TaxTMI 
TaxTMI 
2013 (8) TMI 669
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....Appeals) has erred in deleting the addition of Rs. 2,51,88,406/- made by the A.O under section 92CA of the Act being the TPO adjustment. 3.1 The ld. CIT (A) ignored the fact recorded by the TPO and also the fact that amount of royalty paid and excess amount paid on purchases has also been ignored. 4. On the facts and in the circumstances of the case and in law, the ld. CIT (Appeals) has erred in deleting the addition of Rs. 2,59,434/- made on account of foreign tour of the director of the company." 2. Ground No.1 is general. 3. Ground No.2 challenges the action of the Ld. CIT (A) in deleting the addition of Rs. 2,27,23,781/- made by the Assessing Officer for calculating the book profit, being the provision for retirement benefit. The Assessing Officer observed that in respect of computation of book profit u/s 115JB of the IT Act, the assessee has not offered any explanation in respect of provision of Rs. 2,27,23,781/- for retirement benefit. The Assessing Officer observed that this expenditure was a contingent liability for the future, calling for adjustment to be made under Explanation (c) to Section 115JB (2) of the Act. The Assessing Officer made addition of this ....
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.... was brought about in Section 115JB of the Act, with the result that the provisions for expenses accrued and ascertained shall be allowed while computing book profits under MAT. As such, provision for retirement benefit in the computation of book profits u/s 115JB of the Act is to be allowed, if such provision for retirement benefits has been made on a scientific basis. Now, in the case of the assessee, as even accepted by the Assessing Officer himself in the assessment order (in para No.6 thereof), the computation of retirement benefits, having been made on the basis of actuarial valuation, is based, undoubtedly, on a scientific basis. Such provision is not a contingent liability and the liability accrues from the moment an employee is hired and starts rendering services. Only the payment of the dues is deferred, which does not amount to a contingent liability. As such, the Ld. CIT (A) has correctly held that the provision for retirement benefit, as duly certified by the actuarial valuation, cannot be treated as a contingent or unascertained liability and it is a definite liability in present, which is to be discharged at a future date. 9. The Ld. CIT (A), therefore, has correc....
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....neers, etc., visited Japan for getting trained in the technology, was not correct; that since the assessee had made purchases of moulds and designs to the tune of Rs. 1 crore, further technology was not required, because apart from the moulds and designs, the assessee had also purchased raw material such as bulbs, sockets, lenses, etc.; that in fact, there had not been any actual receipt of technology by the assessee company from Stanley; that all this had duly been taken into consideration by the TPO while making the adjustment; and that the Ld. CIT (A) has erred in brushing aside the observations made by the TPO. Besides, the Ld. DR has reiterated the arguments adduced while dealing with a similar issue concerning royalty, in the assessee's case for Assessment Year 2008-09 in the assessee's appeal in ITA No.4456/Del/2012 (which we have disposed of vide our order dated 31.05.2013). 13. The ld. counsel for the assessee, on the other hand, also reiterating the arguments raised in the assessee's appeal for Assessment Year 2008-09 (supra), has made further verbal arguments. A written synopsis/submissions have also been filed. 14. The arguments raised in the assessee's case for A....
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....logy was required by the assessee, failing to consider that it was in order to put to use such moulds, designs and drawings, that the technology was required, for which, the royalty had been paid; that the TPO had further erred in observing that there had been no actual receipt of technology by the assessee; that whereas the assessee had justifiably applied the CUP method to the royalty payment, the TPO had erred in disregarding the application of the CUP method, without assigning any cogent reason for such disregard; that the TPO had erroneously applied the TNMM and recommended upward adjustment of Rs. 2,03,02,776/-, which was wrong in the event of internal CUP having been available; that the TPO had wrongly rejected all the comparable companies selected by the assessee in its TP study, retaining only one, i.e., Phoenix Lamps Ltd.; that in such rejection, Rule 10B (2) of the Rules was not followed by the TPO; that apropos all the five companies rejected by the TPO as comparables, no FAR analysis was done by the TPO, even though such FAR analysis is essential for establishing comparability between the tested party and the other companies chosen for benchmarking the ALP, as held in ....
