TMI Blog2013 (9) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... ly to vary in a wide range depending on the type of bathrobes supplied and their product mix and in the absence of exact data made available by the assessee to compare the prices of similar products supplied to AEs and non-AEs, CUP cannot be applied as most appropriate method for the transfer pricing exercise. Moreover, there was also a difference in geographical location and size of the markets also in as much as the AEs of the assessee were in Italy whereas the non-AEs i.e. Wal Mart was based in USA having much bigger market than Italy. We, therefore, find no infirmity in the impugned order of the learned CIT(Appeals) confirming the action of the AO in rejecting the CUP method for benchmarking and applying the TNMM - Decided against the assessee. Consideration of DEPB benfits for working out profit margin - Held that:- DEPB benefit received during the year under consideration should be considered as part of the turnover of the assessee for working out the profit margin to make the comparison of like to like and similar to similar. Since the profit margin of the assessee after taking into consideration the DEPB benefit as part of its turnover comes to 12.30% as against the aver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Rule 8D of Income-tax Rules, 1962 is applicable only from assessment year 2007-08. As further held by Hon'ble High Court, the disallowance u/s 14A for the years prior to assessment year 2007-08 has to be made by adopting some reasonable method. Respectfully following the said decision of Hon'ble jurisdictional High Court, we set aside the impugned order of the learned CIT(Appeals) on this issue and restore the matter to the file of the AO with a direction to recompute the disallowance of expenses to be made u/s 14A by applying some reasonable method after giving the assessee an opportunity of being heard. 5. Ground No. 1 of the assessee's appeal is accordingly treated as allowed for statistical purposes. 6. Ground No.2 of the assessee's appeal and ground No. 4 of the Revenue's appeal involve common issue relating to addition made by the AO/TPO by way of transfer pricing adjustment which has been deleted by the learned CIT(Appeals). 7. During the year under consideration, the assessee company had exported bathrobes to its associated enterprises, namely, Vincenzo Zucchi S.p.A., Italy and Basettil S.p.A., Italy of Rs. 13,57,47,189/- and Rs. 1,11,59,013/- respectively. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arms length margin of 13.05%. In reply, the assessee primarily objected to the use of TNMM as the most appropriate method for benchmarking as proposed by the TPO by contending that in the facts of its case, CUP was the most appropriate method. As regards the comparables selected by the TPO for applying TNMM, the assessee submitted that all of them were in the business of manufacture of Terry Towels while the assessee was in the business of manufacture of bathrobes which is a different commercial product. It was also pointed out that the assessee had got DEPB benefit from export of Rs. 2.18 crores in the year under consideration and if the same was considered as part of sales, its profit margin would come to 10.30% and not 5.4%. 9. The TPO did not find merit in the submissions made on behalf of the assessee. He noted that there was no comparable available on the data base which was engaged in the manufacture of bathrobes and, therefore, manufacturers of Terry towels were taken as comparable having business line closely related with that of the assessee. As regards the plea of the assessee that DEPB benefit should be considered as a part of the same, the TPO held that the same was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that required for simple bathrobe stitching unit. This terry fabrics is cut as per required sizes/patterns and stitched into a bathrobe. On the other hand, terry towel manufacturers weave cotton yarn into fabric and hence, their costs, expenditure and margin cannot be compared with that of the Appellant. Further, the marketing strategy for sale of bathrobes is very different from that of sale of terry towels. Whereas, the bathrobes are sold as lingerie products, the terry towels are sold as bath products. Thus, bathrobes cannot be equated with terry towel manufacturers with that of a bathrobe manufacturer is grossly incorrect and invalid. (v) Having wrongly selected companies/enterprises engaged in the manufacture of 'terry towels' which business is inherently different from the business of manufacturing bathrobes, the ld. AO has simply computed average profit margin of these companies and compared the same with the assessee's margin without adjusting for differences in characteristics of product, differential manufacturing process, risks assumed, market conditions etc. Another error of principle made by the ld. AO is applying average profit margin rate of 13.05% to the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure of other terry towel manufacturing companies to the entire expenditure of the company i.e. Rs.30.12 crores. It was submitted that the total expenditure of Rs.30.12 crores includes expenditures incurred for sale of products to the non-AE and it amounts to disturbing the profit margins of transactions with the non-AE. The impact of the sales to the non-AE and its related expenditure needs to be eliminated to derive the correct ratio. The Appellant has worked out net profit margin attributable to sale of products to the AE is 13.50% which is comparable with the net margin of terry towels manufacturers