TaxTMI 
TaxTMI 
TaxTMI 
2015 (9) TMI 609
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....as not appearing in the financial of the comparable concerns. 3 On the facts and in the circumstances of the case, the ld CIT(A) has erred in excluding the custom duties on the import of ROB for benchmarking the arm's price ignoring the fact that the custom duty paid on the import of goods is a normal business expenditure." 2. Briefly stated the facts of the case are that the respondentassessee company is a branch office of a French company, namely, Corning S. A. France which is a leading manufacturer of very high-grade ophthalmic and non-ophthalmic glass products in the world e.g., ophthalmic blanks for eyeglasses and optical fibre etc. For the instant year, assessee filed return of income on 28.11.2003 declaring an income of Rs. 53,99,390/-. The assessee had entered into following "international transactions" with the head office in France and other Corning group companies during the relevant previous year: (i) Import of ROB's of Rs. 20,89,44,767/- from Corning S. A, France as part of distribution function of import of rough ophthalmic blanks ("ROB's") and sale to customers in India; (ii) Receipt of agency service commission of Rs. 55,94,311/-from the Corning S. A. France for....
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....on in arm's length price the arithmetic mean of the average NCP margins of the comparable companies was stated to be in range from 2.30% to 13.06%. Thus, as for financial year ending 31.3.2003 appellant had earned a NCP margin of 6.45% from its marketing support services function it was claimed to be within the above mentioned +/-5% range prescribed under the Act. 4. However, the TPO in an order dated 10.1.2006 rejected the combined evaluation of agency service activity and distribution activity with M/s Corning SA France, as part of distribution activity/segment, followed by the assessee. The TPO segregated the aforesaid activities for the computation of arm's length price and consequently made an upward adjustment, re-computing the arm's length price in respect of the agency activities. The TPO held in this regard as under: (i) the functions performed and risks assumed in the distribution function and the agency services function are quite different and therefore ALP for each of them needs to be determined separately; and, (ii) agency services rendered by the assessee were in the nature of marketing services and were of similar nature as marketing support services provided by ....
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.............. (A) 31,91,70,528 Cost Total cost (for distribution & commission) (as per letter dated 16.11.2005) Less: Cost attributable to commission as per para 6.3 of this order 32,73,93,696 71,34,200 Cost of distribution segment ............. (B) 32,02,59,496 Loss: (A-B) (10,88,968) OP/Sales (-)0.34% 10. The TPO therefore held that assessee has incurred a loss of Rs. 10,88,968/- which corresponds to a loss of 0.34% on sales as compared to average net profit margin of comparable companies engaged in distribution function at 3.15% determined by assessee on a set of 13 comparables in TP documentation. 11. The TPO accordingly computed the adjustment on account of the difference in the arm's length cost of import goods from Corning SA France at Rs. 1,11,42,839/- as follows: Sales of Corning SA India (distribution) 31,91,70,528 Net Profit Margin @ 3.15% 1,00,53,871 Loss incurred by the appellant 10,88,868 Adjustment 1,11,42,839 12. On the basis of above, the Assessing Officer in an order dated 7.3.2006 made the addition of Rs. 1,32,30,634/- by extracting the following observations in TPO order: "To conclude the arm's length ....
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....inished goods and the assessee does not undertake contract risk, inventory risk, credit risk, etc., as opposed to the distribution function. On the basis of the aforesaid FAR (Functions performed, Assets utilized and Risks assumed) analysis, CIT(A) concluded that distribution function and agency service activity are functionally different and comparable benchmarks for distribution function cannot be same as agency service activity and the assessee was thus not correct in undertaking the combined evaluation of two activities. 17. Before CIT(A) the assessee further disputed the allocation of expenses relating to agency service activity in proportion to the turnover by the TPO as it is inconsistent with the accepted accounting principles of matching. The assessee contended that contract sales are made by the AE, i.e. Corning-France to certain existing customers in India, on which commission is received by the assessee without significant deployment of efforts and resources. The CIT(A) on the basis of the aforesaid conclusion in the FAR analysis held that a much lower allocation of common expenses would be required towards agency service activity, in as much as it involves lesser effo....
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....tion the basis of net margins. On the other hand the learned Sr. counsel for the assessee invoked Rule 27 and contended that TPO has erred in not clubbing the trading/distribution and commission from agency transaction because assessee earned income from distribution of selling of the ophthalmic products and agency commission from the same products which are directly sold by the AE at France. It was submitted that TPO erred in clubbing agency commission and market supporting segment together because marketing supporting segment deals with products which are not ophthalmic and it deals with telecommunication and the products are not from France. According to the ld. Sr. counsel the reason for not clubbing the agency and marketing supporting are that for agency the assessee gets 3% commission gross sales; whereas on the other hand in market supporting the assessee gets cost of +/5%. According to learned counsel, there is no cost incurred additionally for earning agency commission because it is incidental to the work at distribution of same products; whereas there was infrastructure liaison office separately for market support and the assessee has incurred Rs. 1.18 crores for engaging....
