TaxTMI 
TaxTMI 
2013 (8) TMI 421
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.... 1,01,91,619 and on query raised by the Assessing Officer a sum of Rs. 60,96,704 was suo motu disallowed by the assessee, hence, net addition of Rs. 40,94,915 was made. The other disallowance is a sum of Rs. 13,73,781 which is with respect to disallowance of excess depreciation on computer peripherals, UPS and printers. The assessee had claimed depreciation at 60% As against that the Assessing Officer has allowed the claim at 15% and in the circumstances a net addition of Rs. 13,73,781 is made on that account. All these additions are agitated by the assessee in the present appeal. The grounds of appeal read as under : "Transfer pricing matters : On the facts and circumstances of the case, and in law ; 1. The learned Assessing Officer pursuant to the directions of the learned Dispute Resolution Panel ('learned DRP') erred in rejecting the approach adopted for transfer pricing analysis/contemporaneous documentation maintained by the appellant and thereby making a transfer pricing adjustment of Rs. 5,45,54,363 to the income of the appellant by holding that the international transactions of the 'manufacturing segment' and the 'marketing su....
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.... manufacturing segment of the assessee by applying the profit level indicator of operating profit/sales to the value of international transaction pertaining to import of raw material instead of sales figure of the manufacturing segment which resulted in an increase in the adjustment by Rs. 26,91,806. General grounds : 8. The learned Dispute Resolution Panel/Assessing Officer erred in not granting the benefit of +/5% range as envisaged by the proviso to section 92C(2) of the Act. 9. On the facts and in the circumstances of the case, the learned Assessing Officer erred in not appreciating the fact that additions made to the total income of the appellant are merely due to difference of opinion and not due to any mala fide intent on the part of the appellant, thereby initiating penalty proceedings under section 271(1)(c) of the Act on the premise that the appellant has concealed/ furnished inaccurate particulars of income. 10. The learned Dispute Resolution Panel erred in issuing directions which are incomplete with respect to : • Discussion on reasons for rejection of the appellant's contentions, evidence and factual and technical a....
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....ppeal." 2. The draft order came to be passed by the Assessing Officer on December 2, 2009 which was forwarded to the assessee. Against the draft order, the assessee opted to refer the matter to the Dispute Resolution Panel (DRP), who vide its order dated September 30, 2010 has passed the order under section 144C(5) of the Act. 3. The transfer pricing study has been conducted by pricewaterhouse Coopers and copy of such study has been placed by the assessee in the paper book at pages 101 to 170. 4. The return of income has been filed by the assessee on November 27, 2006 declaring a loss of Rs. 52,33,133/-. Subsequently, a revised return was filed on March 31, 2008 in which an income of Rs. 79,75,972/- was declared and the assessment has finally come to be passed at an assessed income of Rs. 6,79,99,031/- after making the aforementioned three additions. 5. The assessee is engaged in the business of manufacturing, wholesale trading and installation of furniture and is also providing marketing services. It was incorporated in the year 1997 as a wholly owned subsidiary of Haworth Inc. to promote the sale of "Haworth" branded furniture to the Indian clients of "Haworth" group.....
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....nal net margin method being the most appropriate method with OP/TC as profit level indicator. For this segment the net profit margin has been computed in the transfer pricing report at 1.35% against the net profit margin of comparables at 3.15% For this segment the margin of comparable data for multiple years has been used in the TP report. 8. The segment wise international transactions, as described in the order of the Transfer Pricing Officer in table 2 are as under : TABLE 2 Sl. No. Particulars Manufacturing Segment Marketing Segment Total 1. Import of raw materials 5,93,36,409 5,93,36,409 2. Import of modular furniture 59,78,072 59,78,072 3. Import of display items and mock-ups 24,40,070 24,40,070 4. Import of fixed assets 1,40,82,082 1,40,82,082 5. Marketing & Installation services 15,39,33,769 15,39,33,769 6. Purchase of catalogues 7,89,028 7,89,028 7. Reimbursement of expenses (Paid) 31,76,157 31,76,157 8. Reimbursement of expenses (Received) 12,64,269 12,64,269 Total....
