TMI Blog2014 (6) TMI 920X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered as allowed for statistical purposes and the issue is restored to the file of A.O. to consider the A.E. as tested party. Rejection of Resale Price Method (RPM) as the most appropriate method - Held that:- Since we have already considered above that A.E. should be selected as tested party, it is nothing but natural that the T.P. study should be undertaken by Resale Price Method only, as A.E. is only undertaking the distribution of assessee’s products in the local market. Profitability of the selected Comparable companies in domestic market may vary with the profit margins available abroad, particularly in the USA market. DRP also rejected the method solely on the reason that AE was not selected as tested party. Therefore, keeping in mind the submissions made by the Ld. Counsel, the issue of selection of method of resale price method or of TNMM or any other method suitable to the international transactions is also restored to the file of A.O. to examine the suitability of various methods and consider accordingly. Rejection of alternative analysis of the appellant under Transactional Net Margin Method (TNMM) and Comparable Uncontrolled Price Method (CUP) to determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s disallowed or not allowed in earlier years in the year in which this amount was incurred, A.O. is free to restrict the disallowance amount in this year consequent to the orders in earlier year. There is no need to separately verify the expenses in this year as the expenditure was not stated to be incurred in this year. Therefore, the consequential claim can be allowed on the basis of the record of the earlier year. Levy of interest under section 234B on the transfer pricing adjustments - it was the contention that assessee could not anticipate the T.P. adjustments and therefore, levy of interest under section 234B cannot be made on the adjustments made on account of T.P. provisions if any - Held that:- Considering the above submissions and also keeping in mind the principles laid down by the Hon’ble Uttaranchal High Court in the case of CIT vs. Sedco Forex International Drilling Co. Ltd., (2003 (10) TMI 40 - UTTARANCHAL High Court ) A.O. is directed to reconsider levy of interest as the issue of addition of T.P. itself is restored to the file of the A.O. for fresh consideration. - ITA.No. 1793/Hyd/2012 - - - Dated:- 18-6-2014 - SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground Nos. 1 to 9 pertains to T.P. adjustments made under section 92C whereas, Ground Nos. 10 to 14 pertain to other additions/disallowances made by the A.O. In the course of arguments, Ld. Counsel did not press ground No.9 with reference to limiting the adjustment to a variation of 5% arms length price under proviso to section 92C(2). Ground No.1 is also general one with reference to adjustment made at ₹ 6.62 crores rejecting the economic analysis undertaken by Assessee in accordance with the provisions of the Act. This does not require any specific adjudication as the other grounds taken by Assessee will also have a bearing on this contention. 6. TRANSFER PRICING ADJUSTMENTS (Ground No.2) : Ground No.2 is with reference to issue of selection of tested party in determination of Arm s Length Price. Briefly stated, during the financial year assessee entered into various international transactions with its AE for a total sum of ₹ 59,38,96,711/- as under : S.No Class of transaction Paid/Received A.E. Amount involved (Rs.) Method applied 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d multiple year data v) The comparables selected in USA were cherry picked and found to be functionally dissimilar and the activities in which they were engaged were different from that of the AE. vi) The TPO also rejected the resale price method adopted by Assessee for the purpose of determination of ALP and chose TNMM as the most appropriate method. 6.3. Before the DRP, it was contended that AE should be the tested party and without any justification, TPO rejected the RPM adopted by Assessee. They also submitted that the TPO did not conduct any study by making AE as the tested party. The Panel directed the TPO to examine the submissions of Assessee as the issue goes to the root of the matter. The TPO was directed to offer his views on the applicability of the RPM after giving an opportunity of being heard to Assessee. In response, the TPO submitted a report on 18.07.2012 and a copy of the report was also given to assessee and in response, the company furnished its objections. The TPOs report and Assessee's objections thereon were considered. 6.4. Assessee submitted that it had complied with its statutory obligation to maintain the transaction s documentation as pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PSS World Medical Inc. 1156.00 4,100 vi) Henry Schein Inc. 4740.10 15,000 in USD (Million) Number of employees i) Aceto Corporation 311.70 238 ii) Ameri Source Bergen Corp. 14,982.70 10,300 iii) Amex Drug Corp. 1.60 6 iv) Owens Miner Inc. 1946.80 4,800 v) PSS World Medical Inc. 1156.00 4,100 vi) Henry Schein Inc. 4740.10 15,000 5.6.3 The TPO in his report furnished the business profile of the six comparables selected by the taxpayer. The business profile of these companies reveal that a part of the business of these companies is comparable to the taxpayer but not all the operations undertaken by these six companies. For eg. Ameri Source Bergen Corporation has 10300 employees and it is also engaged in pharmaceuticals services and distributes an offering of brand name and generic pharmaceuticals, over the counter health care products, home health care supplies and equipment and related services to a variety of health care providers primarily located in the USA and Canada. The five comparables selected by the taxpayer in USA were giants and only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of comparables. The Panel does not find any merit in the submissions of Assessee and agrees with the TPO that the TP study of Assessee and comparables selected were cherry picked and not unbiased. The Panel has considered the decisions relied upon by Assessee and in the view of the Panel, the facts of Assessee are totally different. To repeat Assessee selection of comparables was not unbiased . 