TaxTMI 
TaxTMI 
TaxTMI 
2014 (5) TMI 740
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.... 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 disallowance of 50,00,000/- out of travelling and conveyan....
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.... 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. 150,46,47,000/-. Against this order, assessee preferred reference u/s 1....
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.... 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 the assessee has analyzed the international transaction entered with the AE in distribution segment and the manufacturing segment as under:- (Rs. In crore) Particular....
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....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 of the entity. Reliance in this connection is placed in case of Dy. CIT v. Ankit Diamonds [2011] 43 SOT 523 (Mum.). Further the same TPO in case of Vijay Solvex Ltd. For AY 2007-08 has accepted such objections and restricted the adjustment only with reference to international transaction with associate concern as against with reference to turnover proposed by her (Cop....
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.... 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 manufacturing turnover constitute 99% of total turnover. Similarly International Flavours & Fragrances (India) Ltd. cannot be selected for comparison as its manufacturing turnover is also 99% of total turnover. On the above basis, the mean operating margin of the comparable companies at 11.23% is lower than the margin of the assessee at 12.67% worked out by the TPO / A O. Hence the international transaction of the assessee meets the Arms' Length....
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.... 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 examined all aspects and issued a show cause notice, given all reasons for rejection of the TP study report of the assessee, the cited case laws do not come to the assessee's help. 5.7 It is surprising to note that the assessee has claimed that the comparable selected by the TPO were not proper. This is especially when the assessee had itself in the reply to the show cause notice stated that the comparable selected by the TPO had all been examined by th....
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....- 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 relation thereto. 2. The remaining transaction can be broadly classify in four parts as under: a. Import of raw material / stores and spares / supplies Rs. 17,43,76,914/- b. Import of goods for resale / for packaging and sale, i. Distribution function Rs. 30,63,79,946/- ii. Manufacturing function Rs. 34,04,02,390/- Rs. 64,67,82,336/- c. Sale of finished goods Rs. 8,19,63,318/- d. Sale of raw material Rs. 32,39,254/- Total Rs. 90,63....
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.... 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 price. 8. The TPO, summarily, disregarded the TP documentations including the segmental financials submitted by the assessee and proposed aggregating the two segments and analysing the results of the assessee at entity level, he conducted fresh search without providing details regarding search process and arrived at 5 other companies as comparable. He worked out the operating margin of these comparables at 16.5% and that of the assessee company at 12.67%. Even this working suffers from following defects: a. Th....
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....on 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 10957715 48888202 151225154 211071071 211071071 Total including gross margin 459208178 1909756482 151225154 2520189814 2520189814 Expenses Advertisement and Sales Promotion 121142841 540482723 - 661625564 1679078116 Loss on write off of Fixed Assets - - 1723746 1723746 Selling and Distribution expenses 185978717 829750089 - 1015728806 Depreciation 7794164 138111903 9977208 155883275 155883275 VRS Expenses - - 11994761 11994761 11994761 Total Expenses 314915722 1508344715 23695715 1846....
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....larly 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 above submission Ld. AR has explained the TP study submitted by the assessee before the TPO. He has claimed that the TPO summarily disregarded the segmental TP study of the assessee and adopted the entity level TP study without giving any opportunity to the assessee. 1.1 In this regard, it is submitted that the TPO did not reject the TP study of the assessee without any reasons or basis. The TPO has evaluated the TP study of the assessee in para 6 & 7 of her order (APB pg. 131 onwards). It is wrong to say that before rejecting the TP analysis of the assessee the TPO did not give any opportunity. Kind attention is drawn to para 7 of TPO order (APB pg. 132). The TPO has reproduced the letters dated 07.09.2009 and 18.09.2009 in which the deficiencies in the segmental analysis of the assessee have been specifically....
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.... 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 the FMCG segment involving personal care products which is the right segment to compare. Further, in its own segmental TP study the assessee has itself taken companies which have vastly different products from the products in which the assessee deals (APB 250 - distribution segment comp. and APB - 255- manufacturing segment comp.) 2.3 In para 8(c) Ld.AR has pointed out that in calculating operating margin the TPO has excluded other income but has not excluded other expenses. In this regard, first of all it may be noted that this objection was never raised by the assessee before the TPO. Secondly, the TPO has not excluded the other expenses even for the comparable companies Therefore, if the other expenses are to be excluded for the assessee company they have to be excluded for comparables also. 2.4 In para 8(d), the Id. AR is ....
