9911796707
TMI Blog2010 (2) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... action is 9.15 per cent. 4. The learned CIT(A) erred in holding that the AO rightly rejected the resale price method (RPM) applied by the assessee as the most appropriate method (MAM). 5. Without prejudice to ground No.4, the learned CIT(A) erred in not appreciating that the learned AO has applied TNMM (transactional net marginal method) illegally by simply taking the same set of comparables as were used originally by the applicant under RPM, without making any independent study of comparables as required by TNMM. 6. The learned CIT(A) has grossly erred in holding that the adjustment on account of 'extraneous' material differences viz., provision for doubtful debts (Rs.5.8 crores), provision for obsolescence of inventory (Rs.1.3 crores) and net loss on foreign exchange fluctuation (Rs.3A crores) was not warranted to arrive at an objective ALP under TNMM since (a) he erred in not appreciating that the learned AO ought to have provided an adequate opportunity to Axalto to clarify the 'extraneous' nature of these provisions/expenses and abnormal circumstances in which these were provided for. (b) the Axalto had merely created a 'provision' of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany is a wholly owned subsidiary of Schlumberger Sema Ltd., which in turn, is a wholly owned subsidiary of Schlumberger Ltd. The assessee-company continues its trading activity in electronic transaction equipments and has traded in SIM cards for mobile communication, point of sale terminals (e-transaction terminals), smart cards for e-transaction (banking/financial cards, contactless cards, transport/driving cards) and smart card pay phones. As per Form 3CEB, the international transactions entered into by the assessee during the financial year are transactions of repurchase of traded/finished goods amounting to Rs.70,63,04,680, interest paid on ECB borrowings amounting to Rs.63,81,178. The assessee-company has entered into transactions with AEs which exceeded Rs.5 crores. 3. The AO referred the issue of transfer pricing to the TPO for earlier year i.e. asst. yr. 2002-03. The TPO has suggested huge additions under s. 92CA(3) of the IT Act. Following the same, international transactions entered into by the assessee were referred to the TPO by the AO for determination of ALP for the assessment year under consideration also. The TPO vide para 6 of his order determined the ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the starting point of TPO's endeavour to determine the ALP is the transfer pricing study (TP study) prepared by the assessee, this report provides an analysis of functions performed, assets used and risk assumed by the assessee and it examines whether return is commensurate with the functions performed, assets used and risk assumed. 5.3 He further observed that as per the provisions of the Act, a bench marking analysis is done first by selecting comparable uncontrolled cases and then by using data relating to these comparables and the MAM to ascertain whether the intra-group transactions conform to the arm's length standards prescribed by the Act or not. He further observed that in the absence of international comparables, the assessee had chosen the RPM as the most appropriate method (MAM) for bench marking transactions relating to import of finished goods, the assessee has identified seven uncontrolled comparable companies doing similar business in India from prowess database, by using both quantitative and qualitative criteria. The details of the names of the seven companies and gross profit margin earned by them as well as the mean thereof has been mentioned in the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible properties associated with the product. (ii) RPM is also more accurate when revenue is realized within a short span of time of the reseller's purchase of goods. A time lag between the original purchase, resale and realization of revenue, exposes the reseller to special risks such as credit risk, inventory obsolescence risk and foreign exchange fluctuation risk. (iii) The reliability of RPM may also be affected if there are material differences in the ways the controlled parties and independent enterprises undertake their business operations, such as different levels of efficiency in management of inventory, resulting in differences in cost of sales and thereby affecting the gross margins. 5.7 The learned CIT(A) observed that a close examination of the transfer pricing report (TP report) reveals that the comparability analysis carried out by the appellant has not touched upon the above-mentioned aspects while conducting the functions performed, assets used and risk assumed analysis (FAR analysis) of the tested parties and the other comparable distributors. The assessee is an exclusive distributor for the Indian territory for the parent's products, but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of RPM as the MAM are found to be baseless and without any merit as it could not furnish any cogent, reliable and relevant evidence even during the appellate proceedings to rebut the findings recorded by the TPO. In view of this, I agree with the conclusions drawn by the TPO at para 6.15 of his order dt. 9th March, 2006 and hold that RPM is not MAM under the given circumstances. 