TaxTMI 
TaxTMI 
2013 (10) TMI 555
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....he payment of PF and ESIC, the Assessing Officer noted that some of the amounts were paid after the "due date" as per the provisions of section 43B(b). Accordingly, he worked out the disallowance under section 43B after incorporating the details of amount paid, date of payment and due date which has been given at Pages-2 and 3 of the assessment order and thereby worked out the disallowance under section 43B in the following manner:- Total disallowance as computed by the A.O. in Para-4.1 Rs. 44,09,107 Less: disallowance u/s 43B as made by the assessee in the computation of income Rs. 5,52,581 Total disallowance Rs. 38,56,526 4. Before the learned Commissioner (Appeals), besides challenging the disallowance of Rs. 38,56,526, the assessee raised an additional ground in respect of disallowance of Rs. 5,52,581, which was added back by the assessee in the computation of income filed along with the return of income. This additional ground was admitted by the learned Commissioner (Appeals). 5. Before the learned Commissioner (Appeals), it was argued that most of the payments have been made within the grace period and in any case all of them have been paid before the....
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....ployer's and employees' contribution to PF & ECIS, and employees' superannuation funds which have been paid before the "due date" of filing of the return of income. In view of the law settled by the Hon'ble Supreme Court in Alom Extrusions (supra), and followed by various Courts, the payments toward employer's and employees' contribution to PF & ECIS, made after the grace period but prior to filing of the return of income, constitute admissible deduction within the ambit of section 43B. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and allow the claim admissible under section 43B. Thus, treat ground no.1, raised by the assessee is treated as allowed. 9. In ground no.2, the assessee has challenged the disallowance of depreciation of Rs. 24,58,028. 10. The Assessing Officer, on a perusal of audited accounts, especially Schedule "T", clause 19 to the notes and accounts, noted that the board of directors in their meeting held on 31st December 2000, decided to discontinue the manufacturing of toys w.e.f. 1st January 2001. The assessee itself had disallowed the various payments / provisions towards the said factor....
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.... for, then the same should be restricted to plant and machinery which is used for manufacturing activities and were not used in the relevant accounting year. 14. Learned Departmental Representative submitted that the assessee's manufacturing activity had ceased to exist after 1st January 2010 and nothing has been made available on the record that these plant and machinery were intended to be used in future, therefore, depreciation has rightly been disallowed. Regarding alternate plea of the learned Counsel that the some of the plant and machineries were not used for manufacturing activities, he submitted that the same may be restored to the file of the Assessing Officer for verification. 15. We have carefully considered the rival contentions and perused the relevant findings of the Assessing Officer and the learned Commissioner (Appeals). It is not in dispute that the assessee's manufacturing activities have been closed down w.e.f. 1st January 2001 and the plant and machinery which were for the purpose of manufacturing activities have not been put to use either during the relevant accounting year or in the subsequent assessment years. Therefore, the depreciation canno....
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....o the purchase of finished goods and purchase of raw materials. Looking to the nature of international transactions with its A.E., the Assessing Officer made a reference u/s 92CA(1) to the Transfer Pricing Officer (for short "TPO") for determination of ALP as reported in Form-3CEB filed by the assessee. The turnover of the assessee company along with the net profit before interest and tax for various years were reported in the following manner:- A.Y. Sales (Rs. ) Returned income / (Rs. ) NPBT (Rs. ) Taxes Paid in India 2003-04 30,41,12,782 (-) 18,92,71,790 (-) 14,16,04,449 Nil 2002-03 36,58,52,712 (-) 22,31,41,398 (-) 33,33,51,613 Nil 2001-02 46,56,93,750 (-) 34,28,16,554 (-) 40,71,57,703 Nil 2000-01 24,80,65,852 (-) 12,46,36,005 (-) 12,33,00,581 Nil 18. During the relevant assessment year, the assessee has disclosed following international transactions in its transfer pricing report:- Sl. No. Sales (Rs. ) Returned income / loss (Rs. ) Method Applied 1. Purchase of raw materials 2,19,94,477 Cost plus Method 2. Purchase of finished goods 3,08,16,302 TNMM method 3. ....
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....ed on these three segments of the distribution activity, he worked out the operating profit margin and gross profit in the following manner:- Particulars Import from AE & resale in domestic market (Rs. ) Import from AE and export to AE (Rs. ) Import from AE and export to third parties (Rs. ) Total distribution activity (Rs. ) Sales 11,74,41,770 4,61,57,312 7,49,07,171 23,85,06,253 Less: Cost of Sales 8,40,80,455 4,80,71,836 7,88,74,978 21,10,27,269 Gross Profit 3,33,61,315 (19,14,524) (39,67,807) 2,74,78,984 Other Costs 9,35,13,477 1,77,22,486 2,87,61,235 13,99,97,198 Op. Profit (6,01,52,162) (1,96,37,010) (3,27,29,042) (11,25,18,214) Op. Margin (51.22%) (42.54%) (43.69%) (47.17%) Gross Profit 28.40% (4.15%) (5.30%) 11.52% 22. After making the analysis in the aforesaid manner, he observed that the assessee's operating profit margin at (-) 51.22% in the domestic segment is much lower than the average margin earned by the other entities (comparables) engaged in the distribution activity in India which is at 0.91%. After inviting the assessee's submissions....
