TaxTMI 
TaxTMI 
2010 (9) TMI 682
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....e assessee company are held by MEI, Japan and the remaining .01% are held by Matsushita Asia Private Limited, Singapore. The business of the assessee company is organized under three distinct segments. As per the TP report, the following are the three classes of international transactions (Table-3) described in Para 2.5 of the Report : Trading Function Commission & Marketing agency services Advertising Expenses Reimbursement Import of CPD & SPD products by NPIPL from MEI ground entities Rendering sales agency services by NPIPL to MEI group entities in respect of industrial sales division products against receipt of commission payments. Reimbursement received by NPIPL from MEI group entities for certain advertising expenses. Reimbursement of traveling expenses by MEI group entities to NPIPL. Reimbursement of market development expenses incurred for the industrial products by MEI group entities to NPIPL. Payment of Pananet Additional income support by NPIPL to MEI. received by NPIPL for providing warranty services to 'Pananett' machines sold to customers inIndiafrom MEI group entities. Service fee received by NPIPL ....
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.... profit level indicator for benchmarking analysis for the trading function. Then TNMM was also found to be most appropriate method to test the profitability of commission and marketing agency services of ISD division. In respect of margin shown on SPD, the AO found that same was more than arm's length margin of 2.48%, therefore international transaction pertaining to SPD was held to be at arm's length. In respect of imported goods under CPD, the AO observed that the loss margin shown was below the arm's length margin. The AO therefore observed that the transfer price of the imported finished goods under the CPD has to be adjusted downwards. Accordingly, arm's length price was determined at the price declared in form 3CEB minus the adjustment amount i.e. Rs.74704584 - Rs.11237019 = RS.63467565. The arm's length price in respect of remuneration received under ISD division was also enhanced by the AO by an amount equivalent to the difference of operating loss margin and the mean margin of the comparable companies chosen. This difference works out to be 6.11% -(-) 28.8% = 34.91% of the total costs. The total costs have been worked out to be Rs.33131321.34.91% of this amount comes to Rs....
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....s used and risk assumed. As per the provisions of the Act, a bench-marking analysis is done by first selecting the comparable uncontrolled cases, then my computing the ALP with data pertaining to these comparables, using the most appropriate method and finally, by ascertaining whether the intra-group transactions conform to the arm's length standards prescribed by the Act or not. A. Business Profile: 4.4 Before adjudicating on the TP issues, it would be appropriate to sketch the business profile of the appellant as described in the TP report: (i) National Panasonic India Pvt. Ltd. (NPIPL or assessee or Taxpayer Company) is part of the Matsushita group of companies. The group is one of the world's leading manufacturers of consumer electronics products. These products are sold under the brand names 'National' 'Panasonic', 'Technics' and 'Quasar'. (ii) National Panasonic India Private Limited (NPIPL) is wholly owned subsidiary of Matsushita Electric Industrial Company Limited, Japan (MEI). 99.99% of the shares of the assessee company are held by MEI, Japan and the remaining .01% are held by Matsushita Asia Private Limited, Singapore. (iii) The business of the taxpayer c....
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....ional transactions along with risk assumed (Para 3.1.2) and assets deployed by the appellant (Table-4) : Table-4 D. T.P. Report, Economic & Benchmarking Analysis: Trading Functions Import of products Payment for Pananet Support Reimbursement of administrative expenses Supervision of authorized service centers (ASC) Functions * Import products from MEI Group Entities. * Obtaining custom clearance. * Maintenance of warehouse facilities for stocks. * Selling and distribution functions. * Price determination. * Undertaking publicity and advertisement campaigns with full description * Payment for use of Pananet software on the basis of number of hours used. * Receipt of reimbursement for administrative and traveling expenses incurred by NPIPL for its dealers inIndia. * Appointment of ASCs. * Distributin of service manual to ASCs. * Providing technical support to ASCs. * Administering supply of spare parts and tools to ASCs. * To collect records of service claims from ASCs. * Reporting of service activities of ASCs * Replying to complaints, questions & inquiries from customers. Risk * Contract risk wit....
