TaxTMI 
TaxTMI 
2013 (7) TMI 441
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....learly establishes that the Appellant had incurred the said expenditure for the purpose of business. The Appellant prays that the said expenditure in the nature of export promotion expenses, incurred for the purpose of business and duly supported by evidence be allowed as a deduction in arriving at their income." 3 The only issue raised by the assessee in this appeal is against the disallowance of export promotion expense of Rs. 80,90,907/-. 3.1 The assessee is a 100% export oriented unit engaged in manufacturing (assembly and test) of Switch Mode Power Supplies (SMPS) used in computer industry and information technology application. The assessee has entered into the manufacturing contract dated 3.7.200 with its Associated Enterprise namely M/s Quality Component & Systems PPE Ltd (QCS) whereby the assessee agreed to manufacture/assemble SMPS for its AE/QCS as per the terms and conditions of the said agreement. 3.2 During the course of assessment proceedings, the Assessing Officer noticed from the P&L account of the assessee that the assessee has claimed Rs 85,90,907/- under the head 'export promotion expenses'. It was further seen that this payment was on account of for....
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....ted that both the persons who visited foreign country are directors of the assessee company; therefore, there is no question of family members of director visited to the foreign country and the element of personal expenses. The foreign travel is made by the President and the Directors for the purpose of the business. He has further contended that the assessee is a 100% export oriented unit located in Special Economic Zone (SEZ) and has to compete with the international companies outside India. The total business activity of the assessee is mainly dependent on foreign customers. Therefore, it is required that a fair amount of time is spent in meeting customers and suppliers. The ld Sr counsel has submitted that the assessee's principal customers namely Hewlett Packard, Cisco Systems, Foundry Networks, Brocade Communications and Riverstone networks are all world renowned companies, public listed on New York Stock Exchange. To secure their business, extensive direct contracts on regular basis are necessary. The total turnover during the year involved manufacturing 23 models of different manufacturing complexity and sale quantity. Each model has a unique design to meet customer specifi....
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....t or other marketing or promotional functions of the products. The entire manufactured quantity has to be taken by the AE and the assessee is under no obligation to satisfy the client of the AE once the product is manufactured as per the custom design and model provided by the AE. The assessee is a simple contract manufacturer and therefore, the expenditure incurred on foreign visits, which is not to the assessee's clients, cannot be considered as the expenditure incurred for the purpose of the business of the assessee company.. He has relied upon the order of the Commissioner of Income Tax(Appeals). 5 We have considered the rivals submissions as well as the relevant material on record. The manufacturing activity of the products SMPS has been undertaken by the assessee as per the manufacturing contract dated 7.7.2000with its AE. The recital and the relevant clauses of the agreement are as under:- WHEREAS APDS is engaged in the Manufacture-Assembling of electronic product Switch Mode Power Supply (SMPS). WHEREAS QCS is engaged in the design, marketing and sales of electronic product SMPS, APDS and QCS desire to enter in to a Manufacture- Assembling contract agreement whereby A....
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.... third parties unless QCS has given its prior consent. APDS shall set forth in any agreements with third parties that such third parties in advance transfer their claims, if any, to industrial /intellectual property rights to APDS. (4) QCS is free to assign third parties with the same manufacture- assembling work. Such a third party mandate has no effect on this Agreement and the individual order. 5.1 As agreed by the parties, the assessee has to manufacture/assemble SMPS as per the each specification, model of the product to be ordered by the AE/QCS. As per the terms of the agreement QCS will provide complete product design and bill of material for SMPS model to the assessee. These raw material has to be supplied by the AE and the finished products has to be manufactured or assembled by the assessee as per the product design provided by the QCS. QCS will buy all the SMPS manufactured/assembled by the assessee at a price ranging between 1.30 to 1.40 times of its CBOM depending on the volume of SMPS produced, complexity of assembling the SMPS, fluctuation in material cost and foreign currency rates. 5.2 It is the case of the assessee that the director of the assessee visite....
