TMI Blog2013 (10) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee is fair and reasonable. Merely finding faults with the transfer price determined by the revenue authorities (AO/TPO) addition on account of 'adjustments' cannot he deleted. This is because the mandate of section 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the appellate authorities on the basis of material available on record have to determine ALP themselves. Subject to statutory Provisions, appellate authorities can direct lower revenue authorities to carne this exercise in accordance with law. The matter cannot he left hanging in between. ALP of international transaction has to he determined in every case. Excess payment of royalty - Payment of royalty at the rate of 3.75% to the AE by the assessee, as against the royalty at the rate of 3% by other group entities – Held that:- Explained by the assessee before the AO that the royalty at 3.75% was applied after reducing various expenses from ex-factory sale value of the concerned products. It was also explained before the learned CIT(A) that if the effective rate is considered, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld.CIT(A) has erred in law and on the facts of the case in deleting the disallowance of Rs.7,18,64,900/- out of sales and warranty commission. 3. The ld.CIT(A) has erred in law and on the facts of the case in deleting the disallowance of Rs.19,40,400/- out of stores and spares, Rs.76,68,400/- out of expenses on service operators and Rs.88,10,800/- out of salary and wages and staff welfare expenses, after admitting fresh evidence in violation of Rule 46A. 4. The ld.CIT(A) has erred in law and on the facts of the case in deleting the addition of Rs.1,36,61,795/- being adjustment u/s.145A. 5. On the fact and in the circumstances of the case, the ld.CIT(A) ought to have upheld the order of the AO. 6. It is, therefore, prayed that the order of the ld. CIT(A) maybe cancelled and that of the AO maybe restored to the above effect." 3. The learned DR supported the assessment order. He also submitted that no remand report was obtained by the learned CIT(A) and the details filed by the assessee before the learned CIT(A) were not confronted to the AO for his comments. As against this, the learned AR of the assessee supported the order of the ld. CIT(A). He also submitted that ad h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the authority below also, we feel it proper to restore this matter back to the file of the learned CIT(A) for fresh decision after examining the details, on the basis of which, the provision has been made by the assessee, and if it is found that such provision was made on scientific basis, as has been approved by the Hon'ble Apex Court, in the judgement rendered in the case of Rotork Control India P. Ltd. (supra), then no disallowance should be made out of this provision in respect of warranty expenses. But if it is found that the provision is excessive, then such excess provision, if any, should be disallowed. With these observations, we restore this matter back to the file of the ld.CIT(A) for fresh decision. The ground no.2 is allowed for statistical purpose. 6. Regarding ground no.3, it was submitted by the learned DR of the Revenue that the decision of the learned CIT(A) is in violation of Rule 46A of the Income Tax Rules, 1962. When we go through the orders of the authority below, we find that it was observed by the AO at page no.8 of the assessment order that nobody has attended in person before him, and except one letter dated 26.11.2007, all letters were sent through de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue in this year are as under: "1. The ld.CIT(A) has erred in law and on the facts of the case in holding that the assessment should not have been made ex-parte u/s.144. 2. The ld.CIT(A) has erred in law and on the facts of the case in deleting the disallowance of Rs.9,45,75,000/- out of sales and warranty commission. 3. The ld.CIT(A) has erred in law and on the facts of the case in deleting the disallowance of Rs.91,73,700/- out of service operation expenses and Rs.1,20,50,800/- out of salary and wages and staff welfare expenses, after admitting fresh evidence in violation of Rule 46A. 4. The ld.CIT(A) has erred in law and on the facts of the case in deleting the disallownace of Rs.14,94,000/- out of prior period expenses. 5. The ld.CIT(A) ahs erred in law and on the facts in directing to allow voluntary donation of Rs.50,000/- as business expenditure u/s.37. 6. On the facts and in the circumstances of the case, the ld.CIT(A) ought to have upheld the order of the AO. 7. It is, therefore, prayed that the order of the ld. CIT(A) maybe cancelled and that of the AO maybe restored to the above effect." 12. It was agreed by both the sides that the ground nos.1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed in the earlier year, to which such expenses are related to. He also noted that the AO has totally ignored this aspect, although, he has passed the assessment order for the preceding year i.e. A.Y.2000-2001 on the same date. We are of the considered opinion that when there is no other objection of the AO, regarding allowabililty of expenses relating to prior period, the same should be allowed either in the present year or in the preceding year, to which such expenses are related to. The assessee has disclosed a loss of Rs.6,92,700/- in the present year, and in A.Y.2000-2001, the assessee has filed return of income disclosing NIL income after setting off of brought forward loss of earlier years to the extent of Rs.303.11 lakhs. Hence, even if this expenses are allowed in the earlier years i.e. A.Y. 2000-2001, it will ultimately be adjusted in the present year, by way of set off of brought forward loss, and therefore, it will make no difference even if deduction is allowed in the present year. Hence, we feel that no interference is called for in the order of the learned CIT(A) on this aspect. The ground no.4 of the Revenue is rejected. 