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....roviding services to unrelated parties in respect of advertising campaign. Any benefit on account of the campaign accruing to the MEI group was purely incidental. Hence, the reimbursement cost on account of advertising expenses would not warrant any mark up. Accordingly, no separate benchmarking analysis is required to be done for this transaction. E. Multi-Year Data: 4.8 For carrying out the comparability analysis, the appellant had focused on the operating results of comparables over the three financial years 1999-2000, 2000-01, & 2001-02. This was stated to have been done to minimize the impact of abnormal factors on the outcomes of the comparable data. F. Selection of Comparables : Trading Function: 4.9 The appellant identified a set of nine uncontrolled comparable companies from Prowess Database by way of three different searches. In the first search, companies classified under the broad head of electronics were considered as per the selection process detailed in Table-5 of this order, by adopting a formula based search strategy by applying various quantitative and qualitative filters to the set of potential comparables within this segment: Table 5 : SELECTION P....
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....ssing the criterion Explanation Starting Point 730 Companies in the electronics, electrical & non-electrical goods segment having the requisite financial information. Manufacturing sales to total sales ratio of 294 To exclude companies those are primarily into manufacturing. Trading sales to total sales ratio of >75% to be retained 167 To exclude companies those are not primarily engaged in distribution/trading activities. Research & development expenses to sales ratio 166 To eliminate companies undertaking significant research and development activities. Qualitative analysis 6 To eliminate companies • Companies having related party sales. • Companies not dealing in similar product or having similar business and functional profile. • Companies having more than 10% of average loss. • Insufficient information such as absence of director's report. The final set of comparables obtained by way of the three different searches along with the weighted average of net profit margins is detailed in Table No.8 below: ITA-1417 & 1373/D/2008 S. No. Company Name Identified In the sea....
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....administrative expenses 69,925 56,381 39,553 Total Operating Cost 8,59,765 6,74,512 4,04,918 19,39,195 Total Operating Profits 67,319 39,395 20,353 1,27,067 NPM 7.26% 5.52% 4.79% 6.15% It was concluded in the TP report that the assessee had earned net profit margin of 6.15% which exceeded the arm's length profit margin of 2.48%, the outcome of NPIPL's international transactions satisfied the arm's length standard. The order of TPO was as under. T.P.O's ORDER "5. During the TP proceedings, the TPO observed that the combined results of the two segments namely CPD and SPD were benchmarked against the margins of the comparables. It was also noticed that CPD division had made an operating loss of Rs. 2.72 crores as against an operating profit of Rs. 5.79 crores made3 by the SPD division. The TPO also noticed that the segmental accounts of CPD & SPD INCLUDED THE SUM OF Rs 15.3 crores as reimbursements received from associated enterprises for certain advertising expe....
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....closely interlinked with import of office products. The very purpose of transfer pricing analysis is to segregate controlled transactions from uncontrolled transactions and then to evaluate the control led transactions separately. Thus, aggregation of unrelated and related party transactions would distort the evaluation process. CPD with very insignificant proportion of related party transactions cannot be aggregated with SPD. viii. If aggregation of results is done for the two divisions CPD & SPD, then the net losses from the controlled transactions could be justified through profits from another set of controlled transactions, thereby making the analysis meaningless. C. Redrawing of Segmental Accounts CPD (only imported from AEs) (Rs.) SPD (Rs.) Net Sales 132,982,473 777,133,469 Other Operating income 179,443 1,301,080 Total Operating Revenues 133,161,916 778,434,549 Cost of Goods Sold 104,476,649 575393430 Advt. expenses 7,054,248 21,975,346 Selling expenses (other than advt.) 20,395,201 93,538,482 Other operating expenses 7,005,786 30,731,073 Administratio....
