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TMI Blog2015 (3) TMI 311X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of sub-clause (i), the price charged or paid in a “comparable uncontrolled transaction” is to be identified for the purpose of determining the arm’s length price of the international transaction being tested. It is starkly evident that in the present case, the comparable transaction picked-up by the TPO, namely, agreement between assessee and Henkel USA is a transaction between two related/associated enterprises and therefore it is a controlled transaction and not a “uncontrolled transaction”. Such a transaction undertaken between two controlled entities, in our view cannot be considered as a ‘comparable uncontrolled transaction’, as envisaged in clause (a) of sub-rule (1) of rule 10B of the Rules. Hence, on this count itself, the adjustment made by the TPO by considering the agreement between Henkel USA and assessee as an arm's length price for the impugned international transaction has to fail. Therefore, the addition made by the TPO on this count hereby directed to be deleted. - Decided in favour of assessee. Provision for onerous charges - Assessing Officer has denied the claim on the ground that it was a contingent liability - compensation for the unexpired lock-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Incometax Act, 1961 ('the Act') in pursuance of the directions issued by the DRP, the present appeal is being preferred on the following grounds amongst others which, it is prayed, may be considered without prejudice to one another. General grounds 1. On the facts and circumstances of the case and in law, the learned AO, based on directions of DRP erred in making addition of ₹ 3,24,71,763/- in the Appellant's case. Specific grounds Transfer pricing matter International Transaction: Import of raw materials from associated enterprises ('AEs') and export of finished goods to AEs 2. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred in proposing an adjustment of ₹ 3,08,72,664/- and ₹ 61,958/- to the international transactions pertaining to export of finished goods to AEs and import of raw materials from AEs respectively. 3. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred in rejecting the aggregation approach adopted by the Appellant for benchmarking its international transactions viz import of raw materials, import of packing materials and export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n relation to its international transaction of commission received for drop shipment services. Benefit of +/- 5 percent not provided 11. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred in making transfer pricing adjustment without giving the option of +/- 5 percent variation as available under Proviso to section 92C(2) of the Act Non transfer pricing disallowances Disallowance of Provision for Onerous Charges 12. On the facts and circumstances of the case and in law, the learned AO erred in disallowing Provision for Onerous Charges of ₹ 12,50,700/- claimed as expenses by the Appellant during the financial year 2007- 08 relevant to AY 2008-09 treating the same as contingent liability on which no taxes have been withheld. Initiation of Penalty under section 271(1)(c) 13. On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(1)(c) when the Appellant had made full and true disclosures both, in the Return of Income and during the assessment proceedings. The Appellant submits that each of the above grounds of appeal is without prejudice to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering the directions of the DRP contained in its order dated 05.09.2012, which was approached by the assessee raising objections against the draft assessment order proposed by the Assessing Officer dated 20.12.2011. The aforesaid addition of ₹ 3,12,21,063/- on account of transfer pricing adjustment is the subjectmatter of dispute in the present proceeding. 6. The appellant had undertaken international transactions with its associated enterprises on account of : (i) import of raw materials, packing materials, and finished goods; (ii) drop shipment commission receipts; and, (iii) export of finished goods, which are similar to the transactions carried out in the preceding assessment year 2007-08. In the Transfer Pricing Study conducted by the assessee, it aggregated the aforesaid international transactions into two broad segments for the purposes of benchmarking it with the comparables. The international transactions comprising of import of raw materials packing materials, and export of finished goods were aggregated under Manufacturing segment, and the residual international transactions on account of the import of finished goods for re-sale and receipts by way of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21,063/-, which is the subject-matter of dispute before us. These adjustments are similarly placed as were made by the Assessing Officer in preceding assessment year 2007-08. 8. Now, with regard to the assessee s stand of aggregating the international transactions of import of raw materials packing materials and export of finished goods under manufacturing segment. The assessee had aggregated the transactions for the reason that import of raw materials packing materials and export of finished goods were relating to the manufacturing functions and therefore they were aggregated for the purposes of the benchmarking analysis. The TNM method was adopted as the most appropriate method for the determination of arm's length price. Similar issue came before the Tribunal in assessment year 2007-08 wherein the stand of the assessee was dismissed and the application of CUP method was upheld. The following discussion in the order of the Tribunal is relevant :- We have carefully considered the rival submissions. As regards the method to be adopted for comparability analysis, at the outset we may say that the approach of the TPO and the DRP in this regard cannot be faulted. In ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vis- -vis sales to local parties. Additionally, it was also explained