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.... 1,43,57,069 Non-operating expenses (1,28,04,653) Sub-total Fixed Costs 68,21,333 1,12,60,042 Financial charges - - Total expenditure 4,33,75,488 4,78,14,197 Operating Cost 4,33,75,488 Operating Profit 67,68,326 Operating Profit/Sales 13.50% TABLE 6 Note 1 : Particulars Reference Percentage Capacity utilization of comparables A 70% Normal idle capacity B = 100% -A 30% Actual Capacity utilization of Haworth India C 30.58% Normal capacity for Haworth India D=B+C 60.58% Capacity adjustment made considering normal capacity of Haworth India Operating expenses from fixed costs = (Rs. 1126042 * 60.58%) i.e., Rs. 6,821,333 The details of pre-operative expenses are described in table 7 as below : TABLE 7 Particulars Amount (Rs.) Salaries & Wages ....
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.... Excise Duty 16,85,845 (Increase)/Decrease in inventories (61,69,246) Depreciation 20,65,181 Personnel expenses 76,42,445 Administration & Other expenses 1,43,57,069 Total expenditure 6,06,18,850 Operating cost Operating Profit -1,04,75,036 Operating Profit/Sales -20.88% 13. The learned Transfer Pricing Officer has thus, worked out difference in the arm's length price of manufacturing segment at Rs. 1,74,03,994 as per table 10:- TABLE 10 Details Amount Value of International Transactions 5,93,36,409 Arm's Length OP/Sale at the rate of 8.45% 39,521,183 Arm's Length Margin 50,13,926 Margin shown by the assessee @ (-) 20.88% 1,23,90,068 Difference 1,74,03,994 % of difference with the value at which the international transaction has taken place 29.33% 14. Since the variation exceeded 5% no adjustment has been given to the assessee on account of variation up to 5% 15. So far as it relates to market support service segment, it is noticed by the Transfe....
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....s is to be used as the assessee did not establish that the data of the preceding two years demonstrated settled facts which have influenced the result of the financial year under consideration. 2. Adjustment of 5% as provided under the second proviso to section 92C(2) of the Act cannot be granted as the difference computed by the Transfer Pricing Officer in the arm's length price (ALP) is more than 5% of the arm's length price determined by the Transfer Pricing Officer. 3. The Assessing Officer is not under an obligation to demonstrate the existence of tax avoidance for invocation of transfer pricing provisions according to the decision of the Special Bench in the case of Aztec Software and Technology Services Ltd. v. CIT [2007] 294 ITR (AT) 32 (Bang) ; 107 ITD 141. Findings on manufacturing segment : 1. The assessee's claim for considering a sum of Rs. 1,28,04,653/- as pre-commencement expenses cannot be accepted as no preoperative expenditure are shown in the profit and loss account and statutory auditors have not considered any expenditure as preoperative expenses and such claim is made only for the purpose of transfer pricing. ....
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....on business activity of the reality and business service division which has contributed to the increased profitability of the said company and that the efforts continue by the company to improve the sale of market division and thus, it can be seen that the said company was having difference kind of business. There was no segmental report in the annual report of the company. Therefore, the results of the said company cannot be compared with the assessee. 3. The Transfer Pricing Officer was correct in rejecting three out of five comparables selected by the assessee as the financial data of the relevant financial year for those companies was not available. The Transfer Pricing Officer was justified in taking into consideration only the remaining comparable, namely, M/s. Priya International Ltd. Corporate issues : 1. The Assessing Officer has rightly disallowed a sum of Rs. 40,94,950 on account of provision for expenses being pro-type cost, promotional material, display material, promotional programs and public relation as the assessee has not furnished anything to show that the expenditure in question was crystallised in the financial year. The only argument....
