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TMI Blog2012 (11) TMI 347X X X X Extracts X X X X X X X X Extracts X X X X ..... of the TPO and direct him to compute the assessee's average gross profit margin in determining the ALP in accordance with the observations made above - Revenue's appeal partly allowed for statistical purposes. - IT Appeal No. 4201 (Mum.) of 2007 - - - Dated:- 28-9-2012 - R.S. SYAL AND AMIT SHUKLA, JJ. Ajit Kumar Jain for the Appellant. Mayur Kisnodwala for the Respondent. ORDER Amit Shukla, Judicial Member - The aforesaid appeal preferred by the Revenue, is directed against the impugned order dated 30th March 2007, passed by the learned Commissioner (Appeals)-VII, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short "the Act"), for assessment year 2003-04. 2. The sole dispute in this appeal is with regard to transfer pricing adjustment of Rs. 34,20,335, made by the Transfer Pricing Officer (for short "TPO") in his order passed under section 92CA(3) of the Act. 3. Briefly stated the facts of the case are that the assessee is an indirect subsidiary of Rhodia S.A. France. The assessee, which is incorporated in India, is primarily involved in canvassing of Rhodia Products from and around the world to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Potash 12.79% 5. Nikhil Adhesives Ltd. 8.57% 6. Oregon Commercials Ltd. 0.57% Arithmetic Mean 6.56% 5. As against the above arithmetic mean, the assessee's result for distribution segment i.e., import of raw material, sale and purchase of finished goods, were shown as under:- Gross Sales 12,90,25,000 Cost of goods sold 11,83,30,000 Gross Profit 1,06,59,000 G.P. / Sales 8.29% Since the assessee's gross profit margin was better than the average gross profit mean of comparable companies, it showed that its transactions with A.Es were at arm's length price. 6. The Assessing Officer, however, rejected most of the assessee's comparable companies and the reasons for not accepting the assessee's such comparables was that the assessee has taken the criteria of filtration, the ratio of sales in trading upon gross sales which are less than 90%, whereas, it should have been less than 75%. Based on the said search criteria, the following additional comparables were found by the TPO for bench marking. Arvind Chemicals Ltd. Heetu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adjustment made in the ALP after observing and holding as under:- "2.3 The argument of the appellant and facts of the case have been considered. After the rectification order passed by the TPO, vide order dated 11/12/2006, the rectified enhancement is Rs. 34,20,335 as against Rs. 81,78,650, determined in the original order being due to the import of finished goods not having been at arm's length. Further, the A.O. has also passed a rectification order dated 22.6.2006 and allowed set-off of business loss brought forward and the assessed income became nil. The transfer pricing adjustment has been made in respect of the distribution segment of the appellant. There is no dispute as to the resale price method used by the appellant. The dispute is regarding the bench marking the G.P. margins with the comparable companies. It is interesting to note that both the TPO and the appellant have used the same date based but they reached to different results. It is simply because the TPO has removed the comparable companies and also included some other from the comparable companies used by the appellant. To come to the conclusion as to the justification of the transfer pricing adjustment, one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Hans Ltd. and Nikhil Adhesives Ltd. from the list of comparables. Hence, it is directed that the comparable companies selected by the appellant in its transfer pricing study report should be accepted. As such, the adjustment of Rs. 34,20,335, made to the ALP is deleted." 11. Before us, the learned Departmental Representative, appearing on behalf of the Revenue, submitted that assessee's gross turnover i.e., total sales was at Rs. 168.44 millions, out of which, sales on account of trading i.e., distribution segment is Rs. 129.02 millions, which comes to 77% of the total sales. Thus, the TPO was wholly justified in taking the filtration criteria of "Sales trading / Gross sales" 75% and the findings of the Commissioner (Appeals) in accepting the assessee's contentions on this score is not only erroneous but also incorrect. Besides this, the second filtration of "Export sales / Total sales is 20%" adopted by the assessee for selecting the comparables is also not correct, as the assessee's export is around 8% only. He submitted that if these two criteria are taken into consideration for selection of comparable companies, the order of the TPO would, by and large, be justified and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its gross sales which is almost very near to the filtration criteria adopted by the TPO. Accordingly, such a criteria adopted by the TPO for selection of comparable companies is absolutely correct. Insofar as the rejection of other filtration criteria adopted by the assessee with regard to the companies having export sales being less than 20% of the total sales, it is seen that assessee's exports are around 13%, therefore, the selection criteria of 20% of the export does not seems to be correct one. At the same time also, the TPO's rejection of this criteria is also not correct that it should be taken as "Nil" or zero percentage. Therefore, we are of the considered opinion that the second criteria for selection of comparable companies should be the companies having export sales of in and around 13% which would be quite appropriate. Thus, we direct the TPO to look for the comparable companies, which are having export turnover percentage of around 13% of the total sales and accordingly, select the comparable companies using this criterion. While doing so, the TPO will take into account the export turnover out of total sales, gross of excide duty excluding commission and other income. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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