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.... 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 not acceptable because in income tax proceedings each year is different from other. If the Arm's Length Price adjustment has not been made in some years it does not mean it cannot be applied in any other year. 5. In para 12 again Ld. AR has raised the issue of using gross margin instead of the net margin. Here again Ld. AR is requesting for changing the PLI itself which cannot be done at this stage in appeal. 3.9 We have gone through the entire material on record with the assistance of the Ld. AR and the Ld. DR. So far as Ground No. 1(i) is concerned, the main thrust of the assessee is that as per sec. 92CA(4), the AO on receipt of order from TPO u/s 92CA(3) shall compute the total income of the assessee u/s 92C(4) having regard to ALP determined by the TPO. However....
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....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 can be made to total transactions under Chapter X. Such things are done only when AO invokes section 144. Therefore, AO was directed to restrict adjustments, if any, only to international transactions, which are found by him to have taken place at a price other than ALP. In case of Ankit Diamonds (supra), it was held that Determination of ALP of an international transaction has to be only at the transaction level or at the level of a class of transactions. TPO is not authorized to determine the net operational profits at the enterprise level but he shall determine only ALP of international transaction. Therefore, transfer pricing adjustments suggested by TPO is illegal & against the law. In case of Huntsman Advanced Materials (India) (P.) Ltd. (supra), it was held that adjustment for arm's length price is to be made only in respect of assessee&#....
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....essee 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 excluded, the operating margin of assessee became 13.25%. This margin is comparable with the margin of 13.43% of Colgate Palmolive India Ltd. Considering all these factors and also the fact that the TPO himself has admitted that assessee is a market leader and it will be extremely difficult to identify the comparables and the fact that neither in earlier years nor in subsequent years any adjustment has been made by comparing the results at entity level, we hold that the international transaction entered by the assessee with the AE even at entity level is at arm's length and therefore the adjustment made by the AO is not justified. Hence, the addition of Rs.15,75,28,786/-made by the AO is deleted. Ground No. 1(iii) of the assessee is therefore allowed. 4. The second ground of appeal is against disallowance of claim of inventories written off at R....
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.... 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 balance sheet. Therefore the disallowance of Rs 3,64,71,703/- confirmed by the Ld. CIT(A) is deleted." Following the orders of the Tribunals in case of the assessee, the claim of the inventory written off of Rs. 8,28,35,757/- is allowed and hence the addition made by the AO is deleted. This ground is therefore allowed. 5. The third ground of appeal is against disallowance of Rs. 50 lacs out of travelling and conveyance expenses. We noted that AO made lumpsum disallowance out of expenses of Rs.9,94,33,712/- on the ground that assessee has not filed supporting evidence to justify the claim which is approved by the DRP. The Ld. AR contended that the AO has wrongly stated that assessee has not filed supporting evidence to justify the claim and failed to explain the nature and purpose of expenses and therefore it lacks verification. The system of internal control i....
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.... 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. Trade incentive to various distributors Rs. 16,17,24,306/- ♦ Since the amounts claimed is not supported by any documents to indicate that these expenses have been incurred for the purpose of business of the assessee, these amounts are disallowed u/s 37 of the Act. ♦ The services have been received against these payments and the assessee should have deducted tax at source on the value of the gifts. The DRP approved the disallowance made by the AO on the ground that tax is not deducted at source and therefore same is disallowable u/s 40(a)(ia). 6.1 The Ld. AR made detailed written submission and also advance the oral arguments. For the sake of completeness, the written submission made by the AR is reproduced as under:- Advertisement expenses - Group M Media Pvt. Ltd. 1. During the year under consideration, the assessee had mandated the Media Planning activi....
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....tisement 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 services in India to Gillete, Singapore on behalf of Mindshare, Singapore. 4. Further, the assessee invites attention to the fact that during the year under consideration, various invoices were raised by GroupM, in respect of the advertisement work executed from April 1, 2005 by GroupM. The AO has failed to appreciate the fact that the AOR Contract was executed only on January 1, 2006 and was effective only for the period January 1, 2006 to June 30, 2006 whereas GroupM, independent of the said AOR contract was carrying out advertisement work for the assessee for a period much prior to execution of the AOR contract. Hence, this clearly defies the AO's conclusion that the services were rendered pursuant to the said AOR contract and also his assumption that it was for and on behalf of Mindshare, Singapore, a non-resident entity. 5. Further, the assessee wants to highlight an important....
