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TMI Blog2013 (10) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts were paid after the "due date" as per the provisions of section 43B(b). Accordingly, he worked out the disallowance under section 43B after incorporating the details of amount paid, date of payment and due date which has been given at Pages-2 and 3 of the assessment order and thereby worked out the disallowance under section 43B in the following manner:- Total disallowance as computed by the A.O. in Para-4.1 Rs. 44,09,107 Less: disallowance u/s 43B as made by the assessee in the computation of income Rs. 5,52,581 Total disallowance Rs. 38,56,526 4. Before the learned Commissioner (Appeals), besides challenging the disallowance of Rs. 38,56,526, the assessee raised an additional ground in respect of disallowance of Rs. 5,52,581, which was added back by the assessee in the computation of income filed along with the return of income. This additional ground was admitted by the learned Commissioner (Appeals). 5. Before the learned Commissioner (Appeals), it was argued that most of the payments have been made within the grace period and in any case all of them have been paid before the due date of the return of income. It was also pointed out that certain disallowance ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds which have been paid before the "due date" of filing of the return of income. In view of the law settled by the Hon'ble Supreme Court in Alom Extrusions (supra), and followed by various Courts, the payments toward employer's and employees' contribution to PF & ECIS, made after the grace period but prior to filing of the return of income, constitute admissible deduction within the ambit of section 43B. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and allow the claim admissible under section 43B. Thus, treat ground no.1, raised by the assessee is treated as allowed. 9. In ground no.2, the assessee has challenged the disallowance of depreciation of Rs. 24,58,028. 10. The Assessing Officer, on a perusal of audited accounts, especially Schedule "T", clause 19 to the notes and accounts, noted that the board of directors in their meeting held on 31st December 2000, decided to discontinue the manufacturing of toys w.e.f. 1st January 2001. The assessee itself had disallowed the various payments / provisions towards the said factory in the computation of income. However, in the statement of depreciation under section 32, the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d were not used in the relevant accounting year. 14. Learned Departmental Representative submitted that the assessee's manufacturing activity had ceased to exist after 1st January 2010 and nothing has been made available on the record that these plant and machinery were intended to be used in future, therefore, depreciation has rightly been disallowed. Regarding alternate plea of the learned Counsel that the some of the plant and machineries were not used for manufacturing activities, he submitted that the same may be restored to the file of the Assessing Officer for verification. 15. We have carefully considered the rival contentions and perused the relevant findings of the Assessing Officer and the learned Commissioner (Appeals). It is not in dispute that the assessee's manufacturing activities have been closed down w.e.f. 1st January 2001 and the plant and machinery which were for the purpose of manufacturing activities have not been put to use either during the relevant accounting year or in the subsequent assessment years. Therefore, the depreciation cannot be allowed on such machinery and further passive user of such machinery have also not been established by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith its A.E., the Assessing Officer made a reference u/s 92CA(1) to the Transfer Pricing Officer (for short "TPO") for determination of ALP as reported in Form-3CEB filed by the assessee. The turnover of the assessee company along with the net profit before interest and tax for various years were reported in the following manner:- A.Y. Sales (Rs. ) Returned income / (Rs. ) NPBT (Rs. ) Taxes Paid in India 2003-04 30,41,12,782 (-) 18,92,71,790 (-) 14,16,04,449 Nil 2002-03 36,58,52,712 (-) 22,31,41,398 (-) 33,33,51,613 Nil 2001-02 46,56,93,750 (-) 34,28,16,554 (-) 40,71,57,703 Nil 2000-01 24,80,65,852 (-) 12,46,36,005 (-) 12,33,00,581 Nil 18. During the relevant assessment year, the assessee has disclosed following international transactions in its transfer pricing report:- Sl. No. Sales (Rs. ) Returned income / loss (Rs. ) Method Applied 1. Purchase of raw materials 2,19,94,477 Cost plus Method 2. Purchase of finished goods 3,08,16,302 TNMM method 3. Sale of finished goods 3,28,21,040 TNMM method 4. Reimbursement 38,21,597 CUP method 19. Insofar as manufacturing activities were concerned, the TPO accepted the assessee's determination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd parties (Rs. ) Total distribution activity (Rs. ) Sales 11,74,41,770 4,61,57,312 7,49,07,171 23,85,06,253 Less: Cost of Sales 8,40,80,455 4,80,71,836 7,88,74,978 21,10,27,269 Gross Profit 3,33,61,315 (19,14,524) (39,67,807) 2,74,78,984 Other Costs 9,35,13,477 1,77,22,486 2,87,61,235 13,99,97,198 Op. Profit (6,01,52,162) (1,96,37,010) (3,27,29,042) (11,25,18,214) Op. Margin (51.22%) (42.54%) (43.69%) (47.17%) Gross Profit 28.40% (4.15%) (5.30%) 11.52% 22. After making the analysis in the aforesaid manner, he observed that the assessee's operating profit margin at (-) 51.22% in the domestic segment is much lower than the average margin earned by the other entities (comparables) engaged in the distribution activity in India which is at 0.91%. After inviting the assessee's submissions / objections on the proposed adjustments, the TPO gave a detail reasons for rejecting the assessee's submissions which has been discussed from Paras-6.5 to Para-11. One of the very important submissions of the assessee before the TPO, vide letter dated 6th October 2004, was that the gross profit margin should be compared instead of operating profit for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost of sales in this segment (i.e., Rs. 3,08,16,302 / Rs. 8,40,80,455) 37% Hence, 37% of Rs. 3,58,51,993 amounts to 1,32,65,230 Adjustment to the International Transaction 1,32,65,230 II. Import from A.E. and sale to A.E. (Adjustment being made to sales value). Particulars Amount (Rs. ) Actual Sales (International Transactions) 3,29,52,673 Operating profit margin on cost of comparables 0.92% Total costs of assessee 6,57,94,322 Operating profit required 6,05,307 Actual loss of assessee 19637010 Adjustment to the international transaction 20242317 Arm's Length Price of sales to AE 5,31,94,990 Actual Sales (International Transactions) 3,29,52,673 23. Thus, he made adjustment of Rs. 1,32,65,230, in the ALP of international transaction on purchase of finished goods and adjustment of Rs. 2,02,42,317 on sale of finished goods thereby making the total adjustment of Rs. 3,35,07,547. 