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TMI Blog2014 (5) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer / DRP’s approach in comparing external comparables margin of 8.87% with entity level margin of the assessee i.e. 1.08% is wrong, since segmental results are available and as per this the margin in contract manufacturing segment is 20.89% and this margin should have been compared with the comparable margin of 8.87% in determining the upward adjustment in AE sales - the net cost plus margin of the assessee in contract manufacturing segment is 20.89% which is more than the operating profit of 8.87% on the external comparables of the Transfer Pricing Officer, there is no need for any upward adjustment to be made on the AE sales of the assessee – the AO is directed to delete the addition made towards upward adjustment of purchase price on determination of ALP with Associated Enterprise – Decided in favour of Assessee. Disallowance of Provision for discount – Held that:- when the liability is ascertained and not quantifiable during the year and is simply a contingent based on estimates, the same cannot be allowed as deduction - the assessee’s version clearly states that the only reason for creating a provision and not charging the same as an expenses is because of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law and facts in disregarding Transfer pricing documentation report prepared based on the segmental approach and the separate books of accounts for the transfer pricing analysis. 3. Erred in law and facts in adopting entity level approach without considering the functional dissimilarity between the business segments of the Appellant. 4. Erred in facts in placing reliance on the erroneous figures / expense percentages on segmental revenue and erred in facts in ignoring the reason for difference in proportion of common expenses allocated between segments while concluding that the segmental accounts has been prepared incorrectly by way of inappropriate allocation of common expenses. 5. Erred in issuing direction by arbitrarily directing the learned AO alone for reconsidering the deduction under section 10B of the Act without issuing any direction to the learned TPO for considering the segmental accounts as recomputed by the learned AO. 6. Erred in confirming the action of the learned TPO in disregarding the segmental approach adopted by his predecessor in the transfer pricing assessment for AY 2005-06 although the facts were the same in the relevant AY 2007-08, thereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Associated Enterprise of the assessee at Rs. 7.18 crores as against Rs. 7.52 crores made in the order dated 28.10.2010. 6. The assessee filed its objections before the Dispute Resolution Panel (in short DRP ) in respect of upward adjustment of Rs. 7.52 crores towards international transactions with its Associated Enterprise and the other disallowances i.e. in respect of provision for discount and excluding foreign travel expenses from export turnover and not excluding the same from total turnover while computing deduction under section 10A of the Act. The DRP by its order dated 28.9.2011 passed under section 144C(5) sustained the Transfer Pricing Officer s addition of Rs. 7.18 crores in respect of transfer pricing adjustment. The DRP also sustained disallowance of provision for discount and exclusion of travel expenses incurred in foreign currency from export turnover and not excluding the same from total turnover while computing deduction under section 10A of the Act. The Assistant Commissioner of Income Tax passed final assessment order dated 28.10.2011 under section 143(3) read with section 144C(13) giving effect to DRP s order by making upward adjustment of purchase p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the internal TNMM and selected external comparables and arrived at the comparable margin at 8.87% and this margin of 8.87% was compared with the entity level margin of 1.08% of the assessee ignoring the segmental report results where net cost plus margin of the assessee in contract manufacturing segment was 20.89% which is more than 8.87% i.e. margin of external comparables arrived at by the Transfer Pricing Officer and in such circumstances, the Transfer Pricing Officer should not have made any upward adjustment as the net cost plus margin of the contract manufacturing segment is much more than the profit margin of the external comparables adopted by the Transfer Pricing Officer. 10. The counsel submits that the external comparables adopted by the Transfer Pricing Officer has been accepted by the assessee. The counsel submits that the Transfer Pricing Officer has erred in comparing the external comparable s margin of 8.87% with 1.08% margin which is entity level margin of the assessee and this approach is wrong. The counsel submits that the Transfer Pricing Officer should have compared the margin of contract manufacturing segment with that of the margin of the external comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfer Pricing Officer and DRP having accepted the segment results for computing relief under section 10A of the Act, the said segmentation approach should not have been rejected in determining the ALP of sales of Associated Enterprise. 