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TMI Blog2013 (3) TMI 666X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluding the management fees Whether sale of scrap considered as operating income - Held that:- The scrap material has come from the core manufacturing activity of the assessee - Hence it needs to form part of the operational income - recompute the margin of the assessee by including sale of scrap as operating income - Decided in favor of assessee Disallowing the benefit of range of +/-5% while determining the ALP - Held that:- Assessee shall not be entitled to exercise its option of +/-5% if the variation between the arithmetical mean and the price at which such transaction has actually been undertaken exceeds 5 per cent of the arithmetical mean - Decided against assessee Disallowing the provision of agency commission u/s 37 - Held that:- This commission payment accrues to the assessee company on incidence of sale and deferment of the payment of agency commission does not render the commission to be contingent in nature - AO Is directed to verify this aspect as to whether the liability of payment of commission to agents has arisen during the relevant AY and decide in accordance with law - Remanded back X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer (TPO) rejected the comparables offered by the assessee and selected two fresh comparable companies and arrived at the ratio of OP /Saies @ 14.43 per cent and he also determined the PLI of the taxpayer at 5.1 per cent. In respect of purchase of raw materials the AO had taken the above PLI figures and arrived at the adjustment to be made In respect of purchases from international transaction at ₹ 2.76 crores. 6. The TPO also examined the management services fees of ₹ 1,54.71,893 paid by the assessee to its AE. The TPO had asked the assessee to give the particulars of the management services rendered by the AEs and the quantification of the benefits derived therefrom. The assessee had given the particular of various persons who visited the company. According to the TPO unless the assessee showed tangible benefit that has been derived from such management services or the payment made is commensurate with the benefits derived. the ALP of such payment will have to be treated as nil. The TPO also found that except for two persons, that too 4 days each all the other 16 persons whose services are deemed to have been rendered travelled from abroad stayed elsewhere. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. (b) The transfer pricing study of the assessee has been rejected by the TPO on valid grounds. In the transfer pricing study done by the TPO, the adjustments to be made to the purchase transactions from AEs has been quantified at ₹ 2.76 crores, Hence the same shall be adopted for completing the assessment. (c) Other transfer pricing objections raised by the assessee, in grounds 1:6 and 8 before DRP are rejected. Grounds 2, 3, 4, 5, 7 (partly) and 9 are allowed. (d) In computation of PLI for the assessee, the income from sale of scrap Is to be taken as operating income. The stand of the TPO on including finance charges as operating expense remains unaltered. Hence, the PLI for the assessee may be calculated accordingly. 10. Thus, the DRP enhanced the transfer pricing adjustment to ₹ 2,76 crores. In effect the DRP deleted the adjustment of the TPO to the extent of ₹ 1,54,71,893 in respect of fees paid for management services. As a result the PLI of the assessee reverted back to 5.1 per cent (from 10.38 per cent as calculated by the TPO after disallowance of management fees) and the ALP obtained from average of comparable was 14.43 per cent. The DRP restored th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 per cent (from 10.38 per cent as calculated by the TPO after disallowance of management fees) and the ALP obtained from average of comparable was 14.43 per cent. 20. We have perused all the facts and particulars submitted by the assessee as well as the orders of the learned TPO and learned DRP with respect to management fees paid. 21. We are of the opinion that to the extent the payment is for setting up of a new factory at Cherlapally. the expenditure cannot be considered as operating expenses. The PLI is operating profits divided by the sales (Le .. OP/Sales) and OP is determined by deducting from sales the operating' expenditure. Therefore one-off expenditure for setting up a new plant cannot be considered as operating expenses. Operating expenses are those which are essential for carrying out day-to-day operations and directly relatable to the sales. Therefore. to the extent the management service fees is towards setting up of the new factory at Cherlapally. it would not constitute operational expenses and the same should be excluded while computing the operating profits of the assessee in determining the PLI. Furthermore. at the same time. the expenditure incurred tow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses of ₹ 28.20 crores, the total international transaction constitutes only ₹ 16,53,09,321 (including management services fees). 30. The TPO has not worked out the profitability of the international transaction and compared it with the ALP as required under the TNMM. It is difficult to determine the profitability of international transaction which constitutes only a portion of the total expenses of the company. The material purchased from the AE is part of the other raw material and components going into the final product which is then sold to outsiders. 