24. Before the learned Commissioner (Appeals), the assessee contended that the adjustment made by the TPO is wholly incorrect on facts because the TPO has presumed that the assessee's gross profit margin would work out to 80.57% which is much higher s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has been operating in India for around 3 to 4 years in the past and in the earlier years also, the assessee had significant turnover. Therefore, there is no justification in assessee's contentions about adjustment of administrative cost; (ii) the assessee's contention that prices charged by Mattel Europa is at par with the prices charged to other A.Es cannot be accepted because the transfer pricing adjustments have to be based on FAR analysis and if lower prices are being charged in Asia region, the same cannot justify lower profits, because the assessee has not given PLI indices of it's A.Es for operating in this region to justify its claim and whether they are also showing abnormal losses in respective markets; (iii) the gross profit rate in the preceding year was 37.64% whereas in the current year is only 19.90% which supports the TPO's contentions and refute the assessee's claim that negative profits are on account of the fact that this was initial year of operation in India; and (iv) the assessee's contention that RPM should be followed instead of TNMM cannot be accepted because the assessee in its transfer pricing study report has given a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment expenses. He submitted that net sales under the distribution segment was at Rs. 11,74,41,770, as against the total cost incurred by the assessee which was Rs. 17,75,93,932 and operating profit was Rs. (-) 6,01,52,162, thereby giving negative operating profit ratio of (-) 51.22%. The reason for such a huge administrative and advertisement cost in this year was that the assessee has started its distribution activities on its own and all the earlier arrangements under the joint venture with Blowplast was discontinued. If the assessee's gross profit margin has to be analysed, then the assessee's margin as compared to the six comparables are much better. Before the Assessing Officer and the learned Commissioner (Appeals), the revised margin using resale price method was filed which has been rejected by them simply on the ground that the assessee itself has adopted TNMM in the transfer pricing report. He submitted that the assessee being a distributor and in case of distribution activities, the RPM has been recognised to be the most appropriate method for bench marking the ALP while carrying out comparability analysis between controlled and uncontrolled transactions. In supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l become so high which is improbable in any kind of distribution business and in the case of the assessee, the purchase price will almost become negligible. Lastly, by way of alternative arguments, he pointed out that there was certain computational error in the working of TPO. In support of the same, he furnished a chart before us. 31. Per contra, the learned Departmental Representative, Mr. Ajit Kumar Jain, representing the Revenue, submitted that the assessee has, first of all, chosen TNMM as most appropriate method in the transfer pricing study. Based on this method, the assessee has selected six comparable companies which were for the purpose of carrying out functional comparability based on TNMM only. These comparables were not selected for the purpose of resale price method. Had the assessee chosen resale price method in the transfer pricing report then the selection of comparables would have been different and also the different gross profit margin. Once the assessee itself has given a detailed report and comment in the transfer pricing report as to why TNMM is the most appropriate method in this case and why resale price method cannot be adopted. The assessee cannot justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any similarity of product comparability but functional comparability has to be seen. He referred to the same OECD guidelines which were referred by the learned Departmental Representative during the course of his arguments. Regarding the learned Departmental Representative's argument that the assessee has adopted RPM before the TPO and the learned Commissioner (Appeals) so as to justify the ALP at gross profit margin level is not correct because the assessee has given a detail reasons before the TPO and the learned Commissioner (Appeals) as to why the RPM should be adopted and none of the authorities have given any cogent reason for rejecting the RPM or assessee's contention. 35. We have carefully considered the rival contentions, perused the relevant findings of the Assessing Officer and the learned Commissioner (Appeals) as well as the material placed on record. The only dispute before us relates to adjustment of ALP with regard to the distribution segment i.e., import of finished goods from the A.E. and sale in domestic as well as to the A.E. The assessee had initially adopted TNMM as most appropriate method for bench marking its ALP and for this purpose it has chosen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RPM and CPM operate at gross profit margin level requiring functional rather than product comparability. The PSM and TNMM operate on operating profit margin level used for a complex and integrated enterprise. These methods are based on price or profit. The centre point of these methods is comparability analysis with the comparables and the method which provides most reliable way of arriving at the ALP, is considered as most appropriate method. A comparability analysis is done for the comparison of controlled transaction(s) with an uncontrolled transaction(s) and controlled and uncontrolled transactions are comparable if none of the differences between the transactions can materially affect the factor being examined by adopting any of the methodologies as mentioned in section 92C or if any reasonable accurate adjustment can be made to eliminate the material affects of any such difference. 