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....nt, comparables were chosen after an extensive exercise and many attempts were made to find the comparables. After all these efforts, a net profit of 2.48% was adopted as the arm's length margin for benchmarking the trading activity of the appellant. iii. The TPO on the contrary had bifurcating the trading activity of the assessee into two separate divisions of CPD & SPD as against the consolidated trading activity reported and compared by the appellant in its TPO Analysis report. iv. The TPO had given many reasons for bifurcating the activity of the assessee into two different divisions but safely assumed the consolidated profit margin of 2.48% of the comparables as the common net margin indicator as was reported by the assessee in its TP analysis report. Alternatively, he should have found out comparables and adopted a lower margin for the CPD division of the assessee. v. The TPO had simply reworked the financials of the assessee with regard to certain items without making any corresponding adjustments in the PLI of the comparable cases or without finding any further comparable data. The approach adopted by the TPO is arbitrary and not as per the prescribed Rule 10B of T....
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....list of purchases of the same/identical items which were imported was furnished along with the purchase cost. It was also explained that the price paid for the imported goods were very competitive and in no case higher than that paid to the local sellers including the unrelated parties. (xii) The assessee had submitted before the TPO that custom duty was paid on all the imports. In fact, the customs department had charged the assessee with under invoicing the goods but later on SVB (Special Valuation Bench) cleared the assessee of such charges and ordered refund of the duty charged. Hence, any allegation by the tax authorities that assessee had overpaid for its imported goods is uncalled for and contrary to the findings of Customs Department of the Government of India. (xiii) It was explained to the TPO that the ISD division of the assessee was a self-contained independent division exploring the possibility of earning higher commission from agency services. In fact, in the initial years, assessee had made profits but in the year under consideration did not get through enough commission income which resulted in lower income. (xiv) The TPO has totally misdirected himself in ....
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....under: -Profit level indicator -2.48% -unrelated comparable. -Adjustment for G.P. (-) 7.00% -Adjustment for selling expenses (-) 4.63% Comparable Profit level (-) 9.15% Indicator of CPD ======= (xv) The profit determined by the TPO of (-) 5.97% is well above the adjusted PLI of CPD for the comparables at (-) 9.15% and therefore, the transactions of the assessee could only be concluded to be at arm's length. 6. CIT(A) finally adjudicated on the said issue at pages 32, 33 and 34 in paras 9.3, 9.3.1, 9.3.2, 9.3.3, and 9.3.4 wherein he held. "9.3 There is no dispute between the appellant and the TPO/AO regarding using TNMM as the Most Appropriate Method (MAM), the use of net profit margin on sales as the PLI for the trading function and the use of the appellant as the tested party. Therefore, these issues are not discussed in this order. 9.3.1 The first bone of contention between the appellant and the TPO/AO relates to the use of aggregate versus segmental data across the two divisions CPD & SPD. 9.3.2 Para 1.42 of the OECD Guidelines deals with the issue of evaluation of separate and combined transactions. The relevant extract underlying the basic principle is reprod....
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....s. (iv) Two or more operating segments can be aggregated only if the segments have the same characteristics in each of the following areas: * The nature of the products and services provided * The nature of the production process * The type or class of customer * The methods of product or service distribution * If applicable, the nature of the regulatory environment CPD and SPD do not share the same basic characteristics in each of these areas, even if they share some characteristics in some of these areas. (v)The appellant itself has admitted the distinguishing features of the two divisions [Refer Para 7.2(v) of this order]. The SPD product line is characterized by high technology and supported by proprietary intellectual property and therefore, that segment is unique and high quality feature driven. On the other hand, CPD product line is yet to create its market presence. (vi)The spirit of transfer pricing analysis under the TNMM method by choosing a set of narrowly defined transactions is satisfied in terms of Rule 10B(1)(e)(i) only w....
