TaxTMI 
TaxTMI 
2014 (5) TMI 740
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....sp; (iii) Recomputing the arms length price of the international transaction in relation to the import of finished goods by disregarding the TP documentation, segmental analysis, and the comparables selected by the assessee and instead following the aggregation of all transactions, carrying out evaluation of operation at the entity level and not providing the benefit of proviso to sec. 92C(2). 1.1 The Ld. DRP has also erred on in facts and in law in summarily holding that the order of TPO is based on sound reasoning and as per law without discussing the various objections raised by the assessee before it and not giving direction to delete the addition proposed by the AO in this regard. 2. The Ld. AO has erred on facts and in law in not allowing the claim of inventories written off at Rs. 8,28,35,757/- and the Ld. DRP has erred in not giving direction to delete the addition proposed by the AO in this regard. Both the authorities have also erred in making various observations which is not correct on facts and also not considered the subsequent decision of Hon'ble ITAT on this issue. 3. The Ld. AO has erred on facts and in law in making lumpsum dis....
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.... erred on facts and in law in making adjustment of Rs. 39,92,973/- in respect of provision for bad and doubtful debts and advances and also in respect of the alleged claim of excess depreciation to the book profit u/s 115JB. 2. Briefly stated, the facts of the case are that assessee is engaged in the business of manufacturing and distribution of products for personal care and use including blades, razors, shaving preparations, oral care products, hair epilating devices, electric shavers and other appliances. It filed E-return of income on 14.10.2006 declaring total income of Rs. 64,48,03,480/-. Since the assessee has entered into international transaction with its associate enterprises (AEs) as per section 92 of the Act, it has furnished audit report u/s 92E in Form No. 3CEB. The AO made a reference u/s 92CA to the TPO to determine the ALP of the international transaction entered by the assessee with its AEs. The TPO vide its order dated 29.10.2009 proposed an adjustment of Rs. 15,75,28,786/- in respect of import price of traded goods purchased by the assessee from the AEs. Thereafter, the AO passed the draft assessment order on 30.12.2009 by determining the total income at Rs. ....
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.... by the assessee on the ground that assessee imported traded goods of Rs.64.67 crores out of which purchase of Rs.30.63 crores has been considered under distribution function and balance of Rs.34.04 crores under manufacturing segment but the turnover of such bulk purchase sold after repackaging has not been provided, segmental accounts have not been drawn on actual basis and therefore he carried out a fresh search to identify the companies comparable with the assessee at the entity level. In the process, he selected 5 companies whose operating margin was worked out at 16.50% as against assessee's operating margin at entity level worked out at 12.67%. Accordingly, he worked out a difference of Rs.15.75 crores which is reduced from the purchase of traded goods of Rs.64.67 crores to work out the ALP of the import from AE of traded goods at Rs.48.92 crores and thus an addition of Rs.15.57 crores was proposed by him. The AO therefore made this addition which is confirmed by the DRP by observing that the order of the TPO sufficiently answers all the objection of the assessee, is based on sound reasoning and as per the provisions of the law. 3.3 A perusal of the record shows that t....
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.... in Para 10.1 to 10.18 (Page 9-13) of Form No. 35A. In respect of Ground No. 1(ii), he referred to his explanation given in Para 10.1 to 10.36 (Page 15-20) of Form No. 35A. In respect of Ground No. 1(iii), he referred to the explanation given in Para 10.1 to 10.57 (Page 27-42) of Form No. 35A. The Ld. AR also pointed out certain mistakes in working of the addition and also raised certain contentions in his submission as under:- i. As per the TPO, OPM of assessee at entity level is 16.5% as against 12.68% declared by the assessee. On this basis, on turnover of Rs. 412.14 Crores, he worked out the difference at Rs. 15.75 Crores. Even if the rate determined by TPO is accepted, on import of traded goods from Associated Enterprises at Rs. 64.68 Crores, the proportionate difference would be Rs. 2.47 Crores. Hence adjustment at best can be for Rs. 2.47 Crores as against 15.75 Crores made by A O / TPO. In making addition of Rs. 15.75 Crores, it is ignored that adjustment for Arms' Length Price is to be made with reference to International Transaction with Associate Concern and not with reference to the entire transaction o....
