9911796707
TMI Blog2017 (2) TMI 691X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Import of crystal and crystal components'. Briefly stated, the facts of the case are that the assessee company, with its original name of Swaropearl, was incorporated in India in 1996. It is a part of Swarovski group, a globally famous brand for crystal and crystal related products. It is a world-wide market leader in crystal jewellery and accessories, grinding and dressing tools, precision optical equipment and synthetic gemstones. The group has production locations in twelve countries and has sale companies in several countries in Asia, Europe, South America, USA and Canada. The assessee company was initially registered as a 100% export oriented unit for undertaking activities of coating of raw beads, polishing and knotting of crystals etc. Later on, the assessee also started imports and sale of Crystal goods and Crystal components. Apart from 100% EOU division in Pune, the assessee carries out its trading activities from a domestic unit in New Delhi which has further two sub-divisions, namely, Consumer Goods Division (CGD) and a Crystal Components Division (CCD). Major customers of CGD and CCD are designers and garment manufacturers etc. The assessee reported certain internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prices from its AE vis-à-vis the price charged from unrelated parties in India. After rejecting the CUP as the most appropriate method, the TPO took recourse to the Transactional Net Margin Method (TNMM), which we will discuss infra in detail. That is how, he proposed a transfer pricing adjustment of Rs. 4.72 crore. The AO made such an addition. In the first appeal, the ld. CIT(A) accepted the application of the TNMM as the most appropriate method as against the main contention of the assessee for the application of the CUP method or the Resale Price method (RPM) in alternative. He, however, accepted the contention of the assessee that the TPO should not have taken data of comparables for several years for calculating the ALP. Accordingly, it was directed that only the current year's data should be used. In this manner, the issue of transfer pricing adjustment was restored. Aggrieved thereby, the assessee is in appeal before us against the adverse findings returned by the ld. CIT(A). 3. We have heard the rival submissions and perused the relevant material on record. Only the international transaction of `Import of crystal and crystal components' out of the reported transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction ;' 4.2. Sub-clause (i) of Rule 10B(1)(a) provides for, inter alia, identifying the price paid for property purchased. Sub-clause (ii) talks of making adjustments to such price on account of differences, if any, between international transaction and comparable uncontrolled transactions, which could materially affect the price in the open market. Sub-clause (iii) provides that the adjusted price arrived at under subclause (ii) is considered as ALP in respect of the property purchased. Usually the CUP is the method of first choice because it seeks to directly compare the price paid for goods with the price paid in a comparable uncontrolled transaction. Comparison of price paid for goods purchased in contradistinction to the profit rate in other methods - gross or operating - offers best comparison as sometimes profit may be influenced by certain other extraneous factors thereby reducing the reliability of comparability. However, in order to successfully ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n pool of both the Crystal goods and Crystal components, without there being any separate identification for each of them. We have noticed above that Crystal goods and Crystal components are different in terms of utility and value etc. and it is evident that the range of comparables is restricted to Crystal components alone. In view of the fact that the assessee did not report any comparable uncontrolled transaction of Crystal goods, we fail to appreciate as to how such rates charged in transactions of Crystal components can be considered as a benchmark for Crystal goods as well. In such circumstances, applicability of CUP to a single combined international transaction of Import of Crystal goods and Crystal components, cannot be considered as the most appropriate method. 4.4. However, the other view point of the TPO, as accentuated by the ld. DR, that the unrelated parties made purchases of Crystal components for export and hence no customs duty was payable went on to prove that the assessee's purchases were not at ALP because it bargained more, does not prove the case. In our considered opinion, the relevant factor is the price charged by the AE from the assessee and unrelated pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Flow 2,264,028 1,977,898 299,564 1,589,348 Total Assets 12,627,944 12,053,465 9,523,353 7,896,459 Shareholders Funds 3,375,307 2,141,323 1,093,512 1,578,794 Current Ratio (x) 1.65 2.19 1.47 1.85 Profit Margin (%) 4.77 4.8 -1.83 8.36 Return on shareholders Funds (%) 49.01 69.03 -43.01 87.5 Return on capital Employed (%) 30.58 23.11 -4 33.29 Solvency Ratio (%) 26.73 17.76 11.48 19.99 5.3. The TPO mentioned below the table that Swarovski, Korea made a gross profit margin in the region of 48% to 58% during the period 31.12.2002 to 31.12.2005 and net profit margin in the range of 1.9% to 7.7%. 5.4. Then, he tabulated figures of Swarovski, Singapore in relation to five Calendar years from 1999 to 2003 in para 7.3 of his order, as under:- SWAROVSKI SINGAPORE TRADING PTE LTD. FINANCIAL PROFILE Unconsolidated data 12/31/2003 12/31/20042 12/31/2001 12/31/2000 12/31/1999 12 Months 12 Months 12 Months 12 Months 12 Months th SGD th SGD th SGD th SGD th SGD Operating Revenue/Turnover 48,036 38,247 33,149 31,576 25,356 P/L before tax 2,707 2,479 2,401 3,325 1,752 P/L for Period [=Net Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly unjustified in, firstly, choosing the TNMM as the most appropriate method and then, applying the same in a wrongful manner. 