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TMI Blog2011 (9) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... cation of mind. 3. TPO/AO/DRP erred in not accepting the transaction value as representing ALP and therefore requiring no addition in the income of the assessee. 4. The determination of ALP is arbitrary, wrong and bad in law inasmuch as the TPO/AO/DRP have erred in: (a) ignoring and rejecting the segmented accounting results on flimsy, invalid and unwarranted reasons; (b) not appreciating that in earlier years the AO/TPO have accepted results on similar segmented accounts; (c) adopting financials at entity level as a whole; (d) rejecting RPM as the most appropriate method for bench marking in respect of import of goods for resale; (e) adopting TNMM as MAM and that too in violation of rules of natural justice as well as sub-rules (2) and (3) of rule 10B; (f) not allowing comparability adjustment for (i) under utilisation of capacity, and (ii) economic and financial comparability, (a) hardening of rupee; (b) lower export benefit/profitability during the year; (c) difference for FAR; (d) large volume of business with AEs; (g) rejecting the comparables without carrying out research under TNMM as MAM; (h) adopting a comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so been seen in detail. In the arguments made before use, it was pointed out that TPO has objected to segmentation of expenses as the allocation keys were not clear. Sh. Goel argued that expenses have been segmented on turnover basis. The TPO has discussed in detail in para 5.1 the results of scrutiny of segmented accounts. We do not find any reason to give any further directions regarding this selection of new comparables by TPO. The AR for the assessee has suggested that there should be adjustments for foreign exchange loss, capacity utilizations etc. There is no clear cut methodology suggested by the AR for the assessee. In the case of Phillips Software Centre (P) Limited 2009 TIOL 123-HC-Karnataka-IT, Karnataka High Court has admitted the question of Law. It arose from Tribunal's order where certain adjustments were made by Hon'ble ITAT. As the procedural of adjustments sought by the assessee are not clear, we decline to interfere in the adjustments ordered by TPO." 3. The learned AR pleaded that the assessee was issued a show cause notice by TPO on 4-8-2008, which is placed at page 207 of the paper book and assessee submitted the reply for the same, which is placed at pages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y benchmarking international transactions at 'entity level'. The reasons given by the TPO for not accepting the segment accounts are based on surmises which are contrary to the facts on record and have been given without calling upon the assessee to explain the so-called discrepancies. Further, the TPO has not allowed adjustment while working out the ALP of the assessee in respect of under utilization of capacity and risk for environment in which export business was carried out as compared to the companies chosen as comparables. The assessee had asked for adjustment in the price pointing out that it, the assessee had given in a greater detail the functional analysis, assets employed and risk undertaken (FAR) by AEs. As the assessee is dealing in risk free environment while dealing with AEs, it does not have risks of business while dealing with them particularly, with respect of credit and collection risk, product liability risk etc., which are very important and has substantial bearing on the prices. The reasons given by TPO for not allowing adjustments on account of capacity utilization and low risk. The TPO has made price adjustment by adopting PLI at entity level which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, you are required to produce the inventory wise sales in respect of the finished goods imported by you from your associated enterprises for the year under audit. (P.207/Paper Book 1) i. The assessee explained the position in detail vide letter dated 11-8-09 (Page 209 to 221 of paper book) stating that the assessee not being a listed company and nor having turnover of Rs. 50 crores is not required to get the segment accounts audited. ii. It may be noted the said show cause notice of 4th August, 2009 clearly does not point out and nor does it any finding that the segmental any mistake in the segment accounts submitted by the assessee and nor data used by the assessee in computing of ALP was not reliable or correct. iii. The AO wanted to have inventory wise sales of finished goods imported by the assessee to as proof of maintaining separate accounts for business activities undertaken by the assessee. The information was provided to him - refer page 174 to 206 of paper book, which has been accepted by the TPO. It is submitted that the matters decided against the assessee (details given at page 26 -27 of appeal) by making a number of factually incorrect findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. Therefore, there is no requirement to provide details of books maintained for each segment of business. The existence of separate accounts is clearly indicated by the following documents:- (i) (Page 41 to 59 of Appeal Memo) (ii) (Form 3CD at page 12 and 35 of Vol-1) (iii) (Codes in form 3CD at page 20 of Vol-1) (iv) (ITR Return code at page 60 of Vol-1) (v) (Director report at page 20 of Vol-1) In the case of the assessee, the facts in AY 2005-06 and AY 2006-07 are similar with respect to business activities and preparation of segment accounts. In these years also the segment accounts were not audited. On the basis of similar unaudited segment accounts the assessee had benchmarked its international transactions on the basis of profitability of individual business segment