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TMI Blog2010 (3) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... AE in Thailand comparable with the sale to unrelated party in Vietnam. Scope of adjustments has to be widened and all the submissions of the assessee regarding the disparity between the two transactions should be considered and suitable adjustments made for the same. With the directions, the issue is set aside to the file of the ld. CIT(A) for deciding the matter afresh after giving reasonable opportunity to the assessee to present their case. In the result, the appeal filed by the assessee is allowed for statistical purposes. Disallowance on expenditure - Other expenses - We find no infirmity in the order of the ld. CIT(A) as ad hoc disallowance out of the business expenditure cannot be sustained. Following the ratio of decisions in the case of Sunder Mal Sat Pal v. ITO [ 2005 (1) TMI 312 - ITAT AMRITSAR] and Ravi Marketing (P.) Ltd. v. CIT [ 2005 (1) TMI 20 - CALCUTTA HIGH COURT] , we dismiss this ground of revenue. In the result, the appeal filed by the revenue is dismissed. - R.K. PANDA AND SMT. ASHA VIJAYARAGHAVAN, JJ. Rahul Mitra for the Appellant. Arsi Prasad for the Respondent. ORDER Smt. Asha Vijayaraghavan, Judicial Member. - This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate enterprises were referred to the Transfer Pricing Officer. The relevant extracts from TPO s report is as under : ". . . The Company exported five products to associated enterprises as well as to unrelated parties. In respect of four products, the price charged to associated enterprise, is more or less similar to charged to independent enterprises. In respect of Floxdin 10 per cent (50ml) the price charged to AEs is much less in comparison to charged to third parties. The details filed indicated that, though same manufactured products are exported to associated enterprises and independent enterprise, however, these transactions are not separately analysed in the TP Report. The sale price to independent enterprise of USD 3.66 per unit, is 3.12 times of the sale price USD 1.17 per unit, charged to associated enterprise. The assessee was asked to submit as to why not the comparable Uncontrolled Price Method, be considered as the most appropriate method, for computing the Arm s Length Price of the sale of this product. The company, vide letter dated 7-1-2005, submitted its objections, the same reads as: "The transaction being referred is as follows : F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me was also considered while deciding the prices. ( d )Annual Future Business : It is a normal business practice that the prices of the products sold are also adjusted towards the factor of total annual business per customer. It may be noted that the total amount business for the assessment year 2002-03 was as follows : Intervet Thailand (Associate Enterprise)INR 6.6 million Modern Veterinary (Third Party)INR 1.4 million Also, as per the industry norms, a value of the customer is measured in terms of the future potential business and the relationship with the customer including the terms and conditions offered per transaction are influenced by the same. It can be observed that the quantities sold in respect of the product in question as well as the total business offered in case of the Associate Enterprise is substantially higher than that of the Third Party. Intervet Thailand Modern Veterinary, Vietnam Quantity sold during the Period April 2001-March 2004-Floxdin 10% 50ml 105,232 19,995 Total Business in during the period April 2001-March 2004-(In INR) 37.7 million 9 mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee s contention that volume factor will lead to adjustment up to 40 per cent is without any basis and acceptable. A discount of 10 per cent will be a reasonable discount. The assessee did not submit any contemporaneous document evidencing the setting the transfer price for AE and unrelated party. Considering this, a discount of 10 per cent on account of volume difference is being considered reasonable while computing the Arm s Length Price. ( ii )Credit Period : The contention of the assessee regarding credit period is accepted, except the interest rate of 18 per cent the prevalent interest rate during the year was around 12 per cent. Due to this, the adjustment will be 0.5 per cent of the sale price charged to unrelated party. This is calculated by considering 12 per cent interest rate for 15 days differential of credit period. ( iii )Credit Risk : The contention of the assessee regarding credit risk is reasonable, because there is no credit risk in case of sales to associated enterprise. The ARs submitted that the payments are through bank with related and unrelated parties and the payments are not secured by any guarantee or by letter of credit. The risk of collection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 per Unit) - (-) 0.3660 ( b )Adjustment on account of Credit Period - (-) 0.0183 ( c )Adjustment on account of Credit Risk - (-) 0.1830 Total adjustment (-) 0.5673 (III) The Adjusted Arm s Length Rate USD 3.092 per Unit The Company has sold 30,144 units to Intervet (Thailand) Limited. The Arm s Length Price of this transaction is computed at USD 93,205. The equivalent amount in Rupee Terms, by considering the exchange rate of Rs. 47 works out to Rs. 4,380,646 as against the transaction value of Rs. 1,662,825 recorded in the books of account. Due to this, an upward adjustment of Rs. 2,717,821 is required to be made to the income of the assessee." 