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....eting the OECD guidelines pertaining to aggregation Vs. Segregation of the functions. 6. The CIT(A) has grossly erred on the facts of the appellant's case in holding that there exist a distinct difference between the dynamics of the two divisions of the assessee i.e. CPD and SPD. 7. The CIT(A) ought to have held that once having accepted the TNMM method, having accepted the comparables and the PLI of the comparable, the CIT(A) should not have rejected assessee's trading functions on merely conjectures, surmises, and erroneous considerations. 8. The order of the CIT(A) is full of contradictions inasmuch as that on the one hand he has accepted the comparables found by the assessee in its transfer pricing study and on the other hand he has partially rejected the same when it comes to aggregation and segregation of the two trading divisions of the assessee. 9. The CIT(A) has grossly erred in holding that appellant's reliance on the Special Valuation Cell of the custom's department was not proper and he has further erred in rejecting the same. 10. The CIT(A) has erred on law and on the facts of the circumstances in the appellant's case in confirmi....
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.... crores was also recommended in respect of remuneration earned from parent company pertaining to ISD division. In the economic analysis carried out by the assessee, the activities of the supervision of authorized service centers were aggregated with the main activity of trading function for the purpose of benchmarking analysis. TNMM as adopted by assessee was found to be most appropriate method by the TPO and CIT(A) to test the profitability of commission and marketing agency services of ISD division. In respect of margin shown on SPD, the AO found that same was more than arm's length margin of 2.48%, therefore international transaction pertaining to SPD was held to be at arm's length. In respect of imported goods under CPD, the AO observed that the loss margin shown was below the arm's length margin. The AO therefore observed that the transfer price of the imported finished goods under the CPD has to be adjusted downwards. Accordingly, arm's length price was determined at the price declared in form 3CEB minus the adjustment amount i.e. Rs.74704584 - Rs.11237019 = RS.63467565. The arm's length price in respect of remuneration received under ISD division was also enhanced by the AO ....
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....mission agency functions. The assessee had conducted transfer pricing analysis for these two functions separately. For this purpose, the results of CPD & SPD were aggregated and the results of ISD were considered separately. The TPO, however, analyzed the accounts of the assessee on segmental basis and redrew the accounts of the three segments CPD, SPD & ISD separately. Further, CPD was bifurcated into CPD (Local) & CPD (Imported Goods). On the basis of the redrawn segmental accounts, the TPO recommended transfer pricing adjustment of Rs.1,12,37,019/in respect of imported finished goods in the CPD (imported goods) segment. A quantum of TP adjustment to the tune of Rs.1,15,66,144/-was also recommended in respect of remuneration received by the assessee from its parent company pertaining to ISD Division. In the instant case, in the TP report filed by the assessee before the AO, the comparables were chosen after extensive exercise and a net profit of 2.8% was adopted as the arm's length margin for benchmarking the trading activity of the assessee. However, the TPO has bifurcated the trading activity into two separate divisions of CPD and SPD as against consolidated trading activity. H....
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....ducts as well as establishing as well as new, the gain of which will accrue to the Indian counterpart in the form of additional sales. There is no dispute to the well-settled legal proposition that marketing and advertising expenses play a vital role in facing the competition from foreign brands and driving the sales. The sales of CPD and SPD divisions both are dependent on the advertising expenses incurred by the assessee, we therefore do not find any justification in not allowing setting off such reimbursement of advertising expenses insofar as it was a part of package deal. Ignoring such reimbursement would lead to erroneous conclusion. As per records, the reimbursement was an intentional set off received by the assessee for creating market for its products. The assessee has historically been getting reimbursement of about 2/3rd of its total advertisement and produce promotion expenses from its associated enterprises whose products the assessee markets in India. Therefore, the reimbursement of these expenses should be taken into account in the light of provisions of Rules 10B(2)(c) of the Rules. As per clause (c) of Rule 10B(2), the assessee was duly entitled to set off against ....
