TMI Blog2013 (10) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... nd machinery which are used for other than manufacturing activities, the same has to be allowed - Depreciation cannot be denied on plant and machinery which were used for other than manufacturing purpose - Therefore, matter is restored back - Decided in favour of assessee. Adjustment of Arm's Length Price - Import of finished goods from the Associate Enterprise - Held that:- The assessee had initially adopted TNMM as most appropriate method for bench marking its ALP and for this purpose it has chosen six comparables which has been accepted by the TPO. The assessee's operating margin in relation to the transactions of import of finished goods from the A.E. and resale in the domestic market was at 51.22% and the majority of the operating cost was on account of administrative and advertisement costs. In the transfer pricing report, the assessee had submitted that if the adjustment on account of advertisement is made on the average operating profit margin of the six comparables, the operating margin will come down to 17.41%. What should be the most appropriate method of determining arm's length price - Held that:- According to the provisions of sections 92C r/w 10B, the ALP in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termination of ALP and some other method should be resorted. The ultimate aim of the transfer pricing is to examine whether the price or the margin arising from an international transactions with the related party is at ALP or not. The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case - Decided in favour of assessee. Disallowance of professional fees - CIT deleted addition - Held that:- the bills pertaining to the professional services rendered was received in this year and after the receipt of such bill, the payment has been made. In case of professional fees, it is very difficult to project as to what would be the fee that would be charged by the professional for the services rendered. It is when the bill is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2002-03. We first take up assessee's appeal in ITA no.2476/Mum./2008, for the assessment year 2002-03. 2. In ground no.1, the assessee has challenged the disallowance of ₹ 25,12,877, being contribution to superannuation fund and ₹ 5,52,581, being employer's contribution to PF and ESIC under section 43B. 3. On a perusal of the details filed by the assessee in respect of the payment of PF and ESIC, the Assessing Officer noted that some of the amounts were paid after the due date as per the provisions of section 43B(b). Accordingly, he worked out the disallowance under section 43B after incorporating the details of amount paid, date of payment and due date which has been given at Pages-2 and 3 of the assessment order and thereby worked out the disallowance under section 43B in the following manner:- Total disallowance as computed by the A.O. in Para-4.1 ₹ 44,09,107 Less: disallowance u/s 43B as made by the assessee in the computation of income ₹ 5,52,581 Total disallowance ₹ 38,56,526 4. Before the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal wherein the judgment of the Hon'ble Supreme Court in CIT v/s Alom Extrusions Ltd., [2009] 319 ITR 306 (SC), has been followed. 7. The learned Departmental Representative fairly admitted that this issue now squarely covered by the judgment of the Hon'ble Supreme Court. 8. After considering the relevant findings of the Assessing Officer and the learned Commissioner (Appeals), we find that it is not in dispute that all the payments which have been referred to by the Assessing Officer at Pages-2 and 3, relate to employer's and employees' contribution to PF ECIS, and employees' superannuation funds which have been paid before the due date of filing of the return of income. In view of the law settled by the Hon'ble Supreme Court in Alom Extrusions (supra), and followed by various Courts, the payments toward employer's and employees' contribution to PF ECIS, made after the grace period but prior to filing of the return of income, constitute admissible deduction within the ambit of section 43B. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and allow the claim admissible under section 43B. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset forms part of the block asset, depreciation cannot be disallowed on the ground that it has not been used during the accounting year. In any case, these plant and machineries were ready for use and in view of various decisions, allowance of depreciation on such plant and machineries which are ready for use cannot be disallowed. Alternatively, he submitted that the disallowance of depreciation on the plant and machineries for ₹ 24,58,028 also contained certain machineries which were not for manufacturing activities. If any disallowance is called for, then the same should be restricted to plant and machinery which is used for manufacturing activities and were not used in the relevant accounting year. 14. Learned Departmental Representative submitted that the assessee's manufacturing activity had ceased to exist after 1st January 2010 and nothing has been made available on the record that these plant and machinery were intended to be used in future, therefore, depreciation has rightly been disallowed. Regarding alternate plea of the learned Counsel that the some of the plant and machineries were not used for manufacturing activities, he submitted that the same may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is engaged in