TMI Blog2016 (4) TMI 1349X X X X Extracts X X X X X X X X Extracts X X X X ..... gative net worth of the company has impacted the profitability of the comparable company. The issue decided by Special bench in the case of DCIT V Quark Systems Limited [2009 (10) TMI 591 - ITAT, CHANDIGARH] where in the negative net worth company was considered and it was held that business organization with negative net worth cannot be treated at par with a normal business organization. However while considering that issue the comparable was also functionally not comparable in that case. Therefore there was no view expressed in that decision that though comparable has similar FAR still negative net worth company is required to be excluded without showing the impact of negative net worth on the profitability of the company. In view of this we direct the inclusion of this Company i.e. Muller & Phipp India Limited as comparable for the purpose of determining arms length price. Other sales exclusion while working out PLI - HELD THAT:- No reason that the ld TPO to exclude the other sales of ₹ 1214675/- to be excluded while working out PLI. Against this no argument have been advanced by the ld DR that how the order of the ld CIT(A) is incorrect. In view of this we direct t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods. Ld. TPO as well as CIT (A) has not considered this issue and therefore we set aside it to the file of ld. TPO to deal with this issue on merit after giving proper opportunity of hearing to the assessee. - ITA No.499/Del/2013, 151/Del/2013 (Assessment Year:2005-06) - - - Dated:- 1-4-2016 - Shri I.C.Sudhir And Shri Prashant Maharishi, JJ. Revenue by : Sh.Subhakant Sahu, Sr. DR Assessee by: Sh. Pradeep Dinodia, Adv Sh. R. K. Kapoor, CA ORDER Prashant Maharishi, 1. These are the cross appeal filed by the revenue and the assessee against the order of the ld CIT(A)-XXIX, New Delhi dated 12.11.2012 for the Assessment Year 2005-06. 2. In ITA No.499/Del/.2013 the revenue has taken three effective grounds of appeal:- 1. On the facts and in the circumstances of the case the learned CIT(A) has erred in accepting the submissions of the assessee that part of rates taxes. Insurance, loss on sale of assets, common Service expenses and Misc. expenses are not attributable to earning of dividend income. 2. On the facts and circumstances of the case and in law the learned CIT(A) has erred in restricting the disallowance out of interest u/s 14A by accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this matter to the Transfer Pricing Officer (TPO) for determining Arms Length Price. 7. For the purpose of determining arms length price the assessee has adopted transaction net marginal method (TNMM) and has identified a list of five independent companies as its comparables stating that functional profile of comparable are similar with functional profile of the assessee which is of distribution function. The assessee adopted financial data of three years to arrive at mean net profit margin of 3.21% and as the assessee s profit margin itself is 2.77%, according to TP study report it falls within the tolerance limit + 5%, hence stated that transaction entered into by the assessee with its associated enterprises (AE) are at arm s length. 8. Assessee in its T P study Report selected five comparables as under :- i. Argus Cosmetic Ltd. ii. Muller Phipps India Ltd. iii. Bajaj Consumer Care Ltd. iv. J. K. Helene Curtis Ltd. v. Marvel Hi-Tech Ltd. 9. Ld. TPO rejected comparables namely Argus Cosmetic Limited as the financial data for this company for the year 2005 was not available in the data base Prowess or Capitaline. The Ld. TPO also rejected another comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded corresponding expenses of lease while working out PLI. For this the ld CIT(A) held that depreciation amounting to ₹ 9877580/- pertaining to leased out asset should be excluded from the operating expenses. He further held that an amount of ₹ 6496093/- being repairs and maintenance expenses pertaining to leases asset should also be excluded from operating cost. The ld CIT (A) further held that loss on sale of fixed assets of ₹ 1037445/- which is in the nature of non operating expenses should also be excluded from the operating cost of the company. After all these adjustment the ld CIT(A) computed the PLI of the assessee by adopting operating profit/ cost at (-) 2.12%. He further held that as the TPO has computed the PLI OP/cost in respect of three comparables at 1.09% and benefit of tolerance range of + 0.5% is not available to the assessee, therefore he confirmed the upward adjustment to international transactions of the assessee of export of traded goods by ₹ 7899984/-. 12. Against this order of ld CIT(A) both the assessee and the revenue are in appeal. Corporate tax Issues 13. The first two grounds of appeal of the revenue are against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenditure which are having any nexus in relation to exempt dividend income and they have been proportionately disallowed. It was his further submission that the assessee has not made any investment during the year therefore even otherwise there is no expenditure incurred during the year by the assessee. 