5.9. We will first take up the calculation of profit rates as has been challenged before us. The TPO considered four calendar years of Swarovski, Korea for working out the profitability at gross margin in the range of 48% to 58% and then at net level of 1.9% to 7.7.%. It is obvious from the Table itself as reproduced above, that the manner of determination of percentages of 48 to 58% and 1.92 to 7.77% is not deducible. Even the ld. DR could not point out how these percentages were computed. Similar is the position qua the working of margin of Swarovski, Singapore. The TPO referred to profit margin at net level of 5.64% as on 31.12.2003. It can be seen from the Table drawn by the TPO as reproduced above that the rate of 5.64% is not emerging. Position regarding the margins of this company referred by the TPO at gross level of 54% and net of 5%, is also no different. It is not known how these figures were calculated. Even the ld. DR could not help in finding out how these figures were arrived at. This shows that the calculations made by the TPO for determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is used as benchmark for the purpose of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). Sub-clause (iv) states that the net profit margin realized by the enterprise, as referred in sub clause (i), is established to be the same as a net profit margin referred in sub-clause (iii) of the comparables. Sub-clause (v) states that the net profit margin thus established is taken into account to arrive at an arm's length price in relation to international transaction. To summarize the position under this method, the net operating profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base, which is then compared with the net operating profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction with a similar base. 5.12. We find that there are certain inconsistencies in so far as the application of the above rule by the TPO is concerned. He wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected foreign companies as comparable, even such companies operate in altogether different lines of business, which contention has remained uncontroverted on behalf of the Revenue. This also distorts the calculation of ALP by the TPO. In view of the foregoing discussion, we are not inclined to approve the working of ALP done by the TPO under the TNMM. 6.1. Now, we take up the issue about the selection of the most appropriate method between RPM and TNMM in the given facts and circumstances. The ld. AR vehemently argued that if the CUP method is not to be applied, then, the next most appropriate method is Resale Price Method (RPM). This was opposed by the ld. DR who contended that the assessee characterized RPM as not the most appropriate method in its Transfer pricing study report and, hence, now it should not be allowed to argue contrary. 6.2. We are not inclined to jettison the contention made on behalf of the assessee for consideration of RPM as the most appropriate method. The mere fact that in Transfer pricing study report, the assessee itself treated this method as not the most appropriate method, cannot be decisive in consideration of the most appropriate method. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a comparable uncontrolled transaction. The price so arrived at is reduced under subclause (iii) by the amount of expenses incurred by the assessee and the price so arrived at is adjusted to take into account the functional and other differences between the international transaction and the comparable uncontrolled transaction, if any. The adjusted price so arrived under sub-clause (iv) is taken as the ALP in respect of purchase of goods from the AE. It is clear from the command of sub-clause (i) itself that the RPM is applied when the property purchased by the assessee is resold as such. Sub-clause (ii) further provides for choosing comparable cases in which similar property is purchased and resold. Thus it is apparent that this method, by its very language, is applicable where a property purchased from an AE is resold as such. Where, however, some value addition is made to the goods before resale, the RPM ceases to be an unfailing method. 6.5. Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime. It is further clarified that if due to one reason or the other as discussed above, such a method cannot be applied, then, resort should be made to the TNMM in the way enshrined in rule 10B(1)(e) of IT Rules, 1962, taking care of the infirmities discussed above in the earlier calculation made by the TPO. B. TP addition of AMP Expenses 8.1. During the course of first appellate proceedings, the ld. CIT(A) observed that no transfer pricing analysis was done in respect of the international transaction of advertisement, marketing and promotion (AMP) expenses. The assessee was called upon to benchmark this transaction. Taking note of bright line test and other relevant factual details, the ld. CIT(A) made an addition of Rs. 1,91,94,998/- towards transfer pricing adjustment on AMP expenses. The assessee is aggrieved against such adjustment. 8.2. The ld. AR, without making any elaborate arguments on the issue, candidly submitted that transfer pricing adjustment of AMP expenses is a recurring issue before the tribunal and the view consistently taken be adopted here also. The ld. DR submitted that the tribunal has been restoring this matter to the file of TPO for a fresh adjudication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses' and remit the matter to the file of AO/TPO for a fresh determination of their ALP in consonance with our above observations and directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. II. NON-TRANSFER PRICING ADDITIONS 10.1. Now we take up non-transfer pricing grounds in these cross appeals. Ground nos. 24-27 of the assessee's appeal and one additional ground taken by the assessee assail the sustenance of addition on account of Provision for doubtful debts and Provision for doubtful advances. During the course of assessment proceedings, it was noticed by the AO that the assessee made Provision for doubtful debts at Rs. 19,08,162/- and Provision for doubtful advances at Rs. 3,43,870/-. Addition was made for a total sum of Rs. 22,52,032/- as these two amounts , in the opinion of the AO, were not deductible. No relief was allowed in the first appeal. 