9911796707
Advanced Search 
TMI Blog2010 (9) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... the remaining .01% are held by Matsushita Asia Private Limited, Singapore. The business of the assessee company is organized under three distinct segments. As per the TP report, the following are the three classes of international transactions (Table-3) described in Para 2.5 of the Report : Trading Function Commission & Marketing agency services Advertising Expenses Reimbursement Import of CPD & SPD products by NPIPL from MEI ground entities Rendering sales agency services by NPIPL to MEI group entities in respect of industrial sales division products against receipt of commission payments. Reimbursement received by NPIPL from MEI group entities for certain advertising expenses. Reimbursement of traveling expenses by MEI group entities to NPIPL. Reimbursement of market development expenses incurred for the industrial products by MEI group entities to NPIPL. Payment of Pananet Additional income support by NPIPL to MEI. received by NPIPL for providing warranty services to 'Pananett' machines sold to customers inIndiafrom MEI group entities. Service fee received by NPIPL for supervising authorized service centers, and reimbursement of cost of repa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MM was also found to be most appropriate method to test the profitability of commission and marketing agency services of ISD division. In respect of margin shown on SPD, the AO found that same was more than arm's length margin of 2.48%, therefore international transaction pertaining to SPD was held to be at arm's length. In respect of imported goods under CPD, the AO observed that the loss margin shown was below the arm's length margin. The AO therefore observed that the transfer price of the imported finished goods under the CPD has to be adjusted downwards. Accordingly, arm's length price was determined at the price declared in form 3CEB minus the adjustment amount i.e. Rs.74704584 - Rs.11237019 = RS.63467565. The arm's length price in respect of remuneration received under ISD division was also enhanced by the AO by an amount equivalent to the difference of operating loss margin and the mean margin of the comparable companies chosen. This difference works out to be 6.11% -(-) 28.8% = 34.91% of the total costs. The total costs have been worked out to be Rs.33131321.34.91% of this amount comes to Rs.11566144/-. Thus, the total income of the assessee was enhanced by the AO by follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen my computing the ALP with data pertaining to these comparables, using the most appropriate method and finally, by ascertaining whether the intra-group transactions conform to the arm's length standards prescribed by the Act or not. A. Business Profile: 4.4 Before adjudicating on the TP issues, it would be appropriate to sketch the business profile of the appellant as described in the TP report: (i) National Panasonic India Pvt. Ltd. (NPIPL or assessee or Taxpayer Company) is part of the Matsushita group of companies. The group is one of the world's leading manufacturers of consumer electronics products. These products are sold under the brand names 'National' 'Panasonic', 'Technics' and 'Quasar'. (ii) National Panasonic India Private Limited (NPIPL) is wholly owned subsidiary of Matsushita Electric Industrial Company Limited, Japan (MEI). 99.99% of the shares of the assessee company are held by MEI, Japan and the remaining .01% are held by Matsushita Asia Private Limited, Singapore. (iii) The business of the taxpayer company is organized under three distinct segments (Table-2) : Table-2 Division Sub-Division Products Brand Name Functions performed Remarks (i) Cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istrative expenses Supervision of authorized service centers (ASC) Functions * Import products from MEI Group Entities. * Obtaining custom clearance. * Maintenance of warehouse facilities for stocks. * Selling and distribution functions. * Price determination. * Undertaking publicity and advertisement campaigns with full description * Payment for use of Pananet software on the basis of number of hours used. * Receipt of reimbursement for administrative and traveling expenses incurred by NPIPL for its dealers inIndia. * Appointment of ASCs. * Distributin of service manual to ASCs. * Providing technical support to ASCs. * Administering supply of spare parts and tools to ASCs. * To collect records of service claims from ASCs. * Reporting of service activities of ASCs * Replying to complaints, questions & inquiries from customers. Risk * Contract risk with dealer and distributors. * Inventory risk * Market risk. * Quality and warranty risk * Foreign exchange fluctuation risk. No details in the TP report No details in the TP report No details in the TP report Assets deployed * Owns assets to perform importing, werehousing, adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying out the