16. Regarding the ground no.5, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. The learned DR supported the assessment order, whereas, the learned AR of the assessee supported the order of the learned CIT(A). He also submitted that this issue is now covered in favour of the assessee by the judgment of the Hon'ble apex Court rendered in the case of TRF Ltd., as reported in 323 ITR 397 (SC). 26. We have considered rival submissions, and since this issue is squarely covered in favour of the assessee by the judgment of the Hon'ble Apex Court rendered in the cse of TRF Ltd. (supra), this ground of the Revenue is rejected. 27. The ground no.3 of the Revenue is as under: "3. The ld.CIT(A) erred in law and on the facts of the case in giving direction to allow consultancy fees of Rs.11.66 lakhs in A.Y.2003-04 and Rs.58.34 lacs in A.Y.2004-05, though assessee has failed to establish that any services were rendered to it." 28. The learned DR supported the assessment order, whereas it was submitted by the AR of the assessee that this issue is interconnected with Ground no.2 raised by the assessee in the CO. He submitted that out of total amount paid by the assessee of Rs.70 lakhs, the CIT(A) has allowed deduction in the present year of only Rs.11.66 lakhs a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, in the facts of the present case, no interference is called for in the order of the learned CIT(A) on this issue, because, it is not the case of the Revenue that this party is a related party, and hence, it cannot be accepted that the assessee has entered into this agreement and paid this amount to this party without obtaining any services especially, when the assessee has incurred a loss of Rs.32,87,13,169/- in the present year. Even after making various adjustments, the income assessed by the AO is also at a loss and hence, it is not acceptable that in the facts of the present case, this expense by the assessee is bogus expense. 30. Regarding the argument that full amount to be allowed in the present year, we feel that the ld.CIT(A) has allowed the proportionate amount of Rs.11,66,670/- in the present year, and held that the balance amount is allowable in the next year. We, therefore, confirm the order of the ld. CIT(A) on this issue, and accordingly, the ground no.3 of the Revenue and the ground no.2 of the assessee's CO are rejected. 31. The ground no.4 of the Revenue's appeal is as under: "1. The ld.CIT(A) erred in law and on the facts of the case in giving direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysis the assessee did not bring any documents to justify its claim of the royalty rate being in consonance with the international royalty rates. The onus for selecting the most appropriate method and demonstrate the carrying out transactions at arm's length price lies on the assessee. The same is fortified by the judgement delivered in the case of Aztec Software Technology Services ltd Vs ACIT Cir.11 (1) (2007) 107 ITO 141 (Bang) (SB). The relevant portion is reproduced below: The burden is on the assessee to select the most appropriate method (MAM). This decision of selecting MAM is to he substantiated by the assessee by an appropriate documentation as well as by substantiating why a particular method is considered to be best suited in the facts and circumstances of the international transaction and as to how it provides the most reliable result of A LP. Rule 10C(2) of the Income-tax Rules lays down the factors to he considered in selection of MAM. [Para 121].... Having regard to above statutory provisions, it is clear that hunter to establish that international transaction was carried at ALP is on the taxpayer. He has also to furnish comparable transactions, apply approp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. " Perot Systems TSI (India) Ltd Vs DCIT 37 SOT 358, A.4 Thus the assessee did not benchmark the international transaction properly and thus the TPO utilized the information available with him for determining the ALP for which he utilized the royalty payments made by other associate enterprises. In the absence of correct determination by the assessee and insistence on incorrect position adopted by it the TPO had no choice but to utilize the information available with him. Such use of information is approved in the case of Aztec technologics(Supra). There would be cases, inhere taxpayer does not cooperate and fails to furnish ALP or disclose furl/ information, relevant/or determination of ALP when called upon to do so by tax authorities. The taxpayer flails to discharge burden placed on the taxpayer. In similar enactments of other countries, it is provided that burden on the revenue authorities in such a case would he reduced. We have not come across similar provision in Chapter X of the Act. The tax authorities there/ore, have to resort to provision of, section 144 of the Income-tax