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....omparables were not incurring the same levels of advertisement expenses, therefore they were not in receipt of such reimbursement, the same cannot be made basis for ignoring the actual reimbursement received by the assessee. Thus, we found that all the variation of the PLI with the tested party with the PLI of comparables have occurred on this sole account which needed adjustment while arriving at price paid by the assessee to its associated enterprises or the income earned by the assessee from the associated enterprises. Mere book entry of such reimbursement, as income instead of netting of expenses will not alter the character of receipt which is revenue in nature, and the department itself has considered such reimbursement as revenue income of the assessee in earlier years. During the course of arguments before us, both the sides agreed and this is also reiterated by the CIT(A) that there is no dispute between the assessee and the Revenue regarding. (i) use of TNMM as the most appropriate method (MAM) and (ii) the use of net profit margin on sale as the profit level indicator i.e. PLI for the trading functions as the assessee is only doing trading functions and is not engaged in....
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....riteria for determining the arm's length price, then they could not have compared both the Division's results as has been done by them with the same set of comparables; there is obviously a contradiction between the two. If the TPO and the CIT(A) were serious in segregating the two, then they should have applied different set of comparables for both. Therefore, the first point made on merits which deserve to be accepted is that if for the sake of argument it is accepted that the two Divisions have separate characteristics, then obviously different comparables should have been used. We further hold that if the two are to be treated separately but same set of comparables are used as done by the TPO & CIT(A), then the PLI of comparable for the CPD division would have to be adjusted as provided in Rule 10(B(1)(e)(iii) according to which following is the correct working. PLI 2.48% of unrelated comparables. PLI of unrelated comparables. 2.48% Adjustments 1. Difference in GP as given by the TPO & CIT (A) (SPD 26% -CPD 19%) (-) 7.00% 2. Selling expenses difference (CPD 18.63% -14% SPD) (-) 4.63% -------- Adjusted Comparable PLI (-) 9.15% ------....
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.... results of the assessee i.e. the tested party with that of the comparables. If this is not an important criteria for rejecting comparables, then it cannot be an important criteria for segregation of results of the assessee. We are the view that the reasons given by both TPO and CIT(A) with regard to the difference between the two Divisions for purposes of segregation are legally and factually incorrect and cannot be accepted. Rule 10B(2) very clearly lays down as under: "R.10B(2) For the purposes of sub-rule (1),the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely: (b) the functions performed, taking into account assets employed or to be employed and the risks assumed by the respective parties to the transactions;" 13. It is statutorily laid down as to how an international transaction is to be compared with uncontrolled transaction. We found that the criteria used for segregation is incorrect and factually inaccurate, despite the fact that under the Transfer Pricing Regulations the only reason which can be used for segregation is the FAR analysis as provided in Rule 10B(2)(b). The FAR is....
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....d or not is given in Rule 10B(2)(b). Therefore, the grounds raised on the issue of segregations vs. desegregation, as per the provisions of law, segregation was not called for. The Senior DR in his defence of the order of CIT(A) has reiterated the reasons given by TPO and the CIT(A). He also reiterated para 1.42 of OECD guidelines on transfer pricing as reproduced by CIT(A) in para 9.3.2 of his order. The Senior DR also raised doubt about the transfer pricing report given at page 110 of the Paper Book by the assessee. The assessee in his rejoinder to the DR's submissions has stated that the audited accounts filed by the assessee including statutory documents in form 3CEB, Tax Audit Report under Rule 44AB, transfer pricing documentation under Rule 92D have all been accepted by TPO, AO and CIT(A). None of the authorities below have doubted the veracity of the accounts or the figures given in the TPO's report. In fact, page 110 has been verified by TPO and bill-wise details have been given by the assessee to the TPO vide his letter dated 21.12.2004. Again, TPO wanted to have further details which were given to him as at pages 384-389 of the Paper Book. The reconciliation of the figure....
