TaxTMI 
TaxTMI 
TaxTMI 
2015 (7) TMI 871
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....o remuneration of Rs. 1,20,000/- paid to Shri Hammad Rahman clearly covered u/s 40A(2)(b) of the I.T. Act, 1961. 3. The Ld. CIT(A) has erred in law and on facts in allowing relief of Rs. 6,00,000/- on Directors remuneration without appreciating the fact that remuneration was enhanced drastically even when there was almost no growth in business. 4. That the order of the Ld. CIT(A) being erroneous unjust and bad in law be vacated and the order of the Assessing Officer restored." 3. The grounds raised by the Revenue in I.T.A. No. 316/Lkw/2013 are also extracted hereunder for the sake of reference: "1. The Ld. CIT(A) has erred in law and on facts in allowing the relief of Rs. 8,20,572/- on expenditure incurred on study abroad of Shri Hammad Rahaman, the son of a Director and also remuneration of Rs. 1,20,000/- paid to Shri Hammad Rahaman even when he is clearly covered u/s 40A(2)(b) of the I.T. Act, 1961. 2. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 2,23,73,153/- made by the AO by way of adjustment of transfer pricing under section 92CA(3) without giving any opportunity to the TPO as the assessee had not furnished the details of closing stoc....
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....od to determine the Arm's Length Price. The CIT(A) was also of the view that the resale method cannot be applied to determine the Arm's Length Price in case of an exporter. The CIT(A) however also rejected the CUP method adopted by the assessee for determining the Arm's Length Price considering the TNMM method as most appropriate method to compute the Arm's Length Price. The assessee has furnished the calculations as per TNMM method also, which was verified by CIT(A) and on verification, the CIT(A) was of the view that the difference between the two PLIs is within range of +5% therefore, no adjustment was required to be made. He accordingly deleted the adjustment of Rs. 57,07,130/- made by the Assessing Officer. He however asked the Assessing Officer/TPO to verify the calculation. 5. Aggrieved, the Revenue has preferred an appeal before the Tribunal and learned D.R. has placed reliance upon the order of the Assessing Officer and the TPO whereas learned counsel for the assessee, besides placing reliance upon the order of CIT(A) has contended that in the succeeding year, the TPO himself has adopted the TNMM method to determine the Arm's Length Price after reject....
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....as rejected the CUP method as adopted by the assessee by observing: 4. Transfer Pricing approach of the Assesses and TP analysis The assesses has benchmarked its international transactions by using CUP method by comparing average price of various categories of products (based on price range) with average price for similar category of products sold to third parties. 5. Defects in method adopted by assessee The categorization of products based on price range is flawed on account of the following reasons: * Prices of identical products needs to be compared rather than price of a category of products. * Categorization, if at all, may be made, of identical products. Categorization based on price range has an inherent flaw, since, the price of the product is what is being compared. A product worth Rs. 500 if sold to the AE at Rs. 400, would be compared with products that have a price of Rs. 400. Such a comparison is bound to show that the transaction price is an arm's length price, and hence, such a comparison cannot be accepted. * The Assessee itself has admitted in his submission dated 25.10.10 that "the price of footwear sold by the assessee to its AEs ranges from Rs....
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....rect as the same is applicable only for importers, whereas the present assessee is in the business of exports only. The CUP method has already been rejected by the TPO and the assessee has not disputed such rejection. I also find that in the subsequent year i.e. 2008-09, the TPO has adopted TNMM as the most appropriate method to compute the ALP. Accordingly, I am of the considered view that TNMM should be adopted as the most appropriate method for computing ALP even for this year i.e. A.Y.2007-08. In this regard, the Ld. A.R. of the appellant/vide my letter dated 04.01.2013 was requested to give financial details of comparable companies (as adopted by the TPO in A.Y. 2008-09). The letter reads as under: "F.No.CIT(A)-I/310/DCIT-VI/KNP/2012-13 Dated:04/01/2013 To, The Principal Officer M/s Rahman Industries Ltd. Kanpur Sub : Appellate Proceedings for A.Y. 2007-08 - Reg Please refer to above. 2. In this regard, it is noticed from the T.P. Order for A.Y. 2007-08 that the CUP method adopted by you to compute the ALP was rejected by the TPO. The TPO had applied RSM method for computing the ALP. You have stated in your submissions that RSM was not a correct method to deter....