that assessee was undertaking certain functions in local third party sales which were not so in case of export of products to the associated enterprises. The rival stands on this issue are similar to those which came before the Tribunal in assessment year 2007-08 wherein it was held as under :- No doubt, the onus shall be on the assessee to justify suitable adjustments to the comparable uncontrolled transaction. In the present case, assessee has claimed adjustments on account of differences in sales marketing functions and credit risk, and such a plea was very much raised before the TPO. The assessee has referred to the segmental accounts placed at page 302 of the Paper Book to show that it had incurred expenditure on sales marketing function, which is almost 41% of the sales made to the non-associated enterprises and on account of credit risk it is stated to be 1%, as the provision for bad and doubtful debts is around 1% of sales, and in this regard reference has been made to Schedule 16 of the financial statements placed at page 180 of the Paper Book. On this basis, the total adjustment to the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of 12 items, the purchase price of the assessee from associated enterprises was higher than the price at which the same was purchased from a local party, which was explained to be on account of certain business exigencies. On this aspect, it was pointed out that similar matter came before the Tribunal in assessment year 2007-08 wherein the action of the TPO in applying CUP method was upheld in-principle. However, the Tribunal allowed relief by directing that the transactions of the import of raw material from associated enterprises be benchmarked on a cumulative basis. In other words, it was held that the transaction of import from associated enterprises should be considered in entirety to calculate adjustment amounts instead of only those common products whereby the import price from associated enterprises was higher vis- -vis the purchase price from the local third parties. The relevant discussion in the order of the Tribunal on this aspect is contained in para 26 of the order dated 18.03.2014 (supra), which reads as under :- 26 We have carefully considered the rival submissions. In our considered opinion, the entire purpose of the transfer pricing analysis is to compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted from associated enterprises, which were also being purchased from third parties in India. The Ld. Representative pointed out that as per the said working there was no necessity of making any adjustment to the stated value of the imports from the associated enterprises. Nevertheless, we find that the aforesaid working, which is claimed to have been prepared as per the decision of the Tribunal in assessment year 2007-08 (supra) requires to be verified by the Assessing Officer. We therefore direct the Assessing Officer to verify the aforesaid working and if it is in line with the directions of the Tribunal in assessment year 2007-08 (supra) then no addition would survive in relation to the international transaction of import of products from associated enterprises. Needless to say, the Assessing Officer shall allow the assessee an opportunity of being heard before passing an order afresh on this aspect. 13. The other adjustment in dispute is with regard to the international transaction on account of drop shipment commission. The relevant facts in this regard are that assessee earned drop shipment commission from its associated enterprises i.e. Henkel USA and Henkel Malaysia fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal dated 18.03.2014 (supra) as also the above discussion. Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity of being heard before re-working the addition if any on this aspect. 16. Thus, the Grounds of Appeal No.1 to 11 are accordingly disposed-off. 17. The only other Ground remaining is by way of Ground of Appeal No.12 which relates to a Provision for onerous charges of ₹ 12,50,700/- which has been disallowed by the Assessing Officer. In brief, the facts are that the assessee-company entered into a lease agreement in November, 2006 for taking an office space on lease. The lease-deed was entered with the landlord for a period of 54 months effective from 01st November, 2006 and the monthly rent as per the lease-deed was ₹ 56,850/-. The lease-deed was subject to a lock-in-period of 36 months. As per the said term of lease, in case the assessee-company opted to terminate the lease-deed prior to lock-in-period of 36 months then assessee-company was liable to compensate the landlord for the entire unexpired period of lock-in-period. In December, 2007, assesseecompany opted to terminate the said lease-deed and shifted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as arisen on account of the termination of lease-deed by the assessee. The assessee had entered into a lease agreement in November, 2006 for taking a premises on rent for the purposes of office. The lease-deed was for a period of 54 months subject to a lock-in-period of 36 months from November, 2006. Since assessee terminated the lease-deed in November, 2007 i.e. before expiry of the 36 months of the lock-in-period, assessee was required to compensate the landlord for the unexpired period of lock-in-period. The impugned sum of ₹ 12,50,700/- reflects the compensation fastened on the assessee on account of the lease-deed for the assessee having terminated it prematurely. The aforesaid facts are not disputed by the Revenue. In our considered opinion, the said liability cannot be treated as contingent liability. The liability is an ascertained liability because it has arisen because of the assessee having opted to terminate the said lease-deed prematurely. It is also nobody s case that the said decision was not a business decision. Therefore, the liability having crystallized in view of the terms and conditions of the leasedeed, we find that its incurrence cannot be said to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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