comparability analysis, the appellant had focused on the operating results of comparables over the three financial years 1999-2000, 2000-01, & 2001-02. This was stated to have been done to minimize the impact of abnormal factors on the outcomes of the comparable data. F. Selection of Comparables : Trading Function: 4.9 The appellant identified a set of nine uncontrolled comparable companies from Prowess Database by way of three different searches. In the first search, companies classified under the broad head of electronics were considered as per the selection process detailed in Table-5 of this order, by adopting a formula based search strategy by applying various quantitative and qualitative filters to the set of potential comparables within this segment: Table 5 : SELECTION PROCESS Criteria No.of Companies passing the criterion Explanation Starting Point 116 Companies in the electronics segment having the requisite financial information. Manufacturing sales to total sales ratio of < 25% to be retained 27 To exclude companies those are primarily into manufacturing. Trading sales to total 12 To exclude companies those are not sales ratio of > 75% to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking significant research and development activities. Qualitative analysis 6 To eliminate companies * Companies having related party sales. * Companies not dealing in similar product or having similar business and functional profile. * Companies having more than 10% of average loss. * Insufficient information such as absence of director's report. The final set of comparables obtained by way of the three different searches along with the weighted average of net profit margins is detailed in Table No.8 below: ITA-1417 & 1373/D/2008 S. No. Company Name Identified In the search number Business Profile 2000 2001 2002 Weighted Average 1 Amzel Automative Limited Search 3 Trading business of Exide car batteries 5.37 1.13 NA 3.22 2 Gold Rock Investments Ltd. Search 3 Engaged in trading of electrical goods. 6.02 5.31 NA 5.59 3 K Dhandapani & Co. Ltd. Search 2 & 3 Carries on dealership in electrical components for Siemens India Ltd. GEC Alsthom & Finotex Cables Ltd. Supplies switchboards, switches &distribution boards for industrial application and electrical installation contracts 2.23 0.30 NA 1.25 4 Khaitan (India) Ltd. Search 3 Engaged in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng profit of Rs. 5.79 crores made3 by the SPD division. The TPO also noticed that the segmental accounts of CPD & SPD INCLUDED THE SUM OF Rs 15.3 crores as reimbursements received from associated enterprises for certain advertising expenses incurred by the appellant. Removing the reimbursement as operating income, the CPD would make an operating loss of Rs 16.59 crores and the SPD an operating profit of Rs. 4.35 crores. An opportunity was given by the TPO to the appellant to explain as to why the operating margins of the two divisions CPD & SPD should not be recomputed by excluding the advertisement reimbursement. In response to the query, the appellant submitted that the reimbursed amount was exclusively spent on meeting advertising and marketing expenses and therefore, that should be treated as operating income. Further, while examining the segmental accounts, the TPO observed that most of the goods in SPD were imported from the A.Es as against only 5% in the CPD. The conclusions drawn by the TPO in these regards are discussed in the subsequent sub-paras. A. Aggregation of CPD & SPD Divisions 5.1 According to the TPO, the aggregation of the results of the two division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 7,054,248 21,975,346 Selling expenses (other than advt.) 20,395,201 93,538,482 Other operating expenses 7,005,786 30,731,073 Administration expenses 2,172,687 12,874,141 Total operating expenses 141,102,571 734,512,472 Operating Profit (OP) (-)7940655 43,922,077 Operating Profit Margin on Sales (OP/Sales) (-)5.97% 5.65% Computing of Arm's Length Price 5.4 On the basis of redrawn segmental accounts, the TPO had drawn the following conclusions relating to transfer price adjustments to be made in the respect of each of the divisions: i. No TP adjustment was proposed in the respect of SPD as the operating profit margin of SPD (5.65%) was more than the arm's length margin of 2.48%, the three-year weighted average net profit margin of the comparables. ii. In respect of CPD (Imported goods) segment, the loss margin of (-)5.97% was found to be below the arm's length margin of 2.48%. Accordingly, it was held that the appellant and overpaid for the imported goods to its associated enterprises to the extent of Rs. 1,12,37,019/-. This amount was calculated by multiplying the net sales value of the division of Rs. 132,982,473/-with 8.45% being the difference between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable data. The approach adopted by the TPO is arbitrary and not as per the prescribed Rule 10B of The Rules and needs to