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....ting information (b) exploring sales and distribution opportunities (c) undertaking market research and (d) promoting awareness about company's product in India. On the other hand, in respect of agency service activity, the assessee merely acts as communication channel between the existing customers of Corning France and the head office. 22. In light of the above, it was submitted, TPO/AO ought to have considered the "international transactions" relating to distribution activity and aforesaid agency service activity in a combined manner considering the fact that the aforesaid two activities transactions form part of natural business sequent of distribution of ROBs and are inter linked and closely connected in as much as (i) the two activities relate to the same products, viz., ROBs and involves performing some of the common functions by the same employees and it is not feasible to segregate the cost relating to the same; (ii) the agency services rendered by the assessee in relation to sale of ROBs to the customers of Corning France in India, is akin to the distribution of ROBs, in as much as both are aimed at sales and revenues arise to the assessee in both the cases on sale of pr....
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....tely. 26. So far as the allocation of expenses is concerned it is noted that TPO had identified indirect expenses common to both the functions at Rs. 1,93,29,321/- details of which are as under: Particulars Amount (In Rs.) Salaries 42,72,231/- Advertisement 30,78,570/- Insurance 3,77,758/- Repairs and maintenance 8,24,105/- Professional fee 28,31,227/- Rent 12,57,636/- Communication 5,93,240/- Travelling & Conveyance 33,79,299/- Misc. 12,32,610/- Depreciation 14,82,645/- Total (A) 1,93,29,321/- 27. The CIT(A) has held that out of the aforesaid sum of Rs. 30,78,570/- and Rs. 3,77,758/- pertaining to advertisement and insurance have no nexus with the agency function. 28. We find merit in the said conclusion as no material has been lead to discredit the above conclusion. Thus we hold that aggregate indirect expenses common to both the functions are of Rs. 1,58,72,993/- (Rs. 1,93,29,321/- - Rs. 30,78,570/- - Rs. 3,77,758/-). The CIT(A) further more held that allocation of such expenses should be done on the basis of gross margin of distribution function and commission income receipts and not on the basis of sales, as adopted by the TPO. Here too, we d....
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....the revenue. Ground 1 thus stands dismissed. 30. Ground No. 2 and 3 of the Appeal filed by the revenue are against the deletion of addition of Rs. 1.11 crores by excluding the increased custom duties out of the cost of import of ROBs for benchmarking the arm's length price of distribution segment. 31. The facts are that assessee in the course of Transfer Pricing assessment vide letter dated 16.11.2005 submitted the following segmentation of the net profit margin for the various segment: 32. It can be perused from the aforesaid table that while computing the operating profit margin of the distribution segment, the assessee excluded foreign exchange loss of Rs. 1,37,41,434/- and abnormal custom duty of Rs. 3,73,85,895/-from the operating expenses. The assessee submitted in his broad submission before CIT(A) as under: "(i) Foreign Exchange Loss of Rs. 1,37,41,434/- It is submitted that during the relevant previous year, the significant movement in Euro, via-a-vis Indian rupee and Indian rupee depreciated o the extent of 24% leading abnormal foreign exchange loss of Rs. 1,37,41,434/-,. It would further be appreciated that apart from the abnormal foreign exchange fluctuation loss, th....
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.... taken as part of profit of the business. The abnormal evaluation in Indian rupee in the relevant previous year cannot be the reason for excluding the same from the operating cost of the distribution business. However, CIT(A) agreed with the contention of the assessee that custom duty which is paid to the government need not to be taken into account for the purpose of benchmarking analysis, particularly for the reason that abnormal increase in custom duty during the relevant previous year would distort the comparison, when the comparable companies do not incur similar expenses on account of custom duty. 34. Having considered the rival submissions and perused the material on record we find the CIT(A) in this regard has held as under: "I have examined the document on record and it is noted that in the financial of the comparable companies, custom duty does not appear as expenditure. The Delhi bench of the Tribunal in the case of Schefenacker Moherson vs. ITO 123 TTJ 509, held that the assessee was justified in determining the ALP under TNMM method by taking profit level indicator of the comparable cases excluding depreciation to eliminate difference on account of different deprecia....
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....e, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by provisions of IT Regulations. There is no way to dislodge the claim of the taxpayer. The context and purpose of legislation and facts of case overwhelmingly approve adoption of cash profit only. 23. The taxpayer in both the assessment years showed before the Revenue authorities that profit shown by the taxpayer satisfies arm's length requirement on ratio of cash profit to sales if uniformly applied. As the deduction of depreciation is leading to wide differences, the same should be excluded. The only reason given for rejecting taxpayer's analysis and for making adjustment in the two years is that use of ratio of cash profit without depreciation is not permitted under the law. This view in the light of above discussion cannot be accepted as correct and is disapproved." 50 Therefore it would be appropriate to exclude the amount of custom duty of Rs. 3,73,85,895/- from the operating cost for computing the operating profit margin of the distribution segment. 51 Profit margin of the distribution segment is accordingly computed at 10% as follows: Calculation o....