TMI Blog2013 (3) TMI 666X X X X Extracts X X X X X X X X Extracts X X X X ..... The scrap material has come from the core manufacturing activity of the assessee - Hence it needs to form part of the operational income - recompute the margin of the assessee by including sale of scrap as operating income - Decided in favor of assessee Disallowing the benefit of range of +/-5% while determining the ALP - Held that:- Assessee shall not be entitled to exercise its option of +/-5% if the variation between the arithmetical mean and the price at which such transaction has actually been undertaken exceeds 5 per cent of the arithmetical mean - Decided against assessee Disallowing the provision of agency commission u/s 37 - Held that:- This commission payment accrues to the assessee company on incidence of sale and deferment of the payment of agency commission does not render the commission to be contingent in nature - AO Is directed to verify this aspect as to whether the liability of payment of commission to agents has arisen during the relevant AY and decide in accordance with law - Remanded back - ITA No. 2045/Hyd/2011 - - - Dated:- 15-3-2013 - Chandra Poojari, A.M. Smt. Asha Vijayaraghavan, J.M. For the Appellant: Utpai Sen M. G. Ramachandra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer (TPO) rejected the comparables offered by the assessee and selected two fresh comparable companies and arrived at the ratio of OP /Saies @ 14.43 per cent and he also determined the PLI of the taxpayer at 5.1 per cent. In respect of purchase of raw materials the AO had taken the above PLI figures and arrived at the adjustment to be made In respect of purchases from international transaction at ₹ 2.76 crores. 6. The TPO also examined the management services fees of ₹ 1,54.71,893 paid by the assessee to its AE. The TPO had asked the assessee to give the particulars of the management services rendered by the AEs and the quantification of the benefits derived therefrom. The assessee had given the particular of various persons who visited the company. According to the TPO unless the assessee showed tangible benefit that has been derived from such management services or the payment made is commensurate with the benefits derived. the ALP of such payment will have to be treated as nil. The TPO also found that except for two persons, that too 4 days each all the other 16 persons whose services are deemed to have been rendered travelled from abroad stayed elsewhere. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e enterprise level. (b) The transfer pricing study of the assessee has been rejected by the TPO on valid grounds. In the transfer pricing study done by the TPO, the adjustments to be made to the purchase transactions from AEs has been quantified at ₹ 2.76 crores, Hence the same shall be adopted for completing the assessment. (c) Other transfer pricing objections raised by the assessee, in grounds 1:6 and 8 before DRP are rejected. Grounds 2, 3, 4, 5, 7 (partly) and 9 are allowed. (d) In computation of PLI for the assessee, the income from sale of scrap Is to be taken as operating income. The stand of the TPO on including finance charges as operating expense remains unaltered. Hence, the PLI for the assessee may be calculated accordingly. 10. Thus, the DRP enhanced the transfer pricing adjustment to ₹ 2,76 crores. In effect the DRP deleted the adjustment of the TPO to the extent of ₹ 1,54,71,893 in respect of fees paid for management services. As a result the PLI of the assessee reverted back to 5.1 per cent (from 10.38 per cent as calculated by the TPO after disallowance of management fees) and the ALP obtained from average of comparable was 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reverted back to 5.1 per cent (from 10.38 per cent as calculated by the TPO after disallowance of management fees) and the ALP obtained from average of comparable was 14.43 per cent. 20. We have perused all the facts and particulars submitted by the assessee as well as the orders of the learned TPO and learned DRP with respect to management fees paid. 21. We are of the opinion that to the extent the payment is for setting up of a new factory at Cherlapally. the expenditure cannot be considered as operating expenses. The PLI is operating profits divided by the sales (Le .. OP/Sales) and OP is determined by deducting from sales the operating' expenditure. Therefore one-off expenditure for setting up a new plant cannot be considered as operating expenses. Operating expenses are those which are essential for carrying out day-to-day operations and directly relatable to the sales. Therefore. to the extent the management service fees is towards setting up of the new factory at Cherlapally. it would not constitute operational expenses and the same should be excluded while computing the operating profits of the assessee in determining the PLI. Furthermore. at the same time. the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating expenses of ₹ 28.20 crores, the total international transaction constitutes only ₹ 16,53,09,321 (including management services fees). 30. The TPO has not worked out the profitability of the international transaction and compared it with the ALP as required under the TNMM. It is difficult to determine the profitability of international transaction which constitutes only a portion of the total expenses of the company. The material purchased from the AE is part of the other raw material and components going into the final product which is then sold to outsiders. 