be rejected. The order of TPO, thus, on this score is defective and needs to be modified and the addition of Rs. 1,12,37,019/-be deleted. vi. In fact, if transactions of both the divisions having international transactions as found out by the TPO in his order are consolidated as one trading activity (apart from and without prejudice to some adjustments which he has made on which our objections are contained in the paragraphs herein below), the net margin & ALP will be determined as under; CONSOLIDATED SUMMARISED POSITION Net Sales 910,115,942 Other operating Income 1,480,523 Total Operating Reserves 911,596,465 Cost of Goods Sold 679,868,079 Adv. Exp 29,029,594 Selling Exp. (other than adv.) 113,933,683 Other operating Expense 37,736,859 Administration Exp. 15,046,828 Total Operating Exp. 875,615,043 Operating Profit 35,981,422 Operating Profit Margin on sales 3.95% (vii) The consolidated net profit margin of 3.95% computed above exceeds the arm's length margin of 2.48% and therefore, assessee's international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in lower income. (xiv) The TPO has totally misdirected himself in not appreciating that fixed expenses/establishment expenses cannot be varied on day to day basis. The assessee had to incur fixed expenses as in the earlier years, but the decline in the variable revenue resulted in lower net margin during the year under consideration. (xv) Without prejudice, the further allocation of unallocated expenses are wholly unjustified as all the expenses such as, rent salaries, traveling etc. were already fully allocated to the ISD division. The unallocated expenses were explained to be pertaining to the trading activity of the assessee and the same were required to be allocated to trading activity only. Accordingly, the TPO has misdirected himself in allocating the expenses, none of which pertained to ISD division. (xvi) Thus, a cumulative reading of all the aforesaid facts and legal submissions made herein above, it would be appreciated that the TP adjustment of Rs.1,15,66,144/-made by the AO/TPO in respect of the ISD has no legal basis to stand upon and the same is required to be deleted. " 5. The CIT(A) then considered the remand report received from the TPO and the assessee's ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derlying the basic principle is reproduced below: ''1.42 Ideally, in order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction - by - transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis." Following this principle, whether aggregation of the transactions is to be done or not would depend on the very nature of the transactions. 9.3.3 In the present case, the appellant has combined all the transactions relating to the trading functions across the two divisions CPD & SPD. The reason for aggregating these transactions has been cited as the integrated business model under which similar trading function is discharged through both the divisions. The TPO, however, recorded a finding that aggregation of the results of the two divisions would render the transfer pricing analysis meaningless as the losses from one set of international transaction were sought to be justified through profits from another set of international transactions. For coming to this conclusion, the TPO had cited a numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e)(i) only when the aggregation is done of very similar transactions. CPD (local), CPS (Imported) & SPD are well defined divisions in the spirit of TNMM for the purpose of aggregation but the transactions across segments cannot be aggregated due to their diverse characteristics. The trading function of the two divisions of CPD & SPD broadly may be the same but the value drivers are different. 9.3.4. In view of the foregoing analysis, I am of the considered view that the three classes of transactions undertaken by the appellant with its AEs cannot be aggregated for the purpose of benchmarking analysis. Due to the distinct differences between the dynamics of the two divisions, the main rule and not the exception enunciated in para 1.42 of the OECD Guidelines is applicable to the facts of this case. The transactions of the two divisions cannot be said to be closely interlinked." 7. Before the Tribunal following grounds have been taken by the assessee. I.T.A. No.1417/D/08-Appeal of the assessee: 1. That the learned CIT(A) has grossly erred in law and on the facts and in the circumstances of the appellant's case in holding that the segregation of trading functions pertaining to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer/TPO for treating the reimbursement of advertisement expenses by assessee's AE as a non-operating revenue receipt. 11. The CIT(A) has grossly erred in holding that the reimbursement of expenses cannot be considered either as a revenue receipt or in holding that the same are not to be "netted" off against the expenditure incurred on the advertisement by the assessee. 