TMI Blog2015 (7) TMI 871X X X X Extracts X X X X X X X X Extracts X X X X ..... rrive on the figure of operating cost. The assessee has given the figure of correct calculation before the CIT(A) and CIT(A) has examined both the calculations i.e. assessee as well as TPO and having noticed that there was factual error in the TPO's calculation, the CIT(A) has held that the average PLI of other comparables, as compared by TPO himself, comes to 8.11%. Since the PLI of the assessee is 9.56%, which is more than the average PLI of comparables, there was no reason for the TPO for any adjustment. No defect in the order of CIT(A) was pointed out by learned D.R. therefore, we find ourselves in agreement with his order and accordingly we confirm the same. - Decided against revenue. Disallowance of the expenses incurred on study to abroad of Shri Hammad Rahaman, son of the Director and Shri Ebbad Rahman - CIT(A) allowed claim - Held that:- A clear finding is given by CIT(A) that no finding has been recorded by the Assessing Officer that the expenditure claimed by the assessee was excessive in relation to any other such case of the expenditure on the professional course of B. Tech. in U.K. from University, College, Northampton (U.K.). In the absence of any such finding of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of Transfer Pricing Adjustment by rejecting RSM method and adopting TNMM method without appreciating the full facts of the case brought on record by the TPO. 2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of ₹ 32,03,384/- on the study in foreign of Shri Hammad Rahman and Shri Ebbad Rahman and also remuneration of ₹ 1,20,000/- paid to Shri Hammad Rahman clearly covered u/s 40A(2)(b) of the I.T. Act, 1961. 3. The Ld. CIT(A) has erred in law and on facts in allowing relief of ₹ 6,00,000/- on Directors remuneration without appreciating the fact that remuneration was enhanced drastically even when there was almost no growth in business. 4. That the order of the Ld. CIT(A) being erroneous unjust and bad in law be vacated and the order of the Assessing Officer restored. 3. The grounds raised by the Revenue in I.T.A. No. 316/Lkw/2013 are also extracted hereunder for the sake of reference: 1. The Ld. CIT(A) has erred in law and on facts in allowing the relief of ₹ 8,20,572/- on expenditure incurred on study abroad of Shri Hammad Rahaman, the son of a Director and also remuneration of ₹ 1,20,000/- paid to Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 100% exporter therefore, the resale method cannot be applied to compute the Arm's Length Price. The CIT(A) re-examined the issue in the light of the assessee's contention and was of the view that the TPO has wrongly applied the resale method to determine the Arm's Length Price whereas in succeeding assessment year i.e. 2008-09, TPO himself has adopted the TNMM method to determine the Arm's Length Price. The CIT(A) was also of the view that the resale method cannot be applied to determine the Arm's Length Price in case of an exporter. The CIT(A) however also rejected the CUP method adopted by the assessee for determining the Arm's Length Price considering the TNMM method as most appropriate method to compute the Arm's Length Price. The assessee has furnished the calculations as per TNMM method also, which was verified by CIT(A) and on verification, the CIT(A) was of the view that the difference between the two PLIs is within range of +5% therefore, no adjustment was required to be made. He accordingly deleted the adjustment of ₹ 57,07,130/- made by the Assessing Officer. He however asked the Assessing Officer/TPO to verify the calculation. 5. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue opportunity to the assessee had passed an order u/s 92CA dated 27.10.2009 wherein certain adjustments were ordered. The appellant being aggrieved is in appeal before the undersigned. 4.3.2 I have gone through the impugned order of the Ld. TPO and also the submissions made by the appellant in this regard. Some of the salient features of this order of the TPO are: i. That the TPO has rejected the CUP method as adopted by the assessee by observing: 4. Transfer Pricing approach of the Assesses and TP analysis The assesses has benchmarked its international transactions by using CUP method by comparing average price of various categories of products (based on price range) with average price for similar category of products sold to third parties. 5. Defects in method adopted by assessee The categorization of products based on price range is flawed on account of the following reasons: Prices of identical products needs to be compared rather than price of a category of products. Categorization, if at all, may be made, of identical products. Categorization based on price range has an inherent flaw, since, the price of the product is what is being compared. A pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is a trader. In the present case, the AE is the tested party and not the Assessee and therefore, the business of the Assessee would not be pertinent and RSM is the most appropriate method, since the AE is distributor/trader. 4.3.3 The appellant is aggrieved by such order and has submitted that the Ld. TPO fell in error by adopting RSM Method as the same was applicable only for importers and not for an exporter. 4.4 Discussion Decision: 4.4.1 I have perused the order of the TPO and also the submission made by the Ld. A.R. At the outset, it may be observed that the RSM Method as adopted by the TPO was not legally correct as the same is applicable only for importers, whereas the present assessee is in the business of exports only. The CUP method has already been rejected by the TPO and the assessee has not disputed such rejection. I also find that in the subsequent year i.e. 2008-09, the TPO has adopted TNMM as the most appropriate method to compute the ALP. Accordingly, I am of the considered view that TNMM should be adopted as the most appropriate method for computing ALP even for this year i.e. A.Y.2007-08. In this regard, the Ld. A.R. of the appellant/vide my letter d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39233958 3479817 239297057 17.85 (9) Lakhani 4154162 6378348 440746785 2.39 (10) Super Tannery 33090000 41450000 1969400000 3.78 (11) Super House 110610000 49710000 3050720000 5.26 Industry average 8.22 4.4.3 As per these details, the Avg. PLl (OP/TC) of the comparable companies (for the A.Y. 2007-08) comes to 8.22, whereas the PLl (OP/TC) for the appellant company comes to 7.45 I have verified these calculations from the Balance-sheet of each of these companies and they are part of the appeal records. Since the difference between the two PLIs is within the range of +5%, no adjustment was required to be made. The adjustment of ₹ 57,07,130/- made is, therefore, deleted. The A.O./TPO may verify the calculations. 