17. We have carefully considered the rival contentions. Main grievance of ld. AO is that the ld CIT(A) has deleted the disallowance by holding that expenditure in the nature of legal and professional fees, travelling and conveyance, rent and insurance, common services expenses and other miscellaneous expenses have been held to not having any nexus with the earning of dividend income. Before us the ld DR could not point out that rent and taxes, insurance etc could have any nexus with the dividend income earned where only expenditure which could reasonably be linked to earning is expenditure incurred for collection of dividend. It is to be noted that there is no investment made by assessee during the year therefore there cannot be any expenditure on legal and professional fees as well as common expenditure. Impugned appeal is for AY 2005-06 and in that year there was no prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 ITR 340, wherein in Para 16 it has been held as under:- 16. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.' s case [1982] 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it has a negative net worth for the year 2005 hence it is not fit comparable to be taken. On appeal before the ld CIT(A) the assessee submitted that the TP regulation and OECD guidelines do not suggest that loss making company should not be taken as comparable. The ld CIT (A) has hold that this company is not simply the loss making company but is also a company having negative net worth and according to him when a company suffers from erosion of its wealth because of continuous loss, same cannot be taken as comparable. The case laws relied upon by the appellant were also rejected as according to him those were relied upon high loss making company and not for a negative net worth comparables. ii. Before us the ld AR submitted that merely because a company is having negative net worth it cannot be excluded as comparable if the functions performed, Assets deployed and risk assumed are comparable with the business of the company. Against this the ld AR relied on the order of the lower authorities. 25. We have carefully considered the rival contentions. According to rule 10(B)(a) of the Income Tax Rules the comparability of international transactions with an uncontrolled tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 2512001/- 27. It was noted that while working out PLI of the company the ld TPO has only taken the sale figures of ₹ 215873267/-. However he has excluded items stated in schedule No.13 of the annual account of the company Where the assessee has stated that income from corporate support services amounting to ₹ 2187030/-. Profit on foreign exchange fluctuation of ₹ 2512001/- and other sales ₹ 1214675/- and liabilities written back of ₹ 5566871/- should be included as operating income. The ld CIT(A) agreed for inclusion of corporate support services of ₹ 2187030/- and other sales of ₹ 1214675/- and foreign exchange gain of ₹ 2512001/- As they are related to the distribution function of the assessee and are insignificant. Before us the ld AR submitted that ld CIT(A) has rightly excluded the Corporate Support services and other sales. Further the ld AR submitted that the ld CIT(A) has not held anything regarding the foreign exchange gain to be included in the operating income of the assessee. Regarding the provision no longer written back of ₹ 5566871/- he relied on the order of the coord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has opted then only he has covered by it otherwise not. Therefore in the present case the assessee cannot precluded from stating that provision returned back written form part of the operating revenue. Against this the assessee has relied on the decision of the co-ordinate bench of ITAT wherein it has been held that provisions written back should be considered as operative income and provision created during the year should be treated as operative expenditure is normal business activity of business operation. In view of the decision of the coordinate bench we are of the view that provisions no longer required written back of ₹ 5566871/- is to be excluded if the assessee makes the provision and also reverses it as a normal business activity. Further if it is on account of revenue nature it should be included. However if the liabilities originally created are on account of capital items then their write back cannot be a normal instances of the business and hence to be excluded as operating income. As the fact for such write back are not available on record we set aside this issue to the file of the Ld. AO/ TPO to examine as per above direction and decide the issue afres ..... X X X X Extracts X X X X X X X X Extracts X X X X
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