TaxTMI 
TaxTMI 
2012 (5) TMI 317
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..... The Transfer Pricing Officer-IV, West Zone, India vide Order dated 8-12-2006 passed under section 92CA(3) had determined the arms length price of the international transaction of reimbursement of business promotion expenses at Rs. 2,13,46,528/- as against the arms length price of Rs. 32,11,57,736/- determined by the assessee and made an upward adjustment to the tune of Rs. 29,98,11,208/-. The arms length price of export sales was accepted by the TPO. The CIT(A) at pages 1 to 3 of his order has brought out the report of the TPO. At page 5, the TPO's findings were summarized which is extracted hereunder for ready reference : "To summarise the TPO has based his findings on - (a) The assessee should have it's AEs at Ukraine or Russia instead of Cyprus. (b) The money earned from the business in India is largely transferred to assessee's two A.Es in Cyprus, a tax heaven. (c) Allowability of expenditure is primarily the subject matter of A.O. The A.O. is required to look into this matter and find out the ways in consultation with FTD, CBDT to carry out the investigation outside the boundaries of India as these transaction prima facie appear doubtful. (d) Sin....
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....ith CUP/CPM method was adopted and gave a finding that the margin declared was better than the industry average of 55% - 65%. (h) That TPO allowed 10% of total sales, which included expenses incurred in India and this assumption is illogical. (i) The Assessing Officer and TPO have not brought out any evidence on record that part of money paid to the AEs was return back to assessee. (j) That shares in the AEs were transferred to other unrelated parties on 20-10-2003 and thereafter, the assessee had no control over AEs after that date. It would be wrong to presume that the assessee has transferred funds to AEs which it has ultimately lost control off. He deleted the addition". 6. Aggrieved, Revenue filed this appeal on the following grounds : "1. On the facts and in the circumstances of the case as well as in law, the learned CIT(A) has erred in allowing Rs. 32,11,57,736/- i.e., 87.73% as advertisement expenses on sale of Rs. 36,60,04,484/- made through the Associated Enterprises. 2. On the facts and in the circumstances of the case as well as in law, the learned CIT(A) has erred allowing 60.33% of the net sales as marketing expenses as agai....
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.... price has been determined, by taking the average of expenditure incurred on marketing and advertisement, by 17 top pharma companies. He submitted that the Assessing Officer has correctly took the industry average on marketing expenditure of 17 pharma companies and held it to be a benchmark, for determining the arms length price. 7.2 He questioned the findings of the CIT(A) and submitted that most of the conclusions are against the law specifically the finding (a) that money has not been returned, to the AE, (b) regulatory authorities have granted approvals, (c) auditors have verified etc., as there are not tests laid own in computing arms length price and making an adjustment. As per the learned D.R. the basic question is, who is the owner of the product and who is to get the benefit of intangibles ? He submitted that the product is manufactured by the assessee and the benefit is derived by the AEs and hence, the expenditure should be borne by the AEs and not by the assessee-company. He prayed that the Order of the Assessing Officer be upheld. 8. Learned Senior Counsel, appearing on behalf of the assessee, Mr. Firoze B. Abdhyarujina on the other hand has submitted that there are....
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....nomically very instable in that period after disintegration from USSR and that the banking system is not reliable and currency was devalued from time to time. It was also pointed that Indian banks are not recognising nor are ready to deal with Ukraine Banks favourably in those years. 10.2 We find that the TPO in his Order has not given any reason as to why he is rejecting the CUP method adopted by the assessee for determining the arms length price for reimbursement of business promotion expenses by the assessee to the AEs. It is well settled that no method can be rejected without giving cogent reasons. The TPO has to state why CUP method is not applicable in this case. After assigning reasons, then the TPO has to state as to how "TNMM" is the most appropriate method, to be applied on the facts and circumstances of this case. This is not done. There is no whisper on these issues in the order of the TPO. Without giving any reasons for the rejection of "CUP" method, the TPO, applies the mean of percentage of expenditure incurred by 17 pharmaceutical companies on advertisement and marketing and terms the same as arm length price arrive by using "TNMM". This is not "TNMM". 10.3 Sectio....
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.... available in the public domain, by using the software 'Prowess' and adopting various filters for elimination of uncomparables as listed out by it. The assessee classifies itself as a licensed manufacturer and thus having lesser risks. While so the learned Senior Departmental Representative is right in pointing out that the comparables selected by the assessee are not of licensed manufacturers of the similar commodity. The TNMM compares net margins of uncontrolled transactions between independent entities, with those achieved in controlled transactions between related parties. The Tribunal in the case of Aztec Software & Technology Services Ltd. (supra) on page 238 observed as follows: "The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operations. Under this method, the net profit margin realized by an associated enterprise from an international transaction is computed in relation to a particular factor such as costs incurred, sales, assets utilized, etc. The net profit margin realized by an associa....
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....argin realized by the enterprise and referred to in step 1 is established to be the same as the net profit margin referred in step 3. Step 5 : The net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. 70. Section 92C(1) refers to arm's length price in relation to an international transaction. Rule 10B(1)(e) read with section 92C deals with TNMM, and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole. Paragraph 3.26 of Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by OECD reads as follows : "3.26 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter I). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied r....
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....t the regulator should also note that segmentation of transaction does not always lead to more reliable results and that the combined effect of two or more separate transactions may be considered, if such transactions are taken as a whole and are so inter-related with consideration of multiple transactions, is the most reliable means of determining the arm's length consideration of the transactions. At paragraph 25.4 the learned author states that OECD guidelines may also require some segmentation of the inter- company transactions. The issue whether further disaggregation is required, depends on practical issues. Such comments cannot be interpreted as permitting entity level comparison. Similarly, Taxman's book on "Law of Transfer Pricing" by D.P. Mittal, Second Edition paragraph 7.9 has been cited and the book "US Transfer Price" by Robert T. Cole paragraph 2.06 was relied upon by Shri Rajan Vora. On a perusal of all these material we find that none of them suggests entity level comparison. Reliance was also placed on paragraph 1.20 of "Transfer Pricing Guidelines" of OECD. From a perusal of this paragraph it is clear that they are applicable to all methods, that may be adopted f....
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..... Coming to the issue whether the expenditure incurred is genuine or not, as brought out in Instruction No. 3 dated 20-5-2003, the TPO's role is limited to the determination of arms length price in relation to the international transactions referred to him by the Assessing Officer and it is the role of the Assessing Officer to compute the total income of the assessee having regard to the arms length price. The TPO has doubted the expenses and has asked the A.O. to investigate. Despite this, the Assessing Officer in this case has not doubted the expenditure incurred. 10.8 Coming to the findings of the learned CIT(A), we hold that the first appellate authority was wrong in basing his decision on the fact that RBI has granted permission. This is not a ground to allow an appeal. Every remittance would bear the approval of RBI. The ground that the TPO has not brought out any evidence on record that part of the money paid to AEs was returned back to the assessee is also not a basis contemplated under T.P. provisions. The fact that expenses were audited and payments were through banking channels are not issues that determine the transfer pricing adjustment. These are not grounds on which....