at 13.05%. The ld. AO rejected this working for the reason that the Appellant has not maintained separate books of account for transactions with the AE and the non-AE. In this regard we would like to submit that there is no such requirement of maintaining separate books of account under the Transfer Pricing regulations. (viii) Even otherwise, without prejudice to our contention in paragraph 1 2 above, even if the margin is computed for the Appellant as a whole, it works to 12.30% and not 5.04% considering DEPB benefits. (ix) It was further submitted that compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and paid in intra-group transactions leading to erosion of Indian tax revenue. It is submitted that in making the addition on account of arm's length price the ld. AO has considered the entire sales i.e. sales to AE (42.33%), sales to non-AEs (57.67%) and sales in domestic market (negligible) and estimated profit on arm's length price of the entire sales irrespective of fact that the sales is also made to non-AEs. It is submitted that the estimate of arm's length price could be made in respect of sales to AE only. Hence the addition made by the ld. AO is excessive and without any authority." 11. After considering the submissions made on behalf of the assessee as above as well as the relevant material available on record including the orders of the AO and TPO, the learned CIT(Appeals) held that although CUP was a direct and most reliable method for benchmarking, it required a high degree of comparability in respect of product. He held that although the products exported by the assessee company to its AEs and non AEs were comparable, the markets involved were geographically different. Accordingly, the learned CIT(Appeals) upheld the action of the AO/TPO in rejecting CUP method an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case was wrongly applied by the AO to the entire operating cost of the assessee instead of the operating cost relatable to the international transaction. He also found that no TP adjustment was made in the case of the assessee for the earlier years by TPO/AO in the identical facts and circumstances. Accordingly, the addition made by way of TP adjustment was deleted by the learned CIT(Appeals). Aggrieved by the order of the learned CIT(Appeals) on this issue, the Revenue has raised its grievance in the present appeal filed before the Tribunal whereas the assessee has challenged the decision of the learned CIT(Appeals) upholding the action of the AO/TPO in rejecting the CUP method for benchmarking and applying TNMM. 13. As regards the issue raised in the assessee's appeal relating to adoption of most appropriate method for benchmarking, the learned counsel for the assessee submitted that the assessee is in the business of manufacture and export of bathrobes and during the year under consideration, export of bathrobes was made by it to AEs as well as to non AEs. He invited our attention to the details of such export placed at page No. 162 of his paper book to point out that 48% of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s AEs and non AEs, CUP cannot be applied for a transfer pricing exercise as most appropriate method. He also read out and relied upon paragraph No. 6.5 of the CIT(Appeals)' impugned order and submitted that the reasons given therein by the learned CIT(Appeals) fully support the case of the Revenue that the case of the assessee is not a fit case to apply CUP for transfer pricing exercise. He contended that the issue relating to transfer pricing adjustment is a factual issue to which res judicata is not applicable and the same is to be decided independently in each year depending on the relevant facts and circumstances involved. 15. We have considered the rival submissions and also perused the relevant material on record. As regards the adoption of most appropriate method for benchmarking the international transactions with AEs in the assessee's case, it is observed that CUP no doubt is the most appropriate method for such benchmarking provided the comparable prices of similar products or almost similar products in case of uncontrolled transactions are available. The learned counsel for the assessee in this regard has contended that similar products as supplied to associated enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of hearing before us has strongly relied on the order of the AO/TPO in support of Revenue's case. The learned counsel for the assessee, on the other hand, has relied on the order of the learned CIT(Appeals) submitting that the DEPB benefit was rightly considered by him for the purpose of working out the profit margin of the assessee for comparability analysis as the same was also taken into account in working out the profit margins of the comparable cases. 17. After considering the rival submissions and perusing the relevant material on record, it is observed that the DEPB benefit was not taken into consideration by the AO/TPO for the purpose of working out the profit margin of the assessee whereas such benefit was taken into account in the comparable cases while working out their profit margin as found by the learned CIT(Appeals). Before us, nothing has been brought on record to controvert or rebut this finding recorded by the learned CIT(Appeals) and this being so, we find no justifiable reason to interfere with the decision of the learned CIT(Appeals) that the DEPB benefit received during the year under consideration should be considered as part of the turnover of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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