TMI Blog2014 (11) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee during the year - in the manufacturing activity the majority of the raw material was purchased from unrelated third parties - TPO has himself has noted only 12.5% of purchases are from related parties - about 87.5% of the purchases of raw material are from unrelated parties and hence these transactions were outside the purview of transfer pricing examination - in respect of purchase of traded goods, a small portion of the same was purchased from unrelated entities. Selection of comparables Economic adjustment claim denied Computation of margins erroneous Held that:- Assessee rightly contended that there was error in rejecting 4 comparable companies selected by the assessee in its transfer pricing document - three of the comparables namely Ashok Alco Chem, Gayatri Star Chem and Kothari Ferment has been rejected on the ground that they have negative net-worth - there is no correlation between net worth and profitability of a company - The fact that two of these 3 companies had positive margins clearly shows the absence of this correlation - loss and profit are normal incident of business and the law as provided in section 92C(2) provides for taking an arithmetic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the comparable companies is 17.86% while that earned by assessee is 50.01%. Thus the international transactions undertaken by the assessee with respect to its trading segment are at arms length as defined by the Indian Transfer Pricing regulations - there was substance in the contentions of the assessee and the matter is to be remitted back to the TPO for his fresh consideration and decide the issue afresh after affording opportunity of being heard to the assessee and discussing their submissions in the order and reasons, if any for not agreeing or agreeing with them Decided in favour of assessee. - I.T.A.No.5291/Del/2010 - - - Dated:- 29-4-2014 - SHRI R. S. SYAL AND SHRI I.C. SUDHIR, JJ. For The Appellant : Shri Himanshu Shekhar Sinha, Adv Mrs. Priyanka, AR. For The Respondent : Shri Peeyush Jain, CIT-DR. ORDER PER I. C. SUDHIR, JUDICIAL MEMBER The assessee has raised following grounds in its appeal: 1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ( Assessing Officer ) is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plete date for financial year 2005-06 was not available within the public domain. 8. That on facts and circumstances of the case and in law, the Ld. Assessing Officer/ Ld. TPO/ Ld. DRP erred in denying the benefit of 5% margin allowed under the proviso to section 92C(2) of the Act by relying on an amendment applicable only from 01.04.2009 (and not applicable to the relevant assessment year 2006-07). 9. On the facts and circumstances of the case, the Ld. DRP has erred in not examining the validity of initiation of penalty proceedings u/s 271(1) (c). 2. We have heard and considered the arguments advanced by the parties, in view of orders of the authorities below, material available on record and the decisions relied upon. Ground no.1 3. The ground no.1 is general in nature hence does not need independent adjudication. Ground no.2 4. The Ld. AR did not advance any argument in support of this ground saying that the issue raised in the ground questioning the validity of reference of the matter by the Assessing Officer to the Ld. Transfer Pricing Officer for computation of arm s length price without recording reasons for the same has been decided against the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determining the Arm s Length Price of the above international transactions, all the international transactions undertaken by the appellant were grouped together, and the profitability has been determined on a company as a whole approach. To apply TNMM, the assessee searched for external uncontrolled Indian comparable company. The short listed companies were subjected to qualitative analysis and 7 independent companies were identified as comparables. Based on the results of the benchmarking study the mean margin (OPM) of the comparable companies was determined at 3.38% as against OPM margin of 8.65% earned by the assessee. The OPM of the assessee was computed after making an economic adjustment for the high level of administrative expenses vis- -vis the comparables. As the operating profit margin of the assessee was more than average margin of the comparables companies, the international transactions entered into by the assessee were considered to be at arm s length. The assessee carried out a secondary analysis of the international transaction pertaining to the import of finished goods for trading. The assessee further carried out (for trading) for resale price margin (RPM) method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also a function of several other normal third party business expenses incurred by the assessee during the year. He submitted that in the manufacturing activity the majority of the raw material was purchased from unrelated third parties. The Ld. TPO has himself has noted only 12.5% of purchases are from related parties. Hence about 87.5% of the purchases of raw material are from unrelated parties and hence these transactions were outside the purview of transfer pricing examination. However, the Ld. TPO has ignored the above previous of the law while drafting his order. He submitted that in respect of purchase of traded goods, a small portion of the same was purchased from unrelated entities. Thus, the