31. For applying the TNMM in case of international transactions constituting a small portion of expenses, the only practical way of applying the TNMM is to adopt the profitability of the entire enterprise as the profitability from international transaction. It has then to be compared with the PLI of the comparable companies and adjustment made only to the international transactions. This will be achieved by taking the total adjustment applicable to the enterprise as a whole and applying pro rata, on the basis of ratio of the value of international transactions forming part of operational cost to the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his proportion of the overall adjustment can be added as transfer pricing adjustment. We direct the TPO to compute the transfer pricing adjustment along these directions. 34. Ground 6 consists of sub-grounds, 6( 1) to 6(iv) out of which grounds 6(i) and 6(iii) are not being pressed. We deal with grounds 6(ii) and 6(iv) below: 35. Ground 6(ii) reads application of additional filter including selection of inappropriate range for turnover filter of ₹ 5 crores to ₹ 35 crores where appellant's turnover is ₹ 30 crores . 36. The assessee objects to the application of turnover filter as according to the asssessee the filter is too narrow a margin to encompass reasonable comparable companies, Assessee relies on the Bangalore Tribunal in the case of Genisys Integrating Systems (India) (P) Ltd. us. Dy. CIT (2011) 64 DTR (Bang)(Trib) 225: (2012) 15 ITR (Trib) 475 (Bang) wherein in order to select/reject comparables on the basis of turnover when the turnover of the assessee was ₹ 8.15 crores, the Bangalore Tribunal had directed the TPO to reject the companies who have a turnover of less than ₹ 1 crore and more than ₹ 200 crores. 37. Respectfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrive at the conclusion of comparability analysis, we will trace the steps in the transfer pricing assessment: 44. Firstly, the assessee supplied 5 comparables in its transfer pricing study namely. S. No. Name of comparable OP / sales as per transfer pricing documentation (p. 22 of paper book] OP / sales as per contemporaneous data (p. 107 of paper book] 1. Panama Petrochem Ltd. 6.5% 8.27% 2. Sah Petroleums Ltd. 6.6% 7.30% 3. Tide Water Oil Co (India) Ltd. 0.9% 7.23% 4. Balmer LawrIe Co. Ltd. (seg.) 2.9% 6.12% 5. Gulf Oil Corpn. Ltd. (seg) 5.9% 4.22% Count 5 5 Average 4.6% 6.63% 45. These above 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Universal Petrochemicals Ltd. 1.56% 64.70 8.16% 10. Waxpol Industries Ltd. 1.22% 37.65 2.10% Average 6.49% Appellant 5.37% 29.74 0.12% 47. Now, we have held in our detailed analysis above that the filters adopted by the TPO were indeed applied incorrectly, namely turnover of 5-35 crores should actually be 1-200 crores following the Hon'ble Co ordinate Bench of this Tribunal In Capital IQ Information Services (supra) and Bangalore Tribunal in Genisys Integrating Systems (supra) as discussed above and that the zero export revenue companies should not (sic) excluded. Hence, the 8 comparables which were rejected by the TPO have to be taken back in addition to the two comparables chosen by the TPO. In other words, the revised set of ten comparables submitted above by the assessee in reply to the show-cause notice is the correct set to be us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Department by the decision of the Co-ordinate Bench of the Tribunal in case of Dy. CIT us. DeLoitte ConsuLting India (P) Ltd. (2011) 61 DTR (Hyd)(Trib) 101 .. :' 51. We therefore, rely on the decision of the Co-ordinate Bench of this Tribunal and dismiss this ground of the assessee. 52. Ground No. 8 is that on the facts and circumstances of the case, the Hon'ble DRP /leamed AO erred on the facts and circumstances of the case and in law, in disallowing the provision of agency commission of Rs, 14,21,084 under s. 37 of the Act. 53. The assessee submitted that during the financial year 2006-07 relevant to the asst. yr. 2007-08, the assessee company had debited ₹ 14,21,084 towards the provision for agency commission in its P L a/c. 54. The assessee further submits that provision towards agency commission of ₹ 14,21,084 was made based on the sales income and is in consonance with the Accounting Standard 1 (AS-I) 55. The AO had treated the amount debited as agency commission to P L a/cas provision and disallowed the same under the provisions of s. 37 of the Act, which has been upheld by the Hon'ble members of the DRP. 56. The assessee submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dards which require accrual concept to be followed. In the present case the Department is insisting on the fIrst option which. as stated above. is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words. it is not based on matching concept. Under the matching concept. if revenue is recognized the cost incurred to earn that revenue Including warranty costs has to be fully provided for. When valve actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year. otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances. the third option is most appropriate because it fulfils accrual concept as well as the matching concept. 59. We have heard both parties. We find that the short point of the assessee is that its agents have procured the sales orders and hence It has a liability to pay for the agent services though it may be discharged in future and it is not in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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