TMI Blog2016 (5) TMI 1387X X X X Extracts X X X X X X X X Extracts X X X X ..... of the I.T. Rules. We further find that though ld. DRP had given direction for inclusion of commission income as part of the operating income but except PAE Ltd. all other comparables were not having any commission income. As rightly suggested by the assessee, the proper course would be to restore the matter to the file of ld. TPO to find out fresh comparables having trading and commission income both and include the same after making adjustments as mandated by the law. Ld. TPO will also examine the details as per annexure 3 and any further details as may be necessary to consider and will make adjustments to salary and rental income and other adjustments so as to bring the profitability of assessee inconformity with the profitability of the comparable after providing due opportunity of hearing to the assessee. Addition of ROC expenses incurred in connection with increase in authorized share capital - Held that:- Hon’ble SC in the case of Brook Bond India Ltd. (1997 (2) TMI 11 - SUPREME Court) had considered the expenditure in connection with additional issue of shares and had held that expenditure directly related to expansion of capital base and was therefore, capital in na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems and accessories during the FY 2006-07. The assessment year under consideration is the first year of assessee s operation. The assessee imports finished goods (UPS systems and batteries) from its associated enterprises for resale in the domestic market. The products imported comprised of various categories/types of UPS systems. The asessee also performs certain marketing support services in connection with direct sales made by the associated enterprises to customers in India, for which it receives a commission income. The assessee had filed return of income declaring nil income. As the assessee had entered into various international transactions reference was made to transfer pricing officer for determination of arm s length price. The following are the details of international transactions with its associated enterprises as per Form 3CEB: S.No. Description of transaction Value (In Rs.) 1. Sales Promotion Expenses 1,09,188 2. Purchase of finished goods from AE 12,38,16,952 3. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -24.13% 5. OP/Sales -31.81% The arm s length price of the international transaction relating to Purchase segment is calculated as below: Total Sales : ₹ 14,01,54,678 OP at a margin of 5.59% : ₹ 72,60,012 OP shown : Rs. (4,45,86,417) 1. Purchase of finished goods from AE (Amt. paid by the assessee) 12,38,16,952 2. Arm s Length price of the purchase of finished goods 7,19,70,523 Difference : ₹ 5,18,46,429 6. Ld. DRP upheld the application of TNMM over RPM but gave following two directions: For computing the operating income the commission income should be included both for the comparable companies as well as the assessee; For computing the operating expenses, pre-opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. should be considered as comparables as they are engaged in trading of computer peripherals and related items. 3. The ld. AO and the ld. TPO ought to have appreciated that FY 2006-07 (relevant to AY 2007-08) is the first year of operations and losses incurred during the year are solely due to business or commercial reasons than on account of transfer pricing. 4. The ld. AO and the ld. TPO ought to have appreciated the fact that the appellant incurred expenditure, the benefit of which have resulted in the subsequent year. 5. The ld. AO erred in excluding commission income from the operating income of the appellant contrary to the directions of the Hon ble DRP vide their order dated 14th September, 2011. Non-Transfer Pricing adjustments 1. ROC expenses in connection with the issue of the share capital: ₹ 1,30,500 1.1 The ld. AO/DRP erred in confirming the gross disallowance of ₹ 130,500 incurred by the appellant towards filing fees with the Registrar of Companies in connection with the issue of the share capital of the Company. 1.2 Notwithstanding and without prejudice to above, should the said expenditure be treated as capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer be set aside. 9. Ld. Cousnel for the assessee submitted that first we should consider ground no. 3 4 because ld. TPO has not allowed the adjustment in regard to start up of phase. He submitted that assessee was in the first year of his operations and, therefore, losses were incurred. Under such circumstances, ld. TPO should have allowed adjustment because it is well settled commercial principle that break even could reach only after a sufficient period of operations by which time the income is sufficient to contribute towards fixed cost and also start earning profit. He submitted that assessee is not disputing the applicability of TNMM method but TNMM should be applied only after significant differences of operating cost between the comparables and assessee are adjusted. He submitted that first year business operations cannot be compared with old business. 9.1 Ld. Counsel pointed out that the comparables selected by the assessee were quite old which will be evident from the following table: Name of the Company Year of Incorporation V-Guard Industries Limited 1996 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 3484/Del/2011 11. Ld. Counsel referred to annexure 3 of Synopsis filed in course of the proceedings and submitted that the matter may be restored back to the file of ld. TPO to examine all the details and then make the adjustments to operating expenses. 12. Apropos ground no. 2 dealing with the issue relating to selection of comparables ld. Counsel pointed out that all the comparables chosen by the ld. TPO does not have commission income except PAE Ltd. He further pointed out that V-Guard Industries Ltd. is selling stabilizers and UPS is a very small segment of this company. He further pointed out that segmental details are not available. He, therefore, submitted that considering all these aspects fresh comparables having trading and commission income should be taken including PAE with adjustments as mandated by law. 13. Ld. DR submitted that the comparables selected by the TPO were primarily dealing in the same line in which the assessee was dealing. He submitted that it is the functional comparability which is relevant for selection of comparables. He relied on the following decision: ION Trading India Pvt. Ltd. ITA No. 1035/Del/2015 dated 07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. 15. In the result, the grounds relating to transfer pricing adjustments are allowed for statistical purposes in terms of aforementioned observations. Non Transfer Pricing Issues 16. Brief facts apropos ground no. 1 are that assessee had claimed ROC expenses aggregating to ₹ 1,30,500/- incurred in connection with increase in authorized share capital of assessee. The AO disallowed these expenses observing that the same was of capital nature. 17. Before ld. DRP this issue was not raised. However, now assessee has taken fresh plea vide ground nos. 1 1.2 relying on the decision of the Hon ble Rajasthan High Court in the case of CIT vs. Multi Metals Ltd., 188 ITR 151, wherein the alternative submission of the assessee in regard to allowability of the amount paid as fee for registration to ROC for amendment of the memorandum of association for raising the authorized capital being eligible for deduction u/s 35D was accepted. Ld. DR submitted that the issue is covered against the assessee by the decision of Hon ble Supreme Court in 225 ITR 798 Brook Bond India Ltd. vs. CIT. 18. We have considered the submission of both the parties. Hon ble SC in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the parties and have perused the record of the case. Both the decisions relied upon by the ld. Counsel of the assessee clearly hold that the relevant date for deciding whether an expenditure is pre operative or post operative is the date of setting up of business and not the date of commencement of business. Both the lower revenue authorities have not examined this aspect and, therefore, we restore this issue to the file of AO to examine the issue afresh with the light of aforementioned decisions. 25. In the result, this ground is allowed for statistical purposes. 26. Brief facts apropos ground no. 3 are that assessee had claimed provision for gratuity aggregating to ₹ 16,99,465/-. The assessee had made this provision as 6% of the sales. The AO disallowed the assessee s claim, inter alia, observing that estimation was not based on any statistical analysis or any historical data base. He further pointed out that this was the first year operation of the assessee and, therefore, assessee was not having any prior experience. Ld. DRP confirmed the AO s order. 27. Having heard both the parties, we do not find any reason to interfere with the order of AO because the e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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