Feedback   New User   Login      
Tax Management India. Com TMI - Tax Management India. Com
Acts / Rules Notifications Circulars Tariff/ ITC HSN Forms Case Laws Manuals Short Notes Articles SMS News Highlights
        Home        
Extracts
Home List
← Previous Next →

Assistant Commissioner of Income-tax, Kanpur Versus M/s Rahman Industries Ltd.

2015 (7) TMI 871 - ITAT LUCKNOW

Transfer pricing adjustment - most appropriate method - CIT(A) deleted addition - Held that:- Nothing has been placed to justify that the TPO has rightly adopted the resale method to determine the Arm's Length Price whereas the assessee is 100% exporter. Since the CIT(A) has adopted the TNMM method following the method adopted by TPO in succeeding year to determine the Arm's Length Price, we find no infirmity in his order. Moreover, having noticed the difference between two PLIs in the range of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sidered a sum of ₹ 22,57,58,291/- being variation in closing stock in order to arrive 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%, whic .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

inding 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 the Assessing Officer on the basis of some material available on the record that the expenses claimed by the assessee are excessive or unreasonable, the disallowance made by the Assessing Officer u/s 40A(2) .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hat:- 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 th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

S. 389 & 316 (LKW) OF 2013 - Dated:- 12-6-2015 - SHRI SUNIL KUMAR YADAV AND SHRI A.K. GARODIA, JJ. For The Appellant : Shri O.N. Pathak, D.R. For The Respondent : Shri Rakesh Garg, Adv. ORDER PER SUNIL KUMAR YADAV: These appeals are preferred by the Revenue against the respective orders of CIT(A) on common grounds. Since these appeals were heard together, these are being disposed of through this consolidated order for the sake of convenience. 2. The grounds raised by the Revenue in I.T.A. No. 38 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nd 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." .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

leting the addition of ₹ 2,23,73,153/- made by the AO by way of adjustment of transfer pricing under section 92CA(3) without giving any opportunity to the TPO as the assessee had not furnished the details of closing stock which are attributable to the sales to the AE before the TPO. 3. Ld. CIT(A) has erred in law and on facts in deleting the addition of ₹ 2,23,73,153/- made by the AO by way of adjustment of transfer pricing under section 92CA(3) without appreciating the facts brought .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

g regarded to Arm's Length Price covered u/s 92 under Chapter-X of the Income Tax Act, 1961. As the total amount of such international transaction exceeded ₹ 5 crores, the case of the assessee was referred to the Addl. Director of Income Tax/Transfer Pricing Officer for computing the Arm's Length Price. The order u/s 92CA(3) of the Act dated 29/10/2010 passed by TPO was received by the Assessing Officer and the Assessing Officer accordingly adopted the total transfer pricing adjust .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ssee has also challenged the computation made by TPO by adopting a resale method (RSM method) to determine the Arm's Length Price. It was contended before the CIT(A) that the resale method can only be applied in case of importers whereas the assessee is 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he 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. Aggrieved, the Revenue has preferred an appeal b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

PLIs is within the range of +5%, the addition was deleted. Learned counsel for the assessee further contended that the TPO and Assessing Officer cannot adopt the two methods in different assessment years to determine the Arm's Length Price. It was further contended that the resale method adopted by TPO in the impugned assessment year was not applicable in the case of the exporters and it can be applied to determine the Arm's Length Price in case of importers only. Since the CIT(A) has ta .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Arm's Length Price and in that assessment year, the TPO has made certain adjustments on different counts after adopting the TNMM method. We have also carefully examined the order of CIT(A) and we find that the CIT(A) has taken into account the calculations furnished by the assessee in order to determine the Arm's Length Price as per TNMM method. Having noticed that the difference was nominal, the CIT(A) has deleted the additions. We, however, for the sake of reference, extract the order .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 produ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

uct is what is being compared. A product worth ₹ 500 if sold to the AE at ₹ 400, would be compared with products that have a price of ₹ 400. Such a comparison is bound to show that the transaction price is an arm's length price, and hence, such a comparison cannot be accepted. • The Assessee itself has admitted in his submission dated 25.10.10 that "the price of footwear sold by the assessee to its AEs ranges from ₹ 300 per pair to over ₹ 1000 per pair .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

andard of comparability." ii. That the TPO (after rejecting the CUP method as adopted by the appellant) has adopted RSM method and has calculated the ALP by observing as under: 6.1 The assessee was required to show cause why ALP be not computed by using Resale price Method as follow: (A) Sales to SAFETIX FRANCE (i) Sale Price of SAFETIX France (AE) to its customers 11,55,09,675 (ii) Less: 3.54% G.P. to be allowed as normal margin to be retained by the AE 40,89,042 (iii) ALP+(i)-(ii) 11,14,2 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t be applied in the assessee's case, which has solo goods to its AEs and not vice-versa. The argument of the Assessee is considered but found incorrect. The pertinent question is whether the tested party 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 th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 dated 04.01.2013 was requested to give financial details of comparable companies (as adopted by the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

a correct method to determine the ALP for the assessee, who was an exporter and not an importer. 3. You are requested to file the necessary financial details along with computation of PLl (OP/TC) for your company and also for the comparable companies as adopted by the TPO in his order for A.Y.2008-09. 4. Compliance is requested within 7 days. (Raj Kumar Lachbiramka) Commissioner of Income-tax (Appeals)-I, Kanpur" 4.4.2 Vide letter dated 11.01.2013, the Ld. A.R. submitted the required detail .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

