TMI Blog2018 (6) TMI 1501X X X X Extracts X X X X X X X X Extracts X X X X ..... l not question the need and benefit arising out of these services as the same have been conclusively decided by the order of the coordinate bench for earlier years in the case of the assessee itself. Appeal of the assessee with respect to ground No. 1, 2, and 3 are allowed with above direction accordingly. Addition made on account of fall in gross profit of the assessee - Held that:- It is evident that the Assessing Officer has neither invoked section 145 (3) nor rejected books of accounts of the assessee. In such circumstances, we do not understand as how the Assessing Officer has made addition for decrease in gross profit rate during the year under consideration. In the normal business, it is not necessary that always the gross profit rate will be steady and it may increase or decrease depending on the prevailing business atmosphere. Without rejecting books of accounts of the assessee, the Assessing Officer cannot tweak with the gross profit rate declared by the assessee. We direct the Assessing Officer to delete the said addition. Disallowance of expenditure in respect of intra-group services made under section 37(1) - Held that:- We find that though the transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant are intrinsically linked to the business operations by the Appellant in its two business segments i.e. Pressure Sensitive Materials ( PSM ) and Retail Information Branding Solutions ( RBIS ); 3.2. Not appreciating the business model of the Appellant and rejecting the Appellant's economic analysis of benchmarking closely interlinked transactions using Transactional Net Margin Method ('TNMM') in favour of Comparable Uncontrolled Price ( CUP ) method; 3.3. Failing to appreciate that the services received from the AEs are part of a package of composite agreements which cannot be unbundled; 3.4. Ignoring documents, cost allocation methodology and analysis provided by the Appellant and placing reliance on previous year's conclusion that the services availed by the Appellant from its AE were in nature of 'duplicate' and shareholder services which have not conferred any commercial benefit upon the Appellant. 3.5. Not appreciating that the Hon'ble DRP/ Ld. TPO should not question the commercial wisdom of the Appellant and the benefit received by the Appellant from the receipt of intragroup services and can only ascertain the arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogent reasons. 8. That on the facts and circumstances of the case, the Ld. AO has erred both on facts and in law, in making ad-hoc addition of IIMR 39,55,27,776 on account of fall in GP ratio in the subject assessment year. 8.1. That on the facts and in law, the Ld. AO erred in making ad-hoc and arbitrary addition solely on account of fall in the GP ratio without appreciating the business and commercial considerations and that the fall is in the ordinary course of business Activities. 8.2. That on the facts and circumstances of the case, the Ld. AO erred in making additions of INR 39,55,27,776 merely by reason of a decrease in the GP ratio vis-a-vis preceding years ignoring the detailed submissions furnished by the Appellant in the course of assessment proceedings along with supporting evidence, outlining business reasons and justifications for the decrease in GP ratio during AY 2013-14. 8.3. That on the facts and circumstances of the case, the Ld. AO erred in making additions of INR 39,55,27,776 by rejecting books of accounts of Appellant without appreciating the fact that the books of account including bills and invoices were produced by the Appellant for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Transfer Pricing Officer (TPO). The Ld. TPO in his order dated 05/09/2016 proposed an adjustment of ₹ 25,19,80,074 to the value of international transaction reported by the assessee. The Assessing Officer after incorporating the said adjustment issued a draft assessment order on 10/11/2016. In the said order, he proposed other additions/disallowances also. Aggrieved with the draft assessment order, the assessee filed objections before the Ld. DRP, who issued direction to the Assessing Officer on 25/08/2017 disposing the objections of the assessee and upheld the adjustment proposed by the Ld. TPO. Pursuant to the said directions, the Assessing Officer issued the impugned final assessment order. Aggrieved with the said final assessment order, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 3. The ground Nos. 1 and 2 of the appeal are general in nature and covered by the other grounds, and, hence we are not required to adjudicate upon specifically. The Ld. counsel also did not press these grounds and accordingly same are dismissed. 4. The ground Nos. 3 to 3.7 of the appeal relate to the transfer pricing adjustment of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ITSSC) 1,092,721 Retail Branding the Information Solutions 1. Ticket HUB 26,345,175 2. GVP Services 35,256,075 3. VIPFS Services 32,685,030 4. CSC Services 18,251,297 4.3 The assessee benchmarked its international transaction of receipt of the services by applying Transactional Net Margin Method (TNMM) as the most appropriate method and using Profit Level Indicator (PLI) of operating profit/sales (OP/Sales). The assessee was selected as the tested party and comparable companies were used. Based on the said analysis, the assessee claimed that margins earned by it in both the segments, being higher than the comparable companies, the international transactions of the assessee were considered at arm s-length. The assessee also furnished few samples of email correspondence, brochure, product catalogue etc to support that services were rendered. The assessee also furnished det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee in his paper book have also been considered. The assessee has failed to show how they substantiate the services claimed, and are not in relation to other transactions with AEs. The assessee filed a voluminous paperbook but was