TMI Blog2016 (5) TMI 1438X X X X Extracts X X X X X X X X Extracts X X X X ..... nts 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. We in the interest of justice and to meet out ends of justice set aside the matter to the file of the Assessing Officer to decide the issue afresh after undertaking fresh search of comparable companies. It is needless to mention over here that while deciding the issue afresh, the Assessing Officer will afford opportunity of being heard to the assessee and will meet out the submission of the assessee by speaking order. Addition on account of interest on borrowed capital amount - Held that:- Under similar set of facts, the ITAT in the appeal of the present assessee for the assessment year 2004-05 had decided the identical issue as held Assessing Officer had not brought on record any material to show that the loan obtained by the assessee under ECB was diverted to group companies. In the absence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 satisfied in the case, and clearly disregarding the fetters placed by the Central Board of Direct Taxes ( CBDT ) through Circular No. 12/2001 dated 23.8.2001. 3. The Ld. TPO has erred by not disclosing as to why the transfer pricing methodology, and approach including Comparable Uncontrolled Price information for the commission for marketing of advertisements adopted by the appellant, for FY 2003-04, was rejected and by not giving an opportunity of analysis to the appellant on the transfer pricing methodology adopted. 4. The Ld. TPO has erred in rejecting the economic analysis conducted by the Respondent in respect of 'distribution segment' and selecting seven companies without appreciating that their functions performed, assets utilised and risk assumed ('FAR') is different as compared to FAR of the Respondent and by placing erroneous reliance on the TP order of earlier years. 5. The Ld. TPO has erred by not providing the detailed search analysis (including qualitative, quantitative filters and the source of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate 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- 07, the learned DRP has confirmed the same addition which has been questioned by the assessee before the ITAT. 7. The Learned AR on the other hand placed reliance on the finding of the Learned CIT(Appeals) on the issue. He submitted that the assessee is engaged in the business of distribution of satellite channels of cartoon network, CNN, POGO, HBO etc. (collectively referred as TV Channels) and soliciting advertisement to be telecasted on TV Channels. For the purpose of establishing compliance with the arm s length standard, the assessee aggregated its transaction pertaining to distribution function (part of channel subscription fee paid, purchase of distribution and advertisement rights and commission for marketing of advertisement) and bench marked them by comparing operating margin of TIIPL with the arithmetic mean of operating margin of companies engaged in distribution of retail products 8. Having gone through the orders of the authorities below in view of above submissions, we find that the learned TPO f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile 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 non-comparable to the assessee: S.No. Name of company Assessee s contentions 1 IGE (India Ltd. The company is engaged in training and staffing services to the group companies. The schedule 1 to P L a/c provides the breakup of income earned by the company during the A.Y. 2004-05. It clearly depicts that income is earned from training and staffing services. The provision of training courses is not comparable to the distribution functions of the assessee. (Refer page 27 of the supplementary paper book for annual report of the comparable). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied 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 ₹ 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 Communication 137 TPJ 539 (Del.). The Delhi Bench of the ITAT in the case of Mitsubishi Corporation India Pvt. Ltd., (ITA No. 5042/Del/2011) has upheld the use of Berry Ratio as PLI for its trading segment. The relevant para No. 79 of this decision is being reproduced hereunder for a ready r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, 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 nature of the international transaction of the assessee. However, in the final order passed by the learned TPO, the company was rejected on the ground that it was persistent loss making company. It was contended that learned TPO failed to appreciate the fact that the net worth of the company h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouble 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 nature of its intra-group transaction. 14. In view of above submissions and the findings of the ITAT in the appeal for the assessment year 2007-08 and 2008-09 in the case of assessee itself on an identical issue, we in the interest of justice and to meet out ends of justice set aside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onomic 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 ignoring the fact that this company was also selected by him in the TP order for FY 2004- 05. 2.7. disregarding the companies as identified by the appellant, on a without prejudice basis, following the same methodology as adopted by the TPO. 2.8. disregarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n confirming the addition of advertisement charges amounting to ₹ 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 issue under similar set of facts is fully covered in favour of the assessee by the order dated 25..9.2009 of the ITAT in the case of assessee itself (ITA No.98/Del/2008) in the appeal for assessment year 2004-05. 18. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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