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....uced above, pertains to the addition made by the AO based on the order passed by the Tranfer Pricing u/s 92CA(3) of the Income-tax Act, on account of adjustment of arms' length price amount to Rs. 2,51,88,406/-. The AO has discussed this issue in para 7 onwards in his order. The appellant has submitted that during the course of the assessment year under consideration it had undertaken the following international transactions with its AEs and the TPO has made adjustment against such transactions as given below:- Sl. No. Particulars Transactions Adjustment by TPO (Rs.) Arm's length Price as per TPO (Rs.) 1 Import of raw material, spares and components 6,44,55,527/- 48,85,630/- 5,95,64,897/- 2 Purchase of Moulds/Machinery 62,50,907/- NIL 62,50,907/- 3 Payment of Royalty 2,03,02,776/- 2,03,02,776/- NIL 4 Purchases of Design & Drawings 33,18,000/- NIL 33,18,000/- Total 9,43,22,210/- 2,51,88,406 It is further submitted by the appellant that the TPO has recommended adjustments in the arms' length price pertaining to transactions at serial no. 1 & 3 i.e. value of Import of....
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.... The industry is structured in such a way in India, that the whole range of consumers and suppliers in the industry from the automakers to the auto-ancillaries, are all joint ventures and / or foreign collaborations or partnership with foreign companies. The Brand/ goodwill created by the foreign partner is his home country and/ or the world market turn into a Brand even for the Indian market. The consumers of the goods manufactured by the foreign partners of the Indian consumers of the same products in India. Thus, in the present case the assesse is able to sell the products it manufactures under the 'Stanley' brand name without undertaking much of the marketing efforts to the same companies' joint ventures/ collaborations in India who are Stanley's customers in its home market. Thus it is also humbly submitted that, the assess is not incurring substantial expenses on advertisement and sales promotion. The Stanley brand has enormous goodwill in the world market of the auto- industry, which assures all its consumers products of the highest quality and the latest technology and helps the assessee sell its products under the 'Stanley' brand at minimum cost and efforts. It is importan....
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....ability as well as growth of its business on account of close association and support from Nestle SA. Switzerland, internationally renowned and leading food processing company." It has been claimed that in the appellants' case the rate of royalty has been reduced from earlier 4 % to 3 5 for the last few years. The appellant has applied to CUP method to justify the payment of royalty. Alternatively, the royalty payment was justified even under an overall analysis performed by the assessee under the TNMM method. The TPO has ignored all this vital information, ignored the provisions of transfer pricing, ignored the legal aspect (RBI & SIA approvals of the royalty payment and has attempted to decide the issue by saying that the payment was not required to be made or was not warranted. All the reasons adopted by A.O. / TPO to disallow the amount of royalty are of frivolous nature and are full of surmises and conjectures and in any case not warranted from the transfer pricing point of view. (i) It has been submitted that while giving hypothetical examples the TPO had completely overlooked the facts of the assessee's case. Whereas there could be some element of practicability in the....
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....The purpose of the visits was getting the requisite training to enable them to apply the technology given by the AE and not for any other purpose. A commercially expedient company will not incur such expenses on the foreign visit of its employees with business necessity and sound reason. Hence, the contention of the Ld TPO is completely incorrect, it is re-iterated that the visits of the engineers of the appellant were made for training purposes only and not otherwise. (iv) The appellant has further submitted that the TPO's observation that since the assessee had purchased moulds, designs and drawings from the AE and apart from these, most of the material purchased are small items, such as bulbs, sockets, lenses etc. therefore, there was no further technology that may be required in manufacturing, are required to be rejected as surmises and conjectures. It has been claimed that merely import of these drawings, designs and moulds does not ispo-facto lead to situation that the appellant would also know how to make these designs. It has been claimed that if the view of the TPO are accepted, then primarily it would mean that by importing designs and moulds everybody become expert in....
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....l because most of the sales are in the local markets by all the manufacturers. The geographical conditions, size of the market and laws of the government of India are same. However, it is in this category of laws of government that Phoenix Lamps Ltd. situated in SEZ and enjoying lower excise duty fell on aq different platform and which required either an adjustment in its PLI or a total rejection as has been done by the TPO himself in AY 2006-07 based on our similar submissions . It has, therefore, been submitted that all the comparables rejected by the TPO is on certain extraneous factors such as low turnover which is not as per rules. Further, it has been claimed that if the TPO was to retain Phoenix Lamps Ltd., as a sole comparable, he should have carried out adjustment in accordance with rule 10B (1) (e) (iii) of the I.T. Rules. The reliance has been placed on the case of M/s Mentor Graphics (Noida ) Pvt Ltd., 109 ITD 101 (Del) for this proposition. Further, the TPO while rejecting the companies has not performed any FAR analysis and has proceeded to make ad-hoc rejections of comparables chosen by the assesse on a well laid out and accepted basis. (vi) Two other ratios....