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....e of transfer pricing analysis then the same should be allowed as deduction under section 37 for corporate tax assessment and reduce the assessed income to that extent to avoid double taxation. 21. Touching to ground No. 4 the objection of learned counsel is that according to search process conducted for transfer pricing study to identify a set of broadly functional comparable the assessee had arrived at a set of five broadly comparable companies/entities with a mean margin of 3.15% As per table 13 below : TABLE 13: Arm's Length Results Sl. No. Name of the Company Data Source OP/TC 1. Fortune Communications Ltd. Prowess 4.11% 2. Shanthi Sales Ltd. Prowess 1.61% 3. Ujjwal Ltd. Capitaline 3.78% 4. Priya International Ltd. Prowess Segmental 17.15% 5. Alfred Herbet (India) Ltd. Capitaline Segmental -10.91% Mean 3.15% Median 3.78% Lower Quartile 1.61% Upper Quartile 4.11% 22. He submitted that out of the aforementioned five comparables three were rejected by the Transfer Pricin....
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.... or services and that is subjects to risks and returns that are different from those of other business segments.' The fact that the consolidated annual report of Alfred India Ltd. has shown the sales and marketing segment as a separate service proves that this is a separate service provided by the company. • The consolidated segment, i.e., sales and marketing operations is functionally comparable to the MSS segment of the appellant. • As Priya International Ltd. (Indenting segment) has been accepted as a comparable, Alfred Herbert India Ltd. (sales and marketing operations segment) should also be considered as comparable as the said segment is engaged in providing similar services and has relatively low volume as is the case for Priya International Ltd. (Indenting segment). • If Alfred Hebert India Ltd. (sales and marketing segment) is rejected as it has incurred a significant loss of, then on the same lines Priya International Ltd. (indenting segment) should also be rejected as it has a significant high profit. It can be observed that both comparables were outliers in respect of their margins even in the set selected as per the transfer p....
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....reduced from the sales. (c) The change in stock (both raw material and finished goods) during the period be added to (in case of increase in stock) or reduced from (in case of decrease in stock) from the sales are the case may be. (d) The other costs (direct and overheads) pertaining to these sales to be reduced from the sales. (e) The resultant net profit would represent 'profit earned from the international transaction' during the year. (f) The operating margin to be computed by dividing the sales from the profit so arrived at it may be noted that the profit level indicator OP/sales is not disputed in the case." 26. Thus, it was pleaded that by adopting the abovementioned steps the expenses incurred prior to commencement of operations are not required to be considered while computing the operating margins for the international transactions. It was submitted that the margin of manufacturing segment after excluding pre-commencement cost is 4.65% reference in this regard was made to Annexure "C" enclosed with the written submissions which described the net profit margin as under : Annexure C-Computation of operating margin of manufac....
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....see, they should have considered the data for balance comparables to make adjustment. Alternatively, it was pleaded that onus would be on the Department to make adjustments for differences in the stage of operations of the comparables and the assessee for an appropriate comparability analyses. For this purpose the learned authorised representative relied upon the following decisions : 1. Asst. CIT v. Fiat India P. Ltd. (the hon'ble Mumbai Tribunal (I.T.A. No. 1848/Mum/2009): 2. Skoda Auto India P. Ltd. v. Asst. CIT [2009] 122 TTJ (Pune) 699 ; 3. E-Gain Communication P. Ltd. v. ITO [2008] 118 TTJ (Pune) 354 ; 4. Global Vantedge P. Ltd. v. Deputy CIT [2010] 1 ITR (Trib) 326 (Delhi) (I. T. A. Nos. 2763 and 2764/Del/2009). 29. He submitted that in the case of E-Gain Communication P. Ltd. v. ITO [2008] 118 TTJ (Pune) 354, the Tribunal has held that depending upon the facts and circumstances of the case, it will be appropriate to adjust operative profit of the tested party and comparable parties. Thus, it was pleaded that if an adjustment cannot be made to comparables to eliminate material differences, appropriate adjustment can be made to the margins of the tested par....