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....g income. The CIT (A) in his order deals with these issues in para 5.2 page 12, para 7.3 on pages 26, 27 and 28. On page 28 para 8(v), the CIT(A) raised the question which needed to be answered in the appellate proceedings before him which is reproduced as under: (iv) Under the given circumstances, whether the TPO was right in excluding the reimbursement of advertisement and sales promotion expenses as non-operating revenue? 17. He then went on to give his findings in para 9.5 pages 34, 35 and 36. The CIT(A) largely concurred with view of the TPO and the reasons given by the TPO. He went on further to state that as there was no legal obligation for the AEs to reimburse the advertisement expenses and to that extent reimbursement was ad hoc in nature as they did not flow from any formal agreement between the appellant and the AE and therefore could not be made a part of the operating income. The CIT(A) further stated that no linkages were documented wherein the quantum of marketing support subsidy would have influenced the prices of exports or imports or royalty.... 18. The learned Sr. D.R. ITAT stated that reimbursement of advertisement expenditure would not fall withi....
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.... by way of financial support from the A.E. which reimbursements as per the accounting policy of the assessee have been shown under the separate head of operating revenue instead of netting off the operating expenses, the TPO has treated the same as non-operating receipt. (ix) The Accounting Standards as applicable to the assessee under the ICAI Guidelines, which have been certified by the financial auditors have treated such reimbursements as operating revenue and have found no mistake in the accounting treatment given to such revenues. (x) Since in a double-entry book-keeping system, the income and or expense have to be balanced out either through netting off from operating expenses or through including in the operating income of the Profit and Loss Account, the treatment given by the assessee and approved by the Statutory Auditors is correct and does not require any modification as has been done by the TPO. (xi) One reason given by the TPO for excluding the advertisement support from the financials as non-operating income is that comparables have not reported such receipts. However, the TPO while making this conclusion seems to have completely ignored the fact that the c....
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....ract from the order for the A.Y 1999-2000 is reproduced below: "6. We are in agreement with the above observations. We find that the transactions relating to advertisement, sales promotion, commission trade discount etc. are not between the resident and the non-resident. There is no arrangement with the non-resident to hold that the arrangement produces to the resident less profit than the ordinary profit is settled law that if due to certain expenditure incurred by an assessee a benefit flows to the third party, it cannot be a ground to disallow the expenses in the hands of the assessee who has legitimately incurred the expenses wholly and exclusively for the purpose of his business. Thus the Assessing Officer was not correct in invoking the provisions of section 92 of the Act. Similarly since we find that the expenses are incurred wholly and exclusively for the purpose of business, the same are allowable in full and a partial disallowance is to be deleted. Accordingly grounds No. 1 to 3 raised by assessee are allowed and grounds No. 1& 3 raised by the revenue are dismissed." 12.5. In view of the categorical finding given by the Hon'ble Tribunal in the appellant's own case e....
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....xplicitly linked to the incurring of revenue expenditure can have no other character than of revenue receipt and as the receipt is directly linked with the business of the assessee, it cannot be disregarded while calculating its income either for the purpose of Income Tax Act or for the purpose of calculating his operating income. It may be looked at from any angle whatsoever either it will go to reduce the expenditure thereby increasing the income or it may become a part of operating income. Therefore, in our opinion the assessee has correctly taken the reimbursement of expenditure of Rs.15,30,40,478/-as a part of its operating income for transfer pricing analysis. 22. A question was posed by Ld. DR as to whether the assessee was in expectation of this reimbursement while doing its business in India. The TPO and CIT (A) have raised the issue in the absence of formal agreements. The assessee has filed sample copies of advertisement support agreements entered into by the appellant with the AE's. Similarly, some debit notes with regard to claim of reimbursement of expenditure have been filed on pages 704 to 724 of PB Vol. III. The learned AR has further submitted that a....