31. For applying the TNMM in case of international transactions constituting a small portion of expenses, the only practical way of applying the TNMM is to adopt the profitability of the entire enterprise as the profitability from international transaction. It has then to be compared with the PLI of the comparable companies and adjustment made only to the international transactions. This will be achieved by taking the total adjustment applicable to the enterprise as a whole and applying pro rata, on the basis of ratio of the value of international transactions forming part of operational cost to the total operational ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the overall adjustment can be added as transfer pricing adjustment. We direct the TPO to compute the transfer pricing adjustment along these directions. 34. Ground 6 consists of sub-grounds, 6( 1) to 6(iv) out of which grounds 6(i) and 6(iii) are not being pressed. We deal with grounds 6(ii) and 6(iv) below: 35. Ground 6(ii) reads "application of additional filter including selection of inappropriate range for turnover filter of ₹ 5 crores to ₹ 35 crores where appellant's turnover is ₹ 30 crores". 36. The assessee objects to the application of turnover filter as according to the asssessee the filter is too narrow a margin to encompass reasonable comparable companies, Assessee relies on the Bangalore Tribunal in the case of Genisys Integrating Systems (India) (P) Ltd. us. Dy. CIT (2011) 64 DTR (Bang)(Trib) 225: (2012) 15 ITR (Trib) 475 (Bang) wherein in order to select/reject comparables on the basis of turnover when the turnover of the assessee was ₹ 8.15 crores, the Bangalore Tribunal had directed the TPO to reject the companies who have a turnover of less than ₹ 1 crore and more than ₹ 200 crores. 37. Respectfully following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he conclusion of comparability analysis, we will trace the steps in the transfer pricing assessment: 44. Firstly, the assessee supplied 5 comparables in its transfer pricing study namely. S. No. Name of comparable OP / sales as per transfer pricing documentation (p. 22 of paper book] OP / sales as per contemporaneous data (p. 107 of paper book] 1. Panama Petrochem Ltd. 6.5% 8.27% 2. Sah Petroleums Ltd. 6.6% 7.30% 3. Tide Water Oil Co (India) Ltd. 0.9% 7.23% 4. Balmer LawrIe & Co. Ltd. (seg.) 2.9% 6.12% 5. Gulf Oil Corpn. Ltd. (seg) 5.9% 4.22% Count 5 5 Average 4.6% 6.63% 45. These above 5 were rejected by the TPO and the TPO proposed a set of 9 filters and applying them sent a show-cause notice to the assessee containing just 2 comparables namely: Sr. Name of the company Net Operating Operating OP/Sales OP/Cost No. sales cost profit 1. Ahand Engineers (P) Ltd. 10.19 8.67 1.52 14.92 17.53 2. lftex Oil & Chemicals Ltd. 8.47 7.29 1.18 13.93 16.18 Average 14.43 16.87 46. The assessee in reply to the show-cause notice furnished the following list of comparables to the TPO and while doing so rejected the applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal's decision in the case of Sony India (P) Ltd. vs. Dy, CIT (2008) 118 TTJ (Del) 865 : (2008) 14 DTR (Del)(Trib) 228 : (2008) 114 ITD 448 (Del) calls for has directed for allowing benefit of (+)/(-) 5 per cent as standard deduction. The Finance Act, 2012 amended the provision of s. 92C of the Act by inserting s. (2A) with retrospective effect from 1 st April. 2002 which reads as follows: '(2A) Where the first proviso to sub-so (2) as it stood before its amendment by the Finance (No.2) Act, 2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year and the variation between the arithmetical mean referred to in the said proviso and the· price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso:' The aforesaid provision makes it clear that an assessee shall not be entitled to exercise its option as referred in the proviso to sub-so (2) if the variation between the arithmetical mean and the price at which such transaction has- actually been undertaken exceeds 5 per cent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n amount will be sent by DD/at par cheque for the previous quarter before the end of the first month of next quarter after realisation of payments for the previous quarter and C Forms collections as per the prevailing rates." 57. The assessee submitted that the agency commission accrues to the company once the goods are sold by the agent and further it is evident from cl. 5 that at the stage of billing the agency commission Is recognised and accrued in the books of account of the company. Further as per cl. 14 the commission is fixed on the basis of sales and not on collection, though based on collection the payment may be deferred in time in terms of cl. 15. 58. The assessee relies on the decision of Rotork Controls India (P) Ltd. us. CIT (2009) 223 CTR (SC) 425: (2009) 23 DTR (SC) 79: (2009) 314 ITR 62 (SC) wherein It was observed as follows- "The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a proVision for warranty only when the customer makes a claim; and (c) it proVides for warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first opti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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