Act and determine the ALP on the basis of the material collected or available on record. In su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect is to find out the extent of value addition in the sale of product which mandates the payment of royalty. Since different technologies, different technical know-how for the manufacture of the products may be involved in the royalty agreements: the royalty payment for manufacturing is made as percentage of different sales base. However it must be kept in mind that the relevant base should be such which should best capture the value addition incurred as a result of the use of intangibles. A.7.1 The methods for calculation of such value addition vary in different countries. The method for such calculation for entities situated in India is prescribed by the Government authorities and the basis of royalty calculation is net sales subject' to taxes'. The phrase "Net sales subject to taxes" mean that royalty is payable on net sales subject to withholding taxes as applicable. Further the words "net sales" mean net ex factory sale price of the product exclusive of excise duties minus the cost of standard bought out components and landed cost of imported components, irrespective of the source of procurement including ocean freight, insurance, custom duties etc. From the prescribed c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 In this case, as discussed above, the Id CIT(A) has wrongly held that the benchmarking carried out by the assessee is correct, without making appropriate examination of the calculations submitted by the assesses. Thus it is prayed that the appeal of the revenue related to the deletion of royalty by the CIT'(A) be upheld. B. Addition on account of Purchases B.1I The assessee bench marked purchase transactions, from associate enterprise using comparable uncontrolled price (CUP ) method. In the proceeding, the TPO that the assessee relied on single or at best two quotations for bench marking. It was further observed that the same were unsubstantiated and could not consider as representative of price prevailing in the market. On this basis comparable uncontrolled price method was rejected as the most appropriate method and TNMM was considered as the most appropriate method for bench marking the purchase transactions. Comparable uncontrolled price method requires very strict conditions of comparability as even the slight difference in the conditions lead to huge difference in the price: thus affecting the reliability of CUP method. In this respect, reliance is placed on para 2.15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining ALP, shifting from one method to another method in selection process of most appropriate method is inherent in a transfer pricing case - Held, yes iii. Serdia Pharmaceuticals (India) (P.) Ltd vs ACIT [2011] 44 SOT 391 (Mum.) Section 92C, read with section 92CA, of the Income-tax Act, 1961, and rule 10C of the Income-tax Rules, 1962 - transfer pricing - Computation of arm's length price - Assessment years 2002-03 to 2004-05 - Whether in a situation where Assessing Officer finds that selection of most appropriate method for determining Arm's Length Price (ALP) by assessee is not appropriate to all relevant 7bctors, he has powers and indeed a corresponding duty to select most appropriate method, and compute arm's length price by applying that method - held. yes - Whether it is not necessary for Assessing Officer to demonstrate ALP computed by assessee is not computed in manner prescribed by regulations, so as to reject method chosen by assessee - Held, Yes -Whether selection of most appropriate method of computing arm's length Price is a significant component of process of determining arm's length price and assessee has to justify same on sound reasoning and he cannot simply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be ruled out, yet it has to be shown that analysis carried was 'judicial' and was done after taking into account all relevant facts and circumstances of case - Held, yes B.4 The Id. CIT(A) deleted the addition by observing that the approach followed by the TPO is incorrect as there were difference in the consumption of raw material as percentage of sale liar the assessee and the comparables selected by the TPO. the TPO compared the profits instead of cost of the items, the arithmetical mean was used for determining the arms length price and the difference in profit margin of the comparable selected by the assessing officer was large. B.4. In this respect, it is seen that transactional net margin method (TNMM) is based on comparison of net margin earned by the assessee in controlled transaction with the net margin of similar comparable uncontrolled transactions. Therefore, once the TNMM is found to be the most appropriate method, the comparison is bound to be between the profit margin and not on cost. Therefore the observation of the CIT(A) in this regard that the TPO should have compared cost instead of margin is misplaced. It is further seen that as per the provisions of rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exxon Mobil Co. India Pvt. Ltd., 46 SOT 294 (Mum). "33 .... (xi)....... A general argument that you have to exclude units which have high profit range, in case you exclude units have made loss is a general submission which cannot he accepted, In other words, as a general principle, both loss making unit and high Profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits. Thus, this ground is dismissed'' B.4.4 Therefore, the observation of the CIT(A) regarding large variation in the profits of the comparable is also not a factor to assail the methodology adopted by the TPO. B.4.5 The CIT (A) has observed that the TPO has taken arithmetic mean of the profit margins of the comparables which is incorrect. In this regard again it is seen that the provisions of the proviso to section 92C(2) mandates the use of arithmetic mean of the comparables for ascertaining the ALP as shown below: 92C....... (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has adopted CUP method, as most appropriate method. The CUP method was not accepted by the TPO on this basis that only one comparable has been provided by the assessee and that too was unsubstantiated and therefore cannot be considered as a representative of price prevailing in the market. Before us, it was contended by the learned AR that there is no requirement in law that comparable for the purpose of CUP method should be necessarily more than one. As per Rule 10B, there is no requirement that comparable un controlled transaction should necessarily be more than one, because, as per rule 10B(1)(a)(i) it is described that the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. This very language of the clause in Rule 10B clearly shows that comparable uncontrolled transactions may be one or more than one. Hence, this objection of the TPO is not valid that because, the assessee has adopted only one or at best two quotations, and therefore, the same are not acceptable. But we find force in the objection that such price as per quotation is not substantiated and hence cannot be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower of the learned CIT(A) for adjudicating the issue regarding the TP adjustments made by the AO as per the directions of the TPO, because, it is claimed by the Revenue that since the AO is bound by the TPO's order, the CIT(A) cannot adjudicate the issue decided by the TPO. We do not find any merit in these contentions of the Revenue, because, as per section 246 of the IT Act, 1961, any assessment order under section 143(3) is appealable order before the learned CIT(A), and it is immaterial as to whether the decision taken by the AO in such assessment, is as per the directions of the TPO or as per the directions of the Joint Commissioner of Income Tax under section 144A, and therefore, this ground of the Revenue is rejected. 41. The ground nos.9 and 10 are general and do not call for any separate adjudication. 42. In the result, the appeal of the Revenue is partly allowed for statistical purposes. 43. Now, we take up the CO filed by the assessee for A.Y.2003-2004 i.e. CO No.304/Ahd/2007. 44. While deciding the appeal of the Revenue, we have already decided the ground no.1 and 2 of the assessee's CO and both these grounds were rejected. The ground no.3 of the CO is as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cating issues decided by TPO in order passed by him u/s 92CA(3) contrary to the decision given by Allahabad High Court in the case of CWT Vs. Dr. H.Rahman reported in 189 ITR 307 and ITAT special Bench Delhi in the case of Promain Ltd. Vs. DCIT 95 TTJ 825 wherein it is held that CIT(A) can adjudicate those issue which 4.0 can decide . Since order passed by TPO is binding on A.O., the CIT(A) cannot adjudicate the issues decided by TPO. 4. The Ld. CIT(A) has erred in law and on the facts in deleting the disallowance of deduction of Rs.81,69,000/- on account of provision for obsolescence of inventory. 5. The Ld. CIT(A) has erred in law and on the facts in deleting the disallowance of warranty expenses of Rs.1,39,35,979/-. 6. The Ld. CIT(A) has erred in law and on the facts in directing the A.0 to allow deduction of Rs.16,25,243/- on account of provision for TDS on royalty in contravention to the judgment of the Hon'ble Supreme Court in the case of Goetze(India) Ltd, 284 ITR 323. 7. On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer. 8. It is, therefore, prayed that the order of the Ld.CIT(A) may be cancell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered rival submissions. We find that this issue was decided by the learned CIT(A) at para no.13.2 of his order, which is reproduced below for the sake of ready reference: "13.2 I have considered the submissions of the A.R. carefully. The A.R. has submitted that the appellant had made a wrong calculation of royalty for the period from 1.4.2003 to 30.6.2003 and deducted excess TDS and had paid the same. Therefore, the excess TDS to be recovered from the Income tax Department was worked to be Rs.16,25,243/- and the same was shown on the asset side of the balance sheet. This amount was not debited to P L account but the appellant had wrongly disallowed the same in the statement of total income and it was claimed as deduction before the A.O. but the A.O. has not discussed the same in the assessment order and had not allowed the deduction. The A.O. is directed to allow the same as deduction." 56. From the above para of the order of the learned CIT(A), we find that a clear finding is given by the learned CIT(A) that this amount of Rs.16,25,243/- was shown on the assets side of the balance sheet, and the amount was not debited to P L account, but still the assessee has wrongly dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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