm's length price. The main observation of the Tribunal upon which the assessee has placed reliance read as follow : 81. The argument of the assessee-company cannot be accepted as such, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. Therefore, we reject the submission of the assessee that on the basis of one comparable, the arm's length price could not be determined and fresh search was required to be taken as per submissions made before the Dispute Resolution Panel. The facts of the present case do not warrant the fresh search to be taken into consideration as there is no valid reason to do so. 78. In view of the above discussion ground No. 4 of the assessee is rejected. 79. Apropos ground No. 5 it is the case of the assessee that the following expenses should be considered as expenses incurred prior to the commencement of manufacturing activity hence should be excluded from operating expenses : Table 7 Pre-operative Expenses Particulars Amount (in Rs.) Salaries Wages 31,44,719 Fringe benefits 19,93198 Consulting 21,06,241 Maintenance 1,86,049 Supplies 1,64,571 Travelling costs 26,63,272 Telephon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that what are operational expenses are the expenses which are incurred to earn that income. It is not even the case of the assessee that those expenses did not relate to manufacturing segment of the assessee out of which the revenue was earned by the assessee. If the expenses have nexus with the revenue then they are to be considered as operational expenses and they cannot be excluded simply for the reason that the date of occurrence of the revenue is later and expenses have been incurred prior to that. Therefore, ground No. 5 of the assessee is rejected. 83. Apropos ground No. 6, it is already observed that the assessee has computed its margin after claiming adjustment on capacity utilisation. Therefore, the first issue to be decided is that whether the assessee can deviate from the net profit shown in its books of account for the purpose of computing the arm's length price. The method adopted by the assessee is the transactional net margin method for the purpose of computing the arm's length price. The provisions of rule 10B(1)(e)(i) regulates such method and read as under : 10B(1)(e) transactional net margin method, by which,- (i) the net profit margin reali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction shall keep and maintain the following information and documents, namely :. . . (a) to (j) . (k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price ; 88. The perusal of the above provision will reveal that every person who has entered into an international transaction is under an obligation to keep and maintain the information and documents with respect to the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price. The Transfer Pricing Officer in its report has observed that the assessee did not submit any evidence for assuming the capacity utilisation of the comparables and whatever data relied upon by the assessee for seeking capacity utilisation adjustment was either unreliable or incorrect. When fixed cost itself is incurred only for a part of the year the same cannot be adjusted for differential capacity utilisation. 89. According to the submissions made before the Dispute Resolution Panel it was submitted by the assessee that assumption has been made regarding capacity utilisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmission of the assessee it has to be seen that what evidence has been filed by the assessee with regard to assumption made by it with regard to capacity utilisation of 70% of the comparables. It has already been described that it is the legal obligation of the assessee to keep and maintain the information and documents in respect of any assumption made by it which according to the assessee has critically affected the determination of the arm's length price. In the written submissions the assessee has made reference to the evidence being placed at pages 264 to 298 and submissions placed on 245 to 247 of the paper book in paragraph 8.41. Pages 264 to 298 have been described as annexure H in the index of paper book and the narration is copy of application and submission made before the learned Transfer Pricing Officer dated October 9, 2009. Page 264 is the Central excise registration certificate of the assessee dated May 30, 2005. Pages 265 to 269 are the copy of formation E.R.-1 being the return of excisable goods and availment of CENVAT credit for the month of June, 2005. Similarly from pages 270 to 274, 275 to 279, 280 to 284, 285 to 289, 290 to 294, 295 to 297 are the sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Panel has not passed any speaking order on such submission of the assessee. If such submission of the assessee were to be rejected then reasons must should have been given for the same. There being no discussion on this issue in the order passed by the Dispute Resolution Panel, we consider it just and proper to restore this issue to the file of the Dispute Resolution Panel with a direction to consider the submissions of the assessee and to decide this issue by way of speaking order after providing the assessee a reasonable opportunity of hearing. This ground is allowed for statistical purposes in the manner aforesaid. 92. Coming to ground No. 8 the assessee is claiming +/- 5% range as per the proviso to section 92C(2) of the Act. The proviso as applicable for the year under consideration read as under : Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five% of such arithmetical mean. 93. This proviso is applicable in a case where more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;preference'. Therefore, it is the choice of the taxpayer to take the arm's length price with a marginal benefit and not the arithmetical mean determined as the most appropriate method. The controversy is in cases where the international price shown in related party transaction exceeds 5% of the arithmetic mean envisaged by the provision and such the arm's length price is contested by the taxpayer. According to the Revenue, in such a situation, the second limb of the provision is not applicable. The reasons put forth in support of such a view by the Revenue have already been noted. It is their contention that the second part/limb of the provision is meant to cover marginal cases only where the price shown by the taxpayer does not exceed 5% of the arm's length price representing arithmetic mean by the most appropriate method. Where the difference is much more than 5%, then the taxpayer cannot have the benefit of the said provision, particularly where the taxpayer has not accepted such arithmetic mean. 163.4. The other view is the one accepted by the Kolkata 'A' Bench of the Tribunal in the case of Development Consultants P. Ltd. [2008] 115 TTJ (Kol) 57 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmetic mean and determined through the most appropriate method. As stated above, the second proviso is intended to give marginal relief to all taxpayers as determination of the arm's length price is not an exact science but is an approximation. Option is given to the taxpayer as in some cases, variation not exceeding 5% of the arithmetic mean might not suit the taxpayer, and, therefore, taxpayer in such cases should not be put to a prejudice. Otherwise, there is no difference between the first and the second limb of the provision as far as right of the taxpayer to challenge the determined price is concerned. The second limb only allows marginal relief to the taxpayer at his option to take the arm's length price not exceeding 5% of the arithmetic mean. Therefore, in line with the view taken by the Kolkata Bench of the Tribunal, we are of the view that benefit of the second limb is available to all taxpayers irrespective of the fact that price of international transaction disclosed by them exceeds the margin provided in the provision. 94. In this view of the situation, we hold that benefit of 5% is not available to the assessee with respect to marketing support service s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d return and the balance sum remained at ₹ 40,94,915. It has been observed by the Assessing Officer in the assessment order that the assessee was given specific opportunity to explain the allowability or otherwise of these expenditure and in reply the assessee has submitted that according to consistently followed the mercantile system of accounting these expenses were debited to the profit and loss account on account of the provision of accrued expenses. It was submitted that it was not in the nature of contingent liability. The Assessing Officer has found that such explanation of the assessee is not acceptable and he has disallowed the remaining amount of ₹ 40,94,915. Before the Dispute Resolution Panel also, argument of the assessee was that these expenses were closely approximate to the provisions made which cannot be termed to be a contingent liability. In the written submissions filed before us it is submitted that the auditors of the assessee-company had not identified these expenditure as inadmissible. It is submitted that correct amount is not a sum of ₹ 40,94,915/- but it is ₹ 47,40,969/- and against those expenditure the expenses booked by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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