9911796707
TMI Blog2009 (2) TMI 736X X X X Extracts X X X X X X X X Extracts X X X X ..... quiring a controlling stake in the taxpayer company. 3. During the year under consideration, the taxpayer, as per its audit report on Form 3CEB, disclosed six international transactions with its associated enterprises. Out of six, in case of five transactions arm's length principles have been accepted to be satisfied and accordingly no adjustments made under the transfer pricing regulations. The detail of such transactions is available at page 2 of the order of Transfer Pricing Officer (TPO). The only International Transaction (IT) in which taxpayer's audit has not been accepted, is shown in TPO's order as under: Sr. No. Particulars A.E. Amount Method adopted 1. Import of raw materials and goods to be used for the balance systems business and the IS-Infra business. Various Honeywell Group entities as per the Form 3CEB 40,23,37,472 TNMM with external comparables for the balance systems and IS-Infra business As noted above, the taxpayer in its audit report justified and supported prices paid to its associated enterprises (AE) for the raw material etc. used in System Integration Division under TNM Method. The Transfer Pricing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost estimation and lack of expertise in handling similar projects. The losses were on account of genuine business reasons. The taxpayer claimed to have carried international transactions in system integration business at arm's length. 4. Selection of comparable companies were also challenged as under: The taxpayer pointed out that Nelco Ltd. has also suffered losses during the year ending March 31,2004, although the said enterprise (segment) had made profit in earlier year. Reference was also made to the following concerns: Eurotherm Del Ltd. The taxpayer also objected to the inclusion of Eurotherm Del Ltd. in the list of comparable enterprises. The taxpayer claimed that software segment results of this company have been aggregated with results of other manufacturing activities and are not separately available. The company could be considered as comparable only if operating profits of the software business and the system integration business were separately taken and not aggregated. According to the taxpayer the margin of profit of aggregated business was 8.01%. The taxpayer further claimed that this enterprise had carried significant related party transaction as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere not available and this was admitted by the taxpayer before him. 4.1 After rejecting contentions of the taxpayer, the TPO made adjustment of Rs 282 lakhs as per the following calculations: "The profit of the system integration segment is being computed as follows: Gross Sales: 22050 lakhs Operating Profit: -186 lakhs Arm's length operating profit margin: 0.42% Arm's length operating profit = 22050 lakhs * 0.42% = 93 lakhs Profit to be added to total income - 189 lakhs - 93 lakhs = 282 lakhs." On receipt of order of the TPO, the Assessing Officer (A.O) made assessment in conformity with the said order. 5. The addition made under the head "Transfer Pricing adjustments" was challenged by the taxpayer in appeal before the learned CIT (Appeals) and the main contention of the taxpayer that the A.O committed an error in the selection of the comparables was reiterated. The TPO was wrong in not taking into account the results of the relevant period of Wellwin Industry Ltd, which had suffered losses. The said enterprise was considered by the revenue authorities for a similar exercise for the assessment year 2003-04 and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,140 19,910 22,050 Add: Other operating income 39 362 401 Total operating income 2,179 20,272 22,450 Less: Cost of goods sold 2,954 14,978 17,932 Gross profit (GP) (775) 5,294 4,518 Less: Business unit expenses 201 1,875 2,076 Factory allocation 20 185 205 CMG allocation 7 68 75 G & A allocation 161 1,501 1,663 R & D allocation 7 64 71 Depreciation allocation 60 556 615 AR provision 72 669 741 Provision for future loss 201 201 Operating profit (OP) (1303) 376 (927) Add: AR Provision Adjusted 72 669 741 Operating Profit (OP) (1,231) 1,045 (186) Percentage of OP/Sales - 57.54 5.25% - 0.85% This item could not be taken into consideration while working out "operating profit" of the taxpayer for the relevant period. If above debit (deduction) is ignored, the operating profit of the taxpayer will be comparable with the average profit of 0.42% adopted by the TPO in this case. There will be no scope to make any adjustment as the taxpayer has the option to claim +/-0.5% under proviso to section 92C(2) of the Income-tax Act. 8. Shri C.S.Gulati, the learned D.R. opposed above submissions. As regards first co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te accounts for the period March 31, 2004. The taxpayer did try to work out the alleged losses of the concern for the period ending March 31, 2004 on some basis by taking average of profits but was unable to show to the revenue authorities that figures so arrived at were correct and reliable for comparison. During the course of hearing of the appeal, we had also asked the ld. counsel to give working of results of the concern for the relevant period on some sound basis, but the ld. Counsel showed his inability to do so. He conceded that results of the concern are not available in the public domain. If that is the position, we see no force in the objection of the taxpayer to non inclusion of Wellwin Industry Ltd. in the list comparables for working mean margin of operating profit under TNM Method. 9.1 In the OECD guidelines, it is permissible to take profit of similar transaction or enterprises not only of the period under consideration, but also for next or previous year or take the average of such profit. This, however, is not permitted under the Indian Regulations on Transfer Pricing. Sub-rule (4) of Rule 10B provides as under: "10B(4) The data to be used in analysi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere also provided in the accounts. Otherwise such provision of future losses, prima facie, had no connection with operating profit of the financial year. According to learned Departmental Representative, such question was not examined in comparable cases. If it is so, then, there is all the more reason to consider the question in all enterprises taken for comparison. The objection that such a claim was not made before the TPO or other revenue authority, in our opinion, cannot debar the taxpayer from raising this claim before the Income-tax Appellate Tribunal. Evidence of claim is available in the primary record considered by the revenue authorities. The matter can be considered and decided on the basis of material available on record and would cause no surprise to the opposite party. 10.1 In the case of National Thermal Power Co. Ltd. vs. CIT 229 ITR 383 (SC), their Lordship of Supreme Court examined the question of powers of Appellate Tribunal relating to question raised for the first time before the Tribunal. The Supreme Court observed: "There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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