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....tions of the assessee with its AEs have been benchmarked by the assessee under TMM Method for import of raw material and components, import of equipment and payment of royalty and resale price method in respect of international transactions related to import of drawing and design. As per Transfer Pricing Study, the assessee computed its net profit margin @ 6.5% and the average net profit margin of the comparable was computed @ (-) 0.5 % based on three years average. It was concluded that the Transactions undertaken by the assessee with its AE are on arms' length. However, during the course of proceedings, it has been submitted that only current year's data and information should be compared and not three years average which can be done only under certain eventualities, which is as per judgement of M/S Mentor Graphics Pvt Ltd Vs DCIT 109-ITD-101 (Del). Therefore, a revised chart was submitted vide letter dated 5th July, 2010 as under :- SUMMARY OF WEIGHTED AVERAGE NPM S. No. Companies 2003-04 1 India Japan Lighting 8.17 % 2 Autolite India Ltd -10.79 % 3 Fiem Industries Ltd 2.69 % 4 Japan Lamps 1.91 % 5 Phoenix Lamps 12.97 % ....
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....Ltd.) are rejected and only profit making companies are picked up for comparison, it is observed that average profit of the balance three companies works out to be 4.01 % as against 6.5 % being earned by the assessee. Therefore, on all parameters the transactions of the assessee with its AE can only be concluded to have been held by adhering to principles of arms' length. (x) It has further been submitted that for the payment of royalty to the AE, an internal CUP is also applicable. These submissions have been made based on the fact that it was only during this assessment year that M/S Stanley Electric Co. Corporation, Japan has become its AE, because it acquired 19.41 % in the paid up capital and has also appointed Executive Director of the assessee has entered into a commercial relationship with Stanley much before it become its AE in assessment year 2004-05. It has also been submitted and clarified that the assesse was paying royalty @ 4% to the Stanley Electric Co. till assessment year 2003-04, when it was not its AE. However, after it becomes an AE i.e. from assessment year 2004-05, the royalty has been paid @ 3%. To that extent, it was submitted that so far as the royalty ....
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.... 73.21 59.11 5.83 115.62 14.40 Operating Profit 11.39 1.45 5.35 0.51 34.68 (3.26) Adjustment for (6.93) (9.47) (3.61) (0.37) (15.49) (0.51) Adjusted Operating Profit (A) 4.46 (8.02) 1.74 0.14 19.19 (3.77) Net Sales (B) 54.62 74.33 64.73 7.32 147.99 10.78 Net Operating Profit/(Loss) margin (%) (A/B) 8.17% -10.79% 2.69 % 1.91% 12.97 % -34.97 % PBT 4.73 (8.01) 1.86 0.17 13.34 -5.01 Capital Employed 39.85 40.84 28.58 10.52 110.79 6.86 Fix Asserts Ratio 1.10 0.89 2.38 1.07 0.97 0.37 PBT/Sales % 8.66 (10.78) 2.87 2.32 9.01 (46.47) It was also submitted that this is not an additional data as the TPO himself has referred to all the data i.e. sales etc. in his order in Page 15 in para second. (xii) It has further been submitted that so far as the claim of the assessee reject Phoenix Lamps Ltd. is concerned, although the assessee itself selected the Phoenix Lamps Ltd. as one of its comparables, yet it was du....
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....e examined the details of search process for the comparables and find that the assessee has deployed all necessary filters based on functional tests of the comparables. All other relevant care has also been taken to select the comparables for the purposes of carrying out a detailed FAR analysis. I further note that the T.P. Study has taken into cognizance the overall scenario of auto ancillary industry and other various aspcts in relation to the tested party. Types of functions performed, risks assumed and assets employed have been considered. I therefore, am of the considered view that the assessee's most appropriate method, i.e. TNMM was the proper method to judge the arm's length transactions. Similarly, the comparables selected by the assess based on FAR analysis and a thorough search process were acceptable and the TPO was not justified to reject the comparables without getting into details FAR analysis merely on turnover criteria. I am in agreement with the A.R. of the assessee that high turnover may lead to certain economies of scale. Therefore, I would also like to reject two comparables which are into losses as according to me in these two cases low turnover has resulted i....