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....icing Officer's approach were to be followed, then, the erroneous computation for current year would also affect the subsequent years, creating a chain of errors. Rectifying these errors spanning different period is impracticable and effectively the results of such analysis would be absurd. It was submitted that it is also arithmetically incorrect to apply the ratio of OP/sales on any other base, but sales. The Transfer Pricing Officer has applied this ratio on the imports, which is a cost-diametrically opposite in the profitability statement from the denominator, i.e., sales. Thus, it was submitted that the incorrect adjustment amount of Rs. 1,74,03,994/- was computed by the learned Transfer Pricing Officer instead of Rs. 1,47,12,188/- and without prejudice to other grounds, the learned Assessing Officer may be directed to rectify this erroneous computation. 33. Referring to ground No. 8, it was argued that 5% benefit should be allowed in the determination of the arm's length price as this position has been made clear by various decisions of the Income-tax Appellate Tribunal and it is also clear from the Memorandum to Finance Bill, 2009 and reference was made to the fol....
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....e. We, therefore, uphold the assessee's grievance in this respect." (e) Asst. CIT v. UE Trade Corporation (India) P. Ltd. [2011] 9 ITR (Trib) 400 (Delhi) (I. T. A. No. 4460 (Del)/2009) : Para 5.4 "The proviso, which is applicable to the proceedings of this year, contemplates an option to the assessee to choose a price which may vary from the arithmetical mean by an amount not exceeding five% of such arithmetical mean ". . . A substantive provision can be amended retrospectively by the Legislature. However, such amendment is taken retrospectively only if it has been so specifically provided by the Legislature itself. The proviso was substituted with effect from October 1, 2009 and not retrospectively. Therefore, it comes into operation from the assessment year 2009-10 and applies to subsequent years.' (f) Memorandum to the Finance Bill 2009. Clause 40 of the Finance Bill 2009 : Clause 40 of the Finance Bill, 2009 "40. In section 92C of the Income-tax Act, in sub-section (2) for the proviso, the following provisos shall be substituted with effect from the 1st day of October, 2009, namely :-" Notes to clau....
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.... the following decisions : (1) Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) ; (2) Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) ; and (3) Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC). 37. Thus, it was submitted that these expenses are allowable. In the alternative, it was submitted that if these expenses are considered as contingent liability and the disallowance is sustained, then, the same should be adjusted while computing transfer pricing margins and the arm's length prices. 38. So far as it relates to ground No. 13, the learned authorised representative submitted that the depreciation at 60% was claimed by the assessee on computer peripherals, viz., printers, UPS and other computer peripherals and against the claim of the assessee the learned Assessing Officer has allowed only 15% and, accordingly, an addition of Rs. 13,73,781 was made to the total income of the assessee. He submitted that the Assessing Officer has classified the computer peripherals, printers and UPS of Rs. 16,16,213 as plant and machinery and not computers and, thus, the disallowance should be deleted in view of the following decisions: (a) The deci....
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....which the arm's length price is computed. He submitted that the assessee may not be permitted to use the process of new or fresh search only to obtain biased result. He submitted that there should be some finality at some stage, otherwise such process can continue at later stage of litigation also. 43. He further submitted that in respect of two comparables of whom the current year data was available, the Transfer Pricing Officer has rejected one comparable, namely, Alfred Herbert India Ltd. for the detailed reasons mentioned in his order. He submitted that the said comparable cannot be taken into account for the following reasons : (i) The company is involved in completely different business activities. (ii) Sales and marketing operations form an insignificant part of the overall operations of the company. (iii) The turnover of the segment is very low (just Rs. 18 lakhs). (iv) The segment has incurred losses. (v) The segmented accounts are available only on consolidated basis. 44. Thus, he submitted that according to remaining one comparable, the arm's length margin was 22.58% The turnover of the comparable is Rs. 151 lakh....