12. That the CIT(A) has failed to take a holistic view of the matter pertaining to the reimbursement of advertisement expenses inasmuch as that the pure reimbursement could not fall within the purview of transfer pricing. 13. The CIT(A) has grossly erred in law and on the facts of the appellant's case in not entertaining the pleas of the assessee for allowing an adjustment on account of huge advertisement cost incurred by the assessee whereas the comparable cases had not incurred the similar amount of advertisement costs for determining the NPM. 14. The CIT(A) has grossly erred in holding that allocation of the unallocated expenses and income to the ISD division of the assessee was proper by the TPO. 15. That the aforesaid grounds of appeal are without prejudice to one another. 8. Riva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference of operating loss margin and the mean margin of the comparable companies chosen. This difference works out to be 6.11% -(-) 28.8% = 34.91% of the total costs. The total costs have been worked out to be Rs.33131321.34.91% of this amount comes to Rs.11566144. Thus, we found that an addition of Rs.2.28 crores was made by the TPO and the CIT(A) has confirmed the same. From the record, we found that while doing so, the AO has totally ignored the reimbursement of advertising expenses from its associated enterprises (AE) which amounted to Rs.15.30 crores. The plea of the TPO was that such reimbursement of advertising expenses was not operating income to be considered for the purpose of transfer pricing. However, for the purpose of regular income tax proceedings, the AO has duly included as taxable income such reimbursement and held the same as revenue income since inception of the company i.e. AY 1994-95 onwards. The legislative intent for introducing new provisions pertaining to determination of arm's length price between the two associated enterprises, is to prevent the transfer between the associated enterprises of a high tax jurisdiction to a lower tax jurisdiction. Since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48% of the comparables as the common net margin indicator. The TPO had also reworked the financial of the assessee without making any corresponding adjustment in the PLI of the comparable cases. This approach of the TPO was not as per the prescribed Rule 10B. If the transactions of both the divisions having international transactions as found by the TPO in his report are consolidated as one trading activity, the operating profit margin of sales was worked out at 3.95% which exceeds the arm's length margin of 2.48%. Thus, assessee's international transaction works out to be at arm's length. The reimbursement of advertising expenses by the parent company was required to be either added in the operating income or the expenses of the assessee on advertising, selling expenses have got to be reduced by the similar amount. Since the expenditure on advertising actually incurred by the assessee was of revenue nature, the reimbursement of such expenses was also of the revenue nature. Even in the earlier years, the department has treated such receipts as of revenue nature, the same cannot be left out of computation while determining the arm's length price paid by the assessee or the income ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on its imported products. We found that the risk of bearing advertisement cost to sell goods imported from its associated enterprises was almost met by its AEs and therefore, to that extent, the adjustment made by the TPO in excluding the reimbursement from income was unwarranted. With regard to earning of ISD division, the TPO has ignored the fact that after having created an infrastructure in the earlier years wherein ISD division has made profits, it was not possible to close down such unit overnight. The earning of commission income was lower because of lower business done by the principal in Indian territory on which assessee was getting commission income. We found that here is no increase in the expenses of ISD division, earning of income was less only due to the less sales, which resulted into loss. 10. The advertisement expenses incurred by the assessee was in the normal course of its business operation and this formed part of operating expenses of the assessee. When the assessee was in receipt of reimbursement of such expenses from the associated enterprises which reimbursement as per the accounting policy of the assessee had been shown under the separate head of operatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the tested party. The assessee has no difficulty in accepting the first observation of the CIT(A) that ideally each international transaction should be tested with a comparable transaction of uncontrolled parties to arrive at arm's length price, but it was submitted that this ideal situation rarely exists. Normally, the transactions of a tax-payer have to be aggregated to test them for arm's length price where these