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TMI Blog2017 (8) TMI 944X X X X Extracts X X X X X X X X Extracts X X X X ..... y - Held that:- As reminded of the prescription of section 92(1) of the Act, which provides that any income arising from an international transaction shall be computed having regard to the ALP. When this position was confronted, it was fairly admitted by both the sides that in the given circumstances, it would be appropriate if the question of finding suitable comparables is restored to the file of the TPO. We agree with the same and order accordingly. The impugned order to this extent is set aside and the matter is restored to the file of Assessing Officer/TPO for selecting a fresh set of comparables after due opportunity to the assessee and then determining the ALP of the international transaction of purchase of goods. Addition on account of business promotion expenses - Held that:- It is visible from the details of business promotion expenses that some of the expenses do not have any relation with enhancing the value of brand owned by the foreign AE. Such expenses cannot be considered as leading to the brand promotion. Further, some of the expenses like training customers and entertainment, etc., have no relation whatsoever with the brand promotion. In our considered opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri S.P. Singh; Manomeet Dalal; Gyan Srivastava; Jasvinder Singh, CA; Yishu Goel For The Department : Shri Kumar Pranav, Sr. DR ORDER PER R.S. SYAL, VP: This batch of three appeals comprises of one appeal by the Revenue for each of the assessment years 2003-04 and 2005-06 and one appeal by the assessee is for the assessment year 2004-05. Since some common issues are raised in these appeals, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience. Assessment Year 2003-04 2. The first issue raised by the Revenue is against the deletion of transfer pricing addition amounting to ₹ 3,21,70,540/- made by the Assessing Officer from the international transaction of Purchase of finished goods . 3. Succinctly, the facts of the case are that the assessee is a 100% Indian subsidiary of Akzo Noble Coatings International, B.V. The assessee is engaged in the business of distribution and sale of car paints and refinishes and also undertakes contract research and development for the Akzo group. The assessee reported five international transactions in Form No.3CEB. The Assessing Officer referred the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.No. Name of the company OP/Sales (%) 1. Aksharchem (India) Limited 6% 2. Amal 13% 3. Metrochem Industries Limited 8% 4. Indokem 8% 5. Organic Coatings Limited 5% 6. Mafatlal Dyes Chemicals (16)% 7. Vipul Dyes Chemicals 2% Mean 3.71% 4. By applying 3.71% as the arm s length margin, the TPO computed the amount of transfer pricing adjustment from the international transaction of Purchase of finished goods at ₹ 3,21,70,540/-. The assessee assailed the final assessment order, giving effect to the TPO s order, before the ld. CIT(A). The ld. first appellate authority approved the method adopted by the assessee, namely, RPM, as the most appropriate method. He further held that the companies chosen by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions ; ( iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services ; ( iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market ; ( v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm s length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise ; 7. Sub-clause (i) of Rule 10B(1)(b) gives the first step in the determination of the ALP, being identifying the price at which property purchased by the enterprise from an AE is resold. Sub-clause (ii) provides that such resale price is reduced by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ld. DR. 9. This contention is not acceptable for the obvious reason that similarity of the functions performed under any of the methods for determining the ALP is essential and cannot be dispensed with even under the TNMM. The Hon'ble jurisdictional High Court in Rampgreen Solutions Pvt. Ltd . vs. CIT (2015) 377 ITR 533 (Del) has held that the selection of comparables does not differ with the method adopted and the comparables should be selected on the basis of similarity found even under the TNMM. Relevant discussion made in paras 42 and 43 accentuates the importance of functional similarity even under the TNMM : Before concluding, there is yet another aspect of the matter that needs consideration. The Tribunal proceeded on the basis that while applying TNMM method, broad functionality is sufficient and it is not necessary that further effort be taken to find a comparable entity rendering services of similar characteristics as the tested entity. The DRP held that TNMM allows flexibility and tolerance in selection of comparables, as functional dissimilarities are subsumed at net margin levels, as compared to Resale Price Method or Comparable Uncontrolled Price M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing component may be a little less than the trading component, but, the character of trading company cannot be assigned to them. It is so for the reason that the impact of profit from manufacturing segment in the overall kitty of the profit from the entity as a whole cannot be ascertained. Since both the companies are engaged in manufacturing as well and the TPO s selection of five new comparables is based on a level playing with the two companies selected by the assessee on a misunderstanding of the scope of selection of comparables under the TNMM, we cannot permit the two companies chosen by the assessee to stand when the TPO s selection has also been set aside not only on the method but also the comparables. This leaves us with no comparable company existing in the given circumstances. 11. At this juncture, we are reminded of the prescription of section 92(1) of the Act, which provides that any income arising from an international transaction shall be computed having regard to the ALP. When this position was confronted, it was fairly admitted by both the sides that in the given circumstances, it would be appropriate if the question of finding suitable comparables is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomers 208,291 Total 6,651,033 14. It is visible from the details of business promotion expenses that some of the expenses do not have any relation with enhancing the value of brand owned by the foreign AE. Such expenses cannot be considered as leading to the brand promotion. Further, some of the expenses like training customers and entertainment, etc., have no relation whatsoever with the brand promotion. In our considered opinion, the ends of justice would meet adequately if the impugned order on this issue is also set aside and the matter is restored to the file of Assessing Officer. We order accordingly and direct him to examine details of the items extracted above. The expenses which are not in the nature of advertising, marketing and promotion, not leading to the enhancement in value of the brand owned by the AE, should be excluded. The remaining amount should be considered for seeing firstly, if there is an international transaction and if yes, then, to compute the ALP of such international transaction in the light of various judgments of the Hon ble jurisdictional High Court as discussed by the Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such testing material is in the nature of revenue field and, hence, cannot be disallowed as a capital expenditure. It has been brought to our notice that the Assessing Officer has consistently allowed deduction of such expenses in earlier years. We, therefore, countenance the view taken by the ld. CIT(A) on this issue. This ground is not allowed. 19. In the result, the appeal filed by the Revenue is partly allowed for statistical purposes. Assessment Year 2004-05 20. This appeal filed by the assessee is directed against the order passed by the ld. CIT(A) on 22.06.2011. 21. The only issue raised is against the confirmation of addition on account of transfer pricing adjustment from the international transaction of Purchase of traded goods from the AE. 22. At the very outset, it was contended by the ld. AR as well as the ld. DR that the facts and circumstances of this appeal are similar to those of the appeal for assessment year 2003-04 with a small modification. We find that the assessee used the RPM as the most appropriate method for showing purchase of finished goods at ALP. The TPO applied the TNMM as the most appropriate method. However, the ld. CIT(A) appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out Contract R D and received a sum of ₹ 6,66,97,040/-. The TNMM was applied for showing such international transaction at ALP with PLI of OP/OC. The TPO accepted TNMM as the most appropriate method and also the PLI. However, it was observed that the comparables chosen by the assessee were, in fact, not comparable. The TPO selected his own comparables and proposed transfer pricing adjustment of ₹ 1,06,16,921/- by adopting average OP/OC of five comparables at 20.68%. The ld. CIT(A) restored the comparables chosen by the assessee and excluded the companies selected by the TPO. The Revenue is aggrieved against the action of the ld. CIT(A) in this regard. 28. Here, again, both the parties are consensus ad item that the comparables chosen either by the assessee or by the TPO are not, in fact, comparable to the international transaction of Contract R D . It was commonly requested that the matter may be restored for selection of fresh comparables. Agreeing with the rival, but, common submission, we set aside the impugned order and direct the Assessing Officer/TPO to find out fresh comparables under the segment of Contract R D and then find out the ALP of the inter ..... 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