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....91% 10,68,720 (A) Actual loss of assessee (6,01,52,162) (B) Adjustment to International Transaction (A) + (B) 6,12,20,882 Less: Advertisement costs as charged to this segment as discussed in Para-12(d) (As per Annexure-2 to assessee's letter dt. 17.11.04) 2,53,68,909 Adjustment to International Transaction 3,58,51,973 Ratio of International Transaction to the cost of sales in this segment (i.e., Rs. 3,08,16,302 / Rs. 8,40,80,455) 37% Hence, 37% of Rs. 3,58,51,993 amounts to 1,32,65,230 Adjustment to the International Transaction 1,32,65,230 II. Import from A.E. and sale to A.E. (Adjustment being made to sales value). Particulars Amount (Rs. ) Actual Sales (International Transactions) 3,29,52,673 Operating profit margin on cost of comparables 0.92% Total costs of assessee 6,57,94,322 Operating profit required 6,05,307 Actual loss of assessee 19637010 Adjustment to the international transaction 20242317 Arm's Length Price of sales to AE 5,31,94,990 Actual Sales (International Transactions) 3,29,52,673 23. Thus, ....
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.... 10% Adm. Cost as % of sales - Mattel India 80% 69% 66% 60% 52% 45% Adm. Cost as a % of sales - comparables 12% 21% 20% 17% 18% Database - Yet to update the info 25. The learned Commissioner (Appeals), insofar as the transactions relating to import of finished goods and resale in India are concerned, rejected the assessee's contentions on various grounds. The sum and substance of such reasoning are - (i) that the assessee's contention that the current year was the first year of operation and, therefore, they had to incur heavy high administrative cost is not tenable because the assessee has been operating in India for around 3 to 4 years in the past and in the earlier years also, the assessee had significant turnover. Therefore, there is no justification in assessee's contentions about adjustment of administrative cost; (ii) the assessee's contention that prices charged by Mattel Europa is at par with the prices charged to other A.Es cannot be accepted because the transfer pricing adjustments have to be based on FAR analysis and if lower prices are being charged in Asia region, the same cannot justify lower profit....
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....chanism, it was not clear even to the professionals what should have been the best methodology and comparability analysis for arriving at ALP for particular type of business transactions. Before the learned Commissioner (Appeals), a specific submission was raised for applying the resale price method in assessee's case because there was huge operating cost in the form of administrative and advertisement cost which has resulted into negative operating margin of (-) 51.22%. This working of the assessee of the actual net margin at (-) 51.22% has not been disputed by the TPO or the learned Commissioner (Appeals) even after adjustment of advertisement expenses. He submitted that net sales under the distribution segment was at Rs. 11,74,41,770, as against the total cost incurred by the assessee which was Rs. 17,75,93,932 and operating profit was Rs. (-) 6,01,52,162, thereby giving negative operating profit ratio of (-) 51.22%. The reason for such a huge administrative and advertisement cost in this year was that the assessee has started its distribution activities on its own and all the earlier arrangements under the joint venture with Blowplast was discontinued. If the assessee's....
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....bility with that of the assessee but all were functionally comparable, therefore, the same comparables can be taken for the purpose of RPM. In support of this contention that product comparability is not required in RPM, he relied upon the contents of Para-2.26 of the OECD guidelines and the guidelines of ICAI. In case of a distribution, it is very difficult to get the companies with similar product comparability and, therefore, one has to go for functional comparability. Thus, the same comparables can be considered for the purpose of RPM also. He pointed out that if the transfer pricing adjustment as done by the TPO is carried out, then the gross profit margin will become so high which is improbable in any kind of distribution business and in the case of the assessee, the purchase price will almost become negligible. Lastly, by way of alternative arguments, he pointed out that there was certain computational error in the working of TPO. In support of the same, he furnished a chart before us. 31. Per contra, the learned Departmental Representative, Mr. Ajit Kumar Jain, representing the Revenue, submitted that the assessee has, first of all, chosen TNMM as most appropriate method....
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....assessee has taken a turn around for adopting RPM so as to justify the ALP of it's A.E. transactions. Thus, he submitted that the submissions of the learned Counsel for adopting the RPM should be rejected out rightly. 33. By way of alternative arguments, the learned Departmental Representative submitted that in case the RPM is accepted to be the most appropriate method for bench marking the ALP, then the matter should be restored back to the file of the TPO and the assessee should furnish a list of fresh comparables for carrying comparability analysis for the purpose of RPM. 34. The learned Counsel, in the rejoinder, submitted that in case of RPM, there cannot be any similarity of product comparability but functional comparability has to be seen. He referred to the same OECD guidelines which were referred by the learned Departmental Representative during the course of his arguments. Regarding the learned Departmental Representative's argument that the assessee has adopted RPM before the TPO and the learned Commissioner (Appeals) so as to justify the ALP at gross profit margin level is not correct because the assessee has given a detail reasons before the TPO and the l....