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....ement has not been brought out clearly in the submission/argument. It was submitted that if the assessee claims that the expenses incurred prior to commencement of manufacturing are to be excluded while calculating the operating margins of manufacturing segment, then, the onus is on the assessee to prove that these expenditure were actually incurred prior to commencement of manufacturing activities and, thus, do not relate to international transaction of this segment. He submitted that the assessee has not discharged the initial onus by furnishing credible evidence in the shape of auditor's or accountant's certificate. Therefore, the assessee is not entitled to claim such benefit and reference in this case is made to the Special Bench decision in the case of Aztec Software and Technology Services Ltd. v. CIT [2007] 294 ITR (AT) 32 (Bang) ; 107 ITD 141. It was submitted that the assessee did not classify the said expenses as pre-operative in nature and if the assessee wants to contend so, then, the onus will be on the assessee and it cannot be shifted to the Department. Unless the assessee discharge such onus, the claim of the assessee cannot be allowed. 47. Coming to gro....
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.... to change in volume of production. The variable costs are those which vary on increase or decrease in the volume of production and such bifurcation is largely theoretical in nature and in reality and practice fixed costs are never fixed and variable costs are never variable. They some how move in step direction. The assessee did not submit the basis of classification and evidence to substantiate that the movement of cost is in accordance with the claim of the assessee. In the absence of history, the assessee has also not demonstrated the movement taking figures of subsequent period and, thus, the assessee has failed to substantiate the movement of fixed and variable cost in a particular way, therefore, the claim should not be entertained even when the adjustment was to be made in the data of the tested party though the claim of the Department is that adjustments are only to be made in the data of the comparables. 50. Apropos ground No. 7, it was pleaded that the assessee has reported the value of international transaction of import of raw material at Rs. 5,93,36,409, therefore, the arm's length price has to be computed on the entire transaction even if a part of the raw mat....
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..... Nos. 2320, 2321 and 2322/Del/2008). 52. Thus, it was submitted that the assessee's claim is not sustainable. 53. It was further submitted that the amendment brought into the provisions of section 92C(2) was clarificatory in nature, hence, applicable retrospectively. This amendment has been brought to undo the unintended consequences and, for this purpose, the learned Departmental representative relied upon the decision of the hon'ble Supreme Court in the case of Allied Motors P. Ltd. v. CIT [1997] 224 ITR 677 (SC). He submitted that the proviso to section 92C(2) states as follows : "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices : Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five% of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price." 54. He submitted that the position of Circular No. 5, dated June 3, ....
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....iii) Honeywell Ltd. v. Deputy CIT 2009-TIOL-104 (AT) (Pune). 58. Apropos ground No. 12, it was submitted that the assessee has not provided evidence for a sum of Rs. 40,94,915 for making provision for certain expenses which have been considered as contingent liability and in the absence of such evidence, the claim of the assessee has rightly been rejected. So as it relates to ground No. 13, he submitted that the items which can work independently on computer should not be treated as part and parcel of computer and, hence, depreciation claimed by the assessee @ 60% should not be allowed. 59. In the rejoinder, it was submitted by the learned authorised representative that it was impossible for the assessee to envisage that whether current year data for the comparable selected would be available in the public domain or not at the time of transfer pricing assessment which was 2-3 years later. Therefore, he pleaded that there was no basis for the assessee to predict the action of the learned Transfer Pricing Officer for rejecting one of the remaining two comparables. The selection of the assessee regarding comparable was in good faith and was at the time of preparing contemporaneo....