5. On the basis of the TPO s report, the Assessing Officer had added a sum of Rs. 2,717,821 as adjustments on account of transfer pricing between Associated Enterprises. Aggrieved the assessee filed an appeal before the CIT(A). The first Appellate Authority concluded as under : "44. The submission made by the appellant s representative has been considered. The first claim made in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate method is examined in the context of above parameters, in the instant case, there exists an internal comparable inasmuch as the appellant has sold the same product that it has sold to an associate enterprise to the Vietnamese concern in an uncontrolled transaction. On the other hand, the associate concern is located at Thailand. Both these countries are located in Far East Asia and have similar demographical constitution. Therefore, in the circumstances where the product in the transactions is similar and location of the concerned parties are also somewhat similar it would not be correct to hold that on account of differences in economic condition volume of transaction the material difference is such that it cannot be overcome by way of adjustment in the price charged in the uncontrolled transaction and the ALP cannot be determined in respect of the transaction with the associate enterprise. Therefore, the claim of the appellant to change the appropriate method from CUP to TNMM is liable for rejection. 49. Coming to the adjustment per se made, by the Transfer Pricing Officer and requested for by the appellant as has been brought out above, it is to be said that the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer is called for. 53. The Assessing Officer shall rework the Arm s Length Price for per unit of medicine in the manner computed by the Transfer Pricing Officer at page 9 of his order passed under section 92CA(3) of the Act. He shall determine the adjusted ALP in terms of directions given above and consequently revise the addition made on this account to the income of the appellant. The appellant shall get relief in respect of the balance amount. The appeal in respect of Ground No. 3, is disposed off as partly allowed." 6. Aggrieved the assessee is in appeal before us. The learned counsel for the assessee Shri Rahul Mitra submitted that the Assessing Officer and the ld. CIT(A) have not taken into account all the adjustment factors while making adjustments in comparing the sale price to an AE and a third Party while adopting the CUP Method. The assessee has submitted that Thailand (where the AE is situated) and Vietnam (where the unrelated party is situated) have totally different market conditions. Thailand is dominated by Poultry Vietnam is dominated by Pigs and, hence, the needs are different. Market sizes of the two countries are not comparable. Size of the Thailand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o different countries be comparable, when the sale price to the final user in one country is less than the sale price to the whole sale agent in another country, unless adjustment for the same has been considered. Thus, the adjustments merely for volume offtake, credit period and credit risk, though material are not sufficient to make the sale price to AE in Thailand comparable with the sale to unrelated party in Vietnam. Scope of adjustments has to be widened and all the submissions of the assessee regarding the disparity between the two transactions should be considered and suitable adjustments made for the same. 8. With the above directions, the issue is set aside to the file of the ld. CIT(A) for deciding the matter afresh after giving reasonable opportunity to the assessee to present their case. 9. In the result, the appeal filed by the assessee is allowed for statistical purposes. ITA No. 3185/M/06 - Revenue s appeal 10. Ground No. 1 has not pressed by the revenue, therefore, it is dismissed as not pressed. 11. The second ground has been dealt with in assessee s appeal in ITA No. 2845/M/06. 12. The third ground raised by the revenue reads as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, and on the other hand, the total expenditure it had incurred and claimed as deduction and the amount appearing under the head Miscellaneous expenses , a part of which has been subjected to disallowance by the Assessing Officer, the expenditure claimed is reasonable. Further, the accounts of the appellant-company is duly audited and auditors have not drawn any adverse inference in regard to any amount of expenditure claimed as deduction. Therefore, there remains no basis for making ad hoc disallowance where the appellant has been able to justify the reasons for non-maintenance of proper voucher in respect of some expenses. The disallowance of Rs. 83,726 made on this account is, therefore, deleted. Appeal in respect of ground No. 4 is, thus, disposed of as allowed." 16. We heard both the parties. We find no infirmity in the order of the ld. CIT(A) as ad hoc disallowance out of the business expenditure cannot be sustained. Following the ratio of decisions in the case of Sunder Mal Sat Pal v. ITO [2005] 94 TTJ (Asr.) 423 and Ravi Marketing (P.) Ltd. v. CIT [2006] 280 ITR 519 (Cal.), we dismiss this ground of revenue. 17. In the result, the appeal filed by the re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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