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....this stage is, as to what should be the most appropriate method on the facts of the assessee's case which has been discussed at length in the earlier paragraphs. 36. According to the provisions of sections 92C r/w 10B, the ALP in relation to an international transactions has to be determined by following any of the most appropriate method viz. (i) Comparable Uncontrolled Price method (CUP); (ii) Resale Price Method (RPM); (iii) Cost Plus Method (CPM); (iv) Profits Split Method (PSM) and (v) Transactional Net Margin Method (TNMM). In CUP method, the focus is directly on the price of the product sold or transferred requiring both functional and product comparability. The RPM and CPM operate at gross profit margin level requiring functional rather than product comparability. The PSM and TNMM operate on operating profit margin level used for a complex and integrated enterprise. These methods are based on price or profit. The centre point of these methods is comparability analysis with the comparables and the method which provides most reliable way of arriving at the ALP, is considered as most appropriate method. A comparability analysis is done for the comparison of controlled t....
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....milar property or services. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e., resale is made without any value addition having been made. Since in RPM only margins are seen with reference to items purchased and sold or earned by an independent enterprise in comparable uncontrolled transactions vis-a-vis the one in the controlled transactions, therefore, in such a situation, the nature of products has not much relevance though their closer comparable may produce a better result. The focus is more on same or similar nature of properties or services rather than similarity of products. In RPM other attributes of comparabilities than the product itself can produce a reliable measure of arm's length conditions. The main reason is that the product differentiation does not materially effect the gross profit margin as it represents gross compensation after the cost of sales for specific function performed. The functional attribute is more important while unde....
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....ndent entities against those achieved in related party transactions. Under the TNMM, the major thrust is to derive at the operating profit at the transactional level and to identify the operating expenses of both the tested party as well as the independent parties. This requires a lot of adjustments to derive at the actual operating profit. If the ALP of any transaction can be determined by applying any of the direct methods like CUP, RPM, CPM then they should be given the preference and once these traditional methods have been rendered inapplicable then only TNMM should be resorted to. On the facts of the assessee's case, in our opinion, the assessee being a distributor who is purchasing the goods from it's A.E. and reselling them to independent parties / unrelated parties, resale price method would be the most appropriate method for determining the ALP of the transactions between the assessee and the A.E. 41. Now coming to the argument of the learned Departmental Representative that once the assessee itself has chosen TNMM as most appropriate method in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention....
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....es after considering the RPM as the most appropriate method for determination of ALP. The TPO will also provide due and effective opportunity of hearing and determine the ALP after considering the fresh comparables and following the RPM. Thus, ground no.3, raised by the assessee is partly allowed for statistical purposes. 43. The assessee has also raised additional grounds challenging the TPO's order passed under section 92CA3 on legal grounds. 44. Learned Counsel contended before us that he did not wish to press this ground, to which, the learned Departmental Representative also did not object. Consequently, the additional ground is dismissed as "not pressed". 45. In the result, assessee's appeal is treated as partly allowed for statistical purposes. We now take up Revenue's appeal in ITA no.2801/Mum./2008, for assessment year 2002-03. "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in allowing deduction of Rs. 18,66,369 being the professional fees in this year even though the professional services were rendered in the previous year relevant to A.Y. 2000-01. 2. On the facts and in the circumstances of the cas....
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.... has been held that liability is crystallized only when a demand in this regard is made and the same is accepted by the assessee. I, therefore, agree with the argument of the appellant that the liability has crystallized during the current year and hence, the same is allowable in the current year. The addition of Rs. 18,66,369/- on this account is, therefore, deleted." 48. After hearing both the parties, it is seen from the findings of the learned Commissioner (Appeals) which has not been rebutted before us that the bills pertaining to the professional services rendered was received in this year and after the receipt of such bill, the payment has been made. In case of professional fees, it is very difficult to project as to what would be the fee that would be charged by the professional for the services rendered. It is when the bill is received, the liability get crystallised for making the payment. As regards the Assessing Officer's observation that one of the directors of the assessee company is a partner in the professional firm, we find that the Assessing Officer has not examine as to what could have been the proper fees having regard to the value of services rendered. I....
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....6 and 17 of the appellate order. The learned Commissioner (Appeals), after appreciating the entire facts and material on record, deleted the said adjustment in the ALP after holding and observing as under:- "6.14 I have considered the arguments of the appellant and the facts and figures brought out as per statement of facts and further arguments / submissions. The appellant has demonstrated that export to AE is essentially a transaction of purchase return. Such items have been exported back to the supplier AE which became obsolete in the initial year of the appellant's operations in India. It appears that the TPO has not understood that export of finished goods shown to AE is of idle, slow moving and obsolete stock which amounts to purchase returns. Instead, she presumed that these are exports of fresh manufactured items to earn profits. It is in this regard that the TPO has erred in not understanding this second limb of transactions and hence, has suggested the adjustment to the total income. The appellant has also demonstrated that such purchase returns to AEs resulted in a loss of 4.15% as compared to greater loss of 5.30% in respect of sale of obsolete stock to third par....