13. The counsel for the assessee referring to page 67 of the paper book further submits that DRP has directed the Assessing Officer to examine the segmental results for contract manufacturing segment for computing relief under section 10B of the Act and the Assessing Officer has accepted the segment reports and the submissions of the assessee before him vide letter dated 28.10.2011 in respect of segmentation results claiming deduction under section 10B of the Act. 14. The counsel further submits that TNMM does not permit comparison of margins on any entity-wide basis, only margins from the international transaction or a class of international transaction can be compared. Without prejudice to the above, the counsel submits that if segmental data of AE transaction is not available, the adjustment made on the basis of the entity level margin on the total turnover should be restricted to the proportion of AE sales to total turnover. However, AL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders of lower authorities and the case law relied on. The reason given by the Transfer Pricing Officer and DRP for not accepting the segment results are that the assessee has not shown the same in the audited financial accounts and the segment reporting was done only for transfer pricing purposes. They have also stated that allocation of expenses between the contract manufacturing segment and non AE local/domestic segments are abnormal. In so far as the reason that the assessee has not shown the segmental report/results in audited financial accounts and therefore, such segmental results cannot be accepted for ALP has not been accepted by this Tribunal in the case of 3i Infotec Ltd. Vs. ITO in ITA No.21/Mds/2013 vide order dated 7.5.2013. This Tribunal in the above cited case held that even though segmental reports are not show in audited financial accounts, they have to be accepted. 18. This Tribunal further held, in view of the decision of the Delhi Bench of the Tribunal in the case of DCIT Vs. Stratex Net Works (India) Pvt.Ltd., (133 TTJ 365), that rate of profit achieved in other comparable cases are to be compared with profit level declared by the assessee in respect of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... results of the assessee is wrong. For example in the above extracted para from DRP order the employee cost was taken at 1.88 crores as against the correct figure of 2.10 crores. Similarly, other expenses and depreciation was taken at 0.59 crores and 18.50 crores as against the correct figures of Rs. 1.88 crores and 0.58 crores respectively. The Transfer Pricing Officer in his order at page 9 has taken the figures of material cost, employee cost and other expenses at Rs. 2.10 crores, Rs.1.88 crores and Rs. 0.59 crores as against the correct figures of Rs. 1.39 crores, Rs. 2.10 crores and Rs. 1.88 crores respectively for analysis. The Transfer Pricing Officer and DRP have taken wrong figures in respect of these expenses in analyzing and rejecting the segmental results. The figures taken by the Transfer Pricing Officer / DRP in respect of material cost, employee cost, other expenses, depreciation are not matching with the figures given by the assessee in segmental results appearing at page 138 of the paper book submitted before us. Apparently, the Transfer Pricing Officer / DRP have adopted wrong figures and analyzed with these figures and came to a conclusion that apportionment of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision for discount. At the time of hearing, learned counsel for the assessee concedes that this issue is decided against the assessee by the co-ordinate Bench of this Tribunal in the assessee s own case for the assessment year 2005-06 in ITA No.1925/Mds/2010 dated 30.06.2011. The counsel further submits that this Tribunal sustained the disallowance of provision for discount claimed as deduction by the assessee holding that it is unascertained and contingent expenses. However, the counsel submits that an additional ground was placed before the DRP submitting that the assessee during the assessment year 2007-08 had actually passed on Rs. 2,73,03,455/- as discounts to the customers and such discount which was passed on to the customers should be allowed as deduction. The counsel submits that DRP has not given any finding on such additional ground. The counsel places copy of assessment order for the assessment year 2009-10 dated 13.05.2013 passed under section 143(3) read with section 144C(3) and referring to para 3.4 of the order submits that the Assessing Officer allowed the provision on discounts actually passed on to the customers during the assessment year 2009-10. Therefore, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme of gratuity should be allowed to be deducted from the gross profits. The allowance is not restricted to the actual payment of gratuity during the year. 9. In the case of Dy. CIT vs Beardsell Ltd (supra), Hon'ble Jurisdictional High Court has held as under: Held, that if a debt had become irrecoverable the same could be written off and deducted from the profit of the business. A debt, the recovery of which was doubtful could not be termed to be an ascertained liability as mentioned under section 115J of the Act and could not be excluded from the book profits. Accordingly, the conclusion of the Tribunal in directing the Assessing Officer to rectify the alleged mistake of inclusion of the unascertained liability in the book profit could not be upheld. 10. Thus, it becomes evidentially clear that when the liability is ascertained and not quantifiable during the year and is simply a contingent based on estimates, the same cannot be allowed as deduction. In the given case, the assessee s version, as put forth in para 6.4 of the appellate order, clearly states that the only reason for creating a provision and not charging the same as an expenses is because of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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