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....ya International ltd. is applied, then, obviously, the data relating to Alfred Herbert India should also be applied. 61. So far as it relates to arguments of the learned Departmental representative that the assessee bears the capacity utilisation risk and the cost relating to this risk should be operating cost of the assessee and the same should be considered in the cost base while computing the net profit margin of the assessee, it was submitted that if the capacity utilisation risk was not borne by the assessee, then, it would not have any extraneous cost due to capacity under utilisation as they would not have accrued to the assessee in any manner. The question of capacity under utilisation and adjustment, therefore, arises because the assessee bears the capacity utilisation risk in the first place. Furthermore, the risk analysis as per transfer pricing study is intended for holding inappropriate characterisation of the assessee vis-avis associated enterprises. It has nothing to do with the capacity utilised by the assessee or by the uncontrolled comparables. Accordingly, the capacity risk is borne by the assessee vis-a-vis its associated enterprises and the adjustment for un....
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....ages 172 to 232 of the paper book) : "6.4.1 The assessee submits that the commission expense incurred by the assessee is towards payments to local dealers for assisting in procuring orders for products of its associated enterprise from the Indian customers. The assessee filed a revised return where the assessee suo motu disallowed the excessive commission paid to dealers during the year ended March 31, 2006. This expenditure was unauthorised and was discovered as a result of internal investigation. The assessee disallowed the same considering that the reliable evidence of such expenditure may not be readily available. 6.4.2 Accordingly, the revised margins of the assessee's marketing support services for the purposes of transfer pricing analysis were computed which worked out to 9.63%" 64. If the aforementioned submission of the assessee is taken into consideration it will be clear that according to the submission of the assessee the commission expenditure which have been disallowed were payments claimed to be made to local dealers for assistance in procuring orders for the products of the assessee's associated enterprises from the Indian customers. It ....
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....sonnel costs 31,881,328 31,881,328 Admin & other costs Commission paid (Others) 18,613,265 18,613,265 Other admin expenses 110,377,761 110,377,761 Cost of procurement of traded goods 11,204,766 11,204,766 Depreciation 2,950,263 2,950,263 Less: Commission expenses offered as disallowance in the revised return - (13,209,105) Operating expenses ("TC") B 175,027,383 161,818,278 Operating Profit ("OP")_ C=A-B 2,370,814 15,579,919 OP/TC 1.35% 9.63% 66. It can be seen from the above table that the major component of receipt of international transaction of the assessee is commission income as it constitute Rs. 15,39,33,769 of the total operating income of Rs. 17,73,98,197. Therefore, it cannot be said that commission expenses which have been suo motu disallowed by the assessee were not claimed as operating expenses while computing the arm's length price. If they are subsequently disallowed suo motu by the assessee in the revised return, they are required to be excluded from the operating cost and the calcula....
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....tion has been entered into. The proviso carves out an exception that the 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 the transfer price in relation to the transactions being compared. Thus, according to the law, the data relating to relevant financial year is only the contemporaneous data and the proviso is applicable only in some specified conditions. No material has been brought on record by the assessee to suggest that there were circumstances prevailing for application of the proviso. Therefore, we uphold the action of the Assessing Officer/Dispute Resolution Panel/Transfer Pricing Officer for rejection of three comparables in respect of which current year data was not available. 69. Now the objection of the assessee is against rejection of other comparable namely Alfred Haworth India Ltd. The said comparable was rejected by the Transfer Pricing Officer on the ground that the financial data of the said concern was available on a consolidated basis and overall business of the said company was not functionally comparable with the asse....
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....oncern is not functionally comparable with the assessee and hence has rightly been rejected by the Transfer Pricing Officer and the Dispute Resolution Panel. The rejection of the said comparable is upheld. 70. It is also the case of the learned authorised representative that on the basis of one comparable only, the arm's length price of the assessee cannot be determined and in such a situation, it is admissible that a fresh search of comparables should take place and in fact such fresh search was placed before the Dispute Resolution Panel and the Dispute Resolution Panel has failed to take into consideration said search and, therefore, the adjustment made to arrive at arm's length price is to be set aside. To support the argument that on the basis of one comparable only the arm's length price could not be determined. The learned authorised representative has placed reliance upon the following decisions : 1. SAP Labs India P. Ltd. v. Asst. CIT [2010] 6 ITR (Trib) 81 (Bang) (I.T. A. No. 398/Bang/2008 and I. T. A. No. 418/Bang/2008) ; 2. Aztec Software and Technology Services Ltd. v. CIT [2007] 294 ITR (AT) 32 (Bang) ; 3. Mentor Graphics (Noid....
