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2016 (1) TMI 855 - ITAT DELHI

2016 (1) TMI 855 - ITAT DELHI - TMI - Allocation of expenses relating to agency service activity in proportion to the turnover by the TPO - Transfer pricing adjustment - Held that:- Following the decision for the assessment year 2003-2004 as concluded that aggregate indirect expenses common to both the functions should be done on the basis of gross margin of distribution function and commission income receipts and not on the basis of sales, as adopted by the TPO. Allocation of expenses in propor .....

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and Ms. Deepika Agarwal CA For The Reveneu : Shri Nihar Ranjan Pandey, Addl. CIT DR ORDER PER A.T.VARKEY JUDICIAL MEMBER : This appeal, at the instance of the assessee, is filed against the order of the AO, New Delhi dated 22.01.2014 for the assessment year 2009-10 on the following grounds. 1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income Tax Act,1961 ( the Act ) at an income of ₹ 48241533/- as against the income of & .....

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ating that such services ought to have been aggregated with the distribution segment, being closely linked with such segment. 2.2 That the DRP/TPO erred on facts and in law in not5 appreciating that the distribution and agency segment relates to the same products, viz., ROBs and involves performing some of the common functions by the same employees and it is not feasible to segregate the cost relating to the same. 2.3 That the DRP/TPO erred on facts and in law in not appreciating that the appell .....

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gross profit ratio. 2.5 That the DRP/TPO erred on facts and in law in using inappropriate quantitative filters which are not based on any rational or reasonable basis. 2.6 That the DRP/TPO erred on facts and in law in selecting the following companies which are functionally dissimilar to the appellant as comparable for the purpose of benchmarking analysis: a) Choksi Laboratories Ltd. b) WAPCOS 2.7 That the DRP/TPO erred on facts and in law in allegedly rejecting the following comparable companie .....

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less than ₹ 5 crore 8 Overseas manpower corporation Turnover less than ₹ 5 crore 9 Priya International Ltd Turnover less than ₹ 5 crore 2.8 That DRP/TPO erred on facts and in law in not appreciating that the aforesaid companies are functionally comparable to the appellant. 2.9 That the DRP/TPO erred on facts and in law in adopting inappropriate filter of selecting companies having sales more than five crore without objectively applying this filter for eliminating both low and h .....

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e companies may not adequately capture the market and business cycle reflected in the industry. 2.13 That the DRP/TPO erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent entrepreneurs. 2.14 That the DRP/TPO erred on facts and in law in not dealing with the objection of the appellant of comparability adjustment on ac .....

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,47,19,813/-. The appellant had entered into following international transactions with the head office in France and other Corning group companies during the relevant previous year: (i) Import of ROB s of ₹ 24,88,09,859/- from Corning Inc. as part of distribution function of import of rough ophthalmic blanks ( ROB s ) and sale to customers in India; (ii) Import of ROB s of ₹ 18,843,023/- from Corning Inc. as part of distribution function of import of rough ophthalmic blanks (ROB s ) .....

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nt of expenses of ₹ 22,12,448/- paid to Corning Inc. 3. The assessee computed the arm s length price of the international transactions with the AE, M/s Corning SA France, relating to distribution and agency service activities, with reference to the combined operating profits from the aforesaid activities, treating the same to be part of distribution activity/segment. The appellant considering the functional and risk profile of this function and looking at the available comparable data, sel .....

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etic mean of 2.17%. Accordingly for the year ended on 31.03.2009 appellant had earned a NPM of 7.37% (considering foreign exchange loss) from its distribution operations which was higher than the average OP/OC of comparable companies. Further, so far marketing support services to Corning USA, appellant selected Transactional Net Margin Method using Net Profit Margin based on cost (NCP) as the profit level indicator to be the most appropriate method for determining the appropriate arms length pri .....

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31.03.2009 appellant had earned a NCP margin of 8.88% from its marketing support services function it was claimed to be within the above mentioned +/-5% range prescribed under the Act. 4. However, the TPO in an order dated 14.12.2012 rejected the combined evaluation of agency service activity and distribution activity with M/s Corning SA France, as part of distribution activity/segment, followed by the appellant. The TPO segregated the aforesaid activities for the computation of arm s length pri .....

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vices provided by the appellant to Corning Inc. USA. 5. The TPO in view of the aforesaid benchmarked the operating results of each of the activity, applying TNMM. For carrying out the aforesaid analysis, the TPO firstly determined the net income from the agency services function by allocating expenses aggregating to ₹ 4,22,77,131/- relating to the distribution segment (comprising of distribution and agency a service functions) in proportion of distribution sales and agency commission (Rs. .....

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accordingly, computed the arm s length price of the international transactions of agency services at ₹ 76,82,106/- as follows: Operating cost 74728396 Arms length margin% 13.75 Arms length price (ALP) 85003550 Price received 71481830 Shortfall being adjustment u/s 92CA 13,521,720 8. On the basis of above, the TPO accordingly determined arm s length price in respect of commission income at ₹ 8,50,03,550/- as compared to ₹ 7,14,81,830/- the commission income received by the asses .....

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services function carried on by the appellant. 11. When this appeal was called out for hearing, learned counsel for the assessee submitted that this appeal can be decided on the short ground as to whether or not aggregate indirect expenses common to both distribution and agency functions should be done on the basis of gross margin and not on the basis o9f sales, as adopted by the TPO. It is contented that in the event of this issue being decided in favour of the assessee, all other issues raised .....

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activities transactions form part of natural business segment of distribution of ROBs and are inter linked and closely connected in as much as, (i) the two activities relate to the same products and involve performing some of the common functions by the same employees and it is not feasible to segregate the cost relating to the same; (ii) the agency services rendered by the assessee in relation to sale of ROBs to the customers of Corning France in India, is akin to the distribution of ROBs, in a .....

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ntention of the appellant holding as under: Having regard to the above factual matrix we are thus inclined to uphold the conclusion of the CIT(A) to benchmark the two independent functions separately. We do not find any merit in the contention raised by the learned counsel that these are closely linked transactions undertaken by the appellant. On the contrary the nature of transactions are functionally different and even the risk assumed are different We thus negate the stand of the assessee and .....

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