TMI Blog2014 (11) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... s, digitizers, mammographic equipments - The other ground on which the assessee seeks to distinguish its case is that the said company has also commission income. As such, without prejudice, even if the said company is considered as a comparable, the income ought to be excluded while drawing the comparison, doing which would reduce its income to 1.36% - the company was also engaged in distribution of medical devices and equipments - The commission income was only marginal - Both the assessee and the comparable are operating in the health care segment, dealing in premium products - The commission is only on the distribution activity, so that the income is essentially against services relating to distribution activity - The assessee’s business profile, which also includes marketing, pre/after sales and training services, thus matches with the comparable. Advanced Micronic Devices Ltd. – Held that:- Given the broad range of the assessee’s activities (and functions), its’ stating of being a limited risk distributor is internally inconsistent, if not anomalous - both the aforesaid comparables have been rightly included in the list of comparables by the Revenue, resulting in the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice, the ld. Authorized Representative (AR), the assessee s counsel, pointed out to the clarification issued by the assessee in this regard vide its letter dated 25.02.2014, per which the correct date of communication of the order appealed against is 17.01.2014, as specified in the corrected Form-36B (the relevant appeal memo), filed since, and not 17.01.2013, as stated earlier. There was as such no delay in preferring the appeal before the Tribunal. The record was perused, to find the appeal in time. The satisfaction of the condition of stay was also found to have been met; the assessee having made payment of ₹ 50 lacs each on 27.03.2014 and 26.04.2014 (copy of the challans on record). The hearing in the matter was accordingly proceeded with. 3. The assessee-company, incorporated in January, 2005, is a wholly owned subsidiary of Nobel Biocare Asia-Africa Holding AG ( NBH ), Sweden. The Nobel Biocare Group, it is stated, is a medical devices group and world leader in innovative esthetic dental solutions. The assessee undertakes wholesale trading of NBH s dental products/solutions in India, also providing the requisite marketing, pre-sale/after-sale support and training ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The letter of continuity dated 10.01.2012 (PB pg. 193), however, states the first agreement to be effective up to December, 2008. As per the original agreement, all the business and market risks are to be borne by the principal-NHB. The basic contours and the essential attributes of the relationship continue unabated in the second agreement, with, rather, the supplier assuming a larger basket of functional risks, which are understood as of essence to the agreement (Article 14). Beginning 2007, the supplier is to ensure the distributor an operating margin in the range of 2% to 4% (of the turnover). This is to be bench-marked against the operating margin of comparable uncontrolled distributors and the excess (over 4%) or shortfall (i.e., below 2%) is to be paid to or, as the case may be, compensated by the supplier. Per the second agreement, the parties agreed to again adjust the prices so as to allow the assessee-distributor margin (reckoned as earnings before interest and tax (EBIT)) (i.e., according to mutually agreed calculations) within a target range (Article 10.1). The said range is not defined/specified therein, though is stated to have been agreed at 4% for the current yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce as an independent international transaction, which it qualifies as, having been received from an AE, would be of no moment, being factored into in computing the operating margin, and on the basis of which the same has in fact been determined. This formed the substratum of the assessee s argument before us. We are, subject to the caveat or the rider that each of the expenses, qua which adjustment has been made, stand in fact debited to the operating statement (P L Account), and claimed as an expense, so that it gets included in the computation of operating loss, worked out by the TPO at ₹ 6,57,87,920/-, in agreement with the assessee s claim. Further, where and to the extent so, as where the amount is debited directly to the account of the principal (for being received), i.e., treated as on capital account, the same shall stand to be added both as an expense and as a receipt. Also, some adjustments, as for example for ₹ 31,25,248/-, being registration fee, which stands reduced while computing the ALP of participation fee (incurred at ₹ 1,50,29,094/-), forming part of the business development expenditure, would require being factored in computing the ALP of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriate method to be adopted for evaluating all the international transactions under reference, being with the same AE, its lone supplier, of which the assessee is a distributor, is the TNMM at entity level. We are conscious of the fact, when we say so, that the ALP in almost all the (nonpurchase) transactions has been determined at nil either in view of the assessee being not able to furnish the complete details or because the Revenue is of the view that there was no economic justification for the assessee to have incurred the relevant expenditure. We consider this as of little consequence in the facts and circumstances of the case. The reason is simple. Any variation, if any, in the sum at which any IT is transacted, which is what any adjustment seeks or purports to do, bringing it at par with an arm s length value (ALP), would get reflected in the shortfall in the assistance that the AE is obliged to provide to the assessee under the DA. How would then, one may ask, it matter as to at what value their individual ALP is fixed? The payments to, and the assistance from the AE having crystallized, it is the operating margin as obtaining that is to be determined, and on the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year), the AE is to compensate the assessee. The same, accordingly, is only toward an abatement of costs, or reduction therein to that extent. The assessee s margin shall be accordingly computed by treating the assistance from AE as toward a reduction in its operating costs. b) There is, even as clarified during hearing, no dispute in principle. The comparability suffers and is rendered inapposite where segmented results, which alone are relevant and, therefore, are to be compared, are not available. The matter is thus primarily factual, concerning the application of this principle, toward which the assessee has relied on, as afore-stated, three decisions by the tribunal. We enlist the list of the comparables; the assessee objecting to the last two: Sr. No. Name of Comparable Companies PLI (%) 1 Hicks Thermometers (India) Ltd. 4.56 2 Sataytej Commercial Company Ltd. 0.55 3 ADS Diagnostics Ltd. 21.80 4 Advanced Micronic Devices Ltd. 8.60 5 Arithmetic Mean 8.