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....omparable is left, the same cannot be adopted to work out the mean margin to arrive at the arm's length price. 77. Now coming to the case law relied upon by the learned Departmental representative which convey that only one comparable is sufficient and it has been held by the Tribunal in other cases that arm's length price can be worked out even on the basis of one comparable. In the case of Vedaris Technology P. Ltd. v. Asst. CIT [2009] 131 TTJ (Delhi) 309, 20 comparables were short listed and mean margin was worked out at 16.585% and out of those only one comparable was left namely Sophia Software Ltd. on the basis of which the arm's length price was determined. Here, it is the case of the learned authorised representative that the said case is not applicable to the assessee's case as in that case both parties had accepted one comparable only. But that is not the only basis on which the Tribunal has rested its decision. The other case of similar nature is Perot Systems TSI (India) Ltd. v. Deputy CIT [2010] 5 ITR (Trib) 106 (Delhi). Moreover, the comparable which has been left was selected by the assessee itself in its transfer pricing study and no reason whatso....
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....e)(i). Taking support from the above argument it is the case of the assessee that according to the stipulation in the aforementioned provision, the expenses incurred prior to commencement of operation should not be considered while computing the operating margins from the international transaction. It is the submission of the assessee that if the aforementioned expenses are excluded from operational expenses then the margin of the assessee would be within the permissible range of 5% as described in the proviso to section 92C(2). 82. We have carefully considered the rival submissions on this issue. We find no force in the contention of the learned authorised representative that such expenses were required to be excluded. The reason for not accepting such argument is that what are operational expenses are the expenses which are incurred to earn that income. It is not even the case of the assessee that those expenses did not relate to manufacturing segment of the assessee out of which the revenue was earned by the assessee. If the expenses have nexus with the revenue then they are to be considered as operational expenses and they cannot be excluded simply for the reason that the da....
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....erges is that the adjustments can be granted to the assessee in computation of the mean margin only to the extent of these being reasonably accurate. In the light of these provisions we have to examine that whether or not the Department is right in rejecting the claim of the assessee regarding capacity utilisation. 86. It has been the submission of the assessee that it had assumed the capacity utilisation of comparables to be 70% in accordance with rule 10D(1)(k) in its transfer pricing study report due to unavailability of required details at that point of time and has also made appropriate disclosure therein. 87. Rule 10D(1)(k) as described under the head "Information and documents" to be kept and maintained under section 92D "10D(1). Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely :. . . (a) to (j)....... (k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price ;" 88. The perusal of the above provision will reveal that every person who has entered into an international transa....
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.... pages 405 to 408 and 414 to 436. It was submitted that the Transfer Pricing Officer and the Dispute Resolution Panel have rejected the entire adjustment based only on account of the presumed inconsistency which has been observed in one out of the five comparables which has been proved incorrect as licensed capacity does not have any role to play in computing the capacity utilisation. There was no provision to restrict the production only up to capacity as such restriction was applicable only to licence era, i.e., pre 1991. Finally it was submitted that if there was any inconsistency with regard to the data of one comparable then data regarding remaining comparables should have been considered and reference in this regard was made to page 203 of the paper book. 90. For the proper appreciation of the submission of the assessee it has to be seen that what evidence has been filed by the assessee with regard to assumption made by it with regard to capacity utilisation of 70% of the comparables. It has already been described that it is the legal obligation of the assessee to keep and maintain the information and documents in respect of any assumption made by it which according to the....