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....g) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions. The Indian Income-tax Act and the Transfer Pricing Regulations being a code by itself, extraneous judgements of other countries have no binding precedence value as held by the Hon'ble Supreme Court in Azadi Bachao Andolan case. 263 (ITR 706 (SC). Therefore the approach of the TPO to treat the agreement as a mere formal agreement based on certain judgements of the foreign courts, has relevance under the Indian Income-tax Law. The approach of the TPO is lop-sided and is rejected. 11. The other reason given by the TPO to disregard the royalty was that the full-time expatriate qualified engineers have been on the payrolls of the appellant and therefore there was no requirement of payment of any royalty. The answer to this question needs tom be found whether any associated enterprise would give qualified expatriate engineers without any remuneration to the other entity. To my mind, it was only because the appellant was into commercial relationship with the foreign collaborator, that expatriate engineers ha....
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....e contrary to the TPO's own finding, wherein he has accepted the purchase of moulds, drawings, designs from the associated enterprises, for which I hold technology was required and actually obtained as seen from other facts. 15. The TPO and the assessee both benchmarked royalty and raw material on overall TNMM method also and the assessee has also supported the ALP by internal CUP for royalty. I have already held that the method selected by the assessee on TNMM is the most appropriate method for benchmarking the international transactions with the AE of the assessee. I have also held that the comparables found out by the assessee after a thorough search are also broadly acceptable on functional basis. 16. It is, therefore, to be examined whether the adjustment made in the arms' length price on account of purchase of raw material from the AE, which the appellant had justified on the overall TNMM basis is justified or not. The appellant has successfully made out his case for rejection of Phoenix Lamps Ltd. as one of the comparables because the said entity was situated in SEZ and was enjoying certain benefits and was in an advantageous position as compared to the assessee. I ful....
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....at by way of international transactions with its AE, the assessee had imported raw material, spares and components, of Rs. 6,44,50,527/-, purchased moulds/machinery of Rs. 62,50,907/-, purchased design and drawings of Rs. 33,18,000/- and had made payment of royalty of Rs. 2,03,02,776/-, total amounting to Rs. 9,43,22,210/-. Of these transactions, no adjustment was made by the TPO with regard to the purchase of moulds/machinery and design and drawings. The TPO made adjustment of Rs. 48,85,630/- in the import of raw materials, spares and components and of Rs. 2,03,02,776/- (entire amount proposed to be adjusted) qua the payment of royalty. The total adjustment made by the TPO thus amounted to Rs. 2,51,88,406/-. Though the entire amount of royalty payment, of Rs. 2,03,02,776/- was proposed by the TPO to be adjusted, in the final adjustment, the ALP was determined by him on an overall basis under the TNMM. 16.1 Vide order dated 15.12.2006, passed u/s 92CA (3) of the Act, the TPO, qua the issue of payment of royalty and import of raw materials, spares and components, observed, as his first finding that in the TP report of the assessee, it had been mentioned that TNMM had been selecte....
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....e to 19.41% of the total paid up capital of the assessee company. In that year, Stanley became an AE of the assessee company. These facts go a long way to establish that in fact, the agreement between the assessee and Stanley is not merely a paper agreement, having subsisted for over 20 years, though renewed every year. The factum of payment of royalty nowhere stands disputed. The relationship of 20 years between the two entities, or two decades, by any standard, is a time-tested partnership or collaboration in a continuous state of stable equilibrium. Further, the fact of the dip in the percentage of payment of royalty from 4% to 3%, which also is undisputed, shows the growth between the two concerns, to a relationship of equity and parity inter se. It goes without saying that the factum of grant of approval by the Reserve Bank of India and other Government bodies like SIA on an year to year basis, which is as per the policy of the Government of India, further strengthens the validity of the agreement. Further, whereas for the year under consideration, the rate of royalty stood reduced from 4% to 3%, the assesse company was also paying royalty to two other concerns, namely, Rober ....