6.3 It was observed by the learned CIT(A) that as per the (1995) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD guidelines), TNMM operates in a manner similar to RPM. This similarity means that a functional analysis of the AEs and the comparable enterprises is required to determine whether the transactions are comparable and what adjustment may be necessary to obtain reliable results. However, net margins computed under TNMM are less affected by transactional differences and more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margins. Differences in the functions performed between various enterprises are often reflected in variations in operating expenses. Consequently, enterprises may have a wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO in his order has considered all the objections raised by the assessee before him and thereafter following the order of the TPO he made the additions recommended by TPO. This action of the AO is not appreciable. 7.2 Now considering the order passed by the learned CIT(A) as well as looking to the report of the TPO, we find that for determining ALP, the assessee used RPM while taking 7 uncontrolled comparable companies due to broad similarities of functions performed by the assessee and the comparables, irrespective of minor differences in the products dealt by the assessee and the comparables and also because the gross profit margin of 19.9 per cent earned by the assessee being higher than the arithmetical mean of gross profit margin of 13.3 per cent of the comparable companies which satisfied the arm's length standard prescribed by the Act. The tax authorities below as well as the TPO while rejecting the RPM chosen by the assessee adopted TNMM by using the same comparables given by the assessee except Usha (India) Ltd. because TNMM was considered more tolerant to functional and product differences and also being comparable of taking care of the problems relating to the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the transfer pricing regulations, observed as under: "Under the TP regulations the following steps are to be taken to determine the TNMM : 1. The net profit margin realised by an enterprise from an international transaction entered into with an AE is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. 2. The net profit margin realised by the enterprise or by an unrelated enterprise, from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. 3. The net profit margin referred to in step 1 arising in comparable uncontrolled transactions is adjusted taking into account the difference, if any between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions, which would materially affect the amount of net profit margin in the open market. 4. The net profit margin realised by the enterprise and referred to in step 1 is established to be the same as the net profit margin referred in step 3. 5. The net profit margin thus established is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Thus, the method requires a high degree of comparability along the following dimensions: (i) quality of the product or service; (ii) contractual terms; (iii) level of market; (iv) geographical market in which the transaction takes place; (v) date of transaction; (vi). intangible property associated with the sale; (vii) foreign currency receipt; (viii) alternatives realistically available with the buyer and the seller. Indian transfer pricing regulations have the force of law and the tax authority cannot refuse to consider specific characteristics of transactions, functions performed and assets employed. The burden to establish that an international transaction was carried out at ALP is on the taxpayer. The assessee cannot justify its inability to evaluate a transaction or a class of transaction on stand alone basis, on the ground that there was no statutory requirement to maintain segmental data. When the burden of proving that a particular method is the MAM is initially on the assessee, it is for the assessee to demonstrate this by furnishing adequate records and data, irrespective of whether they a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidelines, TPO cannot refuse to consider specific characteristics of transactions, functions performed and assets employed-held, yes." 8. Before us, the learned Authorised Representative for the assessee fairly conceded that in the instant case the assessee has not been able to place on record sufficient details and evidence before the tax authorities below to substantiate its claim of choosing correct comparables for application of RPM for determining the ALP as per mandatory provisions of r. 10B as per guidelines issued by OECD on transfer pricing and in accordance with the principles laid down by the Tribunal in their recent decisions i.e., Mentor Graphics (Noida) (P) Ltd. vs. Dy. CIT (supra) and UCB India (P) Ltd. vs. Asstt. CIT (supra). 8.1 Further, according to the learned Authorised Representative for the assessee, the tax authorities below/TPO while applying TNMM first have not conducted the independent study by choosing their own comparables and second in relying on six comparables out of seven-comparables used by the assessee for applying RPM, have not done proper screening of such comparables in accordance with the guidelines laid down in the decisions (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