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....ribunal (I. T. A. Nos. 2763 and 2764/Del/2009)). Accordingly, ground No. 6 is dismissed. 91. Now coming to ground No. 7, it is the case of the assessee that the Transfer Pricing Officer/Dispute Resolution Panel has erred in computing the quantum of adjustment to be made to the profit of the manufacturing segment of the assessee by applying the profit level indicator of operating profit/sales to the value of international transaction pertaining to the import of raw material instead of sales figure of manufacturing segment which has resulted in an increase of adjustment by a sum of Rs. 26,91,806. It is observed that these submissions were made by the assessee before the Dispute Resolution Panel as per copy of submissions placed at pages 205 and 206 of the paper book and it is observed that the learned Dispute Resolution Panel has not passed any speaking order on such submission of the assessee. If such submission of the assessee were to be rejected then reasons must should have been given for the same. There being no discussion on this issue in the order passed by the Dispute Resolution Panel, we consider it just and proper to restore this issue to the file of the Dispute Resol....
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....determined exceeding 5% and the assessee does not give up its right to contest the remaining addition which is in excess of 5% margin and it will be relevant to reproduce paragraph 163.4 from the said decision: "163.3. The controversy is relating to the second limb/portion of the provision where 'an option' is given to the taxpayer to take the arm's length price which may vary from the arithmetic mean by an amount not exceeding 5% of such arithmetic mean. Here again, there is no controversy that taxpayer can take the arm's length price which is not exceeding 5% of the arithmetic mean. The 'option', as is clear from the language is to take the arm's length price which is not in excess of 5% of the said mean. The word 'option' as per The Law Lexicon is synonymous with 'choice' or 'preference'. Therefore, it is the choice of the taxpayer to take the arm's length price with a marginal benefit and not the arithmetical mean determined as the most appropriate method. The controversy is in cases where the international price shown in related party transaction exceeds 5% of the arithmetic mean envisaged by the provision and su....
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....ute. Therefore, the parameters laid down as per the second limb are fully satisfied. In our opinion, the legal position cannot be different in a case where minor variation of 5% is not accepted and the arm's length price is further challenged in appeal. Mere fact of acceptance or non-acceptance of arithmetic mean can be taken to be the determining factor relating to right to contest the arm's length price in appeal. Such inference has no support of language of the provision. In our view, both in the first as also in the second limb, implications of the determined arm's length price are the same except for the marginal benefit allowed to the taxpayer under the second limb. Hence, we are of the view that the second limb is applicable even to cases where the taxpayer intends to challenge the arm's length price taken as arithmetic mean and determined through the most appropriate method. As stated above, the second proviso is intended to give marginal relief to all taxpayers as determination of the arm's length price is not an exact science but is an approximation. Option is given to the taxpayer as in some cases, variation not exceeding 5% of the arithmetic mean mig....
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....0,023 (g) Legal & Accounting Rs. 16,26,520 (h) Professional fee Rs. 24,89,733 (i) Consultancy Rs. 16,09,000 Total Rs. 1,01,91,619 99. Later on, on account of applicability of section 40(a)(ia), inter alia, legal and accounting, professional fees and consultancy fees were suo motu disallowed by the assessee in the revised return and the balance sum remained at Rs. 40,94,915. It has been observed by the Assessing Officer in the assessment order that the assessee was given specific opportunity to explain the allowability or otherwise of these expenditure and in reply the assessee has submitted that according to consistently followed the mercantile system of accounting these expenses were debited to the profit and loss account on account of the provision of accrued expenses. It was submitted that it was not in the nature of contingent liability. The Assessing Officer has found that such explanation of the assessee is not acceptable and he has disallowed the remaining amount of Rs. 40,94,915. Before the Dispute Resolution Panel also, argument of the assessee was that these expenses were closely approximate to the provisions made which can....