Ld. TPO has erred in making an addition to entire transactions entered into by the assessee. In support of he placed reliance on the following decisions: 1. Abhishek Auto Industries Ltd. vs. DCIT, ITA No. 1433/Del/2009 AY 2004-05 (Paragraph 8.2) 2. Lionbridge Technologies Pvt. Ltd. vs. DCIT, ITA No. 9032/Mum/2010 AY 2006-07 (Paragraph7 page 6) 3. Firestone International (Pvt.) Ltd. Vs. DCIT, ITA No. 4520/MUM/2011 AY 2006-07 (Paragraph 7Page 5) 4. Pennzoil Quaker State I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparability laid down in Rule 10B(2) of I.T. Rules 1962. He submitted that the Ld. TPO ought to have used the segmental accounts furnished by the assessee to examine the trading and manufacturing activities separately. Separate set of comparables should have been chosen for the trading segment. Furthermore for trading Resale Price Method (RPM) widely acknowledged as the most appropriate method for distributors ought to have been used. 11. Regarding the denial of economic adjustments by the Ld. TPO, the Ld. AR submitted that the assessee had in its transfer pricing documentation rightfully made an economic adjustment for difference in the administrative cost of the assesee vis a vis comparable companies. He submitted that Indian Transfer Pricing regulations Rule 10B(1)(e)(iii) provide for reasonable adjustments to be made in case there are differences between transactions being compared. The Ld. AR submitted that the Ld. TPO has denied the economic adjustments made by the assessee in its transfer pricing documentation without providing the assessee any opportunity of being heard. He placed reliance on the following decisions :- 1. Ariston Thermo India Limited ITA No. 1455/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d any value to the produce imported and merely acts as a buy sell agent. This segment constitutes 47.81% to the total revenue of the assessee for the year under consideration. The Ld. AR submitted that in respect of the international transaction of import of furnished goods, wherein the assessee merely acts a reseller / distributor it has applied RPM while comparing the gross profit margin from the sale of such imports in the domestic market with the gross profit margin earned by the comparable companies from the similar transactions. The international transaction of import of finished goods from the AEs for distribution in India would appropriately be benchmarked applying RPM as defined at Rule 10B (1) by comparing the gross profit margins from the transactions of resale of similar products sourced from unrelated parties. In this regard the Ld. AR submitted further that he would also like to draw attention towards the guidance note issued by Institute of Chartered Accountant on the applicability of RPM. He referred relevant extracts of the para Nos. 19.2 and 19.3 of the guidance note which relies on OECD guidelines. On the basis of these guidelines the Ld. AR submitted that resale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and circumstances of the case transaction by transaction approach was more appropriate as the manufacturing and trading transactions are not interlinked and has the two segments having completely different functional profile. Rule 10A defines transaction to include transactions that are closely linked. He submitted that at present he has the benefit of several rulings of the Tribunal, wherein it has been clearly held that transaction by transaction approach is more appropriate in so far as it takes into account the functional profile of each class of transactions separately. In this regard he cited decision of Special Bench in the case of LG Electronics India Pvt. Ltd. ITA No. 5140/D/2011 para 21.5. 18. The Ld. AR submitted further that merely because the assessee adopted a company as a whole approach before the Ld. TPO and Ld. DRP, it is not precluded from asserting the correct position of law regarding the use of most appropriate approach and method. In this regard he placed reliance on the following decisions :- 1. Quark System Pvt. Ltd. (2010) 38 SOT 307 (SB) 2. A.M. Tod Company India Pvt. Ltd. ITA NO. 492/Mum/2006 3. Navisite India Pvt. Ltd. ITA No. 5329/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assesee, non consideration of supplementary analysis carried out by the assessee using RPM for determining the ALP of the import transaction and denial of adequate opportunity of being heard to the assessee by the authorities below as well as their failure to examine the contentions and arguments of the assessee in this regard. Considering these grievances as discussed herein above by us in the arguments advanced by the parties / their submissions and having gone through the decisions relied upon, we find substance in the submission of the assessee and thus we are of the view that it is a fit case to set aside the matter to the file of the Ld. TPO for his fresh consideration and decide the issue afresh after affording opportunity of being heard to the assessee and discussing their submissions in the order and reasons, if any for not agreeing or agreeing with them. It is ordered accordingly with direction to the Ld. TPO to a) first examine as to whether, was there any value addition on imported goods, and if answer is in negative then apply RPM as a most appropriate method for trading transactions of imported goods and in consequence examine the application of appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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