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TMI Blog2016 (5) TMI 1438X X X X Extracts X X X X X X X X Extracts X X X X ..... nature in respect of the A.Y. 2004-05 was confirmed in first appeal. 2. On the facts and in the circumstances of the case, the Learned CIT(Appeals) has erred in deleting the disallowance on account of interest on borrowed capital amounting to Rs. 28,87,831. 3. The assessee ( Cross Obj. No. 246/Del/2011) on the other hand raised following objections against the order of the Learned CIT(Appeals): That the Learned Commissioner (Appeals) ('Ld. CIT') has erred in law and on facts of the case in not adjudicating on the following grounds raised by the Respondent: 1. That the reference made by the Learned Assessing Officer ('AO') suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Learned Transfer Pricing Officer ("Ld. TPQ") for computation of the arm's length price, as required under section 92CA(1). 2. That on the facts and in the circumstances of the case, the Ld. AO erred in confirming the order passed by the Ld. TPO without appreciating that none of the conditions set out in section 92C(3) of the Act are s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised in the above appeals and cross objection are mostly related to transfer pricing hence, inter-connected, we preferred to dispose off these matters simultaneously. 5. Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon. 6. The first grievance of the Revenue in ground No.1 of its appeal is the action of the Learned CIT(Appeals) in deleting the addition of Rs. 5,69,04,207 made on the recommendation of the learned TPO for adjustment to the arm's length price of transaction by the assessee with its associated enterprises. The contention of the learned CIT(DR) remained that while deleting the addition, the Learned CIT(Appeals) has not given reason for accepting change of method applied by the assessee. The assessee had applied TNMM. The Learned CIT(Appeals) has also excluded one comparable and has failed to appreciate that addition of identical nature in the assessment year 2004-05 was upheld by the first appellate authority. The Learned CIT(Appeals) has also not met with the reasons recorded by the TPO/A.O. for making the addition in question. In the assessment year 2006- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies selected by the learned TPO are the service provider which do not have input costs in their cost base unlike the assessee. Thus, in order to overcome the accounting difference between the assessee's distribution segment and the comparable companies, operating profit/value added expenses of the assessee should be selected as the PLI with a view to make a meaningful comparison between the PLI of the comparables chosen by the learned TPO and the PLI of the assessee. The assessee provided the calculation of OP/VAE of the assessee's distribution segment. In support of the fact that the functional profile of the assessee is different from the functional profile of the companies selected by the learned TPO it was submitted that the assessee in the TP documentation had carried out a detailed analysis of functions performed, assets employed and risk assumed (FAR analysis). Based on the said FAR analysis of the distribution segment, the assessee was characterized as a distributor that assumed normal risk in undertaking such distribution activities. The TPO ignored the comparables identified by the assessee and selected following companies, which as per the assessee were functionally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. The assessee contended before the Learned CIT(Appeals) for exclusion of International Travel House Ltd. which had significant related party transaction i.e. hundred percent of its Revenue transaction were with its related party. The operating profit margin of comparable companies identified by the learned TPO after removing International Travel House Ltd. was 7.47%. The assessee accordingly contended that applying the proviso to section 92C(2) of the Act, the international transaction of the assessee under the distribution segment was meeting the arm's length standard. The Learned CIT(Appeals) found substance in the submission of the assessee on using OP/VAE as the PLI. It was pointed out that the OP/VAE of the assessee at 2.78% in comparison to average OP/TC (in absence of cost of goods in the PL of the service companies, OP/TC will be equal to OP/VAE of the comparable companies of 7.47% was accepted to be at arm's length by the Learned CIT(Appeals) and the transfer pricing adjustment of Rs. 5,69,04,207 made by the Assessing Officer was accordingly deleted. We also find that PLI of OP/VAE as a comparable has been approved by Delhi Bench of the ITAT in the case of Cheil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les for the distribution segment of the assessee. The learned TPO was also not justified in ignoring the companies presented by the assessee in the TP documentation and the press search submitted. We concur with the submissions of the Learned AR for benchmarking a distributor like the assessee, only distributors should be selected as comparables and since distributors of channels were not available in public domain, distributors of broadly comparables products/services should have been selected. In the appeals for the assessment years 2007-08 and 2008-09 in the case of assessee itself on similar issues, the ITAT has upheld that the comparables selected by both the Revenue and the assessee are not appropriate and has set aside the orders of the Assessing Officer and remitted back the matter to the file of the Assessing Officer to undertake fresh search of comparables companies. The grievance of the assessee during the year is also that during the assessment proceedings, the learned TPO initially proposed to use interads Ltd. as a final comparables on the premise of using the same companies as used by the learned TPO in assessment year 2005-06 while determining the arm's length natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able and that the assessee itself had accepted this stand by going in far MAP proceedings and accepting that decision, the learned TPO has failed to appreciate the fact that for the earlier years, on behalf of associated enterprises, an application was made under Article 27 of India USA Double Taxation Avoidance Agreement (DTAA) to settle the disputes arising from their assessments and it was pointed out that assessments in India resulted in double taxation especially in view of transfer pricing adjustment made in the case of assessee. In the settlement reached between competent authorities of India and United States, the latter agreed to provide co-relative relief in the assessments of associated enterprises for the transfer pricing adjustment made in the hands of the assessee to avoid double taxation. We thus agree with the submissions of the Learned AR that such act of assessee's should not be considered as a consent of the assessee about the adjustment proposed by the department in earlier years as the assessee, in good faith had not pressed for any appeal. A due functional and economic analysis has to be carried out every year to reflect changes in the market or changes in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R") analysis following a methodical bench marking process and completely disregarding the comparable companies identified by the appellant. 2.3. erred in not providing the search analysis conducted by him in identifying the alleged comparables. 2.4. rejecting the economic analysis conducted by the appellant in respect of 'distribution segment' wherein distributors were selected as comparables and instead selecting three companies which were service providers as comparable to the appellant without appreciating that their FAR is different as compared to the Appellant and by placing erroneous reliance on the TP order of earlier years. 2.5. not considering that in case service companies were to be accepted and compared with the distribution activities of the appellant, operating profit/ value added expenses ('OPNAE') should have been used as the Profit Level Indicator (PLI). 2.6. rejecting a company i.e. Interads Ltd., holding the same to be a persistently loss making company without appreciating that this company was comparable based on his own criteria and the comparable company cannot be selected/ reselected based on the margins earned by them and also erred in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esented the reversal of a provision claimed as not chargeable to tax. The said provision was made in an earlier year and voluntarily disallowed in the return of income of that year. 5. The Ld. DRP erred, both in facts and in law, in confirming the addition of advertisement charges amounting to Rs. 2,79 243 claimed allowable under section 40(a)(ia) of the Act after deducting and depositing appropriate TDS thereon. 6. The Ld. AO erred on facts in levying interest under section 234B of the Act at an excessive amount. The above grounds are without prejudice to each other. 16. Since the issues relating to transfer pricing raised in the present appeal on similar to the issues raised in relation to transfer pricing in the assessment year 2005-06, parties have been adopted similar arguments as advanced by them in assessment year 2009-10. We thus following our finding therein set aside the matter for the fresh adjudication or the TPO/A.O. on similar directions as made in the matters for the assessment year 2005-06 dealt above. The appeal is thus set aside for statistical purposes. 17. So far as ground No.2 of the appeal of the Revenue is concerned, the Learned AR pointed out that the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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