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....t and sales promotion expenses from 14.10% to 16.05% i.e. 1.95% on sale, which in terms of the value on sale shows increase of Rs. 9.20 Crores (PB 316). iv. Even if the aggregation approach adopted by TPO is accepted as correct, the comparable cases selected by him are not correct as he failed to take into consideration the manufacturing/trading ratio of assessee vis-a-vis the comparable cases selected by him. The manufacturing / trading ratio of assessee is 82: 18. Hence only those comparable which have a minimum trading sales of 10% needs to be selected for comparison. On this basis the operating margin of comparable cases works out as under: Sr. No Company Name Ratio of mfg/sales : trading/sales OP (As per TP Study and TPO's Order) 1. Ador Multiproducts Ltd. 70:30 1.97% 2. Colgate-Palmolive (India) Ltd. 90:10 13.43% 3. Dabur India Ltd. 77:23 14.51% 4. Emami Ltd. 90:10 15.01% MEAN 11.22% The above companies include three companies which is selected by the TPO. P & G Hygienic & Healthcare Ltd. cannot be selected for comparison, since it is an Associate concern and its manufact....
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....a to be used. To call for correct information from the assessee time and again can in no way be construed to cause undue hardship to the assessee. Circular No.12 of CBDT does not mean to encourage non compliance by the assessee. Circular No.14 of CBDT talks of usage of reliable and correct data. The assessee did not submit correct data during TP proceedings. The order quoted as AAC (56 ITR 198) only speaks of circulars being binding on the department. 5.5 Submission of the TP study report and segmental information by the assessee does not preclude the TPO from examining the details submitted. Merely submitting information does not give it sanctity. The correctness of the calculation submitted by the assessee has to be examined by TPO. On examination of the details, several short comings were found which have been detailed in the TPO order. 5.6 GOA3: Adjustment of Rs.15.75 crores was made by the TPO after due diligence and proper appreciation of facts, submissions and on merits. Proper detailed reasoning has been given by the TPO in the order dated 29-10-2009. The case laws quoted by the assessee speak of arbitrary rejection of assessee's analysis. But when the TPO has exa....
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....% to any one transaction of the assessee. In order to make any changes, the correct data/calculation should have been submitted by the assessee; which would have changed the OPM of the assessee(as calculated at entity level at 12.67%). Thus, what the TPO did i.e. applied the mean margin of 16.48% at the entity level is correct." 3.7 On further clarification sought by the Bench, the Ld. AR filed the following submission on 11.04.2012 which is reproduced as under:- 1. The assessee has entered into 10 type of transactions with the Associate Enterprises as mentioned on page 2 of the TPO order (PB 128). Out of it, in respect of transaction of reimbursement of expenses, purchase of capital goods and sale of fixed assets, assessee has made detailed submissions before the TPO vide letter dated 15.9.2009 (PB 280-283) and letter dated 15.10.2009 (PB 308 - 313). In these letters it was clarified that reimbursement is of actual expenses to AE and value of import / export of capital equipment is accepted by custom authorities. The TPO has not found anything adverse in these submissions and the documents produced in r....
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.... by the assessee in manufacturing of the goods which has been sold to non-related parties in India. On goods manufactured in India and sold to non-related parties, the gross profit margin is Rs. 56.63% and the net profit margin is 11.59%. The overall net profit margin of the manufacturing function is 11.75% (PB 400). 7. The above distinct distribution function and manufacturing function was analysed in the TP study for which the report is submitted to the TPO (PB 194 to 269). In distribution function, after conclusion of search process as described in para 4.1.4 (PB 219 to 226), six independent comparable companies were identified. The arithmetic mean of the net profit margin of these companies is worked out at 5.72% as against the margin of the assessee at 18.86% as above. Similarly, in manufacturing function, after conclusion of search process as detailed in para 4.2.4 (PB 233-243), 14 independent comparable companies were identified (PB 241). The arithmetical mean of the net profit margin of these companies is worked out at 6.16% as against the margin of the assessee in this function at 11.76%. Accordingly, it is claimed that the transaction with AE are at Arms' length pr....
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.... as against margin of 16.05% in case of Colgate Palmolive India Ltd., 16.65% in case of Emami Ltd. and 15.90% in case of Dabur Ltd. Thus the net result shown by the assessee is comparable with the other companies selected by TPO (PB 397). 9. In the segmental analysis submitted by the assessee, it has considered all the revenue related transactions with AE in as much as the total amount of segmental working tallies with the figures of the financial statements as per following statements: Particulars Distribution Function Manufacturing Function Others Total (PB 400) Total as per Financial Statements (PB 60) Gross Sales 754630409 3366808091 - 4121438500 4121438500 Cost of goods sold - trade 306379946 340402390 - 646782336 1525159078 Cost of goods sold- Mfg. Items - 862776663 - 862776663 Excise duty - 302760758 - 302760758 287160679 Direct Expenses 306379946 1505939811 - 1812319757 1812319757 Gross Margin 448250463 1860868280 2309118743 2309118743 Other Income 1095....