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.... point raised by the CIT(A) and TPO is that comparables do not have reimbursement. As submitted by the learned AR, the comparables do not have advertisement expenses of this magnitude at all. Therefore, even on the first principles of FAR analysis as contained in Rule 10B(2), either the entire advertisement expenditure the comparables operating profits would have to be adjusted to bring it at par with the tested party to the extent of reimbursement, if not to the extent of entire advertisement expenditure of the appellant would have to be taken out because for the purpose of comparison between comparable companies' PLI and the tested company's PLI, elements have to be more or less similar or same. It is not possible to compare a company which incurs heavy advertisement expenditure with a company which incurs almost nil or very little expenditure. If comparables have to be retained, then this adjustment would have to be made. 25. In view of above discussion, we can safely conclude that looked at from any angle, the advertisement reimbursement would definitely form a part of the operating profits of the assessee and would have to be taken into account for purposes of transfer....
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.... Expenditure 141,179,330 734,961,045 876,140,375 31,071,651 3,738,006,829 Operating Profit/Loss (1,988,007) 78,708,629 76,720,622 (7,489,134 ) 21,138,270 PLI as operating profit to sales ratio -1.49% 10.13% 8.43% PLIs of Comparable companies as given in Table 16 on page 40 of CIT(A)'s order. 3.58% Addition on account of difference in PLIs of comparables NIL PLI as operating profit to Cost ratio Weighted average mean of last three previous year, as adopted by assessee to justify the loss-reworking of Table on Pg. 111 of Paper Book PLIs of Comparable companies as given in Table 15 on page 40 of CIT (A)'s order. Addition on account of difference in PLIs of comparables -23.79% &....
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....n the ISD division was on assessee's account. After having created an infrastructure in the earlier years, wherein the ISD division had made profits, it could not have closed it down overnight. The earnings from commission income were lower because of the lower business done by the Principals in the Indian Territory on which the assessee was entitled to commission. It is submitted that there was no increase in expenses of the division. The earning of income was less during the year which resulted into loss." 28. The CIT(A) recorded his finding in para 9.8.2 page 39 of his order which is reproduced below: "9.8.2 I am inclined to agree with the arguments put forward by the TPO that no unrelated party would have incurred such a loss by maintaining a dedicated establishment and personnel to provide services exclusively mark-up. This is a clear cut example of related parties imposing special conditions on an entity, thereby adversely affecting its profitability as described in Article 9 of the OECD Model Tax Convention." 29. The CIT(A) concluded in para 0.8.5 page 40 of his order which is reproduced below: "9.8.5 In view of the foregoing analysis, I am of the considered view....
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....mitted that as per Proviso to Rule 10B(4) the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. Thus the assessee was entitled to take into account data of a period of two years prior to the financial year under review. This is for the simple fact that in service industry once you hire people in expectation of larger volume of business, it is not possible to reduce the people immediately for lack of business. The loss has to be borne till such time the volume of business picks up. Therefore for the purposes of transfer pricing, the Proviso will come to play and the data of previous two years should also be taken into account to find out whether the transactions with the AE is at arm's length or not. The same argument was also raised before the author....
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.... 30,629 85,225 Expenditure Cost of sales 415 - - Direct selling expenses 406 603 - General and administration expenses 30,666 29,180 13,869 73,715 Total Operating Costs 31,487 29,783 13,869 75,139 Total Operating Profits (7,489) 815 16,760 10,086 NCP -23.79% 2.74% 120.85% 33.27% Reworking of Table 4.6 on Page 111 of Paper Book 32.Therefore, the PLI of the tested party of 33.27% when compared to the PLI of the comparables at page 40 of CIT(A)'s order - Table 15 -of 2.95% clearly show that the assessee's transactions in the ISD Division were done at arm's length and addition of the Rs. 74,92,166/-is deleted 33. Next issue is with regard to allocation of expenses. The CIT(A) has dealt with this issue on page 36 para 9.6 of his order. The TPO has allocated non-allocated expenses of Rs.6.05 crores to the three Divisions - CPD, SPD and ISD whereas the assessee has allocated this entire expenditure to its trading functions, i.e. to CPD and SPD. The ld. AR contended that allocation of Rs.20,59,661 to ISD is not correct as this ....