marketing and selling of toy brands of Mattel Group in India and recorded its turnover of ₹ 36 crores during the relevant previous year. Its operations consisted of import of finished goods from the group companies and selling them in India and also manufacturing of the toy after importing the raw materials from the A.E. The toy brands dealt by the assessee in India included Barbie dolls, Hot Wheels, Fisher Price products and other entertainment games. Thus, the assessee had international transactions with the A.E. with regard to the purchase of finished goods and purchase of raw materials. Looking to the nature of international transactions with its A.E., the Assessing Officer made a reference u/s 92CA(1) to the Transfer Pricing Officer (for short TPO ) for determination of ALP as reported in Form-3CEB filed by the assessee. The turnover of the assessee company along with the net profit before interest and tax for various years were reported in the following manner:- A.Y. Sales (Rs. ) Returned income / (Rs. ) NPBT (Rs. ) Taxes Paid in India 2003-04 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment on account of advertisement distribution cost and worked out the average operating margins of the six comparables at (-) 17.41%. The TPO has incorporated the original profit margin and the adjusted operating profit margin of the six comparables in Para-6.3 in the following manner:- Sl. No. Comparables Original Operating Profit Margin Adjusted Operating Profit Margin 1. Balsara Hygiene Products Ltd. 4.36% (-) 3.2% 2. Detergents India Ltd. (-) 0.43% (-) 22.46% 3. Henkel Spic India Ltd. 5.40% (-) 19.74% 4. Mueller and Phipps India Ltd. (-) 0.10% (-) 20.15% 5. Nirma Consumer Care Ltd. (-) 0.83% (-) 19.15% 6. Paramount Cosmetics India Ltd. 0.00% (-) 19.68% Average operatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y important submissions of the assessee before the TPO, vide letter dated 6th October 2004, was that the gross profit margin should be compared instead of operating profit for the three segments of its distribution activities and the most appropriate method for bench marking the ALP should be done through resale price method with the same set of comparables. Such a contention of the assessee has been rejected by the TPO in Para-11.1. The TPO finally determined the ALP in the following manner and made following adjustments:- 12. In view of the above, the arm's length price of the assessee is determined in the following manner: (a) The Arm's Length Price of the international transactions is calculated as per the segmental costs and revenues submitted by the assessee in its submissions dated 17.11.2004 (segmented costs I revenue for Domestic segment) and submission dated 01.12.2004 (for segment costs and Revenue for remaining 2 export segments). (b) The import of finished goods of Re. 3,08,16,3021- is considered under the Domestic segment. (c) The assessee has made adjustments to the margin of the comparables on account of difference in advertisement costs. As a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng profit margin on cost of comparables 0.92% Total costs of assessee 6,57,94,322 Operating profit required 6,05,307 Actual loss of assessee 19637010 Adjustment to the international transaction 20242317 Arm's Length Price of sales to AE 5,31,94,990 Actual Sales (International Transactions) 3,29,52,673 23. Thus, he made adjustment of ₹ 1,32,65,230, in the ALP of international transaction on purchase of finished goods and adjustment of ₹ 2,02,42,317 on sale of finished goods thereby making the total adjustment of ₹ 3,35,07,547. 24. Before the learned Commissioner (Appeals), the assessee contended that the adjustment made by the TPO is wholly incorrect on facts because the TPO has presumed that the assessee's gross profit margin would work out to 80.57% which is much higher side as compared for average gross profit margin earned by the comparable companies. Further, the TPO has failed to appreciate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49% 47% 55% Opr. Margin (%) -51% -36% -15% -11% -5% 10% Adm. Cost as % of sales - Mattel India 80% 69% 66% 60% 52% 45% Adm. Cost as a % of sales - comparables 12% 21% 20% 17% 18% Database - Yet to update the info 25. The learned Commissioner (Appeals), insofar as the transactions relating to import of finished goods and resale in India are concerned, rejected the assessee's contentions on various grounds. The sum and substance of such reasoning are - (i) that the assessee's contention that the current year was the first year of operation and, therefore, they had to incur heavy high administrative cost is not tenable because the assessee has been operating in India for around 3 to 4 years in the past and in the earlier years also, the assessee had significant turnover. Therefore, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt. Even though the assessee has adopted the most appropriate method as TNMM in the transfer pricing report, however, such a method fails in this case due to peculiar circumstances in this case and further in the case of companies which are engaged in the distribution activities, RPM is more preferable method. The assessment year 2002-03 being the first year of application of transfer price mechanism, it was not clear even to the professionals what should have been the best methodology and comparability analysis for arriving at ALP for particular type of business transactions. Before the learned Commissioner (Appeals), a specific submission was raised for applying the resale price method in assessee's case because there was huge operating cost in the form of administrative and advertisement cost which has resulted into negative operating margin of (-) 51.22%. This working of the assessee of the actual net margin at (-) 51.22% has not been disputed by the TPO or the learned Commissioner (Appeals) even after adjustment of advertisement expenses. He submitted that net sales under the distribution segment was at ₹ 11,74,41,770, as against the total cost incurred by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (Pune); and iii) Gap International Sourcing India P. Ltd., 149 TTJ 437. 