transactions are closely linked and/or are continuous transactions and the same cannot be adequately valued on a separate basis. In fact, the assessee also agreed with the OECD guidelines reiterated by CIT(A) in para 9.3.2 of his order. The basic difference between the assessee and the Revenue, before us relates to the reasons for segregation vis-à-vis aggregation. The reasons for the same have been reproduced above and are mentioned at page 33 of CIT(A)'s order. The basic objection that the assessee has is that the reasons given are extraneous to Chapter X contained in the ACT read with rules thereunder. Once a particular law has been enacted by Parliament, then the same cannot be given go-bye by resorting to analysis de-horse Chapter X and the rules made ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (-) 9.15% Therefore, in our opinion, the trading transactions are at Arms' Length and no adjustment is required. 12. From the record we found that the CIT(A) has given five criteria for segregating the two Divisions. Out of these five criteria, three criteria are absolutely the same in both the Divisions i.e. nature of product is the same viz., electrical/electronic goods, secondly distribution channel is the same i.e. the same dealers were used for sale of these products; and thirdly regulatory environment is the same i.e. they both fall under the broad category of electrical/electronic goods. The fourth criteria is that of production process. This is absent. Admittedly, the appellant is only a trading company and does not undertake any production or manufacturing activity. Therefore, out of five, there is no difference as far as the four criteria are concerned. Therefore, CIT(A)'s analysis relating to segregation was incorrect. The only difference relates to the fifth criteria viz., different set of customers. This is again a non-starter as the customers for all the five comparables vis-à-vis the tested party i.e the assessee are different. This itself has not weighed up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A)'s order. "4.6 As per the functional analysis carried out at Para 3 to 3.4 in the T.P. Report, the following are the details relating to the major functions performed in respect of various international transactions along with risk assumed (Para 3.1.2) and assets deployed by the appellant (Table-4) : Table-4 Trading Functions Import of products Functions * Import products from MEI Group Entities. * Obtaining custom clearance. * Maintenance of warehouse facilities for stocks. * Selling and distribution functions. * Price determination. * Undertaking publicity and advertisement campaigns with full description Risk * Contract risk with dealer and distributors. * Inventory risk. * Market risk. * Quality and warranty risk. * Foreign exchange fluctuation risk. Assets deployed * Owns assets to perform importing, warehousing, administration and distribution functions. * No intangible assets. 14. These details are also given at pages 89-90 of the Paper Book of the Transfer Pricing Report submitted by the assessee on this issue submitting that the functions performed, risks assumed, and the assets deployed are absolutely the same in all its trading functions whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g profit of Rs. 6.73 crores was reconciled. The TPO then went further and had also taken line by line reconciliation for all segments and the audited balance sheet was also made available to him at pages 428-435 of the Paper Book. The segment-wise details of sales and purchase at GP level were also made available to him at page 485. All these were also pointed out to us by the AR during the course of hearing and the Senior DR could not rebut any factual aspects thereof. On a careful consideration thereof, no discrepancy is found in the figures as reported by the assessee. In any case, TPO, as well as, the CIT(A) have re-drawn the accounts as has been categorically found by CIT(A) at pages 13 and 14, para 5.3. of his order as reproduced above. We, therefore hold that on the facts and circumstances of the case and as per the provisions laid down in the Transfer Pricing Regulations in India, the assessee succeeds on these grounds. The segregation was totally artificial and uncalled for and the authorities below were not justified in segregating them. The trading functions having the same FAR and having closely linked transactions were to be taken as a whole and not separately, thereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll advertisements are carried out by various local branches of Panasonic India Ltd. for activity all over India in the local languages just to achieve sales of the products being sold by the assessee in the Indian market. (ii) The assessee had to incur huge advertisement costs because the assessee operated in a highly competitive environment against the market leaders such as SONY, SAMSUNG, LG and many local brands of Indian origin such as Videocon etc. (iii) In