unable to pinpoint evidence supporting the services claimed which meets the tests laid down in the OECD Guidelines discussed above. Filing of a voluminous paperbook containing copies of general correspondence does not meet the test of allowability discussed above. This view is supported by the decision of the Hon'ble ITAT in Fosroc Chemicals India Pvt. Ltd v DCIT, 2015-TII-144-TAT-BANG-TP. In this case, the Hon'ble ITAT observed as follows: 35. The Assessee has in the present case filed material before the IPO to demonstrate the nature of services rendered. In the paper book filed before us the index of the paper book gives a description of the service. We are of the view that the above description alone would not suffice. As we have already seen the TPO had specifically called upon the Assessee to give details of the services rendered and how the same were utilized by the Assesses and its relevance for the Assessee s business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of earlier year directions of DRP) anti upheld the remaining adjustment. This year, the TPO has made the adjustment in accordance with the directions of the DRP in the preceding year. In his order, the TPO has discussed the issues in detail and has given valid reasons for the adjustment made. The assessee has not been able to controvert the findings of the TPO. A transfer pricing adjustment towards intra-group services is primarily a question of fact which has to be decided on the facts in a particular year. This year, the 'IPO has determined its ALP at ₹ 5,90,30,205/-using CUP and consequently, made an adjustment of ₹ 25,19,80,074/-. In his order, the TPO has discussed the facts in detail and has given valid reasons for his decision. The decision of the TPO is supported by the OECD guidelines and judicial decisions discussed above. The contentions raised by the assessee have been discussed in detail in these judicial decisions and the issue has been decided in favour of the Department. In CJT v. Cushman Wakefield (India) Pvt Ltd. (2014-TU-07- r iC-DEL-TP), the Hon'ble Delhi High Court have explained the role of the AO and the TPO. This decision permits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght of the direction of the Tribunal. 4.12 We have heard the rival submissions and perused the relevant material on record. This is undisputed that in the immediately preceding assessment year i.e. 2012-13, the issue of arm s-length price of intragroup services has been restored back to the file of the Ld. AO/TPO by the Tribunal in ITA No. 5578/Del/2016. The finding of the Tribunal on the issue in dispute is reproduced as under: 13. We have perused the orders of the coordinate bench as well as of Hon'ble High Court. To determine ALP of intra group services according to us it is necessary for TPO to assess (a) need test, (b) benefit test, (c) rendition test, (d) duplication test and (e) share holder Activity Page 10 of 13 test. It is also accepted that need test and benefit test are required to be examined from the perspective of a businessman and not from the perceptive of the revenue. Services may be required by a person for its business need and at the time of availing it, the benefit accruing to that person is perceived, such benefit may or may not accrue but if services are rendered the payment is required to be made for those services subject to the other condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Email: SF. corn-May figures Email. Beer in India Product Size of ADIPL and ADC Email-Coca cola India RFS Solutions for Modern Trade Juices Email- HFS India need your help -Email- Improved draft business plant Multitrip Email-2011 OGSM Email: Bisleri- Vedica Mineral Water Email: Samples of MZ2001 to each countries Email: Samsung IMDI label _MZ1081 sample Email. Need forecast for MZ 2000 and MZ 2001 for 2012 'Email: Mew projects from LPM-AP Durables Strategy Deployment Meeting Email- Re: New projects from LPM-AP Durables Strategy Deployment Meeting Email - Dust Repellant Coat Email: Conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egic support Email : Upcoming APAC Q3 2012 Attestation- Policy Exception Intercompany database Email: RBIS Controllership Training series HFM Training Presentation Product Training HTT Product Training 11 VIPFS Services List of RBO's 14. We have carefully analysed whether the evidences submitted by the assessee are sufficient to conclude that services have Actually been rendered by the foreign AE or not. Coming to the Paper Book at Page 235-253 we found that it is a marketing broacher for labeling 10. GVP Service and strategic support Email : Upcoming APAC Q3 2012 Attestation- Policy Exception Intercompany database Email: RBIS Controllership Training series HFM Training Presentation Product Training HTT Product Training 11 VIPFS Services List of RBO's solutions. We failed to understand that how this marketing broacher can show that the marketing support services have been rendered by AE. Page Nos. 254 to 259 is with respect to some conference call and webinar. Further the mails at Page No. 262 to 262 are with respect to Beer in India which is just the information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciding in view of the direction of the Tribunal in assessment year 2012-13 as reproduced above. It is needless to mention that assesses shall be afforded adequate opportunity of being heard. Thus, ground No. 3 to 3.7 of the appeal are allowed for statistical purposes. 5. The ground No. 4 and 5 of the appeal were not pressed by the Ld. counsel of the assessee, being general in nature and accordingly, we dismiss the same as infructuous. 6. In ground Nos. 6 to 8, the assessee has challenged the addition made on account of fall in gross profit of the assessee, sustained by the Ld. DRP, amounting to ₹ 39,55,27,776/-. 