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said finding before us in any manner, so that we do not find any substance in its objection. Here we may also clarify that given the broad range of the assessee s activities (and functions), its stating of being a limited risk distributor is internally inconsistent, if not anomalous. To be fair to it though, we may add, it does not dispute the comparables on this score. Accordingly, both the aforesaid comparables have been rightly included in the list of comparables by the Revenue, resulting in the profit level indicator (PLI), which has been accepted as the operating margin on sales, at a mean of 8.88%. The assessee has raised another argument, i.e., the foreign exchange loss arising to it being, in the main, on outstanding liability/s, the AE was in terms of the contract, i.e., the first agreement the scope having increased only per the second agreement - not obliged to meet it, and which therefore stands rightly excluded by the parties in computing the assistance from the AE. The argument is invalid. The purview of the Revenue is not to settle the account between the assessee and its AE. The operating margin has to be computed on the basis of actuals, and which is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re on product promotion forms an integral part of and, consequently, is of direct benefit to its business, which it has in fact also exhibited, i.e., to the extent the circumstances admit of. The tribunal in L. G. Electronics India (P.) Ltd. (supra) has itself clarified of all the agents involved in the marketing chain to be the economic owners of the brand. Further, with regard to the tribunal holding that TNMM is applicable qua each IT separately, we may clarify that our decision does not in any manner impinge on the validity of the same, i.e., in general, but is qua the inapplicability of the same in the facts and circumstances of the case whereby the AE is contractually obliged to ensure a specified margin to the assessee (rendering even the incurring of the expenditure as of little consequence), the adequacy of which stands confirmed for being bench-marked. As such, the said argument, as well as the said order, would have no bearing on our decision. 5.5 The foregoing decides the assessee s grounds 2 through 5. 6.1 Vide its Grounds 1 and 6, the assessee agitates the adjustment of business development expenses at ₹ 1,63,31,366/- u/s.92 r/w s.92C, as well as its di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same independently on merits. We, in this regard, are completely unable to appreciate the Revenue s case. As regards the non-furnishing of the details by the assessee, citing financial irregularity by one of its employees, the same may well have its basis in facts (refer note on misappropriation of funds, forming part of the notes to the accounts for the relevant year), even as without doubt the onus to establish the same as well as its claim is only on the assessee. Continuing further, the disallowance is with reference to specific expenditure, details of which are available, rendering the said reason, forming one of the grounds of the Revenue s objection, as stated by the DRP, superfluous. It further states non-demonstration of economic benefit in incurring these expenses by the assessee as the reason for sustaining the disallowance. The economic benefit of expenditure may flow with a time lag or, perhaps, even not in a given case, so that the said reason is without basis in law. What though is relevant is the economic justification. The assessee, as a part of its business profile, is to market, sale and distribute the principal s products, as well as provide technical serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count). The same cannot be said to a provision in the strict sense. What though is relevant to examine is if the assessee has actually observed its stated accounting policy, i.e., valued the inventory following the same. The cost referred to therein being the historical cost, which therefore gets crystallized upon incurring, the lower value could only be on account of diminution in the net realizable value, so that there is loss of not only the profit and operating costs, which would otherwise stand to be realized on sales, but also a part of the acquisition cost. Clearly, no such exercise has been made nor do we find furnishing of any details in its respect by the assessee in substantiation of its case. In fact, as we observe, the drop in the sale value (Rs.7.74 lacs), separately provided, forms only a part of the total provision of ₹ 70.65 lacs, so that the basis for the balance, stated to be a provision toward non-moving and slow items, would need to be ascertained and verified. This would also meet the Revenue s objection, which, in essence, states of the provision being contingent and not based on facts. In this view of the matter, we only consider it fit and proper to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its factual determination, which in fine is also the Revenue s grievance in-as-much as it considers the provision as contingent and not fact-based, with the assessee contending otherwise, so that it is supported by empirical data. The issue with regard to its deductibility per se, we may though clarify, is decided in favour of the assessee; the law in the matter being well-settled, and toward which it has relied on case law. The A.O. shall decide the matter by issuing defining findings of fact. 9. Vide its ground no. 9, the assessee, without prejudice, prays for a direction to recompute its margin after reducing the disallowance from the operating cost. We find no merit therein in-as-much as the assessee s accounts are stated to represent the actual state of affairs, so that it is not open for it to contend that the operating cost/margin as reflected per its books of account does not represent its true and correct cost/margin. The deductibility of provision is in law, as observed earlier, governed by the accounting principles, so that the disallowance could be for various reasons, as where the assessee is unable to establish its claim on facts, i.e., with evidence. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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