10.2. At the outset, the ld. AR contended that similar issue came up for consideration before the Tribunal in assessee's own case for the immediately preceding year, namely, A.Y. 2003-04, in which similar additions were deleted. A copy of such order dated 26.8.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the amount of Provision for doubtful debts has been placed on page C-5 of the paper book. This is a detailed party-wise and year-wise chart showing Opening balance of the provision for doubtful debts, additions during the period, write back during the period, other incomes written off and closing balance of the provision. On enquiry, it was stated that the assessee is creating Provision for doubtful debts and reducing it from the amount of Debtors for the purpose of reflection in the balance sheet. However, there is no actual write off of the amount of the debtor in the books of account at the time of creating provision. It is only on becoming the debt bad in a later year that the provision is debited and the account of the respective debtor is credited. If a particular sum is recovered before the final write off, such amount is reduced from the provision. To put it simply, the assessee has opened an account of Provision for doubtful debts which is a running account. Every year fresh provision, when created, is credited to such account. On making recoveries or at the time of final write off, the provision account is debited and net closing balance is carried forward to next ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision for bad and doubtful debts made in the accounts of the assessee'. This clinches the issue and clarifies the position beyond an iota of doubt that a mere provision for doubtful debts is not deductible in the case of a non-banking assessees. We are, therefore, persuaded to uphold the impugned order in so far as the disallowance of provision for doubtful debts is concerned. However, it is clarified that the amount of actual write off during the year should be allowed as deduction. The chart at page C-5 of the paper book shows such amount written off at Rs. 98,078/-. The AO is directed to verify if such amount has been actually written off in the books of account. If it is so, then, deduction should be allowed to that extent. As provision for doubtful debts is not deductible, correspondingly its write back also cannot be brought to tax. The AO is directed to determine accordingly. It is further clarified that while allowing deduction in respect of bad debts actually written off and not taxing the amount of write back of the provision, the AO should ensure that no double deduction gets allowed. It has been noticed above that the assessee was allowed deduction for such provision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowance. Admittedly, insurance policy was taken by paying premium to National Insurance Company Ltd. We fail to appreciate as to how the assessee can bring material on record to demonstrate that the insurance policy taken from National Insurance Company Ltd. was approved by IRDA. There is an underlying presumption that all the nationalized insurance companies follow guidelines of IRDA. It is too much to cast such a burden on the assessee to prove that a particular insurance policy taken by it for its employees from National Insurance Company Ltd. was approved by IRDA. Since the assessee paid premium in respect of insurance policy taken for the benefit of its employees, the deduction has to be allowed. We, therefore, allow this ground of appeal. 13.1. The only other ground which survives in the assessee's appeal is against not allowing depreciation on foreign exchange loss of Rs. 8,50,330/- capitalized in the block of 'Buildings.' On perusal of the details filed by the assessee and Schedule of fixed assets, it was observed by the AO that there was an addition in the block of `Building' amounting to Rs. 1,45,31,376/-. The assessee could produce bills only for a sum of Rs. 1.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly by any other person or authority'. There are certain Explanations to this provision and none of them deal with the forex loss or gain in the circumstances as are prevailing before us. Then, there is section 43A, which contains special provisions consequential to changes in rate of exchange of currency. This section provides that : `Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment, (a) towards the whole or a part of the cost of the asset; or (b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the actual cost of the assets for purposes of grant of depreciation for any increase/decrease of liability subsequently arising due to exchange fluctuation'. Reliance of the ld. AR on India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) is misplaced. In that case, it was held that interest on loan taken for business is deductible, irrespective of the fact that such a loan has been used for revenue or capital purpose. It is obvious that in that case the question was of allowing deduction of interest on capital borrowed for business purpose and not of depreciation on the increased value of asset due to change in foreign currency rate after its acquisition. Obviously, the assessee has been granted deduction of interest on such loan taken for acquiring `building' and dispute is only for depreciation on the amount of forex loss capitalized by the assessee, which issue is governed by Woodward Governor (supra) and not India Cements (supra). We, therefore, hold that the authorities below were justified in denying depreciation on increase in the cost of `Buildings' effected by the assessee due to translation of foreign currency loan at the end of the year. This ground fails. 14.1. The only g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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