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....h the TPO & assessee have accepted that ALP is to be determined by applying transitional net margin method (TNMM). Rule 10B(1)(e) provides that the net profit margin arising in comparable uncontrolled transaction should be adjusted to take into account the difference if any between the international transaction & the comparable uncontrolled transaction, which could materially effect the amount of net profit margin in the open market. Therefore, in TNMM, the gross margin can also be one of the profit level indicator (PLI) to rule out the effect of operative & administering expenses. If gross profit margin is considered, then the same is better as compared to the cases taken by the TPO (PB 397). Further reliance is placed on the detailed submissions given before DRP as Appendix I to X of Form No. 35A particularly at Page 28-42 which gives each & every observation of the TPO & the contention of the assessee. In these facts, the transaction entered by the assessee with associate concerns are at ALP & no adjustment is required. 3.8 The Ld. DR, on the above submission of the assessee has given his remark on 18.04.2012 which is reproduced as under:- 1. In Para's 1 to 7 of his ab....
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....ower for making it comparable to that of the assessee. Transactional net margin method is expected to take into account various dynamic factors involved and wider differences. As the net level margin is to be compared under TNMM, use of such a filter as suggested by the assessee, is not necessary. Further, the comparables have not been identified by the TPO for comparisons with two separate functions but of the entity as a whole. Hence, the claim/submission to include this additional filter is not correct and also not permissible at this stage. It is reiterated that the comparables identified by the TPO are engaged in functionally similar sector and are of comparable magnitude. Accordingly, the assessee's objections are devoid of merit and are not maintainable in the facts of the case. 2.2 In para 8(b), Ld. AR has further requested for exclusion of two other companies viz. Dabur India and Emami Ltd. on the ground that their products are not similar to products of the assessee. In this regard, it is submitted that whenever any TP study is done using TNMM method, it is not possible to have exactly the same comparables. Here the TPO has picked up comparables under t....
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....ity level the difference in OPM of the assessee and the mean OPM of the comparables has to be applied on the whole turnover only. Applying this difference on the international transactions will be illogical as in such a case we will be comparing the incomparable. The mean OPM of comparables has been taken at 16.48% compared with the OPM of the assessee at the entity level. As correct segmental has not been drawn by the assessee, it will not mean that the OPM of each segment or each transaction is 12.67% (OPM of the assessee at the entity level). Hence, the mean margin of the comparables has to be necessarily applied at the entity level. In absence of the correct segmental financials submitted by the taxpayer, it is not possible to apply the mean OPM of 16.48% to any one transaction of the assessee. In order to make any changes, the correct data/calculation should have been submitted by the assessee; which would have changed the OPM of the assessee (as calculated at entity level at 12.67%). Thus, what the TPO did i.e. applied the mean margin of 16.48% at the entity level is correct. 4. The argument of Ld. AR in para 11 is ....
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....val submission, we noted that the TPO has accepted the ALP of all other international transactions except in respect of import of goods for resale/for packaging and sale. The TPO by rejecting the segmental analysis and the comparables selected by the assessee has determined the operating margin at entity level by considering 5 other comparables. On this basis, he has determined the difference between the operating margin of the assessee and the comparable cases at 3.83% (16.50% - 12.67%) and applied this difference to total turnover of Rs.412.14 crores to make adjustment of 15.75 crores in the ALP of the finished goods imported by the assessee. The adjustment so made by considering the entire turnover is incorrect as the TPO has no authority to determine the total income of the assessee but only the ALP of the international transactions. Therefore, adjustment is to be restricted to the international transaction and not to the entire turnover of the assessee. In case of Starlite (supra), it was held that adjustments, if any, arising due to computation of ALP should be restricted only to the international transactions & not to the entire turnover of the assessee company. No addition ....