348 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 with .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

;s Length Price whereas the assessee is 100% exporter. Since the CIT(A) has adopted the TNMM method following the method adopted by TPO in succeeding year to determine the Arm's Length Price, we find no infirmity in his order. Moreover, having noticed the difference between two PLIs in the range of +5%, the CIT(A) has rightly deleted the additions as no adjustment was required for such difference. Since we find ourselves in agreement with CIT(A), we confirm the same. 8. In the assessment yea .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

perating cost, has not considered a sum of ₹ 22,57,291/- being the variation in the closing stock. The TPO has worked out 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%. It was further contended that 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%. He has also furnished the correct calcul .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. While applying the aforesaid method, the TPO while arriving at the figure of operating cost, 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) i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

(84%) 1,11,29,28,997 1,30,25,65,962 Expenses for export to A.E.(25%) 27,82,32,249 32,56,41,490 Total sales to A.E. 30,48,35,492 32,96,77,862(*) Operating profits 2,66,03,243 40,36,372*** PLI=OP(on export to Ae) TC 2,66,03,243x100 27,82,32,249 40,36,372x100 32,56,41,490 = 9.656% 1.23% (*) appears to be a typographical error, it should have been ₹ 3,48,35,492/- as per ** (***) arithmetical mistake. Accordingly, it is prayed that the adjustment ordered to be made by the TPO to the extent of & .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. The relevant observations of CIT(A) are also extracted hereunder for the sake of reference: "4.3.1 The appellant company had certain international transactions with its AEs to which Indian Transfer Pricing Regulation (contained in Sec. 92 to Sec. 92 F of the I.T. Act) apply. In order to establish whether such transactions (between the appellant company and its A.Es adhered to arm's length principle ( as required under the T.P. Regulations), a Transfer Pricing study was undertaken by t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e 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 PLI = OP TC = 40,03,672 x 100 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ng stock of ₹ 22,57,58,291/- is considered, the total cost (before financial charges) would come to ₹ 1,32,49,15,473/- as against ₹ 1,55,06,73,764/- adopted by the TPO. Further, there is a typographical error in the order of the TPO wherein export to AEs have been taken at ₹ 32,96,77,862/- instead of ₹ 30,48,35,492/-. The computation of the PLI (OP/TC) in the case of the appellant would be as under: Particulars Amount Total income 1,41,34,62,001 Export sale (84%) 1, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. The PLI of the appellant company is 9.56%, which is more than the average PLI of the 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 adjustment. 10. Having carefully examined the orders of the lower authorities in the light of the rival submissions, we find that in this order, the T.P.O. himself has adopted the TNMM method for determining the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

lations 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 according .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

y the order of the Tribunal in favour of the assessee. In that assessment year, the Tribunal has confirmed the order of the CIT(A) who has deleted the addition made on account of disallowance of expenses incurred on study of the aforesaid persons. For the sake of reference, we extract the relevant portion of the order of the Tribunal as under: "15. We have considered the rival submissions. This issue was decided by the CIT(A) as per Para 8 & 9 of his order and for the sake of ready refe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

mount 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 4 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d to show that the expenditure as such was excessive and unreasonable. The allowability of this expenditure u/s 37 of the I.T. Act has not been looked into by AO. which was required because the payment made for education of Mr. H. Rahman is not excessive and not unreasonable facts, as discussed above, hence question of applicability of section 40A(2)(b) does not arise. As far as allowability of the said expenditure u/s 37 of the I.T. Act is concerned, the same has to be looked into in the perspe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ve of the company during the period. Most importantly, the Degree of B. Tech acquired by him relates to line of the business i.e. leather, of the appellant company and it certainly has some benefits to the business of the company also. The place of posting of Mr. H. Rahman is also relevant i.e. U.K. where more than 50% of the turnover of the company is affected. All these circumstances show that there is no element of personal benefit and consideration being released to Mr. H. Rahman exclusively .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

#39;, or 'to study the advances made in foreign countries' is allowable as revenue business expenditure". It was held in J.B. Advani & Co. Ltd. v. CIT [2005] 1 SOT 830 (Mum.) - "Foreign study expenses incurred by a company in respect of an employee cannot be disallowed simply because employee happens to be relative of 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 ass .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ion, 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 tec .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of trade, interacting with customers, or/and being person on behalf of the company for required business interaction in U.K. Thus, in view of above discussion, both the expenses are allowable u/s 37 of the I.T. Act and as far as section 40A(2)(b) is concerned, same is not applicable because the element of "excessiveness" and "unreasonableness" is not present and/or has not been examined and recorded by AO. The AO is directed to delete the addition of ₹ 2,28,000/-." .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

expenses claimed by the assessee are excessive or unreasonable, the disallowance made by the Assessing Officer u/s 40A(2)(b) is not sustainable. Hence, we do not find any reason to interfere in the order of CIT(A). This ground of the Revenue is dismissed.' 12. Since the impugned issues are squarely covered by the order of the Tribunal, we confirm the order of CIT(A) following the same. 13. The other issue in these grounds relates to the remuneration of ₹ 1,20,000/- paid to Shri Hammad .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

enefit 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 i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

Discussion Forum
what is new what is new
 


Share:            

|| Home || About us || Feedback || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version