order to finance its operations, the parent company had been giving financial help by way of reimbursing about 2/3rd of its advertisement bill. (iv) Although the assessee had advertised under the name `PANASONIC' and has used brand name of `NATIONAL' for trying to make sales in India, yet no royalty for brand name usage has been paid to any of it's A.E's or parent company MEI, Japan as is normal in such cases. (v) It is a settled preposition of law that entry in the books of accounts does not come in the way of determining the true nature of a transaction and the true nature of the receipts of advertisement expenses is pure and simple reimbursements to part finance assessee's routine operations and meeting part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the variations in the PLI of tested party with the PLI of comparables have occurred on this sole account, which needed adjustments in favour of assessee. 19. Learned AR during his submissions before the ITAT also brought to the attention of the Tribunal on pages 43 and 44 para 12 of the CIT(A)'s order wherein the advertisement expenditure of Rs.23,15,18,053/-was disallowed. However, assessee's submissions after taking a remand report were accepted by the CIT(A) in paras 12.3, 12.4 and 12.5 which are reproduced as under: 12.3 In the rejoinder to the remand report, it was submitted that the Delhi Bench of the Tribunal has in the appellant's own case for A.Y: . 1998-99 in ITA No. 3238(Del)/2002 dated 20.01.2006 deleted all the disallowances made by the A.O. including disallowances on account of trade discount, cash discount, advertisement, and sales promotion expenses. A copy of the order was also enclosed. It was further submitted that the AO had based all the disallowances on the assessment order for the A.Y. 1998-99. Since the very basis has been knocked out in appeal, all the disallowances are to be allowed in this appeal. Reliance is also placed on another decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dditions were, therefore, deleted by the CIT(A) following the assessee's own case decided by the Tribunal in AY 1998-99 onwards. The Revenue has accepted this part of the CIT(A)'s order and has not appealed before the Tribunal on any issue other than transfer pricing issue. 21. As regards the nature of expenditure, learned AR Shri Dinodia brought to our notice P.B. Vol. II page 436 which gives details of category of expenditure, voucher number, date, debit note, party from whom reimbursement has been claimed and received and the division to which it pertains. So the entire reimbursement expenditure details have been given voucher-wise. Learned AR further submitted that it is a finding of fact recorded by the Tribunal in previous years which have become final as there has been no challenge by the Revenue in further appeals before the High Court. Similarly even in the relevant order, it has been established by the order of CIT(A) that the advertisement expenditure incurred by the assessee is local in nature and does not have any direct or indirect benefit which is disallowable under the provisions of Income Tax Act flowing to the AE. The question before us is when reimbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee received 68% of his total expenditure by way of reimbursement in assessment year 2000-01, 67% in the assessment year 2001-02 and 66% in assessment year 2002-03, i.e. the year under appeal. Looked at from this perspective that year after year almost 2/3rd of the total expenditure is being reimbursed as compensation by AEs. In our opinion it is a reasonable expectation to assume such reimbursement will continue in the future as well. Some sample formal agreements also produced before the authorities below as well as before us show that reimbursement of expenditure was a normal expectation of the assessee from its AEs in the normal course of its business. 23. Rule 10B(2)(c) states "the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions." . The transfer pricing rule itself states that the contractual terms may be formal or may not be formal, may be in writing, may not be in writing and may be implicit or explicit. Now here the assessee has demonstrated by fact that it was in reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce in PLIs of comparables: Table 17 (Amount in Rs.) Particulars CPD (imported) (B) SPD (C) CPD(Importe d)+SPD (B)+(C ) ISD (D) Total (A)+(B)+(C )+(D) Income: Net Sales 132,982,473 777,133,469 910,115,942 1,228,831 3,569,519,600 Other Income Other Operating Income as per TPO 179,443 1,301,080 1,480,523 - 27,836,673 Allocation of unallocated other income (Rs. 87,48,348) in proportion to sales 325,920 1,904,636 2,230,555 3,012 8,748,348 COGS 415,117 Gross Profit (A) 816,726 Advt. Subsidy (Rs. 153,040,478) in proportion to sales 5,703,487 33,330,489 39,033,977 - 153,040,478 Other Operating Income as per TPO 22,765,791 Total Revenue 139,191,323 813,669,674 952,860,997 23,582,517 3,759,145,099 COGS 104,474,649 575,393,430 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. Accordingly the addition made by the TPO and upheld by CIT(A) amounting to Rs.1,23,48,509/-is ordered to be deleted. 