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.... 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 agreement. It is further submitted that having an agreement is not a pre-requisite for incurrence and allow ability of any expenses. What is required is, to demonstrate that the expense have been incurred by the assessee wholly and solely for the 'purpose of its business'. In this regard, from the perusal of the details mentioned in the invoice of GroupM, it may be noted that the advertisement work has been carried out by GroupM, as the same has been telecasted in India for various products of the assessee; and the assessee has been benefited by such advertisement. The AO also has not disputed the fact of incurrence of expenditure and that it is wholly and exclusively for the purpose of business. Hence, it is submitted that the said advertisement expenses were incurred wholly and solely for the assessee's business and are therefore allowable as deduction. For this proposition assessee relies on the f....
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....tion 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: ♦ Asstt. CIT v. Metalizing Equipment Pvt. Ltd. [2006] 100 TTJ 449)(JD.) - It is held that-"if the AO was not satisfied with the bills produced before him, he was fully authorized to examine the genuineness of the parties and bills issued. Having not done so, he was under obligation to accept the genuineness of the bills for the obvious reason that the onus to prove the apparent as unreal is one who so alleges." 9. On merits assessee submits that the advertisement expenditure is incurred for the purpose of its business, thus it should be allowable as business expenditure. For the purpose of determining the allowability of expenses u/s 37(1), it needs to be considered whether the expenditure incurred is for the purpose of business or not. Your Honours kind attention is invited to the following decisions wherein it has been held that the expression "for the purpose of business "is wider in scope than the expression "for the purpose of earning....
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..... The reimbursement made to various distributors include the following expenses: i. Local promotion expenses - represents payments made to distributors for expenses incurred by them on local promotions. ii. Temporary price reduction - represents amounts reimbursed on account of price adjustment due to temporary reduction in price on scheme, if any. iii. Damage concession - represents fixed amount of discount on sale invoices. 12. The aforesaid expenses are disallowed by the AO on the alleged ground that since the amounts claimed are not supported by any documents to indicate that these expenses have been incurred for the purpose of business of the assessee, these amounts cannot be disallowed u/s 37. The assessee submits that the similar incentives were given to the distributors on achieving their sales targets as per various schemes in earlier years also. The A O without considering the nature of expenses has made the disallowance, though in all earlier years such expenses have been allowed. It is not in dispute tha....
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.... 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 the services but against the sale of goods to the distributors and therefore TDS provisions are not applicable. Therefore, the disallowance of Rs.16,17,24,303/- made by the AO on this account is deleted. 7. Ground No. 5 is against disallowance of Rs.30,57,894/- in respect of depreciation on vehicles. The AO observed that these vehicles are purchased in the name of the employees, and no evidence that they are in the name of the assessee is filed. Accordingly he disallowed the amount of depreciation. This is approved by DRP by holding that assessee is not the owner of these vehicles. 7.1 The Ld. AR submitted that the AO in course of assessment proceedings never required assessee to explain as to in whose names the vehicles, which are given to the employees, are registered. In fact the purchase bills of these vehicles are in the name of the assessee and they are registered in the name of the company as per the registration certificate (PB 679 - 713). Thus it is established tha....
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.... 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 this provision is made during the year by debit to P&L A/c. We also noted that similar addition made in A.Y. 96-97 while processing the return was deleted by the AO himself in order u/s 154 dated 30.06.1998. Since no amount is debited to the P&L a/c during the year on account of the said provision, the addition made by the AO is deleted. 9. Ground No. 7 is against lumpsum disallowance of Rs. 50 lacs out of miscellaneous expenses. The AO made the disallowance for the reason that the assessee could not furnish details in support of the claim of the expenses. The DRP approved the order of the AO. 9.1 The Ld. AR contended that the lower authorities have wrongly stated that assessee could not furnish details in support of the claim and therefore it lacks verification. In fact such details were filed and bills and vouchers for expenses were produced for his verification which were examined by AO on test check basis. This is accepted by AO on Page 2 of his order. All expenses are fully verifia....