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....the manufacturing activity of the assessee. Accordingly, we do not find any error or illegality in the order of the authorities below, qua this issue. 6 In ITA No. 6542/Mum/2011, the revenue has raised the following grounds: 1. On the facts and in the circumstances of the case and in law, the CIT (A)erred in deleting the Transfer Pricing adjustment made by the TPO/AO of Rs.4,90,00,000/- by including 3 new comparables merely on the basis that the Department had treated these entities as comparable in A.Y. 2006-07 & A.Y.2007-08. 2. On the facts and in the circumstances of the case and in 1aw the CIT(A) erred in deleting the Transfer Pricing adjustment without appreciating the fact that the assessee itself had found the above 3 entities as not cQmparab1e ab initio". 7 As we have discussed above, the assessee is a contract manufacturer. Its gets purchase order from its AE(QCS), Singapore and mainly procures the required raw materials from the AEs namely QCS Singapore, and QCS Systems Inc, USA. The assessee is not selling the products other than to the AE; therefore, the entire sales of the assessee are to the AE. 7.1 During the year under consideration, the assessee has ....
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....7.5 After considering the objects of the assessee, the TPO finally considered four comparables for determining the arm's length price by applying TNMN as the most appropriate method and operating profit to Total Cost (OP/TC) as PLI. The TPO worked out the arithmetic mean of the margins of the four comparables at 9.22% in comparison to the operating profit of the assessee at 0.36% as under:- Financial Year 2002-03 S/No Company name Sales (Rs. in cr) Operating Cost (Rs. in cr) Operating Profit (Rs. in cr) Operating Profit by cost in % 1 Ador Powerton Ltd 18.44 16.51 1.93 11.69 2 Auto Ignitio Ltd 65.98 57.02 8.96 15.71 3 N G Technologies Ltd 17.45 16.66 0.79 4.74 4 TVS Electronics Ltd 24.53 23.42 1.11 4.74 Average 9.22% Advance Power Display Systems Ltd 53.36 53.17 0.19 0.36% 7.6 Accordingly, the TPO made an adjustment of Rs 4.90 crores towards ALP. 7.7 On appeal the Commissioner of Income Tax (Appeals), though held that the TNMM is the most appropriate method in this case; however, three more comparables as suggested....
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....s company cannot be considered as comparable for the purpose of determining the ALP. 9.3 In the case of M/s Alpha Transformers, the ld DR has submitted that the Commissioner of Income Tax (Appeals) has included this company on the basis of the subsequent year decision of the TPO without any examination and finding on the comparability for the year under consideration. 9.4 On the other hand, the ld Sr counsel for the assessee has submitted that the TPO rejected the comparables selected by the assessee on the ground of international company whereas in the subsequent year, these companies were considered by the TPO for the purpose of determination of ALP. Therefore, when these companies were accepted as comparables in the subsequent year, then the rejection on the ground of residential status is not justified for the year under consideration. 9.5 He further pointed out that the Commissioner of Income Tax(Appeals) issued a remand order and in the remand report, the TPO has accepted three comparables as suggested by the assessee Thus, the ld Sr counsel for the assessee has submitted that once the TPO has accepted the comparables, then the department cannot take a different stan....
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....Tax(Appeals) asked the TPO to comment on the fact whether the 3 companies suggested by the assessee were accepted as comparable in the subsequent Assessment Year or not and on that aspect, the TPO has stated in the remand report that these three comparables have been accepted by the department in the subsequent year. Nowhere, the TPO has accepted these companies as comparables for the year under consideration. 10.2 Even otherwise when the comparability of the case has to be tested independently for each year, then without examination of the comparability, no case can be accepted as a comparable, solely on the basis that it has been accepted as comparable in the subsequent year. From the annual report of the company M/s BCC Fuba India Ltd., it is clear that this company is showing persisting loss from year after year and therefore, in view of the series of decisions of this Tribunal on the point that persisting loss making company cannot be considered as a good comparable for the purpose of determination of the ALP. 10.3 Further, in the case of ECE Industries Ltd, it is evident from the P&L account that an extra ordinary item of income has been shown on account of sale of busi....