6.1 The Ld. Assessing Officer has mentioned in the draft assessment order that the assessee was asked to furnish explanation for fall in gross profit rate during the year under consideration, however, neither any reply was filed in this respect, nor and books of accounts of vouchers were produced before him therefore, in absence of any books of accounts to verify the trading results, he estimated the gross profit rate taking average gross profit rate of last three assessment years. Accordingly, he proposed average gross profit rate of 38.09% as against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p of books of accounts. The bills/ invoices have been examined thoroughly and found in order . (emphasis supplied) 5. Despite such a clear finding of fAct recorded by the Ld. AO in the assessment order, the ad-hoc addition on account of fall in GP Ratio was sustained alleging that the Appellant failed to provide justification for decrease in GP Ratio during the assessment proceedings. Relevant extrAct from Para 4.7 of the assessment order is reproduced as below for your Honours' easy reference. However, addition on account of GP Ratio has been made on estimate basis with respect to GP Ratio of previous 3 years after rejecting books of accounts of assessee. Hence, assessee failed to provide justification with respect to decrease in GP Ratio during assessment proceeding. Considering the above, addition of ₹ 39,55,27,776 /- made in draft order on account of applying estimated GP Ratio is hereby added to the total income of assessee company. ( emphasis supplied) 6. It is further submitted that detailed justification and reasons for fall in GP Ratio were also furnished in the additional submissions filed with the Hon'ble DRP during hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: 8. The fall in gross profit Ratio, in the absence of any cogent reasons could not, by itself, have been a ground to hold that proper income of the assessee cannot be deduced from the accounts maintained by her and consequently, could not have been a ground to reject the accounts invoking section 145(3) of the Act. 9 ........... 10 .. if the rate of gross profit declared by the assessee in a particular period is tower as compared to the gross profit declared by him in the preceding year, that may alert the Assessing Officer and serve as a warning to him to look into the accounts more carefully and to look for some material which could lead to the conclusion that the accounts maintained by the assessee were not correct, but a low rate of gross profit, in the absence of any material pointing towards falsehood of the account books, cannot, by itself, be a ground to reject the account books under section 145(3) ( emphasis supplied) 3. It has been similarly held in the following judgements that merely because there is a fall in GP Ratio, the same does not provide a basis for the AO to reject an assessee's books of account and go on to make the addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Appellant and that the fall in GP Ratio was in the ordinary course of Appellant's business Activities. 2. In this regard, the Appellant has reproduced in brief for your Honours as below, the reasons and justification for fall in GP Ratio in the subject year vis-a-vis the preceding AY which were also submitted earlier before the Hon'ble DRP and Ld. AO: There was only a 2.79% decline in the GP Ratio in AY 2013-14 as compared to the preceding AY 2012-13 which was a nominal decline in the ordinary course of the business. The comparison with the average GP Ratio of the last three preceding AYs as done by the Ld. AO is not a good comparison considering the ever changing dynamics of the business environment and the new lines of businesses commenced by the Appellant during AY 2012-13 and AY 2013-14. 3. The reasons for year-on-year decline separately for both the PSM and RBIS Divisions are summarized as below. 3.1 RBIS Division: There was decline of 3.11% in the GP Ratio of RBIS Division in the subject year over preceding AY mainly because of the following reasons: i. Introduction of new technology, i.e., Radio Frequency Ide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efer pages 1024 to 1036 @ Paras 1-1 to 1-24 of the Paper Book-Volume HI). B.4 Addition on account of GP Ratio not made in preceding or subsequent assessment years: 1. It may also be pertinent to mention here that the trading results of the Appellant have been accepted all along by the AO. Sl. AY GP Ratio (%) Whether any GP Ratio addition made by the Ld. AO 1 2010-11 38.82 No adjustment and assessment completed under section 143(3) r.w.s. 144C(13) vide order dated February 24, 2015. 2 2011-12 39.24 No adjustment and assessment completed under section 143(3) r.w.s. 144C(13) vide order dated February 26, 2016. 3 2012-13 36.23 No adjustment and assessment completed under section 143(3) r.w.s. 144C(13) vide order dated September 30, 2016. 4 2013-14 33.44 Impugned year un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e depending on the prevailing business atmosphere. Without rejecting books of accounts of the assessee, the Assessing Officer cannot tweak with the gross profit rate declared by the assessee. Accordingly, we direct the Assessing Officer to delete the said addition. The ground No. 6 to 8 of the appeal are accordingly allowed. 7. The ground No. 9 is in respect of protective addition for disallowance of expenditure ₹ 25,19,80,074/- in respect of intragroup services made under section 37(1) of the Act. According to the Assessing Officer intragroup services have not been incurred wholly exclusively for the purpose of the business and thus respective expenditure is disallowed under section 37(1) of the Act on protective basis, as the addition has been made substantially under transfer pricing additions. According to the assessee, this amounts to double disallowance and the Assessing Officer has committed error in interpreting the specific direction issued by the Ld. DRP requiring the Assessing Officer to disallow expenses under section 37(1) of the Act on protective basis. Before us, the learned counsel submitted that in earlier and subsequent assessment years no such addition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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