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....Assessing Officer to say that it is baseless. Rather, it goes without saying that the very payment of the royalty finds its basis in the agreement, which fact has nowhere been doubted by TPO/Assessing Officer. 22. Rule 10B(2)(c) of the IT Rules reads as follows:- " 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:- (a) ..............; (b) ...............; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;" 23. It is evidently clear from Rule 10B (2)(c), that it is the contractual terms of the transactions involved, which govern the action of judging the comparability of an international transaction with an uncontrolled transaction. That the Rule is mandatory is amply clear from the use of the expression 'shall' in the opening part of Rule 10B (2). 24. All these factors have duly been taken into consideration by the Ld. CIT (A). The ....
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....n, it is a combination of technical know-how, royalty and technical assistance through the deputation of expatriate employees on the rolls of the person obtaining the technical know-how and that merely by importing machinery, it cannot be said that the assesse would become competent to make use of such machinery. 27. Accordingly, here too, the observation made by the TPO casts no serious detriment to the case of the assessee and the Ld. CIT (A) has correctly repelled such observation. It merits adding here that there is no case made out by the taxing Authorities that the technology sought to be, and in fact, acquired by the assessee was a screw driver or ready to use technology requiring no further training for putting the same to use. 28. The next observation made by the TPO against the assessee was that the claim of the assessee that Lumax engineers and directors visited the manufacturing unit of Stanley to get the training of the latest know-how, was false. The TPO observed that in this regard, as per the details filed, 34 foreign visits were undertaken by various employees and directors of the assessee company; that however, barring one or two visits to Japan, all other v....
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....etails of the raw material purchased showed that most of the items were bulbs, sockets, lenses, etc.; that since the assessee was manufacturing only head lamps and tail lamps for automobiles, i.e., two-wheelers and four-wheelers, the materials purchased were not items of processing and so, it was not comprehensible as to what further technology might be required for manufacturing lamp items, when moulds had been purchased along with various components. 30. In this regard, as rightly contended, it is seen that mere import of drawings, designs and moulds does not per se lead to an assumption that the assessee had, thereby, acquired the know-how to make the designs and, ultimately, the product. The user, i.e., the assessee in this regard must know how to use the drawings, designs and moulds. As correctly taken note of by the Ld. CIT (A), it is nowhere the TPO's case that for the purchase of these items, the international transactions do not require any adjustment to the value of the imports. From this, it is evident that proper technology and knowledge of the manufacturing process was required so as to utilize the moulds, designs and drawings and it was for this, that the payment o....
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.... between the assessee and Stanley itself is eloquent in this regard and it would be appropriate to reproduce herein, certain relevant extracts thereof, as placed before us:- "PB Page 14 - relevant extracts from the Technical Assistance Agreement WHEREAS LUMAX is already producing Lighting Equipments for Automobiles and now intends to upgrade technology for producing such Lighting Equipments for Automobiles and Motorcycles including Motor Scooters and Mopeds as complying with the aforementioned standards, and for this purpose desires to obtain a right and license to manufacture and sell products defined hereinafter under STANLEY's patents and manufacturing know-how and its technical assistance. PB page 23 - relevant extracts from the Technical Assistance Agreement LUMAX shall not use the trade name of STANLEY, brand name or its unique design on the Licensed Products or packing boxes thereof. In cases where LUMAX uses CKD parts purchased from STANLEY, where these CKD parts bear the STANLEY trademark and/or name, LUMAX shall be authorities to use these parts. STANLEY shall also permit LUMAX to imprint on Licensed Products or components/cartons thereof, a LOGO during the cu....
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....ficate of S.R.Batliboi and Associates, Chartered Accountants which contains all the details of the renewal agreements with dates of the approval by the Central Government and date of recording by the Reserve Bank of India. It is to be further submitted that initially the rate of royalty was 4% which was reduced to 3% on 2-02-1990. The Stanley Japan took up the stake in Lumax in 1994 and their stake in the financial year 2003-04 amounts to 19.41% of the total shareholding. As per the agreement with the Stanley Electric Company they have to provide to the assessee company a non-exclusive right and licence to manufacture and sell the licensed products in India under the Stanley's patents and/or technical information besides granting further non-exclusive right to sell the licensed product manufactured in India and in other countries except Japan. Article 3 of the aforesaid agreement provided that the foreign firm was providing to Lumax, technical assistance to the extent mutually agreed namely :- "1.1 STANLEY will render and communicate or procure to be rendered and communicated to Lumax Technical Information and assistance relating to the Licensed Products from time to tine as agr....