29. Relying on these decisions, he submitted that RPM should be followed in the present case for determination of ALP while evaluating the controlled transactions of the assessee. 30. Regarding the comparables as selected by the assessee and accepted by the TPO, he submitted that even though there was no product comparability with that of the assessee but all were functionally comparable, therefore, the same comparables can be taken for the purpose of RPM. In support of this contention that product comparability is not required in RPM, he relied upon the contents of Para-2.26 of the OECD guidelines and the guidelines of ICAI. In case of a distribution, it is very difficult to get the companies with similar product comparability and, therefore, one has to go for functional comparability. Thus, the same comparables can be considered for the purpose of RPM also. He pointed out that if the transfer pricing adjustment as done by the TPO is carried out, then the gross profit margin will become so high which is improbable in any kind of distribution business and in the case of the assessee, the purchase pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average gross profit rate of six comparables chosen by it though initially selected for the purpose of TNMM. Even after the adjustment of advertisement on the operating profits of six comparables, then also the average net profit margin of comparables comes to (-) 17.41%. Even if that is also accepted as suggested by the assessee, then also the assessee's margin is not at ALP and that is why the assessee has taken a turn around for adopting RPM so as to justify the ALP of it's A.E. transactions. Thus, he submitted that the submissions of the learned Counsel for adopting the RPM should be rejected out rightly. 33. By way of alternative arguments, the learned Departmental Representative submitted that in case the RPM is accepted to be the most appropriate method for bench marking the ALP, then the matter should be restored back to the file of the TPO and the assessee should furnish a list of fresh comparables for carrying comparability analysis for the purpose of RPM. 34. The learned Counsel, in the rejoinder, submitted that in case of RPM, there cannot be any similarity of product comparability but functional comparability has to be seen. He referred to the same OECD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M instead of TNMM. Such a submission was made vide letter dated 6th October 2004. This has been rejected by the TPO mainly on the ground that the assessee has itself adopted TNMM as the most appropriate method and has itself rejected the RPM. This objection / submission of the assessee has also been rejected by the learned Commissioner (Appeals) on the same ground. One of the main issues before us at this stage is, as to what should be the most appropriate method on the facts of the assessee's case which has been discussed at length in the earlier paragraphs. 36. According to the provisions of sections 92C r/w 10B, the ALP in relation to an international transactions has to be determined by following any of the most appropriate method viz. (i) Comparable Uncontrolled Price method (CUP); (ii) Resale Price Method (RPM); (iii) Cost Plus Method (CPM); (iv) Profits Split Method (PSM) and (v) Transactional Net Margin Method (TNMM). In CUP method, the focus is directly on the price of the product sold or transferred requiring both functional and product comparability. The RPM and CPM operate at gross profit margin level requiring functional rather than product comparability. The PS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; 38. Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to a unrelated party. Such price is reduced by normal gross profit margin i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e., resale is made without any value addition having been made. Since in RPM only margins are seen with reference to items purchased and sold or earned by an independent enterprise in comparable uncontrolled transactions vis-a-vis the one in the controlled transactions, therefore, in such a situation, the nature of products has not much relevance though their closer comparable may produce a better result. The focus is more on same or similar nature of properties or services rather than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value addition to a product for bench marking the ALP. 40. On the other hand, under the TNMM, the ALP is determined by comparing the operating profit related to an appropriate base i.e., cost or sale oR assets of the tested party with the operating profit of an uncontrolled party engaged in comparable transactions. Under the TNMM, net margin or operating profit is compared against with the independent entities against those achieved in related party transactions. Under the TNMM, the major thrust is to derive at the operating profit at the transactional level and to identify the operating expenses of both the tested party as well as the independent parties. This requires a lot of adjustments to derive at the actual operating profit. If the ALP of any transaction can be determined by applying any of the direct methods like CUP, RPM, CPM then they should be given the preference and once these traditional methods have been rendered inapplicable then only TNMM should be resorted to. On the facts of the assessee's case, in our opinion, the assessee being a distributor who is purchasing the goods from it's A.E. and reselling them to independent parties / unrelated parties, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables with regard to the gross profit margin level. In our considered opinion, this matter needs to be restored to the file of the TPO for denovo adjudication. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue back to the file of the Assessing Officer who decide the issue afresh after requiring the assessee to furnish fresh comparables after considering the RPM as the most appropriate method for determination of ALP. The TPO will also provide due and effective opportunity of hearing and determine the ALP after considering the fresh comparables and following the RPM. Thus, ground no.3, raised by the assessee is partly allowed for statistical purposes. 43. The assessee has also raised additional grounds challenging the TPO's order passed under section 92CA3 on legal grounds. 44. Learned Counsel contended before us that he did not wish to press this ground, to which, the learned Departmental Representative also did not object. Consequently, the additional ground is dismissed as not pressed . 45. In the result, assessee's appeal is treated as partly allowed for statistical purposes. We now take up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining to the earlier year, were furnished to the appellant during the current year only. The services were rendered in the earlier year, However, the appellant would know the liability only when the bills are received. In this regard, the appellant have also cited the judgments in the case of Saurashtra Cement Chemical Industries Ltd. 213 ITR 523, 531 (Guj.) and Nathmal Tolaram 88 ITR 234 (Gauhati). In both these cases it has been held that liability is crystallized only when a demand in this regard is made and the same is accepted by the assessee. I, therefore, agree with the argument of the appellant that the liability has crystallized during the current year and hence, the same is allowable in the current year. The addition of ₹ 18,66,369/- on this account is, therefore, deleted. 48. After hearing both the parties, it is seen from the findings of the learned Commissioner (Appeals) which has not been rebutted before us that the bills pertaining to the professional services rendered was received in this year and after the receipt of such bill, the payment has been made. In case of professional fees, it is very difficult to project as to what would be the fee that woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loss. To salvage this situation, these unsold products are then sold at best available price depending upon the market condition either in the domestic market or in the export market where the assessee tries to sell back these products wherever there is demand of these products so as to reduce its burden of the loss. The detail submission of the assessee to this effect has been incorporated by the learned Commissioner (Appeals) at Pages-16 and 17 of the appellate order. The learned Commissioner (Appeals), after appreciating the entire facts and material on record, deleted the said adjustment in the ALP after holding and observing as under:- 6.14 I have considered the arguments of the appellant and the facts and figures brought out as per statement of facts and further arguments / submissions. The appellant has demonstrated that export to AE is essentially a transaction of purchase return. Such items have been exported back to the supplier AE which became obsolete in the initial year of the appellant's operations in India. It appears that the TPO has not understood that export of finished goods shown to AE is of idle, slow moving and obsolete stock which amounts to purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t trend, therefore, in order to recover the cost, these unsold products are sold at a best available price either by way of exporting back to the A.E. or by exporting to the third party. It has also been stated that the assessee has suffered a greater loss while making sale in the case of a third party in comparison to the sale made to the A.E. Hence, there was an internal comparable available to judge the ALP. Since this internal comparability has not been examined by the TPO and the learned Commissioner (Appeals) has given a finding without examining the segmental details of transactions with the A.E. and third party and the internal comparability, therefore, under these circumstances, we are of the considered opinion that this margin of export sale to the third party i.e., internal comparable should be compared to the export sale made to the A.E. This aspect should be verified by the TPO. In such a situation, the applicability of internal CUP can also be applied to evaluate the ALP in this segment. We, thus, set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue to the file of the TPO for the purpose of carrying out the comparability anal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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