7.1. Contesting the above issue, it was submitted that the tested party should be the least complex of the transacting entities, i.e., the simpler entity in terms of intensity of functions performed and risks assumed and would not own valuable or non-routine intangibles. It was submitted that assessee is not to be considered as tested party and accordingly benchmarked, since, by virtue of their complex functional and risk profiles, their margins fluctuate heavily with the vagaries of the economy, thus making comparability analysis extremely difficult and unreliable. Further, the financial results of assessee often depend on external economic factors in the market; and not on the internal pricing policies of the Company's Management. It was further contended that availability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purposes of computing the arm's length price, as opposed to the concept of inter quartile range and median ; and (ii) single year data , as opposed to multiple year data , for the purposes of comparability analysis. The term enterprise , used while defining the various TP methods in rule 10B of the Income Tax Rules, does not refer to only the Indian taxpayer for being subject to benchmarking analysis by always selecting the same as the tested party . The term enterprise in rule 10B refers to either of the two AEs involved in the international transaction . Now, which of the two AEs should be selected as the tested party , for the purposes of economic or bench marking analysis, is an issue, on which the Indian TP regulations are absolutely silent. That is where reference is to be made to OECD draft UN TP guidelines. It needs to be borne in mind that carrying out of economic or benchmarking analysis on the wrong entity would result into a mere mathematical fallacy, not leading to any resolution in TP whatsoever. That would defeat the whole purpose of TP; and the same is not; and also could never have been, intended or envisaged by the Indian TP regulations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to customers in US region and does not manufacture any products on its own. It is responsible for receivables, assuming del credre risk. Time gap between the purchase and resale is less (1-3 months). Resale price margin is easiest to determine where the reseller does not add substantially to the value of the product. Granules USA is not making any value addition to the product being redistributed. It was submitted that once it has been proved that the RPM is the most appropriate method, non submission / submission of data / information must not lead to change in the method of determination of ALP. 11. We have considered the rival contentions and examined the issue. Since we have already considered above that A.E. should be selected as tested party, it is nothing but natural that the T.P. study should be undertaken by Resale Price Method only, as A.E. is only undertaking the distribution of assessee s products in the local market. Profitability of the selected Comparable companies in domestic market may vary with the profit margins available abroad, particularly in the USA market. DRP also rejected the method solely on the reason that AE was not selected as tested party. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted turnover range of ₹ 170 Cr to ₹ 370 Cr for selecting comparables. In the subsequent SCN the learned TPO revised the turnover range from ₹ 148 to ₹ 246 Cr without giving proper reasons for the change of turnover. This is against the principle of natural justice, as was rightly held in the case of First Advantage Offshore Services (Pvt) Ltd Vs DClT, wherein it was held that the TPO has to give reasons if he wants to deviate from a set of filters adopted. Secondly, assessee selected the comparables with forex revenue more than 60%of its total sales. The export turnover of assessee is ₹ 143.25Cr. The ratio of export turnover to sales is 74%. It would be inappropriate to select all the companies earnings forex revenue more. Thirdly, the comparatives chosen by the TPO are functionally different. Assessee invited attention to pages 12 to 15 of the DRP's Directions, wherein it has systematically given reasons for non-acceptance of the comparables. 12.2. The DRP vide para 14 of its directions has simply stated the following, as against investigating as to why if the filters were correctly applied: Considering the quantum of international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered the decision of the Hon ble Delhi High Court in the case of AIMIL Ltd., and concluded as under: It is clear that the law was enacted to ensure that the payment of the contributions towards the provident funds, the ESI funds or other such welfare schemes lTJust be made before furnishing the return of income u/s 139(1). When we read Section 36 (1) (va) and Section 438 together, it is obvious that earlier Section 438 made reference to the due date as prescribed under Section 36 (1) (va). There was a conflict between the first and the second proviso and the second proviso was deleted. The SC held that this amendment being curative in nature was retrospective. According to us, the benefit of this amendment must be extended to the employees' contribution also; Once the contribution is there, whether by the employee or by the employer, it is a contribution to a welfare fund held in trust by the employer, who is bound to deposit the same. When the employer does not deposit the same within the time prescribed under the Welfare Acts, such as the Provident Fund Act, ESI Act etc., he may face criminal prosecution under the said Act. He may also become liable to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-recovery of the above amount is certainly a loss. Like wise, even for repairs also, had assessee charged amount directly to the P L account when repairs were occurred, probably the receipt of ₹ 5500/- as amount of settlement of claim could have been shown as income and there will be no issue of separate claim of loss. However, since Assessee choose to make the claim on insurance company, non-recovery of the amount is certainly a loss, but not a bad debt. The contention that amount should be allowed as bad debt on write off cannot be accepted. The case law relied also do not pertain to loss claim, but to bad debt claims. The loss claimed has to be justified and DRP has correctly directed the A.O. to verify the settlement order passed by the ECGC and also the claim with New India Assurance Co. Ltd., in respect of damage of vehicle. Therefore, the directions given by the DRP are justified. A.O. however, is directed to implement the directions of the DRP, if not already done. Ground No.12 is accordingly rejected. 16. Ground No.13 is disallowance of GDR expenses of ₹ 8,70,912/- claimed under section 35D of the Act. A.O. directed Assessee to produce proof in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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