27. Next grievance of the assessee pertains to allocation of the unallocated expenses and income to the ISD division of the assessee. As done by TPO. We have considered rival contentions and gone through the relevant materials placed before us and towards which our attention was invited. From the record, we find that the Industrial Sales Division or ISD Division of the assessee is a commission and marketing agency which provides after sales service for products sold by MEI Japan and other affiliates to Indian customers and also gets commission on sales of MEI products in India. The assessee appoints various service centres, distributes service manuals to these, provides technical support to these and administers supply of spare parts and it reports all the service activities of these centres, it deals with all complaints, questions and answers from customers, i.e. ISD Division is the service part of the assessee. For the ISD Division, the CIT(A) has discussed this issue on page 15 of his order. As there was a loss in these operations, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details below: Table-15 Marketing and commission comparable companies. S. No. Company Name 31st March 2002 1 Purak Vinimay Limited -7.38% 2 Marketing Consultants and agencies Limited 5.28% 3 N I SSpartaLimited 8.76% 4 Indiacom Directories Limited 8.94% 5 Concept Marketing and Advertising Limited -5.00% 6 Interads Limited 7.09% Average Operating Profit Margin (%) 2.95% 30. Contention of LD. AR was that the entrepreneurial risk of running a business is always of the person who conducts the business and can never be passed on to any other person including an AE. Therefore, to say that the business of the assessee in providing commission services is risk free is wholly incorrect statement of facts. There was no agreement with the AEs, neither there is anything to the contrary pointed out by the TPO or the CIT(A) or the Sr. DR that there was any arrangement between the assessee and the AEs to take over the risk of loss in this business by the AEs. Therefore, the basic premises on which this adjustment has been made is factually incorrect. On page 111 of PB-I, the transfer pricing stated in para 4.6 in which the weighted average profit of three years has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars along with the current year for working PLI of the tested party. Similarly, three years' average would also be taken into account for its comparables so that like can be compared with the like. The Proviso to Rule 10B(4) clearly permits this. It is also seen from the facts of the case given on page 29 of the assessee's written note filed by covering letter of 12th March 2010 on page 29, the assessee made a profit of Rs.0.15 lakhs in the next year and the activity was closed at the end of the next year. Simply because there is loss in one year and addition to the assessee's income cannot be made in accordance with transfer pricing regulations, especially when this loss has not been incurred due to any transaction with the AE. In this ISD Division, there is neither any sale nor any purchases from the AEs. It is purely a local service allocated to servicing goods sold by AEs to its customers in India plus commission on the goods sold by the AEs directly in India. It is, therefore, clear that no adjustment on the ISD Division is called for as the PLI for the three years average of assessee is higher than that of the comparables. The chart at page 111 is reworked as under in line wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the controversy at hand and the various grounds raised by the assessee, we can safely conclude that no addition based on Chapter X of the Income Tax Act and the Rules thereto can be made in the assessee's case for the AY 2002-03. Further arguments raised by the assessee also deserve to be seen that the total adjustment proposed by the TPO and now by the CIT(A) is Rs.1,98,40,745/-whereas according to both TPO and the CIT(A) the total money received allegedly without any linkages with the business of the assessee from the AE is Rs.15,30,40,478/-, which is many times more than the benefit alleged to have been taken by the AEs from the assessee. In our view transfer pricing analysis and addition cannot be made in such circumstances even on the overall view of the case. We also found that even after all the adjustments as proposed were made by the TPO and the CIT(A) as per the appeal effect, the assessee is still left with a carry forward business loss and this loss for the current year amounts to Rs.2,87,06,096/-.,therefore, the question of transferring any profits from high tax jurisdiction to low tax jurisdiction which is the fundamental principle of transfer pricing also does no ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