37. The RPM has been prescribed in Rule 10B(1)(b) in the following manner:- Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r result. The focus is more on same or similar nature of properties or services rather than similarity of products. In RPM other attributes of comparabilities than the product itself can produce a reliable measure of arm's length conditions. The main reason is that the product differentiation does not materially effect the gross profit margin as it represents gross compensation after the cost of sales for specific function performed. The functional attribute is more important while undertaking the comparability analysis under this method. Thus, in our opinion, under the RPM, products similarity is not a vital aspect for carrying out comparability analysis but operational comparability is to be seen. Since the gross profit margin is the main criteria while evaluating the transactions in the RPM wherein price is identified at which property or services are resold and normal gross profit margin is derived at by the enterprise which is deducted from the resale price of such property or service in comparable uncontrolled transactions. The gross profit margin earned by the independent enterprise in comparable uncontrolled transactions is served as a guidance factor. This is also what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds from it's A.E. and reselling them to independent parties / unrelated parties, resale price method would be the most appropriate method for determining the ALP of the transactions between the assessee and the A.E. 41. Now coming to the argument of the learned Departmental Representative that once the assessee itself has chosen TNMM as most appropriate method in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the most appropriate method in the transfer pricing report, then also it is not precluded from raising the contentions / objections before the TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal is treated as partly allowed for statistical purposes. We now take up Revenue's appeal in ITA no.2801/Mum./2008, for assessment year 2002-03. "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in allowing deduction of Rs. 18,66,369 being the professional fees in this year even though the professional services were rendered in the previous year relevant to A.Y. 2000-01. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs. 2,02,42,317 made by the A.O. on the basis of Arm's Length Price in respect of import of finished goods from Associated Enterprises and export to other Associated Enterprises." 46. The Assessing Officer disallowed Rs. 18,66,369, against professional fees paid to Mr. Ashok Pratap & Co. a firm in which one of the directors of the assessee was partner. The services were rendered for the period May 2000 to March 2001. The assessee's case before the Assessing Officer was that the liability was crystallised during the current year as the invoices were received in this year, therefore, the same should be allowed in this year. The Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to what would be the fee that would be charged by the professional for the services rendered. It is when the bill is received, the liability get crystallised for making the payment. As regards the Assessing Officer's observation that one of the directors of the assessee company is a partner in the professional firm, we find that the Assessing Officer has not examine as to what could have been the proper fees having regard to the value of services rendered. In the absence of such a finding, this observation and finding of the Assessing Officer is not tenable. In fact, he has proceeded to disallow the entire payment of fees instead of any excess payment.. Moreover, the learned Commissioner (Appeals) has recorded a categorical findings that out of Rs. 18,66,369, professional expenses of Rs. 6,24,949, was rendered in the current assessment year only. For the balance sum also, we agree with the findings and the conclusion drawn by the learned Commissioner (Appeals) and, accordingly, the same are being affirmed. Thus, ground no.1, raised by the Revenue is treated as dismissed. 49. In ground no.2, the Revenue has challenged the deletion of addition of Rs. 2,02,42,317, made by the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts to purchase returns. Instead, she presumed that these are exports of fresh manufactured items to earn profits. It is in this regard that the TPO has erred in not understanding this second limb of transactions and hence, has suggested the adjustment to the total income. The appellant has also demonstrated that such purchase returns to AEs resulted in a loss of 4.15% as compared to greater loss of 5.30% in respect of sale of obsolete stock to third parties. Hence, the appellant has rightly pleaded that exports to AE which were of idle and obsolete stock, were at arm's length. I agree with the argument advanced by the appellant and do not consider the adjustment of Rs. 2,02,42,317/- suggested by the TPO to the total income on this account to be correct. The said addition is hereby deleted." 51. The learned Departmental Representative submitted that this is a case of purchase from the A.E. and again resale to the A.E., therefore, the TPO was justified in bench marking the ALP with that of the independent comparables. As an alternative plea, he submitted that the TPO may be directed to examine the comparability analysis of the price of the goods sold to the A.E. and the thir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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