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.... their technical personal to assist in best utilization of the information made available etc. Article 8 of the agreement also provides that the Stanley shall grant a license in respect of acquisition of any patent or invention in future in respect of the licensed products. As per Article 11 of the agreement Lumax is also authorised to imprint on the license products on components/cartons thereof, a LOGO during the currency of the agreement as under :- "MED. UNDER LICENSE FROM STANLEY JAPAN" It is to be submitted that due to the collaboration agreement with the Stanley, Lumax is getting sales orders almost from all the vehicle manufacturers and the turn over of the company has increased from 530 Million in 1993-94 to 2308 Million during the year under reference and increase in sales is due to the collaboration agreement with the Stanley. This is also a fact that multinational companies who have setup their manufacturing units in India deal with the Indian Companies who have very high standard manufacturing facilities with collaboration agreements with renowned MNCS'. Profile of Stanley have already been submitted on page 5 of Transfer Pricing Report. During the year Lumax ....
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....irrors and windshields, horns, dashboard plastics, etc. While these products could've been included, they are functionally very different and very different technologies go into the manufacture of the same. For example, the kind of investment required in moulds and machinery required for the manufacture of automotive lighting products would be very different from the investment required for the manufacture of wiper blades, horns, etc. Automotive lighting, though a specialized product industry, has various companies that engage exclusively in the production of the same and hence, a need to widen the acceptability criteria wasn't required. In addition, since we found 4 companies that were exact comparables of LIL in terms of products manufactured, a need for broadening the search criteria wasn't considered necessary. 5. To provide Custom valuation copy. This is to inform you that during the year there were more than five hundred import consignments and for your ready reference we are enclosing herewith valuation copies of the capital goods and HOOD CP and socket CP (Components) with details. From the same your honour will note that the invoice values were accepted by the cus....
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....tion that it is if and only if it stands proved that there was manipulation of prices to avoid taxes in India, that the transfer pricing provisions of the Act can be invoked. Now, obviously, once the shareholding of Stanley was only to the extent of 19.51%, the assessee company would not have avoided taxes by shifting profits to Stanley. That transfer pricing regulations in India have been brought on the statute book with the intent of preserving tax base in India and preventing tax evasion through manipulation of pricing of inter company transactions, is also evident from CBDT Circular No.14/2001, providing the Explanatory Notes on provisions relating to direct taxes with respect to Finance Act, 2001. As per this Circular (also brought to the notice of the Assessing Officer by the assessee by way of its submissions dated 20.12.2006, copy at APB 189-218, relevant portion at page 194, para 3.1):- "The profits derived by such enterprises carrying on business in India can be controlled by the multinational group, by manipulating the prices charged and paid in such intra-group transactions, thereby leading to erosion of tax revenues. ........ The basic intention underlying the new t....
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.... 38. Further still, the assessee company is under the control of its Indian management and promoters. A majority of its directors are independent and include nominees of Government bodies. It is a listed company. Stanley is neither a majority shareholder of the assesse company, nor does it have a majority on the Board of Directors of the assessee company. In such a tight scenario, a seamless transfer is just not possible between the assessee company and Stanley. It has not been suggested, much less shown otherwise. 39. Too, considering as to how the royalty is accounted for by Stanley in its financial statements/documents as an income, it is being subjected to tax as per the Japanese law. A copy of Stanley's annual report is contained at pages 386-420 of the assessee's paper book for Assessment Year 2008-09. As available at page 403 of the said paper book, as per the income statement of Stanley, receipt of royalty of about 10 million US $ has been shown for the years ended 31.03.07 and 31.03.08. This is equivalent to about Rs. 50 crores. Stanley is shown to have made income-tax provisions of about 138 million US $ in each of these two years. So much for the doubt entertained by ....
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....ns in financial and commercial terms are attributed to interrelationship between the associate enterprises that is sought to be neutralized by the transfer pricing regulations. 41. Then, as noted hereinabove (para 22), Rule 10B(2)(c) of the Rules states as under:- "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, (a) ....... (b) ....... (c) The contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions." 42. So, the arm's length price of an international transaction shall be determined, as per the Rule, on the basis of and with reference to the contractual terms of the transactions. The TPO and the Assessing Officer erred in ignoring the applicability of Rule 10B (2) (c) of the Rules and the Ld. CIT (A) rightly rejected this approach. 43. The TPO applied the TNMM and recommended upward adjustment of Rs. 2,03,02,776/-. The assessee had benchmarked th....