7. During the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost, has not considered a sum of ₹ 22,57,58,291/- being the variation in the closing stock. The TPO has worked the assessee's margin at 1.23% whereas if the variation in closing stock is considered, the assessee's margin would come to 9.56%. If the aforesaid figure is considered then there would be no requirement of adjustment since the average PLI of the comparables (as computed by the TPO) is 8.11%. This mistake is apparent from the calculation made by TPO done on page No. 5 of the TPO order. The order passed by the TPO is erroneous. Particulars As per appellant As per TPO Total income 1,41,34,62,001 1,41,34,62,001 Export sale (84%) 1,19,30,30,814 1,19,30,30,814 Export to AE(25.25%) 30,48,35,492 30,48,35,492** Total expenses 1,32,49,15,473 1,55,06,73,764 (before finance charges) (This is after Adjustment on account of variation of closing stock of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Item As per the TPO Total income 1,41,34,62,001 Export sale 1,19,30,30,814 Export to AEs (25%) 30,48,35,492 Expenses Total expenses before finance charges 1,55,06,73,764 Expenses for export (84%) 1,30,25,65,961 Expenses for export to A.E.(25%) 32,56,41,490 Total sales to AE 32,96,77,862 Add : Export benefits for calculating operating profits from A.Es NIL Total income on account of export to A.Es 32,96,77,862 Less : Expenses attributable to export to AE 32,56,41,490 Operating profits = 40,03,672 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable companies, thus, there was no occasion for the TPO to order for adjustments. In view of the matter, the Assessing Officer is directed to delete the addition made on this account. 9. Aggrieved, the Revenue has preferred an appeal before the Tribunal and placed reliance upon the order of the TPO and Assessing Officer whereas the learned counsel for the assessee besides placing reliance upon the order of CIT(A) has contended that in this assessment year the TPO has adopted TNMM method to determine the Arm's Length Price after rejecting the CUP method adopted by the assessee. But while determining the Arm's Length Price, the TPO has made factual error in the calculation by not considering the variation in the closing stock. The CIT(A) has reexamined the calculations made by the assessee as well as TPO to determine the Arm's Length Price and being convinced with the facts that an error has crept in the order of the TPO, the CIT(A) has accepted this calculation made by the assessee and he was also of the view that the PLI of the assessee company is 9.5%, which is more than the average PLI of comparable company. Therefore, there was no occasion for the TPO for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en incurred on the technical education of Mr. H. Rahman. The AO has not questioned the genuineness of the expenditure. Same has been disallowed u/s 40A(2)(b) of the I.T. Act. However, as far as the amount of expenditure on the technical education of Mr. H. Rahman is concerned, it is not recorded by AO that amount of ₹ 25,49,622/- was excessive in relation to any other such case of the expenditure on the professional course of B. Tech. in U.K. from University, College, Northampton (U.K.). The expenditure involving fees, etc. is prima facie as per the rates and tariff of the said university and said course. It is not a case where the expenditure is excessive as compared to any other person acquiring this degree in the said Institution. Therefore, application of section 40A(2)(b) does not seem to be proper, unless there is specific payment made by appellant showing that such expenditure is in excess as compared to others made by them in the same Institution for the same course. Now possibly, the AO has considered the expenditure as being for non business purpose. Because Mr. H. Rahman happens to be an specified person within the meaning of section 40A(2)(b), perhaps it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a director. In the instant case, X was not only the daughter of one of directors of the assessee company but also an employee of the assessee company. The assessee company is on a better footing in the instant case. Not only that, S, on returning to India, continued to work for the assessee in compliance of the agreement she had entered into with it before leaving India. She has been further made as a director of the assessee company. Therefore, the relation of X with one of the directors of the assessee company as such need not disqualify her from being sent abroad for higher studies by the assessee company . Therefore, in view of above discussion, the AO is directed to allow expenditure of ₹ 25,49,622/-. 9. Similar are the facts in respect of salary payment of ₹ 2,28,000/- where the AO has disallowed the amount on the ground that the remuneration paid to Mr. H. Rahman was not for business purpose because at that time he was pursuing technical education. However, the AO has failed to appreciate that the said Mr. H. Rahman was Executive of the Company and from the point view of appellant company, even if he was pursuing technical education, he was engaged in the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a particular technical course for the benefit of the assessee company. The CIT(A) has reexamined the entire issue and allowed the salary of ₹ 1,20,000/- per month. Against the allowance of ₹ 1,20,000/-, the Revenue is in appeal before us and placed reliance on the order of the Assessing Officer whereas learned counsel for the assessee has placed reliance on the order of CIT(A) that the payment of salary was made as per the resolution of the board. 14. Having examined the order of CIT(A), we find that Shri Hammad Rahaham is also one of the Directors of the assessee company who was sent abroad for doing a technical course. Undisputedly, Shri Hammad Rahaham was not available in India for rendering any services to the assessee company therefore, any payment of remuneration for the services rendered by him for the company, cannot be allowed in the light of the fact that the assessee has borne all the expenses for his technical course to be undertaken in abroad. Since there is no evidence that he has rendered any services to the assessee company, we are of the view that no remuneration can be paid to the assessee only for the simple reason that the Board has passed a re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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