and the TPO has accepted unaudited segment accounts after due enquiry in the matter. (Pages at 222-307 of vol-I) (Relevant pages 275-279 and 294-298) Para 5.1.2(c) "It is evident from segmental information as disclosed in annexure 1 to transfer pricing the head quarter segment has credited by the assessee to part unallocated expenses of Rs. 32,31,026 and no income or receipt in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter and has given the figures of sale in his order which is contrary to the figures as given in segment accounts. Amount as per segment accounts are: Sch Export Business Retail Business Total Export Sale 10 16,52,10,398 16,52,10,398 Local Sale 10 65,88,125 2,81,93,751 3,47,81,876 TOTAL 17,17,98,523 2,81,93,751 19,99,92,274 AO/TPO has given total sale of 'Export Division' at Rs. 17.18 crores. He has compared this with export sale of Rs. 16.52 crores and came to the conclusion that there are difference in the sale as per audited accounts and segment accounts. In fact, he has compared total sale of 'export Division' with that of export sale alone, whereas the 'Export Division' had also made some local sales which have been not considered by the TPO. (Refer pages 143-146 VOL-I) (Page 46 appeal memo) Para 5.1.2(e) It is further noted from schedule 6 to Form No. 3CD that 10,860 pairs of shoes manufactured by the assessee were transferred to trading sales (that is local sales) where as per schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er outlets pertaining to retail sales. A series of check on test basis showed that an amount of Rs. 12,24,891/- has been cumulatively debited towards advertisement charges and all the account pertaining to retail division whereas as per schedule 15 of the audited profit loss account on amount of only Rs. 6813/- has been debited as advertisement charges. There has been no document which has reconciled the trial balances of export and retail with the audited accounts. Comments:- The trial balances of retail business have been placed on record in proof of maintenance of separate Books of Account for retail business. The total expenditure on advertisement of Rs. 12,37,292/- (AO/TPO has mentioned Rs. 12,24,891/- which is not correct) has been duly shown in the segment accounts in two different schedules (Schedule Nos. 15 and 17) as per details given hereunder: Schedule Reference Amount (Rs.) i. Schedule 15 450 ii. Schedule 17 12, 36, 842 Total 12, 37, 292 However, the AO/TPO has mentioned that as per Schedule 15 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to maintain separately. (Refer pages 35,209,210) Para 5.3 Bench marking international transactions at entity level. Comments:- The TPO has proceeded to determine arms length price of international transaction using financials of entity level and has ignored segment results (5.3 of Order). Because of adverse findings contained para 5, of his order. It has already been discussed in detail in the preceding paragraphs as to how these findings are baseless and contrary to the facts on record. Hence his action in rejecting the segmental comparison of transactions and in adopting PLI at entity level is illegal and unsustainable in law. The TPO has again based his decision on the unilateral findings on the segment accounts. It has already been demonstrated that all these findings factually incorrect. (Refer pages 41-59) Para 5.4 whether assessee has correctly chosen RPM to benchmark International transaction to retail segment. Comments:- The TPO erred in rejecting the RPM adopted by the assessee as MAM for 'Purchase of Finished Goods for resale'. Total retail sale is of Rs. 2.81 crores and the purchase from AE's for resale is very nominal i.e. 17.99 lakhs. Hence, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith production of footwear and has arrived at total production of 10,07,646 pairs as under: a. Footwear Pairs 3,05,737 b. Upper Pairs 3,05,737 c. Sole/insole Pairs 3,05,737 d. Sole/insole Pairs 90,435 Total Pairs 10,07,646 The basis of quantity of intermediate components (uppers, sole/insole) taken by TPO is absurd and totally against commercial practice for determining production capacity. By counting the components which went into making the finished footwear, the TPO has artificially increased the quantity of production from 3,05,737 to 10,07,646 without any base. The assessee many a times make purchase of components as a bought out item and does not produce in house. Assessee has this year produced 3,05,737 pairs of foot wear and 90,435 pairs of socks. vi. Production of components cannot be taken as an independent production as the capacity of the assessee is for footwear. vii. Comparable Companies: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. In the newly substituted Provisos, the option of the assessee in the highlighted portion aforesaid is taken away. It may be stated that the Proviso has been amended by the Finance (No. 2) Act, 2009, w.e.f. 1.10.2009 taking away this power. But, the TPO order has been passed on 1.9.2009 and therefore, old provisions as applicable before amendment are applicable to the facts of the case. The assessee relies on the following cases for this proposition: i. Development Consultants Pvt Ltd v. CIT [2008] 23 SOT 455 (Kolkata) ii. Sony India Pvt Ltd v. DCIT [2009] 315 ITR 150 (Delhi Tribunal) iii. Skoda Auto India Pvt Ltd. v. ACIT [2009] TIOL 439 (Pune Tribunal) It is submitted that benefit of variation of 5% should be allowed in working out the Arm's Length Price on the basis of provisions of law as applicable as on the date of order. It is submitted that the disallowance made by the AO is not as per provisions of law and should be set asi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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