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....rightly deleted the additions as no adjustment was required for such difference. Since we find ourselves in agreement with CIT(A), we confirm the same. 8. In the assessment year 2008-09, the TPO has followed the TNMM method after rejecting the CUP method for determining the Arm's Length Price but while determining the Arm's Length Price, the TPO has made certain adjustments resulting into addition of Rs. 2,23,73,153/-. When the appeal was preferred before the CIT(A), the assessee has pointed out certain mistakes apparent in the calculation of the TPO. It was contended by the assessee that following the TNMM method, the TPO while arriving at the figure of operating cost, has not considered a sum of Rs. 22,57,291/- being the variation in the closing stock. The TPO has worked out the assessee's margin at 1.23% whereas if the variation in closing stock is considered, the assessee's margin would come to 9.56%. It was further contended that if the aforesaid figure is considered then there would be no requirement of adjustment since the average PLI of the comparables (as computed by the TPO) is 8.11%. He has also furnished the correct calculations and pointed out the dif....
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....g the correct total cost and operating profits. The CIT(A) accordingly deleted the additions made on this count. The relevant observations of CIT(A) are also extracted hereunder for the sake of reference: "4.3.1 The appellant company had certain international transactions with its AEs to which Indian Transfer Pricing Regulation (contained in Sec. 92 to Sec. 92 F of the I.T. Act) apply. In order to establish whether such transactions (between the appellant company and its A.Es adhered to arm's length principle ( as required under the T.P. Regulations), a Transfer Pricing study was undertaken by the assessee . The said Report is part of the assessment records. 4.3.2 On a reference made by the A.O., the audit of these international transactions was undertaken by the TPO, who after giving due opportunity to the assessee had passed an order u/s 92CA dated 31/10/2011 wherein certain adjustments were ordered. The appellant being aggrieved is in appeal before the undersigned. 4.3.3 In his order, the TPO has made the following calculation for determining the PLI: Item As per the TPO Total income 1,41,34,62,001 Export sale 1,19,30,30,814 Export to AEs....
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.... this account." 9. Aggrieved, the Revenue has preferred an appeal before the Tribunal and placed reliance upon the order of the TPO and Assessing Officer whereas the learned counsel for the assessee besides placing reliance upon the order of CIT(A) has contended that in this assessment year the TPO has adopted TNMM method to determine the Arm's Length Price after rejecting the CUP method adopted by the assessee. But while determining the Arm's Length Price, the TPO has made factual error in the calculation by not considering the variation in the closing stock. The CIT(A) has reexamined the calculations made by the assessee as well as TPO to determine the Arm's Length Price and being convinced with the facts that an error has crept in the order of the TPO, the CIT(A) has accepted this calculation made by the assessee and he was also of the view that the PLI of the assessee company is 9.5%, which is more than the average PLI of comparable company. Therefore, there was no occasion for the TPO for adjustment. 10. Having carefully examined the orders of the lower authorities in the light of the rival submissions, we find that in this order, the T.P.O. himself has adopted....
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....ar as the amount of expenditure on the technical education of Mr. H. Rahman is concerned, it is not recorded by AO that amount of Rs. 25,49,622/- was "excessive" in relation to any other such case of the expenditure on the professional course of B. Tech. in U.K. from University, College, Northampton (U.K.). The expenditure involving fees, etc. is prima facie as per the rates and tariff of the said university and said course. It is not a case where the expenditure is "excessive" as compared to any other person acquiring this degree in the said Institution. Therefore, application of section 40A(2)(b) does not seem to be proper, unless there is specific payment made by appellant showing that such expenditure is in excess as compared to others made by them in the same Institution for the same course. Now possibly, the AO has considered the expenditure as being for non business purpose. Because Mr. H. Rahman happens to be an "specified person" within the meaning of section 40A(2)(b), perhaps it has mislead the AO to make the disallowance without bringing out anything on record to show that the expenditure as such was excessive and unreasonable. The allowability of this expenditure u/s 3....
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....ting in the instant case. Not only that, S, on returning to India, continued to work for the assessee in compliance of the agreement she had entered into with it before leaving India. She has been further made as a director of the assessee company. Therefore, the relation of X with one of the directors of the assessee company as such need not disqualify her from being sent abroad for higher studies by the assessee company". Therefore, in view of above discussion, the AO is directed to allow expenditure of Rs. 25,49,622/-. 9. Similar are the facts in respect of salary payment of Rs. 2,28,000/- where the AO has disallowed the amount on the ground that the remuneration paid to Mr. H. Rahman was not for business purpose because at that time he was pursuing technical education. However, the AO has failed to appreciate that the said Mr. H. Rahman was Executive of the Company and from the point view of appellant company, even if he was pursuing technical education, he was engaged in the performance of the duty assigned by the employer. More than this, it is clear that more than 50% of the turnover of the company is in U.K. where the person was learning his technical education. Prima-fac....