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....with a company who is both in trading and manufacturing. In case of TCL Holdings (P.) Ltd. v. Asstt. CIT [2013] 35 taxmann.com 147 (Mum.)(Trib.) , it was held that under TNM method, comparables selected should be functionally similar and therefore, where the assessee was a trading concern, manufacturing concerns could not be taken as comparable. Similarly, Emami Ltd. is altogether in a different business segment of female care where traditionally the margins are higher. Dabur India Ltd. is in pharmaceuticals and healthcare product which is again an altogether different segment as against male grooming and personal care products in which the assessee is engaged. After excluding these four companies, only Colgate Palmolive India Ltd. remains as a comparable company where the net operating margin is 13.43% as against operating margin of 12.67% of the assessee as determined by the TPO. Even the determination of operating margin of 12.67% by the TPO without excluding the other unrelated expenses of Rs.2.37 crores comprising of depreciation on let out building Rs.99.7 lacs, write off of fixed assets of Rs.17.24 lacs and VRS expenses of Rs.119.95 lacs is not correct. If these expenses are....
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....posal and destruction of such stock, copy of which is placed in the paper book has rightly deleted the disallowance of Rs 8,37,10,704/- but at the same time he did not allowed the claim of Rs.3,64,71,703/- on the ground that it is only a provision and not actually destroyed. We find that in respect of both these amounts item wise details is filed. The procedure adopted and the recommendation of appropriate authorities is placed on record. The disallowance of Rs 3,64,71,703/- confirmed by the ld. CIT(A) only for the reason that these items are not actually destroyed and is only a provision can't be upheld for the reason that item wise details of the same is filed, these are the identified items and have been subsequently destroyed as per the regular procedure followed. The write off for obsolesce of such identified items is allowable deduction as per the case laws relied by the Ld. AR. In fact no provision is created in books of accounts but only the nomenclature of provision for obsolesce is used. In the balance sheet also no such provision is appearing either in the liabilities side or as reduction from asset side not the Ld. D/R could point out any such provision in the balan....
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.... of any specific expenses. We also note that on these expenses, FBT is paid and that such ad hoc disallowance is not made in the past and in A.Y. 07-08, the DRP has directed the AO not to make such ad hoc disallowance. In these facts and circumstances, we direct the AO to delete the disallowance of Rs. 50 lacs made by him. 6. Ground No. 4 is against disallowance of Rs.52,87,28,092/- in respect of advertisement and sales promotion expenses. The expenses comprises of two amounts, one Rs.36,70,04,056/- paid to Group M Media Pvt. Ltd. for advertisement and another Rs.16,17,24,306/- paid towards trade incentive to the various distributors. The AO made the disallowance for the following reasons:- Advertisement expenses - GroupM Media Pvt. Ltd. Rs. 36,70,04,056/- ♦ The payment made by assessee to Group M Media P. Ltd. is on behalf of Mindshare, Singapore, which is a non resident entity and hence is covered by the provisions of Section 195 of the Act. As the said payments were made without deducting tax at source, it is disallowed u/s 40(a)(i) of the Act. ♦ No agreement has been submitted for the advertisement work done by Group M Media P. Ltd. for the assessee. ....
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.... of the assessee were telecasted on various Indian TV Channels viz. Maa TV, Surya Channel, E TV, Star, Sun, etc. As per the AOR contract, which was entered into between Gillete, Singapore and Mindshare, Singapore dated January 1, 2006. Mindshare had agreed to provide media planning services which included the identification and establishment of most effective media necessary to contribute and enhance the marketing objectives of Gillete, Singapore for a minimum period of six months from January 1, 2006 to June 30, 2006 for the ASEAN countries as listed in the AOR Contract in Appendix 1. These countries also included India. Further, no services were rendered by Mindshare, Singapore to the assessee in India. The services were rendered by GroupM ('an Indian company') to the assessee in India. 3. The assessee submits that it had availed services from GroupM India Pvt. Ltd. for advertisement work but not pursuant to the AOR contract, referred to above. It had independently availed the services from GroupM as an independent entity and not as an affiliate of Mindshare, Singapore. The AO confused since GroupM is also an affiliate of Mindshare, Singapore, who had agreed to provide....
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.... made by assessee to Group M, was on behalf of Mindshare, Singapore as per the AOR contract is not correct and justified in the facts and in the circumstances of the present case. 6. Further, the assessee had duly discharged its TDS obligation in respect of payment towards advertisement work done by GroupM by deducting a sum of Rs. 1,58,30,034/- u/s 194C of the Act. The details of tax deducted at sources were furnished to the AO during the course of assessment proceedings on December 7, 2009. This clearly demonstrates that the assessee has not defaulted in discharging its TDS obligations. 7. Further, one of the reasons for disallowance by the AO was the absence of an agreement between the assessee and GroupM in respect of the advertisement work. In this regard, it is respectfully submitted that GroupM had raised detailed invoices on the assessee and the assessee after having been satisfied with the details of the work done and charges levied by GroupM, it had discharged its part of obligation by making the payment for the said advertisement work. Hence, the conduct of GroupM of raising the invoices and that of the assessee of discharging the same has all the attributes of an ....