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....nufactured by the comparable companies. The TPO determined a shortfall of Rs. 11.94 crore in the profitability of the assessee, while comparing the results of the assessee with Phoenix Lamps Ltd. This shortfall was brought down to Rs. 9.91 crore by reducing the royalty to Rs. 2.03 crore. The assessee's purchases from its AE, of Rs. 6.44 crore represented 4.93% of the total purchases of Rs. 130.47 crore. On this, the TPO worked out an arm's length adjustment in purchases amounting to Rs. 48,85,630/-. 44. The CIT (A), however, rejected two comparables which were into losses, i.e., Auto Light India Ltd. and JMA Industries, since, according to her, in those two cases, it was low turnover which had resulted into losses and the turnover of the tested party had given it the advantage of economies of scale. Apropos Phoenix Lamps, the CIT (A) observed that it was situated in an SEZ and it was enjoying certain benefits and was, thus, in more advantageous position as compared to the assessee. She held that if Phoenix were to be retained as a comparable, certain adjustments were required to be made to its statistics. Therefore, observing that based on the assessee's submissions in Assessmen....
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....Phoenix is only a part. Hence, on this preliminary score too, Phoenix nowhere qualifies as a 'comparable' to the assessee. 44.1 In this regard, in 'E-gain Communication Pvt. Ltd.', 2008-TIOL- 282-ITAT-Pune, it has been observed that the revenue should opt for robust and comprehensive FAR analysis for choosing comparable companies and if need be, the necessary adjustments can also be made in the operating profits of the comparable companies. In the present case, on the other hand, as observed, the TPO rejected the comparables selected by the assessee, merely on the basis of the turnover criterion, even though this is nowhere mandated as a criterion in Rule 10B (2) of the Rules. 45. For the above discussion, finding no error whatsoever therein, the Ld. CIT (A)'s order on this issue is hereby upheld and ground No.3 raised by the department is rejected. 46. Coming to Ground no.4, the department alleges that the Ld. CIT (A) has erred in deleting the addition of Rs. 2,59,434/- on account of foreign tour of the Director of the assessee company. The Assessing Officer observed that the assessee's Director, Shri D.K. Jain had incurred an expenditure of Rs. 1,11,497/- on his visit....
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....1) of the Act, it is not necessary that the incurrence of the expenditure should always result in earning of profits and it can be for any purpose, even incidental or ancillary to the business, for which the expenditure may have been incurred, in order to be allowable under the provision. In the light of the details filed, since export has been shown to have been made to both the countries visited, the grievance raised by the department is found to carry no force at all. Accordingly, the CIT (A)'s findings in this regard are accepted and Ground no.4 is also rejected. 51. In this manner, the appeal filed by the Department for A.Y. 2004- 05 is dismissed. ITA No.6086/Del/2010 52. This is Department's appeal for Assessment Year 2005-06 against the order dated 26.11.2010 passed by the Ld. CIT (A)-XX, New Delhi. The sole grievance raised by the Department in this appeal is by way of Ground no.2, contending that the Ld. CIT (A) has erred in deleting the addition of Rs. 3,15,23,777/- made by the Assessing Officer on account of TPO adjustment, ignoring the facts brought on record by the TPO, as also the fact that Stanley, Japan and Stanley Electric Company, Japan are associate ente....
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.... well established in the Indian automobile market. The TPO also observed that the assessee had itself undertaken substantial research and had developed various new products for its domestic customers, due to which, it was unbelievable that any unrelated party would be willing to pay royalty to any other party; and that the assessee had failed to substantiate that any technology had actually been received, or even was required to be received from its AE. The TPO thus proposed an upward adjustment of Rs. 2,68,77,737/- to the total income of the assessee, being the difference in the arm's length price of the international transaction of payment of royalty. However, since addition of Rs. 3,15,23,777/- had already been proposed under TNMM, which, as per the Assessing Officer, included the amount of royalty paid by the assessee also, no separate addition on account of royalty was proposed. The income of the assessee was, accordingly, proposed to be enhanced by the amount of Rs. 3,15,23,777/-. 56. By virtue of the impugned order, the Ld. CIT (A) deleted the addition made by the Assessing Officer in pursuance of the TPO's order. The Ld. DR has reiterated the submissions made while ar....