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.... Reliance is also placed on the following decisions: * CIT v. Goodlas Narolac Paints Ltd. [1991] 188 ITR 1 (Bom) * CIT v. Thomas & Co. Ltd. [1965] 55 ITR 312 (Cal.) * CIT v. Electric Construction Equipment Co. Ltd. [1990] 182 ITR 510 (Delhi) * Inspecting Assistant Commissioner v. British Pharmaceutical Laboratories [1991] 39 ITD 105 (Bom.) * Laxmi Feeds & Exports Ltd. v. Asstt. CIT 62 ITD 315 (Mum.) * Devanbabu (P.) Ltd. v. ITO 36 TTJ 664 (Ahd.) 8. Further, a doubt was raised during the assessment proceedings about the relationship between GroupM and their group company Mindshare, Singapore, their independent and dependent relationship, etc. In this regard, it is submitted to AO during the assessment proceedings to obtain such information directly from GroupM. But the AO choose to not exercise his unfettered power to ascertain the genuineness of the assessee's claim. Hence, in the absence of any information to the contrary, the AO was not justified in rejecting the genuine claim of the assessee. For this proposition assessee relies on the following decision to prove its claim: ♦ Ass....
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....d that since the payment was made to a resident Indian company the provisions of section 195 of the Act are not applicable to facts of the assessee's case. In view of the foregoing, it is respectfully submitted that: Assessee has got advertisement work done from and GroupM and not Mindshare, Singapore during the year under consideration, Invoices were duly raised by the GroupM on the assessee for the advertisement work and TDS was deducted by the assessee in accordance with section 194C of the Act and since the expenditure is incurred wholly and solely for the 'purpose of its business' it is an allowable expenses u/s 37 of the Act. Trade Incentive 11. During the year under consideration the assessee had provided trade incentive of Rs. 16,17,24,303/- to its distributors pursuant to the sales promotion scheme of the assessee. These incentives were given to various local distributors on achieving their sales targets during the year. The reimbursement made to various distributors include the following expenses: i. Local promotion expenses - represents payments made to distributors for expenses in....
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....d is a company resident in India u/s 6(3). All payment made to this company towards advertisement charges is in Indian currency. Tax is deducted at source on such payment u/s 194C. Sec. 195 is applicable when payment is made to a non resident. Admittedly, payment to Group M Media India Pvt. Ltd. is a payment to resident and not a non resident. Therefore, section 195 is not attracted. The AO has not disputed the genuineness of the payment and therefore only because there is no agreement for the advertisement work with this company cannot be viewed adversely. Therefore, the disallowance of Rs.36,70,04,056/- made by the AO is incorrect, against law and the same is deleted. So far as expenses on trade incentive is concerned, we find that similar incentives given as per various schemes in earlier years has been allowed. The AO at Page 2 of the order has admitted that bills and vouchers of expenses, as desired, were produced for verification which was test checked. The observation of AO that services has been received by the assessee against these payment and therefore he should have deducted tax at source on the value of the gift is ill founded in as much as the payment is not against t....
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....s DDA provision-Old for which details were not furnished. He, therefore, made the addition which is approved by DRP. 8.1 The Ld. AR submitted that Delhi Development Authority has raised certain demand in the earlier years for which provision was made by debiting the land account and crediting the DDA provision account in earlier years. This provision is coming from earlier years. In earlier year, no expenditure was claimed by making such provision as the debit was to the land account. In A.Y. 1996-97 also, the AO made adjustment for this liability while processing the return u/s 143(1)(a). However when pointed out, he vide order u/s 154 dated 30.6.1998 (PB 715) rectified the mistake holding that assessee has not claimed any deduction for this amount or debited in the profit & loss account. Thus when no expenditure claimed in this year or earlier year, disallowance made is unjustified and be deleted. On the other hand, the Ld. DR supported the order of the AO. 8.2 After considering the rival submission and perusing the material on record, we noted that this amount is appearing in the details of other liabilities as old provision. No material is placed by the department that th....